Economy 24

INDIAN
ECONOMY ai
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PRELIMS STATIC REVISION NOTES
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Part of BRAHMASTRA & Prelims Crash Course!

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ECONOMY
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INDEX
CHAPTER 1: INTRODUCTION OF ECONOMICS ............................................... 2

CHAPTER 2: BASIC CONCEPTS OF MICRO ECONOMICS ............................ 7
CHAPTER 3: NATIONAL INCOME ACCOUNTING ......................................... 11
CHAPTER 4: POVERTY IN INDIA ........................................................................ 18
CHAPTER 5: UNEMPLOYMENT IN INDIA ........................................................ 27
CHAPTER 6: FISCAL POLICY IN INDIA ............................................................ 33
CHAPTER 7: TAXATION OF INDIA ..................................................................... 47
CHAPTER 8: MONETARY POLICY ..................................................................... 60
CHAPTER 9: INFLATION ....................................................................................... 66
CHAPTER 10: BANKING SYSTEM IN INDIA ..................................................... 72
CHAPTER 11: EXTERNAL SECTOR .................................................................... 89
CHAPTER 12: FINANCIAL MARKETS .............................................................. 101
CHAPTER 13: REGULATORY BODIES ............................................................. 115
CHAPTER 14: INDUSTRY AND INFRASTRUCTURE .................................... 126
CHAPTER 15: DIGITAL PAYMENTS ................................................................. 133
CHAPTER 16: INTERNATIONAL INSTITUTIONS ......................................... 138
CHAPTER 17: WORLD TRADE ORGANISATION .......................................... 147
*Please Note: Agriculture notes are separate which is covered in an integrated way from the perspective
of Economy, Geography and Environment
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ECONOMY
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CHAPTER 1: INTRODUCTION OF ECONOMICS
1. Introduction: Economics is the science of a n a l yz i n g t h e production, distribution, and

consumption of goods and services that a society uses to address problem of scarcity + It aims
to transform resources into useful goods and services (the act of production), then distribute to
useful ends (the act of consumption).
2. Economic and non-economic activities: Economic activity is carried out in exchange for money
to earn a living. For instance, individuals work in a factory to earn cash + A non-economic
activity is an act that is performed without any monetary motive, with feelings of compassion or
humanity.
3. Different economic activities
 Primary sector
o All the economic activities which are undertaken by using or exploiting natural resources
directly are grouped into the primary sector.
o It forms the base for all other products that we subsequently make.
o It includes agriculture, forestry, animal husbandry, fishing, poultry farming, mining and
quarrying.
 Secondary sector
o It covers activities in which natural products are changed into other forms or finished
items through ways of manufacturing.
o It is also called the industrial sector. For example, making clothes from cotton fibre or
making sugar or gur from sugarcane etc.
 Tertiary Sector
o It covers activities that help in the development of the primary and secondary sectors.
These activities, by themselves, do not produce a good but they support for the production
process. For example, providing transport facilities to move goods from factories to shops
etc.
o Includes trade, transport, communication, banking, education, health, tourism, services,
insurance etc.
 Quaternary activities
o It consists of intellectual activities often associated with technological innovation.
o It includes government, culture, libraries, scientific research, education, and information
technology.
 Quinary activities
o It includes top executives or officials in
such fields as government, science,
universities, nonprofits, health care, culture,
and the media.
o Domestic activities also sometimes
mentioned in the quinary sector.
4. Factors of Production
 Land: It is the naturally occurring materials
(resources) used for production of goods and
services, including the land itself; minerals and
nutrients; water, wildlife, and vegetation on the
surface; and the air above.
 Labour: It is the mental and physical efforts of humans (excluding entrepreneurship) used
for production of goods and services.

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 Capital: Manufactured, synthetic goods used in the production of other goods, including
machinery, equipment, tools, buildings, and vehicles.
 Entrepreneurship: Human effort which takes on the risk of bringing labor, capital, and land
together to produce goods.
5. Factor Payments: Wages paid for the services of labour + Interest is the payment for the
services of capital + Rent is payment for the services of land + Profit is factor payment to
entrepreneurship.
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6. Non-factor incomes: Certain money receipts do not involve any sacrifice on the part of their
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recipients, the examples are gifts, donations, etc. + No production activity is involved in getting
these incomes. These incomes are called transfer incomes because such income merely
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represents a transfer of money without any goods or services being provided in return for the
receipts. + These incomes are not included in national income.
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7. Physical Capital vs Human Capital

Basis Physical Capital Human Capital
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It is tangible and can be easily It is intangible, built in the body and mind of its
Nature sold in the market like any other owner. It is not sold in the market, only its
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commodity. services are sold.

Ownership It is separable from its owner. It is inseparable from its owner.
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It is completely mobile between It is not perfectly mobile between countries as

Mobility countries except some artificial movement is restricted by nationality and
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trade restrictions. culture.

It can be built even through It is to be done through conscious policy
Formation
imports formulations.
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Benefit It creates only private benefit. It creates both private and - social benefits.
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8. Economic Agents (Four Sectors of Macroeconomics)

 Households: All people living under one roof are considered a household + They demand
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goods and services from markets + Supply labor, capital, land, and entrepreneurial ability to
resource markets + They undertake consumption expenditure which is total money spent on
final goods and services by individuals for personal use.
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 Firms: They combine services of four factors of production acquired from household sector
to pursue their productive activities + They primarily produce goods which satisfy wants and
needs of household sector.
 Government: It intervenes in economy by collecting and spending tax revenue and by
establishing and enforcing laws, rules, and other regulations + It promotes competition,
regulate natural monopolies, produce public goods, redistribution of Income, Employment,
price stability, economic growth.
 Foreign sector: Primary role is foreign trade + The domestic household, business, and
government sectors purchase imports produced in the foreign sector. The foreign sector buys
exports produced by the domestic business sector.
9. Circular flow of income

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 There is no government or the external sector (Foreign Firms) in this simple economic model.
 The households receive their income from the firms, for services that they perform for the
firms.
 Households dispose of their entire earnings only in one way by spending it entirely on goods
and services produced by the domestic firms (that is, households do not save anything).
 Thus, entire income of the economy, comes back to the producers in the form of sales
revenue.
 The firms again use this revenue to pay for factor services and thus the loop continues again.
10. Double coincidence of wants: In the barter system, a shortcoming is that an exchange can only
take place, if both parties want exactly the same thing that the other party has to offer at the same
time + Both the parties have to agree to sell and buy each other‘s commodities. This is called as
double coincidence of wants.
11. Opportunity Cost: It represent the potential benefits that an individual, investor, or business
misses out on when choosing one alternative over another + It is always positive because it
usually involves sacrificing (or giving up) some positive amount of one commodity in order to
get one extra unit of another + However, there are certain situations where opportunity cost may
be zero: Free Goods, Single Use-Factors and Heavy Unemployment
12. Investment / Capital Formation: Factor owners get factor incomes in return for their
productive services. They spend a large part of their incomes on goods and services such as food
articles, clothing, furniture, housing, education, health care, etc. However, they do not spend their
entire income on these goods and services. + They also save some income and deposit it in a
bank for the future. + The bank, in turn, may use this money to lend to an industrialist to invest in
the expansion of his business + This increase in the stock of capital goods in a year is called
capital formation or investment. Capital formation increases economic growth in the country.
13. Incremental Capital Outflow Ratio (ICOR): ICOR is a measure of the productivity of capital
investments in the economy + E.g. First year Additional Capital investment in the economy is
Rs. 100000/- and additional output is 25000 units then ICOR is 4. Next year Additional Capital
investment of Rs. 100000/- and additional output is 20000 units then ICOR is 5. + A higher
ICOR is an indicator of inefficiency (decline in the marginal productivity of capital) i.e.
investment capital accumulated in projects is not yielding commensurate output. + The rise in
ICOR can be attributed to the delay in the completion of projects or the lack of complementary
investments. In some cases, it can also be due to non-availability of critical inputs.
14. Scissors effect: It refers to loss of revenues due to demand slowdown, coupled with higher
expenditure associated with the pandemic.
15. Categorization of Economy
16. Types of Economy (In terms of the role of State)

 Market/Capitalist Economy: It is a system in which the laws of supply and demand direct
the production of goods and services. Supply includes natural resources, capital, and labor.
Demand includes purchases by consumers, businesses, and the government.
o Private ownership of most resources, goods, and other stuff (private property);

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o Freedom to use the privately-owned resources, goods to get the most wages, rent,
interest, and profit possible
o Relatively competitive markets + Only those consumer goods will be produced that are in
demand, i.e., goods that can be sold profitably either in the domestic or in the foreign markets.
o Limited role of government-> mainly to protect the rights of private citizens and
maintain an orderly environment.
o Advantages are Supply and demand are driven by consumers and businesses,
competition encourages efficiency, Innovation is rewarded with profits.
o Disadvantages are not everyone can realize their full potential, Self-interest tends to rule
over concern for the whole.
 Socialist Economy: It is based on government ownership of resources, worker control of the
government, income allocated on need rather than on resource ownership or contribution to
production, government decides what goods are to be produced in accordance with the needs of
society.
o Advantages are reduction of relative poverty, benefits of public ownership, equal society
which is more cohesive.
o Disadvantages are lack of incentives, welfare state can cause disincentives.
 Mixed Economy: It is a system that combines aspects of both capitalism and socialism + It
protects private property and allows a level of economic freedom in the use of capital, but
also allows for governments to interfere in economic activities in order to achieve social aims
+ India adopted for the Mixed Economy after Independence + India would be a socialist
society with a strong public sector but also with private property and democracy.
Criteria Capitalist Socialist
Origin Adam Smith Karl Marx
Ownership Private Ownership Government Ownership
Government No or marginal High/Almost everything
Intervention
Equality Income determined by market forces Redistribution of Income
Prices Determined by the market forces Determined by the Government
Dynamic economy, incentives for Promotion of equality. Attempt
Advantages
innovation and economic growth to overcome market failure
17. Feudalism: This was defined by the lords who held land and leased it to peasants for production,
who received a promise of safety and security from the lord.
18. Types of Economy (In terms of Per Capita Income): India is categorized in the Lower Middle-
Income Category with per capita GNI of 1680 as per World Bank.
Categorization Per Capita GNI (2024)
Low Income Economy < $1135
Lower Middle-Income Economy $1136-$4465
Upper Middle-Income Economy $4466- $13,845
High Income Economy > $ 13,845
19. Consumer goods vs Capital goods
 Consumer Goods: Goods are consumed to satisfy current wants of consumer directly +
Further classified into durable and non-durable goods
 Capital Goods: Goods that are of durable character are used in the production process +
Gradually undergo wear and tear, and thus are repaired or gradually replaced over time

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20. Public vs Private Goods: Public Goods = Non-Rivalrous & Non-Excludable + Private Goods =
Rivalrous + Excludable
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21. Common Resources vs Club Goods: Common Resources: Non-excludable but rival. That
means virtually anyone can use them. However, if one individual consumes them, their
availability to other consumers is reduced + Club Goods: Excludable but non-rival. Thus,
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individuals can be prevented from consuming them (i.e., access can be restricted), but their
consumption does not reduce their availability to other individuals (at least not until a point of
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overuse or congestion is reached).
22. Merit goods: A merit good or service is something that adds to the welfare and well-being of
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society when it is produced and consumed. + E.g. Pharma Company producing a vaccine for
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children against Hepatitis B, Educational institutions etc.+ Government encourages the

production of merit goods and hence they are taxed at very low rates.
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23. Demerit goods: Known to cause clear harm when produced and consumed.+ E.g. are alcohol,
cigarettes, tobacco products etc. + They are taxed at very higher rates to discourage the
production but there contribute very much to the Govt revenue that is why Govt hesitant to ban
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the production.
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CHAPTER 2: BASIC CONCEPTS OF MICRO ECONOMICS
1. Microeconomics: It is study of economics that relates to an individual unit or part of the

economy + Focus on production, consumption, supply-demand and price determination +
Basically concerned with determination of
output and price for an individual firm or
industry + Its focus is on maximization of
individual‘s gain.
2. Law of Demand: It states that if all other
factors are equal, the demand for a good is
inversely proportional to the price of the
good. Exceptions: Griffin, Veblen goods,
Necessities and Goods Expected to be
Scarce show exception to Law of Demand.
3. Determinants of Demand
 Price of Product: Generally, when the
price of a product decreases, the
quantity demanded increases, and vice
versa.
 Income: When people's income
increases, they can afford to buy more
goods and services, leading to an
increase in demand.
 Price of Related Goods: The prices of
related goods, such as substitutes and
complements, can affect the demand
for a particular product.
 Consumer Preferences: Consumer
preferences and tastes also influence
demand.
 Size of Population: An increase in
population generally leads to an
increase in demand for goods and
services.
4. Elasticity of demand: It measures the
responsiveness of quantity demanded to a
change in price. It helps us understand
how sensitive consumers are to price
changes.
 Elastic Demand: When a change in price leads to a relatively larger change in quantity
demanded, we say demand is elastic. In this case, consumers are highly responsive to price
changes.
 Inelastic Demand: When a change in price leads to a relatively smaller change in quantity
demanded, we say demand is inelastic.
 Unit Elastic Demand: When a change in price leads to an equal percentage change in
quantity demanded, we say demand is unit elastic. In this case, the responsiveness of quantity
demanded matches the change in price

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5. Law of Supply: It states that, all other factors being equal, as the price of a good or service
increases, the quantity of goods or services that suppliers offer will increase, and vice versa.
6. Determinants of Supply
 If the price of raw materials used in manufacturing increases, it becomes more expensive to
produce the product, potentially leading to a decrease in supply.
 Advancements in technology can enhance production efficiency, reduce costs, and increase
supply.
 If new firms enter the market, the overall supply may increase. Conversely, if existing firms
exit the market, supply may decrease.
 Expectations about future prices or changes in market conditions can influence supply. For
example, if producers anticipate a significant increase in the price of a product in the future,
they might reduce current supply to take advantage of higher profits later.
 Government policies and regulations can affect the supply of goods and services.
7. Price elasticity of supply: It is the ratio of the percentage change in quantity supplied to
percentage change in price + It measures the responsiveness of the quantity of goods supplied in
the market with the changes in prices + If the supply of goods ceases completely when the price
of the goods drops slightly, and the supply of the goods become infinite when there is even a
little increase in the price of the goods, the supply is said to be perfectly elastic + If supply does
not get affected due to change in price, the supply is said to be perfectly inelastic + If price of
goods exactly equal to the supply of goods in the market, the supply is said to unitary elastic.
8. Shift in Demand curve: When the demand for a commodity changes due to change in any factor
other than the price of the commodity, it is known as change in demand.+ Demand curve of a
commodity may shift due to change in price of substitute good, change in price of
complementary goods, change in income of the buyer, change in tastes and preferences, change
in population, change in distribution of income, change in season and weather etc. + In case of
increase in demand, the demand curve shifts towards right. In case of decrease in demand, the
demand curve shifts towards left.
9. Market equilibrium: It refers to a situation where the quantity of a product or service demanded
by buyers is equal to the quantity supplied by sellers at a particular price. It it is the point where
the intentions of buyers and sellers match, resulting in a balance in the market.
10. Production possibility frontier: It is a point in the curve that shows the maximum amount of a
good that can be produced in the economy for any given amount of another good and vice-versa.
It gives the combinations of goods that can be produced when the resources of the economy are
fully utilized.
11. Law of Variable Proportions: It is defined as Marginal Product of a variable factor input
initially rises with its input level but after reaching a certain level of employment, it starts falling.
12. Perfect competition: There are many buyers and sellers offering identical products. No single
buyer or seller has control over the price. Agricultural markets, such as wheat or rice, often
exhibit characteristics of perfect competition.
13. Monopolistic Competition: Monopolistic competition refers to a market with many sellers
offering similar but not identical products. Each seller has some control over the price and can
differentiate their product through branding, marketing, or product features.
14. Monopsony: A monopsony is a market condition in which there is only one buyer, the
monopsonist. Like a monopoly, a monopsony also has imperfect market conditions. The
difference between a monopoly and a monopsony is primarily in the difference between the
controlling entities. A single buyer dominates a monopsonized market while an individual seller
controls a monopolized market.

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15. Capital-Output ratio

 It is a measure used to quantify the amount of capital required to produce a unit of output or
goods and services.
 Capital-Output Ratio = Total Capital Stock / Total Output
 It provides insights into the efficiency and productivity of an economy or industry.
 A lower capital-output ratio indicates that less capital is required to produce a unit of output,
suggesting higher efficiency and productivity.
 A higher capital-output ratio indicates that more capital is needed for the same level of
output, which may suggest lower efficiency.
16. Substitute and Complementary goods
Basis Substitute Goods Complementary Goods
These are the goods which can be used in These are the goods which are
Meaning place of another for the satisfaction of used together to satisfy a specific
specific want. want.
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In the case of these goods, there is always There is always an inverse relation
Price-Demand a positive relationship between the price in price of commodity and
of a commodity and quantity demanded. quantity demanded for these
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Relationship
goods.
The cross demand is positive for these For these goods, the cross demand
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Cross Demand
goods. is negative.
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Degree of Cross Less than One i.e. EY<1 Less than zero i.e. EY<0.
Elasticity
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The increase in the price of a commodity Increase in price of commodity

Price Effect increases the demand for substitute goods decreases demand for
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and vice versa. complementary goods, vice versa.

Some of the examples are- Chrome and Some of the examples are- Coffee
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Examples Firefox, Nike and Adidas, Maggi and and cheesecake, Pencils and
Noodles etc. erasers, shoes and polish etc.
17. Giffen Goods: It is a low income, non-luxury product that defies standard economic and
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consumer demand theory + Demand for Giffen goods rises when the price rises and falls when
the price falls + Typically an inferior good
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18. Veblen Goods: It is a good for which demand increases as the price increases + These are
typically high-quality goods that are made well, are exclusive, and are a status symbol +
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Examples include designer jewelry, yachts, and luxury cars.

19. Income Elasticity of demand (IED): The income elasticity of demand is the responsiveness of
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the quantity demanded for a good to a change in consumer income. It is measured as the ratio of
the percentage change in quantity demanded to the percentage change in income.
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20. Normal goods and inferior goods: An inferior good is a good whose demand decreases when
consumer income rises (or demand increases when consumer income decreases). Example :
Coarse Cloth, Cycle, etc + Negative income elasticity of demand
 Normal goods are those goods for which the demand rises as consumer income rises.
Example : iphone, LG LED TV, etc. + Positive income elasticity of demand + Normal goods
whose IED is between zero and one are typically referred to as necessity goods, which are
products and services that consumers will buy regardless of changes in their income levels.
Examples of necessity goods and services include tobacco products, haircuts, water and
electricity + Normal goods whose IED > 1 are typically referred to as luxury goods.
21. Law of diminishing marginal product: It says that if we keep on increasing the input (e.g.
labour or raw material), with other inputs fixed, marginal product will increase initially till

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certain point is reached after which the resulting addition to output (i.e., marginal product of that
input) will start falling. + For example: One labour is producing 80 units of a product in a 8 hour
working day (i.e. 10 unit per hour) If he works overtime for another 8 hour then initially he may
produce 10 unit per hour for 2 or 3 hour after which his production will fall due to overworking.
22. Marginal rate of substitution: It is defined as the rate at which a consumer
is ready to exchange one good for another at the same level of utility. It
is used to analyse the indifference curve.
23. Consumer’s equilibrium: Consumer‘s equilibrium refers to a
situation when he/she spends his/her money income on purchase of a
commodity/bundle in such a way that yields him/her maximum
satisfaction and he/she feels no urge to change.
24. Indifference curve: An indifference curve is a graphical
representation that shows different combinations of two goods that
provide the same level of satisfaction to an individual + The slope of an
indifference curve is downward sloping, which means that as the quantity of one good increases,
the quantity of the other good decreases to maintain the same level of satisfaction.
25. Market Structure: Market structure refers to the way that various industries are classified and
differentiated in accordance with their degree and nature of competition for products and
services.
Market Perfect Monopolistic Oligopoly Monopoly
Structure Competition Competition
Example Theoretical Hairdressers, taxi Supermarkets, Theoretical
extreme. Fruit companies phone extreme.
sellers, foreign manufacturers Regional
exchange monopolies
markets
Number of A large number A large number of A small number One
firms of small firms small firms of large firms
Product Homogenous Similar but slight High level of Unique product
differentiation (identical differentiated differentiation
products) products
Barriers to Zero Very low High Very high
entry and exit
Price setting Firms are price Firms are price Firms are price The individual
takers makers takers firm sets price
26. Marginal Propensity to consume: Marginal propensity to consume (MPC) refers to the
proportion of extra income that a person spends instead of saving.
27. Marginal propensity to save: It is the fraction of an increase in income that is not spent and
instead used for saving.
28. Lewis model: It suggest that surplus labor in agriculture could be redirected to the manufacturing
sector by offering wages just high enough to attract workers away from the farm + It was put
forth by economist William Arthur Lewis in 1954.

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CHAPTER 3: NATIONAL INCOME ACCOUNTING
1. Gross Domestic Product: The gross domestic product is the value of all the final marketable
goods and services (When calculating the GDP, only the newly produced goods and services are
considered as final goods and not intermediate goods) produced by the residents of a country in a
domestic territory in one year.
 Domestic territory: In economics, it refers to economic territory which refers to the
geographical territory administered by a government within which persons, goods and capital
circulate freely. Domestic territory of a nation includes the following:
o Territory lying within the political frontier including territorial waters of a country.
o Ships and air crafts operated by residents of the country across different parts of the
world.
o Embassies, consulates and military establishments of a country located in abroad.
2. GDP does not capture : Intermediate Goods + Gains from resale + Household Services+
Transfer Payments + Parallel Economy or Black Money + Non-Monetary Exchanges +
Inequality of the country + Externalities (Positive or Negative)
3. GDP Captures: Self-consumed output (For example, Farmer consuming its own produce) +
Owner-occupied housing services (As the rental of tenant-occupied housing is counted as a sale
of a service)
4. Final goods: Meant for final consumption + will not pass through any more stages of production
or transformations. + For example, bread, butter, biscuits etc. used by the consumer
5. Intermediate goods: Which are used as raw material or inputs for production of other
commodities. + Example : Wheat flour is an intermediate good in the production of bread in the
backery. Whether a good is a final good or an intermediate good depends on its use. + For
example; milk used by a sweet maker is an intermediate good but when it is used by the
consumer it becomes a final good
6. Problem of double counting: Intermediate goods are not included in the calculation of national
income. Only final goods are included in the calculation of national income because value of
intermediate goods is already included in the value of final goods.
7. Transfer Payments: Transfer payment (Uni-sided Payments) refers to payments made by
government to individuals for which there no economic activity is produced in return by these
individuals. Example: Scholarship, pension.
8. Types of GDP
Nominal GDP Real GDP
Definition Current year production of final Current year production of final goods
goods and services valued at current and services valued at base year prices.
year prices.
Representation More of estimation of economy Representation of real economy
of economy
Inflation Effects of Inflation is taken into Effects of Inflation is factored out
account
Implications Increase in nominal GDP does not Increase in real GDP implies necessary
implies production of goods and increase in the production of good and
services as it may be due to general services + Better indicator than
price rise. Nominal GDP
9. Base Year: Base year is the year used as the beginning or the reference year for constructing an
index, and which is usually assigned an arbitrary value of 100 + The estimates at the prevailing
prices of the current year are termed as ―at current prices‖, while those prepared at base year

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prices are termed ―at constant prices‖. + Changed periodically to take into account the structural
changes which take place in the economy and to depict a true picture of the economy
 A base year has to be a normal year without large fluctuations in production, trade and prices
of commodities in general + Reliable price data should be available for it + Should be as
recent as possible.
 Revision of Base Year generally shows an upward revision in GDP calculation due to
inclusion of new Goods and services.
10. Market Price and Factor Cost:
 Market Price: Market price refers to the actual transacted price and it includes indirect taxes
(not direct taxes); custom duty, GST etc. and excludes subsidies.
 Factor Cost: Factor cost refers to the actual cost of various factors of production and
includes government grants and subsidies but it excludes indirect taxes.
Factor Cost = Market Price - Indirect Taxes + Subsidies
 Example: Selling of Maggie by Nestle through mixing of wheat floor and spices is value
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addition.
11. Gross National Product (GNP):
 Definition: The gross national product is the value of all final goods and services produced
by the nationals of one country in one year.
 GNP = GDP + Net Factor Income from Abroad (NFIA) l.c
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 Example: GNP versus GDP: Honda manufactures cars in the U.S., but is incorporated in
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Japan. The cars it produces in the U.S. are added to U.S. GDP, but not U.S. GNP as these
cars use domestic factors of production (labour and resources), but are produced by a foreign
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nation. Conversely, the values are added to Japan‘s GNP, but not Japan‘s GDP.
12. Net Factor Income from Abroad (NFIA):
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 It is the difference between Income received from abroad by the normal residents of India
for rendering services in other countries and the income paid to the foreign residents for the
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services rendered by them in India.

 Net factor income from abroad should not be confused with income from net exports which
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are a part of both gross national product (GNP) and gross domestic product (GDP).
13. Relationship between GDP vs GNP
 Case-1: GDP = GNP - Closed economy where nobody leaves its shores, nobody invests
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abroad, nobody comes in and nobody invests in the country.

 Case-2: GDP > GNP - Open economy with great levels of foreign investment (FDI) and
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lesser levels of outbound FDI

 Case-3: GDP < GNP - Open economy but more of its nationals tend to move economic
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activity abroad or earn more from investing abroad compared with non-nationals doing
business and earning incomes within its borders
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14. Net National Product or NNP:

 Definition: It is the monetary value of finished goods and services produced by a country's
citizens, overseas and domestically, in a given period.
 NNP = GNP - Depreciation
 About Depreciation: It is decline in the asset value over time due to wear and tear.
 National Income : NNP at factor cost
15. Per Capita Income
 Definition: Per capita income, also known as income per person, is the mean income of the
people in an economic unit such as a country or city.
 Calculation: When we divide NNP by the total population of nation we get the ‗Per Capita
Income‘ (PCI) of that nation i.e. ‗income per head per year‘.

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(Revision Notes)
16. Net Domestic Product (NDP)

 Definition: NDP is GDP calculated after adjusting value of depreciation.
 Calculation: NDP = GDP – Depreciation. NDP of an economy is always lower than its GDP,
as depreciation can never be reduced to zero.
17. Open economy v/s Closed economy:
Open economy Closed economy
Meaning Which has economic relations with the Which has no economic relations with
rest of the world. Most countries of the the rest of the world. Example of
world are open economy. closed economy is difficult to find in
present day world. (North Korea may
be an example).
Representation In an open economy, the demand for In closed economy Saving and
in economy domestic goods is equal to the domestic investment, Gross Domestic Product
demand for goods (consumption, (GDP) and Gross National Product
investment and government spending) (GNP) are equal but in an open
plus exports minus imports. economy, they can differ.
i.e. In open economy, exports
constitute an additional source of
demand for domestic goods and
services.
18. Measurement of GDP:
 Expenditure Method:
o Contains four components:
 Consumption expenditure: Expenditure by the households on the perishable and
non-perishable goods and services.
 Investment expenditures: It refers to fixed investment by the Businesses, inventory
investment by the businesses and Residential investment by the households.
 Government Expenditures
 Net income = Net exports (Exports – Imports)
o GDP = C + I + G + NX (X-M) where C=consumption, I = Investment G = Government
Expenditure NX = Net Exports (Export - Import)
 Income Method:
o Definition: Measures the income of all the factors of production in economy for
providing the factor services.
o Classification: 4 types of factor incomes are accordingly classified i.e. Rent, Wages,
Interest and Profit.

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(Revision Notes)
 Value Added Method

o Definition: Value added is the difference between the cost of inputs to production and the
price of output at any particular stage in the overall production process.
o The sectoral classification provides data on eight broad categories that span the gamut of
goods produced and services provided in the economy.
Agriculture and Electricity, gas and
Mining Manufacturing Construction
allied services water supply
Banking and Public administration Communication
Real Estate Transport
insurance and Defense and trade
19. Recent Changes for GDP calculation
 Official GDP: Headline growth rate will now be measured as GDP at constant market prices
from GDP at factor cost at constant prices.
 Revision of Cost Price: NSO revised the National Accounts statistics in January 2015 and it
was decided that sector-wise wise estimates of Gross Value Added (GVA) will now be given
at basic prices instead of factor cost.
 Change in base year: Changed base year from GDP from 2004-05 to 2011-12.
 Improved coverage of financial corporations: By including stock brokers, stock
exchanges, asset management companies, mutual funds and pension funds, as well as the
regulatory bodies, SEBI, PFRDA and IRDA.
 Changes in calculation of agricultural income: Earlier data only included value added in
farm produce but the new data includes value addition in Livestock as well. For ex. Value
added to the by-product of Meat like head, skin legs etc.
 Shift from Establishment approach to Enterprise approach: The establishment approach
used in Annual Survey of Industries did not capture the activities of a unit other than
manufacturing. Now in new approach, the activities of a manufacturing company other than
manufacturing are accounted in manufacturing sector. These changes possibly have increased
the coverage of registered sector of manufacturing. The Enterprise approach is facilitated by
MCA 21 with Ministry of Corporate Affairs.
 Incorporation of findings of NSSO Surveys: The updates are an improvement in the
representation of activities in the unorganized manufacturing sector.
 The change in Labour input Method: The new series has switched over to ―Effective
Labour Input Method‖ for Unincorporated Manufacturing & Services Enterprises. Earlier
method was assigning equal weights to all types of worker, while the new method assigns
different weight for workers as per their productivity.
 Change in the calculation methodology:
o GVA at basic prices = CE + OS/MI + CFC + Production taxes - Production subsidies
o GDP = Σ GVA at basic prices + Product taxes - Product subsidies

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(Revision Notes)
o CE: Compensation of Employees; MI: Mixed Income;

o OS: Operating Surplus; CFC: Consumption of fixed
capital
Production Tax/Production Subsidies Product Tax/Product Subsidies
Paid or received with relation to Paid or received on per unit of product.
production and are independent of the
volume of actual production.
Examples: Land Revenue, Stamps and Examples: Excise Tax, Import & Export Duties
Registration Fees
20. GDP Deflator:
 Definition: The GDP deflator (implicit price deflator) is used to determine the levels of
prices of the new domestically produced final goods and services in a country in a year.
 Calculation: GDP deflator = (Nominal GDP/Real GDP) * 100
 Importance: Covers the whole economy and not based on fixed baskets.
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21. Gross National Disposable Income:
 Definition: Gross national disposable income measures the income available to the nation for
final consumption and saving. It includes both earned income and transfer income (unearned
income).
l.c
 Formula: Gross national disposable income may be derived from gross national income by
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adding all current transfers (e.g. Remittances, Social contributions, gifts, aids etc.) receivable
m
by resident from non-resident and subtracting all current transfers payable by resident to non-
resident.
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22. Personal Income:

 Definition: PI is the Part of National Income (NI) which is received by households.
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 Formula: Personal Income (PI) = National Income – Undistributed profits (Savings of

firms) – Net interest payments made by households – Corporate tax + Transfer payments to
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the households from the government and firms

23. Personal Disposable Income:
 Definition: Personal Disposable Income is the part of the aggregate income which belongs to
80
the households. They may decide to consume a part of it, and save the rest.
 Formula: Personal Disposable Income (PDI) ≡ PI – Personal tax payments – Non-tax
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payments.
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24. Potential GDP: Also known as full employment GDP, refers to the level of real GDP an
economy can produce when all of its resources are fully utilized, including labor, capital, and
technology, while maintaining stable inflation + It can change over time and factors such as
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population growth, changes in labor force participation rates, technological advancements, and
improvements in productivity can influence the economy's potential output.
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25. Saving: Saving represents that part of disposable income that is not spent on final consumption
goods and services. Zero saving means final consumption expenditure equals disposable income.
+ For the closed economy savings equals capital formation during the year whereas for the open
economy savings equals capital formation plus net capital inflow from abroad during the year.
 Gross Domestic Saving consists of: Household Sector Savings (Rank 1), Private Corporate
Sector Savings (Rank 2), Public Sector Savings (Rank 3)
26. Paradox of Thrift: Popularized by the renowned economist John Maynard Keynes + It states
that individuals try to save more during an economic recession, which essentially leads to a fall
in aggregate demand and hence in economic growth. Such a situation is harmful for everybody as
investments give lower returns than normal + This theory was heavily criticized by non-
Keynesian economists on the ground that an increase in savings allows banks to lend more.

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(Revision Notes)
27. Flow Variables: Concepts that are defined over a period of time. (example: salary, profit etc. as
they are defined for a particular period of time.)
28. Stock Variables: Concepts that are defined at a particular point of time. (example: Buildings or
Machines in a factory etc.
29. Potential Output: Level of output that an economy can attain without stroking inflation or
deflation + Difference between potential and actual output is referred as output gap + A positive
output gap occurs when actual output is more than full - capacity output + A negative output gap
occurs when actual output is less than what an economy could produce at full capacity
30. Summary of Concepts:
31. Limitation of GDP:
32. Green GDP:

 Green GDP is an attempt by economists to measure growth of an economy compared to the
harm caused to the environment.
33. Gross National Happiness: Adopted by Bhutan in 2008 + Four pillars of Happiness
 Sustainable and equitable socio -economic development
 Environmental conservation
 Preservation and promotion of culture
 Good governance
34. Business cycle and Financial cycle: Business cycle can be
described as the rise and fall in aggregate economic activity
over a period of time and can be measured using real GDP
data. + Financial cycle maps out the expansions and
contractions in the financial activities. + The financial cycle
is not observed directly. Instead it is extracted from

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(Revision Notes)
appropriate macro-financial variables such as credit, credit-to-GDP ratio, equity prices, house
prices, etc., using different econometric or statistical techniques.
35. Economic recovery

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(Revision Notes)
CHAPTER 4: POVERTY IN INDIA
1. Introduction: Poverty is a state or condition in which a person or community lacks the financial
resources and essentials for a minimum standard of living + It means that the income level from
employment is so low that basic human needs can't be met.
2. Amartya Sen Definition: Poverty refers to deprivation of basic capabilities of life rather than
mere lowness of income.
3. Poverty Gap rate = Poverty Gap/ Poverty line + It tells about the depth of the poverty.
4. Types of Poverty
 Absolute Poverty: Defined as lacking the basic means to survive i.e. food, safe drinking
water, Sanitation facilities, health, shelter, education and information.
 Relative Poverty: When people in a country do not enjoy a certain minimum level of living
standards as compared to the rest of the population + It is closely related with issues of
inequality + Gini- coefficient is used to measure relative poverty.
om
 Situational Poverty: Poverty caused because of adversities like earthquakes, floods, illness
etc.
 Generational Poverty: Poverty handed over to individuals from their generations.
l.c
 Multi-dimensional Poverty: It is made up of multiple factors like poor health, lack of
education, inadequate living standard etc.
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5. Categorizing Poverty
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 Chronic poor: People who are always poor and those who are usually poor but who may
sometimes have a little more money (eg: casual workers) are grouped together as chronic
1g
poor.
 Transient poor: Churning poor who regularly move in and out of poverty (example: small
62
farmers and seasonal workers) and the occasionally poor who are rich most of the time but
may sometimes have a patch of bad luck. They are called the transient poor.
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80
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6. Vicious cycle of Poverty

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7. Poverty Estimation in India

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 Pre-Independence Poverty Estimation

o Dadabhai Naoroji ‘Poverty and Un-British Rule in India’-> Formulated poverty line
ranging from Rs16 to Rs35 per capita per year based on 1867-68 prices + Used cost of
subsistence diet consisting of rice, vegetables, mutton and oil.
o National Planning Committee (1938): Estimated poverty line between Rs15 to Rs20 per
capita per month + Also formulated poverty line based on minimum standard of living.
o Bombay Plan (1944): Poverty line of Rs75 per capita per year.
 Post-Independence Poverty Estimation
o Working Group Poverty Line (1962): National minimum for each household of five
persons should be not be less than Rs100 per month for rural and Rs125 for urban at
1960-61 prices (Excluded expenditure on health and education).
o Dandekar and Rath Committee (1971): First scientific assessment of poverty
estimation based on NSS Data (1960-61) + It recommended daily intake of 2,250 calories
per person to define the poverty line for both rural and Urban India.
o Alagh Committee (1979): Poverty line defined as people consuming less than 2100
calories in the urban areas or less than 2400 calories in the rural areas + Defined the first
poverty line in India.
o Lakdawala Committee (1993): Recommended that consumption expenditure be
calculated based on calorie consumption + Suggested for different poverty line for each
state, prescribed basket of commodity and measured poverty in states.
o Tendulkar Committee (2009): Shift away from calorie consumption based poverty
estimation + Uniform poverty line basket across rural and urban India + Incorporation of
private expenditure on health and education + Using Mixed Reference Period (MRP)
based estimates instead of Uniform reference period + Poverty line of Rs32 per capita per
day in Urban India and Rs27 in rural India.
o Saxena Committee (2009): Separated calorific intake apart from nominal income in its
economic analysis of poverty in India + 50% of Indians lived below the poverty line.
o Rangarajan Committee (2012): Methodology based on an independent large survey of
households by Center for Monitoring Indian Economy (CMIE) + Use of Modified mixed
reference period.
 Nutritional requirements
 Calories: 2090 Kcal in urban areas and 2155 Kcal in rural areas.
 Protein: 48 gm for rural areas and 50gm for Urban areas.
 Fat: 28gm for urban areas and 25gm for rural areas.
 Poverty threshold of Rs 47 a day in urban areas and Rs 32 in rural areas + Estimated
number of BPL people 19% higher in rural areas and 41% higher in urban areas.
8. Differences between Rangarajan and Tendulkar committee
Parameters Tendulkar Committee Rangarajan Committee (2012)
(2009)
Poverty Estimation Per Capita Expenditure Monthly expenditure of family of
Method Monthly five members
Urban Poverty Line Rs 32/day/person Rs 47/day/person
Rural Poverty Line Rs 27/day/person Rs 32/day/person
Measures only calorific value Calories, Protein and Fats
Calorie Expenditure
in expenditure
Calories in rural areas 2400 Kcal 2155 Kcal
Calories in Urban 2100 Kcal 2090 Kcal
areas

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(Revision Notes)
Expenditure on food, health, Food, healthcare, clothing, rent,

Focus areas clothing and education transport and non-food items such as
education.
9. Terms related to Poverty Estimation
 Uniform Reference Period (URP): Until 1993-94, consumption information collected by
the NSSO across a 30day recall period.
 Mixed Reference Period (MRP): measures consumption of five low-frequency items
(clothing, footwear, durables, education and institutional health expenditure) over the
previous year, and all other items over the previous 30 days.
10. Modified Mixed Reference Period (MMRP): new consumption data (in addition of other
attributes of MRP) for edible oil, egg, fish and meat, vegetables, fruits, spices, beverages,
refreshments, processed food, pan, tobacco and intoxicants are collected using 7 day recall
period.
11. International Estimations
 World Bank→ $2.15 per day
 Asian Development Bank (ADB): $1.51 per day.
12. World Poverty Clock (WPC):
 WPC is a systematic analytical framework to measure progress towards SDGs by World Data
Lab.
 The World Poverty Clock (WPC) provides real-time poverty estimates until 2030 for (almost)
every country in the world. The World Poverty Clock (WPC) is a global model that tracks
poverty in real time.
 It uses publicly available data on income distribution, production and consumption and
bridges the common decadal gaps between large-scale surveys and censuses.
13. National Poverty Lines (Rs per capita per month)
Year Rural Urban
2004-05 446.7 578.8
2009-10 672.8 859.6
2011-12 816 1000
14. Official Poverty rates
 Based on Planning Commission‘s (Now NITI Aayog) data derived from Tendulkar
Committee methodology.
 Defines poverty not in terms of annual income, but in terms of consumption or spending per
individual over a certain period for a basket of essential goods.
 Census 2011: India‘s extreme poverty rate was reported to be 21.9%, or 265 million people.
 Indian government has not given any number for poverty since 2011 — it was 21.9% as per
the Tendulkar poverty line.
15. Socio-Economic Caste Census
 It is the first-ever census to collect detailed data from rural and urban households +
Conducted by Ministry of Rural Development.
 Criteria Used: 14 parameters of Automatic Exclusion
o Motorized 2/3/4 wheeler/fishing boat.
o Mechanized 3-4 wheeler agricultural equipment.
o Kisan credit card with a credit limit of over Rs. 50,000/-.
o Household member government employee.
o Households with non-agricultural enterprises are registered with the government.
o Any member of the household earning more than Rs. 10,000 per month.
o Paying income tax.

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(Revision Notes)
o Paying professional tax.

o Three or more rooms with pucca walls and roof.
o Owns a refrigerator.
o Owns landline phone.
o Owns more than 2.5 acres of irrigated land with 1 irrigation equipment.
o 5 acres or more of irrigated land for two or more crop seasons.
o Owning at least 7.5 acres of land or more with at least one irrigation equipment.
 5 parameters of Automatic Inclusion: Households without shelter + Destitute, living on
alms + Manual scavenger families + Primitive tribal groups + Legally released bonded
labour.
 Households based on Seven Deprivation: Households with Kutchha house + No adult
member in working age + A household headed by female and no working age male member
+ Households with handicapped members and no able bodied adult + Household with no
literate over 25 years + Landless households engaged in manual labour + SC/ST households.
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16. Important Findings of SECC
 In India, there are 24.49 crores (243.9 million)
households, with 17.97 crores (179.7 million)
living in villages. 10.74 crore of these families
are considered impoverished. l.c
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 5.37 crore (29.97 percent) rural households are
m
"landless" and rely on manual labour for the
majority of their income.
1g
 In villages, 2.37 crore (13.25 percent) of families

live in one-room dwellings with 'kachcha'
62
(permanent) walls and roofs.

 SC/ST families account for 21.53 percent of
77
village families or 3.86 crores.

