Ready Reckoner

READY RECKONER OF ECONOMY
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INDEX
1. BASIC CONCEPTS……………………………………………………………………………………………….01
2. PLANNING…………………………………………………………………………………………………….….05
3. FISCAL POLICY……………………………………………………………………………………………………08
4. MONETARY POLICY AND BANKING…………………………………………..………………….……12
5. BANKING SYSTEM IN INDIA…………….………………………………………………………………..14
6. TAXATION………………………………………………………………………………………………………..21
7. FINANCIAL MARKETS………………………………………………………………………………………..26
8. INFLATION………………………………………………………………………………………………………..32
9. POVERTY………………………………………………………………………………………………….……….35
10. UNEMPLOYMENT……………………………………………………………………………………..………38
11. AGRICULTURE.………………………………………………………………………………………………….40
12. INDUSTRY AND INFRASTRUCTURE………………………………………………………………..…..43
13. BALANCE OF PAYMENT……………………………………………………………………………….……48
14. FOREIGN INVESTMENT…………………………………………………………………………………..…51
15. ECONOMIC INTEGRATION…………………………………………………………………………………53
16. WTO………………………………………………………………………………………………………………….55
17. REPORTSAND INDICES……………………………………………………………………………………….62
18. IMPORTANT GRAPHS………………………………………………………………………….……………..65

1. ECONOMICS DEFINITION, IT’S AGENTS, Gandhian Economics- it is the set of ideas that Gandhi
propounded for economic management and
FACTORS AND ROLE OF STATE IN AN distribution
ECONOMY
Economics is a social science concerned with the
production, distribution and consumption of goods and
services.
Branches of economics:
Structural composition of an economy

 Primary sector: Describes all industries that are
engaged in the extraction of natural resources or the
production of raw materials.
Economic agents: individuals or institutions that take
Ex: Farming, Fishing, Mining etc.
economic decisions, may be –Producers, Consumers,
Government, Corporations, Banks etc.
 Secondary sector: It includes all industries that are
Role of state in an economy: concerned with the manufacturing of usable products
or finished goods.
Adam Smith John Liberals &
Ex: Heavy Industry (steel, chemical, automotive) and
Keynes Neoliberals
Light Industry (food, apparel, cosmetics) etc.
 classical economy
 if buyers and sellers  Tertiary sector: Describes all industries that provide
Need for
can make decision services to other businesses or final consumers.
state
based on Individual Ex: Retail, Healthcare, Insurance etc
interventio Minimal state
self interest, it
n at macro intervention
automatically ensures  Quaternary sector: It includes all industries that are
scale in an
welfare of country. concerned with the creation and distribution of
Ex: New economy
 The state shall not knowledge.
Deal Ex: IMF,
intervene in the Ex: Research and development, Education etc
program in world bank
economy.
USA to deal policies
Ex: Laissez faire economies  Quinary sector: Highest levels of decision making in
with Great
in 17th, 18th centuries an economy.
depression
could not address great
depression(1929) Formal and Informal sectors in the economy.
Socialists believe larger part of economic resources Formal Sector- this sector is one that is registered
should be in government hands to achieve with the government, and they are regulated by
socioeconomic objectives. many government laws like companies act, factories
Nehruvian socialism – coexistence of private and public act.
sector Informal Sector- The unorganised sector refers to
Mao’s socialism –Complete dominance of public sector those enterprises whose activities or collection of
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data is not regulated under any legal provision or do

not maintain any regular accounts  Demerit goods: Have negative externalities. Ex:
Ex: Farmers, landless labourers, street venders etc. Alcohol, cigarettes etc
Types of goods
 Intermediate good: An item used by other producers National income accounting
as material input for production Ex: Rubber used for It refers to a set of rules and techniques that are used to
tyres. measure the output of a country.
 Final goods: An item that is meant for final use and
will not pass through any more stages of production Measurement of economic growth
or transformations. Ex: Car.  Economic growth is the increase or decrease in the
 Consumer goods: Goods that are consumed when value of goods and services produced in an economy
purchased by their ultimate consumers .Ex: Clothes  National income is the aggregate money value of all
 Capital goods: Goods which are of durable character incomes earned by individuals and enterprises.
used in the production process like tools, machines .  Gross investment is that part of our final output that
 Luxury good: As income increases, demand for comprises of capital goods.
certain goods increases.Ex: Gold  Net Investment = Gross investment – Depreciation
 Complementary Goods. Goods which are used  Depreciation: Subtraction from gross investment to
together. Ex: TV and DVD player, Pen and refill etc accommodate wear and tear of capital.
 Substitute goods:Goods which are alternatives.  GDP(Gross Domestic Product) is the total market
Ex: Tea and coffee value of all final goods and services produced within
 Veblen / Snob good:A good where an increase in the geographic boundaries of a country during a
price encourages people to buy more of it. This is specified period of time, normally a year.
because they think more expensive goods are better.  Nominal GDP refers to current year production of
Ex: Diamonds, limited edition cars etc final goods and services. It is not corrected for
 Giffen good: Demand goes up as and when prices inflation.
increases, it’s a Symbol of status.  Real GDP refers to current year production of goods
 Public good: Non rival consumption(one’s and services valued at base year prices. Real GDP is
consumption does not diminish them for others) non- corrected for inflation.
excludable. Ex: park, defence etc  Base year: it is a year in which prices are constant ,
 Private good: Is both rival (ex: club membership) and not much fluctuating.
excludable (if I own a house, others cannot use it).  Gross National Income(GNI): it is the aggregate
 Merit goods: Have positive externalities Ex: health, value of the gross balances of primary income of all
education resident institutional units.
 Market price(MP)refers to actual transacted price
and includes indirect taxes.
 Factor cost(FC)refers to actual cost of production it
includes government grants and subsidies but
excludes indirect taxes.
 Transfer payment– is the payment by the
government in grants, allowances, pensions etc to
people such as pensioners, widows, sick or
unemployed people or others with little or no income.
It does not include subsidies given by government.
Ex: PM KISAN amount transfer
Circular flow in a simple economy

Factors of production in an economy  Income method : Measuring the sum total of all
factor payments.
3 METHODS OF CALCULATING NATIONAL INCOME
INCOME OUT PUT EXPENDITURE
METHODS METHOD METHOD
Gross Domestic Gross Domestic Gross Domestic
Income product Expenditure
+ + +
Net Income Net Income Net Income from
from Overseas from Overseas Overseas and
= = Exports
Gross National Gross National -
Income Product Imports
- - =
Depreciation Depreciation Gross National
 GDP@FC =GDP@MP– indirect taxes+ = = Expenditure+
subsidies Subsidies-tax
 NDP@FC= GDP@FC– depreciation
Gross National
 National income( NNP@FC) = GNP @MP–
Expenditure
depreciation
-
 GDP@MP=GNP @ MP – net income from Depreciation
abroad =
 GNP @ FC=GNP @ MP – net indirect taxes Net National Income = Net National Product = Net National
 NDP @MP =NNP@MP– net income Expenditure
from abroad
 NNP @fc=NNP @mp– indirect taxes Gross value added
Gross value added (GVA) is an economic productivity
metric that measures the contribution of a corporate
 Note: GDP@ MP=GNP @ MP – net income from subsidiary, company or municipality to an economy,
abroad or income earned from abroad. producer, sector or region.
Income earned from abroad includes, GDP= GVA+ taxes on products –subsidies on products
1.Trade balance=Exports -Imports (negative) GVA=GDP- indirect taxes
2.Interest of external loans-Net output wrt interest Difference between GDP and GNP
payments (negative) Gross Domestic Gross National Product
3.Private remittances ( positive) Product (GDP) (GNP)
Therefore, GNP=GDP+(1+2+3) as 1 and 2 are negative It is the value of a It is the value of all finished
GNP=GDP-(1+2+3) ie., GNP< GDP nation's final domestic goods and services owned by
goods and services a country's residents over a
Three methods of national accounting
during a specific time period of time.
 Expenditure method: Measuring the aggregate value period.
GDP: Consumer GNP: GDP+ NR (Net receipts
of spending that the firms receive for the final goods
spending + from abroad or inflows from
and services which they produce. Government spending abroad) – NP (Net payment
 Product method: Measuring the aggregate value of + Investments + Net outflow to foreign assets)
final goods and services produced by all the firms. exports

Application: To see the Application: To see how the CSO vs NSSO

strength of country’s nationals of a country are
local economy doing economically Central Statistical Office National Sample Survey
GDP is the most GNP is not used much by (CSO) Office (NSSO)
commonly used by global economies  It is responsible for  It is responsible for
global economies. coordination of conducting socio-of
Difference between GDP and GVA statistical activities in economic surveys.
the country and for
Gross domestic product Gross Value Added evolving and
(GDP) (GVA) maintaining statistical
standards.
It the sum of private It provides the rupee  Its activities include  The surveys on Consumer
consumption, gross value for the amount of compilation of Expenditure,
investment in the goods and services National Accounts; Employment –
economy, government produced in an economy conduct of Annual Unemployment, Social
investment, government after deducting the cost Survey of Industries Consumption (Health,
spending and net foreign of inputs and raw and Economic Education etc.),
trade (difference materials that have gone Censuses, compilation Manufacturing
between exports and into the production of of Index of Industrial Enterprises, Service
imports) those goods and Production, as well as Sector Enterprises are
Consumer Price carries out once in 5 years
services.
Indices by them.
 It also deals with  The survey of Land and
New GDP Series 2011-12
various social statistics Livestock Holding and
 Change of base year – 2004-05 to2011-12
training, international Debt and Investment are
 Change in GDP calculation to using market prices
cooperation, carried out once in 10
rather than factor costs.
Industrial years.
 Adopted the international practice of valuing
Classification etc.
industry-wise estimates as gross value added (GVA)
MOSPI has merged the CSO and NSSO into National
at basic prices.
statistical office(NSO).
GDP back series
An expert committee set up by National Statistical Note: National statistical commission established in
Commission (NSC) released recently the report on back 2006, based on rangarajan commission, oversees
series GDP data. statistical works in India.
The back-series data provides the earlier years’ data using
the new calculations. Business cycles
It helps in understanding the economy, its size, growth
rate more accurately. Economic Slowdown- A situation in which GDP
growth slows but does not decline. For example, if
Gross capital formation (GCF) GDP goes from 5% growth to 3% growth, an
 The percentage of the investment made each year economy is experiencing a slowdown.
out of the total GDP is called Gross Capital Formation
Economic recession - is a period of general economic
 High GCF denotes higher rate of savings in the
economy which is required for high rate of decline and is typically accompanied by a drop in the
production, capital formation, changes in production stock market, an increase in unemployment, and a
techniques decline in the housing market.
 GCF includes capital formation in public sector,
private sector and also household sector

 When a slowdown leads to negative growth

it is recession.
 It is less severe than a depression.
Depression - A depression is a severe and prolonged

downturn in economic activity. It is as an extreme
recession that lasts three or more years or leads to a
decline in real gross domestic product (GDP) of at
least 10 percent.
Ex: The Great Depression of 1930
Growth vs development
2.PLANNING
A five year plan formed the most basic unit of planning in
India. Efforts towards economic planning in India began
even prior to independence.
National Planning Committee (1938)

Subhas Chandra Bose set up National Planning
GDP, GVA, GNP all measure the quantitative growth Committee in 1938 under the chairmanship of
while neglecting the Qualitative Progress. J.Nehru.
Hence following indices were brought as alternative The Bombay Plan (1944)
to measure growth. In 1944 Eight Industrialists of Bombay viz. Mr. JRD
Tata, GD Birla, Purshottamdas Thakurdas, LalaShriram,
 Human Development Index- HDI Kasturbhai Lalbhai, AD Shroff, Ardeshir Dalal, & John
 Inequality Adjusted HDI Mathai working together prepared what is known as
 Social Progress Index “Bombay Plan”. It recommended a substantially
 National Happiness Index interventionist state and an economy with a sizeable
public sector.
 Green GDP
People’s Plan(1945)
Demand and supply side economics
People’s Plan (1945) was drafted by MN Roy. It gave
equal importance to both agriculture and industries.
This plan was for ten years. It recommended
nationalization of all agriculture and production.

Gandhian Plan (1944)  Target Growth: 5.6% Actual Growth: 2.8%.

This plan was drafted by Sriman Nayaran, principal of  II. This plan is called ‘Gadgil Yojna’ also.
Wardha Commercial College. It emphasized the  III. The main target of this plan was to make the
economic decentralization with primacy to rural economy independent and to reach self active
development by developing the cottage industries.
position of take off.
Sarvodaya Plan (1950)  IV. Due to china war and Indo-pak war, this plan
Sarvodaya Plan as drafted by Jaiprakash Narayan. This could not achieve its growth target of 5.6%.
plan itself was inspired by Gandhian Plan and
Three Annual Plans (1966- 69): Plan Holiday
Sarvodaya Idea of Vinoba Bhave. This plan
emphasized on agriculture and small and cottage  Emphasis on agriculture during the Annual Plans.
industries.
 Green revolution strated: Usuage of high-yielding
Five year plans after independence varieties of seeds, extensive use of fertilizers,
The concept of economic planning in India is derived exploitation of irrigation potential and soil
from the Russia (then USSR). India has launched 12 conservation.
five year plans so far. First five year plan was 4th five year plan(1969 to 1974)
launched in 1951.
1stFive year plan(1951-56)  Target Growth: 5.7% Actual Growth: 3.3%

 There were two main objective of this plan i.e.
 growth with stability and progressive
 It was based on the Harrod-Domar model.
 Its main focus was on the agricultural development achievement of self reliance.
of the country.  During this plan the slogan of “Garibi Hatao” was
 This plan was successful and achieved growth given by Indira Gandhi.
rate of 3.6% (more than its target growth rate
2.1%)
5th five year plan (1974-1979)
Outcomes  Target Growth: 4.4% Actual Growth: 4.8%.
Mettur dam, Hirakud, Bhakra dams were started in  In this plan top priority was given to agriculture,
this period. next came to industry and mines.
 Overall this plan was successful which achieved
2nd Five year plan (1956 to 1961) the growth of 4.8% against the target of 4.4%.
 Target Growth: 4.5% Actual Growth: 4.3%  The draft of this plan was prepared and launched
by the D.P. Dhar. This plan was terminated in
 It was based on the P.C. Mahalanobis Model.
1978 because of Janata government.
 Its main focus was on the industrial development
of the country. Outcomes
 This plan was successful
After promulgation of emergency in 1975, the
Outcomes of the plan emphasis shifted to the implementation of Prime
Ministers 20 Point Programme.
As many as five steel plants including the ones in
Durgapur, Jamshedpur as well as Bhilaiwere set up as Rolling Plan (1978 – 80)
per the 2nd five year plan This plan was started with an annual plan for 1978-79
and as a continuation of the terminated fifth year
3rd five year plan (1961 to 1966) plan.

6th five year plan(1980-1985) 9th five year plan(1997-2002):

 Target Growth: 5.2% Actual Growth: 5.7%.  Target Growth: 6.5% Actual Growth: 5.4%.
 The basic objective of this plan was poverty
eradication and technological self-reliance.  The main focus of this plan was “growth with
 It was based on investment yojana, infrastructural justice and equity”.
changing and trend to growth model.  It was launched in the 50th year of independence
Outcomes of the plan of India.
Economic Liberalization was introduced for the first time Focus areas of the plan
in India during this period.
It assigned priority to agriculture and rural
Family Planning was implemented for the first time in development with a view to generate adequate
India. productive employment and eradicate poverty.
7th five year plan (1985-1989):
 Target Growth: 5.0% Actual Growth: 6.0%.
 Target Growth rate : 8 % Actual Growth : 7.6 %
 Objectives of this plan include the establishment of  This plan aims to double the per capita income of
the self- sufficient economy, opportunities for India in the next 10 years.
productive employment.  It aims to reduce the poverty ratio 15% by 2012.
 For the first time the private sector got the priority  Taking up of extensive afforestation measures, by
over public sector. planting more trees and enhance the forest and
 The plan was a big success. tree areas to 25% by 2007 and 33% by 2012.
Annual Plans:  Decrease in the Maternal Mortality Ratio (MMR) to
Eighth Five Plan could not take place due to volatile 2 per 1000 live births by 2007.
political situation at the centre.  VI. Access to potable drinking water cleaning of
So two annual programmes are formed in 1990-91& major polluted rivers.
1991-92.
 Target Growth 5.6 % Actual Growth 6.8%.  Target Growth 9 % Actual Growth 8%
 In this plan the top priority was given to  It was prepared by the C. Rangarajan.
development of the human resources i.e.  Its main theme was “faster and more
employment, education,and public health. inclusive growth”.
 During this plan Narasimha Rao Govt. launched Objectives of the plan:
New Economic Policy of India.
Outcomes of the plan
 Reduction in unemployment( to less than 5 %
 Rapid economic growth (highest annual growth among educated youth ) and headcount ratio of
rate so far – 6.8 %). poverty ( by 10 %).
 High growth of agriculture and allied sector and  Improvement in sex ratio, forest & tree cover, air
manufacturing sector. quality in major cities.
 Ensuring electricity connection to all villages & BPL
 Growth in exports and imports Improvement in households (by 2009) & reliable power by end of
trade and current account deficit. 11th Plan.

 Providing broad band connectivity to all villages 3.FISCAL POLICY

by 2012.
12th five year plan(2012-2017): Fiscal policy is that part of government policy concerned
with raising revenue through taxation and spending for
I. Its growth rate target is 8%, real growth rate 7% socio economic development.
II. Its main theme is “Faster, More Inclusive and Objectives of fiscal policy:
III. Sustainable Growth”.  Growth
IV. In this plan government embraced 25 monitorable  Equity
 Holistic development of all sectors of economy
targets.
 Employment
NITI Aayog:  Export promotion
Government scrapped Planning commission and in its  Labour intensive growth
place it has introduced NITI Aayog.  Sustainability
NITI Aayog composition:
 Prime Minister of India as the Chairperson.

Vice-chairperson to be appointed by the PM.
 Governing Council comprising the Chief Ministers of

all the States and Lt. Governors of Union Territories.
 Experts, specialists and practitioners with relevant
domain knowledge as special invitees nominated by Types of fiscal policy
the Prime Minister. Expansionary Fiscal Policy
Action Effect
 Regional Councils will be formed to address specific
Lower Taxes Decreasing tax, savings increases,
issues and contingencies impacting more than one available funds for spending increases,
state or a region. so consumers and businesses purchase
more. Demand increases.
Increase Increasing government spending
Government provides the funds needed for
Spending consumers and businesses to purchase
goods and service. Demand is
increased.
Contractionary Fiscal Policy

Action Effect
Raise Taxes Increasing tax, expenditures decreases,
money available for spending
decreases, so consumers and
businesses spend less. Demand is
decreased.

