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SYBCom Business Economics Semester IV 2014
SYBCom Business Economics Semester IV 2014
SYBCom Business Economics Semester IV 2014
SY BCom Semester IV
Business Economics Paper II (Recent Issues of Indian Economy)
Semester IV
October 2014
S.Y.B.Com.
Lecture Notes
Dr Ranga Sai
Dr Ranga Sai
Contents
Module I :Basic Issues in Economic Development
New Economic Policy 1991
Trends in National Income and Per Capita Income
Sectoral Composition of National Income and Occupational Structure
Inclusive Growth
Progress of Human Development Index in India
Human Development and Health,
Human Development and education
Gender Related Development and Economic Indicators
Recent Trends in Employment
Problems of Unemployment
Module II : Agriculture
Significance of Agriculture
Trends in Agricultural Production and Productivity
New Agricultural Policy 2000 and
Recent Policy Measures
Public Distribution System
Food Security
WTO and Indian Agriculture
Module III : Industry and Service Sectors in India
Industrial Development Since 1991
MRTP and Competition Act
Small and m,edium industries: Policy Package for SSIs 2000
Service sector: Growth and Performance since 1991.
Module IV : Banking and Monetary Policy Since 1991
Banking sector reforms since 1991
Structure of Banking in India performance since 1991
Reserve Bank of India Promotional and Developmental functions
RBIs recent measures of Money supply
Trends and Causes of Inflation since 1991
Recent changes in monetary policy in India.
Dr Ranga Sai
Dr Ranga Sai
Module I
Basic Issues in Economic Development
New Economic Policy 1991: Rationale and Key, Policy Changes Trends in National
Income and Per Capita Income Sectoral Composition of National Income and
Occupational Structure Inclusive Growth Progress of Human Development Index in
India ( post 1991 ) Health, Gender Related Development and Economic Indicators
Government Policy w.r.t. Education and Health Recent Trends in Employment
Problems of Unemployment
Dr Ranga Sai
2. Privatization:
Privatization refers to giving greater role to private sector and reducing the
role of public sector. To execute policy of privatization government took the
following steps:
A. Disinvestment of public sector, i.e., transfer of public sector
enterprise to private sector
B. Setting up of Board of Industrial and Financial Reconstruction
(BIFR). This board was set up to revive sick units in public sector
enterprises suffering loss.
C. Dilution of Stake of the Government. If in the process of
disinvestments private sector acquires more than 51percent
shares then it results in transfer of ownership and management to
the private sector.
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
3. Globalization:
It refers to integration of various economies of world. Till 1991 Indian
government was following strict policy in regard to import and foreign
investment in regard to licensing of imports, tariff, restrictions, etc. but after
new policy government adopted policy of globalization by taking following
measures:
Import Liberalization- Government removed many restrictions
from import of capital goods.
Foreign Exchange Regulation Act (FERA) was replaced by
Foreign Exchange Management Act (FEMA)
Rationalization of Tariff structure
Abolition of Export duty.
Reduction of Import duty.
As a result of globalization physical boundaries and political boundaries
remained no barriers for business enterprise. Whole world becomes a global
village.
Globalization involves greater interaction and interdependence among the
various nations of global economy.
4. Market Friendly State:
The role of the state is to ensure a smooth functioning of the market economy.
For this, the state has to ensure stability in the market through the use of
macro economic policies. The state will also intervene in the market when it
fails.
Dr Ranga Sai
Plan
I Plan
II Plan
III Plan
IV Plan
V Plan
VI Plan
VII Plan
VIII Plan
IX Plan
X Plan
XI Plan
GDP growth
3.7
4.2
2.8
3.4
4.9
5.4
5.6
6.6
5.0
7.6
7.9
Growth per
capita income
2.4
2.2
0.3
0.9
2.6
3.1
3.3
4.6
3.5
5.9
6.3
Dr Ranga Sai
Dr Ranga Sai
2005-06. The corresponding rise in imports was from 8.8 per cent in 1990-91
to 17.1 per cent in 2004-05 and further to 19.5 per cent in 2005-06. Thus,
trade deficit as a proportion of GDP, which had declined from 3.0 per cent in
1990-91 to 2.1 per cent in 2002-03, widened to 4.9 per cent in 2004-05 and
further to 6.4 per cent in 2005-06.