 In India, 56 percent of rural households do not
have access to agricultural land.
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 74.5 percent of rural households (13.34 crore) make ends meet with a monthly salary of Rs
5,000 for their highest earner.
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17. Multidimensional Poverty Index

 It was launched by United Nations
ha
Development program (UNDP) and Oxford

Poverty & Human Development Initiative
as
(OPHI).
 The index uses three dimensions and ten
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indicators which are:

 A person is multi-dimensionally poor if he is
deprived in one third or more of the weighted
indicators.
 Deprivation in one half or more of the
weighted indicators-> considered living
in extreme multidimensional poverty.
 Global Multidimensional Poverty Index, 2023

o Global Data: Globally, 1.1 billion people (18% of the total population) out of 6.1 billion
people, are acutely multidimensionally poor + Sub-Saharan Africa has 534 million poor

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(Revision Notes)
and South Asia has 389 million. + Children under 18 years old account for half of MPI-
poor people (566 million) + Poverty rate among children is 27.7%, while among adults it
is 13.4 %.
o India Specific findings: India still has more than 230 million people who are poor +
India has some 18.7% population under Vulnerability category + India is among 25
countries, including Cambodia, China, Congo, Honduras, Indonesia, Morocco, Serbia,
and Vietnam, that successfully halved their global MPI values within 15 years. + Some
415 million Indians escaped poverty between 2005-06 and 2019-21 + The incidence of
poverty in India declined significantly, from 55.1% in 2005/2006 to 16.4% in 2019/2021.
 National Multidimensional Poverty Index, 2023: NITI Aayog publishes this index +
National MPI measure uses the globally accepted and robust methodology developed by the
Oxford Poverty and Human Development Initiative (OPHI)
o India has registered a decline in the number of multidimensionally poor from
24.85% in 2015-16 to 14.96% in 2019-2021.
o In absolute terms, ~13.5 crore Indians escaped poverty during the five-year time period.
o Still, one in seven Indians is multidimensionally poor.
o The number of people in poverty in rural areas witnessed the fastest decline (from
32.59 to 19.28%), owing to improvements in states like Bihar, UP, MP, Odisha, and
Rajasthan.
o Number of states with less than 10% of people living in multidimensional poverty:
Doubled between 2016 and 2021 from 7 (Mizoram, HP, Punjab, Sikkim, TN, Goa, and
Kerala) to 14 (Telangana, Andhra Pradesh, Haryana, Karnataka, Maharashtra, Manipur,
and Uttarakhand).
o Except for Bihar, no other state in India has more than one-third of its population living in
multidimensional poverty.
18. Inequality: Inequality refers to the unequal
distribution of resources or opportunities among
individuals or groups within a society. There are
various methods to measure inequality:
 Quintile ratio: It is a measure of inequality
that compares the income or wealth of the top
20% of a population with the income or
wealth of the bottom 20%.
 Palma ratio: It compares the income of the
top 10% of the population with the income of
the bottom 40%. It is named after the Chilean
economist Gabriel Palma who first proposed
the measure.
19. Human Development Index: It
is a statistical tool used to
measure a country's overall
accomplishment in its social and
economic dimensions published
by the United Nations
Development Programme
(UNDP)
 It was created as a complement
to the Gross domestic product

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(Revision Notes)
(GDP) as it emphasises on importance of human development in the growth process.

 India ranks 132 out of 191 countries in the Human Development Index 2021-22.
 India's HDI score has risen at an annual average rate of 1.42 percent over the last three
decades.
 India's Gross national income per capita has more than doubled since 2005 and the number of
―multi-dimensionally poor‖ individuals has decreased by more than 271 million since 2005-
06.
20. Human Poverty Index: The HPI was an indication of the standard of living in a country,
developed by the United Nations (UN) to complement the Human Development Index (HDI).
21. Poverty Reduction and Growth Facility (PRGF): PRGF is an arm of the International
Monetary Fund which lends to the world's poorest countries.
22. Lorenz Curve: It is a graphical representation of the distribution of income or wealth within a
population + Lorenz curves graph percentiles of the population against cumulative income or
wealth of people at or below that percentile + It is widely used to measure inequality across a
population + The Lorenz curve is a central piece in calculating the Gini coefficient, a
mathematical representation of inequality levels.
23. Gini-Coefficient: It measures the degree of income equality in a population + It can vary from 0
(perfect equality) to 1 (perfect inequality) + Gini Coefficient of zero means that everyone has the
same income, while a Coefficient of 1 represents a single individual receiving all the income.
24. Important Poverty Alleviation programmes in India
 Mahatma Gandhi National Rural Employment Guarantee Act, 2005: It is a statutory
job guarantee scheme for rural India by Ministry of Rural Development (MoRD).
o Aim: Enhancing the livelihood security of people in rural areas by legally
guaranteeing 100 days of wage employment to adult members of any
household willing to do unskilled manual labour at statutory minimum
wage.
o Workers provided work when they demand it (Demand driven
program).
o Employment is to be provided within 5kms of residence.
o Work not provided within 15 days of applying -> Applicants
should be paid unemployment allowance.
o 1/3rd of workforce should be women + Social audit by
Gram Sabha.
o Wages must be paid according to statutory minimum wages specified for agricultural
labourers in the state under the Minimum Wages Act, 1948.
 Integrated Rural Development programme: Provide benefits to the poorest at first priority
+ Set out a goal to generate income of Rs. 2000 per family + Subsidy to small & landless
farmers.
 Food for Work Programme: Its objective is to generate supplementary wage employment +
Launched in 150 most backward districts of India + Presently subsumed under MGNREGA +
Provided food for unskilled manual labor.
 Pradhan Mantri Jan Dhan Yojana: It aimed at direct benefit transfer of subsidy, pension,
insurance etc. and attained the target of opening 1.5 crore bank accounts. It particularly
targets the unbanked poor.
 Annapurna Scheme: Started by Government in 1999-2000 to provide food to senior citizens
who cannot take care of themselves and are not under National Old age pension scheme
(NOAPS) + It provide 10kg of free food grains a month for eligible senior citizens.
 Economic Growth Vs Economic Development

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(Revision Notes)
Economic Growth Economic Development

Definition / It is the positive quantitative It considers rise in output in an economy
Meaning change in the output of an along with the advancement of HDI index
economy in a particular time which considers a rise in living standards,
period advancement in technology and overall
happiness index of a nation.
Concept Economic growth is the Economic development is the ―Broader‖
―Narrower‖ concept concept
Approach Quantitative in nature Qualitative in nature
Scope Rise in parameters like GDP, Rise in life expectancy rate, infant,
GNP, FD1.F1I etc. improvement in literacy rate, infant
mortality rate and poverty rate etc.
Term / Tenure Short term in nature Long-term in nature
Applicability Developed nation Developing economies
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Measurement Increase in national income Increase in real national income i.e. per
Techniques capita income
Frequency In a certain period of time Continuous process
Government
Aid
It is an automatic process so
may not require government l.c
Highly dependent on government
intervention as it includes widespread
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support/aid or intervention policies changes so without government
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intervention it is not possible
25. Inclusive Growth
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 Economic growth: Economic growth that is distributed

fairly across society and creates opportunities for all.
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 Participation and benefit: The process and the

outcome where all groups of people have participated
77
in growth and have benefited equitably from it

 Addition above GDP and GNP: Talks not only about
growth in GDP or GNP, but also talks about how the
80
output is distributed
 Focus on the equity of health, human capital,
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environmental quality, social protection, and food

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security.
 Equality of opportunity in terms of access to markets, resources, and unbiased regulatory
environment for businesses.
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 Explicit Adoption: It was explicitly adopted in India after 11th plan onwards although the
Constitution and objectives of FYP emphasis on Inclusive Growth.
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 Elements of Inclusive Growth: Skill Development + Financial Inclusion + Technological

Advancement + Economic Growth + Social Development + Environment protection +
Poverty reduction + Employment generation
26. Fincluvation: It is a joint initiative to collaborate with the Fintech Startup community to co-
create and innovate solutions for financial inclusion + It will be a permanent platform of India
Post Payments Bank (IPPB) to co-create inclusive financial solutions with participating start-ups
+ Fincluvation invites startups to Participate, Ideate, Develop and Market intuitive and tailored
products and services that can be taken to the customers.
 Challenges for Inclusive Growth:
Challenge Impact
High population Leads to greater competition and increasing pressure on natural

ECONOMY
(Revision Notes)
resources.
Low agricultural Marred by disguised unemployment
growth Involves 50% of the population.
Poverty and One of the poorest and inequal nation across the world
inequality
Unemployment Demand for employment is not being met.
Health India is burdened by health-related issues like malnutrition, infant
mortality, poor sanitation, lack of potable drinking water,
communicable and non-communicable diseases
Education Poor quality of education with little learning outcomes
 Means for Inclusive Growth
Means Ways
Resource  Includes natural resources (eg. Coal, iron-ore, water, sunlight), man-made
allocation resources (eg. Machines, bridges, roads, money) and human resources (eg.
Physical and cognitive skills)
 Efficiency in resource utilisation and equitable resource allocation
 Participation of government, private sector and public sector
Employment  Indicator of qualitative employment is the transition of increasing
generation employment from unorganised to organised sector.
 Leads to income generation from individual as well national perspective
Skill  The Skill India Mission of the Indian government which aims to train over
development 40 crore people in India in different skills by 2022.
Agricultural  Poverty and disguised unemployment is concentrated in the agricultural
development domain.
27. Five Year Plans
Year Plan
First plan  Harrod-Domar Model
(1951-56)  Focus on agriculture, price stability, power and transport
 It was successful and achieved a growth rate of 3.6% (target: 2.1%).
 At the end of this plan, five IITs were set up in the country
Second plan  It was based on the P.C. Mahalanobis Model- Resource allocation to
(1956-61) broad sectors such as agriculture and industry.
 Its main focus was on the industrial development of the country.
 This plan lags behind its target growth rate of 4.5% and achieved a
growth rate of 4.27%.
Third Plan  Also called ‗Gadgil Yojna‘, after the Deputy Chairman of Planning
(1961-66) Commission D.R. Gadgil.
 The main target of this plan was to make India a self-reliant and
self-generating economy.
 Failed to achieve its target due to droughts and war with Pakistan
and China.
Plan holidays (1966-69)
Fourth Plan  Aim: Growth with stability & progressive achievement of self-
(1969-74) reliance.
 14 major Indian banks were nationalized and Green Revolution
started. Indo-Paki War of 1971 and Bangladesh Liberation War took
place.

ECONOMY
(Revision Notes)
Fifth Plan  Focused on Garibi Hatao, employment, justice, agricultural

(1974-79) production and defence.
 The Electricity Supply Act was amended in 1975, a Twenty-point
program was launched in 1975, the Minimum Needs Programme
(MNP) and the Indian National Highway System was introduced.
Sixth Plan  The basic objective of this plan was economic liberalization by
(1980-85) eradicating poverty and achieving technological self-reliance.
 It was based on investment Yojna, infrastructural changing, and
trend to the growth model.
Seventh Plan  Objectives: Establishment of a self-sufficient economy,
(1985-90) opportunities for productive employment, and up-gradation of
technology.
 The Plan aimed at accelerating food grain production, increasing
employment opportunities & raising productivity with a focus on
‗food, work & productivity
 For the first time, the private sector got priority over the public
sector.
Eighth Plan  Under the leadership of PV. Narasimha Rao.
(1992-97)  Priority was given to the development of human resources i.e.
employment, education, and public health.
 LPG reforms were launched
Ninth Plan  Main focus of this plan was ―Growth with Social Justice and
(1997-2002) Equality‖.
 Failed- due to global slowdown after Asian Financial Crisis.
Tenth Plan  Under the leadership of Atal Bihari Vajpayee and Manmohan Singh.
(2002-07)  This plan aimed to double Per Capita Income of India in next 10
years.
 It also aimed to reduce the poverty ratio to 15% by 2012.
Eleventh Plan  Prepared by C Rangarajan
(2007-12)  Towards faster and more inclusive growth
 India had emerged as one of the fastest growing economy
Twelfth Plan  Faster, more inclusive and sustainable growth
(2012-17)  Its growth rate target was 8%.

ECONOMY
(Revision Notes)
CHAPTER 5: UNEMPLOYMENT IN INDIA
1. Important Terms
 Labour Force: It refers to the persons aged between 15-64 years who are either engaged in
any economic activities or are willing to pursue an economic activity in a reference period +
It includes both those who are in workforce and unemployed (refers to all those who are
seeking and available for work).
 Labour Force Participation rate: Defined as proportion of population in labour force to the
total population.
 Definition of Unemployment: It is defined as ―a situation in which the person is capable of
working both physically and mentally at the existing wage rate, but does not get a job to
work‖.
 Unemployment rate: The unemployment rate is defined as the percentage of unemployed
persons in the labour force.
om
 Worker population ratio (WPR): It is the proportion of the population engaged in
producing goods and services (Workers) to the Population (defined as the total number of
people who reside in a particular locality at a particular point of time).
Associated Terms
l.c
 Casualization of Work Force: Casualization of work force is a process in which employment
ai
shifts from a full-time and permanent positions to casual or contract positions.
m
 Underemployment: A situation in which persons are working less than they are willing to
work or they do not get wages according to their skills.
1g
2. Causes of Unemployment: Large population, lack of vocational skills, low productivity in

agriculture sector, low investments in manufacturing sector, inadequate growth of infrastructure,
62
Regressive social norms which deter women from taking employment.

3. Types of Unemployment
77
 Structural Unemployment: It occurs due to structural change in the economy such as

change in technology or change in pattern of demand etc.
80
 Open Unemployment: It is a situation where a large section of the labour force does not get
a job that may yield them regular income.
nt
 Frictional Unemployment: It occurs when a worker is shifting from one job to the other;
unemployment for some time during mobility period.
ha
 Natural rate of unemployment: The sum total of frictional and structural unemployment is
referred as the natural rate of unemployment.
as
 Cyclical Unemployment: It occurs because of cyclical fluctuations in the economy; Phases

of boom, recession, depression and recovery + Boom phase-> High level of economic
pr
activity-> High level of employment.

 Under- Employment: Situation under which employed people are contributing to
production less than they are capable of + Part time workers come under this category.
 Disguised Unemployment: It is a phenomenon wherein more people are employed than
actually needed + Means the situation of employing surplus labourers whose Marginal
Productivity = 0 + Primarily seen in agricultural and the unorganized sectors of India + The
work requires the service of five people but engages eight people. Three people are extra +
The contribution made by the three extra people does not add to the contribution made by the
five people.
 Seasonal Unemployment: Unemployment which occurs during certain seasons of the year.

ECONOMY
(Revision Notes)
 Vulnerable Employment: People working informally without proper job contracts +

Deemed ‗unemployed‘ since records of their work are never maintained.
 Educated Unemployment: Among the educated people, apart from open unemployment,
many are underemployed because their qualification does not match the job + Shortfalls in
education system, mass output, preference for white collar jobs, lack of employable skills and
dwindling formal salaried jobs are mainly responsible for unemployment among educated
youths in India
 Technological Unemployment: It is the result of certain changes in the techniques of
production which may not warrant much labour + Modern technology being capital intensive
requires fewer labourers and contributes to this kind of unemployment
 Casual Unemployment: Industries such as building construction, agriculture, where workers
are employed on a day- to-day basis -> chances of casual unemployment occurring due to
short-term contracts, terminable any time.
 Chronic Unemployment: When unemployment tends to be a long-term feature of a country
+ It is a feature of Underdeveloped countries due to vicious cycle of poverty.
4. Institutions measuring Unemployment: Labour Bureau (Ministry of Labour and Employment)
+ NSO) (Ministry of Statistics and Programme Implementation).
5. Measurement of Unemployment in India: National Sample Survey Office (NSSO) measures
unemployment through:
 Usual Status Approach: It estimates only those persons as unemployed who had no gainful
work for a major time during the 365 days preceding the date of survey + It gives the lowest
estimates of unemployment.
 Weekly Status Approach: It records only those persons as unemployed who did not have
gainful work even for an hour on any day of the week preceding the date of survey.
 Current Daily Status Approach: The status of Unemployment is measured for each day in a
reference week. A person having no gainful work even for 1 hour in a day is described as
unemployed for that day + It is considered to be a comprehensive measure of unemployment
+ Usually if a person works for four hours or more during a day, he or she is considered as
employed for the whole day.
6. Household Surveys
 Employment-Unemployment Survey (Released by NSSO)
o First survey conducted 1955 and since 1972-73, it is conducted every five years + The
latest such survey was conducted in 2011-12 + Note: Presently, the survey has been
discontinued.
 Periodic Labour Force Survey (Released by NSO)

ECONOMY
(Revision Notes)
o It is India‘s first computer-based survey launched by NSO in 2017 + It is constituted on

the recommendation of Amitabh Kundu committee + It collects data on several variables
such as level of unemployment, types of employment and their respective shares, wages
earned from different jobs, number of hours worked etc + First Annual report conducted
for the period July 2017- June 2018 covering both rural and urban areas released in May
2019.
o Objective of PLFS
 To estimate the major employment and unemployment indicators (viz. Worker
Population Ratio, Labour Force Participation Rate, Unemployment Rate) in the short
time interval of three months for the urban areas only in the ‗Current Weekly Status‘
(CWS).
 To estimate employment and unemployment indicators in both usual Status and CWS
in both rural and urban areas annually.
o Quarterly Bulletin of PLFS (July- Sep 2021)
 Unemployment rate (UR) for persons of age 15 years and above in urban areas
dipped to 9.8 per cent in July-September 2021 from 13.2 per cent in the same quarter
of the previous year.
 Worker Population Ratio (WPR) (in per cent) in CWS in urban areas for persons of
age 15 years and above stood at 42.3 per cent in July-September 2021, up from 40.9
per cent in the same period a year ago.
 Labour force participation rate (LFPR) in CWS (current weekly status) in urban
areas for persons of 15 years of age and above was 46.9 per cent in the July-
September quarter of 2021, down from 47.2 per cent in the same period a year ago.
 Annual Labour Force Survey (Ministry of Labour and Employment)
o It was published since 2009-10. A total of six rounds of surveys has been held till 2016 +
It has been discontinued.
7. Enterprise Surveys
 Economic Census (By Ministry of Statistics and Programme Implementation): It covers
all non-agricultural economic activities (Both industries and services sectors included) + 7th
Economic census conducted in 2020-21.
 Annual Survey of Industries (By MoSPI): It covers the industrial units registered under
Factories Act, 1948 and only those industrial units which employ 10 or more workers (in case
of using power) or 20 or more workers (in case of not using power).
 Unorganized Sector Surveys of Industries and Services (By NSSO): It covers unorganized
nonagricultural enterprises, across manufacturing, services and trade.
 Quarterly Employment Survey (QES) (By Labour Bureau): The survey measures
employment in 8 selected labour intensive and export oriented sectors.
 Ministry of MSME: Only four surveys have been conducted + Last survey was conducted in
2006-07.
 Five All India Surveys is being conducted by Labour Bureau: The objective of the All
India Survey on Domestic Workers would be to estimate the proportion of DW in the
workforce by major states and all-India and percentage distribution of these DWs /
households that employ them by important socio-demographic key characteristics. These five
surveys are
o All India Survey on Migrant workers,
o All India survey on Domestic Workers,
o All India survey on employment generated by Professionals,
o All India survey on employment generated in Transport Sector and

ECONOMY
(Revision Notes)
o All-India Quarterly Establishment based Employment Survey.

8. Administrative sources: Data from EPFO, ESIC, NPS + It includes only the formal sector.
9. Centre for Monitoring Indian Economy (CMIE) (Privately held survey): It is a privately
owned business information company headquartered at Mumbai + It conducts the largest survey
to estimate household incomes, the pattern of spending and savings.
10. Differences between Organized and Unorganized sector
Organized Sector Unorganized Sector
It comprises mainly of small scale
Employment terms are fixed and
Meaning enterprises which are not registered
employees have assured work.
with government.
Various acts like factories act, Bonus
Governed By They are not governed by any act.
act, PF act, Minimum wages act etc.
Working
Fixed Not fixed
Hours
om
Various add on benefits like medical
Benefits facilities, pension, leave travel Not provided.
compensation, etc.
11. EPF, ESI, Bonus & Wages act
l.c
 The Employees’ Provident Funds (EPF) and Miscellaneous Provisions Act, 1952
ai
o Applicability: To every establishment where 20 or more persons are employed.
m
Following 3 schemes are framed: Employees‘ Provident funds Scheme, 1952;
Employees‘ Pension Scheme, 1995 and Employees‘ Deposit-Linked Insurance Scheme,
1g
1976
o Eligibility: Employees drawing Salary upto 15000 pm
62
o Employee Contribution: 12% of Basic salary plus DA. Same amount is contributed by
employer
o Investment by EPFO: Employees‘ Provident Fund Organisation (EPFO) is investing in
77
Exchange Traded Funds (ETFs). Maximum investment limit in ETFs is 15%. EPFO does
not invest in shares and equities of individual companies
80
 The Payment of Bonus Act, 1965

o Applicability: To every establishment where 20 or more persons are employed
nt
o Eligibility: Employees drawing Salary upto 21000 pm and for the purpose of calculation
of Bonus salary to be taken Rs. 7000pm
ha
o Minimum and Maximum bonus: Minimum bonus 8.33% and Maximum 20% of the
salary/wages
as
 ESIC act, 1948

o Applicability: is applicable to every establishment where 10 or more persons are
pr
employed
o Contribution wef 01-07-2019: Govt of India has taken a historic decision to reduce the
rate of contribution under the ESI Act from 6.5% to 4% (employers‘ contribution being
reduced from 4.75% to 3.25% and employees‘ contribution being reduced from 1.75% to
0.75%).
 Payment of Wages Act, 1936
o Applicability: To every person employed in any Factory, Railways and other specified
establishment
12. Important Government schemes related to Employment

ECONOMY
(Revision Notes)
 Pradhan Mantri Rojgar Protsahan Yojana: It was launched in 2016-17 by Ministry of

Labor and Employment with objective of promoting employment generation + GOI pays
Employee pension scheme (EPS) contribution (employer‘s full contribution of 12% from
2018) for all new employees enrolling in EPFO for last 3 years of their employment + It is
applicable for workers earning wages upto Rs15000.
 Pradhan Mantri Employment Generation Program (PMEGP): It is a credit linked
subsidy program for generation of employment opportunities through establishment of micro-
enterprises in rural and urban areas + Subsidy of up to 35% provided by Govt for loans up to
Rs 25 lakhs in manufacturing and Rs 10 lakhs in service sector + It is implemented by Khadi
and Village industries commission (KVIC) + Eligibility-> Individuals above 18 years, Class
8th qualification (for projects > 10 lakh in manufacturing and > 5 lakh in service sector),
SHGs and charitable trusts, max cost of project should be 25 lakhs in manufacturing and 10
lakh in service sector.
 Integrated Rural Development Programme (IRDP): It was launched in 1980 to create full
employment opportunities in rural areas.
 Training of Rural Youth for Self-Employment (TRYSEM): It was started in 1979 to help
unemployed rural youth between age of 18 and 35 years to acquire skills for self-
employment.
 Pradhan Mantri Kaushal Vikas Yojana (PMKVY), launched in 2015 has an objective of
enabling a large number of Indian youth to take up industry-relevant skill training that will
help them in securing a better livelihood.
 MGNREGA (Covered in poverty chapter).
 Aatmanirbhar BharatRojgar Yojana (ABRY): It was announced as part of Aatmanirbhar
Bharat 3.0 package to increase the employment generation in post COVID recovery phase +
GOI is crediting for a period of two years both the employees‘ share (12% of wages) and
employers‘ share (12% of wages) of contribution payable or only the employees‘ share,
depending on employment strength of the EPFO registered establishments.
 Garib Kalyan Rojgar Abhiyaan: To boost employment and livelihood opportunities for
returnee migrant workers, launched in June 2020 + Focuses on 25 target-driven works to
provide employment and create infrastructure in the rural areas of 116 districts of 6 States
with a resource envelope of Rs 50,000 crore.
 Deendayal Antyodaya Yojana: National Rural Livelihoods Mission (DAY-NRLM): It
was launched in 2011, seeks to alleviate rural poverty through building sustainable
community institutions for the poor + It targets to mobilise about 9-10 crore households into
Self Help Groups (SHGs).
 DAAY (NULM): It was launched by Ministry of Hosuing in 2013 by replacing Swarna
Jayanti Shahari Rozgari yojana + Under Employment through skill training component, an
expenditure of Rs. 15,000 per person is allowed on training of Urban poor which is Rs18000
in North East and J&K + Urban poor assisted with interest subsidy of 5%-7% for setting up
individual micro-enterprises with a loan of up to Rs2 lakh and for group enterprises with a
loan of up to 10 lakhs.
 DDU-GKY: It is a scheme launched by Ministry of rural development + It aims to skill rural
youth who are poor and provide them with jobs having regular monthly wages or above the
minimum wages + It focus on socially disadvantaged groups -> 50% of funds earmarked for
SCs and STs, 15% to minorities and 3% for PwDs + 1/3rd of the person covered should be
women.
 e-SHRAM Portal: It was launched to create a National Database of Unorganized Workers
(UWs) + The database is seeded with Aadhaar and for age group between 16-59 years.

ECONOMY
(Revision Notes)
 Aatmanirbhar Skilled Employees Employer mapping (ASEEM) portal: It is a digital

platform, created to match supply of skilled workforce with the market demand, acts as a
directory of skilled workforce + A demand and campaign management system for employers
to forecast the current and future demand.

ECONOMY
(Revision Notes)
CHAPTER 6: FISCAL POLICY IN INDIA
1. Introduction: Fiscal policy refers to the action of government which uses the tools of revenue
and expenditure programmes of the government to achieve desirable objectives.
2. Objectives: Boost aggregate demand for goods and services, economic growth, price stability,
employment generation, enhance inclusive growth and bring exchange rate stability.
3. Importance of Fiscal Policy in India
 Increasing the rate of capital formation both in public and private sectors; Government
provide capital subsidy to firms, helping them undertake investment expenditure.
 Mobilization of resources for welfare programmes.
 Providing stimulus to elevate the savings rate: Government has launched various saving
schemes such as - Equity-Linked Savings Scheme, Public Provident Funds, National Savings
Certificate, Senior Citizens Savings Scheme, Kisan Vikas Patra and Sukanya Samruddhi
Yojana to promote savings within the household sector.
om
 Minimize imbalance in the dispersal of income and wealth.
4. Differences between Monetary policy and Fiscal policy
Fiscal Policy Monetary Policy
l.c
Change in government spending and tax Change in interest rates / money supply.
rates
ai
Set by the Government Set by a Central bank
m
No specific target Target inflation
Side effect on government budget / Side effect on exchange rate and housing market
1g
borrowing
Strong political dimension to changing Mostly independent from the political process
62
tax rates
5. Types of Fiscal Policy
 Expansionary Fiscal policy: It means that government spending is more than tax revenue +
77
It is designed to boost the economy; mostly in times of high unemployment and recession + It
leads to increasing government spending and decreasing taxation.
80
nt
ha
as
pr
o Consequences during expansionary fiscal policy

 An increase in demand can lead to higher prices, which can result in inflation if
supply cannot keep up.
 Expansionary policies often involve increased government spending, which can lead
to increased borrowing and higher national debt.
 Lower interest rates can lead to an increase in capital inflows, which can cause the
currency to appreciate and make exports more expensive.

ECONOMY
(Revision Notes)
 An increase in the money supply can lead to an increase in asset prices, such as stocks
and real estate, which can create a wealth effect but also lead to a bubble.
 If an expansionary policy leads to an increase in imports, it can create a trade
imbalance that could harm domestic producers.
 When an economy expands, employment increases.
 Contractionary Fiscal policy: It occurs when government spending is lower than tax
revenue + It is designed to slow down economic growth in the case of high inflation + It
leads to raising of taxes by the government and cut in the spending.
o Consequences during contractionary fiscal policy
 A decrease in demand can lead to reduced production and layoffs, which can result in
higher unemployment.
 Contractionary policies can slow down economic growth, which can lead to lower
consumer and business confidence.
 Contractionary policies often involve decreased government spending, which can lead
to decreased borrowing and lower national debt
 Higher interest rates can lead to a decrease in capital inflows, which can cause the
currency to depreciate and make exports cheaper.
 A decrease in the money supply can lead to a decrease in asset prices, such as stocks
and real estate, which can create a negative wealth effect and potentially trigger a
recession.
 If a contractionary policy leads to a decrease in imports, it can create a better trade
balance and benefit domestic producers.
 Higher interest rates can encourage saving, which can lead to an increase in savings
rates and a corresponding decrease in consumer spending.
 Neutral Fiscal policy: It means that total government spending is fully funded by the tax
revenue + It is adopted by the government when the economy is in a state of equilibrium.
 Pro-cylical vs Counter-cyclical Fiscal Policy
6. Tools of Fiscal Policy

 Taxation: Funds in the form of direct and indirect taxes help the government function +
Taxes affect the consumer's income and changes in consumption lead to changes in real

ECONOMY
(Revision Notes)
gross domestic product (GDP) + Through fiscal policy, government aims to keep the taxes as
much progressive as possible.
 Government spending: It includes welfare programs, government salaries, subsidies, etc.; it
can raise or lower the real GDP + Budget is the most important instrument embodying
expenditure policy of the government.
 Investment and Disinvestment Policy: Optimum levels of domestic and foreign investment
are needed to maintain the economic growth.
 Debt / Surplus Management: To fund the deficit, the government borrows from domestic or
foreign sources. It can also print money for deficit financing.
7. Constitutional Provisions of Budget
 The Constitution refers to the budget as the ‗annual financial statement‘ in Article 112.
 The President shall in respect of every financial year cause to be laid before both the Houses
of Parliament a statement of estimated receipts and expenditure of the Government of India
for that year.
 No demand for a grant shall be made except on the recommendation of the President.
 No money shall be withdrawn from the Consolidated Fund of India except under
appropriation made by law.
 No tax shall be levied or collected except by authority of law.
 Parliament can reduce or abolish a tax but cannot increase it.
 The estimates of expenditure embodied in the budget shall show separately the expenditure
charged on the Consolidated Fund of India and the expenditure made (votable) from the
Consolidated Fund of India.
8. Funds related to Budget:

 Consolidated fund of India: Constitutional Fund + Article 266 + Contains incoming tax
revenue, raised loans and recovered loans. Withdrawal from it need parliament permission +
Certain disbursements distinctly, which are charged on the CFI, such as emoluments of the
President, salaries and allowances of the Chairman and the Deputy Chairman of the Rajya
Sabha and the Speaker and the Deputy Speaker of the Lok Sabha, salaries, allowances and
pensions of the Judges of the Supreme Court etc., may be charged on the CFI and are not
required to be voted by the Lok Sabha.
 Public Account of India: Constitutional Fund + Article 266, Contains Incoming provident
fund, small savings, postal deposit etc. Government acts as Banker. No need for parliament
permission.
 Contingency Fund of India: Statutory Fund (Art. confers power on the Parliament to set up
fund through law) + Article 267, For unforeseen events upto Rs. 30000 crores by Finance
secretary on behalf of President. Need subsequent Parliament approval. + After such post-
facto approval, an equivalent amount is drawn from the Consolidated Fund to recoup the
Contingency Fund.

ECONOMY
(Revision Notes)
9. Budgeting process in India: The budget process in India comprises four distinct phases:
 Budget Formulation: Preparation of estimates of expenditure and receipts for the ensuing
financial year.
o Responsibility lies with Department of Economic Affairs under the Ministry of
Finance.
o The ministries are required to provide three different kinds of figures relating to their
expenditures and receipts during this process of budget preparation. These are: Budget
Estimates, Revised Estimates and Actual Estimates. For Example: Budget 2023-24 on 1
Feb. 2023 will consists of the Budget Estimates of next financial year (2023-24), Revised
estimates of current financial year (2022-23) and actual estimates of previous financial
year (2021-22)
o The National Informatics Centre (NIC) helps the budget division in the process of
consolidation of the budget data.
o At the end of this process, the finance minister takes the permission of the President of
om
India for presenting the Union budget to Parliament.
 Budget Enactment: Approval of the proposed Budget by the Legislature through the
enactment of Finance Bill and Appropriation Bill.
l.c
o As per Rule 204(1) of the Rules of Procedure and Conduct of Business in the Lok Sabha,
the Budget is presented to the Parliament on such date as fixed by the President.
ai
o Detailed discussion in the Polity static notes.
 Budget Execution: Enforcement of the provisions in the Finance Act and Appropriation Act
m
by the government-collection of receipts and making disbursements for various services as

1g
approved by the Legislature; and

 Legislative review of budget implementation: Audits of government‘s financial operations
62
on behalf of the Legislature

 The budget is presented by Finance Minister to Parliament each year during the Budget
Session.
77
10. Changes Introduced in 2017

 Advancement of Budget presentation to February 1 (earlier presented on the last working day
80
of February),
 Merger of Railway Budget with the General Budget, and
nt
 Doing away with plan and non-plan expenditure.

11. Components of Budget: The Union Budget is divided into two parts:
ha
as
pr
 Revenue Budget: Comprise revenue receipts and expenditure met from these revenues.
o Revenue Receipts: These are one-way transactions which are not required to be paid
back + They do not reduce asset, recurring in nature and non-redeemable.
 Tax revenue like income tax, custom duty, excise duties etc.

ECONOMY
(Revision Notes)
 Non-Tax revenue: It includes interest receipts (from loans given to states), Dividend
and profits on investments and other non-tax receipts which include receipts from
fiscal services (Eg: Currency and coinage), Economic services (E.g: receipts from
various departments like agriculture, transport etc.), social services (education, health
etc.), General services (profits from central police etc.), Grants in aid (from foreign
governments, multilateral bodies), proceeds from spectrum auctions and non-tax
receipts from UTs.
o Revenue Expenditure: They are referred as ongoing operating/maintenance expenses +
Expenditure incurred for purposes other than creation of physical or financial assets of the
central government. It includes:
 Interest payments by the government on the internal and external loans.
 Salaries, Pension and Provident Fund paid by the government-to-government
employees.
 Subsidies forwarded to all sectors by the government.
 Defence expenditures by the government.
 Postal deficits of the government.
 Law and order expenditures (i.e. police & para-military).
 Expenditures on social services (includes all social sector expenditures as education,
healthcare, social security, poverty alleviation) and general services (tax collection,
etc.).
 Grants given by the government to Indian states (including the creation of capital
assets) and foreign countries.
 Capital Budget: It is an account of the assets as well as liabilities of the central government,
which takes into consideration changes in capital + It consists of capital receipts (like
borrowing, disinvestment) and long period capital expenditure (creation of assets,
investment).
o Capital Receipts: It results in either reduction in government assets (sale of shares,
disinvestment) or an increase in the liability (government borrowings), not recurring in
nature and can be redeemable (Government should repay the loans taken).
o Debt capital receipts: They include fresh borrowings by government, along with other
liabilities + Fresh borrowing from market loans through bonds, treasury bills issued to
RBI, Ways and Means Advances (WMA) by RBI and external bilateral and multilateral
loans + Other liabilities include money deposited by people in Provident Fund, Small
savings account etc.

ECONOMY
(Revision Notes)
o Non-Debt capital receipts: They do not create any liabilities + They involved in the
reduction of Assets + They include recovery of loans and disinvestment of government
shares.
o Capital Expenditure: These
are one-time large purchases
of fixed assets that will be
used for revenue generation
over a longer period + It
includes expenditure on
acquisition of land, building,
machinery, loans and
advances by central
government to state and UTs,
PSUs and other parties.
 Loan Disbursals by the
Government: Internal
(i.e., to the states and
UTs) or external (i.e., to
foreign countries, loans to
IMF and WB, etc.)
 Loan Repayments by the
Government
 Capital Expenditures on
Defence by the
Government
 General Services: These
also need huge capital
expenditure by the
government - the
railways, postal
department, water supply,
education, rural
extension, etc.
 Other Liabilities of the
Government: Includes all the repayment liabilities of the government on the items of
the 'other receipts'.
12. Some key terms
 Balanced Budget: If the estimated government expenditure is equal- to expected
government receipts in a particular financial year + It ensures economic stability and refrain
government from imprudent expenditures.
 Surplus Budget: If the expected government revenues exceed the estimated government
expenditure in a particular financial year + It allows a government to repay existing national
debt and to cut taxes to stimulate the supply-side of the economy.
 Deficit Budget: If the estimated government expenditure exceeds the expected government
revenue in a particular financial year.
13. Types of Deficit:
Types of Deficit Formula Remarks

ECONOMY
(Revision Notes)
Revenue Expenditure –  It includes only such transactions that affect the

Revenue receipts current income and expenditure of the
government.
 Most dangerous deficit because government is
not able to meet its day to day expenditure.
 It implies that the government is dissaving and is
using up the savings of the other sectors of the
economy to finance a part of its consumption
expenditure.
 A persistent revenue deficit can lead to an
Revenue Deficit increase in inflation, as the government may
resort to printing more money to finance its
expenditure.
 A persistent revenue deficit can lead to an
om
increase in interest rates, as the government may
have to borrow more to finance its expenditure.
 Revenue deficit can be decreased through:
l.c
o Increasing tax compliance and reducing
tax evasion.
ai
o Reduction of subsidies
m
o Privatization and disinvestment
Revenue Deficit –  The term introduced in Budget 2011-12.
1g
Grants for creation of  It signifies that amount of capital receipts that are
Effective capital assets being used for actual consumption expenditure of
62
Revenue Deficit the Government.

 The Government is mandated to eliminate the
77
effective revenue deficit.

Budget Expenditure –  Discontinued by government from 1997.
Budget Deficit
80
Budget Receipt
Total expenditure –  Excess of total budget expenditure (revenue and
(Revenue receipts+ capital) over total budget receipts (revenue and
nt
Non-debt creating capital) excluding borrowings during a fiscal

ha
capital receipts) year.

or Budget Deficit +  It is reflective of total borrowing requirements of
Fiscal deficit Borrowing Or the government.
as
Revenue expenditure +  Includes borrowing from small savings scheme,

capital expenditure – G-Secs, Borrowing from RBI and External
pr
Revenue receipts – Borrowing.

capital Receipts  Adopted by IMF as principal policy target in
excluding borrowings. their programmes.
Fiscal Deficit – Net  Provide picture on how government borrowing is
Interest liabilities for new programs.
Primary Deficit
 Reduction in primary deficit is reflective of
current government efforts at bridging fiscal gap
during a financial year.
Monetized  Broadly defined as the creation of money by the
Deficit Central Bank to fund the fiscal deficit of the

ECONOMY
(Revision Notes)
Government.
 Inflationary in nature as it increases the money
supply.
 Discontinued in 1997
14. Deficit reduction: Government deficit can be reduced by an increase in tax rates or reduction in
govt expenditure. However, this fiscal tightening can cause lower economic growth – which in
turn can cause a higher cyclical deficit (government get less tax revenue in a recession) + One of
the best ways to reduce the deficit is to promote economic growth. If the economy grows, then
tax revenue will increase, without raising taxes.
15. Deficit Financing: It is the practice where the government spends more money than it receives
as revenue, the difference being made up by borrowing or minting new funds + The deficit is
financed by borrowing loans from the central bank, commercial banks, and even state
governments through Ad-hoc Treasury Bills.
 Means of Deficit Financing: External Grants, External aids and borrowings, internal
borrowings, withdrawing cash balances held with RBI, printing currency (last resort as it
increases inflation proportionally).
 Impact: Increases aggregate expenditure which in turn increases aggregate demand and
hence the risk of inflation + It can also lead to the process of economic surplus which causes
economic growth.
 Advantages: Increases financial strength of the government + It leads to inflation which can
prove to be beneficial under certain circumstances + Multiplier effect on economic
development as it encourages the government to utilize unemployed and underemployed
resources.
 Disadvantages: It causes inflation and a rise in prices + Individuals with fixed sources of
income are not benefited + It disturbs the entire investment system as most of the investment
is attracted towards the quick profit-yielding industries which are not beneficial for long-term
growth + Decrease in purchasing power of money leading to an outflow of capital from the
country.
16. Fiscal Consolidation: It is a set of policies undertaken by government so as to reduce
government deficits and debt accumulation + It can be achieved by increasing revenue and
decreasing expenditure + Tools of Fiscal consolidation are Government spending, transfer
payments and taxes.
17. Fiscal Responsibility and Budget Management Act, 2003: It is an act to provide for
responsibility of Central Government to ensure inter-generational equity in fiscal management
and long-term macro-economic stability by removing fiscal impediments.
 Objectives
o To introduce transparency in India’s fiscal management systems.
o Achieve inter-generational equity by ensuring equitable distribution of debt over the
years.
o Ensure long term macro-economic stability through fiscal stability.
 Key Provisions
o Provisions: Originally reduce Fiscal deficit to 3% for Union government, 3% to State
government by 2008, Eliminate Revenue deficit by 2008, total liabilities of central
government should not rise by more than 9% a year.
o The central government shall not borrow from the Reserve Bank of India except by Ways
and Means Advances (WMAs) to meet temporary excess of cash disbursements over cash
receipts.

ECONOMY
(Revision Notes)
o Amendment in 2012: No need of 0% revenue deficit rather 0% Effective Revenue

Deficit by 2015.
o Escape Clause: During National Security/Act of War, National calamity, fall in
agriculture output and farm income, fall in real output or GDP growth government can
escape the target. Note: The term ―escape clause‖ has not been used in the act. It was
used by FRBM review committee headed by NK Singh.
o Required documents to be presented with Budget (Section 3): FRBM act requires
following documents to be presented with budget.
 Macroeconomic Framework Statement: Shows economic data, GDP growth rate,
imports-exports and government receipts and expenditure.
 Medium Term Fiscal Policy Statement
 Fiscal Policy Strategy Statement: Explains how government controls the deficits,
provide for the deviation.
 Medium term Expenditure Framework (Added via FRBM Amendment Act, 2012)
18. NK Singh committee to review FRBM Act (2016)
 Scrap the FRBM Act, 2003 and a new Debt and Fiscal Responsibility and Debt
management act be adopted under which Debt (Combined Debt of the Centre and States) to
be the new anchor and not the Fiscal Deficit.
 Creation of a Fiscal council -> Proposed 3-member body for preparing multi-year fiscal
forecast, providing independent assessment of central government‘s fiscal performance.
 Gradual reduction in fiscal deficit to 2.5% of GDP
 Reduction of revenue deficit to 0.8% by 2002-23 in a phased manner
 Bringing Debt to GDP ratio to 60% by 2023-> 38.7% for central government and 20% for the
state government.
 Escape clause-> allowing up to 0.5% slippage
 Buoyance clause-> Fiscal deficit must fall at least 0.5% below the target if real output grows
3% faster than average of previous four quarters.
 Borrowing from RBI: Prohibits the government from borrowing from the RBI except in the
following circumstances:
o Centre must meet a temporary shortfall in receipts.
o RBI subscribes to government securities to finance any deviations from specified targets, or
o RBI purchases government securities on the secondary market.
19. Ways and Means Advances: Introduced in 1997 + To meet mismatches in the receipts and
payments of the government. Features:
 The government can avail immediate cash from the RBI, if required. But it has to return the
amount within 90 days. Interest is charged at the existing repo rate.
 If the WMA exceeds 90 days, it would be treated as an overdraft (the interest rate on
overdrafts is 2 percentage points more than the repo rate).
 The limits for WMA (for Centre) are decided by the government and RBI mutually and
revised periodically.
 Types: There are two types of Ways and Means Advances — normal and special.
 A Special WMA or Special Drawing Facility is provided against the collateral of the
government securities held by the state.
 After the state has exhausted the limit of SDF, it gets normal WMA.
 The interest rate for SDF is one percentage point less than the repo rate.
 The number of loans under normal WMA is based on a three-year average of actual revenue
and capital expenditure of the state.