Decrease Decreasing government spending the Consolidated Fund of India without enactment of
Government reduces the funds needed for appropriation bill.
Spending consumers and businesses to purchase 4. Finance Bill [Article 110(a)]: It is presented to enact a
goods and services. demand is law for imposition, abolition, remission, alteration or
decreased. regulation of taxes proposed in the Budget.
 Revenue budget: Revenue budgets include income
Deficits
and expenditure for the year and those that will be
incurred regularly in the running of businesses. Ex:  A deficit occurs when expenses exceed revenues,
sales, purchase, salaries, wages and rent. imports exceed exports, or liabilities exceed assets.
 Capital budget: A capital budget estimates inflows  Revenue deficit (RD): It is the difference
and outflows on account of capital expenses. Capital between the revenue receipts (RR) and the revenue
expenses means those expenses which will be expenditure (RE).
incurred for asset creation. Ex: plant &machinery , RD= RR-RE.
shares , furniture etc
 Effective Revenue deficit (ERD): It is defined as the
 Revenue receipts: These are recurrent receipts.
These include revenue raised from tax and non-tax difference between the revenue deficit and creation
sources. of capital assets.
Ex: Tax resources: Income tax, corporation tax,  Fiscal deficit (FD): It is the difference between what
corporation tax, excise duty etc government earns and its total expenditure
 Non-Tax resources: User charges, interest receipts, (excluding non-debt creating capital expenditure)
interest dividends etc
FD= (Revenue receipts + non-debt creating capital
 Revenue expenditure: It does not create any assets.
receipts)- Total expenditure
It is incurred on maintenance and consumption of the
government. Ex: Salaries, interest payments,  Budget deficit: The difference between the total
defence, subsidies budgeted receipts and expenditure.
 Capital account receipts: These are money raised BD=Budgetary receipt – Budgetary expenditure
through borrowing (debt) or sale of assets (non-debt)  Primary deficit: It is the difference between fiscal
Ex: Recoveries of loan; borrowing from India and deficit and interest payments
abroad; disinvestment proceeds
PD=FD-interest payment
 Capital account expenditure: Expenditure made for
asset creation. Ex: Loans repaid, asset creation in Deficit financing: financing of gap between government
infrastructure and social areas receipts and expenditure.
Components of budget How does the government manage its deficits?
1. Annual Financial Statement [Article 112]: This
1. Monetised deficit – Borrowings made from RBI
document comprises the receipts and expenditures
of the government of current year, previous year and through printing fresh currency. The printed money is
budget year in three separate parts viz. Consolidated called high power money. FRBM act disallow RBI to
Fund of India, Contingency Fund of India and Public do this under normal conditions
Account of India. 2. Ways and Means Advances (WMA): The Reserve
2. Demands for Grants [Article 113]: The estimates of Bank of India gives temporary loan facilities to the
expenditures are presented to Lok Sabha in the form centre as a banker to government against adhoc
of Demands for Grants. Ministry wise demand for treasury bill. There is no collateral but penal interest
grants are presented to Lok Sabha. rate is charged.
3. Appropriation Bill [Article 114(3)]: The article 114(3)
stipulates that no amount can be withdrawn from In case of state government there are two types of
WMA, normal WMA are unsecured advances

extended at bank rate. While special WMA are Committee on FRBM.

extended against government securities. The government has utilised 'escape clause' under the
Fiscal Responsibility and Budget Management (FRBM)
Fiscal Responsibility and Budget Management act Act which provides it leeway for relaxation of fiscal
(FRBMA), 2003 deficit roadmap during time of stress.
 Introduction of a transparent system of fiscal "Section 4 (2) of the FRBM Act provides for a trigger
management within the country to ensure fiscal mechanism for a deviation from the estimated fiscal
stability. deficit on account of structural reforms in the
economy with unanticipated fiscal implications.
It is mandated by the act that, Fiscal consolidation: It means strengthening of
1. Macro-Economic Framework Statement: It government finances and includes the following,
comprises an assessment of the overall growth
Revenue side
prospects of the economy with specific underlying
 Rationalization of tax exemptions,
assumptions.
 Improving efficiency of tax collections
2. Medium Term Fiscal Policy Statement (MTFP): It is a
 Tax stability etc
statement that is presented in the Parliament under
Section 3(2) of the Fiscal Responsibility and Budget Expenditure side
Management (FRBM) Act, 2003.  Cutting out non-essential and unproductive activities,
3. Medium Term Expenditure Framework Statement:  Rationalizing subsidies
This document sets forth a three-year rolling target  Reduce time and cost overruns etc
for the expenditure indicators with specification of Government Debt:
underlying assumptions and risks involved. Various classification of government debt
 Government liabilities have been broadly classified
FRBM ACT, 2003 as debt contracted against the Consolidated Fund of
 In the Fiscal Responsibility & Budget Management India (defined as Public Debt) and liabilities in the
Act made obligatory for the govt. to reduce its RD & Public Account, called Other Liabilities.
FD.  Public debt is further classified into internal and
 Reduction beginning from 2004 – 05. external debt.
 Internal debt is debt taken from sources within the
Yearly reduction from 2004 - 05
country by selling of Treasury bills, loan from market.
2008 – 09  External debt loan from foreign countries,
RD 0.5% of GDP 0 international financial institutions, external
FD 0.3% 3% commercial borrowings (largest borrowing), NRI
By 2016-17 bring down (FRBM amendments) 2016-17 deposits, bilateral and multilateral debt, Trade credit.
FD 3%  Rupee debt: refers to that part of India’s total
external debt denominated in Rupees.
RD 1.5%
 Other Liabilities include liabilities on account of
ERD 0 Provident Funds, Reserve Funds Deposits, Other
Accounts, etc
 Government debt as a percent of GDP is used by
Escape Clause in the FRBM Act investors to measure country ability to make future
Escape clause refers to the situation under which the payments on its debt. It affects borrowing cost and
central government can flexibly follow fiscal deficit government bond yields.
target during special circumstances.
This terminology was innovated by the NK Singh

Masala bonds  Pump-priming: Deficit financing and spending by the

 Masala bonds are bonds issued by Indian entities government on public works in an attempt to revive
outside India but denominated in Indian Rupees, not economy during recession
foreign currency.  Twin deficit: Worsening of both Current Account
 The term was used by the International Finance deficit (CAD) and Fiscal deficit (FD) simultaneously in
Corporation (IFC) to evoke the culture and cuisine of the economy.
India.  Fiscal cliff: The fiscal cliff refers to a combination of
expiring tax cuts and across-the-board government
 Low cost borrowing, Diversified funds. spending cuts
Various Budgeting techniques:  Economic stimulus refers to coordinated efforts to
Incremental Incremental budgeting takes last year’s boost economic growth, especially during a recession.
budgeting actual figures and adds or subtracts a
percentage to obtain the current year’s Fiscal stimulus measures are those enacted by
budget. It is the most common method government, such as lowering taxes;
of budgeting because it is simple and monetary stimulus measures are produced by central
easy to understand. banks and may include lowering interest rates
Activity Activity-based budgeting is a top-down  Sovereign Debt Crisis (SDC): It is the term that
based budgeting approach that determines the describes the difficulties that a nation faces to service
budgeting amount of inputs required to support the the loans it takes from the foreign sources in foreign
targets or outputs set by the company. currency.
Value Value proposition budgeting is really a  State development Loans (SDL): SDLs are debt
proposition mindset about making sure that securities auctioned by RBI to raise loans for state
budgeting everything that is included in the budget governments
delivers value for the business.  Off budget financing: This refers to expenditure
that’s not funded through the budget.
Zero based Zero-based budgeting starts with the
o For example, the government sets up a
budgeting assumption that all department budgets
special purpose vehicle (SPV) to construct a
are zero and must be rebuilt from
bridge.
scratch.
o The SPV will likely borrow money to build the
Zero-based budgeting is very tight,
bridge on the strength of a government
aiming to avoid any and all expenditures guarantee.
that are not considered absolutely o It is not taken into account when calculating
essential to the company’s successful fiscal indicators.
(profitable) operation. o Hence, Parliamentary control on such
Gender It encompasses the extent of spending spending is also reduced.
budgeting for women empowerment Note:Some reforms related to budget
Terminologies:
 Budget is preponed to 1st FEB
 Fiscal drag: It is a situation where inflation pushes  railway budget merged with general budget
income into higher tax bracket. The result is increase
 no vote on account
in income taxes but no increase in real purchasing
 plan and non-plan expenditure removed.
power
 Fiscal neutrality: When the net effect of taxation and
public spending is neutral
 Crowding out: Excessive government borrowing can
lead to shrinkage of the liquidity in the market, it
forces the interest rates to go up which in turn affect
private investment.

4.MONETARY POLICY AND BANKING

Monetary policy is made by central bank by using
interest rate and other instruments to influence money
supply in the economy to achieve certain macro-
economic goals.
Objectives:
1. Accelerating economic growth.

2. Price stability.
3. Exchange rate stabilisation.
4. Balancing savings and investment.
5. Employment generation.
Types of monetary policy
Terminologies
 Bank Rate: Rate at which RBI lends long term loan to
commercial banks. It is used for managing money
supply.
 Liquidity Adjustment Facility (LAF): LAF are used by
banks for day to day mismatches in liquidity. RBI
lends money at repo rate.
 Repo Rate: it is the Fixed interest rate charged by RBI
while extending short term loan on the security of
government bonds. Banks undertake to repurchase
them same at a later date.(RBI lends to banks)
It is used as Policy rate, which signals to the financial
system to adjust their lending and borrowing
operations.
 Reverse Repo :RBI borrows from the market on the
basis of securities and repurchases them later. Rate
charged by bank is called Reverse repo rate.(banks
lend to RBI). It absorbs excess liquidty.

 Marginal Standing Facility (MSF): A window through It is a sterilization effort of the central bank. (RBI borrows
which commercial banks can borrow from RBI at a from market absorbing excess liquidity)
rate greater than repo rate, which is meant to ease
liquidity In the market.  Interest rates: A rate which is charged or paid for the
use of money. It is often expressed as an annual
 Monetary policy Corridor: The MSF rate and reverse percentage of the principal.
repo rate determine the corridor for the daily High interest rates Low interest rates
movement in the weighted average call money rate.
Rupee gets stronger Rupee weakens
 Reserve requirements: fraction of total deposits
managed by a bank as reserves that are not to be lent, Encourages saving Encourages spending
which is calculated as a percentage of each bank’s net Less disposable income More disposable income
demand and time liabilities (NDTL). Loan repayments increase Loan repayments
This are used for, providing loans to the government, decrease
safe banking operations, liquidity regulation, Savings earn more interest Savings earn less interest
management of interest rates etc. they can be CRR or
SLR.
Higher inflation Low inflation
 Cash Reserve Ratio (CRR):it is the portion of the bank
 Hawkish stance is when a central bank wants to
deposits that a bank should keep with the RBI in cash
guard against excessive inflation, there by increases
form, with no interest.
interest rates.
It is used to manage liquidity and inflation.
 Dovish is the opposite of hawkish, interest rates are
 Statutory Liquidity Ratio (SLR): portion of time and reduced to fuel growth.
demand deposits banks should keep with themselves
in the form of designated liquid assets like  Benchmark Prime Lending Rate (BPLR) was the rate
Government securities, public sector bond, current at which commercial banks can lend to customers
account balances with banks and gold. who are most credit worthy.
 Liquidity coverage ratio: The LCR is the requirement  Base Rate is the interest rate below which Scheduled
whereby banks must hold an amount of high-quality Commercial Banks (SCBs) will lend no loans to its
liquid assets that's enough to fund cash outflows for customers.
30 days. Base rate is replaced with MCLR (Marginal Cost of
 The high-quality liquid assets include only those with funds-based Lending Rate)
a high potential to be converted easily and quickly
into cash
 Standing Deposit Facility (SDF) is a collateral free
arrangement meaning that RBI need not give
collateral for liquidity absorption.
The SDF will allow the RBI to suck out liquidity
without offering government securities as collateral.
 Open Market Operations (OMOs): These include
both, outright purchase and sale of government  Inflation Targeting :a central bank has an explicit
securities, for injection and absorption of liquidity. target inflation rate range. Government and RBI
Note : Tools of liquidity adjustment-CRR, repo and agree on convergence between fiscal and monetary
reverse repo. policies.
 Market Stabilisation Scheme (MSS): Surplus liquidity Urjit Patel committee 2014: inflation targeting
of a more enduring nature arising from large capital  Inflation target 4% +/- 2%
inflows is absorbed through the sale of short-dated
 Nominal anchor should be defined in terms of
government securities and treasury bills.
headline inflation.

 Setting up Monetary Policy Committee (covered 3. Bankers bank and lender of last resort: scheduled
in Inflation) banks can borrow from RBI by rediscounting bills of
exchange. RBI is the lender of last resort.
 Twin Balance Sheet (TBS) challenge deals with 4. Controller of credit: it has the power to influence the
balance sheet of Indian companies and Indian Banks. volume of credit created by bank in India.
1. Overleveraged companies: Debt accumulation on 5. Agent and advisor of the government: It issues
companies is very high and thus they are unable government bonds, treasury bills, financial adviser to
to pay interest payments on loans. government, as an agent of government manages
public debts.
2. Bad-loan-encumbered-banks: Non-Performing 6. National clearing house: RBI acts as the clearing
Assets (NPA) of the banks is 9% for the total house for settlement of banking transactions.
banking system of India. It is as high as 12.1% for
7. Custodian of foreign reserves: It takes up operation
Public Sector Banks.As companies fail to pay back in forex market to stabilise the exchange rate of
principal or interest, banks are also in trouble. rupee and ensure there is no speculation.
 Public Sector Asset Rehabilitation Agency (PARA) Forex includes- foreign currency assets, gold, IMF-
The Public Sector Asset Rehabilitation Agency (PARA) SDR (special drawing rights).
colloquially called “Bad Bank” is a proposed agency 8. Supervisory functions: Supervises and control over
to assume the Non-Performing Assets (NPA) of public commercial and cooperative banks.
sector banks in India and to deal with the recovery of
the bad loans. 9. Promotional functions: to promote banking habit and
extend banking facilities, it has set up IFCI, SFC, IDB
 Helicopter Money etc.
A helicopter drop, or helicopter money, is a
hypothetical, unconventional tool of monetary policy 5.BANKING SYSTEM IN INDIA
that involves printing large sums of money and
A bank is a financial institution which performs the
distributing it to the public in order to stimulate the
deposit and lending function.
economy.
 Liquidity Trap: it happens when monetary policy Banks classification
becomes ineffective due to very low interest rates
and consumers preferring to save rather than invest
in higher-yielding bonds/investments.
Reserve bank of India:
It was set up in 1935 (by the RBI Act, 1934). Nationalised
in 1949, governed by Central board of directors. It is the
central bank of India and is regulator and controller of
banking system.
It’s functions are as follows,
1. Bank of issue: It has sole right to issue bank notes of
all denominations. Distribution of coin and 1rs notes
is done by RBI on behalf of GOI.
2. Banker to Government: Will transact government
business, receive and make payments on behalf of
government.

Commercial Banks RRBs are jointly owned by GoI, the concerned State
Government and Sponsor Banks (27 scheduled
Banks are broadly classified into two types- Scheduled commercial banks and one State Cooperative Bank),the
Banks and Non-scheduled Banks. issued capital of a RRB is shared by the owners in the
Scheduled banks are those banks which are included in proportion of 50%, 15% and 35% respectively.
the Second Scheduled of the Reserve Bank Act, 1934. The RRBs mobilise deposits primarily from rural/semi-
They satisfy two conditions under the Reserve Bank of urban areas and provide loans and advances mostly to
India Act. small and marginal farmers, agricultural labourers, rural
artisans and other segments of priority sector.
1. paid-up capital and reserves of an aggregate value of
not less than Rs. 5 lakh. Cooperative banks:
2. it must satisfy RBI that its affairs are not conducted in  Initially set up to supplant indigenous sources of rural
a manner detrimental to the depositors. credit, mostly serve the needs of agriculture and
allied activities, rural-based industries and to a lesser
extent, trade and industry in urban centres.
Non-scheduled banks are those banks which are not
included in the second schedule of the RBI Act as they do
not comply with the above criteria and so they do not
enjoy the benefits either.
Public Sector Banks
They are owned by the Government either totally or as a

majority stake holder.
State Bank of India and its five associate banks called the
State Bank group
Co-operative banks have a three tier structure:
Nationalisation of Banks- 50 years
(i) Primary Credit Societies-PCSs (agriculture or urban).
 SBI Act, 1955 partially nationalised the three Imperial (ii) District Central Co-Operative Banks- DCCBs.
Banks. (iii) State Co-Operative Banks-SCBc (at the apex level).
 Partially nationalised eight more private banks via the
SBI (Associates) Act, 1959 and named them as the
Cooperative Banks Commercial Banks
Associates of the SBI
 With Banking Nationalisation Act, 1969, the Commercial banks are
government nationalised These are Co-operative joint stock companies
Societies governed by the
they are governed by the
(i) 14 banks were nationalised in July 1969. Co-operative societies Act,
Banking Regulation Act,
(ii) 6 banks were nationalised in April 1980. 1904.
1949.
Regional Rural Banks Cooperative Banks Commercial banks
generally provide short, generally provide short
RRBs were established under the provisions of an
medium- and long-term medium- and long-term
Ordinance promulgated on the 26th September 1975 and
finance to agriculture and finance, to trade,
the RRB Act, 1976 with an objective to ensure sufficient
institutional credit for agriculture and other rural sectors. allied sectors. commerce and industry.
Cooperative Banks lend Commercial banks lend
The area of operation of RRBs is limited to the area as finance to their members to anyone who is willing
notified by GoI covering one or more districts in the State.

only , shareholders borrow to borrow and satisfies 1. Need of stronger banking system with merger of PSB.
from a co-operative bank. the conditions of the 2. Legal framework for loan recovery
bank. 3. 3 tier banking structure etc.
Cooperative Banks operate Their operations are on a SARFAESI ACT
on a relatively small scale. large scale.
The Securitisation and Reconstruction of Financial Assets
Scope of activities of a co- Commercial banks offer a
and Enforcement of Securities Interest (SARFAESI) Act,
operate bank is limited to wide range of financial
2002, was enforced in the year 2004.
providing different types of assistance and financial
loans to their members. services. SARFAESI was created to allow banks and financial
Cooperative banks operate Commercial banks have institutions to auction properties (residential and
as federal structure in the structure of a joint commercial) if the borrowers fail to repay the loans.
India. stock company. Act applies to outstanding loans (above Rs. 1 lakh), which
Co-operative Barks are Commercial Banks come are classified as Non-Performing Assets(NPA).
subject to the supervision directly under the
Methods of Recovery under the Act
of the state governments, Supervision of the
NABARD and the RBI. Reserve Bank of India. 1. Securitisation
2. Asset Reconstruction
Banking sector reforms 3. Enforcement of security without the interruption of
the court
Post 1991 reforms
Insolvency and Bankruptcy Code, 2016
 Interest rates were deregulated to make banks
IBC is considered as one of the biggest insolvency reforms
respond dynamically to the market conditions. Even
in the economic history of India. This was enacted for
savings bank deposit rates were deregulated in 2011.
reorganization and insolvency resolution of corporate
 Voluntary Retirement Scheme (VRS) for better work
persons, partnership firms and individuals in a time-
culture and productivity. bound manner for maximization of the value of assets of
 Floor and cap on CRR were removed and floor on SLR such persons.
was removed in 2006.
The Code creates time-bound processes for insolvency
 Near level playing field for public, private and foreign
resolution of companies and individuals. These processes
banks in entry.
will be completed within 180 days. If insolvency cannot
 Basel norms adopted for safe banking.
be resolved, the assets of the borrowers may be sold to
 FDI up to 74 per cent was permitted in private banks. repay creditors.
 Bank consolidation through merger.
 Indradhanush comprising banking sector reforms for The resolution processes will be conducted by licensed
insolvency professionals (IPs). These IPs will are
professionalization and strength.
members of insolvency professional agencies (IPAs). IPAs
Narasimham Committee I aimed at: also furnish performance bonds equal to the assets of a
company under insolvency resolution.
 Ensuring a degree of operational flexibility.
 Internal autonomy for public sector banks (PSBs) in Information utilities (IUs) are established to collect,
their decision-making process. collate and disseminate financial information to facilitate
 Greater degree of professionalism in banking insolvency resolution.
operation. The National Company Law Tribunal (NCLT) adjudicate
insolvency resolution for companies. The Debt Recovery
Narasimhan 2 (1998) recommendations