The recent trends show that the 2012-13 per-capita national income in real
terms is estimated to have risen to Rs.39,168 from Rs.38,037 in 2011-12. The
growth rate in per-capita income is estimated at 3percent in 2012-13 against
4.7percent in 2011-12.
Inclusive growth
Inclusive growth is a process, in which, economic growth, measured by a
sustained expansion in GDP, contributions to opportunity, capabilities, access
and security.
Inclusive Growth basically means the following:
1. Opportunity: The economy should generate more and varied
ways for people to earn a living and increase their incomes
over time.
2. Capability: The economy shall provide the means for people
to create or enhance their capabilities in order to exploit
available opportunities.
3. Access: The economy shall provide the means to bring
opportunities and capabilities together.
4. Security: The economy shall provide the means for people to
protect themselves against a temporary or permanent loss of
livelihood.
Dr Ranga Sai
Dr Ranga Sai
Pakistani economist Mahbub ul Haq created HDI in 1990 which was further
used to measure the country's development by the United Nations
development Program (UNDP). Calculation of the index combines four major
indicators: life expectancy for health, expected years of schooling, mean of
years of schooling for education and Gross National Income per capita for
standard of living.
UNDP measures HD in terms of HDI. This is a composite index
encompassing selected information on literacy and education, expectation of
life at birth and measures of material well being. HDI shows the quality of life
of the people.
The Human Development Index (HDI) is the measure of life expectancy,
literacy, education, standard of living, and GDP per capita for countries
worldwide. It is a standard means of measuring well-being, especially
child welfare.
The HDI human development index is a summary composite index that
measures a country's average achievements in three basic aspects of human
development: longevity, knowledge, and a decent standard of living.
Longevity is measured by life expectancy at birth; knowledge is measured by
a combination of the adult literacy rate and the combined primary, secondary,
and tertiary gross enrolment ratio; and standard of living by GDP per capita
The HDI combines three basic dimensions:
Life expectancy at birth, as an index of population health and
longevity
Dr Ranga Sai
The national human development index report for India found that Kerala
ranks top of the list with a HDI of 0.638 and Bihar ranks the last with HDI of
0.367. The next top three positions go to Punjab, Tamilnadu, and Maharashtra
with HDI value of over 0.52. The lowest three states apart from Bihar are
M.P, U.P, and Assam.
The Gender Empowerment Measure (GEM) is a measure of inequalities
between men's and women's opportunities in a country. It combines
inequalities in three areas: political participation and decision making,
economic participation and decision making, and power over economic
resources. It is one of the five indicators used by the United Nations
Development Programme in its annual Human Development Report
The gender empowerment measure is a composite indicator that captures
gender inequality in three key areas:
1. Political participation and decision-making, as measured by
womens and mens percentage shares of parliamentary
seats;
2. Economic participation and decision-making power, as
measured by two indicatorswomens and mens
percentage shares of positions as legislators, senior officials
and managers and womens and mens percentage shares of
professional and technical positions;
3. Power over economic resources, as measured by womens
and mens estimated earned income
Dr Ranga Sai
Dr Ranga Sai
2.
3.
4.
2.
3.
Dr Ranga Sai
4.
5.
Limitations:
1.
2.
3.
4.
Dr Ranga Sai
Trends in Employment
The growth in employment was 4.68 million per year between 2009-10
and 2011-12. Between 2004-05 and 2009-10 employment growth was,
however, lower, at 0.8 million per year, and was higher at 2.93 million
per year. The employment growth slowed between 2009-10 and 2011-12.
Dr Ranga Sai
In 2011-12, 36.4percent
percent of the Indian population
lation was active in the labour
force, that is, either working or actively seeking work according to the
UPS.2
.2 Of the total population, 35.4
35.4percent was employed and 2.7percent
2.7
was unemployed (or 5.6
5.6percent according to CDS).3 About 45percent
percent of
Indian workers
ers were engaged in agriculture and related activities, whereas
in 2009-10
10 it was just about 50percent.
50
In terms of type of employment, 50
50percent of Indian workers were self
selfemployed, 20percent were employed on a regular wage or salary, and
29percent were on a casual wage. Since 1999
1999-2000
2000 the proportion of self
selfemployed workers has been around 50
50percent (except in 2004-05,
05, when it
was 52percent).
). However, between 19
1999-2000 and 2011-12.
Participation in the labor force, the proportion of males in both rural and
urban areas was much higher than that of females.
