Economy Basic Terms
Economy Basic Terms
Economy Basic Terms
Budget ........................................................................................................................................................................ 10
Full Budget........................................................................................................................................................................................................... 11
Inflation ...................................................................................................................................................................... 13
Hyperinflation ..................................................................................................................................................................................................... 14
Stagflation ............................................................................................................................................................................................................ 14
CPI Inflation ......................................................................................................................................................................................................... 15
Deficits........................................................................................................................................................................ 17
Unemployment .......................................................................................................................................................... 20
Employment ............................................................................................................................................................... 23
LPG .............................................................................................................................................................................. 23
Liberalisation ....................................................................................................................................................................................................... 23
Privatisation ......................................................................................................................................................................................................... 24
Globalisation ....................................................................................................................................................................................................... 24
Population .................................................................................................................................................................. 24
Life Expectancy................................................................................................................................................................................................... 26
Census ................................................................................................................................................................................................................... 27
Taxes ........................................................................................................................................................................... 27
Cess ........................................................................................................................................................................................................................ 30
Surcharge ............................................................................................................................................................................................................. 30
Excise Duty ........................................................................................................................................................................................................... 31
Customs Duty ..................................................................................................................................................................................................... 31
Revenue ...................................................................................................................................................................... 33
Expenditure ................................................................................................................................................................ 34
Debt ............................................................................................................................................................................ 35
Patents................................................................................................................................................................................................................... 38
Copyrights............................................................................................................................................................................................................ 39
Copyright Act...................................................................................................................................................................................................... 39
SHGs ....................................................................................................................................................................................................................... 60
Microfinance ....................................................................................................................................................................................................... 60
Regional Rural Bank ......................................................................................................................................................................................... 61
NBFC ...................................................................................................................................................................................................................... 62
Seigniorage ......................................................................................................................................................................................................... 68
Poverty ....................................................................................................................................................................... 72
MSP ........................................................................................................................................................................................................................ 74
e-NAM ................................................................................................................................................................................................................... 75
APMC ..................................................................................................................................................................................................................... 75
Operation Green................................................................................................................................................................................................ 76
Strategic Disinvestment.................................................................................................................................................................................. 81
Champions Sectors........................................................................................................................................................................................... 81
Planning ..................................................................................................................................................................... 84
NIFTY ...................................................................................................................................................................................................................... 88
Bombay Stock Exchange ................................................................................................................................................................................ 89
Participatory Notes........................................................................................................................................................................................... 93
Miscellaneous ............................................................................................................................................................ 95
Devaluation ......................................................................................................................................................................................................... 99
Budget
➔ Budget comes from the old French bougette, meaning 'little bag'
➔ Budget Circular is issued in the month of September during the Budget cycle. It marks the
beginning of the Budget process.
➔ Made through a consultative process involving Ministry of Finance, NITI Aayog and spending
Ministries
➔ Prepared by the Budget Division Department of Economic Affairs of the Ministry of Finance
annually. The Finance Minister is the head of the budget making committee.
➔ Nodal body responsible for producing the Budget ➔ Budget Division of the Department of
Economic Affairs
➔ The printing process of the Union Budget papers is marked by the customer 'Halwa Ceremony' held
at North Block in Delhi
➔ Before presentation of the Budget, President's recommendation is obtained under Article 117(1) and
117(3) for introduction and consideration in the lower house of Parliament.
➔ Presented by Finance Minister
➔ According to Article 112 of the Constitution of India, the Union Budget of a year is a statement of the
estimated receipts and expenditure of the govt. for that particular year.
Full Budget
A Full Budget is not just the presentation of annual finances of the government but an occasion to
change existing tax slabs, announce new schemes and sops for different sectors of the economy.
A Full Budget includes the passage of a finance bill to get Parliament's approval for any tax
related changes.
In an election year, the outgoing government doesn't tinker with the taxes or announce new
schemes and sops as these are left at the disposal of the new government.
In order to manage it its expenditure for the interim period till a new government takes over
and announces the Budget, the outgoing government presents what is called a vote on account
or an interim budget to get the Parliament's approval for expenditure to be incurred for the next few
months.
Vote on Account
➔ In the absence of presentation of a Full Budget, the outgoing government seeks a vote on
account from the Parliament for proposed expenditure to be incurred in the next few months till
the new government takes over.
➔ There are no major announcements related to any new schemes or sops during a vote on account as
the new government's stance could differ from that of the outgoing government.
Inflation
• When inflation is low, consumers and businesses are better able to make long-range plans because
they know that the purchasing power of their money will hold and will not be steadily eroded year after
year.
• Low inflation also means lower nominal and real (inflation-adjusted) interest rates. Lower real
interest rates reduce the cost of borrowing. This encourages households to buy durable goods, such as
houses and autos. It also encourages businesses to invest in order to improve productivity so that they
can stay competitive and prosper without steadily having to raise prices.
• Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is
under long-term control, they do not react as quickly to short-term price pressures by seeking to raise
prices and wages. This helps to keep inflation low.
Creeping inflation
Galloping inflation
➢ ‘Very high inflation’ running in the range of double digit or triple digit (i.e., 20 per cent, 100 per cent
or 200 per cent in a year)
Hyperinflation
➢ This form of inflation is ‘large and accelerating’ which might have the annual rates in million or even
trillion.
➢ In such inflation not only the range of increase is very large, but the increase takes place in a very short
span of time, prices shoot up overnight.
Core Inflation
➢ Inflation measure which excludes transitory or temporary price volatility as in the case of some
commodities such as food items, energy products etc.
➢ Reflects the inflation trend in an economy.
➢ Change in the costs of goods and services but does not include those from the food and energy
sectors.
➢ Excludes these items because their prices are much more volatile.
➢ Most often calculated using the consumer price index (CPI), which is a measure of prices for goods
and services.
Headline inflation
➢ A measure of the total inflation within an economy, including commodities such as food and
energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.
➢ RAW Inflation figure
Stagflation
➢ Situation in which the inflation rate is high, the economic growth rate slows, and unemployment
remains steadily high.
➢ It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate
unemployment.
CPI Inflation
➢ Comprehensive measure used for estimation of price changes in a basket of goods and services
representative of consumption expenditure in an economy is called consumer price index.
➢ Inflation is measured using CPI. The percentage change in this index over a period of time gives the
amount of inflation over that specific period, i.e. the increase in prices of a representative basket of
goods consumed.
Food Inflation
➢ Food inflation refers to the condition whereby there exist increase in wholesale price index of
essential food items (defined as food basket) relative to the general inflation or the consumer
price index
Core Inflation
➢ An inflation measure which excludes transitory or temporary price volatility as in the case of some
commodities such as food items, energy products etc.
➢ It reflects the inflation trend in an economy.
WPI Inflation
o WPI index reflects average price changes of goods that are bought and sold in the wholesale
market.
o Some countries (like the Philippines) use WPI changes as a central measure of inflation.
Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and
Employment. Fourth is compiled by the Central Statistical Organization (CSO) in the Ministry of
Statistics and Programme Implementation.
➢ WPI, tracks inflation at the producer level and CPI captures changes in prices levels at the consumer
level.
➢ Both baskets measure inflationary trends (the movement of price signals) within the broader economy,
the two indices differ in which weightages are assigned to food, fuel and manufactured items.
➢ WPI does not capture changes in the prices of services, which CPI does.
➢ In April 2014, the RBI had adopted the CPI as its key measure of inflation.
It measures the average change in the prices of goods and services, either as they leave the place
of production called Output PPI or as they enter the production process called Input PPI.
Output indices measure the average change in prices that producers receive for their outputs
Input indices measure the average change in prices that producers pay for their inputs.
PPI contrasts with other measures such as the Consumer Price Index (CPI) which measures changes in
prices from buyers or consumers perspective.
What about the comparisons between PPI & WPI? What are the features of it? Which is the most
viable one?
• Wholesale Price Index (WPI) basket tracks prices of bulk transactions at first stage of all intermediate
and final products.
• Drawback of aggregate basket of WPI involves multiple counting leading to bias in measures of
inflation.
• Multiple counting occurs when the price for a specific commodity and the inputs used for its
production are included in an aggregate index.
• PPIs reduce the distortion arising from multiple counting by deriving weights from Supply Use
Table compiled by the CSO.
• Scope of PPI extends to services which are not presently covered under WPI.
• Benefits of migrating from WPI to PPI are to cover bulk transactions of all goods and services.
• Do away with the bias of double counting in WPI
• To compile indices that are consistent with the National Accounts Statistics (NAS) for use as deflators.
Using population proportion as weights, an all India index as weighted average of city indices
has been computed in-house
Deficits
Monetised deficit
• Fiscal deficit is the difference of government expenditure and government revenue.(assume that
government expenditure is more than revenue).
• More fiscal deficit means government has no money, he has to borrow money from central bank or
through some bond/scheme.
• If government is borrowing from RBI, in other words RBI has to print more money, so it will
increase the liquidity of money in the market. So people will have more money in their hand, but we
have limited resources. For example, before there was 5 car buyers for 1 car, now there is 10 car buyer
for 1 car. So demand for car will increase and it will increase the price of car. So price of everything will
go up. Ultimately Inflation will go up.
• If government is borrowing money from people as bond or some scheme through, government
has to pay high interest after some year. So people will invest their money in government
schemes, so liquidity of the money will come down. Before we have 5 car buyer for 1 car, now we
have 2 car buyer for 1 car, so car price will go down. Price of everything will go down, people will buy
less things. It will slow down the industrial growth and it will be deflation in the country. It will make
economic growth sluggish. And in the situation of the deflation, Government has to pay high interest
to the people.
• Third case, government has to borrow money from world bank or from some other country.
Because of that Government has to devalue it’s currency.
• As government has no money, government can’t bring any new development scheme. It will become
difficult to tackle any crisis over country.
• Fiscal deficit is the difference between the government’s expenditures and its revenues (excluding the
money it’s borrowed)
• A country’s fiscal deficit is usually communicated as a percentage of its gross domestic product
(GDP).
• If a country's income is 100 rupees and expenses are 104 rupees ,then fiscal deficit is 4.
• Let's say GDP of the nation is 400 rupees total value of goods and services produced in the country in
an year .Then the deficit of the nation is 1%.[F.D. → 1% of 400 = 4]
➢ Current account deficit is a measurement of a country's trade where the value of the goods and
services it imports exceeds the value of the goods and services it exports.
Trade Deficit
▪ A trade deficit is an economic measure of international trade in which a country's imports exceeds its
exports.
▪ A trade deficit represents an outflow of domestic currency to foreign markets. It is also referred to
as a negative balance of trade (BOT).
▪ Trade Deficit = Total Value of Imports – Total Value of Exports
Twin deficit hypothesis
✓ As the fiscal deficit of the country goes up its trade deficit (i.e. the difference between exports and
imports) also goes up.
✓ When a govt of a country spends more than what it earns, the country also ends up importing more
than exporting.
✓ In India, the trade deficit story is basically about oil and gold – two commodities that the country
does not produce much but imports a hell of a lot.
Revenue Deficit
It is the difference between the revenue receipts (RR) and the revenue expenditure (RE)
Revenue deficit arises when the Govt's actual net receipts is lower than the projected receipts.
Example
If a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net
revenue of Rs 25.
But the actual revenue of Rs 90 is realised and an expenditure is Rs 70. This translates into net
revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit.
• It is defined as the difference between the revenue deficit and creation of capital assets.
• Effective Revenue Deficit excludes those revenue expenditures which were done in the form of
grants for the creation of capital assets.
• There are several grants which the Union Government gives to the state / UTs and some of which do
create some assets, which are not owned by union govt. but by the state govt.