Tribunal (DRT) adjudicate insolvency resolution for  The PCA framework is applicable only to commercial
individuals. banks and not to co-operative banks and non-
banking financial companies (NBFCs).
The Insolvency and Bankruptcy Board of India regulate
functioning of IPs, IPAs and IUs. Priority Sector Lending
Bank recapitalisation  Lending programme is to ensure that adequate
institutional credit flows into some of the vulnerable
As the name suggests, means recapitalising banks with sectors of the economy.
new capital to improve their balance sheet.
Indian Banks need to lend 40%
Since the government is the biggest shareholder in public  Subtarget- 18% Agriculture,10% weaker
sector banks, the responsibility of infusing capital majorly  Sections, and other to housing, education, renewable
lies with the government. energy, MSME, sanitation.
The recapitalisation plan comes into action when banks Foreign Banks (having less than 20 branches) have to
get caught in a situation where their liabilities are fulfil only 36% (reach 40 in phased manner),sub-targets
comparatively higher than their assets. for the exports, small and medium enterprises, micro
enterprises.
Recapitalisation Bonds
Basel norms
A government bond is an instrument to raise money from Basel Committee on Banking Supervision is an
the market with a promise to pay to repay the face value international committee formed in 1974 to develop
of the maturity date and a periodic interest. standards for banking regulation.
A bond issued for the purpose of recapitalisation is called  It consists of central bankers from 27 countries and
recapitalisation bonds. the European Union.
 It is headquartered in the office of Bank for
Prompt corrective Action Framework International Settlements (BIS) in Basel, Switzerland.
 PCA is a framework under which banks with weak It developed a series of policy recommendations wrt
financial metrics are put under watch by the RBI. Capital risk, market risk and operational risk known as
Basel Accords.
 Introduced by RBI in 2002 as a structured early-
intervention mechanism for banks that become  Tier 1 capital which can absorb losses without a bank
undercapitalised due to poor asset quality, or being required to cease trading.
vulnerable due to loss of profitability.  Tier 2 capital absorb losses in the event of winding up,
 It aims to check the problem of Non-Performing which provide lesser degree of protection to
Assets (NPAs) in the Indian banking sector. depositors.
 PCA is intended to help alert the regulator as well as  Tier 3 capital tertiary capital of banks which are used
investors and depositors if a bank is heading for to meet market risk, commodity risk and foreign
trouble. currency risk.
 The idea is to head off problems before they attain Capital Adequacy Ratio (CAR)
crisis proportions.  CAR = (Tier I + Tier II Capital)/Risk Weighted
 The PCA framework deems banks as risky if they slip Assets
some trigger points - capital to risk weighted assets  Expressed as a percentage of a bank’s risk
ratio (CRAR), net NPA, Return on Assets (RoA) and
weighted credit exposures.
Tier 1 Leverage ratio.
 Measure of bank’s financial strength to ensure
 Certain structured and discretionary actions are
that banks have enough cushions to absorb losses
initiated in respect of banks hitting such trigger points.
before becoming insolvent and losing depositors’
funds.

 CAR is required to be 9% by RBI (based on BASEL  M2 = M1 + Savings Deposits of Post office Savings
III norms), where 7% has to be met by Tier 1 capital Banks.
while the remaining 2% by Tier 2 capital.  Broad Money (M3) = M1 + Time Deposits with the
Basel III Framework
Banking System.
Major Features of Basel III
 M4 = M3 + All deposits with Post Office Savings Banks
1. Revised Minimum Equity & Tier I Capital
(excluding National Savings Certificates).
Requirements
2. Better Capital Quality
3. Leverage Ratio
4. Liquidity Ratio
5. Countercyclical Buffer
6. Capital Conservation Buffer
 Ratio under consideration
CAR = (Tier 1 Capital + Tier 2 Capital)
Risk Weighted Assets
Tier 1 Capital
Leverage Ratio = Total Exposure
Liquidity Coverage Ratio = Money Multiplier

High−quality liquid assets
100  It is the ratio of Broad money (M3) divided by
Total net cash outflows over the next 0 calendar days
Reserve Money (M0). It represents money supply as
Available stable funding
in, for each rupee of money of the Central Bank in
Net Stable Funding Ratio = 100
Required stable funding India, how many rupees get generated in the Indian
India and Basel Norms Implementation: Economy.
 Presently Indian banking system follows Basel II Note : Liquidity-As we move from M1 to M4 the
norms. liquidity of the money goes on decreasing.
 Full implementation of the Basel III capital regulations Two basic changes in the new monetary aggregates.
by a year to march 31,2019.
Monetary aggregates:
 The key capital adequacy parameter has been  NM1 = Currency with the Public + Demand Deposits
stipulated at 9% higher than the international norm of with the Banking System +‘Other’ Deposits with the
8%. RBI.
 Recapitalisation: lending to the bank resources  NM2 = NM1 + Short Term Time Deposits of Residents
needed to conform to the capital adequacy norms (including the contractual maturity of one year).
 NM3 = NM2 + Long-term Time Deposits of Residents
which Stand at 8% today - minimum level.
Stock of money + Call/Term Funding from Financial Institutions.
Liquidity aggregates:
 Reserve Money (M0) = Currency in circulation +
 L1 = NM3 + All Deposits with the Post Office Savings
Bankers’ Deposits with the RBI + ‘Other’ deposits with
Banks .
the RBI.
 L2 = L1 + Term deposits with Term Lending
 Narrow Money (M1) = Currency with the Public +
Institutions and Refinancing Institutions (FIs) + Term
Demand Deposits with the Banking System + ‘Other’
Borrowing by FIs +Certificates of Deposit issued by FIs
deposits with the RBI.
 L3 = L2 + Public Deposits of Non-Banking Financial
Companies.

High powered money:The new currency printed by the 90 days or more. In case of Agriculture/Farm Loans,
central bank foe deficit financing is called ‘high powered the
money’. NPA varies for short duration crop (interest not paid
for2 crop seasons) and long duration crops (interest
Cryptocurrencies: A cryptocurrency is a form of digital not paid for 1 Crop season).
money which is designed to work as a medium of
exchange and uses a cryptography method to keep it Substandard, Doubtful & Loss assets.
secure the transaction.
 Substandard assets: Assets which have remained
Crypto currency uses the decentralized network. That NPA for a period less than or equal to 12 months.
means you don’t need any thirdparty server like bank,  Doubtful assets: Assets which have remained in the
government, other authorities to perform any type of substandard category for a period of 12 months
transactionwith the merchants. Ex: Bitcoin  Loss assets: Loss asset is considered uncollectible and
of such little value that its continuance as a bankable
Labels of ATMs asset is not warranted, although there may be some
 The automated teller machine (ATM) enteredIndia salvage or recovery value.
by late 1980s and have evolved into three of its Differentiated Banking
types, The banks which could be differentiated on the account
(i) Bank’s own ATMs: These are owned and operated by of capital requirement, scope of activities and serve the
the concerned bank and carrythe bank’s ‘logo’. They are needs of a certain demographic segment of the
the costliest way to provide such service to bank’s population are called as Differentiated Banks or Niche
customers. Banks.
 The idea of Differentiated Bank was mooted by
(ii) Brown Label ATMs (BLAs): These are owned by third Nachiket Mor Committee 2014, for Financial Inclusion.
party (a non-banking firm). The concerned banks only  It can be classified as Payment Banks, Small Finance
handle part of the process that is ‘cash handling’ and Banks, Regional Rural Banks, Local Area Banks
‘back-end server’ connectivity. They carry ‘logo’ of the Wholesale and Long-Term Finance (WLTF) banks etc.
bank which outsources their service.
 Wholesale and long-term finance banks focused
(iii) White Label ATMs: ‘owned’ and ‘operated’ by a primarily on lending to infrastructure sector and
small, medium and corporate businesses.
third party (a non-banking firm). They do not bear ‘logo’
of the banks they serve. In place, they carrylogo of the Who Can Payments Banks Small Banks
firm which own them. It serves many banks. Promote Prepaid card issuers, Individuals/professi
telecom companies, onals with 10 years
NBFCs, business experience in
Classification of assets correspondent, finance, NBFCs,
 Stressed Assets: It is a broader term and comprises of supermarket chains, microfinance cos,
NPAs, restructured loans and written off assets. corporates, real local area barks.
 Restructured Loans: Assets/loans which have been estate sector Co-
restructured by giving a longer duration for repayment, OPS& PSUS.
lowering interest or by converting them to equity. What  Have a minimum  Have a minimum
 Written off Assets: Assets/loans which aren’tcounted They capital of Rs capital of Rs
as dues, but recovery efforts arecontinued at branch Must Do 100cr. 100cr.
level – Done by banks to cleanup their balance books.  Maintain 75% of  Extend 75% of
 Non-performing asset (NPA) deposits in govt. loans to
It is a loan or advance for which the principal or bonds. priority sector.
interest payment remained overdue for a period of  Maintain 25% of  Have 25% of
deposits in other branches in

banks. unbanked  Is a company registered under Companies Act that

 Have at least 26% areas. provides financial services without meeting the legal
investment by  Maintain definition of a bank.
Indians. reserve  It can engage in the business of loans and advances,
 Get listed if net requirements. acquisition of shares / stocks / bonds / debentures /
worth crosses Rs.  Cap loans to securities issued by Government or local authority or
500cr. individuals and other marketable securities, leasing, hire-purchase,
 Have 25% of groups at 10% insurance business, chit business etc.
branches in and 15% of net  It does not include any institution whose principal
unbanked areas. worth. business is that of agriculture activity, industrial
 Be fully  Have a business activity, purchase/sale of any goods (other than
networked and correspondent securities) and sale/purchase/construction of
network. immovable property.
technology
driven.  It can either be deposit taking (need an RBI
registration) or non-deposit taking.
 Have Rs. 1 lakh
cap for deposits Basic NBFCs Banks
in one a/c.
Meaning They provide It is a government
What  Offer internet  Sell forex to banking authorized financial
They Can banking customers services to intermediary which
Do  Sell mutual funds,  Sell mutual people aims at providing
insurance, funds, without banking services to
pensions. insurance, holding Bank the public.
 Offer bill payment pensions. license.
service for  Can convert into Regulated Companies Banking Regulation
customers Have a full-fledged under Act 2013 Act 1949
ATMs and bank.
Demand Cannot be Can be accepted
business  Expand across accepted
Deposit
correspondents the country.
(BC). Foreign Allowed up Allowed up to 74%
 Can function as Investment to 100% for private-sector
banks
BC of another
Payment and Not a part of An integral Part of
bank.
Settlement the system. the System.
What  Offer credit cards.  Extend large
System
They Cant  Extend loans. loans
Maintenance of Not required Mandatory
Do  Handle cross-  Float subsidiaries
Reserve Ratios
border  Cannot deal in
remittances. Deposit Not available Available
sophisticated
insurance
 Accept NRI financial
facility
Deposits. products.
Credit Creation NBFC does Banks create credit
Banking Correspondents
not create
 They are individuals/entities engaged by a bank in credit
India for providing banking services in unbanked / Transaction Cannot be Provided by Banks
under-banked geographical territories. services provided by
 They work as an agent of the bank and substitutes for NBFC
the brick and mortar branch of the bank.
A Non-Banking Financial Company (NBFC)

6.TAXATION
All India financial institution
Bank Role Taxes are involuntary fees levied on individuals
Exim Bank Export–Import Bank of India, or corporations and enforced by a government entity.
established in 1982 under Export-
Import Bank of India Act 1981, a
catalyst and a key player in the
promotion of cross border trade and
investment.
National Established on the recommendations
Bank for
of B. Sivaraman Committee, on 12 July
Agriculture
and Rural 1982, matters concerning policy,
Development
planning and operations in the field of
NABARD
credit for agriculture and other
economic activities in rural areas in
India.
Small Established on April 2, 1990, through
Industries Three methods of taxation
an Act of Parliament. provide refinance
Development 1. Progressive
Bank of facilities and short term lending to  It is based on the taxpayer's ability to pay.As
India (SIDBI)
industries, and serves as the principal income increases, taxes increases. High
financial institution in the Micro, Small income earner will pay more tax than low
income earner.
and Medium Enterprises (MSME)
Ex: Indian income tax
sector. SBI is the largest shareholder. 2. Regressive
National Subsidiary of Reserve Bank of India  A regressive tax is assessed as a percentage of
Housing the item being purchased.
(RBI), was set up on 9 July 1988 under  Everyone pays the same percentage, regardless
Bank (NHB)
the National Housing Bank Act, 1987. a of earnings, so people with low incomes are hit
much harder than those with large incomes.
principal agency to promote housing Example: Sales tax.
finance institutions both at local and
regional levels and to provide financial 3. Proportional
 Proportional taxes are a flat tax system in
support. which taxpayers pay a set percentage,
regardless of their income.
Example: Income tax of 10% that does not
change as income rises or falls.

Specific and Ad-valorem tax (another classification of Fringe Benefit Tax (FBT), Dividend
taxes) Distribution Tax (DDT), Securities
Transaction Tax (STT) are all levied
 A Specific tax is a set amount of tax per unit
on corporate
sold, based on weight/ number etc.
 An Ad valorem tax is a percentage tax based 3. Wealth  Wealth tax is charged on the
on the value added by the producer. As the tax benefits derived from property
value added increases, taxes also increase. ownership.
Ex: Real estate. 4. Capital  Taxed on the income derived from
gains tax the sale of assets or investments
Two typesof taxation  Capital investments cover homes,
farms, businesses, works of art, etc
Direct Tax
 A direct tax is paid directly by an individual or
organization to the imposing entity. Other direct taxes in India
Example: Real property tax, personal property tax,
1. FBT Fringe Benefits Tax (FBT) is a tax payable by
income tax or taxes on assets.
employers for benefits paid to an employee
Indirect Tax in place of salary or wages.
 An indirect tax is collected by one entity in the supply 2. DDT Dividend distribution tax is the tax imposed
chain (usually a producer or retailer) and paid to the by the Indian Government on India
government, but it is passed on to the consumer as companies according to the dividend paid to
part of the purchase price of a good or service. a company's investors/share holders.
Example: Excise, sales tax, etc., 3. MAT Minimum Alternative Tax is payable under
Five principles of a good tax system the Income Tax Act. The concept of MAT
1. Fairness: horizontal equity and vertical equity. was introduced to target those companies
that make huge profits and pay the dividend
2. Efficiency: raise revenue with least cost.
to their shareholders but pay no/minimal
3. Administrative simplicity: reduce the work required tax under the normal provisions of the
to collect and pay taxes Income Tax Act.
4. Flexibility: modify when needed 4. STT Securities Transaction Tax is a tax payable in
5. Transparency: where the money is coming from, India on the value of securities (excluding
where it is going should be open to all. commodities and currency) transacted
Various Direct taxes in India through a recognized stock exchange
1. Income  It is charged directly on the income
tax of a person. Direct Tax Code
 The task force on the direct tax code (DTC)
 The rate charged is proportional to
submitted its final report to the finance minister.
level of Income.
 The Task Force, initially headed by former CBDT
2. Corporate  Levied on companies who exist as
Member (Legislation) Arbind Modi and later on
tax separate entities from their by Akhilesh Ranjan, was constituted in November
shareholders 2017 in order to review the Income-tax Act and
 Foreign companies are taxed on to draft a new Direct Tax Law.
income that arises, or is deemed to  The proposed new code will replace the Income-
arise, in India. tax Act of 1961.
 Minimum Alternative Tax (MAT),

 The panel on the Direct Tax Code (DTC) has  Composition scheme: Is an easy, low procedure and
suggested a rejig of personal income tax slabs, compliance friendly tax scheme for small and
roadmap of corporate tax rate cut to 25% for medium enterprises(goods and services).
companies, provisions to reduce compliance  Less number of tax returns file return on quarterly
burden by simplification of procedures and basis.
litigation management. It has also suggested  Turnover limit for availing this scheme <1.5 crores.
some changes in Dividend Distribution
 Available only for intra-state supplies.
Tax and Minimum Alternate Tax.
 No input scheme facility is available
Indirect taxes  Ecommerce firms can’t opt
 Exports are exempted from GST as in the case of the
GST-A big bang reform post 1991
previous regime.
Definition: It is a comprehensive tax levied on the
manufacture, sale, and consumption of goods and Advantages of GST-image enhancement
services.
Features of GST
 The GST is a destination based consumption tax
made on value addition.
 GST includes services tax also.
 Central Value Added Tax, Additional Customs Duty,
Special Additional Duty of Customs, Central Sales Tax,
Service Tax, state VAT (Sales tax) are some of the
taxes that has been merged to form the GST
 The GST proposes a four-tier rate structure. The tax
slabs are fixed at 5%, 12%, 18% and 28% besides the
0% tax on essentials.
 GST is applied when turnover of the business exceeds
Rs 20lakhs per year (Limit is Rs 10lakhs for the North-
Eastern States)
 Input tax credit: Input credit means at the time of
paying tax on output, tax paid on Input would be
deducted.
Goods and services tax council
 The centre and states will share GST tax revenues at
50:50 ratio (except the IGST)  It is a constitutional body under Article 279A. It
 The GST Council has adopted a dual GST with two makes recommendations to the Union and State
components – the Central GST (CGST) and the State Government on issues related to GST
GST(SGST).  It was introduced by the Constitution (One Hundred
 The IGST comes to play when the commodity is and First Amendment) Act, 2016.
produced in one state and is traded to another state  The GST Council is chaired by the Union Finance
(interstate trade). In this case, the share of SGST Minister.
should go to theconsuming state (as the GST is a  It is considered as a federal body where both the
destination based tax). centre and the states get due representation.