Urban female participation, which also increased in 2004
2004-05,
05, fell in 2009
200910 and then increased marginally in 2011
2011-12,
12, but to a level lower than that
in 2004-05.
Rural female workers engaged in agriculture as a proportion of total
workers has declined since 1999
1999-2000,
2000, but the fall was more drastic
between 2004-05
05 and 2009
2009-10, and continued till 2011-12.
According to International Labor Organization (ILO) data, labor force
participation for pers
persons
ons aged 15 years and above in India was
55.6percent in 2011, while it was 69.9
69.9percent in Brazil, and 74.1percent
74.1
in
China. In the same year, the worker to population ratio was 53.6
53.6percent in
India, while it was 64.8percent
64.8
in Brazil and 70.9percent in Chi
China. India
has less labor participation levels seen in other developing countries.
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
Dr Ranga Sai
Dr Ranga Sai
Module II:
Agriculture, Industry and Service Sectors
Trends in Agricultural Production and Productivity New Agricultural Policy 2000 and
Recent Policy Measures Public Distribution System and Food Security WTO and
Indian Agriculture
Indian agriculture
Although agriculture contributes only 21percent of Indias GDP, its importance
in the countrys economic, social, and political fabric goes well beyond this
indicator. The rural areas are still home to some 72 percent of the Indias 1.1
billion people, a large number of whom are poor. Most of the rural poor depend
on rain-fed agriculture and fragile forests for their livelihoods. The sharp rise in
foodgrain production during Indias Green Revolution of the 1970s enabled the
country to achieve self-sufficiency in foodgrains and stave off the threat of
famine. Agricultural intensification in the 1970s to 1980s saw an increased
demand for rural labor that raised rural wages and, together with declining food
prices, reduced rural poverty.
Sustained, although much slower, agricultural growth in the 1990s reduced rural
poverty to 26.3 percent by 1999/00. Since then, however, the slowdown in
agricultural growth has become a major cause for concern. Face Indias rice
yields are one-third of Chinas and about half of those in Vietnam and Helvetica
"Indonesia. With the exception of sugarcane, potato and tea, the same is true for
most other agricultural commodities.
The Government of India places high priority on reducing poverty by raising
agricultural productivity. However, bold action from policymakers will be
required to shift away from the existing subsidy-based regime that is no longer
sustainable, to build a solid foundation for a highly productive, internationally
competitive, and diversified agricultural sector.
Dr Ranga Sai
Agricultural productivity
Agricultural productivity has two aspects. Land productivity and labour
productivity. The former implies the productivity of land per hectare or acre
and the latter refers to the productivity per worker employed. Both land and
labour productivity in Indian agriculture is extremely low.
In the post-independence period, particularly after 1962, the previous
stagnant agricultural scenario was reversed and the following changes have
been observed:
1. There has been a steady increase in areas under cultivation.
2. There has been an increase in the intensity of cropping.
3. The production and productivity, particularly in case of wheat has
increased significantly.
Dr Ranga Sai
b. This was the first time that such high growth in production and yield of
both rice and wheat was witnessed in the country. These levels of
growth remain one of the highest achieved so far.
c. The development of high-yielding variety (HYV) of seeds in mid 1960s
and the subsequent use of the fertilizer-pesticides-irrigation package,
better seeds, improved irrigation and education of farmers led to
quantum jumps in the productivity. Consequently, production of wheat,
rice and food grains grew at an average rate of 21.9 per cent, 10.3 per
cent and 10.9 per cent, respectively, during the subsequent years 19671970.
d. High growth in production and yield continued during the subsequent
decades of 1970s and 1980s. Production of wheat, rice and food grains
during 1970s-1980s grew at an average rate of 5.1 per cent, 4.0 per cent
and 3.3 per cent, respectively.
e. The yields of wheat, rice and food grains grew at an average rate of 3.1
per cent for wheat and rice, and 2.9 per cent for food grains,
respectively, during the same period.
3.1
1.2
7.9
1.3
Wheat
percent
Pulses
3.1
1.7
11.2
2.3
0.7
1.1
13.9
3.0
Food grains
2.9
1.6
8.1
2.4
Dr Ranga Sai
4. The crop insurance was another step to protect the farmers against losses
caused by crop failure on account of natural calamities like drought, flood,
hailstorm, cyclone, fire, diseases etc.
5. Easy availability of capital or investment input through a well-knit network of
rural banking and small scale cooperative societies with low interest rates were
other facilities provided to the farmers for modernisation of agriculture.