ECONOMY
(Revision Notes)
20. Public Debt in India: Total liabilities of the central government contracted against the
Consolidated Fund of India + Further classified into internal & external debt.
 Internal Debt: Categorized into marketable and non-marketable securities
o Marketable government securities include G-secs and T-Bills issued through auction.
o Non-marketable securities inFORclude intermediate treasury bills issued to state
government's, special securities issued to national Small Savings Fund among others.
 Dated Securities: Primarily fixed coupon securities of short, medium- and long-term
maturity which have a specified redemption date.
 Treasury-Bills: Zero coupon securities that are issued at a discount and redeemed in face
value at maturity.
 Securities issued to International Financial Institutions: Securities issued to institutions
viz. IMF, IBRD, IDA, ADB, IFAD etc. for India‘s contributions to these institutions etc.
 Securities issued against ‘Small Savings’: All deposits under small savings schemes are
credited to National Small Savings Fund (NSSF).
om
 Market Stabilization Scheme (MSS) Bonds
Components of India’s domestic debt

Component
Government securities l.c Share in total domestic debt
Around 70%
ai
Treasury Bills Around 5%
m
State Development loans Around 10%
Small Savings schemes Around 15%
1g
Market stabilization scheme bonds and Way and means Negligible

advances
62
 External Debt: External loans are not market loans; they are raised from institutional
creditors at concessional rates + Most of these external loans are fixed-rate loans, free from
77
interest rate or currency volatility + Majority of Debt owed by private businesses which
borrowed at attractive rates from foreign lenders + Most of India‘s external debt is linked to
80
the dollar.
 Components of India’s external debt
Component Share in India’s total external debt
nt
Multilateral institutions 9-12%

ha
Bilateral loans 5-7%

External commercial borrowings 15-18%
as
Sovereign bonds 22-25%

Export credit 5-8%
Commercial loans 15-18%
pr
Others (NRI deposits etc) 15-18%

 Government Debt Scenario
Type of loans Trend
Total Public debt State Govt (70%) > Union (30%)
Source Internal (95%) > External (5%)
Type of Interest Mainly Fixed rate
o Primarily contracted at fixed interest rate and low currency risk thereby insulating debt
portfolio from interest rate volatility and exchange rate volatility.

ECONOMY
(Revision Notes)
o Commercial banks remain the dominant holders of dated securities followed by Insurance
Companies and Provident Funds accounted for 24.3 per cent and 5.5 per cent,
respectively, of outstanding stock of dated securities
21. Debt to GDP ratio: Debt-to-GDP ratio is a measure of a country's debt in relation to its
economic output + It is calculated by dividing the total debt of a country by its GDP and
expressing the result as a percentage + A high debt-to-GDP ratio can lead to higher interest
payments on debt, lower investor confidence, and reduced government spending on social
programs and public services.
22. Central government‘s debt stood at 57% of GDP at the end of March 2023(General government
debt is around 85% of GDP).
23. Analysis of Public debt in India
24. Extra Budgetary Resources: Off budget loans taken by Public Sector Organisations and
Government Organisation.
 Example: Loans by FCI, Loans by Ministry of Housing and Urban Affairs to finance PM
Awas Yojana.
25. Types of Budgeting
 Gender Budgeting: Started in 2005, Not separate budget but shows expenditure on
women, monitors expenditure and public service delivery from a gender perspective + This
GB Statement comprises two parts - Part A reflects Women Specific Schemes, i.e. those
which have 100% allocation for women and Part B reflects Pro Women Schemes, i.e. those
where at least 30% of the allocation is for women + Gender Budgeting Cell (GBCs) have
been mandated to be set up in all Ministries/Departments.
 Zero Based budgeting: Initiating budget from zero base every year + The process involves
review of the expenditures incurred by every department each year. It considers current
expectations. On the basis of this, expenditures are allocated and revenues are estimated for
the next period + In India, it is believed to be in practice since 1997-99.
 Incremental Budgeting: It is a type of budget where the previous year's budget is used as a
base, and adjustments are made to reflect changes in economic conditions and policy
priorities + It is often criticized for failing to consider the effectiveness of existing
programs and services.
 Outcome Budgeting: It is a process of budgeting done at micro levels that sets measurable
physical targets to be allocated on every planned project under various ministries + It
measures quantitative and qualitative aspects of the budget and makes budget accountable
and transparent.
 Performance Budget: It is presented by the Ministry of Finance on behalf of the
government + Check cost –benefit and efficiency of each scheme + First time introduced in
USA + It is the compulsion of the government to tell that 'what is done', 'how much is done'
by it for the betterment of the people.

ECONOMY
(Revision Notes)
26. Miscellaneous Concepts

 Challenges of Fiscal Deficit: Crowded out the private sector, impact the sovereign credit
ratings, can result into inflation, leaves lesser money with public.
 Interest Rate Growth Rate Differential (IRGD): Difference between interest rate paid by
government and GDP growth rate in economy. If negative IRGD – Need not worry much.
 Measures of Fiscal Consolidation: Reducing leakage by targeted delivery of schemes and
subsidies, shutting down loss making PSUs (Sale of Air India), Privatisation of loss making
PSU, Undertaking austerity measures like ending parliament subsidy.
 Non Lapsable fund: Money doesn‘t lapse on 31st March. Example: Nirbhaya Fund.
 Plan vs non Plan Expenditure: Stopped after 2017
o Plan expenditure: Contained Revenue expenditure and Capital expenditure.
o Non Plan Expenditure: Expenditure on general, economic and social services of
government, interest payment, defence services, subsidies.
 Fiscal Drag: Fiscal drag is a concept where inflation and earnings growth may push more
taxpayers into higher tax brackets. Therefore, fiscal drag has the effect of raising government
tax revenue without explicitly raising tax rates.
 Fiscal Neutrality: Where government spending is covered almost exactly by tax revenue – in
other words, where tax revenue is equal to government spending. A situation where spending
exceeds the revenue generated from taxes is called a fiscal deficit and requires the
government to borrow money to cover the shortfall.
 Pump Priming: It is the action taken to stimulate an economy, usually during a recessionary
period, through government spending and interest rate and tax reductions.
 Bailout: In some circumstances, countries can be eligible for a bailout from an international
organisation, such as IMF. This means they can draw on temporary funds to help with
temporary liquidity shortages. The bailout may reassure investors and give the country more
time for dealing with the deficit. A bailout usually comes with strict instructions on reducing
the defict
 Crowding out effect: The crowding out effect refers to a phenomenon where increased
government deficits can lead to a rise in interest rates which further leads to reduction in
private sector investments.
 Tax Expenditure : Revenue foregone to the government due to various tax concessions and
exemptions provided to the tax payers by the government
27. Types of Schemes:
 Central Sector Schemes: 100% funded by Union Government. Example: Urea Subsidy,
MDR Subsidy, Jan Aushadhi Scheme, Bharat NET,
 Centrally Sponsored Schemes: Bearing of the expenditure by the states too.
o Core of the Core: Only 6 Schemes, MGNREGA, National Social Assistance
Programme, Umbrella schemes for ST, SC, ST, Minorities & other vulnerable groups.
o Note: National Social Assistance Programme is 100% funded by Central govt.
o Core Scheme: Funding Pattern in 60:40, 70:30,90:10
28. Department of Finance Ministry:
 Department. of Economic Affairs: Prepares budget, fiscal policy, liasons with Finance
commission, Financial Stability and Development Council (FSDC) falls under it, Security
Printing and Minting Corporation of India (SPMCIL) to print coins and notes fall under it.
 Department of Expenditure: deals with Pay Commission reports, Pension Accounting
office, Preparation of expenditure by Controller General of Account, Manages Public
Financial Management System (PFMS) for disbursing money to ministries at Union and state

ECONOMY
(Revision Notes)
level, Bharatkosh- Non Tax Receipts Portal (NTRP) to sell India yearbook Yojana,
Kurukshetra.
 Department of Revenue: Looks after taxation matters, Implements Central Boards of
Revenue Act 1963, Controls Central Board of Direct Taxes (CBDT), Central Board of
Indirect Taxes and Customs (CBIC), Implements GST.
 Department of Financial Services: Implements Schemes for Financial Inclusion,
Undertakes PSB supervision and recapitalization, Controls Bank Board Bureau, Parent
department for National Credit Guarantee Trustee Company (NCGTC) to provide credit
guarantee for loans in Mudra, MSME loans, Stand up India.
 Department of Investment and Public Asset Management (DIPAM): Looks after
Disinvestment /privatization of Govt Companies / Central Public Sector Enterprises, Gives
'Ratna' status to CPSEs,
29. Chief Economic advisor
 About: Falls under Finance Ministry‘s Department of Economic Affairs, not constitutional or
om
statutory body.
 Tenure & Reappointment: 3 years usually, eligible for reappointment, Control over Indian
Economic services.
30. Other Bodies
l.c
 Financial Stability and Development Council (FSDC): Finance Minister as Chairperson,
ai
Members include chiefs of all financial regulatory bodies such as RBI, SEBI, IRDAI
m
 Public Debt Management Agency (PDMA): NITI Aayog called for separate PDMA to
manage market borrowing outside the purview of RBI (as RBI plays a dual and conflicting
1g
roles as the banker and manager of Central government borrowing).

 Public Debt Management cell: It aims to streamline government borrowings and better cash
62
management for deepening bond markets + It is an interim arrangement and will be upgraded
to a statutory Public Debt Management Agency (PDMA) in about 2 years + It will allow
77
separation of debt management functions from RBI to PDMA in gradual manner + The Joint
Secretary (Budget), Department of Economic Affairs of the Finance Ministry will be overall
in-charge of the PDMC + It will have only advisory functions in order to avoid any conflict
80
with the statutory functions of RBI.

31. Fiscal Performance Index: It is published by Confederation of Indian Industry(CII) which
nt
measures the quality of budget of Central as well as various state governments + It has been
constructed using the United Nations Development Programme (UNDP) Human Development
ha
Index methodology + It comprises six components for holistic assessment of quality of

government budgets : Quality of revenue expenditure, Quality of capital expenditure, Quality of
as
revenue, Degree of fiscal prudence, Degree of fiscal prudence II: revenue deficit to GDP, Debt
index: Change in debt and guarantees to GDP.
pr
32. Disinvestment: Non-Debt Capital Receipt + Sale or liquidation of assets by the government,
usually Central and state public sector enterprises, projects, or other fixed assets + The
government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise
money for meeting specific needs, such as to bridge the revenue shortfall from other regular
sources.
33. Types of Disinvestment in India
 Minority Disinvestment (Token Disinvestment) : It is a kind of disinvestment in which the
government retains a majority of the share in the company, generally more than 51 per cent. +
This type of disinvestment policy assures that the government retains management control.
 Strategic disinvestment : It implies the sale of substantial portion of the Government
shareholding of a central public sector enterprise (CPSE) of upto 50%, or such higher

ECONOMY
(Revision Notes)
percentage as the competent authority may determine, along with transfer of management
control + Department of Investment and Public Asset Management (DIPAM) under the
Ministry of Finance is the nodal department for the strategic stake sale in the Public Sector
Undertakings (PSUs).
 Complete Privatization : Complete privatization is a type of majority disinvestment in
which the company‘s whole ownership is transferred to a buyer.
34. Department of Investment and Public Asset Management (DIPAM) : In 2016-17, the
Government of India announced the renaming and restructuring of the Department of
Disinvestment + The Department of Disinvestment has been renamed the Department of
Investment and Public Asset Management, or ‗DIPAM,‘ and it remains under the Ministry of
Finance + DIPAM‘s goal is to manage the central government‘s equity investments efficiently,
including its disinvestment from central public sector enterprises.
35. National Investment Fund (NIF) : It was constituted on 3rd November, 2005, into which the
proceeds from disinvestment of Central Public Sector Enterprises were to be channelized + The
corpus of the fund was to be of permanent nature and the same was to be professionally managed
in order to provide sustainable returns to the Govt., without depleting the corpus + NIF was to be
maintained outside the Consolidated Fund of India.
36. New Policy of Strategic Disinvestment: Existing CPSEs, Public Sector Banks and Public Sector
Insurance Companies to be covered under it. Two fold classification of Sectors to be disinvested :
 Strategic Sector: Bare minimum presence of the public sector enterprises and remaining to
be privatised or merged or subsidiarized with other CPSEs or closed. Following 4 sectors to
come under it :
o Atomic energy, Space and Defence
o Transport and Telecommunications
o Power, Petroleum, Coal and other minerals
o Banking, Insurance and financial services
 Non- Strategic Sector: In this sector, CPSEs will be privatised, otherwise shall be closed.
37. Methods of Disinvestment:
 Initial Public Offering (IPO) - offer of shares by an unlisted CPSE or the Government out
of its shareholding or a combination of both to the public for subscription for the first time.
 Further Public Offering (FPO) - offer of shares by a listed CPSE or the Government out of
its shareholding or a combination of both to the public for subscription.
 Offer for sale (OFS) of shares by Promoters through Stock Exchange mechanism -
method allows auction of shares on the platform provided by the Stock Exchange;
extensively used by the Government since 2012.
 Strategic sale - sale of substantial portion of the Government share holding of a central
public sector enterprise (CPSE) of upto 50%, or such higher percentage as the competent
authority may determine, along with transfer of management control.
 Institutional Placement Program (IPP) - only Institutions can participate in the offering.
 CPSE Exchange Traded Fund (ETF) - Disinvestment through ETF route allows
simultaneous sale of GoI's stake in various CPSEs across diverse sectors through single
offering. It provides a mechanism for the GoI to monetize its shareholding in those CPSEs
which form part of the ETF basket.
******

ECONOMY
(Revision Notes)
CHAPTER 7: TAXATION OF INDIA
1. Introduction: Tax is a compulsory levy payable by individuals/corporations to the government

without any corresponding entitlement to receive a direct quid pro quo from the government +
Non-redeemable which means that it cannot be repaid back from the government + The authority
of the government to levy tax in India is derived from the Constitution of India, which allocates
the power to levy taxes to the Central and State governments + All taxes levied within India need
to be backed by an accompanying law passed by the Parliament or the State Legislature.
2. Principles of Taxation: It must be (a) equal/proportionate to income, (b) must be certain in
nature, (c) must provide convenience of paying and (d) should be based on economy principle.
3. Important Terms associated with Taxation
 Tax Base: Refers to the goods, services and incomes on which tax is imposed. Example: In
the case of income tax, the tax base is taxable income.
 Tax Incidence vs Tax Impact: Both are same in the case of direct tax while different in the
case of indirect tax.
Parameter Direct Tax Indirect Tax
Tax Incidence: Point from where government collects On the On the seller
tax (Event of tax imposition) Assesse
Tax Impact: Point where the burden falls (after-effect On the Customer/Buyer
of tax imposition) Assesse
 Tax Shifting: When incidence of a tax differs from the impact of the tax, it is tax shifting.
 Tax Buoyancy: Explains the relationship between the changes in government‘s tax revenue
growth and the changes in GDP + Refers to the responsiveness of tax revenue growth to
changes in GDP + It largely depends on size of the tax base, friendliness of the tax
administration, reasonableness and simplicity of the tax rates.
 Tax Elasticity: It refers to changes in the tax revenue in response to the changes in tax rate.
 Tax planning: It refers to financial planning for tax efficiency-> aims to reduce one‘s tax
liabilities and optimally utilize tax exemptions, tax rebates as much as possible.
 Tax Avoidance: It is legally reducing one‘s taxable income + Minimising tax liabilities using
exemptions and tax laws-> It usually happens at tax planning stage.
 Tax Evasion: It is the wilful and illegal evasion of taxes by individuals, trusts and
corporations by misrepresenting their financial state of affairs + Includes practices like
dishonest tax reporting, declaration of less income than amount actually earned etc.
 Tax Havens: It is a jurisdiction which has very low tax rates (varies from 2% to as low as
0.02%) + It is done by countries primarily to increase foreign investment and cash flow in
their economy.
 Tax Terrorism: Undue exercise of power by tax authorities to levy taxes using legal or
extra-legal means.
 Base Erosion and Profit shifting (BEPS): It is a tax evasion mechanism used by various
MNCs to artificially shift profits from countries with high taxation rates (such as USA and
European countries) to countries that have low or no taxes (such as Bahamas and Cayman
Island) + The BEPS initiative is an OECD initiative, approved by the G20, to identify ways
of providing more standardised tax rules globally + India has ratified the Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting ("Multilateral Instrument" or "MLI") - outcome of the OECD/G20 Project to tackle
BEPS.

ECONOMY
(Revision Notes)
 Round Tripping: Money that leaves the country through various channels and makes its way
back into the country often as foreign investment. This mostly involves black money and is
allegedly often used for stock price manipulation.
 Pigouvian taxes: It is a tax on a market transaction which creates a negative externality,
borne by individuals not directly involved in transaction. Examples include tobacco taxes,
sugar taxes, and carbon taxes + It is named after Arthur C. Pigou.
 Sin tax: A sin tax is taxing something like cigarettes or gambling which society sees as
immoral or at least bad for society.
While both Sin tax and Pigouvian tax are forms of taxes that address negative externalities
associated with certain goods or behaviors, they are not exactly the same.
1. Sin Tax:
 Purpose: The primary purpose of a sin tax is to discourage the consumption of goods or
engagement in activities that can have adverse effects on individuals or society. Common
examples include taxes on tobacco, alcohol, and sugary beverages.
om
 Revenue Use: While generating revenue is a secondary goal, the main emphasis is on
discouraging the consumption of "sinful" goods.
2. Pigouvian Tax:
l.c
 Purpose: The primary purpose of a Pigouvian tax is to internalize the external costs by
making the price of the good or service reflect its true social cost. This encourages
ai
producers and consumers to consider the full social consequences of their actions.
m
 Revenue Use: While generating revenue is a potential outcome, the primary goal is to
align private costs with social costs and improve overall economic efficiency.
1g
 Inverted Duty structure: It arises when the taxes on output or final product is lower than the
taxes on inputs + Take an imaginary situation of the tyre industry - the tax rate on natural
62
rubber (input) purchased is 10% whereas the tax rate on rubber tyre is 5%. Here since the tax
rate on input is higher than that on the finished good, there is an inverted tax structure +
77
Discourages domestic manufacturing.

 Tobin Tax : The Tobin tax is a duty proposed on spot currency trades to penalize short-term
80
currency trading in order to stabilize markets and disincentive speculation.

 Tax to GDP ratio: It is used as a measure to determine how well the government controls a
country's economic resources + It measures the size of a country's tax revenue compared to
nt
its GDP + Higher the tax to GDP ratio, the better the country's financial position. It denotes
ha
the government's ability to fund its expenditures + A greater tax to GDP ratio indicates that
the government can cast a wider fiscal net + For the tax/GDP ratio to decrease either the tax
collection should decrease or GDP should
as
increase.
 Double Taxation Avoidance Agreement
pr
(DTAA): Tax treaty signed between two or more

countries so that tax-payers in these countries can
avoid being taxed twice for the same income +
Applies in cases where a tax-payer resides in one
country and earns income in another + Can either
be comprehensive to cover all sources of income
or be limited to certain areas such as taxing of
income from shipping, air transport, inheritance,
etc.
o DTAAs are intended to make a country an attractive investment destination by providing
relief on dual taxation. Such relief is provided by exempting income earned abroad from

ECONOMY
(Revision Notes)
tax in the resident country or providing credit to the extent taxes have already been paid
abroad. DTAAs also provide for concessional rates of tax in some cases.
 Advanced Pricing Agreement: It is an agreement between the tax authority and MNC on
the appropriate transfer pricing methodology for a certain period of time. Under this, the
transfer price is fixed based on the ―Arm‘s length principle‖.
o This principle states that the transfer price must be closer to the price at goods and
services are transacted between two unrelated entities.
4. Laffer Curve: It establishes correlation between direct tax rates and tax revenues and explains
that when tax rates are low, raising them would increase tax revenue + However, there is an
optimal rate of tax at which tax revenues are maximize and beyond this rate it causes
disincentives to produce so that tax revenue start falling.
5. Different methods of taxation on goods
 Ad Valorem: If tax is levied as % of
the value of the goods regardless of
number of units produced or sold +
Example: 10% custom duty on gold
value.
 Specific Duty: If tax is levied at a flat
rate per unit of goods. Example: Excise
duty on petrol and liquor products.
6. Methods of Taxation
 Proportional Taxation: Tax levied as
a percentage of tax base irrespective of
size of tax base at a uniform rate + Since the tax is charged at a flat rate for everyone, it is
also called a flat tax.
 Progressive Taxation: Higher tax rate on high income + It results in redistribution of income
from rich to poor + Example: Income tax in India.
 Regressive Taxation: If the tax rate decreases with increase in tax base + Higher tax rate on
poor person (Indirect taxes come into it) + Such tax does not take into account the ability to
pay + Example: Indirect taxes such as VAT, GST.
 Degressive taxation: A type of progressive tax in which the tax rate increases with increases
in taxable income and then becomes constant.
 Retrospective Taxation: It allows a country to pass a rule on taxing certain products or
services and charge companies from a time behind the date on which the law is passed.
7. Cess and Surcharge
 Cess: Imposed by the central government, it is a tax on tax, levied by the government for a
specific purpose + Tax amount collected should not be used for purposes other than purposes
for which it is meant for + Computed on (Tax + Surcharge) + Examples include Education
cess and Krishi Kalyan cess.
 Surcharge: It is a tax additionally levied as a percentage of existing tax amount, but without
any specific purpose + It is levied if size of tax base exceeds a certain threshold.
 The centre need not share both Cess and Surcharges with the states.
 Differences: Surcharge can be kept with Consolidated Fund of India (CFI) and spent like any
other taxes. But, Cess should be kept as a separate fund after allocating to CFI and should be
spent only for specific purpose.
8. Types of Taxes: Direct and Indirect Taxes

ECONOMY
(Revision Notes)
9. Direct Taxes: It is a type of tax where the impact and the incidence fall under the same category
+ It is paid directly by individual to the entity that has imposed the payment + Central Board of
Direct taxes (CBDT) looks after administration of laws related to direct taxes.
 Merits: Progressive in nature, Certainty of taxation, rises with rise in economy, can be used
to enhance savings and investment.
 Demerits: Very narrow base, high litigation, high rate of taxation curtails economic
activities.
 Taxes abolished in Past year: Dividend distribution tax, Wealth tax, Banking Cash
Transaction tax.
Type Applied by Union government Applied by state government
Corporation tax (levied on companies), Agriculture income tax,
Min Alternate tax (levied on 0 profit Professional tax (Ceiling of max
On Income companies), Income tax on income 2500 per year)
except agriculture, Capital Gains tax
(CGT)
Securities Transaction Tax (STT), Land Revenue,
On Assets Commodities Transaction Tax Stamp/Registration duty.
Property tax in urban areas.
On Expenditure Fringe Benefit Tax, Gift Tax
 Corporation tax in India: It is imposed on company's net income or profit from its
operations + It is payable by both public and private companies registered in India under
Companies Act 1956 + Minimum Alternate Tax (MAT) does not apply to such companies.
o Corporate tax rate to be 22 per cent without exemptions; MAT not applicable on such
companies + Effective corporate tax rate after surcharge and cess to be 25.17 percent +
Local companies incorporated after October 2019 and till March 2023, will pay tax at 15
percent(if not taking any exemptions). The effective tax rate for these companies shall be
17.01% inclusive of surcharge & cess.
 Income tax: Levied on individual income; calculated as per the provisions of Income Tax
Act, 1961 and is directly paid to the central government on an annual basis + The government
announced a new regime of income tax (optional) in Union Budget 2020-2021.

ECONOMY
(Revision Notes)
o Who should pay Income Tax in India? - Self-employed individuals, Salaried

individuals, Hindu Undivided Family, Body of individuals, Association of Persons,
Corporate firms or companies and local authorities.
o All residents are taxable for all their income, including income outside India. Non-
residents are taxable only for the income received in India or Income accrued in
India.
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 l.c
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Capital Gains Tax: Tax on the income arising from the sale of capital assets + It can be
either long term or short term.
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o Capital Asset: Machinery, land, building, cars, homes, shares, bonds, art, businesses,
patents, trademarks, leasehold rights, jewellery and farms are some of the examples of
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capital assets.
o The capital gain is considered as Long-Term Capital Gain (LTCG) if
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 Real Estate Property is sold after 2 years of holding period

 Debt funds or any other asset with a holding period of more than 3 years
77
 Equity investments/equity mutual funds with a holding period of more than 1 year
Tax Type Condition Tax applicable
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Long-term Except on sale of equity shares/ 20%

capital gains tax units of equity oriented fund
Long-term On sale of Equity shares/ units 10% over and above Rs 1 lakh
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capital gains tax of equity oriented fund

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Short-term capital When securities transaction tax The short-term capital gain is
gains tax is not applicable added to your income tax return
as
and the taxpayer is taxed

according to his income tax slab.
Short-term capital When securities transaction tax 15%.
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gains tax is applicable

 Equalisation Levy/Google tax:
Imposed in 2016, levy applied on
the payments made to a non-
resident by the Indians for
advertising on their platform +
Restricted to online
advertisement services + India
become the first country to
implement equalization levy +

ECONOMY
(Revision Notes)
Expanded to Digital Services Tax.

 Digital Services Tax (DST): Introduced in April 2020 + 2 per cent tax on non-resident e-
commerce players (digital service providers) with a turnover of Rs 2 crore + These services
include digital platform services, software as a service, data-related services, and several
other categories including e-commerce operations.
 Global Minimum Corporate Tax: Global Minimum Corporate Tax (GMCT) was
introduced to reform the international tax scenario to prevent cross border tension and trade
wars. In this system of taxation, countries would be taxed not only where they are
headquartered but also where they operate.
 Working of GMCT
o Two ideas have been proposed for taxing the Multinational corporations having global
sales of $868 million that would be subject to the global minimum tax rate.
 Taxes at a minimum and subject to rules: Governments could still establish
whatever local corporation tax rate they wanted, but if companies pay lower rates in
one nation than in another, their home governments may "top up" their taxes to the
15% minimum, negating the benefit of transferring earnings.
 Reallocation of a larger portion of profit to market jurisdictions: Allows nations
where revenues are earned to tax the largest multinationals' so-called excess profit –
defined as profit exceeding 10% of revenue – at a rate of 25%.
o Timeline: Countries must enact the agreement into law by 2022 in order for it to take
effect in 2023.
o Countries that have enacted national digital services taxes in recent years (for example,
the Indian government's equalisation levy) would be required to repeal them.

ECONOMY
(Revision Notes)
 Minimum Alternate Tax (MAT): It is levied on zero profit companies (taking advantage of
tax exemptions laws), introduced in 1996 + It is applicable on all entities operating in India
irrespective of Indian or foreign ownership + Computed @15% on the book profit +
Exceptions: Life insurance companies and shipping companies liable for tax on tonnage.
 Dividend Distribution tax: Dividend constitutes income in the hands of the shareholders
which should be subjected to income tax + Any domestic company distributing dividend is
required to pay tax at the rate of 15% on the gross amount of dividend + Budget 2020-21
removed DDT and adopted the system in which dividend shall be taxed only in the hands of
recipients at their applicable rate.
 Buyback Tax: Tax levied on companies undertaking buyback of their shares.
 Presumptive taxation: Self-employed people pay x% of their gross receipts as income tax.
 Advance tax payment: Paying tax in advance instalments on quarterly basis if tax liability is
more than Rs. 10,000 in a financial year.
 Securities Transaction tax: Tax levied on selling and buying of securities; taxable securities
include equity, derivatives, equity oriented mutual fund etc + It is free of any surcharge.
 Fringe Benefits Tax: It is a form of tax that companies paid in lieu of benefits they offered
their employees in addition to the compensation paid to them; it was abolished in 2009.
 Commodities Transaction Tax: It is levied on transactions done on the domestic
commodity derivatives exchanges + First introduced in Union Budget 2008-09 + It is charged
on the buyer and seller of exchange-traded non-agricultural commodity derivatives in India +
Non-farm items like metals and energy products are among the commodities covered by it.
 Angel Tax: It is the income tax payable by start-ups on capital raised via the issue of shares.
To make sure that the money coming in was genuine and to minimise fraud.
10. Indirect Taxes: These are taxes imposed by the government on a taxpayer for goods and
services rendered + The incidence and impact of indirect taxes not necessarily fall on the same
entity (seller pays indirect taxes to the government, and the liability is transferred to the consumer)
+ Central Board of Indirect Taxes and Customs (CBIC) is the nodal national agency responsible
for administering Customs, GST, Central Excise, Service Tax and Narcotics in India.
 Merits: Easy to collect, has very wide base, highly elastic in nature, equitable contributions->
basic necessities attract lower rates of tax while luxury items are charged at higher tax rates,
thereby ensuring that contributions are equitable, growth-oriented (encourage consumers to
save and invest), difficult to evade.
 Demerits: Regressive in nature, leads to inflation, not visible to individual, not industry
friendly-> Taxes are levied on raw materials which in turn increases the cost of production,
not allowing industries to expand as their competitive capacity is restricted.
 Different Types of Indirect taxes in India: Service tax, Excise duty, value added tax, sales
tax, stamp duty, customs duty, local body tax such as octroi and Entertainment tax (Pre-GST)

ECONOMY
(Revision Notes)
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11. Indirect Taxes in a nutshell
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Tax Who Levies Revenue goes to Nature Incidence Levied on
Custom Duty Central Centre Govt Regressive Shifts to Export and
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Government Final Import
Consumer
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Excise Central Both Centre and Regressive Shifts to Domestically
Duty/CENVAT Government State Final Manufactured
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Consumer Goods
Service Tax Central Centre Govt Regressive Shifts to All Services
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Government Final
Consumer
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VAT State State Govt Regressive Shifts to Sale of

Government Final Goods in the
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Consumer States
12. Windfall tax
 A windfall is defined as an ―unearned, unanticipated gain in income through no additional
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effort or expense‖. This tax is levied by governments against certain industries when
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economic conditions allow those industries to experience significantly above-average profits.

 Windfall taxes are designed to tax the profits of the company that it derives from an external,
sometimes unprecedented events.
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 These profits cannot be attributed to something the firm actively did, like an investment
strategy or an expansion of business.
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 Governments typically levy a one-off tax retrospectively over and above the normal rates of
tax on such profits, called windfall tax
13. Goods and Services Tax (GST): Came into force via 101st Constitutional amendment act + it is
one indirect tax for whole country on the supply of goods and services, right from the
manufacturer to the consumer.

ECONOMY
(Revision Notes)
 Features of Goods and Services Tax (GST)

o It is an indirect tax on manufacture, sale and consumption of goods and services
throughout India that replaced many indirect tax laws that previously existed in India
o Destination-based tax-> Goods/services will be taxed at the place where they are
consumed and not at the origin.
o Integrated GST (IGST) -> It is levied on inter-state supply of goods or services; levied
and collected by centre; centre will then distribute IGST proceeds among the states.
o Import of goods/services deemed as supply of goods or services or both, in course of
inter-state trade thus attracting IGST + Import of goods attract BCD and IGST; Import of
services attract IGST.
o Exports are zero rated-> GST will not be levied on export of any kind of goods or
services.
o Reduce cascading effect: Credits of input taxes paid at each stage will be available in
subsequent stage of value addition, making GST essentially a tax only on value addition
at each stage.
o Cross utilization of credit: Credit of CGST
may be used only for paying CGST on output
and credit of SGST paid on inputs may be
used only for paying SGST.
o Compensation to states: The amendment
provides for compensation to states for loss of
revenue for five years.
o Dual GST: It would be a dual GST with the
Centre and States simultaneously levying tax
on a common tax base.
 Advantages: Easy compliance (online tax filing,
single tax), improved competitiveness, gain to
manufacturers and exporters, better control on
leakages, higher revenue efficiency, spur
economic growth (attracting foreign investments,
creation of more jobs), promote co-operative federalism, increasing resource of poor
consuming states.
 GST Tax Structure:

ECONOMY
(Revision Notes)
 Taxes subsumed under GST

Existing taxes to be merged in GST - 17 different taxes and 23 different cesses have been
fitted into GST. GST would replace the following taxes currently levied and collected by the
Centre:
Taxes levied and collected by the Centre State taxes that would be subsumed in GST
 Central Excise Duty;  State VAT;
 Duties of Excise (Medicinal and Toilet  Central Sales Tax;
Preparations);  Purchase Tax;
 Additional Duties of Excise (Goods of  Luxury Tax;
Special Importance);  Entry Tax (All forms);
 Additional Duties of Excise (Textiles and  Entertainment Tax (except those levied by
Textile Products); the local bodies);
 Additional Duties of Customs (commonly  Taxes on advertisements;
known as CVD);  Taxes on lotteries, betting and gambling;
 Special Additional Duty of Customs  State cesses and surcharges insofar as they
(SAD); relate to supply of goods or services.
 Service Tax;
 Cesses and surcharges insofar as they relate
to supply of goods or services.
 Laws enabled to Implement GST:
o Central GST Act, 2017
o Integrated GST Act,2017
o GST (Compensation to States) Act, 2017
o Union Territory GST Act, 2017
o GST Constitutional 101 Amendment Act, 2016
 Exceptions and Exclusions

ECONOMY
(Revision Notes)
Taxes on entertainments and amusements to the extent levied and collected by

a Panchayat or a Municipality or a Regional Council or a District Council
Exclusion shall not be subsumed under GST. The local bodies of States could continue
to levy such taxes.
Applicability of The GST shall be levied on all goods and services except alcoholic liquor for
GST human consumption
They are subjected to GST. However, it has been decided that five products,
Status of
viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and
Petroleum &
aviation turbine fuel would be kept out of the purview of GST in the initial
petroleum
years of implementation. GST Council shall decide the date from which they
products
shall be included in GST.
Status of Tobacco and tobacco products would be subject to GST. In addition, the
Tobacco and its Centre would have the power to levy Central Excise duty on these products.
products
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Real Estate GST is not applicable on real estate sector and electricity sector.
sector
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Electricity sector
 GST Council:
o Chairman: Finance Minister
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o Union Representation: 1/3rd Voting
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power, Representation of Union minister
of State for Finance or revenue
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o State representation: Nomination of

member by each state govt having
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legislature (UT-J &K, Delhi &

Puducherry), Selection of one of them as
77
Vice Chairman, 2/3rd Voting power.

o Functions: Decide GST rate, provide
compensation to states for their revenue loss, protect interests of Special Category states,
80
decide norms related to GST registration of Businessmen.

o If not a unanimous decision, then minimum 3/4th votes required to pass the proposal.
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o Quorum: Needed quorum of 50% of total membership for council meetings.

 GST Composition Scheme
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Small taxpayers can get rid of tedious GST formalities and pay GST at a fixed rate of
Meaning turnover. This scheme can be opted by any taxpayer whose turnover is less than Rs.
as
1.5 crore
The following conditions must be satisfied in order to opt for composition scheme:
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 No Input Tax Credit can be claimed+ cannot supply goods not taxable under
GST such as alcohol+ taxpayer has to pay tax at normal rates for transactions
(under the Reverse Charge Mechanism)+ taxpayer has to mention the words
Condition
‗composition taxable person‘ on every notice + taxpayer has to mention the
words ‗composition taxable person‘ on every bill+ CGST (Amendment) Act,
2018, a manufacturer or trader can now also supply services to an extent of ten
percent of turnover
 GST Compensation Cess

Parameters Action

ECONOMY
(Revision Notes)
Compensation  Allows the central government to levy a GST compensation cess on

fund supply of certain goods and services.
 50% of amount is shared b/w states in proportion to their total
Division of Cess revenue
 Remaining 50% is a part of the centre‘s divisible pool of taxes.
Release  Released at the end of every two months.
 Guaranteed compensation for any revenue shortfall below 14%
Provided for
growth (base year 2015-16) for the first five years ending 2022.
Legislation  GST (Compensation to States) Act, 2017.
 Compensation cess is levied on 5 products considered to be sin or
Others luxury goods-> SUV Vehicles are charged 50% of tax, of which GST
rate is 28% and compensation cess is 22%.
 GST Network (GSTN): It is a not for profit company created under Section 8 of Companies
act, 2013 + It provide IT infrastructure and services to central and state governments and tax
payers + There would be no manual filing of returns + It is owned hundred percent by
government-> Centre and states will have 50-50 ownership of GSTN.
 National Anti-Profiteering Authority (NAA/NAPA)
o Objective: To Check the profiteering arising out the reduction in GST taxes.
o Provided action: Reduce prices, Refund money with interest to consumers, Deposit
money to Consumer Welfare Funds at union & state level, Impose penalty upto 10% of
profiteered amount, Cancel registration
o Appeal: Lies to high court
 Glossaries associated with GST
o Reverse charge mechanism: In Case seller is not registered with GST Portal, buyer will
have to submit the GST.
o E-way bill system: If goods beyond a specific limit is travelling across the states, then the
transporter needs E-Way bills generated by GST portal.
 GST Appellate Tribunal
o It is the second appeal forum under GST for any dissatisfactory order passed by the first
appellate authorities.
o It ensures uniformity in the redressal of disputes arising under GST.
o It holds the same powers as the court and is deemed Civil Court for trying a case.
o Structure
 National Bench: National Appellate Tribunal is situated in New Delhi, constitutes a
National President (Head) along with 2 Technical Members (1 from Centre and State
each)
 Regional Benches: On recommendations of the GST Council, the government can
constitute (by notification) Regional Benches, as required. At present, there are 3
Regional Benches (situatedin Mumbai, Kolkata and Hyderabad) in India.
 Institutions
o Enforcement Directorate
 Has task of enforcing– Foreign Exchange Management Act, 1999 (FEMA) and
Prevention of Money Laundering Act, 2002 (PMLA).
 It also processes cases of fugitive/ fugitives from India under Fugitive Economic
Offenders Act, 2018.
o Financial Intelligence Unit

ECONOMY
(Revision Notes)
 The central national agency responsible for receiving, processing, analysing and
disseminating information relating to suspect financial transactions, money laundering
and related crimes
 FIU-IND is an independent body reporting directly to the Economic Intelligence
Council (EIC) headed by the Finance Minister.
o Central Board of Indirect Taxes and Customs and Central Board of Direct Taxes
 Both are a part of the Department of Revenue under the Ministry of Finance created
under the Central Boards of Revenue Act, 1963.
 The Central Board of Excise and Customs (CBEC) was renamed as the Central Board
of Indirect Taxes and Customs (CBIC) in 2018 after the roll out of Goods and
Services Tax (GST).
 CBIC deals with the tasks of formulation of policy concerning levy and collection of
Customs, Central Excise duties, Central Goods & Services Tax and Integrated GST,
prevention of smuggling.
 CBDT provides inputs for policy and planning of direct taxes in India and is also
responsible for the administration of direct tax laws through the Income Tax
Department.
 Tax Administrative Reforms Commission (TARC)- Parthasarathi Shome- proposal to
merge the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes
and Customs (CBIC).
14. Miscellaneous
 Ricardian equivalence: It is an economic theory that says that financing government
spending out of current taxes or future taxes (and current deficits) will have equivalent effects
on the overall economy + This means that attempts to stimulate an economy by increasing
debt-financed government spending will not be effective because investors and consumers
understand that the debt will eventually have to be paid for in the form of future taxes + The
theory argues that people will save based on their expectation of increased future taxes to be
levied in order to pay off the debt and that this will offset the increase in aggregate demand
from the increased government spending.
 Tax Inspectors Without Borders Initiative (TIWB): It is a joint initiative of the
Organisation for Economic Cooperation and Development (OECD) and United Nations
Development Program (UNDP) + It aims to support countries in building tax audit capacity
and skills with tax administrations in developing countries through a targeted, real time
‗learning by doing‘ approach + The secretariat of TIWB is located in Paris, France.
******

ECONOMY
(Revision Notes)
CHAPTER 8: MONETARY POLICY
1. Money: Money is a commodity accepted by general public as a medium of economic exchange.

2. Functions of Money: Medium of Exchange (Individual goods and services are priced in terms of
money and are exchanged using money) + Measure of value (used to measure and record the
value of goods or services) + Standard for Deferred Payments (Money is used as an agreed
measure of future receipts and payments in contracts) + Store of value.
3. Forms of money
 Metallic Money : Commodity money is that type of money that possesses intrinsic value on
its own, independent of any governing Body + Pieces of metals like gold, silver, bronze, and
copper came to be used as money in both ancient as well as current times. It can be classified
as metallic money.
 Paper Money: Paper money refers to the bank notes and government notes which are used as
money.
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 Plastic Money: It is used in reference to the hard plastic cards in place of actual bank notes.
They can come in many different forms such as credit cards, debit cards, etc.
 Fiat Money: Money which does not have any intrinsic value unlike commodity money + The
l.c
value of the currency, notes and coins is derived from the guarantee provided by the issuing
authority of these items.
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 Fiduciary Money: It is known for its value on the confidence that it will be commonly
m
considered as a mode of exchange. Examples of fiduciary money are bank notes, drafts,
cheques.
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 Legal Tender: They are also called legal tenders as they cannot be refused by any citizen of
the country for settlement of any kind of the transaction + Cheques drawn on savings or
62
current accounts, however, can be refused by anyone as a mode of payment + Hence, demand
deposits are not legal tenders.
 Cryptocurrency: It is a digital currency, which is an alternative form of payment created
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using encryption algorithms. Example, Bitcoin

 Virtual currency: It is a digital representation of value only available in electronic form.
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Example, awards/token in digital games

 Central bank digital currency (CBDC): These are digital tokens, similar to cryptocurrency,
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issued by a central bank. They are pegged to the value of that country's fiat currency.
4. Money Supply: The total stock of money in circulation among the public at a particular point of
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time is called money supply. (By public, it refers to the households, firms, local authorities,
companies etc.) + Public money does not include the money held by the government and the
as
money held as CRR with RBI and SLR with themselves by commercial banks.
5. Money Aggregates: Standard Measures of Money Supply
pr
 M0 (Reserve Money or High Powered Money): Total liability of the monetary authority of
the country + Calculation =Currency in circulation + Bankers‘ deposits with the RBI +
‗Other‘ deposits with the RBI +
 M1 (Narrow Money) : Currency with the public + Deposit money of the public (Demand
deposits with the banking system + ‗Other‘ deposits with the RBI).
 M2: M1 + Savings deposits with Post office savings banks.
 M3: (Broad Money) = M1+ Net Time deposits with the banking system
 M4: M3 + All deposits with post office savings banks (excluding National Savings
Certificates).