Example
Under the MGNREGA programme, some capital assets such as roads, ponds etc. are created thus the
grants for such expenditure will not strictly fall in the revenue expenditure
Primary Deficit
Example
1. Revenue Receipts = Rs. 3,00,000
2. Capital Receipts = Rs. 1,60,000
a) Loan recoveries + other receipts = Rs. 10,000
b) Borrowings & Other liabilities = Rs. 1,50,000
3. Total Receipts (1 +2) = Rs. 4,60,000
4. Revenue Expenditure = Rs.3,50,000
5. Capital Expenditure = Rs. 1,10,000
6. Total Expenditure (4+5) = Rs. 4,60,000
7. Budget Deficit (3-6) =NIL
8. Fiscal Deficit [1+2(a) - 6 =3- 2(b)-6=7 + 2 (b)]= Rs. 1,50,000
Simply
If Govt expenditure is more than it collects then deficit occurs and its known as fiscal deficit and to
finance the deficit it borrows money .
If it borrows the amount equals to fiscal deficit ,then the budget deficit becomes zero and if it borrows
less than the fiscal deficit amount, then budget deficit occurs.
Unemployment
National Sample Survey Organization (NSSO) defines employment and unemployment on the
following activity statuses of an individual
Disguised Unemployment
Seasonal Unemployment
Structural Unemployment
➔ It is a category of unemployment arising from the mismatch between the jobs available in the
market and the skills of the available workers in the market.
➔ Many people in India do not get job due to lack of requisite skills and due to poor education level, it
becomes difficult to train them.
Cyclical Unemployment
➔ It is result of the business cycle, where unemployment rises during recessions and declines with
economic growth.
➔ Cyclical unemployment figures in India are negligible. It is a phenomenon that is mostly found in
capitalist economies.
Technological Unemployment
Frictional Unemployment
➔ The Frictional Unemployment also called as Search Unemployment, refers to the time lag between the
jobs when an individual is searching for a new job or is switching between the jobs.
Unemployment Trap
Philips Curve
➔ Describes inverse relationship between rates of unemployment and corresponding rates of rises in
wages that result within an economy
➔ Simply decreased unemployment, (i.e., increased levels of employment) in an economy will
correlate with higher rates of wage rises
➔ The trade-off between inflation and unemployment is explained by Philips Curve
➔ Phillips curve remains the primary framework for understanding and forecasting inflation used in
central banks
Jobless Growth
➔ UR is defined as the percentage of persons unemployed among the persons in the labour force.
➔ 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 basis of the reference period of last 365 days preceding
the date of survey, it is known as the usual activity status of the person.
➔ Mahatma Gandhi Employment Guarantee Act 2005 later renamed as the "Mahatma Gandhi
National Rural Employment Guarantee Act", MGNREGA, is an Indian labour law and social security
measure that aims to guarantee the 'right to work'.
➔ This act was passed in September 2005
➔ The act was first proposed in 1991 by P.V. Narasimha Rao
➔ Commenced implementation in 625 districts of India. Based on this pilot experience, NREGA was
scoped up to cover all the districts of India from April 1, 2008
➔ In its World Development Report 2014, the World Bank termed it a "stellar example of rural
development"
➔ MGNREGA was initiated with the objective of "enhancing livelihood security in rural areas by providing
at least 100 days of guaranteed wage employment in a financial year, to every household whose
adult members volunteer to do unskilled manual work"
➔ Another aim of MGNREGA is to create durable assets (such as roads, canals, ponds and wells).
➔ Employment is to be provided within 5 km of an applicant's residence, and minimum wages are to be
paid.
➔ If work is not provided within 15 days of applying, applicants are entitled to an unemployment
allowance.
➔ That is, if the government fails to provide employment, it has to provide certain unemployment
allowances to those people. Thus, employment under MGNREGA is a legal entitlement.
➔ MGNREGA is to be implemented mainly by gram panchayats
Employment
➔ Labour force participation rate is defined as the section of working population in the age group of
16-64 in the economy currently employed or seeking employment.
➔ People who are still undergoing studies, housewives and persons above the age of 64 are not reckoned
in the labour force.
➔ The information relating to employment in the formal sector is collected by the Union Ministry of
Labour through employment exchanges located in different parts of the country.
LPG
Liberalisation
Privatisation
Privatisation refers to giving greater role to private sector and reducing the role of public sector.
To execute the policy of privatisation govt. took the following steps
➔ Disinvestment of public sector i.e. transfer of public sector enterprise to private sector
➔ Setting up of board of Industrial and Financial Reconstruction (BIFR)→ This board was setup to
revive sick units in public sector enterprises suffering loss
➔ Dilution of stake of the govt → If in the process of disinvestment private sector acquires more than
51% shares then it results in transfer of ownership and management to the private sector
Globalisation
a) Import liberlisation → govt removed many restrcitions from import of capital goods
b) Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act(FEMA)
c) Rationalisation of tariff structure
d) Abolition of export duty
e) Reduction of import duty
Population
Population Explosion
➔ Population data are collected through Census operation held every 10 years in our country.
➔ The first population Census in India was conducted in 1872 but its first complete Census was
conducted only in 1881.
Density of Population
➔ Population doubling time is the time taken by any population to double itself at its current annual
growth rate.
Growth of Population
➔ Growth of population is the change in the number of people living in a particular area between
two points of time. Its rate is expressed in percentage.
➔ Population growth has two components namely; natural and induced
➔ Natural growth is analysed assessing the crude birth and death rates
➔ Induced components are explained by the volume of inward and outward movement of people in any
given area
➔ Main Worker is a person who works for atleast 183 days ( or six months) in a year
➔ Marginal Worker is a person who works for less than 183 days ( or six months) in a year
Demographic Dividend
➔ The demographic advantage or ‘dividend’ to be derived from the age structure of the population
➔ The ‘demographic dividend’ results from an increase in the proportion of workers relative to non-
workers in the population.
➔ In terms of age, the working population is roughly that between 15 and 64 years of age.
➔ According to United Nations Population Fund (UNFPA), demographic dividend means, "the economic
growth potential that can result from shifts in a population’s age structure, mainly when the
share of the working-age population (15 to 64) is larger than non-working-age share of the
population (14 and younger, and 65 and older)".
Growth rate of population
➔ The rate of natural increase or the growth rate of population refers to the difference between the
birth rate and the death rate.
➔ When this difference is zero (or, in practice, very small) then we say that the population has
‘stabilised’, or has reached the ‘replacement level’, which is the rate of growth required for new
generations to replace the older ones that are dying out.
➔ Sometimes, societies can experience a negative growth rate – that is, their fertility levels are below
the replacement rate.
Fertility Rate
➔ The fertility rate refers to the number of live births per 1000 women in the child-bearing age
group, usually taken to be 15 to 49 years.
➔ The infant mortality rate is the number of deaths of babies before the age of one year per 1000 live
births.
➔ Maternal mortality rate is the number of women who die in childbirth per 1000 live births.
Life Expectancy
➔ It refers to the estimated number of years that an average person is expected to survive.
➔ It is calculated on the basis of data on age-specific death rates in a given area over a period of time
Sex Ratio
➔ The sex ratio refers to the number of females per 1000 males in a given area at a specified time period.
Child mortality
➔ It refers to the death of a foetus or neonate and is the basis to calculate the perinatal mortality rate
Fetal mortality
➔ It refers to stillbirths or fetal death. It encompasses any death of a foetus after 20 weeks of gestation
or 500 gm.
Neonatal mortality
➔ Neonatal mortality refers to death of a live-born baby within the first 28 days of life.
➔ Early neonatal mortality refers to the death of a live-born baby within the first seven days of life, while
late neonatal mortality refers to death after 7 days until before 28 days.
Census
Taxes
Income Tax
➔ Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families
or firms or co-operative societies (other than companies) and trusts (identified as bodies of
individuals associations of persons) or every artificial juridical person.
➔ The inclusion of a particular income in the total incomes of a person for income-tax in India is based
on his residential status.
Corporation Tax
➔ The companies and business organizations in India are taxed on the income from their worldwide
transactions under the provision of Income Tax Act, 1961.
➔ A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and
management is situated entirely in India.
➔ In case of non resident corporations, tax is levied on the income which is earned from their business
transactions in India or any other Indian sources depending on bilateral agreement of that country.
Property Tax
➔ Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed
on owners.
➔ The tax power is vested in the states and it is delegated by law to the local bodies, specifying the
valuation method, rate band, and collection procedures.
➔ The tax base is the annual ratable value (ARV) or areabased rating.
➔ Owner-occupied and other properties not producing rent are assessed on cost and then converted into
ARV by applying a percentage of cost, usually 6%.
➔ Vacant land is generally exempted from the assessment.
➔ The properties lying under control of Central are exempted from the taxation. Instead a 'service charge'
is permissible under executive order.
➔ Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity.
➔ An inheritance tax (also known as an estate tax or death duty) is a tax which arises on the death of
an individual.
➔ It is a tax on the estate, or total value of the money and property, of a person who has died.
➔ India enforced estate duty from 1953 to 1985.
➔ Estate Duty Act, 1953 came into existence w.e.f. 15th October, 1953.
➔ Estate Duty on agricultural land was discontinued under the Estate Duty (Amendment) Act, 1984.
➔ The levy of Estate Duty in respect of property (other than agricultural land) passing on death occurring
on or after 16th March, 1985, has also been abolished under the Estate Duty (Amendment) Act,
1985.
Gift Tax
➔ Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April, 1958.
➔ As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others,
received from one who doesn't have blood relations with the recipient, were taxable.
➔ However, with effect from 1st October, 1998, gift tax got demolished and all the gifts made on or after
the date were free from tax. But in 2004, the act was again revived partially.
➔ A new provision was introduced in the Income Tax Act 1961 under section 56 (2).
➔ According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs.
50,000 in a year would be taxable.
Sales Tax
➔ Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a
particular commodity within the country.
➔ Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales
Tax) Legislation.
➔ Generally, each State follows its own Sales Tax Act and levies tax at various rates.
➔ Apart from sales tax, certain States also imposes additional charges like works contracts tax, turnover
tax and purchaser tax.
➔ Thus, Sales Tax Acts as a major revenue-generator for the various State Governments.
➔ When a person purchases a certain kind of product, a special tax is added at every stage wherever a
certain amount of ‘value is added’ to the product, as well as at the final sale of that particular item.
➔ This tax falls under the category of indirect tax because it is paid by the taxpayer to the Government
indirectly through the producers of various goods and services.
➔ It is a multi-stage tax that is imposed at various stages of purchase and sale of goods and services.
➔ The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials
used in the product that have already been taxed.
➔ The basic concept of VAT was originally proposed by Dr. Wilhelm von Siemens
➔ STT is a tax being levied on all transactions done on the stock exchanges.
➔ STT is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity
oriented Mutual Funds.
Angel Tax
➔ An angel investor is one who provides capital for a business start-up, usually in exchange for
convertible debt or ownership equity
➔ Angel tax is the tax levied on such investments made by external investors in startups or
companies.
➔ Introduced in the 2012 Union Budget to arrest laundering of illegal wealth by means of investments
in the shares of unlisted private companies at extraordinary valuations.
Cess
➔ CESS is tax on tax and usually levied for the specific purposes.
➔ Once its purpose is solved they are stopped.
➔ Unlike the other taxes that have to be shared with other Indian states, the centre keeps the entire
amount raised from the Cess.
➔ The collection through the CESS is kept in the Consolidated Fund of India.
➔ It is a kind of carbon tax was levied on coal produced in India or imported coal
➔ Under segment 83 (3) of the Finance Act, 2010 on Coal, Lignite and Peat with a specific end goal to
back and advance clean condition activities, subsidizing research in the zone of clean condition or for
any such related purposes.
➔ In the Union budget 2016-17, tax on coal was renamed as Clean Environment Cess.