 The GST council is the key decision-making body that  Though check-posts have been abolished under GST,
will take all important decisions (tax rate, tax exemption, a consignment can be intercepted at any point for the
the due date of forms, tax laws, and tax deadlines) verification of its E-way bill, for all inter-State and
 Every decision of the Goods and Services Tax Council intra-State movement of goods.
shall be taken at a meeting by a majority of not less  If a consignment is found without an E-way bill, a
than three-fourths of the weighted votes of the penalty of Rs.10,000 or tax sought to be evaded,
members present and voting, in accordance with the whichever is greater, can be levied.
following principles, namely:  Whether goods are transported on one’s own or
 the vote of the Central Government shall have a hired conveyance, by air, rail or road, the E-way bill
weightage of one third of the total votes cast, and the has to be generated.
votes of all the State Governments taken together TAX PLANNING, TAXAVOIDANCE AND TAX EVASION: The
shall have a weightage of two-thirds of the total votes tax liability of a person can be reduced through Tax
cast, in that meeting. Planning, Tax Avoidance and Tax Evasion
 The Council will also set up Anti-profiteering 1. Tax  Tax Avoidance basically means
screening committees that will make the National avoidance making use of the loopholes in
Anti-Profiteering Authority stronger under the GST the Tax Law to one’s own
law. advantage to reduce the tax
burden.
National anti-profiteering authority
 Although Tax Avoidance is 100%
It is institutional mechanism under GST law to check the legal, it is not advisable.
unfair profit-making activities by the trading community, 2. Tax  Tax evasion involves breaking the
with core function of ensuring tax reduction will be evasion law, not paying one’s taxes
passed on to end customer.  . Tax evasion is the method by
which a person illegally reduces
Goods and Services Tax Network (GSTN)
his tax burden by either deflating
 It not for profit organisation jointly owned by
their income or inflating their
government and private players.
expenses
 GSTN has been entrusted with the responsibility of
3. Tax  It is the art of reducing the tax
building Indirect Taxation platform for GST to help
planning liability by using the various
one prepare, file, rectify returns and make payments
provisions of Law.
of your indirect tax liabilities.
 The government provides various
E way bill deductions and exemptions which
can be used by a person to reduce
 The E-way bill is a document to be generated online
his tax liability. Ex: Investment in
under the GST system, when goods of the value of
mutual funds, Savings certificates
more than Rs.50,000 are shipped inter-State or intra-
State. Steps taken by the government to reduce tax avoidance
 The E-way bill must be raised before the goods are in India
shipped and should include details of the goods, their 1. Renegotiating Double taxation avoidance agreement
consignor, recipient and transporter. (DTAA)
 The transporter has to carry the invoice and the copy  DTAA also referred as Tax Treaty is a bilateral
of E-way bill as support documents for the movement economic agreement between two nations that
of goods. aims to avoid or eliminate double taxation of the
same income in two countries.

 India has DTAA with 84 nations. 3. Quoting of PAN made mandatory for sale or purchase
of any goods/services above Rs. 2 Lakh.
2. Advanced pricing agreements (APA) 4. Proactively engaging with foreign governments to
 An APA is a contract, usually for multiple years, enhance the exchange of information (EoI) under tax
between a taxpayer and at least one tax authority treaties
specifying the pricing method that the taxpayer 5. India joined a group of 48 countries as early adopters
will apply to its related-company transactions to new global standards for automatically exchanging
 APAs gives certainty to taxpayers, reduce information from 2017
disputes, avoid tax avoidance.
3. General Anti Avoidance Rules: Terminologies related to Taxation
 GAAR usually consists of a set of broad rules  Tax incidence: entity on whom tax is imposed.
which are based on general principles to check  Tax burden: Those who pay tax.
the potential avoidance of the tax in general.  Tax expenditure: revenue forgone as a result of
 The government set up a panel under exemptions and concessions given by
ParthasarathyShome to review the proposals government.
with regards to GAAR.  Tax base: volume of goods and services on which
4. Base Erosion and Profit Shifting (BEPS) tax is imposed.
 BEPS refers to tax planning strategies that  Tax buoyancy: % change in tax revenue with
exploit gaps and mismatches in tax rules to growth of national income.
artificially shift profits to low or no-tax locations  Transfer pricing:Is the setting of the price for
where there is little or no economic activity. goods and services sold between controlled (or
 OECD and G20 countries along with developing related) legal entities within an enterprise.
countries that participated in the development of  Arm’s length principle: Arm’s length price, is the
the BEPS Package are establishing a modern price at which two unrelated parties will make a
international tax framework under which profits deal. hence market forces of supply-demand will
are taxed where economic activity and value work.
creation occur.  Cess: Tax or additional levy on tax. It is imposed
for specific purpose and can be used for
designated ends only.
Ex: Education cess
 Surcharge: Tax or additional levy on tax. It is
imposed for general purpose and can be used for
any purpose.
 Tax elasticity: % change in tax revenue wrt
change in tax rate and extension of coverage.
 The tax-to-GDP ratio is a ratio of a nation's tax
5. Other steps taken by the government in recent
revenue relative to its gross domestic product.
times to prevent tax avoidance and evasion
Countries with higher GDP generally collect more
taxes, while those with lower taxes produce a
1. Enactment of the black money (Undisclosed Foreign
lower GDP.
Income and Assets) and Imposition of Tax Act, 2015
2. Enactment of the Benami Transactions (Prohibition)  Capital Gains tax: Capital gains tax is a levy
Amendment Act, 2016 assessed on the positive difference between the

sale price of the asset and its original purchase 7.FINANCIAL MARKETS
price.
Long-term capital gains tax is a levy on the profits A financial market brings buyers and sellers together to
from the sale of assets held for more than a year trade in financial assets such as stocks, bonds,
 Inverted duty structure is a situation where commodities, derivatives and currencies. The purpose of
a financial market is to set prices for global trade, raise
import duty on finished goods is low compared to
capital, and transfer liquidity and risk.
the import duty on raw materials that are used in
the production of such finished goods Classification of financial markets
 Tax planning: it is the analysis of finances from a Money market Capital market
tax perspective, with the purpose of ensuring
Money markets Capital markets are more
maximum tax efficiency. are used by frequently used for long-term
 Tax avoidance: it is the use of legal methods to government and assets, which are those with
modify an individual's financial situation to lower corporate entities as maturities of greater than one
the amount of income tax owed. a means for year.
This is generally accomplished by claiming the borrowing and Capital markets include the
lending in the short equity (stock) market and debt
permissible deductions and credits. It differs from
term, usually for (bond) market.
tax evasion. assets being held for
 Tax evasion can be either the illegal non- up to a year.
payment or underpayment of actual tax liabilities
due. Money market
 tax shelter: it is a place to legally store assets so
Structure of money market
that current or future tax liabilities are minimized.
A tax shelter is a tax minimization strategy, and 1. Organized money market: Organized structure
should not be confused with the illegal practice of includes, Reserve bank of India, DFHI (Discount and
tax evasion. Finance House of India),Commercial Banks,
 Tax haven is defined as a country or place with Development bank IDBI, IFCI, ICICI, NABARD, LIC, GIC,
UTI etc.
very low "effective" rates of taxation for foreign
2. The unorganized structure includes: Indigenous banks,
investors.
Money lenders, Chits andNidhis, Co-operative Sector
Ex panama, Bermuda, Cayman Islands, Hong
Kong etc. Money market instruments
 Tobin tax: it is a tax on spot currency conversions 1. Call money market
that was originally proposed with the intention of  Money borrowed or lent for a very short period of
penalizing short-term currency speculation. time
 Pigouvian tax: it is intended to tax the producer  1-14 days it is called notice money, else it is called
of goods or services that create adverse side call money
effects for society.  No collateral required
 Fringe Benefit Tax (FBT) is fundamentally a tax  Commercial banks, co-op banks, DFHI participate
that an employer has to pay in lieu of the benefits both as lenders and borrowers.
that are given to his/her employees.  LIC, SEBI participate as only lenders.
 Hidden/implicit taxes: taxes that are concealed  Market determined Interest rates
in the price of articles that one buys.
 Negative income tax- subsidies given by the
government

2. Government securities 8. Commercial bill

 These are dated securities issued by the
Government of India and state governments, Bills of exchange are negotiable instruments drawn by
managed by RBI. the seller of goods or services on the buyer of goods for
 Treasury-Bills: T-bills are short-term securities the value of goods delivered, called as trade bills.
that mature in one year or less from their issue When trade bills are accepted by commercial banks for
date. They are issued 91, 182, 364 days of discounting are called commercial bill.
maturity periods. These are issued at discount and
redeemed at par, so no interest rate (zero Discount and Finance House of India
coupon instrument). Most secure as it is backed
by government. Ensures Short term liquidity. 1. It was established by RBI in 1988
 Banks, insurance companies and Financial 2. Objective: it is to facilitate the smoothening of short
institutions participate. term liquidity imbalances by developing active money
market and integrating various segments of money
3. Cash management bills: they are like T-bills but are market.
issued for maturities less than 91 days, to adjust
temporary mismatches in government cash flow. Capital markets
 It refers to market for funds with a maturity of

4. Certificate of deposits:
1year.
 These are negotiable promissory notes, secure and
 The capital market includes primary and
short term issued by scheduled commercial
secondary markets.
banks(>15days to 1 year) and Financial institutions
 The primary market is the part of the capital
(>1year to 3year ).
market that deals with the issuance and sale of
 Regional rural banks and Local area banks cannot
equity-backed securities to investors directly by
issue CDs
the issuer.
 These are also issued at a discount to the face value
 The secondary market is where investors buy and
to individuals and firm.
sell securities they already own.
5. Inter corporate deposit market: Significance of Capital Markets

 It is an unsecured loan extended by one corporate to  Growth of savings.
another.  Efficient allocation of investment resources and
Better utilization of the existing resources.
6. Commercial paper
Capital market instruments
 It is a short term unsecured promissory note issued
by top rated Corporate and Financial institutions at a 1. Shares
discounted value on face value for 7days to 1year.  Shares are units of ownership interest in a
 They yield higher returns as compared to T -Bills as corporation or financial asset that provide for an
they are less secure in comparison to these bills
equal distribution in any profits, if any are
7. Ready forward contracts (Repo): declared, in the form of dividends.
Covered in Banking section
 The two main types of shares are common shares
and preferred shares.

Difference between common stock and preferred stock  Bonds have lower interest rates compared to
debentures
Common stock Preferred stock
1. Common stock 1. Preferred stock pays a 4. Derivatives
allows its holders predetermined dividend,
 A derivative is a financial security with a value that is
to make a profit whereas the dividends paid
through rising to common shareholders derived from, an underlying asset or group of assets
share prices and tend to vary according to  The most common underlying assets include stocks,
dividend the company's fortunes bonds, commodities, currencies, interest rates and
payments. 2. Holders of preferred stock market indexes.
2. Holders of do not get a vote on  Derivatives can either be traded over-the-counter
common stock company matters
(OTC) or on an exchange
have voting 3. if a company's assets are
rights liquidated, the preferred
Types of derivatives:
3. If a company stockholders get to redeem
Futures It is an agreement between two parties
goes bust, they their shares before
for the purchase and delivery of an asset
are paid last common stockholders
at an agreed upon price at a future date
Forward It is a non-standardized contract
 Stock is the capital raised by a corporation between two parties to buy or to sell an
through the sale of shares. asset at a specified future time at a price
2. Debentures agreed upon today, making it a type of
 A debenture is a type of debt instrument that is not derivative instrument
secured by physical assets or collateral. Swaps Swaps are another common type of
 Debentures are backed only by the general derivative that is often used to swap one
creditworthiness and reputation of the issuer. kind of cash flow with another. For
 Both corporations and governments frequently issue example, one might use an interest rate
this type of bond to secure capital. swap to switch from a variable interest
 There are two types of debentures as of 2016: rate loan to a fixed interest rate loan, or
convertible and nonconvertible. vice versa.
 Convertible debentures are bonds that can convert Options The key difference between options and
into equity shares of the issuing corporation after a futures is that, with an option, the buyer
specific period of time. is not obligated to "exercise" the option,
 Nonconvertible debentures are regular debentures while the option seller is obligated to
that cannot be converted into equity of the issuing either buy or sell the underlying asset if
corporation the buyer chooses to exercise the
contract.
3. Bond Warrant Longer dated options (>1 year)
 Bonds and debentures represent the majority of LEAPS The acronym LEAPS means Long-Term
issued debt capital. Although the term bonds and Equity Anticipation Securities. These are
debentures are often used interchangeably the two options having a maturity of up to three
are distinctly different: years.
 A bond is typically a loan that is secured by a specific Stock exchange: A physically existing institutionalised set-
physical asset. A debenture is secured only by the up where instruments of security stock market (shares,
issuer’s promise to pay the interest and loan principal. bonds, debentures, securities, etc.) are traded.

Ex: BSE, NSE  Exchange-Traded Funds (ETFs): ETFs are a mix of

There are three ways in which a company raises capital in open-ended and close-ended schemes. ETFs, like
the primary market. close-ended schemes,
 are listed and traded on a stock exchange on a daily
 Public Issue basis, but the price is usually very close to its
A public offer is open for all Indian citizens, the most underlying asset
broad-based method of raising capital and the most
prestigious. 3. Hedge Funds: A hedge fund is an investment fund
that pools capital from accredited investors or
 Rights Issue institutional investors and invests in a variety of
Raising capital from the existing shareholders of a assets, often with complex portfolio-construction and
company, it means it is a preferential kind of issue risk management techniques
restricted to a certain category of the public only.
4. Venture capital:
 Private Placement  Venture capital is a type of private equity, a form of
Raising capital by selling shares to a select group of financing that is provided by firms or funds to small,
investors, usually financial institutions (FIs) but may be to early-stage, emerging firms that are deemed to have
individuals also. high growth potential, or which have demonstrated
high growth.
 G-secs (Gilt edged securities): is a tradable
instrument (bond) issued by central / state 5. Angel investors:
government. They are risk free tradable instruments.  He/she is an affluent individual who provides capital
Central government issues both short term(Treasury bills) for a business start-up usually in exchange for
and long term(G-secs), where as state government can convertible debt or ownership of equity.
issue only long term/ dated securities.
6. Collective investment schemes (CIS)
Players in the Indian capital market  It is an arrangement which pools funds from investors
1. Merchant banks: to pool their money for investment in particular asset.
It manage and underwrite new issues, provide  SEBI regulates players involved in CIS.
consultancy and corporate advisory services for
raising funds and other financial aspects. 7. Alternative investment Funds (AIF)
2. Mutual funds:  It is a newly created investment vehicle for real
 A mutual fund is a type of financial vehicle made up estate, private equity and hedge funds.
of a pool of money collected from many investors to  SEBI regulates AIF in India
invest in securities such as stocks, bonds, money  It does not include mutual funds, family trusts,
market instruments, and other assets. employee stock option or CIS.
8. Foreign portfolio investor
Types of mutual funds  FPIs generally participate through the stock markets
 Open ended funds : an investor can buy or sell as and and gets in and out of a particular stock at much
when they intend to faster frequencies.
 Close-ended funds: usually issue units to investors  Globally FPIs are defined as those who hold less than
only once, when they launch an offer, called New 10% in a company.
Fund Offer.

 FIIs, Sub-Accounts and Qualified Foreign Investment  It is an association of organisations that regulate
(QFI) are merged together to form the new investor the world’s securities and futures markets.
class, namely Foreign Portfolio Investors, with an Members are typically primary securities and/or
aggregate investment limit of 24% which can be futures regulators in a national jurisdiction or the
raised by the Company up to the applicable sectoral main financial regulator from each country.
cap.
 They are not permitted to invest in unlisted shares 4. Sustainable stock exchange
and also in T-bills.  They provide a unique, high-level platform to
explore how the world's exchanges can work
9. QFI together with investors, regulators and
 The Qualified Foreign Investor (QFI) is an companies to create more sustainable capital
individual group or association resident in a markets.
foreign country that is compliant with FATF  They are designed to analyze, promote and foster
standards. communication on stock exchanges’
 They can directly invest in corporate debt, sustainability-related activities.
equities and mutual funds etc.
External commercial borrowings
Prominent institutions with respect to securities
market  ECB are loans in India made by non-resident lenders
1. SEBI in foreign currency to Indian borrowers. They are
 The Securities and Exchange Board of India (SEBI) used widely in India to facilitate access to foreign
is the regulator for the securities market in India. money by Indian corporations and PSUs
It was established in 1988 and given statutory  Ministry of Finance and RBI regulate the amount of
powers on 30 January 1992 through the SEBI Act, money that can be raised by the players under this
1992 mechanism
 SEBI has three functions rolled into one body:  ECB be raised through two routes, Automatic route
quasi-legislative, quasi-judicial and quasi- and the approval route. The former does not require
executive. any permission by the authorities while the latter
 Regulate the working of stock exchanges and does
intermediaries, accords approvals for mutual fund, Stock exchange
registers FII who wish to trade in stock markets.  It is a facility where stock brokers and traders can buy
and sell securities, such as shares of stock and bonds
2. FATF and other financial instruments.
 It is an intergovernmental organization founded Stock exchanges in India
in 1989 on the initiative of the G7 to develop  Most of the trading in the Indian stock market takes
policies to combat money laundering. place on its two stock exchanges: the Bombay Stock
 In 2001 its mandate expanded to include Exchange (BSE) and the National Stock Exchange
terrorism financing (NSE).
 The FATF Secretariat is housed at the OECD  The BSE has been in existence since 1875, S & P BSE
headquarters in Paris SENSEX India’s most widely traded benchmark index.
 1. The NSE, on the other hand, was founded in 1992
3. IOSCO and started trading in 1994. S & P crisil NSE index
50 or S & P CNX nifty.National Stock Exchange

(NSE) had developed and launched the NSE  Bull market :period characterized by rising prices
Mumbai inter-bank bid rate (MIBID) and NSE over a long period of time.
Mumbai inter-bank offer rate (MIBOR) for the  Gilt: it is a bond issued by the government which
overnight money market in 1998 carries less risk.
 Blue chip Company: shares of the company that are
International Stock exchange the most valuable.
 Retail investor: it is an investor whose subscription to
 The India International Exchange (INX) is India's securities if of value less than 2 lakh.
first international stock exchange, opened in  Negotiated dealing system: it is an electronic
2017. platform for facilitating dealing in government
 It is located in the state of Gujarat securities and money market instruments.
 It is one of the most advanced stock exchanges in  Short selling
the world
Demutualization means ownership, management and

trading is in the hands of three different sets of people.
This concept was first brought in by National Stock
Exchange of India Ltd.
BSE SME and NSE Emerge:SME exchange platform to

enable small and medium enterprises to raise funds and
get listed as public entities.
Commodity exchanges:
 It is an independent commodity exchange based in  Market capitalization: price per share multiplied by
India. It was established in 2003 and is based in the total number of shares outstanding.
Mumbai  Depository: it holds securities (shares, debentures,
 Commodities traded include metal, bullion, agro- bonds) in electronic format
commodities, energy etc. National securities depository limited (NSDL)
 It was regulated by Forward market commission  It holds securities in depository accounts, just like
(Ministry of Consumer affairs), it was merged with funds in bank in accounts.
SEBI in 2015  NSDL was established according to depositories act,
1996.
Terminologies:  Nasdaq: is an electronic stock market that uses a
computerized system to provide price quotes to
 Bear: is an investor who believes that market will go brokers and dealers.
down.  Shariah index: The NIFTY Shariah Indices are
 Bull: is an investor who believes that market will go designed to offer investors Shariah-compliant
up. investment solutions. Shariah compliant companies
 Bear market : a sustained period of falling stock are ones who do not deal in alcohol, entertainment,
prices. tobacco, pork, meat etc