ECONOMY
(Revision Notes)
6. Money Multiplier (m): A money multiplier is an approach used to demonstrate the maximum amount
of broad money that could be created by commercial banks for a given fixed amount of base money
and reserve ratio + Higher the capital available with the banks, higher will be the money multiplier.
7. Investment Multiplier: It is the ratio of the change in national income to the initial change in
planned investment expenditure + It can also be defined as the ratio of the total increment in
equilibrium value of final goods output to the initial increment in autonomous expenditure is
called the investment multiplier of the economy + For instance, if a change in investment of Rs
2000 may cause a change in national income of Rs 8000, the multiplier (8000/2000) is 4.
8. Money Creation by the Banking System
 Currency Deposit Ratio: The ratio of money held by the public in currency to that they hold in
bank deposits. It reflects people‘s preference for liquidity.
 Reserve Deposit Ratio: Banks hold a part of the money people keep in their bank deposits as
reserve money and loan out the rest to various investment projects. Reserve money consists
of two things – vault cash in banks and deposits of commercial banks with RBI. Banks use
this reserve to meet the demand for cash by account holders.
9. Money laundering: Converting the black money into white money
10. Hawala: It is an illegal method of remittance of money. Hawala does not involve physical
movement of cash.
11. Monetary policy: It is considered as the most dynamic function of central bank (RBI) primarily
aimed at regulating size and cost of money in the economic system + It is brought out by central
bank (RBI) + It manage money and interest rates, controls inflation, savings, investment and
capital formation + RBI's Monetary policy responsibility is explicitly mandated under the
Reserve Bank of India Act, 1934 + It is announced bi-monthly (announced 6 times in a financial
year).
12. Inflation Targeting: Inflation targeting is a monetary policy framework in which a country's
central bank focuses mainly on keeping inflation within a certain range (maintaining price
stability while keeping in mind the objective of growth) + Amendment in RBI Act, 1934 in 2016
to provide the statutory basis for the implementation of Inflation Targeting + Headline CPI
(Combined) is the anchor + Target set by the government in consultation with the RBI + Target
of 4% +-2% till 31 Mar. 2026 + Failure to achieve Inflation target if average inflation rate is
more than the upper tolerance level or less than the lower tolerance level for any three
consecutive quarters.
13. Monetary Policy Committee: The committee will have six members. Of the six members, the
government will nominate three and other three from the RBI + The quorum for the meeting of
the MPC is four members. + Decisions will be taken by majority vote with each member having
a vote + Members of the MPC will be appointed for a period of four years and shall not be
eligible for reappointment. + The RBI Governor will chair the committee + The governor will not
enjoy a veto power to overrule the other panel members, but will have a casting vote in case of a
tie.
14. Monetary Policy Report: As per section 45-ZM of the RBI Act 1934, Once in every six months,
RBI shall publish a document called the Monetary Policy Report which will explain: Source of
inflation; and Forecast of inflation for 6-18 months ahead.
15. Primary goals of Monetary Policy
 Controlling inflation: The RBI tries to keep inflation within a target range of 2-6% by
adjusting interest rates and liquidity in the market. If inflation is too high, it can raise interest
rates. This makes borrowing more expensive -> reduce spending in the economy and lower
inflation.

ECONOMY
(Revision Notes)
 Economic growth: By keeping interest rates low to encourage borrowing and spending.
When people and businesses can borrow money at lower interest rates, they are more likely to
invest in new projects and expand their businesses, which can lead to economic growth.
 Financial stability: If the banking system is at risk of collapse, the RBI through monetary
policy can increase liquidity in the market by injecting money into the banking system.
16. RBI Monetary policy stances
 Neutral stance: It means policy repo rate may be unchanged/increased/decreased + It is
adopted when the policy priority is equal on both inflation and growth.
 Calibrated Tightening: It means interest rates can only move upward + Central bank may
not go for a rate increase in every policy meeting, but the overall policy stance is tilted
towards a rate hike.
 Accommodative/Expansionary/Dovish stance: It means injection of more funds into the
financial system + It is aimed at expansion in lending, investment and growth + Lowering
key interest rates and enhancing market liquidity are used to implement it + It is adopted
when growth needs policy support and inflation is not immediate concern.
 Contractionary Monetary policy: It means syphoning out of fund from the financial system
+ It is aims to decrease the money supply in an economy; at times also aimed to tame
inflation in long-term + Increase in key interest rates used to achieve this policy.
 Hawkish stance: It means contractionary stance aimed at checking inflation rise + It is
linked to statutory goals of inflation targeting the headline inflation.
17. Monetary Policy tools: Quantitative and Qualitative
Parameter Quantitative Tools Qualitative Tools
1. Bank Rate
2. Statutory Liquidity Ratio (SLR)
3. Cash Reserve Ratio
1. Marginal requirements
4. Open Market Operation (OMO)
2. Regulation of consumer credit
5. Repo rate
Tools 3. Rationing of Credit
6. Reverse Repo Rate
4. Moral Suasion
7. Liquidity Adjustment Facility
5. Direct Action
8. Standing Deposit Facility (MSF)
9. Long Term Repo
10. Market Stabilisation Scheme (MSS)
Direct in nature as any changes are
Indirect in nature as any change in these
directly impacting the consumers as the
Impact tools may not transmit to the consumer
case of requirement of a down
immediately or directly.
payment.
The reach of Quantitative tools is
The reach of Qualitative tools is
general.
selective. It can affect money supply in
Reach They affect money supply in the entire
a specific sector of the economy like
economy and all sectors be it housing
automobile or agriculture.
automobile, manufacturing- everything.
18. Quantitative tools of Monetary Policy
 Cash Reserve Ratio (CRR): Banks cash deposit with RBI [% of their NDTL], no minimum
and maximum limit, mandatory for all banks, stored in bank‘s vault or is sent to the RBI + It
is to be calculated with a lag of one fortnight, i.e., on the reporting Friday + Purpose: It
ensures the security of the amount; helps in keeping inflation under control + RBI does not
pay interest on deposits even if the deposits are in excess of minimum required by RBI->

ECONOMY
(Revision Notes)
Increase cost of deposits to the banking sector + Penalty for non-maintenance-> penal
interest will be levied for that day at the rate of 3% per annum above the Bank Rate.
 Statutory Liquidity ratio (SLR): Banks deposits in G-Sec, Cash, gold, T-bills, state
development loans and other securities notified by RBI, mandated under Banking regulation
act 1949 + Maximum limit: 40%+ Banks should report every alternate Friday + Mandatory
for all scheduled commercial banks, local area banks, Primary (Urban) co-operative banks
(UCBs), state co-operative banks and central co-operative banks + Banks earn returns on
money parked as SLR + The main objectives are to control the expansion of bank credit;
ensures the solvency of commercial banks.
Basis For Comparison CRR SLR
CRR is the percentage of The bank has to keep a certain
money which the bank has to percentage of their Net Time and
Meaning
keep with the Central Bank of Demand Liabilities in the form of
India in the form of cash. liquid assets as specified by RBI.
om
Cash Cash and other assets like gold and
Reserves in the
government securities viz. Central
Form of
and State government securities.
Effect in the economy. l.c

It controls excess money flow It helps in meeting out the
unexpected demand of any
ai
depositor by selling the bonds.
m
Maintained RBI Bank itself
with
1g
Regulates Liquidity in the economy Credit growth in the economy

Banks don't earn any interest on Banks can earn interest on SLR
Interest on Reserve
62
amount deposited in CRR

 Bank rate/Discount rate: Introduced by RBI Act, 1934. Since 2012: Bank rate % =
77
Marginal Standing Facility (MSF)%, rate at which RBI provides refinancing facilities to
commercial banks. In other words, when banks give loans, the RBI may refinance some of
these loans given by banks on the request of the concerned banks + Only Banks can borrow
80
from RBI + Duration is longer than Repo, mainly used to decide penalty.
 MSF (Marginal Standing Facility): A facility under which SCBs can borrow additional amount
nt
of overnight (short-term) money from the RBI by dipping into their SLR portfolio up to a limit
(currently 2% of their deposits) at a penal rate of interest + MSF is always fixed above the repo rate
ha
+ Provides safety valve against unanticipated liquidity shocks to the banking system.
 Corridor: The corridor for the daily movement in the weighted average call money rate is
as
determined by the MSF rate and the reverse repo rate.

 Repo rate: Introduced in 2000, decided by Monetary Policy + It is used for borrowing by
pr
banks, state government, Union government, non-bank + Collateral is G-Sec, T bill but not
from SLR + Duration is short term (one day, 7 days, and a maximum of up to 21 days) +
High repo rate -> access to money is expensive for banks and lesser credit will flow into the
system.
 Liquid Adjustment Facility: Consists repo rate and reverse Repo rate. Implies that by repo
it injects liquidity in banks and under reverse repo it absorbs liquidity from banks depends
upon whether banks have excess liquidity (R. Repo) or whether they are short of liquidity
(Repo) + RBI introduced it on recommendation of Narasimhan Committee on Banking
Sector Reforms (1998) + Banks are permitted to borrow only a certain percentage of its
NDTL + If Bank requires more funds, it can access through Marginal Standing Facility
(MSF).

ECONOMY
(Revision Notes)
 LAF Repo rate: Rate at which RBI lends by keeping G-sec as collateral. Policy rate to
control inflation. The following are eligible to participate in repo transaction:
o Any regulated entity.
o Any listed corporate.
o Any unlisted company, which has been issued special securities by the Government of
India, using only such special securities as collateral.
o Any All India Financial Institution (FIs) viz. Exim Bank, NABARD, NHB and Small
Industries Development Bank of India (SIDBI), constituted by an Act of Parliament and
o Any other entity approved by the Reserve Bank from time to time for this purpose.
 LAF reverse Repo rate: Rate at which clients deposit their surplus funds with RBI +
Collateral used is Government secs + Reverse Repo= Repo - X. Example: RBI increases
Repo rate to control inflation and reduces it to inject liquidity in economy.
 Long-term repo operations: Funds are provided at repo rate, but for longer duration (1 year
and 3 years) of appropriate sizes for up to a total amount of Rs 1 lakh crore at the
prevailing repo rate + It helps RBI to ensure that banks reduce their marginal cost of funds-
based lending rate, without reducing policy rates.
 Targeted Long Term Repo operations (TLTRO): Tenure is 3 years, interest rate is linked
to Repo rate, demands Banks to invest in bonds of corporates, mutual funds and NBFC.
 Open Market Operations: It is the simultaneous sale and purchase of government securities
and treasury bills by RBI + Objective is to regulate the money supply in the economy + RBI
carries out the OMO through commercial banks and does not directly deal with the public +
Purchase of security: increases money Supply, enhances inflation, cheap money policy +
Sell of security: Reduces money Supply, controlling the inflation, dead money policy.
 Operation Twist: RBI sells shorter duration G-sec (less than 1 year) and purchases longer
duration G-sec to reduce bond yield on long term, make borrowing cheaper, make corporates
to invest in economy.
 Market Stabilization Scheme (MSS): It is intervention by the RBI in 2004 to withdraw
excess liquidity by selling government securities in the economy + These securities are
owned by the government though they are issued by the RBI + The securities issued under
MSS are purchased by financial institutions.
 Standing Deposit Facility (SDF) scheme: It is first recommended by Urjit Patel committee
report in 2014 + It is a remunerated facility that will not require the provision of collateral for
liquidity absorption.
 Quantitative easing (QE) : It refers to increasing the system's money supply. This occurs
when the Central Bank creates new money and spends it on asset purchases. These asset
purchases add new money to the system. It is one of the monetary policies in which a central
bank purchases government securities or other securities from the market in order to lower
interest rates and increase the money supply.
IF Increase/ Liquidity in Inflation Monetary policy
Decrease Market
CRR/SLR/Repo/Rev Increases Decreases Decreases Dearer/Tight
erse Repo/Bank Rate Monetary Policy
CRR/SLR/Repo/Rev Decreases Increases Increases Accommodative/
erse Repo/Bank Rate Easy/
Expansionary
monetary policy

ECONOMY
(Revision Notes)
19. Qualitative tools of Monetary policy: They are direct and specific in nature + It include
persuasion by RBI to make commercial banks discourage or encourage lending done through
moral suasion.
 Moral suasion: Appealing to Banks to give credit to specific sectors. Example: RBI
persuades Banks to open branches in rural area, passing interest rate to customers + It is not a
statutory obligation + RBI may request commercial banks not to give loans for
unproductive purpose which doesn‘t add to economic growth but increases inflation.
 Direct action: taking action against the erring Banks, in 2019, RBI asked Banks CEO to
return previously paid salary if engaged in scam.
 Loan to Value(LTV): Mandate LTV for home loan, auto loan, gold loan etc. Like not
allowing lending more than x% of collateral.
 Selective Credit Control: Priority Sector lending, relaxing down EMI during Corona.
 Rationing of credit: It is done by regulating the purposes for which loans are given among
the various member banks + Priority sector should be given preference in lending loans +
Under it, RBI directed banks since 1969 that they must give at least 40% of their total credit
at any given point of time to priority sectors.
20. Monetary policy transmission: It is the process by which the central bank's policy action is
transmitted in order to achieve the ultimate goals of inflation and growth + Channels of
transmission-> Interest rate, Credit, exchange rate and asset price.
21. Bond Yield and Bond Price: Yield is the amount of return that an investor will realize on a
bond. If the investor holds the bond to maturity, he will be guaranteed to get the principal amount
back plus the interest. The bond prices and yields generally move in opposite directions. This is
because, as a bond‘s price increases, its yield to maturity falls.
 Bond Yield is inversely proportional to the Bond Prices and directly proportional to the
Interest rate it offers.
22. Monetary Policy Trilemma: Trilemma is a term in economic decision-making theory.
However, only one option of the trilemma is achievable at a given time, as the three options of
the trilemma are mutually exclusive. These options include:
 Setting a fixed currency exchange rate
 Allowing capital to flow freely with no fixed currency exchange rate agreement
 Independent monetary policy
23. Impacts of tight Monetary Policy by US Federal Reserve
 It implies Central Bank is trying to reduce demand for money and limit pace of economic
expansion.
 It is undertaken when an economy is accelerating too quickly or inflation is high and usually
involves increasing interest rates.
 Raising interest rates can discourage investment and depress asset prices which could lead to
capital flight by the investors. It is also known as ‗Taper Tantrum‘.
 If the interest rates in US increase, the spread between US and Indian government bonds will
narrow which will lead to global funds pulling money out of Indian G-secs.
 The reduction in funds infused by Fed and increase in fed funds rate will impact the
availability and increase the cost of overseas finance for Indian companies. The indirect
impact is of a reduction of foreign portfolio flows in to Indian equity and bond markets.
 The US Fed hawkish stance will strengthen the US Dollar as interest rates of dollar
denominated securities begin moving higher, resulting in depreciation of Indian rupee.
 The difference between interest rates of India and the US narrows which can make India less
attractive for currency trade.

ECONOMY
(Revision Notes)
CHAPTER 9: INFLATION
1. Introduction: It is the general rise in the prices of goods and services in an economy over a
period of time + Rate of inflation = (Prices in current year/ Prices in base year) * 100 + Inflation
is measured ‗point-to-point‘ (Example: January 1 to January 1 of two consecutive years).
2. Causes of Inflation
 Demand pull inflation: It is caused by overall increase in demand for goods and services +
Too much money chasing too few goods + Major reasons are increase in money supply,
economy close to full capacity, increase in exports which undervalues rupee, Aggregate
demand for a good or service overtakes aggregate supply + Expansionary fiscal and monetary
policies, black money, increase in disposable income.
 Cost-Push inflation (Supply-shock inflation): It occurs when firms respond to increase in
factor input costs by increasing prices in order to protect their profits + Major reasons are rise
in labor cost, rise in raw material price, fall in exchange rate and increase in indirect taxes,
om
declining productivity + supply side pressure. For example, Brent crude prices crossed
$65 per barrel in May 2021, which is more than double of 2020.
 Monetary inflation: It is caused by oversupply of money in an economy + This theory is
promoted by Monetarist school of economics.
l.c
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m
1g
62
77
80
nt
ha
3. Measures to check inflation

 Measures by Government: Cutting down the indirect taxes and increasing of direct taxes,
as
Technological improvement to enhance the efficiency, Upscaling the production or import of

the items.
pr
 Monetary policy: Increasing Repo rate and CRR, undertaking Open market operations
(OMOs) to reduce the money Supply.
 Usage of CPI by RBI: Used to determine the Monetary policy, CPI head inflation or CPI
combined is taken by RBI.
4. Measurement of Inflation
Calculating Base
Indices Utility Additional Information
Authority year
Determination of  RBI uses CPI-C as
CPI- Combined Dearness Allowance, sole inflation
NSO 2012
(CPI-C) understanding the measure for
real values of monetary policy.

ECONOMY
(Revision Notes)
salaries, Pension and  908 items (448 for

wages. rural and 460 for
Urban)
Used for wage
indexation in
CPI-IW Labour Bureau, organized sector and
(Industrial Ministry of 2016 government jobs,
workers) Labour also used for price
variation clause in
business contract.
Determining Data collected in 600
CPI- Labour Bureau,
minimum wages and villages with a monthly
AL(Agricultural Ministry of 1986-87
those for jobs under frequency and three
labourers) Labour
MGNREGA weeks‘ time lag.
Determining
Labour Bureau,
CPI- RL (Rural minimum wages and
Ministry of 1986-87
labourers) those for jobs under
Labour
MGNREGA
Office of
Economic
Whole Sale
advisor, DIPP, Measurement of
Price Index 2011-12
Ministry of headline inflation
(WPI)
Commerce and
Industry
5. Consumer Price Index (CPI): It measures the average change of prices paid by final consumers
for a basket of goods and services + CPI = (Weighted price for current year/ Weighted price for
base yr) * 100.
 Recent changes
o CPI (Rural, Urban and Combined) are published at all India as well as state wise levels.
o Base year changed from 2010 to 2012.
o Number of Items: 448 (Rural) and 460 (Urban).
o Weight of Core group increased from 42.9% to 47.3%.
o Increase in number of groups-> Pan, tobacco and intoxicants which was a subgroup under
‗Food, beverages and Tobacco‘ made as a separate group.
 Significance of CPI
o As an economic statistic, the Consumer Price Index measures the inflation experienced by
the end customer.
o It is also a gauge for a government's economic policy effectiveness.

ECONOMY
(Revision Notes)
o To account for price fluctuations in other economic indicators: Components of national

income, for example, could be changed using CPI.
o CPI (C) has been utilized as a nominal anchor for the conduct of monetary policy in India
since the RBI established Inflation Targeting.
o The Monetary Policy Committee is required to keep the CPI (C) in the range of 2% to
6%. As a result, the CPI is used to target inflation.
o In the National Accounts, CPI is also utilized as a deflator.
o The Consumer Price Index (CPI) is also used to calculate Dearness Allowance.
6. All India Inflation rates: National Statistical Office (NSO), Ministry of Statistics and
Programme Implementation publishes All India Inflation rates (on point to point basis i.e. current
month over same month of last year, e.g- , September 2023 over September 2022). Inflation rates
are provided based on Consumer Price Index (General)-for Rural, Urban and Combined and
Consumer Food Price Index (CFPI)- Rural, Urban and Combined (called Food Inflation).
7. Wholesale Price Index (WPI): It measures change in price of commodities supplied to
wholesale market; based on value of production adjusted for net imports. + Issued by Office of
economic adviser, DPIIT, Ministry of commerce & Industry
 Features: It captures inflation closest to producers + It does not capture price inflation in
services + Headline inflation measured through WPI + It is measured year-on-year basis +
Indirect taxes are excluded.
 Categories: It consists of 3 categories (in decreasing order of weight): Manufacturing->
Primary articles-> Fuel and power.
Major Group Weights No. of Items No. of Quotations

2004-05 2011-12 2004-05 2011-12 2004-05 2011-12
All Commodities 100.0 100.0 676 697 5482 8331
Primary Articles 20.12 22.62 102 117 579 983
Fuel & Power 14.91 13.15 19 16 72 442
Manufactured Products 64.97 64.23 555 564 4831 6906
 Recent changes to WPI (2017)

o Base year for All-India WPI revised from 2004-05 to 2011-12.
o Do not include indirect taxes in order to remove impact of fiscal policy.
o New ―WPI Food Index‖ to capture inflation in food items.
o Number of items increased to 697 from earlier 676.
o Decrease in weight of manufacturing items from 64.9% to 64.2%.
o Decrease in weight of fuel and power from 14.9% to 13.1%.
o Increase in weight of primary articles from 20.1% to 22.6%.

ECONOMY
(Revision Notes)
8. Why was CPI chosen instead of WPI?

 CPI was used as an inflation indicator in India from 2014, replacing WPI.
 CPI indicates the inflation rate at the consumer level which is a better indicator than the
Wholesale Price Index (WPI).
 CPI includes services such as medical care and education which are not included in WPI.
These services are essential to gauge the inflation rate.
9. Other measures of Inflation
om
 Consumer Food Price Index: Measure of change in retail prices of food products, NSO
releases CFPI for 3 categories->Rural, Urban and Combined + Calculated on a monthly basis
and base year is 2012.
l.c
 Producer Price Index: It measures average change in price of goods at the place of
production or when they enter production process + Only basic prices used and taxes, trade
ai
margins, transportation costs excluded + Government working on proposal to shift from WPI
m
to PPI.
 Housing Price Index: It measures price changes of residential housing + National Housing
1g
Bank (NHB) computes an index called NHB RESIDEX.

10. Types of Inflation
 Creeping inflation: Mild/ Moderate inflation around 3%, acts as driver of economic growth.
62
 Walking inflation: Rate is higher than creeping inflation, typically in the range of 3% to
10%.
77
 Trotting Inflation: When inflation rises to 10% or more.

 Galloping inflation: When prices rises at a double, triple digit rate per annum. (i.e, 20%,
80
100% in a year) + Also known as hopping inflation, jumping inflation and runaway inflation.
 Hyperinflation: Hyperinflation is large and accelerating with annual rates in million or even
nt
trillion, increase in prices may shoot up overnight. Example: Venezuela hyper-inflation

(2021).
ha
 Open inflation: It is a type of inflation that occurs due to factors that are outside the control
of a government or central bank; caused by external factors that affect the supply and demand
as
of goods and services in the economy.

 Stagflation: High inflation and stagnant economic growth leads to stagflation + Rise in
pr
prices while unemployment is high.

 Bottleneck/Structural inflation: Supply falls drastically and the level of demand remains at
same level + It occurs mainly due to supply-side hurdles.
 Skewflation: When there is a price rise of one or a small group of commodities over a
sustained period of time, without a traditional designation.
 Deflation: Sustained decline in the prices of goods.
 Reflation: Reflation is a monetary or fiscal policy by the central bank and government to
boost demand and thus increase the level of economic activity and combat deflation.
 Headline inflation: official rate of increase in prices that excludes no item in the basket +
Includes food and fuel as component + Consists both the demand side factors and supply side
factors such as food, fuel.

ECONOMY
(Revision Notes)
 Core inflation/Underlying inflation: Inflation after removing the price rise in the volatile
items - food and fuel (temporary effects on inflation are factored out) + Measure of long-term
price movement + Mainly reflects the demand driven inflation
 Asset inflation: Rise in prices of specific assets like housing, gold etc.
 Benign inflation: It means inflation is moderate not harmful i.e. under control. It gives room
to RBI to cut key policy rates for economic growth.
 Disinflation: Rate of inflation is low but there is rise in prices of goods.
 Imported Inflation: When the general price level rises in a country due to the rise in prices
of imported commodities, it is termed imported inflation. For example, increase in price of
crude oil, Gold etc.
 Shrinkflation: Consumers are generally price-sensitive so companies, during the periods of
high inflation, often reduce the size/weight of packaged food product rather than increase the
price of product. Consumers often donot notice the smaller reduction in size/weight of
packaged food product.
11. Structural inflation in India: Inflation in the Indian economy is due to supply side issues and
the inefficiencies inherent in production and distribution. For example,
 Lack of efficient supply and distribution network for agricultural commodities.
 Lack of post harvest infrastructure and facilities like cold storage, cold chain, refrigerated van
etc which help in reducing post harvest wastage.
 Price differential between farm gate and consumer due to unorganized retail sector
 This means that policy should not be focused on aggregate demand, but rather on overcoming
capacity constraints and productivity deficiencies.
12. Terms related to inflation
 Base effect: Relates to inflation in the
corresponding period of previous years, if inflation
rate was too low in previous year, it will lead to
higher inflation in this year.
 Philips curve: Describes relationship between
inflation rate and Unemployment rate +Inverse
relationship + Rate of inflation is indirectly
proportional to unemployment.
 Engel’s law: Engel's Law is an economic theory
put forth in 1857 by Ernst Engel, a German statistician. It states that the percentage of income
allocated for food purchases decreases as a household's income rises, while the percentage
spent on other things (such as education and recreation) increases.
 Inflationary gap: Difference between current level of real GDP and potential GDP when
GDP is at full employment. Exists because higher employment increases the demand leading
to inflation.
 Deflationary Gap: The shortfall in total spending of the government (i.e. fiscal surplus) over
the national income creates deflationary gaps in the economy. This is a situation of producing
more than the demand and the economy usually head for a general slowdown in the level of
demand.
 Inflation tax: Inflation erodes value of money and people who hold currency suffer in this
process.
 Inflation Spiral: When wages press price up and prices pull wages up.
 Greedflation: It refers to the situation where corporate greed drives inflation. Rather than a
wage-price spiral, it is a Profit-Price Spiral where companies exploit inflation by raising

ECONOMY
(Revision Notes)
prices excessively, going beyond covering their increased costs, and aiming to maximize their
profit margins. These further fuels inflation.
 Inflation Accounting: Due to inflation the profit of firms/companies get overstated. When a
firm calculates its profits after adjusting the effect of current level of inflation, this process is
known as inflation accounting.
 Inflation Premium: The bonus brought by the inflation to the borrowers is known as the
inflation premium.
 Hard landing: A hard landing is when the central bank of an economy hikes the rate so
aggressively to curb inflation that it leads to a recession.
 Soft landing: It is a cyclical slowdown in economic growth that avoids recession + A soft
landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an
economy from overheating and experiencing high inflation, without causing a severe
downturn.
13. Effect of inflation
 Value of currency: Price rise  lowers the value of currency
 Balance of Payments: Inflation  Decline in Exports  Depreciation of Currency 
Imports becomes costlier  Adverse impact on Balance of Payments
 Exchange Rate: Weakening of currency w.r.t foreign currencies-- Rise in price of imported
goods.
 Effect on Production: Favourable conditions for production, creates an incentive to enhance
the production + Investment increases in the short-term
 On creditors and debtors: Lenders (Bond holders) suffer and borrowers (Bond issuers)
benefit due to inflation.
 Gainers: Businessmen, Farmers, Shareholders, Debtors and Government.
 Losers: Wage earners, Pensioners, Students, Bondholders and Creditors.
14. Sacrifice ratio: It measures the proportionate reduction in growth rate due to reduction in
inflation. It indicate that if inflation comes down then growth rate will also fall. Suppose sacrifice
ratio is 5 then to reduce 2% inflation you should be ready to sacrifice 10% of GDP.
15. Measures to control Inflation and Deflation: Both inflation and deflation are bad for the
society. The measures or policies to tackle these problems include:
 Fiscal policy: Implemented by the Government
 Monetary policy: Implemented by the RBI (Increase/Decrease of policy interest rates)
16. Inflation Targeting in India: It is a central banking policy that revolves around adjusting
monetary policy to achieve a specified annual rate of inflation.
 Reserve Bank of India act, 1934 amendment: It provides for inflation target to be set up by
government in consultation with RBI once in every five years.
 Target: Govt has notified 4% CPI (Combined) inflation as the target for period from 1 April,
2021, to March 31, 2026, with upper tolerance limit of 6% and the lower tolerance limit of
2%.

ECONOMY
(Revision Notes)
CHAPTER 10: BANKING SYSTEM IN INDIA
PART 1
1. Introduction: A bank is a financial institution that accepts deposits from public and creates
credit + Lending activities is performed either directly or indirectly through capital markets.
2. Functions of a Bank
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3. History of Banking
 Pre-Independence Evolution
m
o Earliest evidence of Banking in India is found in Vedic Civilization-> loan deeds

1g
called rnapatra (or) rnalekhya.

o First bank was set up in Madras by officers of British East India company in 1683.
o First joint stock bank was Bank of Bombay (Established in 1720).
62
o First Presidency bank was Bank of Bengal (Established in 1806) with a capital of Rs. 50
lakhs.
77
o First Indian owned bank was Allahabad Bank, set up in 1865.

o In 1921, three presidency banks amalgamated to form Imperial Bank of India + It was
80
nationalized in 1955 and renamed as State Bank of India (SBI).

o Impact of Great Depression: Failure of small banks-> RBI act, 1934 was enacted and RBI
nt
was set up in 1935 to check bank failures + Commercial banks governed by Company
Law and permission of RBI not required for setting up of a new bank.
ha
 Post-Independence Evolution
o Banking Companies act, 1949 (later renamed as Banking regulation act) enacted to
as
increase the reach and growth of Banking sector.

o Bank consolidations: State Bank of India (SBI) became state owned in 1955 + On 19th July,
1969, Indira Gandhi government nationalized 14 largest private banks of the country having
pr
deposits of at least Rs. 50 crores + Six banks nationalized in 1980s included Punjab and Sind
Bank, Vijaya bank, Oriental Bank of India, Corporate bank, Andhra Bank and New bank of
India.
o Objective of nationalization: Extension of banking facilities on a large scale,
particularly in rural and semi-urban areas and for diverse other public purposes.
4. Banking system in India

ECONOMY
(Revision Notes)
 Banking regulation act: Empowers RBI to give license to open Banks, give permission to open
new branches, prescribe auditing and liquidity norms like CRR, determine merger and elimination
of Banks.
 Scheduled Commercial Banks: These are banks included in second schedule of the Reserve
Bank of India Act, 1934 + Fulfils conditions- having paid up capital and reserves more than 5
Lakh, it becomes eligible for debts/loans at the bank rate from the RBI; and, it automatically
acquires the membership of clearing house.
o Provisions: Deposits CRR money to RBI's office/ Vault, eligible to borrow/ deposit funds
in RBI's window operations.
o Types
 Public sector banks: State Bank of India and its associates and nationalized banks.
 Private sector banks: The Narasimham Committee-> RBI should permit the
establishment of new banks in the private sector provided they conform to the minimum
start-up capital and other requirements + Examples of Private banks are ICICI, HDFC bank
etc.
 Foreign banks in India: Many foreign banks from different countries set up their
branches in India during the 1990s—the liberalization period. A total of 27 new
foreign banks opened branches in India following the reforms of 1991.
 Regional rural banks: These are local level banking organizations created to serve
primarily the rural areas with basic banking and financial services + However, RRBs
may have branches set up for urban operations and their area of operation may
include urban areas too + Functions of RRBs include:
 Providing banking facilities to rural and semi-urban areas.
 Carrying out government operations like disbursement of wages of MGNREGA
workers, distribution of pensions etc.
 Providing Para-Banking facilities like locker facilities, debit and credit cards.
 Provisions of non-Scheduled banks: Can maintain CRR money in their Vault, RBI's
discretion in allowing for window operations, lots of cooperative banks.
 Co-operative banks: A financial entity which belongs to its members who are at the same
time the owners and the customers of their bank (Customer owned entities) + Democratic

ECONOMY
(Revision Notes)
Member Control - Members usually have equal voting rights, according to the cooperative
principle of ―one person, one vote‖ + Regulation - Co-operative banks in India are registered
under the States Cooperative Societies Act. The Co-operative banks are also regulated by the
Reserve Bank of India (RBI), 1934.
o Urban Cooperatives: Majority of these banks fall in the non-scheduled and single-state
category + Banking activities of Urban Cooperative Banks are monitored by RBI +
Registration and Management activities are managed by Registrar of Cooperative
Societies (RCS).
o Rural Cooperatives:
 Short term: State Cooperative Banks- They operate at the apex level in states;
District Central Cooperative Banks-They operate at the district levels; Primary
Agricultural Credit Societies-They operate at the village or grass-root level.
 Long term: State Cooperative Agriculture and Rural Development Banks
(SCARDS)- These operate at state- level + Primary Cooperative Agriculture and
Rural Development Banks (PCARDBS)-They operate at district/block level.
5. Function of Commercial banks
 Primary: Accepting deposit and Providing loans
 Secondary: Collection and payment of various items e.g. Cheques, Bills
 Purchase and sell of securities
 Remittance of money
 Purchase and sell of foreign exchange
 Acting as executors and trustees of wills
 Underwriting of shares
 Lockers facility
 Travelers‘ cheque and letter of credit
6. Types of Account
 Fixed deposit: higher interest rate than saving (around 6%), penalty on withdrawal, can
provide for collateral to secure loan.
 Current Account/Financial account: 0% interest, no penalty, mainly used by business
entity, provides overdraft facility, no restrictions on number of transactions in a day, higher
minimum balance compared to saving account.
 Savings Account: Lower interest rate (around 3%), no penalty on withdrawal, can't pledge as
collateral for loan.
7. Types of Deposits
 Demand Deposits: These are types of accounts that offer money accessibility on demand +
They offer lower interest rate as they are more used for day to day business + No penalty or
advanced notice required to withdraw money.
 Fixed Deposits: Banks accept deposits varying from 7 days to maximum of 10 years; interest
varies from bank to bank.
 Recurring Deposits: Banks accept a fixed amount from a customer in fixed instalment at
regular interval of time; period varies from 6 months to 10 years.
 Savings account Deposit: Most common and basic type of bank account + Interest earned is
generally low + It allows to deposit and withdraw funds at your convenience.
o Basic Savings Bank Deposit Accounts: No requirement of minimum balance +
Available for Economically weaker sections + Only one BSBDA account in one bank is
permitted + Jan Dhan accounts come under this.
o Basic Savings bank deposit accounts small scheme: Relaxed KYC and self-attested
required documents + Upper limit on credit is Rs. 1 lakh in a year + Account can be

ECONOMY
(Revision Notes)
opened for only 12 months-> further extension requires submission of documents.

o Normal saving Bank account: Minimum balance provisions vary from bank to bank +
Mostly help the salaried individuals, students etc.
8. Liquidity order: Currency> Demand deposits in Banks> Savings deposits in Banks> Term
deposits in Banks
9. Narasimhan Committee on Banking Reform
 Narasimhan Committee 1991: Establishment of 4 tier banking structure+ supervisory
functions over banks and financial institutions can be assigned to a quasi-autonomous body
sponsored by RBI+ phased reduction in SLR+ Phased achievement of 8% CAR+ Abolition of
branch licensing policy+ Proper classification of assets and full disclosure of accounts of
banks+ Deregulation of Interest rates+ Competition among financial institutions+ Setting up
Asset Reconstruction fund to take over a portion of the loan portfolio of banks.
 Narasimhan Committee Report II – 1998: Strengthening Banks in India (recommended the
merger of strong banks) + Narrow Banking (where weak banks will be allowed to place their
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funds only in the short term and risk-free assets) + Government should raise the prescribed
capital adequacy norms+ freedom for banks in its working and bank autonomy+ Review of
banking laws
10. Private Banks in India
l.c
 3 round for giving license for private Banks completed.
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 On tap License: 2016, RBI has made on tap license to open the private banks. No need to
m
wait for notification, can apply anytime for banking license.
 Conditions: Resident Indian individual, min 10 years of experience in NBFC, Initial
1g
shareholding in hands of Indians, willing to open 25% branches in rural India, investment of
minimum 500 crore capital, Not allowed for large industrial groups and NBFC.
62
 Performance of ON - Tap license: No applicant has been given license.

11. Foreign Banks
 Foreign banks in India: Can open branches/ subsidiary in India, can invest upto maximum
77
20% in public sector Bank, can invest upto 49% through automatic route and 74% by
approval in Private Sector Bank.
80
12. Regional Rural Banks

 Establishment: Set up in 1976 by provisions for RRB act 1976.Voting power is (Union
nt
govt+ State+ Sponsor bank) = 51% [Ownership structure: Central Govt (50%), State
government 15% and Sponsor Bank 35%]
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 Subjected to CRR, SLR norms but RBI could prescribe separate norms.
 PSL: 75%
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 Loan interest rate can't be more than prevailing lending rates of cooperative banks.
 Operation restricted to few areas. Can operate in urban areas too.
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 Regulator: RBI but immediate is NABARD.

13. Payment Banks
 It is a differentiated bank that will undertake only certain restricted banking functions which
include acceptance of deposits, payments and remittance services but cannot lend money.
 They can accept deposits restricted to Rs. 2 lakhs per customer, and can pay customers
interest on the money that is deposited.
 They cannot lend money to the people.
 They can offer financial products like loans, insurance, mutual funds, pension funds etc. by
partnering with other financial institutions and banks.
 They can issue ATM cards but cannot issue credit cards.

ECONOMY
(Revision Notes)
 75% of the deposits generated by payment banks must be invested in government securities
and the remaining maximum of 25% as deposits (including fixed deposits) with scheduled
commercial banks.
 They are required to maintain a minimum capital adequacy ratio of 15% of its risk weighted
assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed
by RBI from time to time.
 The minimum paid-up capital is Rs 100 crores.
 Minimum initial contribution to the paid-up equity capital shall at least be 40% for the first
five years from the commencement of its business.
14. Small Finance Banks: They will offer basic banking services, accepting deposits and lending to
unserved sections, including small business units, small and marginal farmers, micro and small
industries, and entities in the unorganized sector.
 They can issue both credit and Debit cards and can have their own ATM‘s.
 The maximum loan size and investment limit exposure to single and group obligators cannot
be more than 10 per cent and 15 per cent of its capital funds, respectively.
 75% of the credit to the priority sector.
 50% of their loan portfolio constitutes advances of up to Rs.25 lakhs.
 They can undertake financial services like distribution of mutual fund units, insurance
products, pension products, and so on, but not without prior approval from the RBI
 The initial paid-up voting equity share capital/net worth required to set up a small
finance bank, currently, it is Rs 200 crore.
15. Small Finance Bank and Payment Bank
Small Finance Bank (SFB) Payment Bank
Capital Small Finance Bank 6 at present: Airtel, India Post, FINO,
Examples (Punjab), Ujjivan (Kar), Utkarsh Paytm, Jio, NSDL.
(UP): Total 10
CRR, SLR, Same as Indian private banks Same as Indian Private Banks, but T& C
Repo, FDI for SLR
Conditions 25% Branches 25% access points
for Rural
area
Unserved Underserved Farmers, Remittance of migrant labors, low-income
Devised for Micro, Small industries households, unorganized sector, small
business
No Condition Can‘t accept NRI deposits, Fixed deposit,
Conditions
Recurring Deposit. Can accept only
for Deposits
Demand deposits under 2 Lakh/ customer.
75% in PSL, 50% loan lower than Can‘t give loan, Can only issue G-sec, T-
Loan
50 Lakh/Customer bill, and other government securities
Issuance of Allowed Debit and Credit Card Can issue only Debit card
Cards
16. Neobank:
 A neobank is a kind of digital bank without any branches. Rather than being physically
present at a specific location, neobanking is entirely online.
 Neobanks are financial institutions that give customers a cheaper alternative to traditional
banks.
 They leverage technology and artificial intelligence to offer personalised services to
customers while minimising operating costs.

ECONOMY
(Revision Notes)
 In India, these firms don‘t have a bank licence of their own but rely on bank partners to offer
licensed services. + That‘s because the Reserve Bank of India (RBI) doesn‘t allow banks to
be 100% digital yet. + The RBI remains unwavering in prioritising banks‘ physical presence,
and has spoken about the need for digital banking service providers to have some physical
presence as well.
17. On-Tap License for SFB: RBI allowed in 2019, promotes financial inclusion, allowed urban
cooperative banks to become SFB. Example: Centrum Small Finance Bank (SFB) is getting the
On-tap license and will take over the PMC assets.
18. Lead bank Scheme : Introduced towards the end of 1969, envisages assignment of lead roles to
individual banks (both in public sector and private sector) for the districts allotted to them + A
bank having a relatively large network of branches in the rural areas of a given district and
endowed with adequate financial and manpower resources has generally been entrusted with the
lead responsibility for that district + All the districts in the country have been allotted to various
banks + The lead bank acts as a leader for coordinating the efforts of all credit institutions in the
allotted districts.
19. Priority Sector Lending : The RBI mandates banks to lend a certain portion of their funds to
specified sectors, like agriculture, Micro, Small and Medium Enterprises (MSMEs), export
credit, education, housing, social infrastructure, renewable energy among others. + All scheduled
commercial banks and foreign banks (with a sizable presence in India) are mandated to set aside
40% of their Adjusted Net Bank Credit (ANDC) for lending to these sectors. + Regional rural
banks, co-operative banks and small finance banks have to allocate 75% of ANDC to PSL.
20. Priority Sector Lending Certificates (PSLCs): These are short-term accounting instrument to
enable banks to achieve the priority sector lending target and sub-targets by purchase of these
instruments in the event of shortfall
+ This also incentivizes surplus
banks as it allows them to sell their
excess achievement over targets
thereby enhancing lending to the
categories under priority sector +
The buyer would pay a fee to the
seller which will be market
determined + Scheduled
commercial banks (SCBs), regional
rural banks (RRBs), local area

ECONOMY
(Revision Notes)
banks (LABs), small finance banks and urban cooperative banks are eligible to buy and sell these
certificates.
21. External Benchmark Lending Rates (EBLR) : Replaced the MCLR system + These are the
lending rates set by the banks based on external benchmarks such as repo rate, 91 days Treasury
bill and 182 days Treasury bill + Every bank can choose any such external benchmark and link
its lending rates
BANKING SYSTEM –PART 2

1. Basel Norms: It is a global, voluntary, regulatory framework on bank capital adequacy stress
testing and market liquidity risks + Formulated by Basel committee on Banking supervision;
secretariat located at Bank of International settlement (BIS) in Basel, Switzerland.
 Parameters: They comprise parameters like Liquidity, Asset quality, Risk weight, Capital
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adequacy, Management, Earning, Supervision and system control (CAMELS).
 Important Terms related to Basel Norms
o Risk weighted assets: Assets of a bank weighted by their degree of credit risk + Used to
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determine minimum amount of capital should be held by banks to reduce risk of
insolvency.
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o Capital to risk weighted asset ratio (CRAR)/Capital adequacy ratio (CAR): It is an
important measure of ―safety and soundness‖ for banks because it serves as a buffer or
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cushion for absorbing losses.

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o Tier 1 capital: It is bank‘s core capital used when it needs to absorb losses without
ceasing its operations + It consists of Equity share capital, Reserves (excluding
62
revaluation reserve), Capital reserve arising due

to sale of assets.
o Additional Tier 1 capital: Perpetual bonds
77
which carry a fixed coupon payable annually

from past or present profits of the bank.
80
o Tier 2 capital: It is supplementary capital of

bank used to absorb losses if a bank is winding
nt
up its assets; less reliable than first tier + It

includes revaluation reserves, subordinate term debt, general provisions and hybrid
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capital instruments.
o Leverage Ratio: It is a relative amount of capital to total assets + Aimed to put cap on
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swelling of leverage in banking sector.