Surcharge
Excise Duty
Customs Duty
1. Basic duty
2. Additional Customs duty
3. True Countervailing duty or additional duty of customs
4. Anti dumping duty/Safeguard duty
➔ It was created to bring these ‘zero-tax paying companies’ within the ambit of income tax and make
them pay a minimum amount in tax to the government.
➔ It was introduced in the budget of 1986-87 when the applicable rate was 15.75 %
➔ Introduced by the Finance Act, 1987, MAT came into effect from assessment year 1988-89.
➔ Discontinued from 1990-91 and reintroduced in 1996-97 when the effective rate was 11.87%
➔ MAT credit is the difference between the tax the company pays under MAT and the regular tax.
Progressive Taxation
➔ Progressive taxation means higher tax rates for those with higher income or more wealth, so that
those who earn or have more are taxed at a higher rate.
➔ Income redistribution is possible by progressive taxation
Regressive Taxation
➔ Regressive taxation means the poor pay a greater proportion of their available resources than the
rich.
➔ Consumption taxes which employ a flat rate are the clearest example of regressive taxes.
NOTE The amount of tax to be paid is proportionate to the value of the commodity in respect of Ad
valorem tax
MODVAT
➔ First Indirect Tax Reform occurred in India when the Modified Value Added Tax (MODVAT) was
introduced for selected commodities in 1986 to replace the Central Excise Duty.
➔ It was gradually extended to all commodities through Central Value Added Tax (CENVAT).
➔ The states also followed the suit and enacted the VAT acts to replace the sales tax with Value Added
Tax.
Revenue
Tax Revenue
• Taxes collected from both direct and indirect taxes are considered in Tax Revenue
• It gives a detailed report on revenue collected from different items like corporation tax, income tax,
wealth tax, customs, union excise, service, taxes on UTs like land revenue, stamp registration etc.
Non-Tax Revenue
• Revenue receipts which are not generated by taxing the public➔ Non-Tax Revenue
Examples
o Money which the Govt earns as “Dividends and profits” from its profit making public enterprises
(PSUs).
o Interest which the Govt earns on the money lent by it to external or internal borrowers. Thus this
revenue receipts may be in foreign currency as well as Indian Rupees.
o The money which the govt receives out of its fiscal services such as stamp printing, currency
printing, medal printing etc.
o Money which the Govt earns from its “General Services” such as power distribution, irrigation,
banking services, insurance, and community services etc. which make the part of the Government
business.
o Money which the govt accrues as fees, fines, penalties etc.
o Grants the Govt of India receives from the external sources. In case of the State Govts, it may be the
internal grant from the central Government.
Tax Buoyancy
• As the economy achieves faster growth, the tax revenue of the govt also goes up➔ Tax buoyancy
explains this relationship between the changes in govt’s tax revenue growth and the changes in
GDP
• It refers to the responsiveness of tax revenue growth to changes in GDP.
• When a tax is buoyant, its revenue increases without increasing the tax rate.
Hence, tax buoyancy shows the association between economy’s performance and the government’s
‘happiness’ (tax revenue). It indicates the high sensitiveness of tax revenue realisation to GDP growth.
This concept reveals some interesting aspects as well as some interesting questions.
✓ First thing is that the govt can feel relieved and happy if the economy achieves higher growth. It may
not borrow highly to finance the budget. New schemes and programmes can be lavished because of
high revenue growth.
✓ Second is that tax buoyancy will be highest for direct taxes. As the economy grows fast, the additional
income generated may go to the rich group. A part of that they have to pay to the govt in the form of
taxes. So if the GDP growth rate registers high say, 9%, direct income tax collection will accelerate.
Generally, direct taxes are more sensitive to GDP growth rate.
Expenditure
Govt expenditure can be classified in two broad formats Capital Expenditure and Revenue Expenditure
Capital Expenditure
Revenue Expenditure
Consumption Expenditure
• Consumption Expenditure is the spending by households on goods and services, excluding new
housing.
Debt
Debt Trap
➔ Net debt per capita is simply a country’s total debt divided by the population living there.
External Debt
o It refers to money borrowed from a source outside the country.
o External debt has to be paid back in the currency in which it is borrowed
o External debt can be obtained from foreign commercial banks, international financial institutions like
IMF, World Bank, ADB etc and from the government of foreign nations.
o Government and corporations are eligible to raise loans from abroad. These are in the form of external
commercial borrowings.
o The interest rate on foreign loans is linked to LIBOR (London Interbank Offer rate) and the actual
rate will be LIBOR plus applicable spread, depending upon the credit rating of the borrower.
o As State Governments are not empowered to contract external debt, all external debt is contracted
by the Central Government and those intended for state government projects are on-lent to States.
o Under Article 292 of the Constitution of India, the Central Government may borrow from within as well
as outside the territory of the country.
o There is no borrowing from international capital markets. The entire External Debt is originally
long-term and a major part is at fixed interest rates.
Internal Debt
➢ Established in 1893
➢ To administer Berne Convention for the Protection of Literary and Artistic Works and Paris
Convention for the Protection of Industrial Property.
➢ World Intellectual Property Indicators is an annual report published by the WIPO
➢ Intellectual property rights refer to the rights given to people over the creations of their minds.
➢ They usually give the creator an exclusive right over the use for a certain period of time.
Patents
➢ Patent is one of the most important IPR under which protection is granted for an exclusive right to
exploit an invention.
➢ The invention must be a product or a process that provides a novelty and must have commercial
application.
➢ The owner of a patent is usually granted 20 years of patent protection.
➢ Set of initiatives for providing accelerated patent prosecution procedures by sharing information
between some patent offices.
➢ National policy on Electronics 2019 created Sovereign Patent Fund (SPF) to promote the
development and acquisition of IPs in ESDM sector.
Product Patent
➢ Article 28 of TRIPS confers on the owner of a product patent an exclusive right to prevent third
parties without his consent, from the acts of making, using, offering for sale, selling or importing that
product.
Process Patent
➢ The TRIPs regulation provides for registration of both the product patent as well as a process
patent under the new patent regime.
Copyrights
➢ Copyrights include the right of the author of computer programs and cinema to graphic works apart
from the general work of art and literature.
➢ Article 12 provides for protection of copyrights for at least fifty years.
Copyright Act
Trade marks
➢ It means any sign or any combination of signs capable of distinguishing the goods or services
from those of other undertakings.
➢ The term of protection is for seven years and is renewable indefinitely.
➢ The owner of a registered trademark has the right to assign his trademark with or without the transfer
of his business.
Industrial Designs
➢ Design broadly implies to the characteristics of shape, pattern, configuration, or composition of
lines or colors which is tested to any commodity by any industrial process or means, which is judged
by eyes.
Trade Secret
➢ Trade secrets with commercial value must be protected against breach of confidence, breach of
contract, inducements and other acts contrary to “honest commercial practices”.
➢ Furthermore, reasonable steps must be taken to keep the information secret.
➢ Governments must protect against unfair commercial use test data submitted to obtain marketing
approval for new pharmaceutical or agricultural chemicals.
Utility Model
➢ A utility model is an exclusive right granted for an invention, which allows the right holder to
prevent others from commercially using the protected invention, without his authorization, for a
limited period of time.
➢ In its basic definition, which may vary from one country (where such protection is available) to another,
a utility model is similar to a patent.
➢ In fact, utility models are sometimes referred to as "petty patents" or "innovation patents."
➔ The commission followed the method adopted by the 12th commission and put the floor limit at 2 %
for smaller States and assigned 15 % weight.
➔ The commission assigned 50% weight to income distance as it is the only measure of fiscal capacity.
It is the distance of actual per capita income of a state from the state with the highest per capita. The
commission calculated the income distance following the method used the 12th commission.
➔ Income distance has been computed by taking the distance from the state having highest per
capita GSDP. Goa had the highest, followed by Sikkim. Since these two are very small states, income
distance had been computed from the third, Haryana. Goa, Sikkim and Haryana are assigned the same
distance as obtained for Haryana.
➔ Article 280 of the Constitution of India provides for a quasi-judicial body, the Finance Commission.
➔ It is constituted by the President of India every 5th year or at such earlier time as he considers
necessary.
➔ 15th Finance commission makes recommendations for the period of 2020-2025 (5 years)
➔ Recommended a one percentage point reduction in the vertical split of the divisible pool of tax
revenues accruing to States to 41%.
Horizontal Distribution
➔ Inter se distribution of tax shares, by the Finance Commission, amongst the states is known as
Horizontal Distribution
Horizontal Devolution
Vertical Devolution
➔ Distribution of net proceeds of taxes between the Union and States is called Vertical devolution
• It is the first estimate of gross domestic product (GDP) and its components for a quarter
• In calculating quarterly GDP, the first estimate published approximately one month after the end of a
quarter. It includes all information then available, but because relevant information may not be
available immediately or may be subject to revision, it is subject to scrutiny and is usually revised in the
preliminary estimate and later in the final estimate
• First Advance Estimates ➔released by CSO
• The approach for compiling the advance estimates is based on benchmark-indicator method
▪ The current account is one of the two components of a country's balance of payments, the other being
the capital account.
▪ It consists of the trade balance (the difference between the total value of exports of goods and
services and the total value of imports of goods and services), the net factor income (difference
between the return on investments generated by citizens abroad and payments made to foreign
investors domestically) and net cash transfers, where all these elements are measured in the domestic
currency.
▪ When a country's current account balance is positive (also known as incurring a surplus), the country
is a net lender to the rest of the world. When a country's current account balance is negative (also
known as running a deficit), the country is a net borrower from the rest of the world.
▪ The ratio of the current account balance to the Gross Domestic Product (or % of GDP) provides an
indication of the country’s level of international competitiveness.
Debt-to-GDP ratio
▪ Debt-to-GDP ratio is the ratio between a country's government debt (a cumulative amount) and its
gross domestic product (GDP) (measured in years).
▪ A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient
to pay back debts without incurring further debt.
How is it measured?
At the macro level, from national accounting perspective, it is the sum of a country’s GDP and net of
subsidies and taxes in the economy.
When measured from the production side, it is a balancing item of the national accounts.
GVA gives a picture of the state of economic activity from the producer’s side or supply side
GDP gives the picture from the consumer’s side or demand perspective.
Both measures need not match because of the difference in treatment of net taxes.
Gross National Product (GNP)
➔ Sum of money received in regular or increasing amounts over time (Individual level)
➔ Total Value of Goods & Services earned by the State Citizens in a Year
➔ Includes our State Citizen Income in other States & other Country ➔ (Inter State Income)
Income generated by state citizens in other State & other countries are included in Income Accruing
IA = SI + ISI
➔ Income of the value of the Goods & Services produced in a State in a year within the four Geographical
boundaries of the State
➔ Note Inter State & Country incomes are not included
Gross State Domestic Product (GSDP) (State Economy)
▪ Volume of all goods and services produced within the boundaries of the State during a given
period of time, accounted without duplication
▪ Stamp duties and property taxes ➔ production taxes
▪ Subsidies to labour, capital and investment (apprentice subsidies and interest subsidies)➔ production
subsidies
▪ Value of all final goods and services produced by all sectors of the economy
▪ Used in the estimation of GSDP
▪ Key indicator of the state of the whole economy
▪ Economic growth is measured by Gross Value Added (GVA)
▪ Volume of all goods and services produced within the boundaries of the State during a given period of
time after deducting the wear and tear or depreciation, accounted without duplication
➔ Cash to GDP ratio gives the ratio of cash currency available in the market to the total monetary
value of GDP
➔ Cash to GDP = Amount of cash in circulation / total GDP value
Reserve Money
✓ Narrow Money (M1) = Currency with the public + Demand Deposits of public in Banks
✓ When a third component viz. Post office Savings Deposits is also added to M1, it becomes M2.