6. Special weather bulletins for farmers were introduced on radio and television.
7. The government announced minimum support price for various crops
removing the elements of uncertainty. It ensures minimum price for the crop
grown by the farmers.
Dr Ranga Sai
Dr Ranga Sai
Dr Ranga Sai
it has been found that "the value of the subsidy is so little even for those
households who make all their purchases of cereals from rationshops.
The main weakness in PDS i.e. not reaching poor effectively
Suggestions for improvement
o Retail price at FPSs should be uniform throughout the state/area after
weight-averaging the transport cost for the FPS.
o Regular supply of good quality grains has to be ensured.
o Entitlement card's easy availability and improvement in its design and
durability.
o FPS doorstep delivery of PDS commodities instead of delivery to FPS
owners at FCI godowns.
o Improvement in the viability of FPSs.
o Enlarging the basket of PDS commodities to enhance its utility as also
to improve economic viability of FPSs.
o Streamlining of the supply chain by construction of small intermediary
godowns between FCI's base godown and FPSs in the interior.
o Introduction of a more effective Management Information System.
o A number of new FPS to be opened so that physical access of
beneficiaries is improved;
o Special campaign to be mounted by the state governments to cancel the
bogus entitlement cards and to issue new cards to households found to
be without them;
o To progressively bring more and more FPS under the system of FPS
doorstep delivery of PDS commodities;
o Set up vigilance committees of local people with substantial
representation of women for each FPS at the village level and also at
higher levels;
o Improve the supply chain by constructing or hiring small intermediary
godowns;
Dr Ranga Sai
Limitations
o High fiscal burden- subsidy cost above 1.25 lakh crore rupees per year.
(Budget 2014 allotted 1.15 lakh crores, out of that, 88000 crore
specially for Food security act.)
o Government will have to keep large stock of foodgrains but FCI storage
capacity insufficient.
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
o If so much food grains kept out of open market will cause food
inflation, and middle class will suffer.
o Government may have to import foodgrain during drought years
leading to an additional current account deficit.
o An Adult needs ~14kg foodgrain. While NFSA gives only 5 kg per
person to Priority households.
o Focusing only cereal. What about pulses (to give protein), edible oil (to
give fat), fruits, vegetables (for vitamin) and milk- to combat
malnutrition?
o Malnutrition has its connections with lack of sanitation and medical
facilities in rural areas. NFSA alone insufficient.
o Parliamentary standing Committee has recommended GPS tracking of
trucks, CCTVs in go-downs to prevent diversion. But this are not
implemented.
o identifying households eligible for this scheme will be a big challenge
o Section 44 of the act: During natural calamity and wars- Union and
state govt. will not be responsible for non-supply of foods.
o Stopping institutional corruption in state PDS machinery is difficult.
Dr Ranga Sai
Dr Ranga Sai
Module III
Industry and Service Sectors in India
Industrial Development Since 1991: Growth and Diversification MRTP and Competition
Act Comprehensive Policy Package for SSIs 2000 and Recent Policy Measures Service
sector: Growth and Performance since 1991.
Dr Ranga Sai
11
12
13
14
Dr Ranga Sai
Dr Ranga Sai
Technology Upgradation
To meet the urgent need of technology upgradation, the Government has
announced a capital subsidy of 12 per cent for investment in technology in
select sector and setting up of an inter-ministerial committee of experts to
define the scope of technology upgradation and sectorial priorities. To
encourage total quality management, the Government has decided to continue,
for the next six years, granting Rs 75,000 to each small scale unit that obtains
ISO 9000 certification. The Ministry has formulated a comprehensive plan for
preparing Small Scale Industries for e-commerce with appropriate
infrastructure support. It has also sought to strengthen the IT support to Small
Scale Industry through the development of a 'Master Website' on small
industries comprising information on policies and procedures, technology,
products etc., with hyperlinks to States.
Credit Guarantee Scheme
The Government has approved a Rs 125 crore Credit Guarantee Fund Scheme
for small industries to tackle the problem of collateral guarantee and provide
necessary comfort level to banks lending money to small-scale units. The
scheme will be operational from 2000-2001 and will be implemented by a
trust set up by the Small Industries Development Bank of India (SIDBI). The
SIDBI will no longer be a subsidiary of IDBI and shall have a separate status
in order to promote development of small industries.