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ECONOMY
(Revision Notes)
o Capital Conservation Buffer: It ensure that banks maintain cushion of capital which can
be used to absorb losses during financial and economic stress.
o Counter Cyclical Capital Buffer (CCCB): It is aimed to increase capital requirements
in good times and decrease them in bad times.
o Liquidity Coverage Ratio: It refers to proportion of highly liquid assets held by
financial institutions to ensure their ongoing ability to meet short-term obligations + It is
calculated by dividing bank high quality assets by its total net cash flows over a 30-day
stress period + Urjit Patel committee recommended that India should move away from
SLR mechanism and adopt LCR.
o Net Stable Funding Requirement: The NSFR promotes resilience over a longer-term
time horizon by requiring banks to fund their activities with more stable sources of
funding on an ongoing basis. It is defined as the amount of available stable funding in
relation to amount of required stable funding.
o Provisioning Coverage Ratio: Provisioning Coverage Ratio (PCR) is essentially the

ratio of provisioning to gross non-performing assets and indicates the extent of funds a
bank has kept aside to cover loan losses.
 Basel 1/Basel Capital Accord (1988): It focused entirely on credit risk; established the
capital and risk-weighting structure for banks; minimum capital was set at 8% of risk-
weighted assets (RWA) + India adopted the Basel 1 guidelines in 1991.
 BASEL 2 (2004): Banks should keep a minimum capital adequacy requirement of 8% of risk
assets + Supervisory review and market discipline-> stricter disclosure requirements; Banks
must report their CAR, risk exposure, and other information to the central bank on a regular
basis + They were implemented in India from 2009.
 Basel 3 (2010): These guidelines were put in place in response to the 2008 financial crisis +
Minimum requirement of capital equity raised from 2% to 4.5% of total risk weighted assets
+ Overall Tier 1 capital requirement increase from current minimum 4% to 6% + The capital
adequacy ratio should be kept at 12.9 percent + Minimum Tier 1 and Tier 2 capital
ratios must be maintained at 10.5% and 2 percent of risk-weighted assets, respectively +
Capital conservation buffer of 2.5 percent + Counter-cyclical buffer should also be kept at 0-
2.5 percent + The leverage ratio must be at least 3%.

ECONOMY
(Revision Notes)
o Liquidity Coverage Ratio (LCR): Basel 3 requires banks to hold an amount of high-
quality liquid assets that are enough to fund cash outflow for 30 days.
o Net Stable Funding Requirement (NSFR): Basel 3 requires banks to hold enough stable
funding to cover duration of their long term assets + Banks must maintain a ratio of 100%
to satisfy the requirement + LCR assesses short-term (30-day) resilience while NSFR
assesses medium-term (1-year) resilience.
 Recent decisions: Implementation of BASEL 3 standards finalized in 2017, deferred by one

year to Jan 1st 2023 (earlier Jan 2022).
 Basel 3 and India
o Guidelines regarding capital required to be maintained by banks are issued by RBI.
o Indian Banks need to maintain minimum Capital Adequacy ratio (CAR) of 9% + Capital
Conservation Buffer in form of common equity at 2.5% of risk weighted assets.
o Indian Banks required to maintain 5.5% of Common Equity Tier 1 (CET1) as against
4.5% required under Basel 3.
Parameters Requirement by Basel 3 Requirement by RBI
Banks-9%
Capital Adequacy ratio 8% Small Finance Banks and
Payment Banks- 15%
Capital Conservation Buffer 2.5% 2.5%
CET 1 4.5% 5.5%
NSFR 100% 100%
DSIBs- 4%
Leverage Ratio 3%
Other Banks- 3.5%
Note: Capital Adequacy Ratio requirements required by RBI are stricter than Basel 3 norms.
 Domestically Systematically Important Banks: It means the bank is too big to fail->
significant disruption to essential services + Banks whose assets exceed 2% of GDP are
considered part of this group + As per the framework, from 2015, every August, the central
bank has to disclose names of banks designated as D-SIB + It classifies the banks under five
buckets depending on order of importance. ICICI Bank and HDFC Bank are in bucket one
while SBI falls in bucket three + Banks in bucket one need to maintain a 0.15% incremental
Tier-I capital from April 2018 + Banks in bucket three have to maintain an additional 0.45%.

ECONOMY
(Revision Notes)
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 l.c
Balance sheet of Bank: Assets: Loans, G.sec + Liabilities: CASA (Current Account, Saving
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Account and Demand draft), FDRD (fixed deposits and recurring deposits)
2. Coinage act
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 Provisions: Government prints Rs 1 note and all coins upto Rs 1000 denomination, RBI
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circulates as agent of government, RBI pays government currency notes.

 RBI: Public debt Manager of government, issues G- sec on behalf of government, primary
62
dealers, Banks, EPFO buys the G-sec, Unsold G- sec bought by RBI, if RBI doesn't have
cash then prints the cash and buys it.
3. RBI balance sheet
77
 Liabilities: Bank notes (2-2000) issues under RBI Act, coins and Rs 1 issued under coinage
act.
80
 Assets: American/ foreign government treasury bonds, gold coins, gold billions, Indian
government bonds, Rupee coins and 1 Rs note.
nt
 Note: RBI can print notes of difference between its assets and Liabilities.
4. All India Financial Institutions(AIFI)
ha
EXIM NABARD
Parameters NHB (1988) SIDBI (1990)
(Jan 1982) (Jul 1982)
as
GOI (Earlier RBI- GOI (Earlier RBI, but SBI & LIC ; earlier
Shareholder GOI minority but not sold to govt in 2019). 100% with IDBI.
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after 2018)
Regulatory Finance to Banks & Operates Credit
supervision of NBFCs for housing, Guarantee fund, Small
Cooperative Banks Monitors RESIDex, Enterprises
To promote & RRB, Refinance Development
Objective cross border to farmers, Fund(SEDF).
trade artisans, Operates Operates
Rural Infra. udyamimitra.in for
Development fund loans to small firms
( RIDF)

ECONOMY
(Revision Notes)
Common
Points for Don‘t accept deposits from public, Regulator is RBI, BASEL norms are applicable.
AIFI
5. Type of Borrowers
 Prime: Has capacity to pay.
 Subprime Borrower: Lacks the capacity to pay.
 Zombie lending: Weak banks giving new loans to subprime borrower.
6. Non-Performing Asset Related Definitions
 Standard Assets: Loan account where borrower is paying regularly.
 NPA: If loan principal or interest on an account is not paid for more than 90 days from its
due date + In case of agricultural loans if instalment/interest is due for two crop seasons for a
short duration crop, or one crop season for a long duration crop.
 Provisioning: Setting aside funds to cover losses against arising NPA.
 Gross NPA: Grand total of all NPA. PSB GNPA: 6 Lakh Crore, Private GNPA: 2 Lakh
Crore, Total: 8 Lakh Crore.
 Sectors with High GNPA: Industries > Agriculture > Service Sector> Personal Loans.
 Net NPA: GNPA – Provisioning
 Substandard asset: If loan account remains in NPA classification for 12 months.
 Doubtful: When loan account in substandard classification for 12 months.
 Loan write –off: When Bankers remove the loan amount from the asset side of the bank
balance sheet, reduces the NPA% of bank.
 Restructuring of Loans: Changing the principal/interest rate/tenure of loan.
 Stressed Assets: NPA + Loans Written – Off + Restructured Loans
 Provisioning Coverage Ratio (PCR) : It is essentially the ratio of provisioning to gross non-
performing assets and indicates the extent of funds a bank has kept aside to cover loan losses.
+ It is the percentage of bad assets that the bank has to provide for (keep money) from their
own funds.
 Twin Balance sheet challenge : The Twin Balance Sheet problem refers to the situation of
overleveraged companies on one hand and bad-loan-encumbered banks on the other.
 The Four Balance Sheet challenge : It includes the original two sectors - infrastructure
companies and banks, plus NBFCs and real estate companies.
7. RBI means to recover stressed assets
 Rectification: Conduct Asset Quality Review, find new partner to revive the project.
 Restructuring: Changing the tenure or loan interest amount, Schemes like 5/25 for
Infrastructure loans, Corporate debt structuring, Strategic debt restructuring loans, S4A
scheme for stressed assets announced for restructuring.
 Recovery: Checking the defaulter under Sarfaesi act-2002 and Insolvency and Bankruptcy
Code 2016.
8. Special Mention Accounts
 These are those assets/accounts that shows symptoms of bad asset quality in the first 90 days
itself or before it being identified as NPA.
 The classification of Special Mention Accounts (SMA) was introduced by the RBI in 2014,
to identify those accounts that has the potential to become an NPA/Stressed Asset.
 There are four types of Special Mention Accounts – SMA-NF, SMA 0, SMA1 and SMA 2.
 In the case of SMA -1, the overdue period is between 31 to 60 days. On the other hand, an
overdue between 61 to 90 days will make an asset SMA -2.

ECONOMY
(Revision Notes)
 But some ‗Special Mention‘ assets are identified on the basis of other factors that reflect
sickness/irregularities in the account (SMA -NF).
9. Debt Recovery Tribunals (DRTs): These are Tribunals which facilitate the debt recovery
involving banks and other financial institutions with their customers + These are governed by
provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, also
popularly called as the RDB Act. Thus, DRTs are statutory bodies + Act applies only to those
cases where the due amount is more than Rs. 20 lakhs or more + After adjudication, the DRT
issues order and Recovery Certificate, certifying the amount payable by the borrower. This is
executed by Recovery Officers as per the procedure for recovery of income tax
10. SARFAESI ACT 2002: The SARFAESI Act essentially empowers banks and other financial
institutions to directly auction residential or commercial properties that have been pledged with
them to recover loans from borrowers + This Act is effective only against secured loans where
banks can enforce the underlying security
 Provisions: Allows attaching of the mortgaging assets for non-payment of loan, case is
tried in debt recovery tribunal, higher appeal to Debt Recovery Appellate Tribunal.
 Lenders having SARFAESI Powers: Banks, HFCs, NBFCs and Cooperative Banks too
11. Asset Reconstruction
Company (ARC): It is
a specialized financial
institution that buys the
Non-Performing Assets
(NPAs) from banks and
financial institutions so
that they can clean up
their balance sheets + It
is a company registered
under Section 3 of the
SARFESI Act, 2002 + It
is regulated by the
Reserve bank of India
as a Non-Banking
Financial Company.
12. National Asset Reconstruction Company Limited (NARCL) : NARCL has been incorporated
under the Companies Act and has applied to the Reserve Bank of India for a license as an Asset
Reconstruction Company (ARC) + NARCL will acquire stressed assets worth about Rs 2 lakh
crore from various commercial banks in different phases + Public Sector Banks (PSBs) will
maintain 51% ownership in NARCL.
13. IDRCL : Another entity, India Debt Resolution Company Ltd (IDRCL), will then try to sell the
stressed assets in the market + PSBs and Public Financial Institutes (FIs) will hold a maximum of
49% stake in IDRCL. The remaining 51% stake will be with private-sector lenders.
14. Insolvency and Bankruptcy Code, 2016: It is based on recommendations of Bankruptcy Law
Reform committee headed by TK Viswanathan.
 Unified Framework: It is applicable to both individuals and companies + It applies to
companies, LLPs, partnerships, individuals and any other body specified by the central
government.
 Operational Creditors: Suppliers, contractors, salaried employees etc.
 Financial Creditors: Banks, NBFC, bond & other debt security holders, + Home buyers

ECONOMY
(Revision Notes)
 Provisions: Insolvency proceedings at National Company Law Tribunal (NCLT), Insolvency

professional to draft a resolution plan like reviving or finding another investor.
 Committee of Creditors: Comprised of Financial Creditors, voting based on loan given by
financial creditor, determine the final verdict on resolution.
 Appeal Structure: If individual borrower – Debt recovery tribunal, Company borrower-
NCLAT
 No applicability: For wilful defaulter, Incapable defaulter (has no capacity to pay)- they do
directly to SARFAESI.
 Insolvency resolution: Max (180 + 90 days) 330 days (including liquidation process after
Aug 2019 amendment).
 Institutional Infrastructure
o Insolvency and Bankruptcy Board of India-> Insolvency regulator, oversees functioning
of insolvency intermediaries.
o Insolvency professionals and Insolvency professional agencies-> These are private bodies
om
specialized in helping sick companies.
o NCLT: Adjudicate insolvency resolution for corporates (Companies and LLPs); appeals
to NCLAT and Supreme Court.
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o Debt Recovery Tribunal (DRT)-> It will adjudicate insolvency resolution for individuals;
appeals to DRAT and Supreme
ai
Court.
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 Insolvency and Bankruptcy
Board of India
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o About: Statutory Body,

implements I & B code
62
o Membership: 1 Chairman, 1
nominated member from RBI
77
and 8 members from govt.

o Ministry: Ministry of Corporate
affairs
80
o Tenure: Chairman-5 years/65

age, eligible for reappointment
nt
o Functions: Selects Insolvency

Professional Agencies, selects
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Information Utility to maintain

database of borrowers.
as
 Cross Border Insolvency

o Provisions: I &B 2016 code has provisions but not yet enforced. Allows for foreign
pr
creditor to recover money lent to Indian corporates and allow Indian lenders to recover
money from foreign assets.
15. Prompt Corrective Action:
 PCA is a framework under which banks with weak financial metrics are put under watch by
the RBI
 The RBI introduced the PCA framework in 2002 as a structured early-intervention
mechanism for banks that become under-capitalised due to poor asset quality, or vulnerable
due to loss of profitability.
 The framework applies to all banks operating in India, including foreign banks operating
through branches or subsidiaries based on breach of risk thresholds of identified indicators.
 Payments banks and small finance banks (SFBs) are not included

ECONOMY
(Revision Notes)
 Capital, Asset Quality and Capital-To-Risk Weighted Assets Ratio(CRAR), NPA ratio, Tier I
Leverage Ratio, will be the key areas for monitoring in the revised framework.
 The revised framework excludes return on assets as a parameter that may trigger action under
the framework.
 The RBI can supersede the board under Section 36ACA of the Banking Regulation Act,
1949.
 Reserve Bank can reconstruct or amalgamate a bank, with or without implementing a
moratorium, with the approval of the Central government.
 The RBI, as part of its mandatory and discretionary actions, may also impose appropriate
restrictions on capital expenditure, other than for technological upgradation within Board
approved limits, under the revised PCA.
 Withdrawal of restrictions imposed will be considered if no breaches in risk thresholds in any
of the parameters are observed as per four continuous quarterly financial statements.
16. Financial Services Institutions Bureau (FSIB) : It‘s a government body set up under the
Department of Financial Services. The board will be entrusted with making recommendations for
the appointment of full-time directors and non-executive chairman of state-run financial services
institutions + It replaced Banks Board Bureau (BBB).
17. Project Sashakt : Project Sashakt was proposed by a panel led by PNB chairman Sunil Mehta to
help consolidate stressed assets + Bad loans of up to ₹ 50 crore will be managed at the bank
level, with a deadline of 90 days + For bad loans of ₹ 50-500 crore, banks will enter an inter-
creditor agreement, authorizing the lead bank to implement a resolution plan in 180 days, or refer
the asset to NCLT.
18. Important Schemes of banking sector
 Differential Interest Rate Scheme (DIRS): It is used in 1972, under which it is mandatory
for every PSB to lend to poorest of the poor families atleast 1% of their total loans given by
them at the end of the preceding year at a mere rate of 4%. Families eligible under the
scheme should have annual income not exceeding Rs 18000 in rural areas and Rs 24000 in
other areas.
 Lead Bank Scheme (Introduced in 1969): Under which every PSB as well as some private
sector banks have to adopt certain districts with the objective of bringing about their
extensive development by identifying their problems, credit requirement. This scheme is
popularly known as scheme based on ‗Area Approach‘.
19. Non-Banking Financial Companies (NBFC): It is a heterogeneous group of institutions (other
than commercial and co-operative banks) performing financial intermediation in a variety of
ways, like accepting deposits, making loans and advances etc + It is mandatory for a NBFC to
get itself registered with the RBI as a deposit taking company.
 Registration: Under Companies act
 Supervision: Reserve Bank of India
 Types: Deposit taking NBFCs and Non-deposit taking NBFCs
 Condition of Deposits: Can take only Time deposits, Can‘t issue the Chequebooks,
debit/credit card and deposits not insured under DICGCI Act, cannot offer gifts, incentives or
any other additional benefit to the depositors, need to maintain CAR norm as prescribed by
the RBI, allowed to accept and/or renew public deposits for a minimum period of 12 months
and maximum period of 60 months.
 Investment of Deposits: Can invest in Share Market.
 Forum for Consumer Complaints: RBI started separate Ombudsman for NBFCs since
2018.
 Minimum NOF (net owned fund) of ₹100 crores.

ECONOMY
(Revision Notes)
 Following are exempted from the regulatory control of the RBI:

o venture capital fund, merchant bank, stock broking firms (SEBI registers and regulates
them);
o insurance company (registered and regulated by the IRDA);
o housing finance company (regulated by the National Housing Bank);
o nidhi company (regulated by the Ministry of Corporate Affairs under the Companies
Act, 1956);
o chit fund company (by respective state governments under Chit Funds Act, 1982).
20. Different types of NBFC often in news: These are regulated by RBI.
 Micro Finance Institutions: Give small loans to poor without collateral, Regulation by RBI
and Ministry of Corporate affairs, limitation of income to borrow from MFI.
 Factoring Companies: Lend short term money to client against his invoices.
 Asset Reconstruction companies: Buy bad loans from Banks & other NBFC.
 MUDRA (2015): Doesn‘t accept deposits, NBFC owned by SIDBI. Gives indirect loans to
Micro enterprises.
21. Shadow Banking: Not fully regulated by RBI, operates outside the traditional commercial
banking sector, composed of single institution, mobilise funds by borrowing from banks, issuing
Commercial Papers(CP) and Bonds.
22. MUDRA Bank
 Micro units can avail up to ₹10 lakh loan through refinance route (through the Public and
private sector banks, NBFCs, MFIs, RRBs, District Banks, etc).
 The products designed under it are categorized into three buckets of finance named Shishu
(loan up to ₹50,000), Kishor (₹50,000 to ₹5 lakh) and Tarun (₹5 lakhs to ₹10 lakh).
 It covers the traders of fruits and vegetables, but it does not refinance the agriculture sector.
 There is no fixed interest rate in this scheme. Interest rates on the loans are supposed to vary
according the risk involved in the enterprises seeking loans.
23. Other important concepts:
 Project Shakti: Project to solve issue of NPA.
 RBI Financial Year: April-March, Before 2020 – July to June.
 RBI income source: Interest on G-sec, Interest on foreign G-Sec, Interest on Loans given to
other Banks, Revaluation of foreign currency and gold, Penalties on errand banks.
 RBI expenditure: Staff salary, Reserves for contingency, Reserve for Exchange rate stability
(called as Currency & Gold Revaluation Reserve)
 Credit Information companies: Maintain database of borrowers, CRISIL, CARE, Fitch
India, ICRA are some companies.
 Central Repository of Information on Large Credits (CRILC): RBI database for Loans
above 5 crores.
 National e-governance services Ltd (NeSL): Provides borrower database under I&B act.
 Legal Entity Identifier (LEI) Number: Global number for companies to keep a trail of
financial transaction of company, 20 Digit alphanumeric code, Initiated in June 2018 for
large borrowers.
 EASE framework: 6 pillars to make PSBs more Responsive and Responsible like Customer
responsiveness, reach out to potential borrowers, helping MSME enterpreneurs.
 Ease 3.0 Framework: Smart, Tech-enabled Banking like Doorstep Banking, Dial-a-loan,
Credit@click, Palm banking (using phone/tablets)
 AT1 bonds: No maturity date, Banks pays interest for infinite time/perpetuity and no
principal payment.

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(Revision Notes)
 Haircut in banking: Haircut is the difference between the actual dues from a borrower and
the amount he settles with the bank. it is often a last resort when there is absolutely no hope
of a recovery and the loan is written off for a one-time settlement.. For example: Loan due is
Rs. 10 lacs, Final Settlement Rs. 4 lacs then haircut Rs. 6 lacs.
 RTGS: Settlement in ―real time‖. ―Gross settlement‖ means the transaction is settled on one
to one basis without bunching with any other transaction. Transfer limit Minimum amount to
be transferred Rs. 2 lakhs. No upper ceiling
 NEFT: Meaning NEFT operates in hourly batches. There is no limit either minimum or
maximum on the amount of funds that could be transferred using NEFT
 Core Banking Solution (CBS): CBS is networking of branches, which enables Customers to
operate their accounts, and avail banking services from any CBS branch of the Bank,
regardless of where he maintains his account. The customer is no more the customer of a
Branch. He becomes the Bank‘s Customer.
 Bancassurance: Bancassurance, i.e., banc + assurance, refers to banks selling the insurance
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products.
 Reverse Mortgage: A reverse mortgage enables a senior citizen to receive a regular/monthly
income from a lender (a bank or a financial institution) against the mortgage of his home. The
l.c
borrower continues to reside in the property till the end of his life.
 Merchant banker: It means any person who is engaged in the business of issue management
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(e.g. issue of equity shares, preference shares and debentures or bonds) either by making
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arrangements regarding selling, buying or subscribing to securities or acting as manager,
consultant, adviser or rendering corporate advisory service in relation to such issue
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management. Registration with SEBI is required for working as Merchant Banker

 Merchant Discount Rate (MDR): The commission charged by the bank to the Merchant
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(Trader/Service Provider) for providing debit and credit card services through POS terminal.
When payment is made at a merchant point of sale, MDR is payable by the merchant to the
77
bank. It is also termed as Merchant Service Fee (MSF).

 Business Correspondents: Business Correspondents are retail agents engaged by banks for
providing banking services at locations other than a bank branch/ATM + Banks are required
80
to take full responsibility for the acts of omission and commission of the BCs that they
engage and have, therefore, to ensure thorough due diligence and additional safeguards for
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minimizing the agency risk.

 Bank Run: It occurs when a large number of customers of a bank withdraw their deposits
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simultaneously due to concerns about the bank's solvency.

 Fixed and Floating Rate of Interest
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o For a Fixed Rate Loan, the rate of interest is fixed either for the entire tenure of the loan
or a certain part of the tenure of the loan.
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o The EMI of a floating rate loan changes with changes in market interest rates. If market
rates increase, your repayment increases. When rates fall, your dues also fall.
24. Fugitive Economic Offenders Act,2018:
 Provisions: Attachment of the Indian & Overseas properties of economic offenders, No civil
court can stay the order, appeal only in High court or Supreme Court, Union govt will
oversee administration of attached properties.
 Declaration of Economic offender: Special courts under the PMLA (Prevention of Money-
laundering Act, 2002) will declare economic offender.
25. Investment Models
 Investment: It is defined as an increase in the capital stock of an economy during a given
year. It is addition to the country‘s physical stock of capital during a given period.

ECONOMY
(Revision Notes)
 Importance of Investment: Opens up the possibilities of large scale production, Enables the
country to make use of modern techniques of production, Creates employment.
26. Factors affecting investment
 Technological Advance and Innovation: Investment in labour and capital saving machines
and other facilities are an example.
 Government Policy: The monetary and fiscal policies of the government affect investment
through monetary policy, taxation and Government expenditure.
 Discovery of resources: Discovery of new natural resources such as metals, minerals and oil
induce investment.
 Political Environment: Peaceful and stable political environment favour investments.
 Rate of Population Growth: Leads to increased demand, Higher profit and lower wages.
 Other Factors: Availability of finance, stock of capital goods, aggregate demand and
conditions of labour market are other factors.

ECONOMY
(Revision Notes)
CHAPTER 11: EXTERNAL SECTOR
1. Introduction: It is a systematic record of economic transactions made by the residents of a

country with the residents of other country in a specific time frame. These transactions are made
by individuals, firms and government bodies.
2. Components of Balance of Payment:
3. Current Account: It is a record of all trade between one nation and other nations + Includes
payments for imports and exports of both goods and services; monetary gifts or transfer
payments to and from other nations.
 Trade in Goods
o Exports of India
 Most exported Goods: Petroleum products> Drug formulations, biologicals> Pearl,
precious, semiprecious stones> Electric machinery and equipment> Telecom
instruments

ECONOMY
(Revision Notes)
 Trade surplus countries: USA, UAE and Netherland

 Export Preparedness Index: Developed by NITI Aayog + Ranks states by their
infrastructure, transport connectivity and ease of doing business.
 Remittances: India > China > Mexico
o Imports of India
 Most imported goods: Petroleum: Crude > Gold > Petroleum Products > Electronics
Components > and Coal,Coke And Briquittes Etc.
 Trade Deficit: China, Switzerland, Middle East nations.
 Trade in Services: It includes factor
income and non-factor income transactions.
o Net Factor Income from abroad: It
captures the net flow of income
payments between domestic economy
and the foreign sector + It is the
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difference between foreign factor
payments to domestic citizens and
domestic factor payments to foreign
citizens.
o Net Non-Factor Income from abroad: l.c
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All invisible receipts not attributable to
i.e, income (remittances from overseas
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migrants) and capital (income from investments and interest payments)

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 Non-factor services: It comprise shipment, passenger and other transport services

and current account transactions not separately reported (e.g., not classified as
merchandise, non-factor services, or transfers).
62
 Most imported services in year: Business Service > Travel > Transport > Software
service.
77
 Transfer payments: These are one-sided transactions which do not have any quid pro quo +
It includes grants, gifts, remittances and repatriation of savings + Official transfer receipts
80
include grants, donations received by GoI from bilateral and multilateral institutions; similar
transfers by Indian Government to other countries.
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 Balance on Current Account: Current Account is in balance when receipts on current

account are equal to the payments on the current account. It has three components:
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o Balance of Trade (BOT): It is the difference

between the value of a country‘s imports
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and exports of goods for a given period + It is

the largest component of a country‘s balance of
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payments (BOP) + Deficit BoT will arise if a

country imports more goods than what it
exports.
o Balance of Invisibles: The invisible balance is
that part of the balance of trade that refers to
services and other income that do not result in
the transfer of physical objects. Examples
include consulting services, shipping services,
tourism, and patent license revenues.
o Balance of Transfer: It is the difference between gifts or transfers received from other
nations and transfers sent to other nations.

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(Revision Notes)
4. Capital Account: It records all international purchases and sales of assets such as money, stocks,
bonds, and so on + It keeps track of capital inflows and outflows that have a direct impact on a
country's international assets and liabilities.
 BPM6 Format: The sixth edition of the IMF's Balance of Payments and International
Investment Position Manual (BPM6) was released in 2009. It provides guidelines for
recording cross-border transactions and positions. Transactions are divided into three
accounts: Current account, Capital account and Financial account
o CURRENT ACCOUNT
 Goods and Services
 Primary Income (Compensation of employees, Investment income like interest,
dividend, profit etc.)
 Secondary Income (Current Transfers like Gift, Remittance, Grant, external
assistance)
o CAPITAL ACCOUNT
 Gross acquisitions/disposals of non-produced non-financial assets ( land sold to
embassies and sales of leases and licences)
 Capital transfers (e.g. Investment grants for financing costs of acquiring fixed assets,
transfers of funds for acquisition of fixed assets)
o FINANCIAL ACCOUNT (reflects net acquisition and disposal of financial assets and
liabilities.)
 Foreign Direct Investment (FDI)
 Portfolio Investment
 Financial derivatives (other than reserves) and employee stock options
 Other investment
 Other equity (ADRs/GDRs)
 Currency and deposits (NRI Deposits)
 Loans (External Assistance, ECBs and Banking Capital)
 Insurance, pension, and standardized guarantee schemes
 Trade credit and advances
 Other accounts receivable/payable—other
 Special drawing rights
 Reserve assets (i.e. Increase/Decrease in Foreign Exchange Reserves)

ECONOMY
(Revision Notes)
 Foreign Direct Investment: It is a financial investment made by a party from one country
into a business or corporation in another country with the intention of establishing a long-
term partnership + Investment by a person resident outside India in an unlisted Indian
company; or in 10 percent or more in a listed Indian company + It brings money, skills,
technology and knowledge +
o Components: Equity capital, reinvested earnings, short and long-term borrowing and
lending operations direct investors and linked enterprises.
o FDI in India: India is the world's top greenfield FDI destination + In FY22, India
received the highest-ever FDI inflows of US$ 84.8 billion + Computer software and
hardware received the most FDI equity inflows of US$ 9.4 billion FY22-23 +
Singapore remains the top investment country in terms of FDI equity inflows.
o Automatic Route: A non-resident or Indian firm does not need the RBI's or the Indian
government's prior approval for FDI.
 Sectors: Medical devices (up to 100%); Thermal power (up to 100%); Insurance (up to
49%), Pension (up to 49%); Power exchanges (up to 49%), Petroleum Refining (By PSUs):
up to 49%, Ports and harbor construction (100%), Railway infrastructure (up to 100%).
o Government Route: The corporation must submit an application through the Foreign
Investment Facilitation Portal-> Application is sent to the appropriate ministry, which, in
collaboration with Ministry of Commerce's DPIIT will accept or reject it.
 Sectors: Core Investment Company: 100%; Multi-Brand Retail Trading: 51%;
Mining & Minerals separations of titanium bearing minerals and ores: 100%; Print
Media up to 100%; Satellite (Establishment and operations): 100%.
o Prohibited sectors: Lottery industry (Government, private and internet lotteries), Gambling
and betting, including casinos, Nidhi corporation and chit funds, Trading in Transferable
Development Rights (TDRs), Tobacco or tobacco substitutes for cigars, cheroots, cigarillos,
and cigarettes; investment in atomic energy and railway operations sectors not opened to
private sectors.
 Portfolio Investment: It is the acquisition of financial assets (which includes stock, bonds,
deposits, and currencies) from one country in another country.
o Foreign Portfolio Investment (FPI)/Hot money: Not involved in actual operations,
production and management; investor goal is to create a quick return on his money; Undertakes
buying and selling of shares; more liquid and less risky than FDI + Foreign investment of less
than 10 per cent in a listed company will be treated as foreign portfolio investment (FPI).
 External Borrowings: Portion of a country's debt that was borrowed from foreign lenders,
including commercial banks, governments, or international financial institutions.
 External Assistance: It denotes aid extended by India to other foreign Governments under
various agreements + External Assistance to India refers multilateral and bilateral loans
received under the agreements between GoI and other international institutions or
governments and repayments of such loans by India.
5. Current Account Deficit: A current account deficit occurs when the total value of goods and
services a country imports exceeds the total value of goods and services it exports + Balance of
exports and imports of goods is referred to as the trade balance. Trade Balance is a part of
Current Account Balance + India generally faces CAD.
6. Balance of Payments Surplus: The account by which the money coming into a nation is more
than the money going out in a particular time frame.
7. Balance of Payments Deficit: It means the nation imports more commodities, capital and
services than it exports. It must take from other nations to pay for their imports + The nation
could use its reserves of foreign exchange in order to balance any shortfall in its BoP (known as

ECONOMY
(Revision Notes)
official reserve transactions) + The decrease or increase in official reserves is known as the
overall balance of payments deficit or surplus.
8. Autonomous Transactions: It is also called ―above the line‖ items in BoP + International
economic transactions are called autonomous when transactions are made due to some reason
other than to bridge the gap in the balance of payments, that is, when they are independent of the
state of BoP + The balance of payments is said to be in surplus (deficit) if autonomous receipts
are greater (less) than autonomous payments.
9. Accommodating Transactions: It is also called ―below the line‖ items in BoP. It depends,
whether there is a deficit or surplus in the balance of payments + They are determined by the gap
in the balance of payments + They are also determined by the net consequences of the
autonomous transactions + Since the official reserve transactions are made to bridge the gap in
the BoP, they are seen as the accommodating item in the BoP (all others being autonomous).
10. Forex Reserves: These are assets held in reserve by a central bank in foreign currencies, such
as bonds, treasury bills and other government securities + India's foreign exchange reserves
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include Foreign currency assets, Gold reserves, Special Drawing Rights (SDR) and Reserve
tranche position with International Monetary Fund (IMF).
 Objectives: Maintaining confidence in monetary and exchange rate management policies +
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Provides for intervention in favor of the national or union currency + Limits external
vulnerability by maintaining the foreign currency liquidity to absorb shocks during times of
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crisis.
 Current foreign reserve: $598 Billion as of September 8, 2023 (4th largest country in the
m
world).
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11. India’s External Debt scenario

 India‘s external debt is US$ 635 billion (September 2023)-> Commercial borrowing forms
62
the largest component of external debt followed by NRI deposits, trade credit and debt
securities.
 Together, these three (Commercial Borrowings, NRI deposits and Short term trade credit)
77
constitute 77.2% of total external debt.

 Currency Composition of External Debt: Dominated by US$ (54.7%), followed by Indian
80
Rupee (29.8%).
 The external debt to GDP ratio declined to 18.6 per cent at end-September 2023.
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 The share of short-term debt (with original maturity of up to one year) in total external debt
increased to 20.1 per cent at end-September 2023
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12. Exchange rate: It is the value of one nation's currency versus the currency of another nation or
economic zone.
as
 Flexible/Floating Exchange rate (Clean Floating Exchange Rate): Non-intervening policy

which allows foreign exchange market to adjust to equilibrium through the balance of
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demand and supply with no explicit government/central banks actions. (Eg: USA) + Official
reserve transactions are zero + Concepts of depreciation and appreciation of currency are
used under this exchange rate.
 Fixed Exchange rate (Pegged Exchange Rate): It is an exchange rate established at a
specific level and maintained through government actions (usually through monetary policy
actions of a central bank) + Official reserve transactions are not zero + High forex reserves
are required to maintain fixed exchange rate.
o Devaluation: Reducing the price (exchange rate) of one nation's currency in terms of
other currencies + Usually done to lower the price of the country's exports and raise the
price of foreign imports -> greater domestic production.

ECONOMY
(Revision Notes)
o Revaluation: Increasing the price (exchange rate) of one nation's currency in terms of
other currencies + It is done to raise the price of the country's exports and lower the price
of foreign imports.
 Managed Flexible Exchange rate (Dirty Floating Exchange Rate): Combination of fixed
and flexible exchange rate + When demand and supply force in market are independent and
Government also give direction (e.g. India)
13. Nominal Exchange rate: The number of units of the domestic currency that are needed to
purchase a unit of a given foreign currency.
14. Real Exchange rate: It can be defined as the rate that takes into account inflation differential
between the countries + Ratio of foreign to domestic prices, measured in the same currency + It
tells how much the goods and services in the domestic country can be exchanged for the goods
and services in a foreign country + If the real exchange rate is equal to one, currencies are at
purchasing power parity. This means that goods cost the same in two countries when measured in
the same currency.
15. Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER): An
EER is a summary indicator of movements of the home currency against a basket of currencies of
trading partners + Reserve Bank compiles and disseminates indices of NEER and REER of the
Indian rupee + 2015-16 is chosen as the new base year for the NEER/REER indices.
 NEER: Multilateral rate representing the price of a representative basket of foreign
currencies, each weighted by its importance to the domestic country in international trade.
 REER: REER is a weighted average of bilateral nominal exchange rates that have been
adjusted for inflation i.e. relative price differential between the domestic and foreign
countries.
 Increase/ Decrease in REER: The competitiveness of exports is determined by the REER as
the latter reflects the movements in relative price levels + An increase in REER implies that
exports become more expensive and imports become cheaper; therefore, an increase indicates
a loss in trade competitiveness
 NEER/REER-6 : It is calculated with reference to the basket of six major trading currencies
representing the – USD, Hong Kong dollar, Euro, Pound sterling, Japanese Yen, Chinese
Renminbi.
 NEER/REER-40: Expanded from 36 to 40 currencies.
16. Factors influencing Exchange Rates
 Inflation: If a country has low inflation rates consistently, its currency value typically rises
 Appreciation of rupee. This is because the currency‘s purchasing power becomes higher
than the other currencies with which it is compared + Conversely, higher inflation rates lead
to the currency depreciating in value, losing out on purchasing power and value against other
currencies.
 Interest Rates : Interest rates are directly correlated to inflation as well as exchange rates. If
a country has a high-interest rate, lenders have the chance to earn more. This attracts foreign
capital looking to earn at higher rates. The result is that the appreciation of currency.
 Deficit : A current account deficit means that the country is spending more to buy than what
it earns. Consequently, its foreign currency earnings via exports are not enough; it will need
to borrow money from abroad to make up the difference. This high demand for foreign
currency lowers the country‘s exchange rate.
 Import-Export : Exporting earns a country some money while importing is spending it. If a
country‘s exports are growing at a higher rate than its imports, it‘s a good sign for its
currency exchange rate. Higher exports mean increased demand for the country‘s currency,
and therefore its value ---> Appreciation of country‘s currency.

ECONOMY
(Revision Notes)
17. Internationalization of Rupee: Benefits and Disadvantages
18. Gresham’s law: It refers to the dictum that ―bad money drives out good.‖ Gresham‘s law comes
into play when the exchange rate between two moneys or currencies is fixed by the government
at a certain ratio that is different from the market exchange rate. Such price fixing causes the
undervalued currency — that is, the currency whose price is fixed at a level below the market
rate — to go out of circulation + The overvalued currency, on the other hand, remains in
circulation but it does not find enough buyers.
19. J Curve: It is used to describe the pattern of a country's trade balance following a currency
devaluation/depreciation + It suggests that in the short term, after a depreciation of a country's
currency, its trade balance may worsen before improving + This is because there is usually a time
lag between the currency depreciation and the response of foreign buyers to take advantage of the
cheaper exports.
20. Types of Currencies

 Hard Currency: It is the international currency in which the highest faith is shown and is
needed by every economy; has the highest level of liquidity + Some of the best hard
currencies of the world today are US Dollar, the Euro and Japanese Yen.
 Soft Currency/Weak currency: The currency which is hyper sensitive and fluctuates
frequently to the political or the economic situation of a country + Mostly exist in developing
countries with relatively unstable governments + They cause high volatility in exchange
rates making them undesirable by foreign exchange dealers.
 Hot Money/Stolen Money: It is a currency that quickly and regularly moves between
financial markets, that ensures investors lock in the highest available short-term interest rates

ECONOMY
(Revision Notes)
+ It continuously shifts from countries with low-interest rates to those with higher rates + FPI
is often referred to as ‗hot money‖
 Heated Currency/Under hammering: It is a domestic currency which is under enough
pressure (heat) of depreciation due to a hard currency‘s high tendency of exiting the
economy (since it has become hot).
 Cheap Currency: If a government starts re-purchasing its bonds before their maturities (at
full-maturity prices) the money which flows into the economy is known as the cheap
currency.
 Dear Currency: When a government issues bonds, the money which flows from the public
to the government or the money in the economy in general is called dear currency.
21. Convertibility of Rupee: It means when currency of a country can be freely converted into
foreign exchange or vice-versa at market determined rate of exchange.
 Current account convertibility: When foreign exchange received for export of merchandise
and services can be freely converted into Indian rupees and vice-versa in case of imports +
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Fully convertible since 1994.
 Capital account convertibility: A currency is freely convertible into foreign exchange and
vice-versa at market determined exchange rate for capital account purposes + After
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recommendations of the S.S. Tarapore Committee (1997) it is partially allowed in India;
Limit on external borrowing, controlled under Foreign Exchange Management Act, 1999.
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 Advantages of a fully convertible currency: Sign of stable and mature markets, increased
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liquidity in financial markets, improved business opportunities, On-shore rupee market
development, easy access to foreign capital and improved financial system.
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 Disadvantages of a fully convertible currency: High volatility and foreign debt burden.
22. SEZ to promote Exports (Current Account)
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 About: Demarcated area which is treated as foreign territory for taxation and trade laws, Has
low rate of taxes + Every SEZ is divided into a processing area where alone the SEZ units
77
would come up and the non-processing area where the supporting infrastructure is to be
created.
 Legislation: Regulated under Special Economic Zone Act, 2005.
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 Accrued Benefits: Single Window Clearances, Government bears the cost of development of
roads, sewer network and other related infrastructure.
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 Procedure of development: State government proposes - Union government approves

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(Ministry of Commerce)
 More than 220 SEZ in India.
 Asia's First SEZ: Kanda, Gujarat in 1965.
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23. Foreign Trade Policy to promote Exports

 Act: Foreign Trade Development and Regulation Act, 1992
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 Nodal agency: Director General of Foreign Trade under Ministry of Commerce

 Objective: To provide the development and regulation of foreign trade by facilitating
imports into, and augmenting exports from India.
 Regional trading agreements : These vary depending on the level of commitment and the
arrangement among the member countries.
24. Types of Regional Trading Agreements
 Preferential Trade Agreement (PTA): Two or more
countries agree upon a preferential right of entry to certain
products facilitated by reducing duties.
o A positive list is maintained i.e. the list of the products
to which preferential access is provided + Examples:

ECONOMY
(Revision Notes)
India – MERCOSUR PTA and India – SAARC Preferential Trading Arrangement

(SAPTA)
 Free Trade Agreement (FTA): It is a pact between two or more nations to reduce barriers to
imports and exports among them + Under a free trade policy, goods and services can be
bought and sold across international borders with little or no government tariffs, quotas,
subsidies, or prohibitions to inhibit their exchange + A negative list of products and services
is maintained by the negotiating countries on which the terms of FTA are not applicable.
Hence compared to PTAs, FTAs are more comprehensive + Examples: India – South Asia
Free Trade Area (SAFTA) and India Sri Lanka FTA.
 Comprehensive Economic Cooperation Agreement (CECA): These involve a
comprehensive package of agreements on goods/services, investment, mutual recognition, e-
commerce, intellectual property, etc. + Examples: India-Singapore CECA and India-Malaysia
CECA
 Customs Union (CU): Members of the CU may agree to trade at zero duty among
themselves and maintain common tariffs against the rest of the world + Examples: European
Union Customs Union and Southern African Customs Union
 Common Market: In a common market, countries also allow free trade and free movement
of labour and capital among the members of the group + Example: East African Common
market
 Economic Union: It is a
common Market extended
through further harmonisation of
fiscal/monetary policies and
shared executive, judicial &
legislative institutions +
Example: European Union (EU)
25. India’s Trading Agreements: India
recently signed 2 new FTA i.e.
India-UAE CEPA and India-
Australia ECTA (Economic
Cooperation and Trade Agreement)
26. Miscellaneous Concepts
 Debt overhang: When debt
becomes so much, that all the monthly income goes into payment of debt, is called debt
overhang.
 Current situation in Balance of Payment (BoP): Current Account in deficit, but Capital
Account in surplus.
 1991 crisis: Deficit in Current Account and low surplus in Capital Account- Poor forex
reserve to bring down the BoP to zero - had to pledge gold with IMF to borrow dollars.
 Purchasing Power Parity : It is the conversion rate of the currency of any country to the
currency of another country so that the same particular product or the same particular service
can be purchased in each of the countries.
o Example : If there is a country A where a product X costs 5000 units (say 5000 rupees if
the country is India). To purchase the same product in another country, a customer wants
to spend the same amount of money. Because of PPP, it will be possible for him to spend
the same amount. Hence, the same product in country Y costs 65 units (say 65 dollars if
country Y is to be the USA).
o Therefore, the PPP formula could be derived as-

ECONOMY
(Revision Notes)
 S = P1/P2 Where, S = Exchange rate of currency 1 to currency 2, P1 = Cost of good

in currency 1, and P2 = Cost of the same good in currency 2.
 Capital flight
o It refers to the large-scale outflow of capital or financial assets from a country.
o It is caused by factors such as political instability, economic crises, high inflation,
currency devaluation, or adverse government policies.
o Impacts: Decline in domestic and foreign investment + Demand for the domestic currency
decreases, leading to currency depreciation + Liquidity shortages and banking crises +
Economic downturn, characterized by lower GDP growth, higher unemployment, and a
decline in consumer and business confidence.
 Dumping: If a company exports a product at a price lower than the price it normally charges
on its own home market, it is said to be ―dumping‖ the product. This is an unfair trade
practice which can have a distortive effect on international trade.
 Bound Tariff: The bound tariff is the maximum MFN tariff level for a given commodity line
that governments apply to imports from other WTO members. Each country agrees to these
commitments when they join the WTO.
o Nations are permitted the flexibility to apply lower tariff levels to certain imports but they
may not exceed their bound limits. If one WTO member raises applied tariffs above their
bound level, other WTO members can take the country to dispute settlement.
 Asian Premium: It is the extra charge per barrel collected by OPEC countries from Asian
buyers when compared to western buyers. India is looking to form buyers‘ alliance with
China, Japan and South Korea to end 'Asian premium'.
 Baltic Dry Index: It is a shipping freight index reported daily by the Baltic Exchange in
London. The index provides a benchmark for the price of moving the major raw materials by
sea.
 Import substitution: Means replacing or substituting imports with domestic production. For
example, instead of importing vehicles made in a foreign country, industries would be
encouraged to produce them in India itself. In this policy the government protected the
domestic industries from foreign competition. + Protection from imports took two forms:
tariffs and quotas.
o Tariffs are a tax on imported goods; they make imported goods more expensive and
discourage their use.
o Quotas specify the quantity of goods which can be imported.
o The effect of tariffs and quotas is that they restrict imports and, therefore, protect the
domestic firms from foreign competition.
 Transfer pricing: It is an accounting practice that represents the price that one division in a
company charges another division for goods and services provided + In such transactions,
one party transfers to another goods or services, for a price known as transfer price + This
may be arbitrary and dictated, with no relation to cost and added value, diverge from the
market forces.
 Friendshoring: It happens when a government pushes businesses to restructure supply
chains, shifting production away from geopolitical rivals to friendly powers + Essentially
friendshoring refers to the rerouting of supply chains to countries perceived as politically and
economically safe or low-risk, to avoid disruption to the flow of business.
 Nearshoring: This describes the process of a company relocating business operations to a
nearby country, often with a shared border. It ensures faster speed to market and quicker
transit from manufacturers to customers.