Pension Fund Regulatory and Development Authority 8.INFLATION

(PFRDA)
Inflation is persistent rise in the price of goods and
Pension Fund regulatory is a pension related authority,
which was established in the year 2003 by the Indian services.
Government.
Causes of Inflation
It is authorized by the Finance Ministry, and it helps in
1. Demand-pull inflation: “too much money chasing
promoting income security of old age by regulating and
too few goods.” As wages increase within an
also developing pension funds.
economic system, people will have more money
Insurance Regulatory and Development Authority of to spend on consumer goods. As a result of the
India (IRDAI) increased demand, companies will raise prices.
The Insurance Regulatory and Development Authority 2. Cost-push inflation: when companies are faced
(IRDA) is a national agency of the Government of India. with increased input costs like raw goods,
materials or wages, they will preserve their
It was formed by an Act of Indian Parliament known as
profitability by passing this increased cost of
IRDA Act 1999, which was amended in 2002 to
production onto the consumer in the form of
incorporate some emerging requirements.
higher prices.
Insurance Regulatory and Development Authority of India 3. Imported inflation: When the exchange rate
is the regulator of all private sector insurance business suffers such that the Rupee currency has become
and public sector insurance business in India. less valuable relative to foreign currency, this
IRDA issues guidelines for various insurance companies. makes foreign commodities and goods more
expensive to Indian consumers.
Largest stock exchanges in the world 4. Structural inflation: Persistent inflation due to
inadequacies in economy like backward
agriculture, inefficient storage and distribution
network etc.
5. Speculation in commodity exchanges.
6. Cartelization of Producers: producers manipulate
prices in market for their profit.
7. Hoarding: accumulation of huge quantities of
goods and releasing them into market in condition
of scarcity at higher prices.
Kinds of inflation- based on the rate of inflation

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Creeping (General Price Raise By 4%), Trotting (4% To 8%), Long run – saving decreases, purchasing power
Galloping (8% To 10%), Runaway (>10% And < 20%), decreases, less investment , less demand.
Hyper Inflation(20 Or 30 %) 4. Saving: short run – saving increases
Long run – saving decreases
Terminologies:
5. Tax – 2 distortions
1. Stagflation: A combination of Inflation and a. Tax payer suffers.
unemployment (usually in the time of Recession). Indirect tax – as value is added cost increases–
2. Disinflation: Reduction in the rate of inflation. more goods in tax bracket (more taxes)
3. Deflation: General fall in the level of prices. Direct tax – gross income Increases – crosses
4. Reflation: Rise in the prices to counter deflation. It is lower tax slabs- increases taxes.
when inflation returns after a spell of deflation and b. Tax collection by government – Inflation
recession. increases nominal value of gross tax revenue
5. Skewflation: It is a phenomenon in which there is a while real value suffers.
price rise of one or a small group of commodities 6. Exchange rate: As Inflation increases currency
over sustained period of time depreciates.
6. Inflation gap: Excess of government spending above 7. Export: Increases (depreciation of currency), volume
national income. of exports also increases.
7. Deflationary gap: Shortfall in total spending over 8. Import: foreign goods become costlier as currency
national income. depriciates, import substitution measure would be
8. Inflation tax: Due to price rise, wages increases, as taken.
wage increases taxes on this increases, more revenue 9. Trade balance: Developed countries – inflation Is
for government. favourable. Developing countries – inflation
9. Inflation spiral: wage- price spiral ie., when wages unfavourable.
press prices up and prices pull wages down. 10. Employment: In short run employment increases, but
10. Inflation accounting: Firms calculate profit after decreases in long run.
adjusting to inflation. 11. Wages: Increases nominal value of wage but real
11. Inflation premium: Bonus brought by inflation to value falls.
borrowers. Real interest rate(nominal IR adjusted to Economic recession and economic depression
inflation)<<nominal interest rate(charged on lending)
1. A recession is a significant decline in economic
12. Headline inflation: Entire economic inflation.
activity spread across the economy, lasting more
13. Core inflation: Excluding primary articles, food etc
than a few months, normally visible in real GDP,
which induces volatility/short term fluctuations.
real income, employment, industrial production,
and wholesale-retail sales.
Effects of Inflation:
2. A depression is a sustained, long-term downturn
1. Creditors and debtors: Lender suffers and debtors
in economic activity in one or more economies. It
benefit. lending intuition will suffer.
is a more severe economic downturn than a
2. Aggregate demand: High demand, low supply, higher
recession, which is a slowdown in economic
purchasing power.
activity over the course of a normal business
3. Investment: short run – boost the investment.
cycle.
a. High inflation – high demand – more production –
more investment.
b. Inflation lowers rate of interest.

Business cycle: Double-Dip- Depression: A recession followed by a short

lived Recovery and followed by another recession. GDP
The business cycle describes the rise and fall in
growth sliding back to negative after two positive growth.
production output of goods and services in an economy.
Business cycles are generally measured using the rise and Inflation indices
fall in real gross domestic product (GDP) or GDP adjusted
In India, generally, two kinds of indices are used to
for inflation.
measure inflation—Wholesale Price Index (WPI) and
Consumer Price Index (CPI).
WPI CPI
 A wholesale price index  Consumer Price
(WPI) is an index that Index is a measure
measures and tracks the of change in retail
changes in the price of prices of goods and
goods in the stages services consumed
before the retail level by defined
 WPI (base year-2012) is population group in
Characterized by four stages composed of three a given area with
groups: Manufactured reference to a base
 Depression
Products (65 percent of year
 Recovery
total weight), Primary  The CPI (Rural,
 Boom
Articles like food, etc. Urban, Combined)
 Recession (20.1 percent), and Fuel on Base 2012=100 is
Depression: Low aggregate demand, Low inflation, and Power (14.9 being prepared by
Unemployment grow fast, forced Labour cuts. percent). Ministry of
 The WPI is calculated by Statistics and
Ex: The great depression of 1929. the Ministry of programme
Commerce and implementation
Recovery: Upturn in aggregate demand in turn lead to
Industry.  Food and beverages
increase in production level and new investments.
are given maximum
Increase in inflation, Unemployment rate starts declining.
weightage under
To recover an economy , governments go for tax breaks , CPI-combined
interest cuts, an increase in the salaries etc.
Four types of CPI are as follows:
Boom : Accelerate and prolonged increase in the demand,
It exceeds sustainable production, economy heats up and I. CPI for Industrial Workers (IW).
faces structural problems, demand and supply II. CPI for Agricultural Labourer (AL).
Disequilibrium. III. CPI for Rural Labourer (RL).
IV. CPI (Rural/Urban/Combined).
Recession : General fall in demand as economic activities
Of these, the first three are compiled by the Labour
takes a downturn, lower inflation, unemployment rate
Bureau in the Ministry of Labour and Employment. Fourth
grows, industries resort to price cuts to sustain their
is compiled by the Central Statistical Organisation
business.
(CSO) in the Ministry of Statistics and Programme
Implementation.

GDP deflator and inflation or within a range. It indicates the primacy of price
 The GDP deflator, also called implicit price stability as the key objective of monetary policy.
deflator, is a measure of inflation.  The Reserve Bank of India and Government of India
 GDP deflator= (GDP nominal/GDP real)*100 signed a Monetary Policy Framework Agreement
 The deflator covers the entire range of goods and  RBI would aim to contain consumer price inflation
services produced in the economy — as against within 6 percent and within 4 percent with a band of
the limited commodity baskets for the wholesale (+/-) 2 percent
or consumer price indices Monetary policy committee (MPC)
 GDP deflator is available only on a quarterly basis  MPC would be the institutional arrangement at the
along with GDP estimates, whereas CPI and WPI disposal of RBI for targeting inflation.
data are released every month.
 The committee comprises six members - three
Producer Price Index officials of the Reserve Bank of India and three
external members nominated by the Government of
It measures the average change in the prices of both
India.
goods and services, either as they leave the place of
production called Output PPI or as they enter the input  The Governor of Reserve Bank of India is the
production process called as input PPI; thus PPI estimates chairperson ex officio of the committee.
the change in average prices that a producer receives.  Decisions are taken by majority with the Governor
having the casting vote in case of a tie
While WPI does not include services, but PPI includes
services thus making the index more inclusive.  The current mandate of the committee is to maintain
4% annual inflation until March 31, 2021 with an
PPI eliminates the multiple counting bias which is
upper tolerance of 6% and a lower tolerance of 2%.
inherent in the Wholesale Price Index.
In PPI the weights of the items are derived based 9.POVERTY

on Supply use Tables.
Poverty is a social phenomenon in which there is
PPI is considered as a better measure of inflation as the deprivation of basic human needs.
price change at the primary and intermediate stage can
be tracked before it gets built in the finished good stage Dimensions:
and due to this reason, many countries have switched Absolute Poverty: it is defined as condition characterized
over to the PPI. by severe deprivation of basic human needs.
Relative poverty: it is defined as condition in which
people lack the minimum amount of income needed in
Base effect and inflation
order to maintain the average standard of living in the
The base effect relates to inflation in the corresponding society in which they live.
period of the previous year, if the inflation rate was too
Poverty line: it is the level of income below which one
low in the corresponding period of the previous year,
cannot afford to purchase all resources one requires to
even a smaller rise in the Price Index will arithmetically
live.
give a high rate of inflation
Headcount ratio:Percentage of population below poverty
Inflation targeting
line to total population.
Inflation targeting is a monetary policy strategy used by Poverty gap: it is difference between the mean income
Central Banks for maintaining price level at a certain level among the poor and the poverty line.

Causes:  Introduce a new term Poverty Line Basket (PLB)

which is the basket of all goods selected to determine
poverty.
 Consumption quantity fixed the same for both rural
and urban people but price differs. Daily per capita
expenditure for Rural- Rs. 27, Daily per capita
expenditure for Urban- Rs. 33.
 Estimated that 21.5% of the Indian population as
poor.
Rangarajan Committee:
 Adopted the calorie-based approach which was used
in past.
Monthly consumption expenditure per person or per
household as a tool,Daily per capita expenditure for
Rural- Rs. 33 and Daily per capita expenditure for Urban-
Rs. 47
 Overall poverty- 29.5 Percent (in the year 2011-12)
Rural- 30.9 Percent (in the year 2011-12)
Urban- 26.4 Percent (in the year 2011-12)
SECC methodology:
To estimate the BPL population, SECC followed a three-
step process:
Committees:  Automatic Exclusion.
YK Alagh Committee:  Automatic Inclusion.
 First to come up with an official poverty line, based  Neither automatically included nor automatically
on calorie intake. excluded.
 2100 calorie in Urban areas,2400 calories in rural areas. After applying above methodology, it was found that the
percentage of people below the poverty line in 2011-12
Tendulkar Methodology:
was 30.95 percent in rural areas and 26.4 percent in
Committee headed by Suresh Tendulkar. India currently urban areas.
follows this method,
Components:
 Changed calorie based estimation to expenditure
based. 1. Food component
2. Non food component such as, Education Clothing,
Conveyance, Rent, Behaviour related expenditures.

omparison of various committees relating to poverty

COMMITTEES Y K Alagh Lakdawala Tendulkar Saxena Rangarajan
Committee Committee committee committee Committe
YEAR 1979 1993 2005 2009 2013
Constituted by Planning Planning Planning Ministry of Rural Government of
Commission Commission Expert Commission development India
Group Expert Group
BASED ON CALORIES CALORIES in Basket of CALORIES
addition with consumption (it included
clothing, education, goods nutrition,fat and
shelter. (monthly other essential
Poverty line based spending on non-food items)
on household per education,
capita consumption health, electricity
expenditure. and transport
also.)
RURAL calories 2400 kcal 2400 kcal 2090 kcal
48g protein
26g fat
URBAN calories 2100 kcal 2100 kcal 2155 kcal
50g protein
28g fat
RURAL Rupees ₹446.68 per ₹972 per capita
capita per month per month
URBAN Rupees ₹578.80 per ₹ 1181 per capita
capita per month per month
Poor definition the people all persons who live Based on cost of a household is
consuming less in households with living considered poor if
than 2100 per capita it is unable to
calories in the expenditures below save.
urban areas or the estimated
less than 2400 value.
calories in the
rural areas
Percent of poor 16 percent 36.3 per cent 21.9%(2011-12) 29.5%(2011-12)
OTHER YK Alagh State specific Shift from Calorie Gave Poverty
OBSERVATIONS eventually poverty lines Consumption methodology of estimated was 7%
defined the first should be updated based Poverty automatic higher than
poverty line in using the CPI-IW in Estimation. inclusion and Tendulkar
India. urban areas and All India Uniform automatic committee
ASSUMPTION; CPI-AL in rural Poverty line exclusion on estimation
health and areas. Basket BPL
education is
taken care by
state

10.UNEMPLOYMENT
Unemployment is a phenomenon that occurs when a
person who is capable of working and is actively
searching for the work is unable to find work.
UNEMPLOYMENT STATISTICS IN INDIA
Unemployment in India statistics is released once every

five years by the Ministry of Labour and Employment
(MLE), primarily from sample studies conducted by the
National Sample Survey Office.
UNEMPLOYMENT TRENDS IN INDIA
THE PERIODIC LABOUR FORCE SURVEY (PLFS) OF THE

NATIONAL SAMPLE SURVEY OFFICE (NSSO)
•The unemployment rate in the country in FY18 was at

KEY EMPLOYMENT AND UNEMPLOYMENT INDICATORS
5.3% in rural India and 7.8% in urban India, resulting in
overall unemployment rate of 6.1%. a. Labour Force Participation Rate (LFPR): LFPR is
•The unemployment rate (UR) in both rural and urban defined as the percentage of persons in labour force (i.e.
India is at its highest since 1972. working or seeking or available for work) in the
population.
•17.8% of young people (15-29 years) in the labour force
are unemployed.
•The unemployment rates in urban areas are higher than

those in rural areas.
•In urban areas, the unemployment rate among men is b. Worker Population Ratio (WPR): WPR is defined
more than twice and has increased twice among women
as the percentage of employed persons in the population.
•Among religious groups, Christians have the highest UR
c. Proportion Unemployed (PU): It is defined as the
in both urban and rural areas.
percentage of persons unemployed in the population.
•Regular wage/salaried workforce 8% in 2017-18 (7% in
2011-12) d. Unemployment Rate (UR): UR is defined as the
percentage of persons unemployed among the persons in
[other countries regular work salaried force is far higher
the labour force.
than India. China (53.1%), Brazil (67.7%) and South Africa
(84.8%)] e. Activity Status- Usual Status: The activity status
of a person is determined on the basis of the activities
pursued by the person during the specified reference

period. When the activity status is determined on the Employment intensity:

basis of the reference period of last 365 days preceding  Extent to which growth creates employment.
the date of survey, it is known as the usual activity status Types of Unemployment:
of the person.
f. Activity Status- Current Weekly Status (CWS):

The activity status determined on the basis of a reference
period of last 7 days preceding the date of survey is
known as the current weekly status (CWS) of the person.
Current Daily Status Unemployment (CDS):

Here the reference period is each of the 7 days,
preceding the date of survey in each of these days. It
records the activity status of a person for each day of the
1. Voluntary Unemployment:
7 days preceding the survey i.e. persons who did not find
Voluntary unemployment refers to a situation where
work on a day or some days during the survey week. The
workers are either not seeking for work or are in
Current daily status approach gives a composite or
transition from one job to another.
comprehensive measure of unemployment, i.e., it is a
measure of chronic unemployment. 2. Involuntary Unemployment:
Involuntary unemployment refers to a situation
Labour Force:
where workers are seeking work and are willing to
 Persons who are either working (or employed) or
work but are unable to get work.
seeking or available for work (or unemployed)
during the reference period together constitute 3. Frictional Unemployment:
the labour force.  The minimum amount of unemployment that
prevails in an economy due to workers quitting
Work force: their previous jobs and are searching for the new
 All people in age group of 15 -59 years. jobs is called Frictional Unemployment.
 This type of unemployment is of voluntary nature.
Work force> labour force
Employment rate: 4. Cyclical Unemployment:
 ratio of employed person to population (15 to 59  Cyclical unemployment is due to lack of demand
years) in the economy and slowdown of economic
activity.
Employment elasticity:
 Cyclical unemployment is a type of
 Percentage changes in employment induced by unemployment which is related to the cyclical
changes in GDP, which captures responsiveness
of labour market.

trends of booms and recessions of the business 11.AGRICULTURE

cycle.
 Agriculture remains the most important sector of
 This type of unemployment is of involuntary the Indian economy, whether it be the pre-
nature. independence or the post-independence periods.
5. Structural Unemployment:  In the fiscal 1950–51 agriculture accounted for
 It refers to a situation which arises due to change 55.4 per cent of the GDP.
in the structure of the economy or mismatch of  The Economic Survey 2017-18 states that
skills. Ex: An economy transforms itself from a agriculture employs more than 50% of total work
force and 17-18% share in GDP.
Labour-intensive economy to a Capital-intensive
Share of agriculture in GDP
economy.
6. Seasonal Unemployment:
Seasonal unemployment occurs during certain
seasons of the year. It occurs in Agricultural sector,
Tourism sector and in factories producing seasonal
goods. Therefore, they offer employment for only a
certain period of time in a year.
7. Disguised Unemployment:  Agriculture is the biggest unorganised sector of
the economy accounting for more than 90 per
 Disguised unemployment is when too many cent share in the total unorganised labour-force.
people are employed than what is required to
Cropping Seasons: The agricultural crop year in India is
produce efficiently.
from July to June. The Indian cropping seasons are
 Production does not suffer even if some of the classified in to,
employed people are withdrawn. 1. Kharif: The kharif cropping season is from July to
 The key point to remember is that the marginal October during the South-West Monsoon.
productivity of labourers under disguised  The kharif crops include Rice, maize, sorghum,
unemployment is zero. pearl millet/bajra, finger millet/ragi (cereals),
arhar (pulses), soyabean, groundnut (oilseeds),
8. Under Employment: cotton etc.
 Underemployment is the most dangerous kind of 2. Rabi: The rabi cropping season is from October to
unemployment in an economy. March during the North-East Monsoon.
Underemployment is a situation under which  The rabi crops include wheat, barley, oats
(cereals), chickpea/gram (pulses), linseed,
People with a higher level of skills are employed
mustard (oilseeds) etc.
in less productive jobs. It simply means that the
3. Zaid: The crop season between March to June.
Labour force of the economy is not fully utilised Seasonal fruits and vegetables.
as per their skills and experience.