M2 = M1 + Post Office Savings
✓ M4 = M3 + All deposits with post office savings banks (excluding National Savings Certificates)
A policy in which a govt reduces the amount of money being spent in an economy by raising
interest rates, making it more expensive to borrow money
It is a monetary policy that increases the money supply usually by lowering interest rates. It occurs
when a country's central bank decides to allow new cash flows into the banking system.
Currency Notes (Bank Notes)
Front
Back
✓ Image of Mangalyaan
✓ Swachh Bharat Logo and slogan
✓ Language panel
Front
Back
Rani ki vav
Swachh Bharat logo and slogan
Language panel
Rs. 50 Note
Colour Fluorescent Blue
Release Date 10th November 2017
Size 135mm X 66mm
Front
Image of Mahatma Gandhi in center
50 written in Devanagari
Back
Image of Hampi
Swachh Bharat logo and slogan
Language panel
Rs. 20 Note
Colour Greenish-Yellow
Release Date 26th April 2019
Size 129 mm × 63 mm
Front
Image of Mahatma Gandhi in center
100 written in Devanagari
Back
Ellora Caves
Swachh Bharat logo and slogan
Language panel
Rs. 10 Note
Colour Chocolate Brown
Release Date 5th Jan 2018
Size 123mm X 63mm
Front
Image of Mahatma Gandhi in center
10 written in Devanagari
Back
Motif of the Konark Sun Temple
Swachh Bharat logo and slogan
Language panel
Cryptocurrency
Money Multiplier
➔ It describes how an initial deposit leads to a greater final increase in the total money supply.
➔ It represents the largest degree to which the money supply is influenced by changes in the quantity of
deposits.
Nationalisation of Banks
Recapitalisation of Banks
To understand this, one must examine the way banks loan money. The banks create loans based on the
amount of capital in hand. Taking an example, let us say that a bank has forwarded loans of 100cr. To
back this loan, the bank must have at least 10% of the loan amount as capital i.e. 10cr. Now suppose,
the bank loses 5cr on the loans due to a defaulter, it turns the loan into a non-performing asset (NPA)
and this loss hits the capital.
Now, the bank has 5cr ( 10cr - 5cr loss) capital against a loan of 95cr which comes out to be nearly 5 %.
This is way below the required 10% ratio. So, the bank needs to increase its capital ratio and this
can be achieved by the following methods
➔ Recall loans worth 45cr so that the remaining loans to capital ratio now increases to 10%.
➔ Freeze disbursement of loans
The banks have resorted to the latter as loan recall is not a viable option. This has adversely affected
the economic growth of the country as a credit crunch has reduced private investment and stressed
corporate balance sheets further. The twin-balance sheet problem has thus been exacerbated.
Simply, Bank recapitalization means infusing more capital in state-run banks so that they meet the
capital adequacy norms.
Prompt Corrective Action
➔ PCA is a framework under which banks with weak financial metrics are put under watch by the RBI
➔ The PCA framework deems banks as risky if they slip below certain norms on three parameters —
capital ratios, asset quality and profitability.
➔ It has 3 risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on
these ratios.
➔ Banks with a capital to risk-weighted assets ratio (CRAR) of less than 10.25 per cent but more than 7.75
per cent fall under threshold 1.
➔ Those with CRAR of more than 6.25 per cent but less than 7.75 per cent fall in the second threshold.
➔ In case a bank’s common equity Tier 1 (the bare minimum capital under CRAR) falls below 3.625 per
cent, it gets categorised under the third threshold level.
➔ Banks that have a net NPA of 6 % or more but less than 9 % fall under threshold 1, and those with
12 % or more fall under the third threshold level.
Basel III
➔ World Bank is an international financial institution that provides loans and grants to the
governments of poorer countries for the purpose of pursuing capital projects.
➔ It has 2 basic types of lending instruments investment loans and adjustment loans.
➔ Investment loans have a long-term focus (5 to 10 years), and finance goods, works, and services in
support of economic and social development projects in a broad range of sectors.
➔ Adjustment loans are provided by the World Bank to countries that experienced economic crises.
➔ Medium and Long term loans are sanctioned by World Bank
➔ Reserve Bank of India (RBI) is India's central bank, which controls the issue and supply of the Indian
rupee.
➔ RBI is the regulator of entire Banking in India.
➔ RBI regulates commercial banks and non-banking finance companies working in India.
➔ It serves as the leader of the banking system and the money market.
➔ It regulates money supply and credit in the country.
➔ The RBI carries out India's monetary policy and exercises supervision and control over banks and
non-banking finance companies in India.
➔ RBI was set up in 1935 under the Reserve Bank of India Act,1934
➔ RBI was nationalised on January 1, 1949
➔ Headquarters ➔ Mumbai
➔ Reserve Bank of India has offices at 31 locations.
➔ Reserve Bank of India was conceptualized based on the guidelines presented by
Dr. Ambedkar to the "Royal Commission on Indian Currency & Finance” in 1925.
➔ RBI is a leading member of the Alliance for Financial Inclusion (AFI).
➔ RBI is also known as banker's bank and is often referred to by the name 'Mint Street'.
➔ The bank was set up based on the recommendations of the 1926 Royal Commission on Indian
Currency and Finance, also known as the Hilton–Young Commission.
➔ The original choice for the seal of RBI was the East India Company Double Mohur, with the sketch
of the Lion and Palm Tree. However, it was decided to replace the lion with the tiger, the national
animal of India.
➔ The Central Office of the RBI was established in Calcutta (now Kolkata) but was moved to Bombay
(now Mumbai) in 1937.
➔ RBI has 4 regional representations North in New Delhi, South in Chennai, East in Kolkata and West in
Mumbai.
➔ It has 2 training colleges for its officers, viz. Reserve Bank Staff College, Chennai and College of
Agricultural Banking, Pune.
➔ There are 3 autonomous institutions run by RBI namely National Institute of Bank Management
(NIBM), Indira Gandhi Institute of Development Research (IGIDR), Institute for Development and
Research in Banking Technology (IDRBT).
➔ Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI
deputy governor S. S. Tarapore to "lay the road map" to capital account convertibility.
➔ Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned company of
the Government of India, has printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh.
➔ Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the RBI, has printing
facilities in Mysore, Karnataka and Salboni, West Bengal.
➔ For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and Hyderabad for coin
production.
➔ Whilst coins are minted by, and Re.1 notes are issued by the Government of India (GoI), the RBI works
as an agent of GoI for the distribution and handling of coins.
➔ New Rs. 500 and Rs. 2,000 notes were been issued on 8 November 2016. The old series of Rs. 1,000
and Rs. 500 notes were demonetized from midnight on 8 November 2016.
NOTE Under Section 22 of the Reserve Bank of India Act, RBI has sole right to issue currency
notes of various denominations except one rupee notes. The One Rupee note is issued by Ministry
of Finance and it bears the signatures of Finance Secretary, while other notes bear the signature of
Governor RBI.
➔ The first Reserve Bank of India Governor, Sir Osborne Smith, is the only apex bank Governor who
did not sign any Indian currency notes.
➔ The notes signed by Smith could not be put in circulation as the then King of England, Edward VII,
had just stepped down.
➔ Open market operations is the sale and purchase of govt. securities and treasury bills by RBI or the
central bank of the country.
➔ The objective of OMO is to regulate the money supply in the economy.
➔ When the RBI wants to increase the money supply in the economy, it purchases the government
securities from the market and it sells government securities to suck out liquidity from the
system.
➔ RBI carries out the OMO through commercial banks and does not directly deal with the public.
➔ OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and
minimise its impact on the interest rate and inflation rate levels.
➔ OMO is a part of credit policy.
▪ It is constituted by RBI and lead by its Governor which is assigned with the mission of fixing the
benchmark policy interest rate (repo rate) to restrain inflation within the particular target level.
▪ Total 6 members body, 3 from RBI & other 3 appointed by the government.
▪ MPC takes decisions based on majority vote
➔ It is an umbrella organisation for operating retail payments and settlement systems in India.
➔ Founded in 2008
➔ NPCI is a not-for-profit organisation registered under section 8 of the Companies Act 2013
➔ Established by Reserve Bank of India & IBA
➔ NPCI was incorporated in December 2008 and the Certificate of Commencement of Business was
issued in April 2009
SHGs
➔ Self-Help Groups (SHGs) are informal associations of people who choose to come together to find
ways to improve their living conditions.
➔ Villages face numerous problems related to poverty, illiteracy, lack of skills, lack of formal credit etc.
These problems cannot be tackled at an individual level and need collective efforts.
➔ Thus SHG can become a vehicle of change for the poor and marginalized.
➔ SHG rely on the notion of “Self Help” to encourage self-employment and poverty alleviation.
➔ Genesis of SHG in India can be traced to formation of Self-Employed Women’s Association (SEWA)
in 1970
➔ SHG Bank Linkage Project launched by NABARD in 1992 has blossomed into the world’s largest
microfinance project.
Microfinance
➔ It is a category of financial services targeting individuals and small businesses who lack access to
conventional banking and related services.
➔ It includes microcredit, the provision of small loans to poor clients; savings and checking accounts;
microinsurance; and payment systems, among other branches.
➔ The modern use of the expression "microfinancing" has roots in 1976 @ Grameen Bank of
Bangladesh
➔ Founded by microfinance pioneer Muhammad Yunus
➔ Another pioneer in this sector is Pakistani social scientist Akhtar Hameed Khan
➔ Regional Rural Banks (RRBs) are Scheduled Commercial Banks (Government Banks) operating at
regional level in different States of India.
➔ They have been created with a view of serving primarily the rural areas of India with basic banking
and financial services.
➔ RRBs may have branches set up for urban operations and their area of operation may include urban
areas too. [RURAL + URBAN]
➔ Established under the provisions of an Ordinance passed on September 26, 1975 and the RRB Act 1976
➔ Founded on October 2nd, 1975
➔ 5 Regional Rural Banks were set up on 2 October 1975,Gandhi Jayanti
➔ Set up on the recommendations of Narshimham committee Working Group during the tenure of
Indira Gandhi's Government
➔ First RRB - Prathama Bank, Head Office at Moradabad (U.P.)
➔ Prathama bank was sponsored by Syndicate Bank
➔ Regional Rural Banks were owned by the Central Government, the State Government and the Sponsor
Bank (Any commercial bank can sponsor the regional rural banks) who held shares in the ratios as
follows Central Government – 50%, State Government – 15% and Sponsored Banks – 35%.
NBFC
➔ The ratio which is maintained by the commercial banks in India between the customer deposits and
bills discounted is called Minimum Reserve Ratio
Currency in Circulation
• Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank
of India in its credit policy of May 2011.
• MSF is the rate at which the banks are able to borrow overnight funds from RBI against the
approved government securities.
• This window was created for commercial banks to borrow from RBI in certain emergency conditions
when inter-bank liquidity dries up completely and there is a volatility in the overnight interest rates.
• To curb this volatility, RBI allowed them to pledge Govt-securities and get more funds from RBI at a
rate higher than the repo rate. Thus, overall idea behind the MSF is to contain volatility in the
overnight inter-bank rates.
• Although, the system of lending remains same just like under repo ➔ SBI sells Government security to
RBI, and promises to buy it back after sometime, at a higher rate. Difference in selling and purchase =
interest rate earned by RBI.
In short→
Repo Rate
• It is rate at which RBI lends to its clients generally against Govt securities
• When SBI wants to borrow money from RBI for short term, SBI will have to pay this much interest rate
Example
Example
• Let’s assume there are only four people in India 1) common men and 2) businessmen 3) Commercial
banks (like SBI) 4) Central Bank (RBI.)