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(Revision Notes)
 Reshoring: Reshoring is when a business transfers operations back to its home country. This
can be an attractive solution for companies whose supply chains have been disrupted by geo-
political events.
 Vostro account: Vostro comes from the Latin word for ―yours,‖ as in ―your money that is on
deposit at our bank‖. + It is an account that a domestic bank holds for a foreign bank in the
domestic bank‘s currency — which, in the case of India, is the rupee + From the domestic
bank‘s point of view, a Vostro account is just the same as any other ordinary bank account as
it is payable on demand and is denoted by the same domestic currency of the country.
 Nostro account: Nostro comes from the Latin word for ―ours,‖ as in ―our money that is on
deposit at your bank.‖ + It is defined as a bank account that is created by any commercial
bank of a given country in some other foreign country with the currency of a foreign country
+ The interest rate is not given to this type of account.
 Loro account: Derived from the Italian word ―Loro,‖ which means ‗Their,‘ which means
this account is a ‗Third Party Account.‘ + In bilateral correspondence between any two given
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banks, the words Vostro (Your) and Nostro (Our) are used, that is, the bank whose book the
account is maintained and the one who is maintaining the account + In such conditions, a
third bank‘s account, which is talked about, is called a Loro account.

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Currency Swap agreement: The currency swap agreement between the two countries is
entered between the Central Banks of the two countries + One country exchanges its national
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currency for that of another or even a third one + Examples: India and Japan signed a
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currency swap agreement in 2018 worth $ 75 billion. India can/will get Yen(or dollars) from
Japan worth a max of $ 75 billion and Japan will get equivalent Indian Rupees as per the
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market exchange rate at the time of transaction.

 Tariff Barrier: Tariff barriers are imposed by the government in the form of taxes or duties
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on its imports + Reason for imposing : To provide protection to its domestic companies and
increase government revenue. Example, taxes and duties

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Non -Tariff Barrier : Non tariff barriers cover all the restrictions other than taxes imposed
by the government on its imports + To protect the domestic companies and discriminate new
entrants. Example, Regulations, requirements, conditions, etc
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o Countervailing Duty (CVD) : It is a type of duty imposed by the government to

safeguard domestic manufacturers from the detrimental effects of import subsidies. To
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prevent these commodities from flooding the importing country‘s market, the importing
country‘s government applies a countervailing tax, charging a specific amount on imports
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of these goods.
o Anti-Dumping Duty : It is a protectionist levy imposed by a domestic government on
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foreign goods that it considers to be underpriced + Many countries apply tariffs on

products they believe are being dumped in their domestic market in order to defend their
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economies.
 Directorate General of Trade Remedies (DGTR) under Dept of Commerce, Ministry of
Commerce and Industry
o DGTR is the apex National Authority for administering all trade remedial measures
including anti-dumping, countervailing duties and safeguard measures.
o DGTR is a quasi-judicial body functioning under the aegis of the Department of
Commerce, Ministry of Commerce and Industry, Government of India.
o The DGTR serves as a watchdog against unfair trade practices resorted by the
producers/ exporters in foreign countries and aims to create a level playing for the Indian
industry.

ECONOMY
(Revision Notes)
o The unfair trade practices that the DGTR acts against are in the form of dumped imports
or subsidised imports or imports that circumvent existing anti-dumping/countervailing
duties. DGTR also protects the domestic industry from surge in imports that harm the
Indian industry.
o The function of the DGTR is to conduct an elaborate investigation into the complaint
filed by the Indian domestic producers allegedly injured by the unfair trade practices
adopted by foreign producers/ exporters and then take a decision on whether or not to
recommend imposition of duty.
o Final decision regarding imposition of duty recommended by the DGTR is taken by the
Ministry of Finance, Govt of India.
******

ECONOMY
(Revision Notes)
CHAPTER 12: FINANCIAL MARKETS
1. Introduction: Financial markets is any marketplace where buyers and sellers participate in the
trade of assets such as equities, bonds, currencies and derivatives.
2. Functions of financial market: Mobilisation of saving and channelized them into more
productive uses + Facilitate price discovery + Providing liquidity to finance assets + Reducing
the cost of transaction and save time and efforts.
3. Types of Financial Markets:
4. Money Markets: It refers to the institutional arrangement facilitating borrowing and lending of
short-term funds (less than 365 days) + Chakravarthy committee (1985) for the first time
underlined the need for organized money market in India + Functions: To maintain monetary
equilibrium, provide help to trade and industry, help in implementing monetary policy and non-
inflationary sources of finance to the government.
 Treasury Bills (T-Bills)
o Also, known as Zero coupon bonds i.e. provides zero rate of interest. (Returns on these bills
occurs because they are issued at price less than face value and Government buys them at face
value).
o The Central Government for its daily operations borrows through T-bills primarily to
fund fiscal deficit.

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(Revision Notes)
o Presently, only the 91-day TBs, 182-day TBs and the 364-day TBs are issued by
government.
o They also function as short-term investment avenues for the banks and fulfill
requirements of CRR and SLR.
o They will be issued for a minimum amount of Rs. 10,000 and in multiples of
10,000.
o They are highly liquid, give assured yield and absence of default risk.
o Note: State governments do not issue treasury bills.
 Certificate of Deposit (CD)
o It is an agreement between depositor and bank where a predetermined amount of money is
fixed for a specific time period-> Principal and interest is available for withdrawal after
maturity.
o It can be issued by Scheduled Commercial Banks, RRBs, Small Finance Banks and
financial institutions such as IDBI, IRBI and IFCI permitted by RBI.
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o CDs can be issued to individuals, corporations, companies (including banks and PDs),
trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs.
o Slightly higher yield than T-Bills (as there is risk of default of banks).
o Tradeable and Transferable unlike FDs.
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o They are used by banks when deposit growth is less and credit demand is high.
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o It should have a minimum amount of Rs 5 lakh and multiples thereof
o Maturity: For Banks -> should not be less than 7 days; for Financial institutions>
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maturity period should not be less than one year and not exceeding three years
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o Loans cannot be granted against certificate of deposits

o Buyback can be made only 7 days after the date of issue.

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Commercial Paper (CP)

o Promissory notes which are unsecured and are generally issued by companies and
financial institutions. At a discounted rate from their face value.
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o Maturity: 1 to 270 days

o Denominations of Rs.5 lakhs or multiples of 5 lakhs
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o Enable the corporates with a good credit rating to diversify their resources for short
term fund requirements.
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o They are issued at a discount to face value.

o Companies and All India Financial Institutions are eligible to issue CPs subject to
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condition that any fund-based facility availed of from banks is not a stressed asset.
o Minimum rating needed is A-3
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o They are actively traded in the OTC market on Fixed Income Money Market and
Derivatives Association of India (FIMMDA) platform.
o Buyback offer may not be made before 30 days from the date of issue.
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 Commercial Bill
o It is a bill of exchange defined by section 5 of the Negotiable Instruments Act of 1881.
o Seller (drawer) issues commercial bills to the buyer (drawee) for the value of items
delivered by him.
o Maturity of 30 days, 60 days, or 90 days.
o It is a bill that is payable on demand.
o Provision of re-discounting-> Bank that accepts the bill is in need of fund and trades the
bill with institutions such as LIC, UTI etc then the bill gets discounted again.
 Call Money Market

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(Revision Notes)
o It is required by banks to borrow money without collateral from other banks to

maintain CRR (Cash Reserve Ratio) and SLR requirement. It is also required to meet
sudden demand for funds arising out of large outflows.
o The money that is lent for one day in this market is known as "Call Money", and if it
exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money
refers to Money lent for 15 days or more in the Inter Bank Market.
 As the RBI guideline, the participants in call/notice money market currently include
scheduled commercial banks (excluding RRBs), Development Financial Institutions, Co-
operative banks (other than Land Development Banks) and Primary Dealers (PDs), both as
borrowers and lenders. Payment Banks are also allowed to participate in CMM as both
lenders and borrowers.
 Money Market Mutual Funds
o Introduced in 1992 to provide short-term investment opportunity to individuals.
o Since March 2000, MFs have been brought under preview of SEBI, besides the RBI.
o They can be set up by commercial banks, public and private financial institutions and
private sector companies.
 Repurchase Agreement (Repo) and Reverse Repo
o Repo: It allows the banks and financial institutions to borrow money from RBI for short-
term (by selling government securities to RBI).
 Tenor: 1 day to 1 year
 Eligible Securities for Repo
 Government securities issued by Central Government or State Government.
 Listed corporate bonds and debentures
 Commercial Papers (CPs) and Certificate of Deposits (CDs).
 Units of Debt ETF
 Any other entity approved by the Reserve Bank from time to time.
o Reverse repo: It is used for absorption of liquidity + It is an instrument for lending funds
by purchasing securities with agreement to resell the securities on a mutually agreed
future date at an agreed price which includes interest for the funds lent.
 Cash Management Bill
o Introduced since August 2009 to meet temporary cash flow mismatches of the
government.
o Similar characteristics as of T-Bills except the maturity period.
o These are non-standard and discounted instruments.
o Maturities less than 91 days.
o Issued at discount to the face value and tradable and qualify for ready forward facility
o They are considered as an eligible investment in government securities by banks for SLR
purposes.
 Banker's acceptance: Short term investment plan that comes from a firm backed by
guarantee from bank + Guarantee states that buyer will pay the seller at a future date.
 Collateralized Borrowing and Lending Obligation (CBLO): It is a discounted instrument
for non-bank entities to borrow money against government securities(collateral) + maturity
ranging from 1 day to 1 year
 Overnight Repo: The maturity contract with 1-day maturity.
 Term Repo: The maturity Contract with certain specified contract date more than 1 day.
 Open Repo: The maturity Contract with no specified contract date.

ECONOMY
(Revision Notes)
 Inter corporate deposits: It is an unsecured borrowing by corporates from other corporate

entities + Tenure range from 1 day to 1 year + The borrowing is restricted to 150% of the Net
Owned Funds and the minimum tenor of borrowing is for 7 days.
5. London Interbank Offered Rate (LIBOR): It is a benchmark interest rate used by major
international banks in the international interbank market to lend to one another for short-term
loans + Rate is calculated and published every day by the Intercontinental Exchange (ICE) +
Calculated in 5 currencies: UK Pound Sterling, Swiss Franc, Euro, Japanese Yen & US dollar
6. Secured Overnight Financing Rate (SOFR): Secured (collateral is used) interbank overnight
interest rate + Replacement for USD LIBOR + Based on transactions in the treasury repurchase
market + Preferable than LIBOR as LIBOR was based on estimated borrowing rates.
7. Mumbai Interbank Offered Rate (MIBOR): Yardstick of Indian call money market + It is utilized
related to the Mumbai interbank bid and forward rates (MIBID and MIBOR) by the national bank of
India to set transient financial arrangements + It is the short-term loaning offered rate for Indian
business banks.
8. Discount and Finance House of India (DFHI): RBI set up the Discount and Finance House of
India (DFHI) jointly with public sector banks and the all-India financial institutions pursuant to
the Vaghul Working Group recommendation + Incorporated in 1988 + The main objective of this
money market institution is to facilitate smoothening of the short-term liquidity imbalances by
developing an active secondary market for the money market instruments.
 DFHI participates in transactions in all the market segments, it borrows and lends in the call,
notice and term money market, purchases and sells treasury bills sold at auctions, commercial
bills, CDs and CPs. DFHI quotes its daily bid (buying) and offer (selling) rates for money
market instruments to develop an active secondary market for all these.
9. Components of Money Market:
Component Working Specific Remarks
 Market for extremely short-period  It is governed by Reserve Bank of
loans India (RBI).
 Issuers of call money or borrowers are
commercial banks, cooperative banks,
Call Money financial institutions
Market  If money is lent for a day it is called
call money or overnight money,
 If it is for a period more than one day
and less than 14 days, it is called notice
money.
 When loans are offered against  Products that need collaterals:
collateral securities like stocks and  Repurchase Agreements (Repo)
Collateral bonds  Exchange Traded Securities
loan market  Equities
 Bank Loans
 Commodities
 Market for banker's acceptances
Acceptance involved in trade transactions.
Market  Banker's acceptances can be easily sold
or discounted in the money market
 Market in which short-term papers or  Bills of exchange and the treasury
Bill Market
bills are bought and sold. bills.

ECONOMY
(Revision Notes)
CAPITAL MARKETS
1. Introduction: These are places where savings and investments are channelled between suppliers
of capital and those in need of capital + It facilitates the movement of stream of capital + Provide
incentives to savers in the form of interest or dividend.
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2. Features of Equity Markets: Equity markets refers to market where money is raised from
public by issuance of equity + It provides variable returns (investors paid periodic dividend
62
which is not pre-determined) + Shareholders are ranked last for claiming a share of company‘s
assets in case of liquidation.
3. Features of Debt Markets: It comprise basically three segments, viz., Government Securities
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Market; PSU Bonds market and corporate securities market + Debt to fund for capital intensive
projects + low return but relatively risk free investment.
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4. Equity Financing and Debt Financing:

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Equity Financing over Debt Financing Investing in Equity over Debt

Advantages Advantages
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 No obligation to return back to investor.  It may result in higher returns over ebt
 No obligation to pay interest regularly. investments (Due to higher risk).
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Disadvantages Disadvantages
 Results in diluting ownership of business.  No guaranteed returns due to higher risks.
 Less control over management of  Risking capital
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company‘s operations.
5. Primary Market vs Secondary Market:

ECONOMY
(Revision Notes)
6. Primary market/New issues market: When company directly issues new shares to certain
private individuals + It taps larger markets for capital + Price of stock determined by market
forces-> fosters competition + Diversify ownership + Facilitate transfer of investible funds from
savers to entrepreneurs seeking to establish new businesses or expand existing ones by issuing
securities for the first time + Banks, financial institutions, mutual funds, and individuals are
among those who are investors.
 Offerings in Primary Market
 Initial Public Offer (IPO): IPO is public launch of equity of any unlisted firms, leads to
listing of company on the exchange, underwritten by one or more investment banks.
 Process of IPO
 Further Public Offer: It refers to already listed company which generates funds from public
for its expansion by issuing a greater number of shares + Fresh issue -> stake of promoters
decreases + Offer for sale-> sale of shares by promoters (large shareholders) to public where
the money collected from sale is pocketed by promoters.

ECONOMY
(Revision Notes)
 Rights Issue: A new issue of shares offered at a special price by a company to its existing
shareholders in proportion to their holding of old shares.
 Preferential Issue: Stocks issued to parties with some preference over common shareholders
+ They are usually guaranteed a fixed dividend forever if the company has sufficient profits +
Event of liquidation-> preferred shareholders are paid off before common shareholder + They
do not offer voting rights or a right over the assets of the company except in certain cases.
Parameters Preference Shares Shares
Dividend Fixed rate Variable
Voting Rights No Yes
Case during Right of return of capital before equity shares Last right
liquidation
 Private Placement: It refers to offer made by a company to a select group of investors such
as financial institutions, banks and mutual funds.
 Qualified Institutional Placement (QIP): Special type of private placement -> It can be
only made by already listed companies.
7. Depository Receipts: These are financial instruments that represent shares of a local company
issued in foreign currency, listed and traded on a stock exchange outside country + It gives
investors the right to dividends and capital appreciation from the underlying shares, but not the
voting rights.
 Indian Depository Receipt: Created by Indian depository for the foreign company to trade
in India. Ex: Trading depositories of Facebook in India.
 American Depository Receipt: Negotiable certificate issued by US bank to trade foreign
securities. Ex: Investment in TCS ADR by American investors.
 Global Depository Receipt: Issuance of Bank certificate in more than one country.
 Sponsored issue: When existing shareholders of a company agree to offer their shares for
conversion into DRs in which case shares gets acquired and delivered to the local custodian
of the depository bank
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8. Secondary market/Stock Market: It refers to market where one person buy/sell shares from
another person + It makes existing securities more liquid and marketable + SEBI governs the
trading, clearing, and settlement of securities.
 Functions: Liquidity and marketability to existing securities + Enable price discovery of
traded securities.

ECONOMY
(Revision Notes)
 Stock Exchange: It facilitates buying and selling of stocks between company and
shareholders or between different stakeholders + Ensure participants live up to their
commitments-> follows institutionalized rules and procedures + Publishes Index and fulfils
purpose of projecting moods of stock exchange + First stock exchange established in
Antwerp, Belgium in 1631 + Top five largest stock exchanges on basis of market
capitalisation are New York Stock exchange, NASAQ, Tokyo stock exchange, London stock
exchange and Bombay stock exchange.
 Different Stock Exchanges in India
o Bombay Stock Exchange (BSE): SENSEX (Sensitivity Index) is the benchmark index
of BSE which comprises of 30 stocks from different sectors such as IT, Pharma etc.+ It is
the first stock exchange which got recognition from SEBI + Headquarters at Mumbai.
o National Stock Exchange (NSE): NIFTY is its benchmark index which comprises of
fifty stocks from different sectors such as IT, Automobile, Cement, Pharma etc. + It is
located at Bandra in Mumbai.
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o Calcutta Stock Exchange Ltd. (CSE): One of the oldest stock exchanges of India. It was
set up as an Association in 1908. It has permanent recognition as stock exchange.
o India International Exchange (India INX): It is a subsidiary of BSE and has been set up
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in the International Financial Services Centre (IFSC), Gandhinagar.
o OTCEI (Over the Counter Exchange of India): Set up in 1992, to provide small and
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medium companies an access to the
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capital market for raising finance
o MCX Stock Exchange (MCX-SX): Its
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flagship index is SX40 comprising 40

blue chip companies.
o Indo Next: It is a new stock exchange
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to promote liquidity to stocks of small

enterprises + Launched in 2005 jointly
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and for medium the BSE and FISE

(Federation of Indian stock exchanges,
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representing 18 regional stock

exchanges).
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o Social Stock Exchange: It would function as a separate segment within the existing stock
exchange + It will help social enterprises raise funds from the public through its
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mechanism + Retail investors can only invest in securities offered by for--profit social
enterprises (SEs) under the Main Board + Any non-profit organisation (NPO) or for-
as
-profit social enterprise (FPSEs) that establishes the primacy of social intent would be
recognised as a social enterprise (SE), which will make it eligible to be registered or listed
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on the SSE.
 Regulatory Legislations
o SEBI Act, 1992: It was enacted to empower SEBI with statutory powers for protecting
the interests of investors in securities + promoting the development of the securities
market + regulating the securities market
o Depositories Act, 1996: It provides for the establishment of depositories in securities with
the objective of ensuring free transferability of securities with speed, accuracy and
security.
9. Regulation of the Capital Market : The securities market is regulated by various agencies such
as the Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve
Bank of India and the SEBI. The four main legislations governing the capital market are as
follows:

ECONOMY
(Revision Notes)
 The SEBI Act, 1992 which establishes the SEBI with four-fold objectives of protection of the
interests of investors in securities, development of the securities market, regulation of the
securities market and matter connected therewith and incidental thereto.
 The Companies Act, 1956 which deals with issue, allotment and transfer of transfer of
securities, disclosures to be made in public issues, underwriting, rights and bonus issues and
payment of interest and dividends.
 The Securities Contracts Regulation Act, 1956 which provides for regulations of securities
trading and the management of stock exchanges.
 The Depositories Act, 1996 which provides for establishment of depositories for electronic
maintenance and transfer of ownership of demat securities.
10. Derivatives: Derive its value on underlying equity, index. Volatility, price depend upon underlying
assets.
11. Bonds: A bond is a loan to a company or government that pays investors a fixed rate of return
over a set period of time. Bonds are an important component of a well-balanced portfolio +
These bonds have a maturity date, and once that date is reached, the issuing company is required
to pay back the amount to the investor as well as a portion of the profit.
12. Types of bonds :
 Traditional Bond: A Traditional Bond is a bond in which the entire principal can be
withdrawn at once after the bond's maturity date has passed.
 Callable Bond: A Callable Bond is one in which the bond's issuer asserts his right to redeem
the bond before it matures. The issuer can convert a high debt bond into a low debt bond
using this type of bond.
 Fixed-Rate Bonds: Fixed-rate bonds are those in which the coupon rate remains constant
over the life of the investment.
 Floating Rate Bonds: A floating rate bond is one in which the coupon rate fluctuates over
the course of an investment.
 Zero-Coupon Bond: A zero-coupon bond is one in which the coupon rate is zero and the
issuer is only required to repay the principal amount to the investor.
 Climate Bonds: Climate Bonds are issued by any government to raise funds when a
country's climatic conditions deteriorate.
 Inflation Indexed Bonds: IIBs are government-issued bonds that guarantee a steady yield
regardless of the amount of inflation in the economy + Purpose: To preserve the poor and
middle classes' savings against inflation + Since these bonds provide no risk of capital loss, it
can offer a lesser rate of interest as interest is directly proportional to risk + The real coupon
interest rate on IIBs is fixed, but the nominal principal value is adjusted for inflation + They
can be tradable in the secondary market like other G-Secs + Like other G-Secs, coupon on
IIBs would be paid on half yearly basis. Fixed coupon rate would be paid on the adjusted
principal + IIBs are classified as G-Sec and hence qualify for repo transactions, as well as
SLR status + These bonds are auctioned directly by the RBI.
 Masala Bonds: They are bonds issued outside India by an Indian entity or corporate. These
bonds are issued in Indian currency than local currency. Indian corporates usually issue
Masala Bonds to raise funds from foreign investors. As it is pegged into Indian currency, if
the rupee rates fall, investors bear the risk. The first Masala bond was issued in 2014 by IFC
for the infrastructure projects in India.
 Oil Bonds: An oil bond is a promissory note issued by the government to the oil marketing
companies (OMCs), in lieu of cash that the government would have given them so that these
companies do not charge the public the full price of fuel + Benefits: the government is able to

ECONOMY
(Revision Notes)
protect/ subsidise the consumers without either ruining the profitability of the OMC or
running a huge budget deficit itself.
 Blue bonds: SEBI has proposed the concept of blue bonds as a mode of sustainable finance +
A blue bond is a relatively new form of debt instrument that is issued to support investments
in healthy oceans and blue economies + They offer an opportunity for private sector capital to
be mobilized to support the blue economy + Blue bonds can be deployed in areas such as
oceanic resource mining, sustainable fishing, national offshore wind energy policy etc.
 Surety bonds: It is a kind of risk transfer tool for the Principal and protects the Principal
from losses that may cause in case the contractor fails to perform their contractual duties +
The product gives the principal a contract of guarantee that contractual terms and other
business deals will be concluded in accordance with the mutually agreed terms + In case the
contractor does not fulfil the terms then the Principal can claim surety bonds to recover the
losses + The surety is provided by an insurance company which acts as a security
arrangement for infrastructure projects and insulates the contractor as well as the principal.
 Skill impact bonds: It is a public-private partnership model in India for the skilling and
employment sector + It shifts its focus from inputs like training and certification to outcomes
like job placement and retention for India‘s youth + Under the Skill Impact Bond, risk
investors such as NSDC provided upfront working capital to the trainers to implement skill
development programmes + It is pioneered by National Skill Development Corporation
(NSDC) under the aegis of the Ministry of Skill Development and Entrepreneurship (MSDE)
and a coalition of mission-aligned partners.
13. Inverted Yield Curve: It shows that long-term interest rates are less than short-term interest
rates. With an inverted yield curve, the yield decreases the farther away the maturity date is +
When there are signs of a slowdown in an economy, it would mean that the economy faces risk
in the short term. However, in the long term, the economy may come back to normalcy + Due to
this, the yield on the short-term bonds becomes higher than the yields of long-term bonds +
Hence, an inverted yield curve points towards a probable economic recession.
14. Government Securities:
 A G-Sec is a tradable instrument issued by the Central Government or the State
Governments.
 It acknowledges the Government‘s debt obligation. Such securities are short term (usually
called treasury bills, with original maturities of less than one year- presently issued in three
tenors, namely, 91 day, 182 day and 364 day) or long term (usually called Government bonds
or dated securities with original maturity of one year or more).
 In India, the Central Government issues both treasury bills and bonds or dated securities
while the State Governments issue only bonds or dated securities, which are called the State
Development Loans (SDLs).
 G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged
instruments.
 Government of India also issues savings instruments (Savings Bonds, National Saving
Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds,
fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not
eligible to be SLR securities.
 GOI Dated Securities can be held by any person, firm, company, corporate body or
institution, State Governments, Provident Funds and Trusts, Non--Resident Indians (NRI,
viz., Indian citizens and Individuals of Indian origin), Overseas corporate bodies
pre-dominantly owned NRIs and Foreign Institutional Investors registered with SEBI and
approved by Reserve Bank of India.

ECONOMY
(Revision Notes)
15. Bonds vs Debentures: Bonds are more secure than debentures. The company provides collateral
for the loan. Moreover, in case of liquidation, bondholders will be paid off before debenture
holders + Debenture holders have no collateral that a holder can claim from the company. To
compensate for this, companies pay higher interest rates to debenture holders, compared to Bond
holders.
16. Convertible vs Non-Convertible Debentures:
Criteria Capitalist Socialist
Origin Adam Smith Karl Marx
Ownership Private Ownership Government Ownership
Government No or marginal High/Alniost everything
Intervention
Income determined by market Redistribution of Income
Equality
Forces
Prices Determined by the market forces Determined by the Government
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Dynamic economy, incentives for Promotion of equality. Attempt to
Advantages
innovation and economic growth overcome market failure
17. Chit Fund: Chit funds are a popular type of savings institutions in India. It is one of the main
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parts of the unorganised money market industry + It refers to an agreement arrived at by a group
of individuals to invest a certain amount through periodic installments over a specified period of
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time + The chit fund provides access to savings and borrowings for people with limited access to
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banking facilities + Chit funds in India are managed, conducted, and regulated according to Chit
Funds Act of 1982. + They are governed through central legislation while state governments are
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responsible for their administration.

 Laws governing Chit Funds:
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o Chit funds is being part of the Concurrent List of the Indian Constitution.
o RBI and SEBI does not regulate Chit Funds.
o States like Tamil Nadu, Andhra Pradesh and Kerala had enacted legislation (e.g. The
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Kerala Chitties Act, 1975 and The Tamil Nadu Chit Funds Act, 1961) for regulating chit
funds.
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o In 1982, the Ministry of Finance enacted the Chit Funds Act, 1982 to regulate the sector.
o The responsibility for enforcing the provisions of this Act lies with the state government.
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o Under this Act, the chit fund businesses can be registered and regulated only by the
respective State Governments.
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o Regulator of chit funds is the Registrar of Chits appointed by respective state

governments under Section 61 of Chit Funds Act.
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18. Credit Rating Agencies: A credit rating agency (CRA) is a company that assigns credit ratings,
which rate a debtor's ability to pay back debt by making timely principal and interest payments
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and the likelihood of default. There are six credit rating agencies registered under SEBI namely,
CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. The Securities and
Exchange Board of India (Credit Rating Agencies) Regulations, 1999 empowers SEBI to
regulate CRAs operating in India.
19. Participatory Notes: Instruments issued by registered foreign institutions investors to overseas
invest without registering themselves with the market regulator, Keep the investor name
anonymous, make it simplified to invest in multiple foreign securities.
20. Other terms associated with Capital Markets
 Depository: Holds securities of investors like Shares, bonds, debentures, mutual fund,
Licensed by SEBI.

ECONOMY
(Revision Notes)
 National Securities Depository Ltd.(NSDL): Promoted by UTI, IDBI and NSE, first
depository of India.
 Dematerialisation: Conversion of physical securities into electronic form, Demat account is
used for purchase and sell of shares, Mandatory in India since 2018.
 Angel Investors: Affluent individual who provides capital for a business start-up in exchange
of equity, also provides management advise.
 Venture Capital (VC): Funding for the start-ups by firms or individuals, invests in early
state companies, generally after Seed funding round.
 Qualified stock brokers: SEBI defines QSBs as entities who, because of their size and scale
of operations, can likely impact investors and the securities market, as well as governance
and service standards. These stock brokers cater to the needs of a large number of investors.
 Front-running: It is a dubious market practice in which a dealer, trader or employee gets
wind of a big order for buying or selling shares that will be placed by a fund or big investor
and gets ‗in front‘ of the trade + Large orders usually move a stock‘s price + By buying
shares just before the big order hits the market and selling them once the price moves up, the
front-runner pockets illegal gains from his advance knowledge + SEBI (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003
clearly define front-running and characterises it as a fraudulent and unfair practice.
 Impact Investing: It refers to investments made into companies, organizations, and funds
with the intention to generate a measurable, beneficial social or environmental impact
alongside a financial return + Investors who follow impact investing consider a company‘s
commitment to corporate social responsibility or the duty to positively serve society as a
whole.
21. Funding Stages
22. Foreign Security Market: It is the market where different currencies can be bought and sold +
There are two levels to this global market - interbank market and over-the-counter market + It is
the world's largest financial market.
 Benefits: Low cost transactions, increased leverage, relatively transparent, high liquidity and
operates 24 hrs.
 Forex reserves: These are assets held by the central bank (Reserve Bank of India) in foreign
currencies, gold reserves, SDRs with the IMF + They act as a buffer and as hedging against
difficult and challenging times + The foreign currencies held as forex reserves include the US
dollar, the Euro, the British pound sterling, the Japanese yen, and the Chinese yuan +
India currently has the fourth largest foreign exchange reserves in the world + India's foreign
exchange reserves increased by USD 4.471 billion to USD 620.441 billion in the week
ending December 22, 2023 + Forex reserves in India comprise of Foreign Exchange assets
(FEAs), Gold, Special Drawing Rights (SDRs) and Reserve Position in the IMF + Foreign
Currency Assets (88%) > Gold (8%) > SDR (3.2%) > RTP (0.8%).
 Spot Market: Transactions involving currency pairs take place on the spot market +
Necessitate immediate payment at the current exchange rate, also known as the spot rate +
Traders are not exposed to market uncertainty, which can result in an increase or decrease in
the price between the agreement and trade.
 Forward Contracts: Agreement to buy/sell an asset on specified date for specified price.
 Future Contracts: Essentially forward contracts, more liquid in nature, traded on exchanges,
Standardised in nature.

ECONOMY
(Revision Notes)
 Option Contracts: Contract which gives one part to buy or sell the underlying on a future
date at predetermined price, traded on exchanges + Call Option: Right to buy + Put Option:
Right to sell.
 Swaps: Derivatives in which counterparties agree to exchange one stream of cash flows
against another stream, used to hedge interest rate risks, not used in equity market in India +
Transaction is carried out in order to pay off their obligations without having to deal with
foreign exchange risk.
23. Investment Funds
 Mutual Funds: It is an investment vehicle that pools money from many individual investors
to purchase a diversified portfolio of stocks, bonds, or other securities + Benefits:
Diversification, professional management and accessibility + Types of mutual funds are:
o Equity funds - invest primarily in stocks
o Bond funds - invest in fixed-income securities like bonds
o Hybrid funds - invest in both stocks and bonds
o Index funds - track the performance of a specific market index
o Actively managed funds - fund manager makes decisions on which securities to buy and
sell in an attempt to outperform the market.
 Hedge funds
o It is a type of investment fund that pools money from investors and uses advanced
investment strategies to generate high returns.
o They are usually only open to wealthy investors and require a high minimum investment.
o Hedge funds can invest in almost anything, including derivatives, real estate, currencies,
and even art.
o Known for their use of complex financial instruments and techniques, such as leverage,
short selling, and options trading, to maximize returns.
o Hedge funds are not as tightly regulated as mutual funds, which means they have more
freedom to pursue their investment strategies. This can lead to higher returns, but also
higher risks.
 Alternative investment funds
o It is a type of pooled investment vehicle in India that pools together capital from different
investors and invests it in non-traditional assets such as private equity, hedge funds, real
estate, and other alternative investments.
o Regulated by the Securities and Exchange Board of India (SEBI).
o AIFs are not regulated under the same laws as mutual funds and have fewer restrictions
on the types of assets they can invest in.
o They are designed for high net worth individuals and institutional investors who are
looking for higher returns and are willing to take higher risks.
o There are three categories of AIFs in India
 Category I AIFs invest in start-ups, MSMEs, social ventures, infrastructure, or other
areas that the government or regulators consider economically or socially desirable.
 Category II AIFs invest in debt or equity securities of companies that are not listed
on a stock exchange, or in listed securities that are not frequently traded.
 Category III AIFs use complex trading strategies and invest in derivatives,
commodities, or other high-risk assets with the aim of generating high returns for
investors.
 Real Estate Investment Trust
o It is a type of investment vehicle that allows individuals to invest in real estate without
actually owning physical property.

ECONOMY
(Revision Notes)
o REITs own and operate income-generating real estate properties such as shopping malls,
apartments, office buildings, hotels, and warehouses.
o REITs are required by law to distribute at least 90% of their taxable income to their
shareholders.
o In India, REITs were introduced in 2014 and they operate under the regulations of the
Securities and Exchange Board of India (SEBI).
o The first REIT launched in India was Embassy Office Parks REIT, which is a joint
venture between Embassy Group and Blackstone Group.
o In India, when REITs were introduced a couple of years back, the minimum investment
was INR 50,000 with a lot size of 200 units. However, SEBI has brought down the
minimum investment to INR 10,000-INR 15,000 with a lot size of one unit recently.
 Infrastructure Investment Trust (InvITs): It is like a mutual fund, which enables direct
investment of small amounts of money from possible individual/ institutional investors in
infrastructure to earn a small portion of the income as return + It can be treated as the
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modified version of REITs designed to suit the specific circumstances of the infrastructure
sector + InvITs are regulated by the Securities and Exchange Board of India (SEBI)
(Infrastructure Investment Trusts) Regulations, 2014.
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ECONOMY
(Revision Notes)
CHAPTER 13: REGULATORY BODIES
1. Financial Stability and Development Council (FSDC) = Non-statutory apex council under the
Ministry of Finance constituted by the Executive Order in 2010 + Based on Raghuram Rajan
committee (2008) on financial sector reforms + Chaired by the Finance Minister +Members
include the heads of all Financial Sector Regulators (RBI, SEBI, PFRDA & IRDA), Finance
Secretary, Secretary of Department of Economic Affairs (DEA), Secretary of Department of
Financial Services (DFS), and Chief Economic Adviser.
 Updates: In 2018, the government reconstituted FSDC to include the Minister of State
responsible for the Department of Economic Affairs (DEA), Secretary of Department of
Electronics and Information Technology, Chairperson of the Insolvency and Bankruptcy
Board of India (IBBI) and the Revenue Secretary.
 Functions: Strengthen and institutionalize the mechanism for maintaining financial stability,
enhancing inter-regulatory coordination and promoting financial sector development +
Monitor macro-prudential supervision of the economy.
2. Reserve Bank of India: It is India‘s central bank set up on April 1, 1935 under the RBI
Act,1934 based on the recommendation of Hilton Young Commission Report (1926) with a share
capital of 5 crores+ Originally, RBI was privately owned but in 1949 it was nationalized and now
fully owned by the Government of India.
 Administration of RBI: The Board of Directors (21 members) is the key decision-making
body of RBI + Board is appointed by GoI in keeping with RBI Act + The directors are
appointed/nominated for a period of four years + It consists of:
o RBI Governor
o Four Deputy Governors
o Two Finance Ministry representatives- Economic affairs secretary and Financial services
secretary.
o 10 government nominated directors
o 4 directors to represent local boards headquartered at Bombay, Calcutta, Madras and New
Delhi.
 RBI Governor and Deputy Governors are appointed by the Central Government. Their
appointments are made by Cabinet Committee on Appointments.
 Legal Framework: The major duties and responsibilities of RBI flow from RBI act, 1934.
However, its functions are governed by other statutes as well such as FEMA,1999, Payment
and settlement act, 2007 etc.
 Functions of RBI
o Public Debt Functions: Section 20 of RBI act-> Central government to entrust RBI with
its debt and cash management functions + Market borrowing through issuance of various
bonds + Debt Manager of both Central Govt. (via the Act) and State Govt. (via the
Agreement)
o Foreign Exchange Management: Section 10 of FEMA empowers RBI to authorize person to
deal in foreign exchange as an authorized dealer as it deems fit + Custodian of Foreign
Exchange reserves in India + It facilitates external trade and payment and promotes orderly
development and maintenance of foreign exchange market in India + Maintains external value
of rupee.
o Monetary Functions
 Issue of Currency: All currency in India (except Rs.1 notes and coins of all
denominations) are issued and circulated by RBI. [Note: Rs.1 notes and all coins
issued by Ministry of Finance but circulated by the RBI].

ECONOMY
(Revision Notes)
 Minimum reserves system: RBI has to keep a minimum reserve of 200 crores
comprising of Gold and foreign exchange.
 Implements Monetary policy: It implements and monitors the monetary policy and
ensures price stability + RBI amendment act provided statutory basis for
implementation of the flexible inflation targeting framework and provided for
empowered six-member Monetary Policy Committee (MPC) to be constituted by the
Central Government.
o Banker and Debt Manager to government: It maintainsbank accountfor government,
receive and make payments out of it + It helps GoI to raise money from public through
issue of bonds.
o Bankers Bank: Commercial banks are account holders in RBI and it maintains banking
account of all scheduled banks + Provides financial assistance against mortgaged securities and
rediscounts bills of exchange + It also acts as lender of last resorts by providing fund to banks.
o Developmental role: Various functions to support national objectives such as making
institutional arrangements for rural or agricultural finance + SCBs lend loans to small-
scale industrial units as per its directives (Priority Sector Lending).
o Financial Inclusion: No Frills accounts (account either with nil or very low minimum
balance) + Use of technology (Devices such as ATMs, hand held devices to identify user
accounts through a card and biometric identifier etc).
o Controller of credit: By making frequent changes in monetary policy (like CRR, SLR,
Repo Rate and Reverse Repo Rate), it ensures that the monetary system in the economy
functions according to the nation‘s needs and goals.
o Inflation control: The RBI has targeted to keep the mid-term inflation (CPI-combined) at
4 four percent (+/- 2 percent).
o Payment and settlement functions: Payment and settlement systems act, 2007 designate
RBI for regulation and supervision of payment systems in India + Board for Regulation
and Supervision of Payment and Settlement Systems (BPSS), a sub-committee of the
Central Board of the RBI is the highest policy making body on payment systems in the
country.
o Regulatory role: Maintains public confidence in the system, protect depositors' interest
and provide cost-effective banking services such as commercial banking, co-operative
banking, to the public + It covers commercial banks, co-operative banks and certain
categories of NBFCs registered with it + All India financial institutions such as EXIM,
NABARD, NHB and SIDBI are covered under regulation of RBI.
 Subsidiaries of RBI
o Deposit Insurance and Credit Guarantee Corporation (DICGC): It insures various
deposits with eligible banks + Every bank depositor insured upto Rs. 5 Lakh for both
principal and interest.
o Bharatiya Reserve Bank note mudran private limited (BRBNMPL)
o Reserve Bank Information Technology Private Limited (ReBIT)
o Indian Financial Technology and Allied Services (IFTAS)
 Independence of RBI: Under Sec. 7 of RBI Act,Central government may from time to time
give such directions to the RBI as it may, after consultation with RBI governor + There is no
legal act mandating autonomy of the RBI.
 Assets of RBI: Foreign currency assets, Gold coin Bullion, Rupee securities (including
treasury bills), Loans and advances to Central and State Governments, commercial and
cooperative banks and others in terms of section 17 and 18 of RBI act, 1934.