In the National Equity Fund (NEF) Scheme, the project cost limit has been
revised from Rs 25 lakh to Rs 50 lakh. The soft loan will be retained at 25 per
cent of the project cost subject to a maximum of Rs 10 lakh per project.
Assistance under the NEF will be provided at a service charge of 5 per cent
per annum.
Initiatives for North-Eastern region
The Government has announced a number of initiatives for the development
of SSIs in the North-eastern region at the national convention on SSIs on
August 30, 2001. A task force comprising of all North-Eastern State Ministers
in-charge of SSIs has been set up specifically for that region.
Marketing Development Assistance Scheme
SSIs face problems in marketing of their products. To help SSIs in marketing
their products a new SSI Marketing Development Assistance (MDA) scheme
has been launched to assist SSIs exporters to participate in international
exhibitions and fairs. Sub contracting and acnillarisation is being encouraged
through setting up sub-contracting exchanges and vendor development
programmes.
Dr Ranga Sai
Service sector
The tertiary sector of the economy (also known as the service sector or the
service industry) is one of the three economic sectors, the others being the
secondary sector (approximately the same as manufacturing) and the primary
sector (agriculture, fishing, and extraction such as mining).The production of
information is generally also regarded as a service, but some economists now
attribute it to a fourth sector, the quaternary sector.
The various sectors that combine together to constitute service industry in
India are:
Trade, Hotels and Restaurants, Railways, Other Transport & Storage,
Communication (Post, Telecom), Banking, Insurance, Dwellings,
Real Estate, Business Services, Public Administration; Defence,
Personal Services, Community Services, Other Services
Dr Ranga Sai
India is in a position to tap the top end of the USD 3 trillion global healthcare
market because of the quality of its services and the brand equity of Indian
healthcare professionals across the globe. The Indian Government places top
priority on the healthcare sector and is focusing on indigenous research and
development and the further creation of human capital.
Tourism is estimated to contribute 5.83 per cent to the GDP and 8.27
per cent to employment in the country; the employment generated by
tourism is estimated at 51.1 million in 2006-07
In the case of engineering and integrated engineering services, India has
the single largest pool of technically qualified and trained manpower
with the potential to operate in the international market.
In the case of engineering and integrated engineering services, India has
the single largest pool of technically qualified and trained manpower
with the potential to operate in the international market. With the
growth in the manufacturing and services sector, and given the aging
demographic profile of most developed countries, the demand for
Indian engineers is likely to increase considerably in the coming years.
Professional services include the widest variety of individual and firm
based services. These include, inter alia, legal, accountancy,
engineering, architecture and medical services. This set of services is
amenable to all the four modes of supply recognised under GATS.
Education levels have a direct bearing on the sustainability of a
countrys competitiveness and economic growth. Against the
background of economic globalisation, the development of human
capital very much depends on the internationalisation of education
services.
The share of banking and insurance services in the GDP of India has
been stable between 5.5 and 6.5 per cent over the last few years even
though the sector has been showing a double digit growth in the pre2008 period.
The telecom services have been recognized the world-over as an
important tool for socio-economic development for a nation. It is one of
the prime support services needed for rapid growth and modernization
of various sectors of the economy. Indian telecommunication sector has
undergone a major process of transformation through significant policy
reforms, particularly beginning with the announcement of NTP 1994
and was subsequently re-emphasized and carried forward under NTP
1999.
Information technology essentially refers to the digital processing,
storage and communication of information of all kinds . Therefore, IT
can potentially be used in every sector of the economy.
Dr Ranga Sai
Module IV
Banking and Monetary Policy Since 1991
Banking sector reforms since 1991: Rational and measures Structure of Banking in India
performance of commercial banks since 1991 Promotional and Developmental
functions of RBI, RBIs recent measures of Money supply-Trends and Causes of Inflation
since 1991 Recent changes in monetary policy in India.
Narasimham Committee
In 1991, under the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalization of banking practices.
M. Narasimham (1998) had pointed out; the reforms in the banking sector can
be classified into two phases:
1. The first phase consisted of the curative measures, which were
brought about for making the banking sector more oriented to the
market and impart competition to the environment.
2. The second phase consisted of the preventive measures, which
were brought about to ensure smooth functioning of the banking
sector in the long run.
The primary curative measures included the reduction of reserve
requirements, interest rate deregulation and lifting of entry barriers. Other
important measures introduced in this category included prudential reforms in
terms of following capital adequacy norms as well as adhering to well-defined
asset classification and provisioning standards.