• Now the Question How do commercial banks make money?
• Common men save their money in bank. Bank gives them say 4% interest rate on savings.
• Then Bank gives that money as loan to businessmen and charges 10% interest rate.
• So 10-4=6% is the profit of Bank. Although that’s technically incorrect, because we’ve not counted
bank’s input cost=staff salary, telephone-internet-electricity bill, office rent, xerox machine etc. So
actual profit will be less than 6%.
Example
SBI has only one branch in a small town. It was opened on Monday.
On the very same day, Total 100 common men deposited 1 lakh each in their savings accounts here
(=total deposit is 1 crore)
SBI offered them 4% interest rate per year on their savings
✓ On Tuesday, SBI Branch manager gives away entire 1 crore to a businessman as loan for 10% interest
rate for 5 years.
✓ From SBI’s point of view, sounds very good right? 10-4=6% profit!
✓ But we’ve not considered the fact that on Wednesday, some of those common men (account holders)
will need to take out some money from their banks savings account- to pay for gas, electricity, mobile
bills, college fees, writing cheques and demand drafts etc.
✓ But SBI’s office doesn’t have a single paisa left! = problem, protest, rioting, suicides.
✓ So condition #1 Banks must not give away all of the deposit money to businessmen for loans.
Banks must keep some money with aside.
✓ Ok but who’ll decide how much minimum cash should a bank keep aside? Ans. RBI via CRR.(Cash
reserve ratio).
NDTL
• from depositors,
• from loan takers who’re re-paying EMI,
• (fraudulent) hidden charges imposed on credit cards
• Commission charged on giving demand draft
• Commission charged on online money transfer
• Commission charged on foreign currency conversion etc.etc.etc.
• So how does bank exactly count CRR, SLR requirements? = Net Demand and Time Liabilities
(NDTL)
Time Liabilities
Demand Liabilities
Bank Rate
• When banks borrow long term funds from RBI, they have to pay this much interest rate to RBI
• Collateral NIL (Bank can borrow money without pledging government securities to RBI)
• Penal rates are linked with Bank rate. For example, If a bank doesn’t maintain CRR, SLR as per the
prescribed limit.
• Then RBI can impose penalty interest on such notorious bank.
• At present, Penalty rate = Bank rate + 3% (or 5% in some cases)
• Meaning if Bank rate = 7% then penalty rate=7+3=10%
➔ It is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI), that allows banks
to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI
through reverse repo agreements.
Liquidity aggregates
➔ Aggregate liquidity refers to the ease of execution for financial transactions for everyone in the
entire market which is highly dependent on the availability of credit in the markets and the size of
the money supply in a country.
The following Liquidity aggregates have been formulated for monitoring the state of liquidity in an
economy.
L1=M3+Postal Deposits (excluding National Saving Certificate)
L2= L1+Term Money Borrowings, Certificate of Deposits and Term Deposits of Financial Institutions
like IDBI, IFCI, Exim Bank, NABARD, SIDBI etc.
L3= L2+ Public Deposit with non-banking financial institutions
Green Banking
➔ Green banking means promoting environmental friendly practices and reducing your carbon footprints
from your banking activities.
• It is a monetary policy intervention by the RBI to withdraw excess liquidity (or money supply) by
selling government securities in the economy.
• MSS is used when there is high liquidity in the system.
Seigniorage
➔ Seigniorage is the difference between the value of currency/money and the cost of producing it.
➔ It is essentially the profit earned by the government by printing currency.
SDGs are a set of 17 goals and 169 targets aimed at resolving global social, economic and
environmental problems.
These new SDGs replace the Millennium Development Goals (MDGs) which were adopted in 2000
Aiming to encompass almost every aspect of human life, the main themes of the SDGs are ending
poverty, tackling inequality and combating climate change.
According to the UN’s own estimates, achieving the 17 Sustainable Development Goals and 169 targets
meant to transform the world will require over 250 billion dollars annually for the next 15 years.
✓ Some 795 million people around the world still go hungry and around 800 million people live in
extreme poverty, with fragile and conflict-torn states experiencing the highest poverty rates
✓ Between 2008 and 2012, 144 million people were displaced from their homes by natural disasters, a
number predicted to rise as the planet warms, bringing more extreme weather and rising seas
✓ Water scarcity affects 40% of the global population and is projected to increase
✓ Some 946 million people still practice open defecation
✓ Gender inequality persists in spite of more representation for women in parliaments and more girls
going to school
✓ 57 million children still denied right to primary education
▪ Urbanisation
▪ Consumption and production
▪ Climate change
▪ Resources and environment
▪ Peace and justice
▪ Means of implementation and global partnership
• The VNR report is based on an analysis of progress under various programmes and initiatives in
the country.
• The VNR report focused on 7 SDGs 1 (No Poverty); 2 (Zero Hunger); 3 (Good Health and Well-Being);
5 (Gender Equality); 9 (Industry, Innovation and Infrastructure), 14 (Life below Water) and 17
(Partnerships for the Goals).
Types of Economy
Traditional economy
Command economy
Open economy
Closed economy
Capitalist economy
• Capitalism - basic economic system based on private or corporate ownership of production and
distribution of goods.
• Capitalists favour a system of free enterprise which means the govt does not interfere in the
economy that the laws of supply and demand will make sure that the economy runs most efficiently in
meeting people's needs.
• Capitalism is characterised by competition in which there is rivalry in supplying or getting an
economic service or good
Socialist economy
• Socialism is an economic theory or idea that states the govt or the state should be incharge of
economic planning , production and distribution of goods
• Socialism tends to favour cooperation whereas capitalism is characterised by competitions
• Communism advocates class struggle and revolution to establish a society of cooperation with strong
govt control
• Communism predominated in the former Soviet Union and much of eastern Europe at one time.
• Today it predominates in China and Cuba, but its influence has lessened
Blue Economy
Green Economy
➔ Aims at making issues of reducing environmental risks and ecological scarcities, and that aims for
sustainable development without degrading the environment.
➔ The green economy requires that economic development is decoupled from the use of resources
and environmental degradation. Decoupling refers to reducing the environmental impact (in terms
of both resource use and the generation of pollution and wastes) associated with any economic
activity.
➔ Green jobs are work in agriculture, industry, services and administration that contribute to preserving
or restoring the quality of the environment.
Poverty
➔ Human Poverty Index (HPI) was an indication of the poverty of community in a country, developed
by the United Nations to complement the Human Development Index (HDI) and was first reported as
part of the Human Deprivation Report in 1997.
➔ HPI concentrates on the deprivation in the three essential elements of human life already reflected in
the HDI longevity, knowledge and a decent standard of living.
➔ It is an indication of Standard of Living
➔ It is the proportion of a population that exists, or lives, below the poverty line.
➔ Definition-When the number of poor is estimated as the proportion of people below the poverty
line, it is known as 'head count ratio'.
Poverty Line
➔ Poverty trends in India and the world are illustrated through the concept of the poverty line.
➔ A common method used to measure poverty is based on the income or consumption levels.
➔ A person is considered poor if his or her income or consumption level falls below a given
“minimum level” necessary to fulfill basic needs.
➔ While determining the poverty line in India, a minimum level of food requirement, clothing, footwear,
fuel and light, educational and medical requirement etc. are determined for subsistence. These physical
quantities are multiplied by their prices in rupees.
➔ The present formula for food requirement while estimating the poverty line is based on the desired
calorie requirement.
➔ The accepted average calorie requirement in India is 2400 calories per person per day in rural areas
and 2100 calories per person per day in urban areas.
➔ Since people living in rural areas engage themselves in more physical work, calorie requirements in
rural areas are considered to be higher than urban areas.
➔ The poverty line is estimated periodically (normally every five years) by conducting sample surveys.
These surveys are carried out by the National Sample Survey Organisation (NSSO).
➔ The international poverty line is a monetary threshold under which an individual is considered to
be living in poverty.
➔ It is calculated by taking the poverty threshold from each country—given the value of the goods
needed to sustain one adult—and converting it into dollars.
Sen Index
Incidence of Poverty
➔ Incidence of poverty shows the proportion of people who are under the poverty line
➔ Mixed Recall Period and Uniform Recall Period are calculated for the measurement of Incidence of
poverty
➔ It is a tool to monitor progress against poverty globally and regionally, created by an NGO,
World Data Lab.
➔ It takes into account household surveys and projections of economic growth from the
International Monetary Fund's World Economic Outlook.
➔ Developed in 2010 by the Oxford Poverty & Human Development Initiative (OPHI) and the United
Nations Development Programme (UNDP)
➔ Uses health, education and standard of living indicators to determine the degree of poverty
experienced by a population.
➔ Global MPI is released annually by OPHI
➔ It replaced the Human Poverty Index
➔ The global MPI scrutinizes a person’s deprivations across 10 indicators in health, education and
standard of living and offers a high-resolution lens to identify both who is poor and how they are
poor.
➔ It complements the international $1.90 a day poverty rate by showing the nature and extent of
overlapping deprivations for each person.
➔ Sustainable Development Goal (SDG) 1 aims to end poverty in all its forms and dimensions
MSP
▪ A Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure
agricultural producers against any sharp fall in farm prices.
▪ The minimum support prices are announced by the Govt of India at the beginning of the sowing
season for certain crops on the basis of the recommendations of the Commission for
Agricultural Costs and Prices (CACP).
▪ MSP is price fixed by Government of India to protect the producer - farmers - against excessive fall
in price during bumper production years.
▪ The minimum support prices are a guarantee price for their produce from the Government.
▪ The major objectives are to support the farmers from distress sales and to procure food grains for
public distribution.
▪ In case the market price for the commodity falls below the announced minimum price due to bumper
production and glut in the market, government agencies purchase the entire quantity offered by the
farmers at the announced minimum price.
e-NAM
▪ Department of Agriculture & Cooperation formulated a Central Sector scheme for Promotion of
National Agriculture Market through Agri-Tech Infrastructure Fund (ATIF) through provision of the
common e-platform.
▪ Electronic National Agriculture Market (e-NAM) platform seeks to create a common national
market, for enhancing farmer’s access to buyers
▪ NAM is an online platform with a physical market or mandi at the backend
▪ It will make price discovery and trading transparent.
▪ It seeks to leverage the physical infrastructure of mandis through an online trading portal, enabling
buyers situated even outside the state to participate in trading at the local level
APMC
Under it, farmer can effectively avail short term crop loans up to Rs. 3 lakh payable within one year
at only 4% per annum
It also gives loans at concessional rate of 7% for storage in ware houses accredited by Warehousing
Development Regulatory Authority(WDRA) for upto 6 months post harvest for avoiding distress sale
▪ Kisan Credit Card (KCC) scheme was introduced in August 1998 by NABARD and RBI
▪ This model scheme was prepared by the National Bank for Agriculture and Rural Development
(NABARD) on the recommendations of R.V.GUPTA to provide term loans and agricultural needs.
▪ Credit delivery mechanism that is aimed at enabling farmers to have quick and timely access to
affordable credit
▪ The scheme aims to reduce farmer dependence on the informal banking sector for credit – which
can be very expensive and suck them into a debt spiral.
▪ The card is offered by cooperative banks, regional rural banks and public sector banks.
Operation Barga
➔ It was a land reform movement throughout rural West Bengal for recording the names of
sharecroppers (bargadars) while avoiding the time-consuming method of recording through the
settlement machinery
➔ Launched in 1978
➔ The ultimate aim of these land reforms was to facilitate the conversion of the state's bargadars into
landowners, in line with the Directive Principles of State Policy of the Indian Constitution.
Operation Green
➔ Tomato, onion and potato are basic vegetables consumed throughout the year.
➔ Seasonal and regional production of these perishable commodities pose a challenge in connecting
farmers and consumers in a manner that satisfies both.