ECONOMY
(Revision Notes)
 Liabilities of RBI: Notes issued, Notes in circulation, Notes held in banking departments,
cash balances maintained with Reserve Bank by Central and State governments, banks, All
India Financial institutions such as EXIM Bank, NABARD, foreign central banks and
balance in different accounts relating to Employee‘s Provident Fund, Gratuity and
Superannuation Funds.
 Recent Initiatives of RBI
o RBI Guidelines on OTS: The Reserve Bank of India (RBI) has recently introduced
significant changes to the regulations governing one-time settlements (OTS) and technical
write-offs of loans. The RBI has issued detailed guidelines aimed at streamlining the
process and ensuring greater accountability in these areas for all regulated entities. +
These guidelines aim to define the process, set precedents, and outline a graded
framework for staff accountability, all within specific timelines.
o RBI Guidelines on Default Loss Guarantee: The Reserve Bank of India (RBI) has
taken a significant step by allowing a ‗first loss default guarantee‘ (FLDG) arrangement
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between regulated entities and lending service providers. This move aims to enhance the
digital lending sector and mitigate credit risks associated with it.
o Draft Master Directions on Cyber Resilience and Digital Payment Security Controls
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for PSOs: The Reserve Bank of India (RBI) has recently made an important move in the
field of cyber resilience and digital payment security. They have released the draft Master
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Directions on Cyber Resilience and Digital Payment Security Controls for Payment
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System Operators (PSOs). This draft aims to provide comprehensive guidelines and
measures to strengthen the cybersecurity framework in the digital payment ecosystem.
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o Currency Demand Paradox: The currency demand paradox, often referred to as the
―paradox of banknotes,‖ is a phenomenon where the value of banknotes in circulation
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increases despite a decline in their use for payments. This intriguing trend has been
observed in several nations since 2007, challenging the notion that digital payments
would replace traditional cash transactions. In India, despite the remarkable growth of
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retail digital payments, the currency in circulation to GDP ratio peaked at 14.4% in 2020-
21.
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o DAKSH: It is a web-based end-to-end workflow application through which RBI shall

monitor compliance requirements in a more focused manner with the objective of further
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improving the compliance culture in Supervised Entities (SEs) like Banks, NBFCs, etc +
The application will also enable seamless communication, inspection planning and
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execution, cyber incident reporting and analysis, provision of various MIS reports etc.,
through a platform which enables anytime-anywhere secure access.
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o RBI liberalizes norms for Micro Finance institutions (Mar 2022): Any collateral-free
loan given to a household with an annual income of up to Rs. 3 lakhs as an MFI loan +
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Lenders cannot provide loans where loan payment is at 50% of monthly household
income + If any existing loans with an outgo of > 50%, the loans will be permitted to
mature; RBI eliminates restrictions on processing fees and interest.
o One Nation One Ombudsman scheme: It provides unified ombudsman scheme by
integrating Banking ombudsman scheme of 2006, Ombudsman scheme for NBFCs 2018 and
Ombudsman scheme of digital transactions of 2019 + It defines ‗deficiency in service‘ as the
ground for filing a complaint + Centralized receipt and processing centre has been set-up in
Chandigarh for initial handling of complaints + RBI‘s Executive Director-in charge of
Consumer Education and Protection Department would be the Appellate Authority under the
integrated scheme.

ECONOMY
(Revision Notes)
o Revised Priority sector lending (PSL) norms: Scope of PSL broadened to include
startups, increase in limits for renewable energy including solar power and compressed
bio-gas plants.
o Central bank digital currencies (CBDC): RBI proposed amendments to the RBI Act,
1934, which would enable it to launch CBDC + It is a digital form of Fiat currency which
can be transacted using wallets backed by block chain and is regulated by the central bank
+ Using CBDC countries will be able to directly exchange digital currencies in a bilateral
way and without going through SWIFT or similar settlement systems + CBDC can be
classified into two broad types viz. general purpose or retail (CBDC-R) and wholesale
(CBDC-W) + Retail CBDC would be potentially available for use by all viz. private
sector, non-financial consumers and businesses while wholesale CBDC is designed for
restricted access to select financial institutions + While Wholesale CBDC is intended for
the settlement of interbank transfers and related wholesale transactions, Retail CBDC is
an electronic version of cash primarily meant for retail transactions + It would lower the
cost of currency maintenance while allowing real-time payments to be made without the
need for interbank settlement.
o Legal Entity Identifier (LEI) for large value transactions in RTGS/NEFT: It is a 20-
digit number used to uniquely identify parties to financial transactions worldwide aimed
at improving accuracy of financial data systems for better risk management + RBI
decided to introduce the LEI system for all payment transactions of value Rs.50 crores
and above undertaken by entities (non-individuals) using RBI-run centralised payment
systems viz. RTGS and NEFT + It can be obtained from Legal Entity Identifier India Ltd.
(LEIL) recognized by Reserve Bank under the Payment and Settlement Systems Act,
2007.
o Operation Twist: It is RBI‘s simultaneous selling of short-term securities and buying of
long term securities through OMOs + It will bring down interest on long term loans->
increase in economic spending, borrowers will benefit as the retail loans will get cheaper.
o Access to Government Gilt bonds to retail investors: RBI allowed retail investors to
directly buy government debts (gilt bonds), making India the first Asian country to do so
+ It will broaden investor base and provide retail investors with enhanced access to
participate in government securities market + G-Secs are tradeable investment
instruments issued by government which are mostly risk-free as they are backed by
sovereign.
o Regulatory Sandbox: It refers to live testing of new products or services in a controlled
and test regulatory environment for which regulators may (or may not) permit certain
regulatory relaxations for the limited purpose of the testing to boost innovation in Fintech
firms + Objective is to foster responsible innovation in financial services, promote
efficiency and bring benefit to consumers + Advantages include it fosters learning by
doing on all sides, tests product viability without large and expensive rollout, improves
the pace of innovation and technology absorption.
o On-tap licensing for Universal Small Finance Banks (SFBs): On-tap licensing means
that the window for getting a bank license from RBI is open throughout the year.
o Digital Payments Index: It comprises five broad parameters that enable us to know the
penetration of digital payments in the country over different time periods + Parameters
include payment enablers (with 25% weight), payment infrastructure-demand-side factors
(10%), payment infrastructure-supply-side factors (15%), payment performance (45%)
and consumer centricity (5%) + It will be published on semi-annual basis from March
2021 onwards with a lag of 4 months.

ECONOMY
(Revision Notes)
o Other Reports published by RBI: Industrial Outlook Survey of Manufacturing sector,

Consumer Confidence Survey.
 RBI Dividend Transfer: Section 47 of RBI Act mandates that profits made by the central
bank from its operations be sent to the Centre +Every year the RBI also pays a dividend to
the government to help with the finances from its surplus or profit.
o RBI‘s Earnings:Returns earned on its foreign currency assets + Interest on its holdings of
local rupee-denominated government bonds or securities + lending to banks for very short
tenures, such as overnight + Management commission on handling the borrowings of
state governments and the central government.
o RBI‘s Expenditure:Printing of currency notes and on staff + Commission it gives to banks
for undertaking transactions on behalf of the government across the country, and to
primary dealers, including banks, for underwriting some of these borrowings.
 Economic Capital Framework:
Refers to the risk capital required by
the central bank while taking into
account different risks + Reflects the
capital that an institution requires or
needs to hold as a counter against
unforeseen risks or events or losses
in the future + It includes its capital,
reserves, risk provisions and
revaluation balances + Committees
constituted - Y. H. Malegam
Committee (2013-2014) and Bimal
Jalan Committee (2018)
3. Securities and Exchange Board of
India (SEBI): It came into existence as
a non-statutory body in 1988 under a
resolution of GOI + Later became
autonomous and given statutory powers by SEBI Act 1992 + Headquarters at Mumbai and
regional offices at Ahmedabad, Kolkata, Chennai and Delhi.

ECONOMY
(Revision Notes)
 Structure of SEBI
o Composition: SEBI Board consists of nine members-
o Securities Appellate Tribunal
 It is a statutory body established under provisions of SEBI act 1992.
 Composition-> Presiding officer (appointed by central government in consultation
with CJI) and two other members.
 To hear and dispose of appeals against orders passed by SEBI or by an adjudicating
officer under SEBI act, 1992, PFRDA, IRDAI.
 It has the same powers as vested in a civil court.
 Further, if any person feels aggrieved by SAT‘s decision or order can appeal to the
Supreme Court.
 Powers and Functions of SEBI: The basic function is to protect the interests of investors in
securities and to promote and regulate the securities market.
o It is a quasi-legislative and
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quasi-judicial body which
can draft regulations, conduct
inquiries, pass rulings and
impose penalties.
o Review market operations, l.c
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organizational structure and
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administrative control of
stock exchanges.
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o Regulation of market
intermediaries such as
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merchant bankers, portfolio

managers etc.
o Overlook registration and regulation of mutual funds and venture capital funds.
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o Prohibit unfair trade practices in securities market.

o Prohibition of insider trading.
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o Securities laws (Amendment) Act, 2014 ->Enables regulating any money pooling scheme
> Rs. 100 crore and attach assets in cases of non-compliance.
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 Recent Initiatives of SEBI

o SaaRthi App: It is an initiative of SEBI to create investor awareness of the fundamental
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concepts of the securities market + It also include information on the KYC procedure,
trading and settlement, mutual funds and investor grievance redressal mechanisms + It is
as
available in Hindi and English.

o SEBI amends norms for Independent directors: Appointment, re-appointment and
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removal of independent directors will be done only through special resolution passed by
shareholders (applicable to all listed entities) + One-year cooling period will be given for
an independent director transitioning to a whole-time director in same company or
subsidiary or any company belonging to promoter group.
o Usha Thorat committee: The SEBI revamped its committee that advises it on matters of
development of mutual fund + It advise the regulator on measures required for a change
in legal framework to introduce transparency and simplification in mutual fund
regulations.
o SCORES: It is a mobile application which assist investors to enter grievances in SEBI
complaints redress system (SCORES) portal + It is available on both iOS and Android
platforms, will encourage investors to lodge their complaints on SCORES instead of
sending physical letters.

ECONOMY
(Revision Notes)
o T+1 Settlement system: SEBI allowed stock exchanges to start the T+1 system as an
option in place of T+2 for completion of share transactions on an optional basis in a move
to enhance liquidity + It is expected to reduce settlement time, reduction in systemic risks
and reduction in unsettled trade.
o One-hour trade settlement: SEBI is planning to implement one-hour settlement of
trades first + In one-hour settlement, if an investor sells a share, the money will be
credited to their account in an hour, and the buyer will get the shares in their demat
account within an hour.
4. NABARD: Established on recommendations of B Sivaraman committee under National
Bank for Agriculture and Rural Development Act, 1981 + It is the apex banking institution to
provide finance for Agriculture and rural development + It is headquartered at Mumbai + Its
paid-up capital was Rs 100 crore; wholly owned by Government of India.
 Organizational structure
o Board of Directors: Management of NABARD vests in board of directors + It has
representatives from RBI, GOI, State governments and directors nominated by GOI + The
Chairperson and other directors (except elected ones by share-holders and officials of the
Central Government) shall be appointed by the Central Government in consultation with
RBI.
o Executive committee: Executive committee may be constituted by Board of Directors.
They shall discharge such functions as may be prescribed or may be delegated to it by the
Board.
 Subsidiaries of NABARD: NABARD Consultancy services (NABCONS), Delhi, NABARD
Financial services (NABFINS), Bengaluru, Agri business finance ltd, Hyderabad and
NABKISAN Financial Ltd. Chennai.
 Functions of NABARD
o Financial Functions
 Refinance support: It provides short-term and long-term refinance available to SCBs
and RRBs for activities such as agriculture and allied activities, marketing of crops,
fisheries sector etc + Refinance given to both farm sector and non-farm sector
(artisans, handicrafts, handlooms, MSME etc).
 Direct Finance
 Rural Infrastructure Development Fund (RIDF): It was set up with NABARD
in 1995-96 by the RBI out of the shortfall in lending to PSL by SCBs to support
rural infrastructure projects.
 Eligible activities: 37 activities classified under three broad categories such as
Agriculture and related sector, social sector and rural connectivity.
 Mode of Finance: It releases the sanctioned amount on reimbursement basis
except for the initial mobilisation advance @30% to North Eastern & hilly
States and 20% for other states.
 Quantum of loan: The project for rural connectivity, social and agri-related
sector, are eligible for loans from 80 to 95% of project cost.
 Rate of interest: Interest rates payable to banks on deposits placed with
NABARD and loans disbursed by NABARD from RIDF have been linked to
bank rate prevailing at that point of time.
 Repayment period: Loan to be repaid in equal annual instalments within
seven years from the date of withdrawal, including a grace period of 2 years.
 NABARD Infrastructure Development Finance (NIDA): NIDA designed to
complement RIDF.

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(Revision Notes)
 Rural Infrastructure Promotion Fund (RIPF):It has been setup with a corpus
of Rs. 25 crores + Contributed out of margin received by NABARD from special
window under RIDF for funding rural roads component of Bharat Nirman.
 Warehouse Infrastructure Fund (WIF): It was created in 2013- 14 with
NABARD with a corpus of Rs 5,000 crore for providing loans to meet the
requirements for scientific warehousing infrastructure for agricultural
commodities in the country.
 Long term Irrigation Fund (LTIF): It was launched in 2016 to complete
projects along with their command area development (CAD) + It has instituted in
NABARD as a part of Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) + It
aimed to bridge the resources gap and facilitate completion of 99 prioritized
irrigation projects as part of Pradhan Mantri Krishi Sinchayee Yojana (PMKSY)
during 2016-2020 + Funds raised through budgetary resources from GOI and
market borrowings by NABARD.
o Developmental Functions
 Farm technology transfer fund (FTTF): Set up in 2008 out of NABARDs operating
profit to facilitate better access for farmers to various inputs, technology, credit,
marketing support etc.
 Tribal development fund (TDF): It was created with a corpus of Rs. 50 crores in
2003-04 out of its profits.
 Promotion of FPOs: It provides financial and development support to FPOs through
Producers organization development fund (PODF), PRODUCE fund and central
sector scheme for promotion of FPOs.
 Kisan credit card: The Kisan credit card (KCC) scheme was designed by NABARD
in association with the RBI in August 1998 for providing crop loans.
 RuPayKisan Cards (RKCs): It helped rural financial institutions in providing RuPay
Kisan Cards to all their farmer clients.
 EShakti: It was launched in 2015 to improve the digitization of SHGs.
 Training: It provides training to handicraft artisans and helps them in developing a
marketing platform for selling these articles.
 Micro Finance Sector: NABARD launched SHG Bank Linkage programme in 1992
with target of linking 500 SHGs in a year.
 District credit plans: It prepares district level credit plans to guiding and motivating
the banking industry in achieving these targets.
 Green Climate Fund: It is designated as operating entity of financial mechanism of
UNFCCC + NABARD accredited as National Implementing Entity and it is eligible
to submit large size projects having outlay of more than USD 250 million.
 National Adaptation Fund for climate change: It was established in 2015 to meet
the cost of adaptation to climate change for the State and UTs particularly vulnerable
to the adverse effects of climate change + NABARD has been designated as National
Implementing Entity (NIE) for implementation of adaptation projects under NAFCC
+ NABARD perform roles in facilitating identification of project ideas from
State Action Plan for Climate Change (SAPCC), project formulation and
capacity building of stakeholders.
o Supervisory Functions: It supervises Cooperative Banks and Regional Rural Banks
(RRBs) and helping them develop sound banking practices and integrate them to the CBS
(Core Banking Solution) platform.
 Recent initiatives of NABARD

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o RBI extends fresh support of ₹50,000 crores to NABARD: RBI provided NABARD
with a special liquidity facility (SLF) of ₹25,000 crores for one year to support
agriculture and allied activities, the rural non-farm sector and non-banking
financial companies-micro finance institutions.
o First Agricultural Export Facilitation Centre: The Maharashtra government and
NABARD recently launched first agricultural export facilitation centre at Pune + It will
aid in boosting the agricultural and food exports of Maharashtra and act as a one-stop
shop to export agricultural food productions.
o Grameena Habba: It isa platform for rural artisans to sell handicraft, agricultural, and
handloom products held by NABARD‘s Karnataka regional office in Bengaluru.
o JIVA Programme: It is an agroecology-based programme that aims to promote natural
farming under NABARD‘s existing watershed and wadi programmes in 11 states
covering five agroecological zones + An amount of Rs 50,000 per hectare will be
invested under the programme + NABARD collaborates with national and multilateral
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agencies with focus on resilience to climate change, food sustainability and nutrition
security.
5. Pension Fund regulatory and development authority (PFRDA): It is the statutory authority
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under Department of Financial services (Ministry of Finance) + It is established by an act of
Parliament, to regulate, promote and ensure orderly growth of the National pension system (NPS)
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+ Major functions include -> Performing function of appointing various intermediate
agencies like Pension Fund Managers and Central record keeping agency (CRA) + It functions as
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a quasi-government organization with executive, legislative, and judicial powers similar to RBI,
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SEBI and IRDA.

6. Insurance Regulatory and Development Authority of India (IRDAI): It is a statutory agency
established by IRDA Act of 1999 following the recommendations of Malhotra committee + Its
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main function is overall supervision and development of Insurance sector in India + Its
headquarters is situated at Hyderabad, Telangana.
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 Composition: Chairman + Five whole-time members + Four part-time members appointed by GoI.
 Objectives: Protect the interest and fair treatment of policyholders + Regulation of insurance
80
industry + Framing regulations to ensure that industry operates without any ambiguity.
 Entities regulated by IRDAI
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o Life Insurance companies - Both public and private sector Companies

o General Insurance companies - Both public and private sector companies.
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o Reinsurance companies
o Agency channel
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o Intermediaries which include corporate agents, brokers, third-party administrators,

surveyors and loss assessors.
 Powers and Functions: These are laid down in the IRDAI Act, 1999, and Insurance Act,
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1938 + Important functions include:

o Grant, renew, suspend, cancel certificates of insurance company.
o Protecting the interests of the policyholder; specify code of conduct, qualifications and
training for insurance agents.
o Specify code of conduct for loss assessors and surveyors.
o Levying fees and charges for carrying out the provisions of the act.
 Recent Initiatives of IRDAI
 Bima Sugam: It is an online platform where customers can choose a suitable scheme
from multiple options given by various companies + All insurance requirements,
including those for life, health, and general insurance (including motor and travel) will be

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(Revision Notes)
met by Bima Sugam + It will enable easy access under a single roof for insurance
companies, agents, brokers, banks and aggregators.
 Bima Vistar: It aims to provide ‗affordable, accessible and comprehensive cover‘ in the
form of a bundled risk cover for life, health, property and casualties or accidents.
 Bima Vahaks: It is a women-centric, dedicated distribution channel to enhance insurance
inclusion with a focus on rural areas + Each Gram Panchayat would have a ‗Bima Vahak‘
who would be tasked to sell and service insurance products.
 Saral Jeevan Bima: It is regulator-mandated standard term life insurance plan offering
basic protection to people who are self-employed or belong to a lower income category
launched by IRDAI.Key Features:
 Eligibility: It is a pure term life insurance product which can be purchased by
people in the age group of 18- 65 years with policy term of 5 to 40 years.
 Sum assured: It ranges from Rs 5 lakh to Rs 25 lakh (in multiples of Rs
50,000).
 Lump sum payment: It provides for payment of sum assured in lump sum to
the nominee in case of the life assured‘s unfortunate death during the policy
term.
 Maturity: It allows for a maximum maturity age of 70 years + There will be no
maturity benefit. Neither will there be any surrender value nor can any loan be
taken against the product.
 No Exclusions: There are no exclusions, other than suicides.
 Micro-Insurance Regulations: IRDA Micro-insurance Regulations, 2005 defines micro-
insurance as: A general or life insurance policy with a sum assured of Rs 50,000 or less +
Targeted towards low-income households or to individuals who have little savings
o Micro-insurance business is done through the intermediaries: Non-Government
Organisations, Micro-Finance Institution, Self-Help Groups etc.
 Domestic Systemically Important Insurers (D-SIIs): IRDAI identified LIC, General
Insurance Corporation of India (GIC) and New India Assurance Co as D-SIIs for 2021-22
+ D-SIIs are perceived as insurers that are ‗too big or too important to fail‘ (TBTF) +
IRDAI would identify D-SIIs on an annual basis and disclose the names of such insurers
for public information.
 Deposit Insurance and Credit Guarantee Corporation (DICGC): It was established in
1978 after merger of Deposit Insurance Corporation (DIC) and Credit Guarantee
Corporation of India Ltd (CGCI) in 1961 + It serves as a deposit insurance and credit
guarantee for banks in India + It is a fully owned subsidiary of the RBI + It covers banks,
including regional rural banks, local area banks, foreign banks with branches in India, and
cooperative banks + It maintains funds such as Deposit Insurance Fund, Credit Guarantee
Fund and General Fund.
 Coverage: It insures all bank deposits, such as saving, fixed, current, recurring, etc up to a
limit of Rs 5 lakh per account holder of a bank, except the following types of deposits:
o Deposits of foreign Governments.
o Deposits of Central/State Governments, Inter-bank deposits.
o Deposits of the State Land Development Banks with the State co-operative banks.
o Any amount due on account of any deposit received outside India.
o Any amount which has been specifically exempted by the corporation with the previous
approval of the RBI.
 DICGC Act, 2021
o Expedited Liquidation: It is now proposed to be done in 90 days.

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(Revision Notes)
o Deposit Insurance Premium: It allows raising the deposit insurance premium by 20%
immediately, and maximum by 50%.
o Insurance coverage:Funds up to Rs 5 lakh to an account holder within 90 days in the
event of a bank coming under the moratorium imposed by RBI + It covers 98.3% of
depositors and 50.9% of deposit value in the banking system, way above the global level
of 80% and 30%, respectively + Cover all types of banks including RRBs and Co-
operative banks.
o New and Old Banks Inclusion: It will cover banks already under moratorium and those
that could come under moratorium.
o Insurance Premium:It allows raising insurance premium by 20% immediately, and
maximum by 50%.
 Export Credit Guarantee Corporation of India (ECGC): Wholly owned by the
Government and is controlled by the Ministry of Commerce + Provides export credit
insurance support to Indian exporters to facilitate exports from the country + To protect
exporters against losses due to non-payment of export dues by overseas buyers due to
political and / or commercial risks + Introduced the Export Credit Insurance Scheme (ECIS)
called NIRVIK to enhance loan availability and ease the lending process + Nirvik is an
insurance cover guarantee that will cover up to 90% of the principal and interest. The cover
will include both pre and post-shipment credit.
******

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CHAPTER 14: INDUSTRY AND INFRASTRUCTURE
1. Introduction: Infrastructure is the set of basic facilities that help an economy to function and
grow such as energy, irrigation, roads, railway and telecommunication. As per Global
Infrastructure Outlook, India will need about USD 4.5 trillion in the next 25 years for
infrastructure development.
2. National Infrastructure Pipeline (2020-25): Launched by GOI to facilitate world class
infrastructure projects to be implemented + It has projected total infrastructure investment of Rs.
102 lakh crore during the period FY 2020 to 2025 + Energy (24%), Roads (18%), Urban (17%),
and Railways 11%) along take up more than 70% of the projected capital expenditure + It
envisages both Central Government (39%) and State Government (40%) to have equal share in
funding and the remaining 21% will come from private sector.
3. National Monetization Pipeline: It envisages an aggregate monetisation potential of ₹6-lakh
crore through the leasing of core assets of the Central government in sectors such as roads,
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railways, power, oil and gas pipelines, telecom, civil aviation etc, over a four-year period (FY
2022-25) + The core infrastructure assets that will be rolled out under the Asset Monetization
Programme are NHAI Operational Toll Roads, AAI Airports in Tier II and III cities and
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Warehousing Assets of CPSEs such as Central Warehousing Corporation and NAFED
among others.
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4. National Infrastructure and Investment Fund: It is a fund created by GOI in 2015 for
enhancing infrastructure financing in the country + It is registered as a category II alternative
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investment fund with the SEBI + It has been set up as fund of funds structure with aim to
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generate risk adjusted returns for its investors alongside promoting infrastructure development +
Government‘s contribution to NIIF is 49% of total commitment at any given point of time;
remaining 51% will be raised from domestic and global investors, including international pension
62
funds + Its Governing Council is chaired by Finance Minister.

5. PM Gati Shakti: It is aimed to
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ensure integrated planning and

implementation of infrastructure
80
projects in the next four years, with

focus on expediting works on the
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ground, saving costs and creating jobs +

It will subsume the Rs 110 lakh
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crore National Infrastructure

Pipeline that was launched in 2019 + It
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also aims to have 11 industrial

corridors and two new defence
corridors + It will help in fulfilling the
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ambitious targets set by the government

for 2024-25, including expanding the length of the national highway network to 2 lakh kms,
creation of more than 200 new airports, heliports and water aerodromes + It intends to bring
together 16 infrastructure related Ministries.
6. Infrastructure Investment Trust (InvITs): It is like a mutual fund, which enables direct
investment of small amounts of money from possible individual/ institutional investors in
infrastructure to earn a small portion of the income as return + It can be treated as the modified
version of REITs designed to suit the specific circumstances of the infrastructure sector + InvITs
are regulated by the Securities and Exchange Board of India (SEBI) (Infrastructure Investment
Trusts) Regulations, 2014.

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(Revision Notes)
7. National Bank for Financing Infrastructure and Development (NaBFID): Established in

2021 by National Bank for Financing Infrastructure and Development Act, 2021 + Specialized
Development Finance Institution in India + It aims to address gaps in long-term non-recourse
finance for infrastructure development and strengthen bonds and derivatives markets in India +
Regulated and supervised by RBI as an All India Financial Institution (AIFI).
8. UDAN scheme: It was launched as a Regional Connectivity Scheme (RCS) under the Ministry
of Civil Aviation in 2016 + It was formulated based on the review of The National Civil Aviation
Policy (NCAP)-2016 + It envisages providing connectivity to unserved and underserved
airports of the country through the revival of existing air-strips and airports + 220
destinations (airports/heliports/water aerodromes) under UDAN are targeted to be completed by
2026 with 1000 routes to provide air connectivity to unconnected destinations in the country.
9. Central Road & Infrastructure Fund(CRIF): Ministry of Finance + It was given statutory
status under the Central Road and Infrastructure Fund Act, 2000 amended by the Finance Act,
2019 + Before that the Central Road Fund was governed by the Resolution of Parliament passed
in 1988 + Earlier administrative control of CRIF was under the Ministry of Road Transport and
Highways, but now it is under the control of the Ministry of Finance+ It is earmarked for various
infrastructure sectors such as Transport, Energy, Communication, Water & Sanitation, Social &
Commercial Infrastructure, etc., as per the provisions of the CRIF Act, 2000 + Fund shall be
utilised for Development and maintenance of national highways; other State roads including
roads of inter-State and economic importance.
10. Sagarmala: Its objective is to promote ―Port-led development‖ along India‘s 7500 km long
coastline + The Union Ministry of Shipping has been appointed as the nodal ministry for
this initiative + To implement this, State governments would set up State Sagarmala
committees, headed by the chief minister or the minister in charge of ports + At t he
central level, a Sagarmala Development Company (SDC) will be setup to provide equity
support to assist various special purpose vehicles (SPVs) setup for various projects.
11. Bharatmala Pariyojana: It is a new umbrella initiative for the roads sector that focuses on
improving the efficiency of road traffic flow across the country by bridging crucial infrastructure
gaps + It envisages creation of Multimodal Logistics Parks and the removal of chokepoints
would improve the efficiency of current routes.
12. National Urban Digital Mission: It has been launched by the Ministry of Housing and Urban
Affairs along with the Ministry of Electronics and Information Technology + It will
institutionalize a citizen-centric and ecosystem-driven approach to urban governance and service
delivery in 2022 cities by 2022, and across all cities and towns in India by 2024 + It inherits the
technology design principles of the National Urban Innovation Stack (NUIS).
13. SWAMIH Fund: It is Special Window for Funding Stalled Affordable and Middle-Income
Housing Projects + The main objective of the scheme is to provide debt financing to the stalled
housing projects + It is a Category II AIF debt fund that was set up with the support of
Government of India. AIF is Alternate Investment Fund + It was launched in 2019 and is
registered with SEBI (Securities and Exchange Board of India) + It was launched to complete the
construction of RERA registered mid-income category and affordable housing projects +
SBICAP Ventures is the investment manager of SWAMIH Fund + The Department of Economic
Affairs operating under the Ministry of Finance is the sponsor of the fund.
14. Setu Bharatam: Nodal Agency: Road Ministry + Central Sector Scheme i.e. 100% funded by
Union + It aims to make all National Highways free of railway level crossings by constructing
Railway Over Bridges (ROB)/Railway Under Bridges (RUB).
15. Infrastructure Financing Models: PPP involves models like Build-Operate-Transfer (BOT),
Build-Own-Operate (BOO), Build-Operate-Lease-Transfer (BOLT), Design-Build-Operate-

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(Revision Notes)
Transfer (DBFOT), Operate-Maintain-Transfer (OMT), Toll-Operate-Transfer (TOT), Hybrid

Annuity Model (HAM) and Engineering, Procurement and Construction (EPC).
 Build-Operate-Transfer (BOT): Under this model, private partner is responsible for the
design, building, operation (during the contracted period) and transferring back the project to
the public sector. Here, private sector brings in the money and collects user fees for the
period decided beforehand in the agreement.
 Toll-Operate-Transfer (TOT): Under this model, national highway projects are monetized
where investors make a lump sum payment, and in return, they get a right for long-term
(typically 30 years) toll collection + It is more attractive for investors as they don‘t have to
build an infrastructure project from scratch + As per amendment in 2019, any PPP funded
projects that are operational for more than a year are eligible for monetization through TOT
model.
 Engineering, Procurement and Construction (EPC): Under this PPP model, the
procurement of raw material and the construction costs are completely borne by the
government + The private sector‘s participation is minimum and is limited to the provision of
engineering expertise.
 Hybrid Annuity Model (HAM): EXTERHAM is a mix between the existing two models –
BOT Annuity and EPC + As per this model, the government will contribute to 40% of the
project cost in the first five years through annual payments (annuity). The remaining 60%
will be made on the basis of the assets created and the performance of the private player +
Under this model, there is no toll right for the private player.
INDUSTRIAL POLICIES SINCE INDEPENDENCE

1. Industrial Policy Resolution, 1948
 It declared the Indian economy as Mixed Economy
 Small scale and cottage industries were given the importance
 The government restricted foreign investments
 Industries were divided into 4 categories
 Exclusive monopoly of central government(arms and ammunitions, production of atomic
energy and management of railways)
 New undertaking undertaken only by state(coal, iron and steel, aircraft manufacturing, ship
building, telegraph, telephone etc.)
 Industries to be regulated by the government(Industries of basic importance)
 Open to private enterprise, individuals and cooperatives(remaining)
2. Industrial Policy Resolution, 1956 (IPR 1956)
 This policy laid down the basic framework of Industrial Policy
 This policy is also known as the Economic Constitution of India
 It is classified into three sectors
 Schedule A – which covers Public Sector (17 Industries)
 Schedule B – covering Mixed Sector (i.e. Public & Private) (12 Industries)
 Schedule C – only Private Industries
 This has provisions for Public Sector, Small Scale Industry, Foreign Investment. To meet
new challenges, from time to time, it was modified through statements in 1973, 1977, and
1980.
3. New Industrial Policy 1991
 Reduction in Government’s Monopoly: Government monopoly was reduced by decreasing
the number of industries reserved for the public sector from 17 (as per 1956 policy) to 8
industries such as arms and ammunition, atomic energy, coal, mineral oil, mining of iron ore,

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(Revision Notes)
manganese ore, gold, silver, mining of copper, lead, etc. (Presently, only atomic energy and
core operations of railway transport are reserved for the public sector)
 Abolition of Industrial Licensing: The Industrial Licensing Policy abolished the industrial
licensing given to all industries except for the 18 industries, which was further reduced to 6
industries in 1999. (Presently, only 4 industries require compulsory licensing - Tobacco
items, Defense aerospace and warships, Hazardous chemicals and Industrial explosives)
 Provision of Foreign Companies as a Major Stake: It allowed foreign companies to have a
majority stake in India. For example, in 47 high-priority industries, up to 51% of FDI was
allowed.
4. MSME sector: Existing and Revised Definition of MSMEs
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5. National Investment & Manufacturing Zones

 National Investment & Manufacturing Zones (NIMZs) are one of the important instruments
62
of National Manufacturing Policy, 2011.

 NIMZs are envisaged as large areas of developed land with the requisite eco-system for
77
promoting world class manufacturing activity.

 The main objective of Special Economic Zones is promotion of exports, while NIMZs are
80
based on the principle of industrial growth in partnership with States and focuses on
manufacturing growth and employment generation.
 NIMZs are different from SEZs in terms of size, level of infrastructure planning, governance
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structures related to regulatory procedures, and exit policies.

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6. Location of NIMZ
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(Revision Notes)
Difference between NIMZ and Special Economic Zone

Basis of Difference NIMZ SEZ
Under the National
Under the special Economic
Legislative backing Manufacturing Policy (NMP)
Zones Act, 2005
in 2011
10-10000 hectares (depending
Minimum Area 5000 hectares
on the sector)
Maximum Area Not Specified 5000 hectares
T Small and medium 100% for the first 5 years,
Income tax exemption
enterprises 50% for the next five years
Environmental Impact Provided by the state
By the project developer
Assessment government
7. Mining Sector in India
 Legislative Framework of Mining Sector in India
o The entry at serial No. 23 of List II (State List) to the Constitution of India mandates the
state government to own the minerals located within their boundaries,

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(Revision Notes)
o The entry at serial No. 54 of List I (Central List) mandates the central government to
own the minerals within the exclusive economic zone of India (EEZ). In pursuance to this
Mines & Minerals (Development and Regulation) (MMDR) Act of 1957 was framed.
o International Seabed Authority (ISA) regulates mineral exploration and extraction. It is
guided by the UN treaty and India being a party to the treaty has received an exclusive
right to explore polymetallic nodules over 75000 sq. km in Central Indian Ocean Basin.
o The MMDR Amendment Act of 2015 introduces Mineral Concessions Grant through
auctions to bring transparency and remove discretion; The District Mineral Foundation
(DMF) to address the longtime grievance of the people affected by mining; and the
National Mineral Exploration Trust (NMET) for incentivising regional and detailed
exploration to fill the gaps in exploration in the country, and stringent measures to check
illegal mining.
 Authorities governing mining in India
o The Ministry of Mines (MoM) is responsible for the survey and exploration of all
minerals (other than coal, natural gases and petroleum) mining and metallurgy of non-
ferrous metals; and administration of the MMDR Act.
o The Geological Survey of India (GSI) which is attached to the Ministry of Mines
(MoM) creates and updates national geoscientific data and mineral resource assessments.
o The Indian Bureau of Mines (IBM) which is subordinate to the Ministry of Mines is
mainly responsible for regulating and ensuring the systematic development of mining in
India.
o The Ministry of Environment, Forest and Climate Change (MoEFCC) is responsible
for the planning and implementation of India‘s environmental and forestry policies and
programmes.
 Types of Mines in India
o Captive Mines: Captive industries own these mines. The coal or mineral produced from
these mines is for the exclusive use of the owner company of the mines. The company
cannot sell coal or mineral outside. Some electricity generation companies used to have
captive mines.
 For Example, If an iron ore mine is allowed to a captive industry(iron and steel
plant). Then that iron and steel plant can use the iron ore only for producing
steel for their company. They cannot sell the ore to any outsider.
o Non- Captive Mines: In Non-captive mines, the minerals obtained by a company can be
sold in the market.
 Types of Leases
o Reconnaissance permit and Non-Exclusive Reconnaissance Permit (NERP): Undertaking
preliminary prospecting of a mineral through regional, aerial, geophysical or geochemical
surveys and geological mapping.
o Prospecting licence: A prospecting licence is a concession to undertake prospecting
operations, including exploring, locating and proving mineral deposits.
o Composite (prospecting/mining) licence: The composite licence is a two-stage concession
where prospecting is followed by mining operations.
o Mining lease: This is a lease allowing mining operations within the boundaries of the
State. It allows for the grant of sub-leases for mining operation. Mining leases for
minerals other than coal, lignite and atomic minerals are granted for a period of 50 years.
 District Mineral Foundation (DMF)

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(Revision Notes)
o It is instituted under the Mines and Minerals (Development and Regulation) (MMDR)
Amendment Act 2015 as non-profit trusts to work for the interest and benefit of persons
and areas affected by mining-related operations.
o Its manner of operation comes under the jurisdiction of the relevant State Government.
o It is funded through the contributions from miners by both holders of mining leases and
composite lease (10%-30%).
o DMFs are expected to implement the Pradhan Mantri Khanij Kshetra Kalyan Yojana
(PMKKKY) for the welfare of mining areas and affected population.
 National Mineral Exploration Trust (NMET)
o It is a Trust set up as a non-profit body by the Central Government for the purposes of
regional and detailed exploration of minerals using the funds accrued to it and in such
manner as prescribed by the Central Government.
o The holder of a mining lease or a prospecting licence-cum-mining lease has to pay to the
MET, two per cent of the royalty paid by it.
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o An inter-ministerial executive committee chaired by the Secretary of Ministry of Mines
manages the day to day affairs of the Trust.
8. Coal Sector
 Overview :
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o Ministry of Coal has the overall responsibility of managing coal reserves in the country.
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o Top 5 States in terms of total coal reserves in India are: Jharkhand > Odisha >
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Chhattisgarh > West Bengal > Madhya Pradesh.
o India is the second-largest producer of coal in the world, but also third-biggest importer
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of coal despite having the world's fifth largest coal reserves.

o As per the present import policy, coal can be freely imported (under Open General
62
Licence) by the consumers themselves considering their needs based on their commercial
prudence.
o Coking Coal is being imported by Steel Authority of India Limited (SAIL) and other
77
Steel manufacturing units mainly to bridge the gap between the requirement and
indigenous availability and to improve the quality of production.
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o Coal based power plants, cement plants, captive power plants, sponge iron plants,
industrial consumers and coal traders are importing non-coking coal.
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 Government Initiatives
o In April 2018, The Ministry of Coal has launched UTTAM (Unlocking Transparency by
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Third Party Assessment of Mined Coal) Application for coal quality monitoring.
o The app aims to ensure transparency and efficiency in coal quality monitoring process
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and bring coal governance closer to people.

o The Cabinet Committee on Economic Affairs (CCEA) has approved a new coal linkage
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policy to ensure adequate supply of the fuel to power plants through reverse auction. The
new policy will help in ensuring fuel supplies to the power plants in an organised manner.
o Ministry of Coal has developed Online Coal Clearances System to provide a single
window access to its investors to submit online applications for all the permissions /
clearances and approvals granted by Ministry of Coal.
o Coal Allocation Monitoring System (CAMS) is developed to monitor the allocation of
coal by CIL to States, States to SNA and SNA to such consumers in a transparent manner.
o Opening up of commercial coal mining for Indian and foreign companies in the private
sector.

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(Revision Notes)
CHAPTER 15: DIGITAL PAYMENTS
1. Payment System : A payment system is a system used to settle financial transactions through the
transfer of monetary value and consist of the various mechanisms that facilitate the transfer of
funds from one party (the payer) to another (the payee) + A payment system includes the
participants (institutions) and the users (customers/clients), the rules and regulations that guide its
operation and the standards and technologies on which the system operates + The Board for
Regulation and Supervision of Payment and Settlement Systems (BPSS), a sub-committee of the
Central Board of the RBI is the highest policy making body on payment systems in India.
2. Payment System Operators (PSOs) : PSOs by virtue of services they provide and the
construct of models on which they operate, largely outsource their payment and settlement -
related activities to various other entities. It is an institution which has been granted an
authorisation for the operation of a payment system.
3. Payment and settlement system : India, the payment and settlement systems are regulated by
the Payment and Settlement Systems Act, 2007 (PSS Act) + In terms of Section 4 of the PSS
Act, no person other than the Reserve Bank of India (RBI) can commence or operate a payment
system in India unless authorised by RBI.
4. Electronic Payments :
 Cheque Truncation System (CTS): CTS or online image-based cheque clearing system is a
cheque clearing system undertaken by the Reserve Bank of India (RBI) for faster clearing of
cheques. It eliminates the associated cost of movement of physical cheques.
 ECS DR/CR: ECS (Electronic Clearing System) is an electronic mode of payment / receipt for
transactions that are repetitive and periodic in nature. DR/CR is 'Debit Record or Credit Record'.
ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa.
ECS includes transactions processed under National Automated Clearing House (NACH) operated
by NPCI
 National Financial Switch (NFS): National Financial Switch (NFS) is the largest network of
shared Automated Teller Machines (ATMs) in India facilitating interoperable cash
withdrawal, card to card funds transfer and interoperable cash deposit transactions among
other value added services in the country.
 Electronic Clearing Service (ECS) Credit : The Bank introduced the ECS (Credit) scheme during
the 1990s to handle bulk and repetitive payment requirements (like salary, interest, dividend
payments) of corporates and other institutions. ECS (Credit) facilitates customer accounts to be
credited on the specified value date and is presently available at all major cities in the country.
 Electronic Clearing Service (ECS) Debit : The ECS (Debit) Scheme was introduced by
RBI to provide a faster method of effecting periodic and repetitive collections of utility
companies. ECS (Debit) facilitates consumers / subscribers of utility companies to make
routine and repetitive payments by ‗mandating‘ bank branches to debit their accounts and
pass on the money to the companies. There is no limit as to the minimum or maximum
amount of payment. This is also available across major cities in the country.
 Electronic Funds Transfer (EFT) ; This retail funds transfer system introduced in the late
1990s enabled an account holder of a bank to electronically transfer funds to another account
holder with any other participating bank. Available across 15 major centers in the country,
this system is no longer available for use by the general public, for whose benefit a feature-
rich and more efficient system is now in place, which is the National Electronic Funds
Transfer (NEFT) system.
 National Electronic Funds Transfer (NEFT) System : In November 2005, a more secure system
was introduced for facilitating one-to-one funds transfer requirements of individuals / corporates.