Supervisory and regulatory reforms were introduced to ensure transparency
and adequate risk management practices were made mandatory. The thrust of
the preventive measures was primarily on privatization and government stake
was reduced to 30 per cent. The establishment of asset reconstruction
companies was envisaged and capital adequacy norms were made more
stringent.
Some of the recommendations offered by the committee, in its report
submitted in November 1991, are:
1. A reduction, phased over five years in the Statutory
Liquidity Ratio (SLR) to 25 percent, synchronized with the
planned contraction in Fiscal Deficit.
2. A progressive reduction in the Cash Reserve Ratio (CRR).
3. Gradual deregulation of interest rates.
4. All banks to attain Capital Adequacy o 8 percent in a phased
manner.
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
Dr Ranga Sai
Dr Ranga Sai
Dr Ranga Sai
The Indian banking sector consists of the Reserve Bank of India (RBI), which
is the central bank, commercial banks and co-operative banks.
Commercial banks are of two types:
1. Scheduled, which are subject to statutory requirements and
2. Non-scheduled, which are not.
Scheduled banks can be further classified into
a. Public sector banks comprising of the State bank of India, its seven
associates,
b. Other nationalized banks
b. Regional Rural Banks and
c. Private sector banks, which can be either domestic or foreign.
Public Sector Banks
a. State Bank of India and its associate banks called the State Bank group
b. 20 nationalized banks
c. Regional Rural Banks mainly sponsored by Public Sector Banks
Private Sector Banks
a. Old generation private banks
b. New generation private banks
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
Scheduled Banks in India constitute those banks which have been included in
the Second Schedule of Reserve Bank of India Act, 1934. RBI in turn includes
only those banks in this schedule which satisfy the criteria laid down vide
section 42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total
network of 64,918 branches. The scheduled commercial banks in India
comprise of State bank of India and its associates (8), nationalized banks (19),
foreign banks (45), private sector banks (32), co-operative banks and regional
rural banks.
"Scheduled banks in India" means the State Bank of India constituted under
the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined
in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a
corresponding new bank constituted under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970),
or under section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank
included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of
1934), but does not include a co-operative bank".
"Non-scheduled bank in India" means a banking company as defined in clause
(c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is
not a scheduled bank".
Dr Ranga Sai
Formally, in 1935 RBI was established as an apex institution and the nation's
monetary authority. It had a division of two separate activities viz. the issue
department and the Banking department.
The Banking Regulation Act of 1949 gave RBI the control and supervision of
commercial Banks. The amendments to RBI Act in 1962 provided the RBI
right of information from commercial banks regarding their credit functions.
Currently, RBI has emerged as a potential apex monetary authority with
control over the capital markets, money markets, foreign exchange markets
and the monetary policy.
RBI as an apex institution has the overall control over the monetary policy. It
regulates the monetary economy by sets of guidelines pertaining to interest
rates, liquidity, lending operations of financial institutions etc. It also
promotes financial institutions to augment Government of India.
The broad objectives of the Reserve Bank are:
(a) Regulating the issue of currency in India;
(b) keeping the foreign exchange reserves of the country;
(c) establishing the monetary stability in the country; and
(d) developing the financial structure of the country on sound lines
consistent with the national socio-economic objectives and
policies.
2. Banker to Government:
The Reserve Bank acts as the banker, agent and adviser to Government of
India:
(a) It maintains and operates government deposits,
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
3. Banker's Bank:
The Reserve Bank acts as the banker's bank in the following respects:
(a) Every Bank is under the statutory obligation to keep a certain minimum of
cash reserves with the Reserve Bank. The purpose of these reserves is to
enable the Reserve Bank to extend financial assistance to the scheduled banks
in times of emergency and thus to act as the lender of the last resort.