Cropping Contour bunding is the farming practice

of plowing and/or planting across a slope following its
Cropping intensity:
elevation contour lines. These contour lines create a
 Number of crops cultivated in a piece of land per water break which reduces the formation of rills and
annum is cropping intensity. gullies during times of heavy water run-off; which is a
major cause of soil erosion.
Cropping pattern:
Organic farming
 The cropping pattern depends on a farm and its  Farming where all kinds of agricultural products
interactions with farm resources, other farm are produced organically i.e, avoids or largely
enterprises, and available technology which excludes the use of synthetic fertilizers, pesticides,
determine their makeup. growth regulators and livestock feed additives.
Integrated farming system
Multiple cropping: Growing more than two crops in a  Integration of farm enterprises such as cropping
piece of land in a year in orderly succession systems, animal husbandry, fisheries, forestry etc.
Intercropping: Growing two or more crops for optimal utilisation of resources bringing
simultaneously with distinct row arrangement on the prosperity to the farmer.
same field at same time. Zero budget natural farming
Farming Systems  Natural farming is “do nothing farming”, no-till,
1. Wet land farming: Soils flooded or irrigated no chemical use farming. It is use of locally
through lake, pond or canal and land is always in available materials: seeds treated with cow dung
submerged condition. and urine; soil rejuvenated with cow dung etc,.
2. Dry land farming: The practice of crop production  Zero budget refers to the zero net cost of
entirely depending upon rainfall and the moisture production of all crops (inter crops, border crops,
multi crops).
conserved in the soil.
3. Rain fed farming: Crop production in areas where
rainfall is, more than 750mm (i.e assured rainfall
areas).
4. Mixed farming: System of farming on a particular
farm which includes crop production, raising
livestock, poultry, fisheries, bee keeping etc.
Mixed cropping, also known as polyculture, inter-

cropping is a type of agriculture that involves planting
two or more plants simultaneously in the same field,
interdigitating the crops
Strip cropping is a method of farming which involves

cultivating a field partitioned into long, narrow strips
which are alternated in a crop rotation system. It is used
when a slope is too steep or when there is no alternative
method of preventing soil erosion.

National Mission for Sustainable Agriculture: Land reforms

Aims at making agriculture more productive, At the time of independence ownership of land was
sustainable and remunerative and climate resilient by concentrated in the hands of a few. This led to
promoting location specific integrated/composite
exploitation of farmers and was a major hurdle in socio-
farming systems; soil and moisture conservation
measures; comprehensive soil health management; economic development of the rural population.
efficient water management practices and Land reforms in India had three objectives,
mainstreaming rainfed technologies. 1. Removing institutional discrepancies of the
agrarian structure inherited from the past.
Revolutions related to agriculture 2. Issue of socioeconomic inequality in the country.
 Green revolution: The Green Revolution, 3. Increasing agricultural production for solving the
spreading over the period from1967/68 to inter-related problems of poverty, malnutrition
1977/78, changed India’s status from a food- and food insecurity.
deficient country to one of the world's leading 1 generation land reforms
st
agricultural nations. Steps taken

Use of high yielding variety (HYV) seeds, tractors, 1. Abolition of intermediaries
irrigation facilities, pesticides, and fertilizers resulted 2. Tenancy reforms
in increase in agricultural productivity. 3. Redistribution of land
4. Cooperative farming
5. Consolidation of land
 White revolution: Operation Flood started the
White Revolution in India and made our country  Except for abolishing the intermediaries all other
self-sufficient in milk. initiatives have mixed results and certainly not
 Yellow revolution: The growth, development and satisfactory which varies from state to state. The
adoption of new varieties of oilseeds to increase most successful land reforms happened in WB
the productivity. and Kerala.
 Blue revolution: Fish Production 2nd generation land reforms (focused on marketisation)
 Red revolution: Meat, Tomato production
 Pink revolution: Onions, prawns 1. Land records modernization/computerization -
 Round revolution: Potato Ex: The National Land Records Modernisation
 Silver revolution: Egg production Programme (NLRMP).
 Grey revolution: Fertilizers 2. Appropriate land compensation - Ex: LARR act,
2013.
 Second Green revolution: The Second Green 3. Land leasing - Ex: Model Agricultural Land Leasing
Revolution is a change in agricultural production Act, 2016 (T Haque committee).
widely thought necessary to feed and sustain the 4. Contract farming - Ex: Draft Model Contract
growing population on Earth. Farming Act, 2018.
5. Consolidation of land holdings so that huge
 Bringing Green Revolution in Eastern India machineries can be utilized – Ex: by bringing
(BGREI): It is about binging similar benefits to people out of agriculture.
eastern India through green revolution. 6. FDI in agricultural sector.
7. Use of land banks (ex: Odisha) and land pooling.

Land acquisition, rehabilitation and resettlement land, while those with 10 hectares and more account
act (LAAR) for just 0.57%.
 Compensation: four times the market value in
rural areas and twice the market value in urban Minimum Support Price (MSP)
areas.  Minimum Support Price (MSP) is a form of market
 Rehabilitation and Resettlement: This is the very intervention by the Government of India to insure
first law that links land acquisition and the
agricultural producers against any sharp fall in farm
accompanying obligations for resettlement and
rehabilitation prices —a guarantee price to save farmers from
 Retrospective operation distress sale.
 Multiple checks and balances  The MSPs are announced at the beginning of the
 Special safeguards for tribal communities and sowing season for certain crops on the basis of the
other disadvantaged groups: PESA and FRA to be recommendations of the Commission for Agricultural
followed Costs and Prices (CACP, 1985).
 Displacement only after compensation  MSPs are announced for 24 commodities including
 Compensation for livelihood losers seven cereals (paddy, wheat, barley, jowar, bajra,
maize and ragi); five pulses (gram, arhar/tur, moong,
• Consent: urad and lentil); eight oilseeds (groundnut,
In cases where PPP projects are involved or acquisition is rapeseed/mustard, toria, soyabean, sunflower seed,
taking place for private companies, consent of no less sesamum, safflower seed and nigerseed); copra, raw
than 70% and 80% respectively (in both cases) of those cotton, raw jute and virginia flu cured (VFC) tobacco.
whose land is sought to be acquired.
Calculation of MSP
According to the formula prescribed by the Swaminathan
• Caps on acquisition of multi-crop and agricultural land: Committee, there are three variables that determine
• Return of unutilized land to the owner or to the State production cost –
Land Bank. 1. A2
• Exemption from income tax and stamp duty on 2. A2+FL
amount given as compensation 3. C2
A2 includes out-of-pocket expenses borne by farmers,
• Share in appreciated land value: Where the acquired
such as term loans for machinery, fertilisers, fuel,
land is sold to a third party for a higher price, 40% of the
irrigation, cost of hired labour and leasing land.
appreciated land value (or profit) will be shared with the
original owners. NEW METHOD
Agricultural holdings • Budget for 2018-19 announced that MSPs
 The average size of land holding in India is would henceforth be fixed at 1½ times of
continuously decreasing due to rapid and high production costs for crops as a “pre-determined
population growth. principle”.
 The average landholding size of a household has
shrunk marginally to 1.1 hectare (ha) in 2015-16 from
1.16 ha in 2012-13. This will be the official MSP
 The percentage of female operational land holders • A2 -- Actual costs incurred by farmer on seeds,
fertilizers, pesticides, hired labour, depreciation
increased from 12.79% in 2010-11 to 13.87% in 2015-
on farm
16. • Buildings & machinery, interest on working
capital, diesel/electricity for tractor/ pump sets
 86.21% of India's cultivated farmland is held by small etc.
and marginal farmers with less than two hectares of FL -- Imputed cost of (unpaid) family labour.

THE COMPREHENSIVE COST (COST C2) METHOD  Indirect farm subsidies: These are the farm subsidies
The Comprehensive Cost (C2) is more reflective of the which are provided in the form of cheaper credit
actual cost of production since it takes it accounts for facilities, farm loan waivers, reduction in irrigation
rent and interest foregone on owned land and machinery, and electricity bills, fertilizers, seeds and pesticides
over and above the A2+FL rate. subsidy as well as the investments in agricultural
The ideal formula according to the M.S Swaminathan research, environmental assistance, farmer training,
Committee recommendation would be: etc.
 The World Trade Organization (WTO) has put some
MSP = C2+ 50% of C2. ceilings on the amount of direct and indirect
subsidies being provided by the government.
Fair and Remunerative Price (FRP)- Sugarcane Irrigation
 FRP is used in sugarcane industry to replace the  Major Irrigation Schemes: those with cultivable
MSP command areas (CCA) of more than 10,000
 It is based on the Rangarajan Committee report hectares.
of reorganizing the sugarcane industry.  Medium Irrigation Schemes: those with
 FRP is announced by central government. cultivable command areas (CCA) between 2,000
 Like MSP, FRP is also based on the and 10,000 hectares.
recommendation of the Commission for  Minor Irrigation Schemes: those with cultivable
command area (CCA) up to 2,000 hectares.
Agricultural Costs and Prices (CACP) and
 Rural Infrastructure Development Fund (RIDF):
are announced by the Cabinet Committee on
With a view to ensuring early completion of
Economic Affairs, which is chaired by Prime projects for providing irrigation.
Minister.  Accelerated Irrigation Benefits Programme
 The State Advised Prices (SAP) are announced by (AIBP): loan assistance to the states to help them
key sugarcane producing states which are complete some of the incomplete major/medium
generally higher than FRP. irrigation projects, which were in an advanced
stage of completion.
Market Intervention Scheme (MIS)
Doubling farm income
 The Market Intervention Scheme (MIS) is similar to
Government of India has announced a ‘seven-point
MSP, which is implemented on the request of state
strategy’ which aims to double the farm income by 2022.
governments for procurement of perishable and
1. Emphasis on irrigation along with end to end
horticultural commodities in the event of fall in
market prices. solution on creation of resources for ‘More crop
Price stabilization Fund (PSF) per drop'
 It is a Central Sector Scheme to support market 2. Provision of quality seeds and nutrients
interventions for price control of perishable agri-
according to the soil quality of each farm.
horticultural commodities.
 Pradhan Mantri Annadata Aay Sanrakshan Abhiyan 3. Large investments in warehouses and cold chains
(PM-AASHA): to ensure that poor farmers growing to prevent Post-harvest losses.
pulses and oilseeds benefit from higher minimum
4. Promotion of value addition through food
support prices (MSPs).
processing.
Farm Subsidies
 Direct farm subsidies: These are the kinds of 5. Implementation of National Agricultural Markets
subsidies in which direct cash incentives are paid to and e-platforms (e-NAM) to eliminate
the farmers in order to make their products more shortcomings of all the 585 centers.
competitive in the global markets. 6. To mitigate the risk, introduction of crop
insurance scheme at a lower cost.

7. Promotion of allied activities such as Dairy-Animal

husbandry, Poultry, Bee-keeping, Medh Per Ped, Agriculture Census
Horticulture, and Fisheries.  Agriculture Census in India is conducted at every five
year intervals to collect data on structural aspects of
Climate Smart Agriculture (CSA) farm holdings. The basic statistical unit for data
Climate-smart agriculture (CSA) is an approach that helps collection is 'Operational Holding'.
to guide actions needed to transform and reorient
 The first census was conducted with reference year
agricultural systems to effectively support development 1970-71. So far, nine censuses have been done and
and ensure food security in a changing climate. this is the 10th in series.
 Operational holding has been defined as all land used
CSA aims to tackle three main objectives: wholly or partly for agricultural production.
1. Sustainably increasing agricultural productivity
and incomes.  Total operated area, which includes both cultivated
2. Adapting and building resilience to climate and uncultivated area provided part of it is put to
farm production during the reference period.
change.
3. Reducing and/or removing greenhouse gas 12.INDUSTRY AND INFRASTRUCTURE
emissions, where possible.
Public Sector
In PSU the majority of the shares is owned by
NABARD government directly or indirectly through government
 Established under NABARD Act of 1981 with an institutions.
objective of providing and regulating credit to
Departmental undertaking : set up by executive actions,
farmers, small- scale industries, cottage and village
industries, handicrafts etc in rural areas. for specifically defined functions, subject to budgetary,
audit and other controls of government.
 Refinances the financial institutions like state
cooperative agriculture and rural development banks Statutory corporations: set up by the act of legislature,
(SCARDBs), state co-operative banks (SCBs),regional engaged in economic and manufacturing activity. These
rural banks (RRBs), commercial banks (CBs) which are separate legal entities. Financing is not part of the
finances the rural sector. budget.
 Promotes SHG-Bank linkage programme for
Control boards: they are set up to manage government
encouraging banks to lend to SHGs.
projects.
Cooperative society form: To support cooperative
Long Term Irrigation Fund (LTIF):
movement.
it has been established in NABARD during Budget 2016-17,
as a part of PMKSY with an initial corpus of `20,000 cr Last type is companies registered under companies act.
Post new industrial policy 1991, only 3 industries are
Agri Export Zones
reserved, they are,
 It was introduced in 2001, through EXIM Policy 1997-
1. Atomic energy.
2001, for the purpose of developing and sourcing the
2. Minerals specified in the schedule to atomic
raw materials, their processing/packaging, leading to energy act.
final exports, along with convergence of central and 3. Railway passenger transport.
state government schemes. 60 Agri Export Zones Industries which require compulsory licensing involves:
(AEZ) have been notified. 1. Drugs and pharmaceuticals.

2. Hazardous chemicals. There are PSEs that have made profits continuously
3. Gun powder, industrial explosives etc. for the last 3 years and earned net profit of rupees 30
4. Aerospace and defence related electronics. crores are more in one of the three years. These
5. Alcohol drinks. miniratnas are granted certain autonomy like incurring
6. Tobacco, cigarette and related products. capital expenditure without government approval up to
rupees 500 crores or equal to their net worth whichever
Disinvestment:
is lower. There are 48 miniratnas bridge and roof
It is the sale of shares of the government to retail public/ Company (India) Limited as added late in 2010.
employees etc. there is no change in the management as
Category II Miniratna
government holds the majority equity.
This category include those PSEs which have made profit
Privatisation :
for the last 3 years continuously and should have a
The government sells chunk of equity to a single buyer- positive net worth. Category II miniratnas have autonomy
26% or 51% to whom management is to incurring the capital expenditure without government
Corporatization: approval up to rupees 300 crores or upto 50% of their net
worth whichever is lower. There are 14 such miniratnas
Government units are reogranised on the lines of
Bharat pumps and Compressors Limited was added late in
business.
2010.
Buy back :
Maharatnas
Cash rich companies buy back their own shares from the
The category of PSEs was created in 2011.
secondary market to help shareholders and share market.
To be eligible for the grant of the Maharatna status the
Cross holdings:
company should have an average turnover of over RS
State owned companies buy shares of one another as the 25000 crores average, annual net worth of more than
companies are related and have synergies. 15000 crores and average annual net profit of over
Navratna rupees 5,000 crore during the last 3 years.
Government introduced in Navratna concept in 1997,it Maharatna status it's board would not be required to
granted enhanced autonomy to nine selected PSEs take the government permission for investments up to
referred to as “Navratnas”. These navratnas were subject rupees 5000 crores in a joint venture project or wholly
certain guidelines now they have freedom to Incur capital owned subsidiary. For the Navratna companies, the limit
expenditure decide upon joint ventures set up is rupees 1000 crore.
subsidiaries/ offices abroad enter into technological and NIF-National Investment Fund
strategic alliances. They can raise funds from capital
The proceeds from disinvestment of UPUSs will be
markets (International and Domestic) enjoy
channelised into NIFs, Which is to be maintained outside
substantialoperational and managerial autonomy. Boards
the consolidated Fund of India.
of these PSEs have been board based with induction of
nonofficial part time professional directors. 75% of the annual income of finance selected social
sector schemes, which promote education, health and
Invest up to rupees 1000 crores or 15% of their networth
employment. The residual 25% of the annual income of
on single project without seeking government approval
the fund will be used to meet the capital investment
Miniratna companies requirements of profitable and revivable CPSUs that yield
Category 1 Miniratna adequate returns.

Exchange traded fund: In EPC as all the clearances, land acquisition and
regulatory norms have to be completed by the
It will cumulate the shares of selected PSUs proposed for
government itself and the private players do not have to
disinvestment under a single fund. Then these cumulated
get itself involved in these time taking procedures.
shares are divided into different units/shares. The value
of one unit depends upon prices of underlying PSU shares. Hybrid Annuity Model:
These units can be listed in the stock exchange as ETF and
In India, the new HAM is a mix of BOT Annuity and EPC
can be traded like ordinary shares.
models.
Bharath -22
As per the design, the government will contribute to 40%
Bharath -22 has 19 central public sector enterprises, of the project cost in the first five years through annual
government banks and some holdings of the payments (annuity). Whereas the remaining 60% is raised
government investment arm SUUTI. by developer from equity or loan as variable depending
upon the value of assets created.
Public Private Partnership means an arrangement
between a government/statutoryentity/government Under HAM, Revenue collection would be the
owned entity on one side and a private sector entity on responsibility of the National Highways Authority of India
the other. (NHAI).The developer doesn’t have right to collect
revenue.
Build Operate Transfer(BOT-TOLL and BOT-ANNUITY)
Swiss Challenge
Private partner is responsible to design, build, operate
(during the contracted period) and transfer back the A ‘Swiss Challenge’ is a way to award a project to a
facility to the public sector. private player on an unsolicited proposal
Role of the private sector partner is to bring the finance Such projects may not be in the bouquet of projects
for the project and take the responsibility to construct planned by the state or a state-owned agency, but are
and maintain it. considered given the gaps in physical or social
infrastructure that they propose to fill, and the
In return, the public sector will allow it to collect revenue
innovation and enterprise that private players bring.
from the users in BOT –Toll model and Government pays
an annual fee in BOT- Annuity model The government may enter into direct negotiations with a
private player who submits a proposal and, if they cannot
The national highway projects contracted out by NHAI
agree on the terms of the project, consider calling for
under PPP mode is a major example for the BOT model.
bids from other interested players.
Engineer Procure Construct Model (EPC):
In one variant of the Challenge, the government awards
Under this system the entire project is funded by the bonus points to the project’s ideate; in another, it calls
government. for comparative bids, but gives the first right of refusal to
The EPC entails the contractor build the project by the original player.
designing, installing and procuring necessary labour and The Government has facilitated the PPP sector by
land to construct the infrastructure, either directly or by offering:
subcontracting.
Viability Gap Funding (VGF) Means a grant one-time or
Under EPC model the contractor is legally responsible to deferred, provided to support infrastructure projects that
complete the project under some fixed predetermined are economically justified but fall short of financial
timeline and may also involve scope for penalty in case of viability.VGF subsidy up to 40% of the cost of the project
time overrun. can be accessed in the form of a capital grant.

India Infrastructure Project Development Fund (IIPDF)-

Scheme supports the Central and the State Governments
and local bodies through financial support for project
development activities ( feasibility reports, project
structuring etc) for PPP projects
IIFCL - long-term debt for financing infrastructure projects
that typically involve long gestation periods since debt
finance for such projects should be of a sufficient.
Foreign Direct Investment (FDI) - upto 100% FDI
in equity of SPVs in the PPP sector is allowed on the
automatic route for most sectors.
13. BALANCE OF PAYMENTS (BOP)

External Sector
All economic activities of an economy which take place in
foreign currency fall in the external sector such as export,
import, foreign investment, external debt, current
account, capital account, balance of payment, etc.
Closed and open economics

Balance of payments (BoP)

The balance of payments (BoP) is the international
balance sheet of a nation that records all international
transactions in goods, services, and assets over a year.
Balance of payment consist of Balance of trade, balance

of current account and capital account.
The balance of payments divides transactions in two

accounts: the current account and the capital account.
1. Current  These are short term implication

account transactions
 It includes export and import of
goods (trade account) and
services, repayments and
dividends from loans, transfers,
investments.