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Available across a longer time window, the NEFT system provides for batch settlements at hourly
intervals, thus enabling near real-time transfer of funds. Certain other unique features viz. accepting
cash for originating transactions, initiating transfer requests without any minimum or maximum
amount limitations, facilitating one-way transfers to Nepal, receiving confirmation of the date / time
of credit to the account of the beneficiaries, etc., are available in the system.
 Real Time Gross Settlement (RTGS)System : RTGS is a funds transfer systems where
transfer of money takes place from one bank to another on a "real time" and on "gross" basis.
Settlement in "real time" means payment transaction is not subjected to any waiting period.
"Gross settlement" means the transaction is settled on one to one basis without bunching or
netting with any other transaction. Once processed, payments are final and irrevocable.
 Immediate Mobile Payment Services(IMPS) : The transfer of funds is completed
immediately via IMPS. You can transfer money 24x7 by using this method. IMPS can be
completed by using internet banking or mobile banking. Various digital banks in India use
IMPS services to transfer money. Depending on the bank, the transaction charges may vary.
 Clearing Corporation of India Limited (CCIL) : CCIL was set up in April 2001 by banks,
financial institutions and primary dealers, to function as an industry service organisation for
clearing and settlement of trades in money market, government securities and foreign
exchange markets. + The Clearing Corporation plays the crucial role of a Central Counter
Party (CCP) in the government securities, USD –INR forex exchange (both spot and forward
segments) and Collaterised Borrowing and Lending Obligation (CBLO) markets + CCIL is
also providing a reporting platform and acts as a repository for Over the Counter (OTC)
products.
 Unified Payments Interface: It is an advanced version of Immediate Payment Service
(IMPS)- round–the-clock funds transfer service to make cashless payments faster, easier and
smoother. UPI is a system that powers multiple bank accounts into a single mobile
application (of any participating bank), merging several banking features, seamless fund
routing & merchant payments into one hood. National Payments Corporation of India (NPCI)
launched UPI with 21 member banks in 2016.
 UPI LITE: UPI LITE is a new payment solution that leverages the trusted NPCI Common
Library (CL) application to process low value transactions that have been set at below ₹ 500
+ The solution runs off existing UPI ecosystem protocols for mobile phones to ensure
commonality, compliance and system acceptance + UPI LITE experience is intended to be a

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customer-friendly approach to enabling low value transactions without utilizing a Remitter

bank‘s core banking systems in real-time, while providing adequate risk mitigation.
 UPI 123Pay: UPI 123PAY is a payment system mainly for non-smart phone/feature phone
user by which they can make payment using UPI without Internet in a safe and secure
manner. Per transaction limit is INR 5000 on UPI 123PAY. Per day transactions limit is INR
1,00,000. While registration of your account with UPI 123PAY, you have to setup a 4-6 digit
UPI PIN by entering your debit card details. Customer have to enter UPI PIN every time he
makes the transactions.
 RuPay Card Scheme: The name, derived from the words ‗Rupee and ‗Payment‘, emphasises
that it is India‘s very own initiative for Debit and Credit Card payments. The card can also be
used for transactions in Singapore, Bhutan, UAE, Bahrain and Saudi Arabia.
 Aadhaar Enabled Payment System (AEPS) : AEPS is a bank led model which allows
online interoperable financial transaction at PoS (Point of Sale / Micro ATM) through the
Business Correspondent or Bank Mitra of any bank using the Aadhaar authentication.
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 Unstructured Supplementary Service Data (USSD): This service allows mobile banking
transactions using basic feature mobile phone (dialing *99#), there is no need to have mobile
internet data facility for using USSD based mobile banking. Key services offered under *99#
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service include, interbank account to account fund transfer, balance enquiry, mini statement
besides host of other services.
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 Stablecoins: Stablecoins are a type of cryptocurrency whose value is tied to another asset
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class to keep a stable, steady value + They aim to provide an alternative to the high volatility
of the most popular cryptocurrencies, including Bitcoin (BTC) + Unlike cryptocurrencies like
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Bitcoin, stablecoins‘ prices remain steady, in accordance with whichever fiat currency backs
them + They are open, global, and accessible to anyone on the internet.
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 Mobile Wallets : It is a way to carry cash in digital format. Instead of using physical plastic
card to make purchases, we can pay with our smartphone, tablet, or smart watch. An
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individual's account is required to be linked to the digital wallet to load money in it.
 National Automated Clearing House : National Automated Clearing House (NACH) is a
service offered by NPCI to banks which aims at facilitating interbank high volume, low value
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debit/credit transactions, which are repetitive and electronic in nature.

 National Financial Switch (NFS): NFS is the largest network of shared automated teller
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machines (ATMs) in India. It was designed, developed and deployed with the aim of inter-
connecting the ATMs in the country and facilitating convenience banking.
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 e-RUPI:
o It is a cashless and contactless method for digital payment. It is a Quick Response (QR)
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code or SMS string-based e-voucher, which is delivered to the mobile of the users.
o The users will be able to redeem the voucher without needing a card, digital payments
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app, or internet banking access, at the service provider.

o It connects the sponsors of the services with the beneficiaries and service providers in a
digital mode without any physical interface.
o The mechanism also ensures that the payment to the service provider is made only after
the transaction is completed.
o The system is pre-paid in nature and hence, assures timely payment to the service
provider without the involvement of any intermediary.
 Different from Virtual Currency:
o In effect, e-RUPI is still backed by the existing Indian rupee as the underlying asset and
specificity of its purpose makes it different to a virtual currency and puts it closer to a
voucher-based payment

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o Issuing Entities & Beneficiary Identification:

o The one-time payment mechanism has been developed by the National Payments
Corporation of India on its Unified Payments Interface (UPI) platform, in collaboration
with the Department of Financial Services, Ministry of Health & Family Welfare, and
National Health
5. National Payments Corporation of India (NPCI) : It is an umbrella organisation for operating
retail payments and settlement systems in India. It is an initiative of Reserve Bank of India (RBI)
and Indian Banks‘ Association (IBA) under the provisions of the Payment and Settlement
Systems Act, 2007. + It has been incorporated as a ―Not for Profit‖ Company under the
provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013) + The
ten core promoter banks are State Bank of India, Punjab National Bank, Canara Bank, Bank of
Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC. In
2016 the shareholding was broad-based to 56 member banks to include more banks representing
all sectors.
6. Digital Payments Index (DPI) : It comprises 5 broad parameters that enable measurement of
deepening and penetration of digital payments in the country over different time periods. It has
been constructed with March 2018 as the base period, i.e. DPI score for March 2018 is set at 100.
It has increased from 304.46 for September 2021 to 349.30 for March 2022. 5 Parameters:
 Payment Enablers (weight 25%),
 Payment Infrastructure – Demand-side factors (10%),
 Payment Infrastructure – Supply-side factors (15%),
 Payment Performance (45%) and
 Consumer Centricity (5%).
7. Payment Infrastructure Development Fund (PIDF) Scheme : It was operationalised by the
central bank in January 2021 to incentivise deployment of Point-of-Sale machines (PoS), mPoS
(mobile PoS), Quick Response (QR) codes in tier-3 to tier-6 centres and North Eastern States +
From August 2021, beneficiaries of PM Street Vendor‘s AtmaNirbhar Nidhi (PM SVANidhi
Scheme) in tier-1 and tier-2 centres were also covered + A subsidy of 30% to 50% of cost of
physical PoS and 50% to 75% subsidy for Digital PoS is offered under the scheme.
8. Payment Vision 2025 : It has been prepared by considering the guidance from the Board for
Regulation and Supervision of Payment and Settlement Systems of the RBI + It builds on the
initiatives of Payments Vision 2019-21.
9. Payment gateway: А payment gateway is the technology that captures and transfers payment data
from the customer to the acquirer and then transfers the payment acceptance or decline back to the
customer + A payment gateway keeps the payments ecosystem rolling smoothly, as it enables online
payments for consumers and businesses + It acts as an interface between a merchant‘s website and its
acquirer.
10. Digital Payment Gateway: It has been launched by National Internet Exchange of India (NIXI),
a not-for-profit Company under the aegis of the Ministry of Electronics and Information
Technology (MeitY) + To facilitate its customers and partners, NIXI has gone digital by enabling
digital payments across its three business units by integrating payment gateways on all its
customer-facing websites for ease of use + NIXI has partnered with PayU and NSDL to offer the
Payment gateway services.
11. NIXI payment gateway partners
 PayU: PayU is India‘s leading payment gateways which provides payment gateway solutions
to online businesses and serves more than 4,50,000+ merchants with over 100+ payment
methods.

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 NSDL: NSDL is one of the largest Depositories in the World and has established a state-of-
the-art infrastructure that handles most of the securities held and settled in dematerialized
form in the Indian capital market. They also provide secure and seamless payment gateway
services to businesses.
12. Offline Digital Payments: To push digital transactions in rural and semi-urban areas, the RBI
issued a framework allowing offline payments up to Rs 200 per transaction, subject to an overall
limit of Rs 2,000 + It is a transaction that does not require internet or telecom connectivity +
Under it, payments can be carried out face-to-face (proximity mode) using any channel or
instrument like cards, wallets, and mobile devices + These transactions will not require an
additional factor of authentication (AFA).
13. Digital Payments Index: Developed by Reserve Bank of India (RBI) + It comprises five broad
parameters: Payment Enablers, Payment Infrastructure, Demand-side factors and Supply-side
factors, Payment Performance, Consumer Centricity + The index has been constructed to capture
the extent of digitisation of payments across the country + It has been constructed with 2018 as
the base period.
14. UPI Lite: Launched by Reserve Bank of India + The users will be able to make small-value
transactions in a near-offline mode + The upper limit of a payment transaction will be ₹200. The
total limit of the UPI Lite digital payment mode on the wallet on a device would be ₹2,000 at any
point in time + Customers of 8 banks would be able to use this system i.e, Canara Bank, HDFC
Bank, Indian Bank, Kotak Mahindra Bank, Punjab National Bank, State Bank of India (SBI),
Union Bank of India and Utkarsh Small Finance Bank.
15. Bharat Bill Pay System: It was conceptualised by the RBI; owned and operated by NPCI Bharat
BillPay Ltd + It is a one-stop payment platformfor all bills, providing an interoperable and
accessible ―Anytime Anywhere‖ bill payment service to customers across the country with
certainty, reliability and safety of transactions + Recently, the RBI allowed BBPS to process
cross-border inbound bill payments which will help the NRIs who face challenges in paying
utility bills in India + Payments through BBPS may be made using cash, transfer cheques
and electronic modes.
16. Card Tokenization: Recently the RBI signalled that it would not extend the October 1,
deadline for implementation for tokenization of card based payments + Tokenization refers
to replacement of actual card details with an alternate code called the ―token", which shall be
unique for a combination of card, token requestor and device + Tokenization not only aids in
making the payment transaction experience more secure for the end user but also aids merchants
in delivering a consistent user experience and higher transaction approval rates with speed and
security.
******

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(Revision Notes)
CHAPTER 16: INTERNATIONAL INSTITUTIONS
1. United Nations Monetary and Financial Conference (1944): Also known as Bretton Woods
conference + It resulted in establishment of International Bank for reconstruction and
development (IBRD, later known as World Bank) and International Monetary Fund (IMF).
2. World Bank Group: It is the largest developmental bank in the world; came into existence on
27th December 1945 + All the five organizations make up World Bank Group and are
headquartered at Washington D.C, USA + Prepares World Development Report.
 Goal/Mission: ‗Working for a World Free of Poverty‘
 Purpose: Bridge the economic divide between poor and rich countries.
 Voting Rights: World Bank Group owned by its member governments, which subscribe to
its basic share capital, with votes proportional to shareholding + Membership gives certain
voting rights that are the same for all countries but there are also additional votes which
depend on financial contributions to the organization.
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 Five organizations form part of WBG:

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o IBRD: It provides assistance to middle income and poor but credit worthy countries
(Developmental loans with interest) + It was the original arm of World Bank responsible
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for reconstruction of post-war Europe + Its membership is compulsory for a country to be

a member of WB Group affiliates such as IFC, MIGA and ICSID + It finances only to the
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sovereign governments directly or projects backed by sovereign governments.

 Board of Governors: It consist of one Governor and one alternate governor appointed by
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each member country + It delegates most of its authority over daily matters such as lending
and operations to the Board of Directors.
 Board of Directors: Itconsists of 25 executive directors and chaired by the President of WB
Group + They are appointed or elected by the Governors + Their main role is to select WB
President.
 Funding: It raises most of its funds in the world's financial markets + It earns income from
the return on its equity and from the interest on lending.
o IDA: It provides concessional financing (mostly interest free loans or grants), usually
with sovereign guarantees + They offer 10-year grace period and maturity of 35-40 years
+ It also provides debt relief through the Heavily Indebted Poor Countries (HIPC)
initiative and the Multilateral Debt Relief Initiative (MDRI) + Largest source of

ECONOMY
(Revision Notes)
assistance for the world‘s 77 poorest countries (including India) + IBRD mainly focuses
on middle income and creditworthy poor countries, while IDA focuses on the poorest
countries in the world.
o IFC: It provides various forms of financing without sovereign guarantees, primarily to
private sector of developing countries + It acts as an investor in capital markets and help
governments privatize inefficient public enterprises + No policy of uniform interest rates
for its investments; interest rate negotiated in each case by analyzing the risks
involved + Global Trade Finance Program->provides guarantees to cover payment risks
for emerging market banks with respect to promissory notes, bills of exchange, supplier
credit for capital goods imports, and advance payments.
o MIGA: Itoffers (foreign) investors insurance against non-commercial risk (helps poor nation to
attract the investment) + These guarantees include political risk insurance + Covers only new
investments (greenfield investments) + Not a lender but only insurer +The convention can be
amended by the Council of Governors of MIGA + Its membership is open to all IBRD
members.
o ICSID: It helps towards settlement in the event of a dispute between a foreign investor
and a country + India is not a member of ICSID + Membership is available to IBRD
members, and parties to the Statute of the International Court of Justice (ICJ), on the
invitation of the ICSID Administrative Council by a vote of two-thirds of its members.
 Membership: There are 189 member countries in IBRD which is the primary arm of WBG +
To become a member of the bank, a country must first join the International Monetary Fund
(IMF) + Membership in IDA, IFC, and MIGA are conditional on membership in IBRD +
Size of shareholders depends on size of country‘s economy + Obligatory subscription fee
equivalent to 88.29% of quota should be paid to the IMF + President of WB comes from
largest shareholder i.e, USA + Five largest shareholders – US, UK, France, Germany and
Japan + It gets its funding from rich countries and issuance of bonds on the world‘s capital
markets.
 Decision making process: Bank runs like a cooperative -> members are shareholders and is
operated for benefit of those using its service + Number of shares of each country is based on
size of its economy + Board of Governors represent shareholders; they are ultimate policy
makers and meet once in a year + 24 Executive directors deal with daily functions of bank
which includes approving loans and guarantees (Five executive directors are from five largest
donors).
 Reports published by World Bank: Global Economic prospects, World Development report,
Ease of Doing Business, International Debt statistics, Logistics performance index and Human
capital index.
3. International Monetary Fund (IMF): It is formed in 1944 Bretton woods conference primarily
by the ideas of Harry Dexter white and John Maynard Keynes + It is an organization of 190
member countries (Principality of Andorra is the latest entry in 2020) + Headquarters in
Washington, D.C + Objective is to help in global currency exchange stability and against balance
of payment crisis.
 Objectives of IMF
o Foster international monetary cooperation.
o Secure financial stability.
o Facilitate international trade.
o Encourage high employment and sustainable economic growth.
o Reduce poverty all around the planet.
 Internal Working Arrangement of IMF

ECONOMY
(Revision Notes)
o Board of Governors: Highest decision making body; consists of one governor and one
alternate governor for each member country + Governor appointed by member country
(Usually Minister of Finance or Governor of Central Bank) + All powers of IMF vested
in BoG which may delegate to Executive board all except certain reserved powers + They
normally meets once a year + Board of Governors advised by two ministerial committees,
the International Monetary and Financial Committee (IMFC) and the Development
Committee.
 Primary responsibilities of Board of Governors: Electing or appointing executive
directors to the Executive Board + Approving quota increases and Special Drawing
Rights (SDR) allocations + Admittance of new members, compulsory withdrawal of
member + Amendments to the Articles of Agreement and By-Laws.
o Executive Board: It is 24-member Executive Board elected by the Board of Governors +
It is responsible for conducting day-to-day business of the IMF + It meets several times
each week and discusses all aspects from the IMF staff's annual health checks of member
countries' economies to policy issues relevant to the global economy + Votes of each
member equal the sum of its basic votes and quota-based votes. A member‘s quota
determines its voting power.
o Ministerial committees: The Board of Governors is advised by International Monetary
and Financial Committee (IMFC) and Development committee (joint committee from
Board of Governors of IMF & World Bank).
o Management: The fund Managing Director is both chairman of the IMF‘s Executive
Board and head of IMF staff; appointed by the Executive Board by voting or consensus.
 Membership: It is open to any country that conducts foreign policy and accepts
organization‘s statutes + Membership in the IMF is a prerequisite to membership in the
IBRD.
 Where the IMF gets its Money: Most resources of IMF provided by countries through their
payment of Quotas + Borrowings provides a temporary supplement to quota resources
(General Arrangements to Borrow and New Arrangements to Borrow) + Contribution based
trust funds for concessional lending to low income countries.
 Functions of IMF
o Financial Assistance: It providesloans to member countries experiencing financial
difficulties + Unlike Development banks, IMF does not lend for specific projects.
 Process of Lending: Request from a member country -> IMF resources made
available under a lending ‗arrangement‘ depending on stipulating economic policies,
lending instrument used and measures country agreed to resolve its BoP crisis + Non-
Concessional Lending such as Standby Arrangements (SBA), Flexible Credit Line
(FCL), Extended Fund Facility (EFF) + Concessional Lending such as Extended
Credit Facility (ECF), Standby Credit Facility (SCF) and Rapid Credit Facility (RCF).
 Facilities of IMF to lending: Stand-By arrangements (address short-term BoP
problems), Standby Credit Facility for low income countries.
o Surveillance: Oversee international monetary system and monitor economic and
financial policies of its member countries.
o Technical Assistance: Helps countries strengthen their capacity to design and implement
sound economic policies.
o Capacity Development: Assisting central banks, finance ministries, tax authorities, and
other economic institutions with technical help and training + aids governments in
achieving the Sustainable Development Goals (SDGs).

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(Revision Notes)
 IMF Quotas: Quota subscriptions are cardinal component of the IMF resources + Each
member assigned quota based on its position in the world economy + A country‘s quota
determines its Maximum financial commitment to IMF, its voting power (Each member votes
include basic votes and one additional vote for each SDR 1,00,000 of quota) and access to
Finance (amount of finance obtained by member country from IMF based on its quota).
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o Current Quota Formula: It is a weighted average of GDP (weight of 50%), Openness
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(30%), Economic variability (15 %) and International reserves (5 %).
 Note: GDP is measured as a blend of GDP—based on market exchange rates (weight
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of 60%) and on PPP exchange rates (40 %).
o Review of Quotas: Board of Governors conducts general quota reviews (usually at
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intervals of 5 years) + Changes in quota should be approved by 85% majority of total

voting power + Member quota can‘t be changed without its consent.
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 2010 Quota review: Key outcomes are Double quota from SDR 238.5 billion to SDR 477
billion + Shift more than 6% of quota shares from over-represented to under-represented
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member countries + Preserve the quota and voting shares of poorest countries + India‘s
voting rights increased by 0.3% from current 2.3% to 2.6% + China‘s voting rights
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increased from 3.8% to 6% + USA quota share dropped from 16.7% to 16.5% but it will
retain its veto power + China will have 3rd largest IMF quota and voting share after US and
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Japan.
o Denomination of quotas: The quotas are denominated in Special Drawing Rights
(SDRs), IMFs unit of account.
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 Special Drawing Rights (SDRs): It is an international reserve asset created by IMF in 1969
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to supplement its member countries official reserves.

o It is neither a currency nor a claim on the IMF but it is a potential claim on freely usuable
currencies of IMF members.
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o Value of SDRs-> Calculated by adding the values of an SDR basket of currencies which
consists of the US dollar, Euro, Japanese yen, pound sterling, and Chinese renminbi.
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o SDR currency value is updated every five years (except during IMF vacations), and the
valuation basket is reviewed and altered every five years.
o A country's quota is measured in SDRs and voting power is proportional to their quotas.
o Working of SDR-> When SDRs allocated to member country, the members are given two
positions which are SDR allocations and SDR holdings. The countries receive interest on
their SDR holdings and pay interest based on their SDR allocations.
o SDR allocations to IMF member countries
 It allocates SDRs to member countries in proportion to their IMF quotas.
 It is a Self-financing mechanism; it levies charges on allocations to member countries
which are then used to pay interest on SDR holdings.

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(Revision Notes)
o Aside from gold reserves, foreign currency assets, and the IMF Reserve Tranche, India's
foreign exchange reserves include SDR.
o Recent Developments: G20 nods to IMF for fresh SDR Issue->IMF permitted to
provide SDR worth 650 million USD to help the least developed and developing
countries facing high foreign exchange crisis due to COVID-19.
 IMF bailout
o Reasons for seeking bailout from IMF: Balance of payment crisis, which includes trade
imbalances, a shortage of foreign exchange reserves, and difficulties in meeting external
debt obligations + Unsustainable levels of debt + external shocks such as natural
disasters, global economic crises, or other external shocks + Currency depreciation due to
inappropriate monetary & fiscal policies.
o IMF lends money in the form of special drawing rights (SDRs).
o Conditionalities of IMF Bailout: Reducing government borrowing – Higher taxes and
lower spending + Higher interest rates to stabilise the currency + Structural adjustment
such Privatization, deregulation of certain sectors.
 IMF lending provisions
o Extended Fund Facility: It provides financial assistance to countries facing serious
medium-term balance of payments problems because of structural weaknesses that
require time to address.
o Extended credit Facility: It provides medium-term financial assistance to low-income
countries (LICs) with protracted balance of payments problems.
o Flexible Credit Line: It is designed to meet the demand for crisis-prevention and crisis-
mitigation lending for countries with very strong policy frameworks and track records in
economic performance.
o Resilience and Sustainability Facility: It provides affordable long-term financing to
countries undertaking reforms to reduce risks to prospective balance of payments
stability, including those related to climate change and pandemic preparedness.
o Rapid Financing Instrument
 Lending instrument by International Monetary Fund; Available to any IMF member
countries facing an urgent BoP need.
 It can provide support to meet commodity price shocks, natural disasters, conflict and
post-conflict situations, emergencies resulting from fragility, and food shocks.
 Fund support is provided without ex-post program-based conditionality although prior
actions apply.
 Access to finance determined on case-by-case basis.
 Subject to the same financing terms as Flexible Credit Line (FCL), Precautionary and
Liquidity Line (PLL) and Stand-By Arrangements (SBA). It has three windows:
 Regular window: for urgent BoP needs caused by domestic instability, exogenous
shocks and fragility.
 Large Natural Disaster window: for urgent BoP needs arising from natural disasters
where damage is assessed to be equivalent to or exceed 20% of the member‘s GDP.
 Food Shock Window: for urgent BoP needs due to acute food insecurity, a sharp
increase in the food or fertilizer import bill, or a shock to cereal exports.
o Rapid Credit Facility
 It provides rapid concessional financial assistance to low-income countries (LICs)
facing an urgent BoP need with no ex-post conditionality
 Created under the Poverty Reduction and Growth Trust (PRGT)
 Provide support for external shocks, natural disasters, and emergencies resulting from
fragility; also help catalyze foreign aid.

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(Revision Notes)
 It is available to PRGT-eligible member country that faces an urgent balance of

payments need.
 It has four windows: Regular window: for urgent BoP needs caused by domestic
instability, emergencies, and fragility. Exogenous shock window: for urgent BoP
needs caused by a sudden, exogenous shock. Large natural disaster window: for
urgent BoP needs arising from natural disasters where damage is assessed to be
equivalent to or exceed 20 percent of the member‘s GDP. Food shock window:
available for urgent BoP needs due to acute food insecurity, a sharp increase in the
food import bill, or a shock to cereal exports.
 Zero-interest rate, has a grace period of 5½ years, and a final maturity of 10 years.
 Reports published by IMF: Global Financial Stability Report, World Economic Outlook,
Fiscal Monitor.
 Differences Between IMF and World Bank
4. New Development Bank (NDB)

 Establishment: It is a multilateral development bank established at 6thBRICS Summit in
Fortaleza (2014) headquartered at Shanghai, China.
 Objectives: Fostering development of member countries + Supporting economic growth +
Promoting competitiveness and facilitating job creation + Building a knowledge sharing
platform among developing countries.
 Members: Brazil, Russia, China, India, South Africa, Bangladesh, UAE, Egypt & Uruguay
(Total 9 members)
 Voting powers and contributions: Each participant country will be assigned one vote and
no country has a veto power + Each member is given equal 20% voting power + Each
member‘s contribution will be equal with equal voting rights.
 Governance: It is governed by Board of Governors→ comprises the finance ministers of the
BRICS nations + President of the NDB is elected from among the member countries. There
are four vice presidents who are from the remaining members.
 Development Capital
o Its primary focus of lending is on infrastructure projects with authorized lending of up to
$34 billion annually.
o Capital share of each member cannot be increased without all other four members
agreeing.
o BRICS capital share cannot fall below 55% even after entry of new members.
o It supports public or private projects through loans, guarantees, equity participation and
other financial instruments.
 Contingency Reserve arrangement (CRA)->It is a framework for provision of support through
liquidity and precautionary instruments in response to actual potential short term BoP crisis.

ECONOMY
(Revision Notes)
 Updates: In 2018, NDB received observer status in UNGA + Bangladesh, UAE, and
Uruguay joined in September 2021 + Egypt became a new member of the NDB in December
2021.
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5. Asian Development Bank (ADB)
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 Establishment: It is a regional development bank established on 19th December 1966;

headquartered in Ortigas center in Mandaluyong, Manila, Philippines.
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 Members: ADB has 68 members + The bank admits the members of the United Nations
Economic and Social Commission for Asia and the Pacific (UNESCAP) and non-regional
developed countries.
 Voting rights: Weighted voting system where votes are distributed in proportion with
member‘s capital subscriptions (similar to World Bank) + ADB‘s five largest shareholders
are Japan and the United States (each with 15.6% of total shares), the People‘s Republic of
China (6.4%), India (6.3%), and Australia (5.8%).
 Aims of ADB
o Social development by reducing poverty in the Asia Pacific with inclusive growth,
sustainable growth, and regional integration.

ECONOMY
(Revision Notes)
o It invests in infrastructure, health, public administration system, helping nations to reduce

the impact of climate change and to manage natural resources.
 Masala Bonds and ADB: It has listed its 10-year masala bonds worth Rs.850 crores on the
global debt listing platform of India INX (BSE-owned exchange).
 Reports: Asian Development Outlook
6. Asian Infrastructure Investment Bank
 Establishment: It is an international development bank founded in January 2016
with headquarters at Beijing.
 Goals: Fostering sustainable economic
development, create wealth and improve
infrastructure connectivity in Asia +
Encourage public and private capital
investment for development reasons,
particularly in infrastructure and other
productive areas.
 Membership: It presently has 105 members;
France, Germany, Italy, and UK are among
the 14 G-20 countries that are members of
the AIIB + New members are considered for
membership only once a year.
o Criteria: Membership open to all
members of the Asian Development
Bank or the World Bank + It also allows
non-sovereign entities to apply for
membership provided their home
countries are members.
 Voting power: Based on share capital
provided; Asian countries control about 75%
voting; China largest ~27%, India second
largest shareholding~7% + Regional
members hold 75% of the total voting power.
 Governance
o Board of Governors (Highest decision making body)-> It consists of one Governor and one
alternate Governor appointed by each member-country + All the powers of the AIIB are vested
in the Board of Governors + It may delegate to Board of directors any of its
powers, except powers of:
 Admitting new members and determine the conditions of their admission
 Increase or decrease the authorized capital stock of the Bank.
 Elect the Directors of the Bank and determine the expenses to be paid for Directors
and Alternate Directors and remuneration
 Elect the President, suspend or remove him from office, and determine his
remuneration and other conditions of service.
 Amending the AIIB Articles of Agreement.
o Board of Directors: It is made up of 12 governors and in charge of the daily operations
and tasks.
o Senior Management: It is headed by the President who is elected by AIIB shareholders
for a five-year term and eligible for reelection once.

ECONOMY
(Revision Notes)
o International Advisory Panel: To support the President and Senior Management on the
Bank‘s strategies and policies as well as on general operational issues.
 APVAX project (Asia Pacific Vaccine Access Facility) → India requested financing
from AIIB and ADB to purchase 667 million doses of Covid-19 vaccines.
 Finances: Initial total capital is 100 billion $: 20% is paid-in share capital and remaining
80% is called-up share capital.
 AIIB Lending: Recipients include member countries and
international or regional agencies concerned with the
economic development of the Asia-Pacific region + It can
lend outside Asia provided that it supports connectivity with
Asia or it is for a global public good that benefits Asia.
7. Bank for International Settlement (BIS): It is an
international financial organisation owned by 60 member
central banks + It fosters international monetary and financial
cooperation and serves as a bank for central banks + It is headquartered in Basel, Switzerland.
8. African Development Bank: Itis a multilateral development finance bank established to
contribute to the economic development and social progress of African countries + Founded in
1964 and comprises ofThe African Development Bank, the African Development Fund
and the Nigeria trust fund + It is governed by a Board of Executive Directors, made up of
representatives of its member countries + Voting power on the Board is given according
to the size of each member‘s share + The largest African Development Bank shareholder
is Nigeria with 9% of the votes + India became a member of the Bank in 1983; It is a non-
regional member of the Bank.
9. Credit Suisse: It is a famous investment bank headquartered in Switzerland + Established in
1856 + Credit Suisse is the 12th largest foreign bank in India and it owns assets worth Rs 20,000
crore.
10. European Bank for Reconstruction & Development (EBRD): It is an international financial
institution setup at London in 1991 + India will not be eligible for loans from EBRD but can
initiate joint loan proposals, became shareholder in 2018 + It uses investment as a tool to build
market economies + Biggest shareholder being the United States + It is owned by 65 countries
and two EU institutions + It invests mainly in private enterprises, together with commercial
partners.

ECONOMY
(Revision Notes)
CHAPTER 17: WORLD TRADE ORGANISATION
1. Introduction: WTO was set up under Marrakesh Treaty (1994) as a result of Uruguay round
(1986-94) of negotiation + It is the successor of GATT established in wake of 2nd World War +
India is the founding member + It is the only international organization which deals with global
rules of trade between nations + Headquartered at Geneva, Switzerland.
 Members: It has 164 members (including European Union, Hong Kong, Macau, Thailand) +
Afghanistan became 164th member in 2015+ 23 observer governments like Iran, Iraq, Bhutan
etc.
 Differences between GATT and WTO: GATT was provisional while WTO & its
agreements are permanent + GATT ad contracting parties while WTO has members + GATT
dealt only in goods while WTO deals with trade in services and intellectual property as well.
 Objectives
o Improve standard of living in member countries.
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o Ensure Full employment and broad increase in effective demand.
o Enlarge production and trade of goods.
o Ensure that trade flows as smoothly, freely and predictably as possible.
o Ensure optimum utilization of world resources.
o To protect the environment. l.c
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o To accept the concept of sustainable development.
o Reviewing national trade policies: Technical assistance to developing countries on trade
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policy issues.
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 Structure of WTO
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o Ministerial Conference: Highest decision-making body + meets once every two years +
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Based on One country one vote + It appoints Director General.

o General Council: Day to day decision making body and implements the decisions + It
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also meets as Trade Policy Review Body and Dispute settlement body.
o Council for Trade in Goods (Goods Council), Council for Trade in Services (Services
Council), Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS
Council) are at next level which report to Genera council.
o Specialized committees, working groups and working parties deal with individual
agreements.
o Secretariat: It is based in Geneva; headed by a Director-General + Its main duties
include provide technical assistance to developing countries, analyze world trade etc.
 Decision making: Decisions made by entire membership (By consensus) + Majority vote is
also possible but never used + WTOs agreements have been ratified in all member‘s
parliaments.

ECONOMY
(Revision Notes)
 Principles Used in WTO

o Most Favoured Nation (MFN)
 Treating Other People Equally: Countries cannot normally discriminate between
their trading partners + Cannot grant someone a special favour (lower customs duty
rate for one of their products)->It must do the same for all other WTO members.
 Exceptions: FTAs, developing countries, national security, unfairly traded goods, in
services countries allowed in some circumstances to discriminate + Imports from poor
countries (Generalised System of Preferences) + India & Pakistan.
o National Treatment
 Treating Foreigners and locals equally: Imported and local produced goods should
be treated equally- at least after foreign goods enter the market + The same applies to
foreign and domestic services.
 It only applies once a product or service has entered the market (Charging customs
duty on import is not a violation of this principle)
o Freer Trade: Gradually through negotiations
 Lowering trade barriers (include custom duties, import bans or quotas) + It allows
countries to bring changes gradually through ―progressive liberalization‖.
o Predictability: Binding and transparent policy-> predictability-> Businesses get clear
view of future opportunities-> investments are increased.
o Promoting Fair competition: Many WTO agreements such as in agriculture, intellectual
property promote fair competition.
o Encouraging Development and Economic reform: WTO agreements allow special
assistance and trade concessions for developing countries.
 Doha Development Agenda (2001)
o It was launched in Doha, Qatar in 2001 + Aims at further liberalizing trade whilst making
it easier for developing countries to integrate into WTO system.
o Major subjects: Multilateral environmental agreements, Trade barriers on environmental
goods & services and Fisheries subsidies.
o Issue of the Geographical Indications is the only intellectual property right issue included
in the Doha Round.
o Negotiations stalled after July 2008 due to disagreements over agriculture, services, non-
tariff barriers and trade remedies.
 India Stand in Doha Round: It supports Special Safeguard Mechanism (SSM) to protect its
farmers from the import surge + Rich countries should drastically reduce its ‗trade-distorting‘ farm
subsidies + It wants a permanent solution to the issue of public food stockholding in developing
countries for the purpose of food security + IPR protection under GI should not be limited only to
wine and spirits but should be extended to include other products (such as Basmati rice).
 Important Agreements of WTO
o Agreement on Agriculture (AoA), (1994)
 Objective: It is aimed at establishing a fair and market oriented agriculture oriented
trading system.
 Three pillars->Market access, Domestic support and Export subsidies.
 Market Access: It requires that tariffs fixed by individual countries be cut
progressively (tariff reduction), remove non-tariff barriers and convert them into
Tariff duties (tariffication) + It urges for provision of access to imported
agriculture goods in the member countries.
 Domestic Support: It refers to subsidies such as guaranteed Minimum Price
which are direct and product specific + They are categorized into:

ECONOMY
(Revision Notes)
 Green Box: Subsidies that do not distort trade, or at most cause minimal
distortion. They are government-funded + They does not involve price
support + They include environmental protection & regional development
programmes + Allowed without limits provided that they comply with policy
specific criteria + Examples include Agriculture research, Training and Pest
control etc.
 Amber Box: All domestic support measures considered to distort production
and trade (with some exceptions) fall into the amber box + These include
measures to support prices, or subsidies directly related to production
quantities + Example: Minimum Support Price in India.
- De minimis provision: Developed countries allowed to maintain trade
distorting subsidies to level of 5% of total value of agri-output + 10% of
agricultural production for developing countries.
- Aggregate Measure of Support” (AMS): It is the amount of money spent
by governments on agriculture production, except for those contained in
Blue box, Green box and De minimis.
 Blue Box: This is the ―amber box with conditions‖. Only Production limiting
subsidies are allowed under this; They cover payments based on acreage, yield
or number of livestock in a base year + Example is giving MSP on rice for
only 1000 kgs-> It comes under Blue box.
 Special and Differentiated Treatment Box (S &D Box) Subsidies: It is not
available to developed countries + These subsidies include assistance which
are essential for rural development and up-liftment of poor farmers.
 Export Subsidies: Subsidies that subsidizes exports are called export subsidies +
These are direct subsidies given by government to producers of agricultural
products against exports.
 Special Safeguard Mechanism: It allow developing countries to impose
additional (temporary)
safeguard duties in event of
abnormal surge in imports.
o Trade-Related Aspects of Intellectual
Property Rights (TRIPS): International
legal agreement between all member
nations of WTO + It sets minimum
standards for regulation by national
governments of Intellectual property + It
was negotiated at Uruguay round of
GATT (1989-1990) + It became
effective on 1st January 1995
+Developing countries got 10 years to
adopt the TRIPS agreement standards
while the advanced countries adopted
them by 1995 + Geographical
Indications covered under TRIPS; India
enacted Geographical Indications of
Goods (Registration and Protection) act, 1999.
 IPR are the rights which allow creators of patents, trademarks or copyrighted work to
benefit them for their own work or investment. These rights have been outlined in
Article 27 of Universal Declaration of Human Rights Rights.

ECONOMY
(Revision Notes)
 The importance of IPR was first recognized in the Paris Convention for the protection
of Industrial Property (1883) and Berne Convention for the Protection of Literary and
Artistic Works (1886) (both administered by WIPO).
 TRIPS and Patents:TRIPS agreement allows both process and product patents.
+Product patents must be awarded for food, pharmaceuticalsand chemicals + Patents
should be valid for 20 years + Safeguards in TRIPS = Compulsory Licensing +
Prevents Evergreening of Patents.
 Compulsory Licensing: Patent is suspended without the consent of the patent holder
and a domestic manufacturer is allowed to come up with the drug + Only one
compulsory license has been issued since 2005 for the drug ‗Nexaver‘ manufactured
by Bayer.
 Evergreening of Patents:Section 3(d) of Patents Act, 2005- Discovery of a new form
of a known substance does not qualify for a patent; nor mere discovery of any new
property or new use for a known substance.
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o General Agreement on Trade in Services (GATS): Set of regulations that governs trade
in services among the WTO countries + One of the three agreements adopted in 1995 +
GATS negotiations are conducted among members bilaterally on the basis of requests +
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Cover four modes of supply for the delivery of services:
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o Agreement on Trade Related Investment Measures (TRIMs): WTO members may not
apply any measure that discriminates against foreign products + A list of prohibited
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TRIMS such as local content requirements is part of the Agreement + Applies to

investment measures related to trade in goods only (does not apply to services) + Not
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concerned with the regulation of foreign investment.

o Agreement on Subsidies and Countervailing Measures: It applies to non-agricultural
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products + It classifies subsidies into:

 Red: Subsidies with high trade-distorting effects such as export subsidies.
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 Green: Subsidies that are not specific to an enterprise or industry or industries are
non-actionable.
 Amber: They are actionable by trading partners if their interests are adversely hit.
o Agreement on Sanitary and Phyto-Sanitary Measures: SPS measures must be based
on international standards + It is open to country to adopt a level of SPS protection higher
than international standards if there is scientific justification.
o Agreement on Anti-Dumping: It provides right to contracting parties to apply anti-
dumping measures on a unilateral basis after investigations + All countervailing duties
should be terminated within five years of their imposition.
o Agreement on Technical Barriers to Trade: To counter Non-Tariff barrier for non-food
Trade.

ECONOMY
(Revision Notes)
o Trade Facilitation agreement (2013): Concluded at the Bali Ministerial conference +

India became 76th member to ratify this agreement + It include lowering import tariffs
and agricultural subsidies, abolishing hard import quotas and reduction in red tape at
international borders.
 Trade Barriers
o Countervailing Duty (CVD): It is a duty that the government imposes to protect
domestic producers by countering the negative impact of import subsidies.
o Anti-dumping duty: Dumping is when countries sell the produce at lower cost than
production. Foreign countries levy anti-dumping duty to protect industry.
 Mechanism to raise complaints: Commerce Ministry raises complaints - Directorate
General of Trade Remedies investigates - Finance Ministry imposes.
 ARTIS Portal: Developed by DG Foreign Trade to raise complaints related to
dumping.
 Non-Tariff Barriers: Subsidies to domestic industries, Public procurement, Technical
barrier to trade, and Quota system. Countervailing Duty and Anti-dumping Duty are also
non-tariff barriers.
 Developing Country status: It allows a member to seek temporary exception from
commitments under various agreements of WTO + These exceptions are known as Special
and Differential treatment (SDT) + Individual countries themselves are allowed to
unilaterally classify themselves as developing countries + Two-third of 164 members of
WTO classified themselves as developing countries.
 Least Developing Countries: Identified by UN Economic & Social Council (ECOSOC),
WTO agreements permit other countries to give duty free quota free access to exports from
LDC.
 Rule of Origin: To prevent dumping of goods by 3rd country, it allows a minimum value
addition to be qualified for trade agreements.
 Certificate of Origin: Issued by the Director general of foreign trade under the commerce
ministry for allowing companies to take benefit of free trade agreements.
 Submits and related agreements:
Doha  Exhorted 1st world countries to give more access to 3rd world countries
Development  Allowed 3rd world countries to retain some barrier to protect their
Round industries
(Qatar 2001)
Food  Under WTO‘s Agreement on Agriculture (AOA), 1st world and 3rd world
Subsidies and countries provide subsidies to farmers at differential amount.
Peace Clause  Peace Clause: Allows subsidies to the farmers for any amount.
Bali Package  Exhorted to cut red tape to enhance trade
& Trade  Trade facilitation agreement: set up online portals to seek clearances and
Facilitation pay fees
Agreement /  Mechanism in India: national committee on trade facilitation (NCTF)
TFA (2013) under cabinet secretary (IAS)
 Extended peace clause
Nairobi
 Brought special safeguard mechanism (SSM): allowed protection of
Package &
industries of 3rd world countries from export of 1st world countries by
SSM (2015)
letting them raise the barrier
 Dispute Settlement System at WTO: Uruguay round of negotiations resulted in adoption of
Dispute settlement system (DSS) and Dispute Settlement Understanding (DSU) with
objective of resolving trade disputes between member states.

ECONOMY
(Revision Notes)
o Dispute settlement process: Consultations between parties-> Adjudication by panels or

Appellate body (if appealed)-> Implementation of the ruling including possibility of
counter-measures if party does not implement the ruling.
o General Council-> It also convenes as Dispute Settlement Body; it has authority to
establish dispute settlement panels, refer matter for arbitration, appellate body, maintain
surveillance over implementation of recommendations.
o Appellate Body-> It is a standing body of persons which hear appeals from reports
issued by panels in disputes brought by WTO members + It can uphold or reverse the
legal findings and conclusion of a panel.
 Structure of Appellate Body: It is composed of seven members who are appointed by the
DSB to serve for four-year terms + Each person may be reappointed for another four-year
term + Chairman is elected among the Members to serve a one-year term, responsible for the
overall direction of Appellate Body business + Division of three Members is selected to hear
each appeal and each division elects a Presiding Member.
 Multi-Party Interim Appeal Arrangement: The new system will allow EU, together with
other participating WTO members, to overcome the current paralysis of the WTO‘s Appellate
Body and solve trade disputes amongst themselves + It is a temporary arrangement based on
Article 25 of the WTO Dispute Settlement Understanding (DSU).
******

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INDIAN

Part of BRAHMASTRA & Prelims Crash Course!

Our Offline Centers: Delhi, Bengaluru, Pune, Indore, Jammu, Hyderabad

CHAPTER 1: INTRODUCTION OF ECONOMICS ............................................... 2

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CHAPTER 1: INTRODUCTION OF ECONOMICS

1. Introduction: Economics is the science of a n a l yz i n g t h e production, distribution, and

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7. Physical Capital vs Human Capital

commodity. services are sold.

It is completely mobile between It is not perfectly mobile between countries as

trade restrictions. culture.

8. Economic Agents (Four Sectors of Macroeconomics)

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16. Types of Economy (In terms of the role of State)

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children against Hepatitis B, Educational institutions etc.+ Government encourages the

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CHAPTER 2: BASIC CONCEPTS OF MICRO ECONOMICS

1. Microeconomics: It is study of economics that relates to an individual unit or part of the

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15. Capital-Output ratio

The increase in the price of a commodity Increase in price of commodity

and vice versa. complementary goods, vice versa.

Examples include designer jewelry, yachts, and luxury cars.

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CHAPTER 3: NATIONAL INCOME ACCOUNTING

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services rendered by them in India.

abroad, nobody comes in and nobody invests in the country.

lesser levels of outbound FDI

14. Net National Product or NNP:

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16. Net Domestic Product (NDP)

18. Measurement of GDP:

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 Value Added Method

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o CE: Compensation of Employees; MI: Mixed Income;

22. Personal Income:

 Formula: Personal Income (PI) = National Income – Undistributed profits (Savings of

the households from the government and firms

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31. Limitation of GDP:

32. Green GDP:

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CHAPTER 4: POVERTY IN INDIA

6. Vicious cycle of Poverty

7. Poverty Estimation in India

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 Pre-Independence Poverty Estimation

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Expenditure on food, health, Food, healthcare, clothing, rent,

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o Paying professional tax.

 In villages, 2.37 crore (13.25 percent) of families