➔ To reduce the fluctuation in pricing of Onion, Tomatoes and Potatoes the scheme has been launched.
➔ ‘‘Operation Greens’’ on the lines of ‘‘Operation Flood’’
➔ The operation aims to aid farmers and help control and limit the erratic fluctuations in the prices of
onions, potatoes and tomatoes.
➔ ‘‘Operation Greens’’ shall promote Farmer Producers Organizations (FPOs), agri-logistics, processing
facilities and professional management.
➔ The idea behind Operation Greens is to double the income of farmers by the end of 2022.
➔ Operation is essentially a price fixation scheme that aims to ensure farmers are given the right price
for their produce.
➔ It is a method of farming where the cost of growing and harvesting plants is zero.
➔ This means that farmers need not purchase fertilizers and pesticides in order to ensure the
healthy growth of crops.
➔ It was originally promoted by Maharashtrian agriculturist and Padma Shri recipient Subhash
Palekar, who developed it in the mid-1990s as an alternative to the Green Revolution’s methods driven
by chemical fertilizers and pesticides and intensive irrigation.
➔ Concept of crop diversification means competition among various grown crops for space in a given
region.
➔ Index of Crop Diversification is computed for major States and All India to examine whether there
are major changes in the cropping patterns across States.
➔ The index value ranges between 0 and 1 and higher the value, greater the diversification.
Operational Holdings
➔ All land which is used wholly or partly for agricultural production and is operated as one technical
unit by one person alone or with others without regard to the title, legal form, size or location is
known as operational holding.
➔ Operational holdings are also classified in three social groups, viz., Scheduled Castes, Scheduled
Tribes and Others
➔ In agriculture Census, the operational holdings are categorised in five size classes as follows
Peace Clause
➔ The term ‘peace clause’ has been a cause of disquiet ever since India dug in its heels on the issue of
domestic food security in the recent world trade organisation (WTO) negotiations, leading to a
deadlock.
➔ The ‘peace clause’ said that no country would be legally barred from food security programmes
even if the subsidy breached the limits specified in the WTO agreement on agriculture.
Contract Farming
➔ Contract farming is an arrangement between the farmer producer and agri-business firms to sell
the produce at a pre-fixed Price or Quantity or Time or All Three.
➔ The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the
quality standards and delivery requirements of the purchaser.
➔ In return, the buyer, usually a company, agrees to buy the product, often at a price that is
established in advance.
➔ The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with
land preparation, providing production advice and transporting produce to its premises.
➔ The term "outgrower scheme" is sometimes used synonymously with contract farming, most
commonly in Eastern and Southern Africa.
➔ The prices at which the central government supplies food grains to the states for the distribution
through fair price or ration shops are called Central issue prices
➔ The states fix retail price to be charged at fair price shops.
➔ The state government's responsibility in PDS is operational.
NOTE Centre procures food grains from farmers at a minimum support price (MSP) and sells it to
states at central issue prices.
▪ To address the problems associated with perennial irrigation water crisis in rural India, Ministry of
Water Resources, River Development and Ganga Rejuvenation has signed an agreement with
NABARD to operationalise the Long Term Irrigation Fund (LTIF).
▪ LTIF has instituted in NABARD as a part of Pradhan Mantri Krishi Sinchayee Yojana (PMKSY).
Agro-Climatic Zone
➔ “Agro-climatic zone” is a land unit in terms of major climates, suitable for a certain range of crops
and cultivars.
➔ The planning aims at scientific management of regional resources to meet the food, fiber, fodder
and fuel wood without adversely affecting the status of natural resources and environment.
➔ Agro-climatic conditions mainly refer to soil types, rainfall, temperature and water availability which
influence the type of vegetations.
➔ Agro-ecological zone is the land unit carved out of agro-climatic zone superimposed on landform
which acts as modifier to climate and length of growing period.
➔ Rajagopalachari, the founder of the first market friendly political party, the Swatantra Party, in late
1950s coined the term “Quota-Permit-License Raj” to describe the Indian model of socialism.
➔ It is the elaborate system of licences, regulations and accompanying red tape that were required to set
up and run businesses in India between 1947 and 1990
➔ Under ‘License – Permit – Quota Raj’ govt. control was so strong that it decided which company would
produce what
➔ With the nationalization of banks in 1969 and the Monopolies and Restrictive Trade Practices (MRTP)
Act of 1970, the License Raj was further strengthened.
➔ License Raj created a ‘scarcity economy’, and this scarcity also applied to foreign reserves since we
practiced ‘swadeshi’. The Balance of Payment crisis arose in the 1970s and worsened towards the end
of 1980s. The balance of payments situation came to the verge of collapse in 1991, mainly because the
current account deficits were financed by borrowings from abroad.
➔ Licence Raj system was in place for four decades. In 1991, the government of India initiated a
liberalisation policy under P. V. Narasimha Rao.
➔ ‘License – Permit – Quota Raj’ was abolished in the year 1991.
Goods
Normal Goods
➔ The quantity of a good that the consumer demands can increase or decrease with the rise in
income depending on the nature of the good.
➔ For most goods, the quantity that a consumer chooses, increases as the consumer’s income
increases and decreases as the consumer’s income decreases. Such goods are called normal goods.
➔ Goods for which demand directly (positively) related to income are called Average Normal Goods
Inferior Goods
➔ There are some goods the demands for which move in the opposite direction of the income of the
consumer. Such goods are called inferior goods.
➔ As the income of the consumer increases, the demand for an inferior good falls, and as the income
decreases, the demand for an inferior good rises.
➔ Examples of inferior goods include low quality food items like coarse cereals.
o Index of Industrial Production (IIP) is an index for India which details out the growth of various
sectors in an economy such as mineral mining, electricity and manufacturing
o The all India IIP is a composite indicator that measures the short-term changes in the volume of
production of a basket of industrial products during a given period with respect to that in a chosen
base period
o Calculated and published by the Central Statistical Organisation (CSO) every month
o IIP is published monthly, six weeks after the reference month ends
o 8 Core Industries comprise nearly 40.27% of the weight of items included in the Index of
Industrial Production (IIP). These are electricity , steel, refinery products, crude oil, coal, cement,
natural gas and fertilisers.
Industry Weight
Refinery Products [HIGHEST] 28.04
Electricity 19.85
Steel 17.92
Coal 10.33
Crude Oil 8.98
Natural Gas 6.88
Cement 5.37
Fertilisers [LOWEST] 2.63
Total 100
▪ Central Public Sector Enterprises (CPSEs) are those companies in which the direct holding of the
Central Govt or other CPSEs is 51% or more
Strategic Disinvestment
Champions Sectors
Champions Sectors include Capital goods, Auto and Auto Components, Defence & Aerospace,
Biotechnology, Pharmaceuticals and Medical Devices, Chemicals, Electronic System Design &
Manufacturing (ESDM), Leather & Footwear, Textiles & Apparels, Food Processing, Gems & Jewellery,
New & Renewable Energy, Construction, Shipping and Railways.
• Developed as a single point of contact for the entire Startup ecosystem and enables knowledge
exchange
• Fund of Funds for Startups (FFS), managed by SIDBI, has been created with a corpus of 10,000
crores to provide financial support.
• Seed Fund and Equity Funding support is also provided to Bio-Tech Startups.
➔ In recent years, the central and state governments in India are taking special steps to attract foreign
companies to invest in India. Industrial zones, called Special Economic Zones (SEZs), are being set up.
➔ It is an area in a country that is subject to unique economic regulations that differ from other regions of
the same country.
➔ The SEZ regulations tend to be conducive to foreign direct investment (FDI).
➔ Conducting business in an SEZ typically implies that the company will receive tax incentives and the
opportunity to pay lower tariffs.
➔ SEZs are to have world class facilities electricity, water, roads, transport, storage, recreational and
educational facilities
Navaratna Status
Miniratna Status
Initiated before the Company Law Board under the previous act (the Companies Act 1956);
Pending before the Board for Industrial and Financial Reconstruction, including those pending under
the Sick Industrial Companies (Special Provisions) Act, 1985;
Pending before the Appellate Authority for Industrial and Financial Reconstruction; and
Pertaining to claims of oppression and mismanagement of a company, winding up of companies and
all other powers prescribed under the Companies Act.
➔ It is a tribunal which was formed by the Central Government of India under Section 410 of the
Companies Act, 2013.
➔ NCLAT includes a Chairperson, a judicial member, and a technical member. It consists of a total of
not more than 11 members
➔ The tribunal is responsible for hearing appeals from the orders of National Company Law
Tribunal(s) (NCLT), starting on 1 June 2016.
➔ The tribunal also hears appeals from orders issued by the Insolvency and Bankruptcy Board of India
under Section 202 and Section 211 of IBC.
➔ It also hears appeals from any direction issued, decision made, or order passed by the Competition
Commission of India (CCI).
Planning
Planning Commission
➔ Planning Commission was an institution in the Government of India, which formulated India's Five-
Year Plans
➔ Formed on March 15, 1950 with Prime Minister Jawaharlal Nehru as the Chairman.
➔ Prime Minister was the ex officio Chairman
➔ The first Five-Year Plan was launched in 1951, focusing mainly on development of the agricultural
sector.
Plan Holiday
➔ Due to miserable failure of the Third Plan the government was forced to declare "plan holidays"
(from 1966–67, 1967–68, and 1968–69).
➔ Three annual plans were drawn during this intervening period. During 1966–67 there was again the
problem of drought.
➔ Equal priority was given to agriculture, its allied activities, and industrial sector.
➔ The government of India declared "Devaluation of Rupee" to increase the exports of the country.
➔ The main reasons for plan holidays were the war, lack of resources and increase in inflation.
NITI Aayog
➔ At the core of NITI Aayog’s creation are two hubs – Team India Hub and the Knowledge and
Innovation Hub.
➔ Team India Hub leads the engagement of states with the Central government
➔ Knowledge and Innovation Hub builds NITI’s think-tank capabilities.
➔ NITI Aayog is the premier policy ‘Think Tank’ of the Government of India, providing both
directional and policy inputs.
➔ NITI Aayog, was formed via a resolution of the Union Cabinet on January 1, 2015
➔ NITI Aayog acts as the quintessential platform of the Government of India to bring States to act
together in national interest, and thereby fosters Cooperative Federalism.
Imp Bonds
Green bonds
• Debt instruments
• Specifically earmarked to be used for climate and environmental projects
• These bonds are typically asset-linked and backed by the issuer's balance sheet, and are also referred
to as climate bonds.
• Intended to encourage sustainability and to support climate-related or other types of special
environmental projects.
• Green bonds come with tax incentives such as tax exemption and tax credits, making them a more
attractive investment compared to a comparable taxable bond.
• To qualify for green bond status, they are often verified by a third party such as the Climate
Bond Standard Board, which certifies Bond.
• Green bonds can be released by financial institutions like World Bank, IMF, commercial banks,
corporates and even governments.
Blue Bonds
➔ It is a debt instrument issued by governments, development banks etc. to raise capital from
investors to finance marine and ocean-based projects.
➔ It will help in expansion of marine protected areas and improved governance of priority fisheries
➔ Seychelles was the first country in the world to launch sovereign Blue Bonds.
Capital Market
▪ The market in which bonds, shares and securities are bought and sold is called as Capital Market
▪ It is an institutional arrangement for medium and long-term funds and provides facilities for
marketing and trading of securities.
▪ Securities➔ shares, bonds, debentures etc.
Primary Market
Consists of arrangements for procurement of long-term funds by companies by fresh issue of shares
and debentures.
Secondary Market
Secondary Market or stock exchange provides a ready market for existing long term securities.