According to the Banking Regulation Act, 1949, all scheduled banks are
required to maintain with the Reserve Bank minimum cash reserves of
5percent of their demand liabilities and 2percent of their time liabilities. The
Reserve Bank (Amendment) Act, 1956 empowered the Reserve Bank to raise
the cash reserve ratio to 20percent in the case of demand deposits and to
8percent in case of time deposits. Due to the difficulty of classifying deposits
into demand and time categories, the amendment to the Banking Regulation
Act in September 1972 changed the provision of reserves to 3percent of
aggregate deposit liabilities, which can be raised to 15percent if the Reserve
Bank considers it necessary,
(b) The Reserve Bank provide financial assistance to the scheduled banks by
discounting their eligible bilk and through loans and advances against
approved securities,
Dr Ranga Sai
(c) Under the Banking Regulation Act,1949 and its various amendments, the
Reserve Bank has been given extensive powers of supervision and control
over the banking system. These regulatory powers relate to the licensing of
banks and their branch expansion; liquidity of assets of the banks;
management and methods of working of the banks; amalgamation,
reconstruction and liquidation of banks; inspection of banks; etc.
5. Controller of Credit:
As the central bank of the country, the Reserve Bank undertakes the
responsibility of controlling credit in order to ensure internal price stability
and promote economic growth. Through this function, the Reserve Bank
attempts to achieve price stability in the country and avoids inflationary and
deflationary tendencies in the country. Price stability is essential for economic
development. The Reserve Bank regulates the money supply in accordance
with the changing requirements of the economy. The Reserve Bank makes
extensive use of various quantitative and qualitative techniques to effectively
control and regulate credit in the country.
Dr Ranga Sai
Issue of License: Under the Banking Regulation Act 1949, the RBI has
been given powers to grant licenses to commence new banking
operations. The RBI also grants licenses to open new branches for
existing banks. Under the licensing policy, the RBI provides banking
services in areas that do not have this facility.
Prudential Norms: The RBI issues guidelines for credit control and
management. The RBI is a member of the Banking Committee on
Banking Supervision (BCBS). As such, they are responsible for
implementation of international standards of capital adequacy norms
and asset classification.
Corporate Governance: The RBI has power to control the appointment
of the chairman and directors of banks in India. The RBI has powers to
appoint additional directors in banks as well.
KYC Norms: To curb money laundering and prevent the use of the
banking system for financial crimes, The RBI has Know Your
Customer guidelines. Every bank has to ensure KYC norms are
applied before allowing someone to open an account.
Transparency Norms: This means that every bank has to disclose their
charges for providing services and customers have the right to know
these charges.
Risk Management: The RBI provides guidelines to banks for taking the
steps that are necessary to mitigate risk. They do this through risk
management in basel norms.
Audit and Inspection: The procedure of audit and inspection is
controlled by the RBI through off-site and on-site monitoring system.
On-site inspection is done by the RBI on the basis of CAMELS.
Capital adequacy; Asset quality; Management; Earning; Liquidity;
System and control.
Foreign Exchange Control: The RBI plays a crucial role in foreign
exchange transactions. It does due diligence on every foreign
transaction, including the inflow and outflow of foreign exchange. It
takes steps to stop the fall in value of the Indian Rupee. The RBI also
takes necessary steps to control the current account deficit. They also
give support to promote export and the RBI provides a variety of
options for NRIs.
Development: Being the banker of the Government of India, the RBI is
responsible for implementation of the governments policies related to
agriculture and rural development. The RBI also ensures the flow of
credit to other priority sectors as well. Section 54 of the RBI gives
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Dr Ranga Sai
the financial system since its inception. Some of the major development
functions of the RBI are maintained below.
1. Development of the Financial System : The financial system comprises
the financial institutions, financial markets and financial instruments.
The sound and efficient financial system is a precondition of the rapid
economic development of the nation. The RBI has encouraged
establishment of main banking and non-banking institutions to cater to
the credit requirements of diverse sectors of the economy.
2. Development of Agriculture : In an agrarian economy like ours, the
RBI has to provide special attention for the credit need of agriculture
and allied activities. It has successfully rendered service in this
direction by increasing the flow of credit to this sector. It has earlier the
Agriculture Refinance and Development Corporation (ARDC) to look
after the credit, National Bank for Agriculture and Rural Development
(NABARD) and Regional Rural Banks (RRBs).
3. Provision of Industrial Finance : Rapid industrial growth is the key to
faster economic development. In this regard, the adequate and timely
availability of credit to small, medium and large industry is very
significant. In this regard the RBI has always been instrumental in
setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI
and EXIM BANK etc.
4. Bill market : it also undertakes measures for developing bill market in
the country.
5. Provisions of Training : The RBI has always tried to provide essential
training to the staff of the banking industry. The RBI has set up the
bankers' training colleges at several places. National Institute of Bank
Management i.e NIBM, Bankers Staff College i.e BSC and College of
Agriculture Banking i.e CAB are few to mention.