 Components
1. Merchandise transactions or
the visible trade (export and
import of goods)
2. Invisible trade (the export and
import of services)
3. Unilateral or unrequited
transfers (one sided
transactions)
 Income receipts and payments
(investment income)
2. Capital  This involves long term
account transaction.
 Deals with investment and
borrowing. Current account deficit (CAD)
 Components Current account deficit = balance of trade (exports –
1. Borrowing and lendings from imports) + net factor income (interest, dividends etc) +
foreign countries net transfer payment (foreign aid)
2. Investments to and from the
Factors influencing Current Account deficit (CAD)
foreign countries
3. Foreign direct investment 1. Exchange rate (overvalued exchange rate would
(FDI) cause large deficit).
4. Foreign portfolio investment 2. Level of consumer spending (economic growth) and
(FPI) hence import spending.
 Changes in the Foreign Exchange 3. Capital flows to finance deficit in long-term.
Reserves 4. Saving rates: influencing level of import spending.
5. Relative inflation/competitiveness.

Depreciation: In foreign exchange market, it is a situation Nominal Effective Exchange Rate (NEER): prevailing
when domestic currency loses its value in front of a official exchange rate.
foreign currency which is market-driven. Real Effective Exchange Rate(REER): inflation adjusted
exchange rate.
Devaluation: In the foreign exchange market when LERMS (Liberalised Exchange Rate Mechanism System):
exchange rate of a domestic currency is lowered by its it was operationalized in 1993. India delinked its currency
government, it is called devaluation. Official depreciation from the fixed currency system and moved into the era of
is devaluation. floating exchange-rate system under it.
Convertibility
Appreciation: In foreign exchange market, if a free Convertible currencies give freedom to the holder of
floating domestic currency increases its value against the
currency to convert them freely into other currencies at
value of a foreign currency, it is appreciation.
the prevailing market rate.
Revaluation: A term used in foreign exchange market Current account convertibility: It refers to the freedom
which means a government increasing the exchange rate to convert domestic currency into foreign currency and
of its currency against any foreign currency. It is official vice versa for exports and imports, interest payments,
appreciation. remittances, travel, education etc.
Capital account convertibility : It refers to the freedom to
Exchange rate convert domestic currency into foreign currency, which
An exchange rate is the price at which one currency is implies there should be 100% FDI and FII allowed across
converted into or exchanged for another currency. all sectors.
Full convertibility: It refers to the freedom to convert
Various exchange rate mechanisms: domestic currency into foreign currency, and vice versa
1. Floating exchange rate: Forces of demand and for both current and capital account with least
supply determine the valuation and role of monetary restrictions.
authority is nill. Partial convertibility: the portion allowed by the
2. Fixed exchange rate: central bank artificially and government can be converted into foreign currency for
arbitrarily fixes the exchange rate irrespective of current and capital purposes.
market forces.
3. Pegged float exchange rate: A currency Convertibility in India
is pegged to international hard currency. Current account is today fully convertible
4. Managed float exchange rate: Exchange rate is (operationalised on 19 August, 1994). But in case of
largely market determined but the central bank capital account convertibility India is still following partial
manages the rate in specific band. current account convertibility.
5. Nominal Effective Exchange Rate (NEER) is the
Tarapore committee I and II were set up for fuller
weighted average of bilateral nominal exchange
convertibility of capital accounts. Advantages of capital
rates of the rupee in terms of foreign currencies. It is
account convertibility,
simple and direct for example - one US Dollar as per
NEER will be, say 66 rupees.  Foreign capital for investment.
6. Real Effective Exchange Rate (REER) is the weighted  FII flows can increase liquidity.
average of nominal exchange rates, adjusted for  Competition for domestic players.
inflation. The indices of Nominal Effective Exchange  Technology transfer.
Rate (NEER) and Real Effective Exchange Rate (REER)  Macroeconomic discipline.
are used as indicators of external competitiveness by  India will have wider range of choice for
RBI. Investment and borrowing.

Extended fund Facility (EFF) Beggar they neighbor policy: When a country damages
It is a service provided by the IMF to its member its competitors through a weak currency.
countries which authorises them to raise any amount of
foreign exchange from it to fulfil their BoP crisis, but on Weak currency: Cheapens the rate of country’s export,
the conditions of structural reforms in the economy put making them more attractive to international buyers.
by the body. It is the first agreement of its kind. India had Sovereign wealth fund: It is the fund of foreign currency
signed this agreement with the IMF in the financial year
that is meant to be invested in global assets like, shares,
1981–82.
Hard currency: any globally traded currency which has bonds, energy assets etc. It diversify the income, secure
global demand, liquid(adequate supply) and stable( does external account.
not fluctuate) Internationalization of rupee: A currency used by other
Soft currency: It is basically the opposite term for the countries banks, firms and citizens as financial security.
hard currency. Degree of internationalization depends on, traded
actively, liquid and stable.
Hot currency: Hot currency is a term of the forex market Ex: US dollar, euro, yen, pound, renminbi.
and is a temporary name for any hard currency. 14.FOREIGN INVESTMENT
Foreign investment involves capital flows from one
Heated currency: A term used in the forex market to
country to another, granting extensive ownership
denote the domestic currency which is under enough
stakes in domestic companies and assets.
pressure (heat) of depreciation due to a hard currency’s
high tendency of exiting the economy.
Types of Foreign Investment:
Cheap Currency: If a government starts re-purchasing its
bonds before their maturities (at full-maturity prices) the  Foreign Direct Investment (FDI)
money which flows into the economy is known as the  Foreign Institutional Investment (FII)
cheap currency, also called cheap money.  Qualified foreign investment (QFI)
 Foreign Portfolio Investment (FPI)
Dear Currency: when a government issues bonds, the
money which flows from the public to the government or Details on each of the foreign investment type can
the money in the economy in general is called dear be found below:
currency, also called as dear money.
1. FDI  Foreign direct investment (FDI) is
Real value of rupee: it depends on, Demand and supply, when a foreign company or
net capital inflows, performance of economy, forex individual establishes new business
reserves, interest rate, CAD, international prices of
commodities, political stability. operations or acquiring business
assets, including controlling
Forex reserve: RBI holds foreign exchange reserves interests, in an already existing
which are made up of, foreign currency, bank deposits, Indian company
government securities, gold reserves, special drawing
2. FII  FII is when foreign institutional
rights of IMF.
investors invest in the shares of an
Capital control: Any measure taken by government / Indian company, or in bonds offered
central bank to limit the flow of foreign capital in and out by an Indian company.
of the domestic economy. Ex: Tobin tax , quantitative  Only institutional investors like
restrictions. Investment companies, Insurance

FDI FPI sub-accounts with FIIs) and QFIs can be

collectively classified as Foreign Portfolio
Investment in
Investment (FPI).
productive assets Investment in financial
Investments through Participatory notes(PN), (ADR)
(whose value increase assets like stocks,
and (GDR)
over time) like plant bonds, mutual funds,
and machinery for a etc. Participatory notes also referred to as P-Notes, or PNs,
business are financial instruments required by investors or hedge
funds to invest in Indian securities without having to
Investment gives Investment gives register with the Securities and Exchange Board of India
investores ownership investors only (SEBI).
right as well as ownership right and not
ADR(American Depository receipts) and GDR(Global
management right management right
depository receipts)are commonly used by the
Engage in decision Not involved in decisionIndian companies to raise funds from the foreign
making of a firm making capital market. While ADR is traded on US stock
exchanges, GDR is traded onEuropean stock
Investors enter a Investors can plan for exchanges.
country with long- long but often have
term approach short-term plans Department of Industrial policy and promotion
(DIPP), Ministry of Commerce and industry
So investors cannot
Investors can easily The Department of Industrial Policy & Promotion
depart from the
depart from the countrywas established in 1995 and has been reconstituted
country easily
in the year 2000 with the merger of the Department
Investment is greater Investment is less than of Industrial Development.
than 10% 10%
FATF
funds etc. are allowed to invest in
 The FATF is an inter-governmental body that
Indian stock market directly.
works to set standards and promote effective
 However, if foreign individuals want
to invest in India’s markets, they implementation of legal, regulatory and
have to get themselves registered as operational measures for combating money
a sub-account of an FII. laundering, terrorist financing and other
3. QFI  QFI was introduced in 2002. A related threats to the integrity of the
Qualified Foreign Investor can invest international financial system.
in India without sub-account.  A country is put on the grey list when it fails
 The Qualified foreign investor (QFI) to curb terrorism financing and money
can be an individual, group or an laundering.
association.
 The QFI should be resident in a Putting a country on the blacklist means shutting all
foreign country that is compliant Doors to international finance for that country.
with the standards of Financial Functions:
Action Task Force (FATF).
4. FPI In the Indian context, FIIs (along with

1. Formulation of Foreign Direct Investment (FDI)

Policy and promotion, approval and facilitation
of FDI.
2. Encouragement to foreign technology collabo-
rations at enterprise level and formulating policy
parameters for the same.
15.ECONOMIC INTEGRATION
Economic integration and trade agreements
Economic integration refers to trade unification between
different states by the partial or full abolishing of customs
tariffs on trade taking place within the borders of each Various levels of Economic integration
state.
Advantages
1. increases the combined economic
productivity of the countries – easier access of
goods and services
2. It increases competitiveness.
3. Economic integration can broaden markets,
boost employment, and spur political coopera-
tion
4. Regions may agree to economicintegration
to better serve their citizens.
5. Political cooperation among countries can
improve because of stronger economic ties, 1. PTA – PREFERENTIAL TRADE AGREEMENT
which can help resolve conflicts peacefully and A preferential trade agreement, is a trading bloc that
lead to greater stability. gives preferential access to certain products from the
participating countries.
What is a trade agreement?
This is done by reducing tariffs but not by abolishing them
completely. A PTA can be established through a trade
A trade agreement is a contract/agreement/pact
pact. It is the first stage of economic integration. For
between two or more nations that outlines how they will
example,
work together to ensure mutual benefit in the field of
trade and investment.  Asia-Pacific
Trade Agreement (APTA): formerly known as the
Bangkok Agreement, was signed on 31st of July 1975 as
an initiative of the United Nations Economic and Social
Commission for Asia and the Pacific (ESCAP). ESCAP is the

regional development arm of the United Nations for the  Southern Common Market –
Asia-Pacific region. Mercosur (Argentina; Bolivia; Brazil; Paraguay;
Uruguay; and Venezuela)
 India-
 Gulf Cooperation Council (GCC) – Bahrain, Kuwait,
Mercosur Preferential Trade Agreement (PTA): Mercosur
Oman, Qatar, Saudi Arabia, and the United Arab
is a sub-regional blocs with its member countries – full
Emirates
members are Argentina, Brazil, Paraguay, Uruguay and
 East African Community (EAC) – composed of
Venezuela.
5 countries in the African Great Lakes region in
2. FTA– FREE TRADE AGREEMENT eastern Africa: Burundi, Kenya, Rwanda, Tanzania,
and Uganda
A free-trade area is a trade bloc whose member countries
have signed a free-trade agreement (FTA), which 5. COMMON MARKET
eliminates tariffs, import quotas, and preferences on
A type of custom union where there are common policies
most (if not all) goods and services traded between them.
on product regulation, and free movement of goods and
For example,
services, capital and labour.
 Evolution of SAPTA to SAFTA (South Asian PTA to FTA)

6. ECONOMIC UNION
 ASEAN FTA (Trade agreement within the Southeast
asian nations) An economic union is a type of trade bloc which is
composed of a common market with a customs
3. CECA (Comprehensive Economic Cooperation Agree-
union. The participant countries have both common
ment) / CEPA (Comprehensive Economic partnership
policies on product regulation, freedom of movement of
Agreement):
goods, services and the factors of production (capital and
When the countries go beyond FTA and agree for a labour) and a common external trade policy.
greater degree of economic integration which extends to
capital and human resources, and to expand trade and 7. ECONOMIC AND MONETARY UNION
investment, it would result in CECA or CEPA.
When an economic union involves unifying currency it
CEPA has a bit wider scope than CECA. While CECA comes becomes a economic and monetary union. For example
first with elimination of tariffs, CEPA comes later European union.
including trade in services and investments. For example,
Few agreements which have been in the news
 India has signed CECA with Singapore and CEPA with recently
South Korea Trade Countries Features
Trans- European union The aim of this
4. CUSTOMS UNION
Atlantic and United states agreement is for
An agreement among countries to have free trade among trade and promoting trade
themselves and to adopt common external barriers investment and multilateral
against any other country interested in exporting to these partnership economic growth.
countries. For example, (TTIP)
Regional Brunei, Cambodia, It would be the
comprehensi Indonesia, Laos, largest economic
ve Economic Malaysia, bloc. This

partnership Myanmar, agreement would settlement mechanism settlement mechanism

(RCEP) Philippines, have Strategic
GATT was essentially WTO has much more
Singapore, Partnership,
concerned with extensive coverage of
Thailand, Vietnam, enhance regional
traditional trade issues issues such as IPR, Services
Australia, China, connectivity,
such as tariff and non- among others
Japan, South promote trade &
tariff issues in
Korea and New investment
international trade
Zealand
GATT had small WTO has a full-fledged
Comprehensi Australia, Brunei, It is the third
secretariat with no secretariat and
ve and Canada, Chile, largest free-trade
institutional foundation to implementing agencies
Progressive Japan, Malaysia, area in the world
implement these rules
Agreement Mexico, New by GDP. It
for Trans- Zealand, Peru, removes tariffs on
Guiding principles of WTO
Pacific Singapore, and an estimated 95%
Partnership Vietnam. of goods traded Principles guiding the WTO are:
(CPTPP) between member
countries. 1. Non-Discriminatory and rule based trading
system where foreign goods and services should
receive the same treatment as domestically
16.WTO: EVOLUTION AND sourced ones.
CONTEMPORARY ISSUES 2. Trade barriers should be dismantled and
international trade should be free.
Background of International Trading Regime after 3. Developing countries should receive preferential
World War II terms of trade.
In 1947, 23 countries arrived at an agreement, namely, Principles

General Agreement on Tariffs and Trade (GATT). GATT
Most o Purpose: eliminate discriminatory
established a free and fair international regime based on
dismantling of trade barriers --- tariff (high duties regime) Favoured policies by members.
and non-tariff (quota regime). The agreement came into Nation o If a member extends special
force in 1948 and India was a founder member. treatment to any nation then
similar treatment must be
Emergence of World Trade Organisation (WTO)
extended to all.
Uruguay Round of GATT was concluded in 1994 with o Some Exceptions: a) Differential
Marrakesh Treaty and this treaty laid down the treatment under Free Trade
foundation of WTO in 1995 by replacing GATT. first Agreements is allowed, b) National
round was the Doha round which started in 2001 and is Security
yet to complete. Headquarter is in Geneva, Switzerland.
National o No discrimination between
It has 164 members as of 2017. Afghanistan became 164th
member in 2016. Treatment imported and domestically
produced goods.
Difference: WTO v/s GATT
Democratic o WTO follows the principle of “One
GATT WTO principle nation, One vote, One value”.
GATT is a treaty WTO is an organisation Special and o Developing countries receive
Differential preferential terms of trade within
GATT had no dispute WTO has dispute
Treatment WTO framework

Governing Structure of WTO 4. To increase the trade of services.

Ministerial o Highest decision making body 5. To ensure optimum utilization of world resources.
6. To protect the environment.
Conference o Meet twice a year Minister of
7. To accept the concept of sustainable development.
(Highest Commerce represent India in this
WTO Agreements
Decision body WTO
Making TRIP
Body – Level
Multi Fibre Arra
I) ngement on Good Service
General o Perform day to day work and Textiles
Council & implement MC’s decisions Agreement
Dispute o General Council also meets as on Anti- GAT
Tariff Non-Tariff
Settlement Trade policy review body to related Agreements
Agreement
Body undertake trade policy reviews of Agreements
on
(Level - 2) Members Agriculture General
o DSB redresses the trade related Agreement SP TRIM
grievances of WTO members on Tariff
and SC
Councils of o There are 3 councils: a) Council for Trade
Trade (Level - trade in Goods b) Council for TRIPS Agreement on Agriculture:
3) c) Council for trade in services
o These councils work under General It is aimed to remove trade barriers and to promote
Council transparent market access and integration of global
markets.
Director o Head of WTO
General o Elected by Ministerial Council for 4 It has 3 pillars: Domestic Support, Export Subsidies,
years Market Access.
1. Domestic Support refers to domestic subsidies that a

Chronology of Trade Negotiations under WTO
government provide to a farmer such as fertilizer, power
1. 1996 – 1st Ministerial conference in Singapore led to
etc. These subsidies are grouped into 3 classes or boxes:
Birth of “Singapore issues”
Green Box, Blue Box and Amber Box.
2. 2001 – 4th Ministerial conference -Doha
Development Round Green Box includes subsidies on which there are no limits
3. 9th Ministerial Summit in Bali in 2013 as they are not considered as trade distorting or they
4. 10th Ministerial Summit in Nairobi minimally distort the international trade. These
5. 11th Ministerial Summit in Buenos Aires, Argentina in subsidies must be government funded. These subsidies
in general are not directed at particular products (unlike
2017
MSP) and they may include income support that is
6. 12th Ministerial Summit in Kazakhstan. However, it decoupled from production level or prices (Ex:
has refused to host the conference because of COVID Telangana’s Rythu Bandhu Scheme, PM- KISAN).
19 PANDEMIC
Amber Box subsidies cover all domestic support
Objectives of WTO
measures considered to distort production and trade.
1. To improve the standard of living of people in the These are required to be maintained within 5-10% of
member countries. production value (5% for developed countries and 10%
2. To ensure full employment and broad increase in for developing countries).
effective demand. Reduced based on a formula called “Aggregate Measure
3. To enlarge production and trade of goods. of Support”

Ex: MSP- minimum support price SSM provisions are available to all developing and least
developed country members of WTO. Ministerial Decision
Blue Box subsidies are direct payments under production at Nairobi in 2015 recognizes that the developing
limiting program. There is no limit. It is also considered members will have the right to temporarily increase
trade distorting tariffs in face of import surges by using an SSM.
Ex: subsidies linked with acreage or number of animals
TRIPS Agreement: It lays down legal standards to
2. Export Subsidies protect intellectual property by way of copyright rights;
Agricultural export subsidies are to be limited by geographical indications; industrial designs; integrated
developed countries either in value or volume terms so circuit layout-designs; patents; monopolies for
that international prices are not lowered below a point developers of new plant varieties; trademarks. It also
and exports and domestic markets of the developing regulates dispute resolution procedures and
countries are not priced out. Nairobi Ministerial in 2015 enforcement procedures.
decided to phase them out. Types of Intellectual Explanations
Property Rights
3. Market Access Patent It may be granted for a new,
It means that all member useful, and non-obvious
invention, and gives patent
countries should throw open their domestic market to
holder an exclusive right to
agricultural imports by reduction of tariff and removal of
commercially exploit the
non-tariff barriers. Hence, members should undertake:
invention for a certain period of
1. Tariffication – to convert non-tariff barriers (like time (typically 20 years)
quotas) to tariffs
2. Bind their tariff to agree to a limit that is Copyright It is given for creative and
bounded rate and not increase the rates beyond artistic works (e.g., books,
them. movies, music) and gives
copyright holder the exclusive
Special Products right to control reproduction or
These are agricultural products of particular importance adaptation of such works for a
to farming communities in developing countries for certain period of time.
reasons of food security, livelihood, security and rural Trademark It is a distinctive sign which is
development. Under the Doha Development Round, it used to distinguish the products
was decided that the Special products would attract or services of different
lower levels of tariff reduction commitment than other businesses
agricultural products so as to protect and enhance Industrial design It protects the form of
livelihood and food security in domestic economy. appearance, style or design of
an industrial objects (e.g., spare
Special Product regime is a component of WTO’s Special parts, textile)
and Differential (S&D) provision and is available only to
developing country members of WTO.
Patent is an incentive to innovate and invent and thus
The current discussions over Special Products are mainly sustains R&D. In return for the patent, inventor offers the
focused on: knowledge with commercial use to be put in public
1. The number of products to be given Special Product domain after the expiry of the patent.
status
Under WTO, patents can be granted for process or
2. The modalities to select Special Products
product. Product patent provide for absolute protection
Special Safeguard Mechanism
of product exhausting all processes that may lead to the
SSM is a trade defence mechanism to essentially counter
product, whereas process patents provide protection in
the volatility of international commodity prices.
respect of a specific method of production.