Capital Market
▪ The market in which bonds, shares and securities are bought and sold is called as Capital Market
▪ It is an institutional arrangement for medium and long-term funds and provides facilities for
marketing and trading of securities.
▪ Securities ➔ shares, bonds, debentures etc.
Primary Market
Consists of arrangements for procurement of long-term funds by companies by fresh issue of shares
and debentures.
Secondary Market
Secondary Market or stock exchange provides a ready market for existing long term securities.
Capital Market Instruments in India
➔ The main instruments traded in the capital market are – equity shares, debentures, bonds,
preference shares etc.
➔ It is the regulator of the securities and commodity market in India owned by the Government of
India.
➔ It was established on April 12, 1988 and given Statutory Powers on 30 January 1992 through the
SEBI Act, 1992
➔ It became an autonomous body on 12 April 1992
➔ Headquarters Mumbai
➔ Northern Regional Office – New Delhi
➔ Eastern Regional Office – Kolkata
➔ Southern Regional Office - Chennai
➔ Western Regional Office - Ahmedabad
➔ SEBI has to be responsive to the needs of three groups, which constitute the market
issuers of securities
investors
market intermediaries
SENSEX
NIFTY
➔ NIFTY 50 index is National Stock Exchange of India's benchmark broad based stock market index
for the Indian equity market
➔ It represents the weighted average of 50 Indian company stocks in 13 sectors
➔ Nifty is owned and managed by India Index Services and Products (IISL), which is a wholly owned
subsidiary of the NSE Strategic Investment Corporation Limited.
➔ Launched on April 1, 1996
➔ NIFTY 50 index is a free float market capitalisation weighted index.
➔ The index was initially calculated on full market capitalisation methodology.
➔ From 26 June 2009, the computation was changed to a free-float methodology
➔ The base period for the CNX Nifty index is 3 November 1995, which marked the completion of one
year of operations of National Stock Exchange Equity Market Segment.
➔ It is the practice of lending money to individuals or businesses through online services that match
lenders with borrowers.
➔ P2P lending is a form of crowd-funding used to raise loans which are paid back with interest by
bringing together people who need to borrow, from those who want to invest.
➔ It can be defined as the use of an online platform that matches lenders with borrowers to provide
unsecured loans.
Venture Capital
➔ Venture capital is a type of private equity, a form of financing that is provided by firms or funds to
small, early-stage, emerging firms that are deemed to have high growth potential, or which have
demonstrated high growth.
Insurance Penetration
o The ratio of premium underwritten in a given year to the gross domestic product (GDP).
Insurance Density
o The ratio of premium underwritten in a given year to the total population
Penetration Rate
➔ The balance of exports and imports of goods is referred to as the trade balance.
➔ Adding trade in services and net transfers to the trade balance, we get the current account
balance.
➔ A country is said to be in balance of payments equilibrium when the sum of its current account
and its non-reserve capital account equals zero, so that the current account balance is financed
entirely by international lending without reserve movements.
➔ The difference between value of exports and imports of goods and services and unrequited
transfers are the items that are included in balance of current account.
➔ Current account convertibility means freedom to convert domestic currency into foreign currency
and vice versa for trade in goods and invisibles (services, transfers or income from investment).
➔ Individuals and entities can convert currencies in the foreign exchange market.
Invisibles
▪ Payments and receipts resulting from international trade in 'invisible' services instead of 'visible'
goods.
▪ Invisibles include banking, franchising, insurance, interest (on foreign investments), licensing, profit
repatriation (from foreign subsidiaries), salary remittances (from nationals employed abroad), shipping,
and tourism.
o Holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies
other than India's national currency, the Indian rupee.
o The reserves are managed by the Reserve Bank of India for GOI and the main component is foreign
currency assets.
Balance of Payments
According to the RBI, balance of payment is a statistical statement that shows
1) The transaction in goods, services and income between an economy and the rest of the world
2) Changes of ownership and other changes in that economy’s monetary gold, special drawing rights
(SDRs), and financial claims on and liabilities to the rest of the world
3) Unrequited transfers
BoP is made up of two parts Current account and capital account (As per IMF definition, three
parts Current Account + Capital account+ Financial account)
Current Account
• Foreign investment in India (FDI, FII, ADR, direct purchase of land, assets)
• External commercial borrowing, external assistance etc.
o SDR is an international reserve asset, created by the IMF in 1969 to supplement its member
countries’ official reserves
o SDRs can be exchanged for freely usable currencies.
o The value of the SDR is based on a basket of five major currencies—the US dollar, the euro, the
Chinese renminbi (RMB), the Japanese yen, and the British pound sterling.
Foreign Capital
➔ Foreign capital is money entering the country in the form of concessional assistance or non-
concessional flows.
➔ It includes Foreign direct investment, Trade credit, NRI deposits and External commercial
borrowings.
Foreign Direct Investment
➔ Foreign direct investment is a form of investment that earns interest in enterprises which function
outside the domestic territory of the investor.
➔ Foreign direct investment is a component of a country's national financial account.
➔ Foreign direct investment is a lead driver for economic growth and brings certain benefits to
national economies.
➔ It can contribute to Gross Domestic Product (GDP), Gross Fixed Capital Formation (total investment in a
host economy) and Balance of Payments.
➔ Foreign portfolio investment is the entry of funds into a country where foreigners deposit money
in a country's bank or make purchases in the country's stock and bond markets, sometimes for
speculation.
➔ In 1992, India opened up its economy and allowed foreign portfolio investment in its domestic
stock markets.
➔ Since then, foreign portfolio investment has emerged as a major source of private capital inflow in this
country.
➔ FPI is investment by non-resident in Indian securities including shares, govt. bonds, infrastructure
securities etc.
➔ FII (Foreign Institutional Investment) and FPI (Foreign Portfolio Investment) are same things.
➔ The foreign institutions invest in a capital / money market which is not their home country.
➔ Such kinds of investments are seen in the Mutual Funds, Investment Companies, Pension Funds and
Insurance Houses.
➔ This means that FII/ FPI brings only capital.
Participatory Notes
➔ A flexible exchange-rate system is a monetary system that allows the exchange rate to be
determined by the forces of supply and demand in the foreign exchange market
➔ Here a currency is pegged or held at the same value relative to another currency.
➔ According to their degree of flexibility, post-Bretton Woods-exchange rate regimes are arranged into
three categories currency unions, dollarized regimes, currency boards and conventional currency pegs
are described as “fixed-rate regimes”
➔ Horizontal bands, crawling pegs and crawling bands are grouped into “intermediate regimes”
➔ Managed and independent floats are described as flexible regimes.
➔ A floating exchange rate is a regime where the currency price of a nation is set by the forex market
based on supply and demand relative to other currencies.
➔ This is in contrast to a fixed exchange rate, in which the government entirely or predominantly
determines the rate.
➔ A floating exchange rate is one that is determined by supply and demand on the open market.
Import Quota
➔ It is a type of trade restriction that sets a physical limit on the quantity of a good that can be
imported into a country in a given period of time.
Export Quota
➔ A restriction imposed by a government on the amount or number of goods or services that may be
exported within a given period, usually with the intent of keeping prices of those goods or services low
for domestic users
Uruguay Round
➔ Uruguay Round was the 8th round of multilateral trade negotiations (MTN) conducted within the
framework of the General Agreement on Tariffs and Trade (GATT), spanning from September 1986
to 1993 and embracing 123 countries as "contracting parties"
➔ The Round led to the creation of the World Trade Organization, with GATT remaining as an integral
part of the WTO agreements
➔ World Trade Organization, which came into being upon its entry into force on 1 January 1995, to replace
the GATT system
➔ It has enabled countries to focus on issues that are relevant to their stage of development as well as
encourage trade between neighbors.
➔ There are four main types of regional economic integration
1) Free Trade Area
2) Customs Union
3) Common Market
4) Economic Union
Entrepot trade
➔ International trade in which imported goods are re-exported with or without any processing or
packaging is called Entrepot trade
Export merchandising
Miscellaneous
Behavioural Economics
➔ The economic analysis that applies psychological insights into human behaviour to explain
economic decision making is called Behavioural Economics
➔ Established under SICA or Sick Industrial Companies (Special Provisions) Act, 1985
➔ Tiwari Committee suggested a comprehensive special legislation designed to deal with the problem
of sickness laying down its basic objectives and parameters, remedies necessary for revival of Sick
Units
➔ SICA came into existence in 1985 and BIFR started functioning from 1987
➔ SICA covers both public and private companies that have industrial undertakings
➔ On 1 December 2016, the Modi government dissolved BIFR and referred all proceedings to the
National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as per
provisions of Insolvency and Bankruptcy Code
➔ BIFR Extinction Nov 30, 2016
➔ Business Reform Action Plan (BRAP) for implementation by States/UTs was released for the first time
in 2015
➔ It is released by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce
and Industry in partnership with the World Bank Group
➔ BRAP includes recommendations for reforms on regulatory processes across various reform areas such
as labour regulation enablers; contract enforcement; registering property; inspection reform enablers;
single window system etc.
Total – 5 Divisions
This Division is responsible for the preparation of national accounts, which includes
▪ Gross Domestic Product
▪ Government and Private Final Consumption Expenditure
▪ Fixed Capital Formation
▪ Other macro-economic aggregates.
The Division brings out an annual publication, titled “National Accounts Statistics”, containing these
statistics.
Training Division
▪ This Division is primarily responsible for the training manpower in theoretical and applied statistics
to tackle the emerging challenges of data collection, collation, analysis and dissemination required for
evidence based policy making as also for planning, monitoring and evaluation.
▪ The Division also looks after the National Statistical Systems Training Academy (NSSTA), which is a
premier Institute fostering human resource development in official statistics in India as well as at
international level, particularly amongst developing and SAARC countries.
▪ The Division looks after co-ordination work within CSO as well as with the line Ministries and
State/UT Governments in statistical matters.
▪ The Division is also responsible for implementation of Capacity Development Scheme and Support for
Statistical Strengthening (SSS) , a Central Sector Scheme aimed at improving the Statistical Capacity
and Infrastructure of the State Statistical System for Collecting, Compiling and Disseminating relevant
and reliable official statistics for policy making and to promote their usage at the State/District and
Block Levels.
▪ It is a nodal Division for administering the Collection of Statistics Act, 2008 and coordination of
follow-up on the implementation of recommendations of NSC recommendations.
➔ An Act to provide, keeping in view of the economic development of the country, for the establishment
of a Commission to prevent practices having adverse effect on competition, to promote and
sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade
carried on by other participants in markets, in India, and for matters connected therewith or incidental
thereto
➔ It replaced the Monopolies and Restrictive Trade Practices Act, 1969
➔ This act extends to whole of India
➔ Commenced on March 31, 2003
➔ Introduced by Arun Jaitley
Consumer Surplus
➔ Consumer Surplus is the difference between the price that consumers pay and the price that they
are willing to pay.
➔ On a supply and demand curve, it is the area between the equilibrium price and the demand curve.
➔ Consumer surplus is highest in necessities.
➔ Cost Inflation Index is a measure of inflation, used to calculate long-term capital gains from sale of
capital assets.
➔ Capital gains is the profit that you make from selling an asset, which can be real estate, jewellery,
stock, etc.
➔ Indexation benefits on Capital Gains are adjusted by means of a Cost Inflation Index
➔ Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing
power of the currency.
➔ It can be driven by an increase in productivity and the abundance of goods and services, by a
decrease in total or aggregate demand, or by a decrease in the supply of money and credit.
➔ It leads to lower wages, which leads to lower demand by businesses and consumers, which lead
to further decreases in prices
Growth Enhancing
Growth Reducing
Devaluation
➔ In modern monetary policy, devaluation is an official lowering of the value of a country's currency
within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange
rate of the national currency in relation to a foreign reference currency or currency basket.