6. Collection of Data : Being the apex monetary authority of the country,
the RBI collects process and disseminates statistical data on several
topics. It includes interest rate, inflation, savings and investments etc.
This data proves to be quite useful for researchers and policy makers.
7. Publication of the Reports : The Reserve Bank has its separate
publication division. This division collects and publishes data on
several sectors of the economy. The reports and bulletins are regularly
published by the RBI. It includes RBI weekly reports, RBI Annual
Report, Report on Trend and Progress of Commercial Banks India., etc.
This information is made available to the public also at cheaper rates.
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
Narrow money: Narrow money deals with transactions demand for money.
The constituents of narrow money are limited to the central bank and the
central government and commercial and co-operative banks.
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
M3
M3 is the international standard of money supply. IMF, World Bank and WTO
use this measure, uniformly, for comparing different economies of the world.
M3 is similar to Milton Friedmans measure of money supply. M3 is the
measure of aggregate liquidity in the economy. This is an important measure
for monetary targeting by RBI.
Liquidity measures for Broad money
In addition, the Third Working Group proposed two liquidity measures for
broad money for measuring overall economic activities (monthly and
quarterly compilation). This measure brings out the importance of Non
depository corporations (Non banking financial corporations).
L1
L2
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inflation was 6.3 percent. India's CPI inflation has been the second highest
among the Asian economies.
Nature of inflationary pressures in India:1. Deregulation of administered prices such as petrol, diesel etc and
other measures such as caps on number of subsidized cylinders a
household can use leads to upward movement in the prices.
2. Supply shocks which happen due to adverse monsoon conditions
leads to increase in demand in agricultural sector which can
spillover to other sectors.
3. Increase of indirect taxes in the recent budget of 2012.
4. Increase in the prices of crude oil imports which leads to price rise
in all those industries which use it as raw material. eg-power,
petroleum products.
5. Increase in money in the hands of people due to increased
Government spending in schemes like NREGA.
6. Increase in population which leads to increase in demand.
7. Capital stock deficiency tends to lead to bottlenecks, under which
resource constraints, including limited infrastructure and/or the
lack of manufacturing capacity delay overall production or service
generating processes, further leading to higher inflation through
shortages in supply. India's capital stock-to-GDP ratio was 1.79 in
2010, among the lowest in Asia.
8. Demand Side Drivers (The National Rural Employment
Guarantee Act (NREGA)): demand-side inflation drivers,
especially those arising from a sharp rise in personal income and
an expansionary fiscal policy, have also played an important role
in keeping inflation persistently high.
9. Food price inflation has been a major driver of inflation and the
lack of rainfall during the monsoon season often hits India's food
production. In addition, the structural change in food intake has
contributed to food price inflation.
10. Import price pressures have also been an important factor for
overall inflation as India has become a more open economy over
the past 10 years. In fact, the imported goods-to-GDP ratio
doubled from just above 11 percent in FY00/01 to 21.9 percent in
FY10/11 with bulk imports, such as crude oil, metals, rubber and
food - primarily commodity-related items - accounting for 42.7
percent of total imports.
Inflation Expectations: In the RBI's latest inflation expectations survey of
households, respondents' inflation expectations for three months ahead inched
up to 12.2 percent in the third quarter of 2011 from 11.8 percent in the second
quarter. Overall, inflation expectations have been largely driven by food price
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
Monetary management
Maintenance of a sound monetary system is the basic objective of any central
bank of a nation - De kock.
Monetary management involves four major issues.
1. Price stability
2. Control over money supply
3. Control of Reserve money creation (RBI credit
government) and
4. Rationalization of administered interest rate.
to
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Dr Ranga Sai
Dr Ranga Sai
RBI may reduce liquidity by selling the securities in the market and may
increase liquidity by buying back the securities from the public.
Short term liquidity management refers to injection or absorption of liquidity
by RBI through Repos and Reverse Repos.
Liquidity adjustment facility is an instrument of monetary policy through
which the repos and reverse repos are auctioned within a corridor of interest
rates in the short run. The corridor of inertest rates refr to narrow range
predetermined by RBI.
The second Liquidity adjustment facility announced in 2005 allowed auction
twice daily. This reduced dependence on other tools like cash reserve ratio.
Liquidity adjustment facility reduces emphasis on the banks monetary
targeting and concentrates on interest rate alone.
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