Under TRIPS, only product patents must be awarded for In India, Geographical Indications registration is
food, pharmaceuticals and chemicals. These patents administered by the Geographical Indications of Goods
should be valid for 20 years. (Registration and Protection) Act, 1999 which came into
From the above discussion, it is clear that product patent force with effect from September 2003. The first product
have the potential to raise prices, safeguards have been in India to be accorded with GI tag was Darjeeling tea in
built in the TRIPS Agreement called:“Parallel Imports” the year 2004-05.
and “Compulsory Licensing”.
 Parallel Importation is the importation of drugs at a There are a number of benefits that GI confers on a
lower price to meet a public health crisis if the particular good:
company holding the patent is unwilling to provide 1. It confers legal protection to GI in India.
the patented drug at lower price. 2. Prevents unauthorised use of a Registered
 Compulsory Licensing means that the government of Geographical Indication by others.
a country facing health crisis can ask for production 3. It provides legal protection to Indian
and sale of drugs in the country at concessional price Geographical Indications which in turn boost
based on a compulsory license that it issues. This exports.
allows generic copies of a patented product to be 4. It promotes economic prosperity of producers of
produced domestically, with compensation paid to
goods produced in a geographical territory.
the patent holder.
GI generally is not awarded to an individual. It is given for
Anti-Counterfeiting Trade Agreement
a period of 10 years and may be renewed for another 10
It is a multinational treaty for the purpose of establishing years on expiry. GI prevents spurious goods from entering
international standards for intellectual property rights the market. It helps maintain quality. There is greater
enforcement. accountability, too. It boots exports.
It aims to establish an international legal framework for Sanitary and Phyto-sanitary Measures
targeting counterfeit goods, generics medicines and
copyright infringement on the Internet, and would create It is an international treaty under WTO that aims to set
a new governing body outside existing forums, such as constraints on member state’s policies relating to food
WTO, World Intellectual Property Organisation or UN. It safety (bacterial, pesticides, inspection and labelling) as
was signed in 2011. well as animal and plant health (phyto-sanitary) about
imported pests and diseases.
Sui Generis System
General Agreement on Trade in Services (GATS)
TRIPS agreement provides sui generis option regarding It is the set of regulations that governs trade in services
patent laws. Sui generis means generating by itself or of among WTO members.
itself. It means that they can protect inventions either on
the basis of TRIPS pattern of patents or any other GATS cover four modes of supply for the delivery of
indigenous system (sui generis). services in international trade:
Criteria Supplier
Geographical Indications Presence
There are some goods that owe their properties (e.g., its Mode – 1: Cross Service delivered Service
special quality or reputation) to the region in which they within the supplier not
Border Supply
originate and are nurtured. Such products are given territory of the present within
Geographical Indications. GI is used to identify agricultural, Member, from the territory of
natural or manufactured goods. the territory of the member
another member

Mode – 2: Service delivered Under WTO, dumping is prohibited if it causes or

Consumption outside the threatens to cause injury to a domestic industry in the
abroad territory of importing country. Otherwise, it is not prohibited.
Member, in the
territory of Director General of Anti-Dumping and Allied Duties
another member, initiates the imposition of Anti-dumping duty.
to a service
consumer of the Overview of WTO Ministerial Conferences and
member. Contemporary Issues
Mode–3: Service delivered
Commercial within the Doha Round
Presence territory of the (Presently, this is the active round of negotiation)
member, through o Improve trading prospects of
Service
the commercial Aim developing world.(Hence, also called
supplier
presence of the as Doha Development Agenda)
present within
supplier o Started at 4th Ministerial Conference
the territory of
Mode -4: Service delivered the member in Doha, Qatar, in 2001.
Presence of a within the
Package Every item was part of an indivisible
natural person territory of the
package, i.e., “single undertaking”:
member, with
“Nothing is agreed until everything is
supplier present
agreed”.
as a natural
person Outcome: Members committed to negotiate on
Agriculture o Market access
o Reductions in Exports subsidies
Safeguard Duty
o Reductions in domestic support that
Under WTO regime, a safeguard is used to restrain distort trade
international trade in order to protect a certain home Market o Cutting Tariff and Non-Tariff barrier
industry from foreign competition like Dumping, Subsidy Access for
that attracts countervailing duty Non-
Agricultural
Countervailing Duty (CVD) Products
TRIPS o Interpretation of TRIPS to supports
Many countries subsidise their products and make them public health — promoting: access of
cheap to be exported. In such cases, importing country medicines and creation of new ones.
can take the recourse to CVDs. Thus, CVDs are anti- Electronic o Non-imposition of customs duties on
subsidy duties. These are import duties to neutralize the commerce electronic transmissions agreed at 2nd
negative effects of subsidies. MC in 1998 to continue.
Trade and o Launch negotiations on relationship
Director General of Anti-Dumping and Allied Duties
environment between WTO rules and trade
(DGAD) recommends the duty but Finance Ministry obligations under environmental
imposes it. agreements. Important issues were:
o Fisheries subsidies and
Anti-Dumping Duty
environmental G&S
Dumping is the act of charging a lower price in a foreign Trade o Negotiate to conclude an agreement
market for a product than the price of the same product facilitation
in a domestic market or in a 3rd country market. In simple
words, it is selling at less than fair value.

July 2008 Package Agriculture o On public stockholding: Keep

engaging to arrive at a permanent
Aim o To conclude Doha Development
solution. [No time-frame specified]
Agenda
o Special safeguard mechanism. [No
Outcome: Draft could not be finalized due to wide time-frame specified to finalise the
divergences among members. implementation modalities]
Finer points were: o Export subsidies: Immediate
Agriculture o Developed countries to end export elimination by developed countries
subsidies by 2013. was agreed upon.
o Green Box: Revisions and tighter SMEs (Small o Keep negotiating
monitoring. and Medium
o Blue Box: Cap on subsidies provided Enterprise)
o Negotiate modalities of Special Electronic o Keep negotiating
safeguard mechanism. Commerce
Non- o In 2005 Hong Kong MC, it was It has been said that the Doha Agenda lost its relevance
Agricultural decided that Swiss formula would be after 2008 Ministerial summit because, the issues of
Market used for NAMA. relevance for developing countries were sidelined and
Access o Different tariff cuts were specified for new issues which were important to developed world are
(NAMA) developed and developing countries introduced and emphasized.
in 2008.
This became explicit in Nairobi Declaration which did not
Trade o Developing countries agreed, if
mention unanimous commitment to Doha Agenda.
facilitation safeguards are provided.
9 Ministerial summit – “Bali package” (2013)
th
Principle of reciprocity was sidelined: Trade Facilitation
Aim o Negotiate towards concluding Doha Agreement was concluded while developed countries
Development Agenda went back on their promise of permanent solution to
public stock holding.
Agriculture o On public stockholding: Interim
Agenda for 11th Ministerial Conference at Buenos Aires,
peace clause was agreed upon and
2017:
permanent solution was to be found
by 2017. Developed Countries Developing Countries
o Developing countries will have right Equal importance to Bringing Doha Agenda back to
to recourse to Special safeguard “new issues” along with the table and any negotiation
contentious ones under on “new issues” (discussed
mechanism but there is no
Doha Agenda below) to start after
agreement over “implementation
conclusion of Doha Agenda,
modalities”. that too with “consensus”
SMEs (Small o Keep negotiating Negotiation on Reforming Agreement on
and Medium “Domestic support” Agriculture to make it more
Enterprise) under Agreement on equitable.
Trade o Negotiations on the agreement were Agriculture to phase out
Facilitation concluded. trade-distorting
subsidies.
Electronic o Keep negotiating
Negotiate on Fisheries Securing mandate on Special
Commerce
subsidies leading to Safeguard Mechanism.
10th Ministerial summit – “Nairobi package” (2015) overfishing and IUU
Outcome: No explicit commitment to Doha Development (Illegal, unreported and
Agenda (DDA). Declaration, recognised divergence in unregulated) fishing.
viewpoint among members over DDA. Negotiate applicability of Negotiating permanent
differential treatment to solution to the issue of Public

fast growing economies Stockholding.

such as India and China.
Who said what?

Developing Countries
Reform of o West provides subsidies amounting to
Agreement billions of dollars under green box.
on o Studies have pointed out that green
box subsidies are trade-distorting.
Agriculture
Thus 'Green Box' needs to be
reformed.
o Public stockholding subsidies are
calculated at 1986-88 price level and
on total production value. 30 year old
price reference level is unrealistic
today and subsidies must be
calculated on quantity procured.
Public Stock Interim Peace clause in current form is
Holding difficult to invoke because of conditions
attached. Hence, G33 called for “legal
certainty”.
Special It needs to be negotiated and agreed upon
Safeguard at earliest.
Mechanism
Developed Negotiate “Domestic support” to
Countries “reduce” subsidies by developing
countries without any commitment on
above issues.

17.REPORTS AND INDICES

Financial Organisation and report
World Bank 1. Ease of Doing Business
2. World Development Report
3. Universal Health Coverage Index
4. Remittance Report
5. Ease of Living Index
6. India Development Update
7. Global Economic Prospect (GEP) report
8. Global Financial Development Report
9. Logistics Performance Index
International Monetary Fund (IMF) 1. Global Financial Stability report
2. World Economic Outlook
Organisation of Economic Development and Cooperation 1. The Programme for International Student
(OECD) Assessment (PISA)
2. Global Index of Countries
3. Government at a Glance Report
WTO World Trade outlook Indicator
Bank for International Settlements (BIS) Global Financial System Report
Financial Action Task Force (FATF) Global Money Laundering Report
World Economic Forum (WEF) 1. Global Information Technology Report
2. Travel and Tourism Competitiveness Report
3. Global Competitiveness Report
4. Enabling Trade Report
5. Global Environment Performance Index
6. World Power Language Index
7. Inclusive Development Index
8. Human Capital Index
9. Energy Transition Index
10. Global Manufacturing Index
11. Global Gender Gap Index
12. Global Hunger Index, 2017
 Undernourishment
 Child wasting
 Child stunting
 Child mortality

UN and its Specialised Agencies
United Nations Development Programme (UNDP) Gender Inequality Index

United Nations Educational, Scientific and Cultural 1. Gender Parity Index
Organization (UNESCO) 2. Global education monitoring Report
UN – Sustainable Development Solutions Network (SDSN) World Happiness Report
United Nations Environment Programme (UNEP) 1. Actions on Air Quality
2. Global Environment Outlook
3. Emission Gap Report
FAO 1. World State of Forest Report
2. Global Food Price Index
World Health Organization (WHO) 1. World Health Statistics
2. World Tuberculosis Report
3. Ambient Air Pollution Report
Non – Profit Organisations
Transparency International 1. Global Corruption Report (GCR)

2. Corruption Perception Index
International Food Policy Research Institute (IFPRI) Global Hunger Index
Gender Inequality Index Global Gender Gap Index Gender Parity Index
 It is computed by United Nations  It is published by World Economic  It is released by UNESCO.
Development Programme (UNDP) Forum.  It is a socioeconomic index
 It uses three dimensions  It measures progress towards parity usually designed to measure
o Reproductive Health between men and women in – the relative access to
o Empowerment & 1. Economy education of males and
o Labour Market Participation. 2. Education females.
 India ranked 122 out of 162 3. Health &  Ratio of girls to boys in
countries in 2016. 4. Political representation. primary, secondary and
 The index lies between 0 and 1, with tertiary levels of education
1 denoting complete parity and 0, to the number of male
complete inequality. students in each level is
 In its recent (2017) report, India has taken in to account.
been ranked 108 out of 144 countries
in the recent report.
 This is a fall of 21 places from the last
year‘s 87, and India's lowest since the
index was developed in 2006.
 The country rankings allow for
effective comparisons across regions
and income groups.

Basis for Wholesale Price Consumer Price Index of Annual survey Industries Purchasing
comparison Index Index industrial Managers’ Index
production (PMI)
Meaning Wholesale Price Consumer Price Measures the industrial statistics in India It is an index of the
Index (WPI), Index (CPI), short-term providing information on prevailing direction
amounts to the indicates the changes in the important characteristics of of economic trends
average change average change volume of registered manufacturing in the
in prices of in the prices of production of a sector manufacturing and
commodities at commodities, at basket of service sectors.
wholesale level. retail level. industrial
products.
Published by Office of Central central statistical Central Statistics Office (CSO) PMI Data is
Economic Advisor Statistics Office organisation and Industrial Statistics (IS) published by
Japanese firm
Nikkei but
compiled and
constructed by
Market Economics
Covers Goods only Goods and Industrial sector Manufacturing sector Manufacturing and
Services services sectors
Focuses on Prices of goods Prices of goods Eight Core Organisedmanufacturingsector Output, New
traded between purchased by Industries data,details ofproduction, Orders,
business houses. consumers. investment, employment and Employment, Input
Electricity, costs. Costs, Output
steel,refinery Prices, Backlogs of
products,crude Work, Export
oil, coal,cement, Orders, Quantity of
natural gasand Purchases, Stocks
fertilisers. of Purchases and
Stocks of Finished
Goods
Base year 2011 -2012 2011-2012 2011-2012 2013 -2014 NA
Share in the Primary Articles Food and Manufacturing NA NA
index (22.62% of total beverages have (77%) followed by
weight), Fuel and maximum mining (14.7%)
Power (13.15%) weightage and electricity
and under this. (7.9%)
Manufactured Among the Index
Products of eight core
(64.23%). industries under
IIP, the sector
wise contribution
are:
Refinery products
(28%), electricity
(19%), Steel
(17%), coal (10%),
crude oil (8%),
natural gas (6%),
cement (5%),
Fertilizers (2%)

18.IMPORTANT GRAPHS
 Philips curve shows the trade off between
unemploy-ment and inflation. It indicates that to
reduce un-employment, an economy has to adjust
with higher level of inflation.
 Laffer curve shows the relationship between tax

revenue and tax rate. Its message is that if the tax is
fixed at an optimum (reasonably low levels), tax
revenue will be maximum.
 Kuznets curve explain the relationship between

growth and inequality. During the initial stages of
development inequality increases with economic
growth.
 Lorenz curve indicate inequality in an economy. It

is a graphical representation of the distribution of
income or of wealth
 Environmental Kuznets curve explains the

relationship between economic growth and
environmental degradaion.

J curve effect: it is a theory stating that a country’s trade deficit will initially worsen after the depreciation of its currency,
as higher prices on imports will be greater than reduced volume of imports and growth in exports initially. When exports
become price competitive and imports are reduced due to high cost, the BOP turns positive.
Interrelations
Increase in repo rate When inflation is high
Decrease in repo rate When inflation is low
Increase in reverse When inflation is high
repo rate
Decrease in reverse When inflation is low
repo rate
Increase in CRR When inflation is very high and needs extreme measures to control it
Decrease in CRR When inflation is very low and needs extreme measures to bring It to healthy levels
Bond yields increase As bond prices fall
Bond prices rise When interest rates fall
Increase in taxes Leads to lower aggregate demand and inflation
Decrease in taxes Leads to higher aggregate demand and inflation
Increase in Leads to higher aggregate demand and inflation
government
spending
Decrease in govt. Leads to Lower aggregate demand and inflation
spending
Increased Leads to Crowding out effect
government
spending
Reduced government Leads to crowding in effect
spending
Increase in inflation  Leads to lower disposable income
 Leads to higher tax collections
 Is correlated with reduced unemployment
 Real debt levels fall
 Competitiveness in external market suffers
 Consequences of depriciation
Increased fiscal  Indicates increased borrowings
deficit  May lead to higher inflation
 Correlated with higher interest rates
 Lower sovereign rating of a country
Increased external Leads to loss of sovereignty
debt
Increased overall Leads to higher interest burden for the future
debt
Increased share of Indicator of regressive tax regime
indirect taxes among
tax revenue
Increased share of Indicator of progressive tax regime

direct taxes among

tax revenue
Rupee depreciation  exports increases as the goods price is less
 inessential imports will reduce
 more FII
 remittances will increase
 debt servicing would be costly
 fiscal deficit increases
 inflation increases
Rupee appreciation  Booming economy
 Huge FII
 Less cost of imports
 Export suffers
 Manage inflation
 Brings in competition
Current account  Net outflow of foreign currency
deficit  Depletion of forex reserves
Large Fiscal deficit  Macro economic instability
 Increase in debt
 Increase in interest payments
 BOP crisis
 Downgrading rating



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READY RECKONER OF ECONOMY

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4. MONETARY POLICY AND BANKING…………………………………………..………………….……12

5. BANKING SYSTEM IN INDIA…………….………………………………………………………………..14

12. INDUSTRY AND INFRASTRUCTURE………………………………………………………………..…..43

13. BALANCE OF PAYMENT……………………………………………………………………………….……48

14. FOREIGN INVESTMENT…………………………………………………………………………………..…51

15. ECONOMIC INTEGRATION…………………………………………………………………………………53

17. REPORTSAND INDICES……………………………………………………………………………………….62

18. IMPORTANT GRAPHS………………………………………………………………………….……………..65

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Structural composition of an economy

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data is not regulated under any legal provision or do

Circular flow in a simple economy

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Application: To see the Application: To see how the CSO vs NSSO

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 When a slowdown leads to negative growth

Depression - A depression is a severe and prolonged

Ex: The Great Depression of 1930

National Planning Committee (1938)

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Gandhian Plan (1944)  Target Growth: 5.6% Actual Growth: 2.8%.

1stFive year plan(1951-56)  Target Growth: 5.7% Actual Growth: 3.3%

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6th five year plan(1980-1985) 9th five year plan(1997-2002):

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 Providing broad band connectivity to all villages 3.FISCAL POLICY

NITI Aayog composition:

 Prime Minister of India as the Chairperson.

 Governing Council comprising the Chief Ministers of

Contractionary Fiscal Policy

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extended at bank rate. While special WMA are Committee on FRBM.

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Masala bonds  Pump-priming: Deficit financing and spending by the

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4.MONETARY POLICY AND BANKING

1. Accelerating economic growth.

Types of monetary policy

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Public Sector Banks

They are owned by the Government either totally or as a

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Liquidity Coverage Ratio = Money Multiplier

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banks. unbanked  Is a company registered under Companies Act that

A Non-Banking Financial Company (NBFC)

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