➔ Devaluation is an indication that the monetary authority will buy and sell foreign currency at a lower
rate
➔ Devaluation is an expenditure-switching policy which makes the country’s goods relatively
cheaper compared with foreign goods, will tend to switch both domestic and foreign expenditures
towards the home-produced goods.
➔ Devaluation is the appropriate expenditure-switching policy to correct a difference in balance of
payments
Disposable Income
➔ It is the income of individuals at their disposal after paying direct tax liabilities.
➔ Disposable = Personal Income –income Direct taxes (e.g., Income Tax)
➔ Reduction in direct taxes increases Disposable Income
▪ International Finance Corporation (IFC), the World Bank Group’s private sector arm, first
conceptualized the Doing Business report.
▪ These rankings had a signalling effect for investors and that countries were beginning to take them
seriously.
Economic Corridor
➔ Economic corridors are integrated networks of infrastructure within a geographical area designed
to stimulate economic development.
➔ Economic corridors often feature integrated infrastructure, such as highways, railroads and ports, and
may link cities or countries.
➔ Asian Development Bank coined the term in 1998
➔ East Coast Economic Corridor (ECEC) is India’s first coastal economic corridor covering 2500km of
India's coastline, to be developed with the help of the Asian Development Bank (ADB).
➔ It is a zone in the sea prescribed by the 1982 United Nations Convention on the Law of the Sea
(UNCLOS) over which a country has certain rights
➔ EEZ is an area that is adjacent to and beyond the territorial sea
➔ It can extend to a maximum of 200 nautical miles from the baseline
➔ EEZ does not include the territorial sea and also does not include the continental shelf beyond 200
nautical miles
➔ FATF is an inter-governmental body that works to set standards and promote effective implementation of
legal, regulatory and operational measures for combating money laundering, terrorist financing
and other related threats to the integrity of the international financial system.
➔ A country is put on the grey list when it fails to curb terrorism financing and money laundering.
➔ Putting a country on the blacklist means shutting all doors to international finance for that country.
Financial Capital
➔ The type of capital used by entrepreneurs to buy what they need to produce their products is known as
Financial Capital
Financial Rotation
➔ The rotation which yields the highest net return on the invested capital is called Financial rotation
Forward Market
➔ Market in which purchase and sale takes place at time ‘t’ but exchange takes place on some other
future date i.e. t + n is forward market
➔ Gender Related Development Index (GDI) is an index designed to measure gender equality
➔ GDI together with the Gender Empowerment Measure (GEM) were introduced in 1995 in the
Human Development Report written by the United Nations Development Program.
➔ The aim of these measurements was to add a gender-sensitive dimension to the Human
Development Index (HDI).
Gini Coefficient
The HDI was created to emphasize that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic growth alone. The HDI can also
be used to question national policy choices, asking how two countries with the same level of GNI per
capita can end up with different human development outcomes. These contrasts can stimulate debate
about government policy priorities.
➔ The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development a long and healthy life, being knowledgeable and have a
decent standard of living. The HDI is the geometric mean of normalized indices for each of the three
dimensions.
➔ The health dimension is assessed by life expectancy at birth, the education dimension is measured by
mean of years of schooling for adults aged 25 years and more and expected years of schooling for
children of school entering age.
➔ The standard of living dimension is measured by gross national income per capita.
➔ The HDI uses the logarithm of income, to reflect the diminishing importance of income with
increasing GNI.
The scores for the three HDI dimension indices are then aggregated into a composite index using
geometric mean.
The HDI simplifies and captures only part of what human development entails. It does not reflect on
inequalities, poverty, human security, empowerment, etc.
A fuller picture of a country's level of human development requires analysis of other indicators and
information presented in the statistical annex of the report.
Human Development Index (HDI) is a summary measure of achievements in three key dimensions of
human development a long and healthy life, access to knowledge and a decent standard of living.
The HDI is the geometric mean of normalized indices for each of the three dimensions.
Imperfect Competition
➔ Imperfect competition is a competitive market situation where there are many sellers, but they are
selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario.
➔ As the name suggests, competitive markets that are imperfect in nature.
➔ “Concept of “menu costs” is incorporated in imperfect competition.
➔ It is an international financial institution which offers concessional loans and grants to the world's
poorest developing countries.
➔ The IDA is a member of the World Bank Group and is headquartered in Washington D.C.
➔ It was established in 1960 to complement the existing International Bank for Reconstruction and
Development by lending to developing countries which suffer from the lowest gross national income,
from troubled creditworthiness, or from the lowest per capita income.
➔ Together, the International Development Association and International Bank for Reconstruction and
Development are collectively generally known as the World Bank.
International Liquidity
➔ It is the sum total of international reserves of all the nations participating in the world monetary
and trading system.
➔ It is comprised of all reserves that are available in the monetary authorities of different countries for
meeting international disbursements.
➔ The problem of international liquidity is concerned with the imbalances in the demand for and
supply of international liquidity
➔ As dollar is the dominating component in the forex, the problem of international liquidity is related to
the non-availability of dollar and other hard currencies.
1) Gold reserves with the national monetary authorities — central banks — and with the IMF
2) Dollar reserves of countries other than the USA
3) Sterling reserves of countries other than the UK
4) IMF tranche position which represents the “drawing potential” of the IMF members
5) Credit arrangements (bilateral and multi-lateral credit) between countries such as “swap agreements”
and the “Ten” of the Paris Club
➔ Purpose Promote international monetary co-operation, facilitate international trade, foster sustainable
economic growth, make resources available to members experiencing balance of payments difficulties
➔ Headquarters Washington D.C.
➔ Membership 189 countries
➔ Parent Organisation – United Nations
➔ Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and
John Maynard Keynes
➔ Came into formal existence on December 27, 1945 with 29 member countries and the goal of
reconstructing the international payment system.
➔ On 1 March 1947, the IMF began its financial operations
➔ On 8 May France became the first country to borrow from it
➔ A curve used to demonstrate the hypothesis that economic growth initially leads to greater
inequality, followed later by the reduction of inequality.
➔ The idea was first proposed by American economist Simon Kuznets.
➔ As economic growth comes from the creation of better products, it usually boosts the income of
workers and investors who participate in the first wave of innovation.
➔ The industrialisation of an agrarian economy is a common example.
➔ This inequality, however, tends to be temporary as workers and investors who were initially left behind
soon catch up by helping offer either the same or better products. This improves their incomes.
Laffer Effect
➔ Laffer effect implies Reduction in the rate of taxation leads to more than proportionate increase in
tax yield
➔ Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of
the government's tax revenue.
➔ The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and
that there is a tax rate between 0% and 100% that maximizes government tax revenue.
➔ The term "Laffer curve" was coined by Jude Wanniski
➔ Laffer curve, popularised in 1974 by economist Arthur Laffer in a discussion with former U.S.
President Gerald Ford
➔ Laffer curve shows how tax revenues change when the tax rate is either increased or decreased.
Typically, it has an inverted-U shape.
Liquidity aggregates
➔ Aggregate liquidity refers to the ease of execution for financial transactions for everyone in the
entire market which is highly dependent on the availability of credit in the markets and the size of
the money supply in a country.
The following Liquidity aggregates have been formulated for monitoring the state of liquidity in an
economy.
L1=M3+Postal Deposits (excluding National Saving Certificate)
L2= L1+Term Money Borrowings, Certificate of Deposits and Term Deposits of Financial Institutions
like IDBI, IFCI, EXIM Bank, NABARD, SIDBI etc.
L3= L2+ Public Deposit with non-banking financial institutions
Lorenz Curve
Miracle economies
➔ Miracle economies are defined as those with GDP growth of 7% for a decade or more.
Monopolistic competition
➔ Market structure where there exist a very large number of sellers selling differentiated but
substitutable products
Mudra Yojana
➔ Constituted under Section 171 of the Central Goods and Services Tax Act, 2017
➔ Purpose To ensure that the reduction in rate of tax or the benefit of input tax credit is passed on to the
recipient by way of commensurate reduction in prices.
➔ Key Objective Ensure that the benefits of reduction in GST rates are passed to consumers
Steps taken by the NAA to ensure that customers get the full benefit of tax cuts
Holding regular meetings with the Zonal Screening Committees and the Chief Commissioners of
Central Tax to stress upon consumer awareness programmes
Launching a helpline to resolve the queries of citizens regarding registration of complaints against
profiteering
Receiving complaints through email and NAA portal
Working with consumer welfare organizations in order to facilitate outreach activities
National Income
• National income measures the net value of goods and services produced in a country during a
year and it also includes net earned foreign income.
• In other words, a total of national income measures the flow of goods and services in an
economy. National income is a flow not a stock.
• As contrasted with national wealth which measures the stock of commodities held by the nationals of a
country at a point of time, national income measures the productive power of an economy in a
given period to turn out goods and services for final consumption.
Oligopsony
➔ A state of the market in which only a small number of buyers exists for a product
Paradox of Thrift
Perfect Competition
➔ Perfect competition refers to a market situation in which there are large number of buyers and
sellers of homogeneous products.
➔ The price of the product is determined by industry with the forces of demand and supply.
Perfect Competition
➔ Perfect competition is an ideal type of market structure where all producers and consumers have full
and symmetric information, no transaction costs, where there are a large number of producers
and consumers competing with one another.
➔ Perfect competition is theoretically the opposite of a monopolistic market.
Philips Curve
➔ Describes inverse relationship between rates of unemployment and corresponding rates of rises in
wages that result within an economy
➔ Simply decreased unemployment, (i.e., increased levels of employment) in an economy will
correlate with higher rates of wage rises
➔ The trade-off between inflation and unemployment is explained by Philips Curve
➔ Phillips curve remains the primary framework for understanding and forecasting inflation used in
central banks
PPAs
➢ PPA is a contract between purchaser of electricity and electricity generator setting out the terms
and price for supplying electricity.
➢ In the case of renewable energy, state electricity regulatory commissions set the Feed-in Tariffs for the
purchase of electricity from these sources.
➢ PPAs were signed based on these pre-determined prices for a number of years.
➔ Purchasing power parity (PPP) is a popular metric used by macroeconomic analysts that compares
different countries' currencies through a "basket of goods" approach.
➔ Purchasing power parity (PPP) allows for economists to compare economic productivity and standards of
living between countries.
Recalibration
➔ The process where the cassettes that hold cash in ATMs are modified to suit the size of the currency is
called recalibration.
Recapitalisation
Sectors
Structural adjustment programs (SAPs)
➔ Structural adjustment programs (SAPs) consist of loans provided by the International Monetary
Fund (IMF) and the World Bank (WB) to countries that experienced economic crises
➔ SAPs are created with the goal of reducing the borrowing country's fiscal imbalances in the short
and medium term or in order to adjust the economy to long-term growth
➔ Structural adjustment policies emerged from two of the Bretton Woods institutions, the IMF and
the World Bank.
Swaminathan Commission
➔ Govt. of India constituted the National Commission on Farmers (NCF) on November 18, 2004
➔ National Commission on Farmers was chaired by Professor M.S. Swaminathan.
➔ To address the nationwide calamity of farmers suicides in India
➔ Suggestions to achieve the goal of "faster and more inclusive growth" as envisaged in the Approach to
11th Five Year Plan and are collectively termed the M.S.Swaminathan report for farmers
Transfer Earnings
➔ Minimum payments required to keep a factor of production in its present use is called Transfer
earnings
Transfer Payments
➢ Governments typically redistribute a share of tax revenues back to specified groups of individuals
in the form of various social programs (such as welfare benefits, unemployment insurance, public
pensions, or child benefits).
➢ These transfer payments supplement the market income of the households which receive them.
➔ It points out the supply side connection between Productivity and Income.
X-inefficiency