RedefEdu 4 Redefine Education Synapsis IAS Overview of Indian Economy wes sia seee4 Economics is a study of the utilization of the scarce resources and choices made by the economic agents like producers, government for the proper allocation of those scarce resources. Thus, it is a branch of social science that deals with the production, distribution and consumption of the goods and services, seer yer sant fr eer, wee eR we oe ei ee RF SOR eR FEE art ae sea sey, Fer ae Economie agents: individuals or institutions that take economic decisions, may’ be Producers, Consumers, Government, Corporations, Banks tc fier es ofan ee, ts, ee, Py, fe aaerh ‘The economy of India is characterized as a developing market economy. 0 sore we Faster are ardor rer an Poarar Itis the world’s fifth-largest economy by nominal GDP and the third largest by purchasing power parity as per IMP tie se (ae ee) Tf We eet ae he renee RTC a AFT rot snore ‘The Indian Economy is characterized as a sete nferararat fear ae fara ‘+ mixed economy model irs xt ‘© It isa developing market economy, ewe free ara sree ‘+ India is the fifth largest economy in the world sega wae wt sere ‘© It stands third inthe purchasing power party, wea-raiteamar cher ech ‘+ India has the lowest per-capita GDP as it has a lange population, ster saw ere we IR sabres area’ ‘© thas a high dependance on the primary sector. sire sre sara ‘* The maximum contribution tothe Indian growth and GDP is from the service that isthe tertiary sector. sre Brae stra se ioe aera Barr ae Role of State in Economy sieve if =98 P= There are three major school of thoughts: Patra sareper Adam Smith w= fer ‘+ The state shall not intervene in the economy. 14 sere ewe mn ‘+ Inhis work the Wealth of Nations he talks ofan Invisible Hand that let loose the economy and the market forces will freely determine the demand and supply. sere woe et ar) He ese er “eth at onder ser war ica ar ear ee ea rar sh ‘+ This ideology did paved way for the free-market economy (Laissez faite) and the capitalism. 2 Fm ye ere onforren (seen) ste par fgets fe ‘+The negative fallout was lack of addressl of the great depression (1929) saree =a (1929) Setar tt ar RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS ‘+ To prevent this fallout to become a reality India adopted a mixed economy model, zr ahor-t aearear ‘ree eqs Pierson er se, John Maynard Keynes ats ¥=ré sar ‘+ Post Great Depression of 1929 a ‘strong state intervention’ as suggested by Keynes helped to mitigate the crisis. 1929 a eee) ar ar ce yee we ge eee ee te ‘+ He linked fiscal policy withthe economic performance, >ataravnrr sit aftmacti fat ‘+ Thus, Keynesian economics is used asa post-recession strategy where the governments are suggested for raising the investment so that the economy grows and emerges strong. 5 fer snare ae eet Rear me ee ae We ear ea ondorear a aT ‘+ The increasing expenditure ofthe Indian government on the infrastructure so that the Investment increases with i the demand too increases. Eg the National Infrastructure Pipeline, 34 2 errr wy “arte itera, eres ga kre ear ETE, Liberals & Neoliberals sear stesererarét ‘© ‘Those are a set of reform policy as suggested by the Intemational Monetary Fund, World Bank to the developing countries faced with economic crisis, * she 9sry, fr te maitre rr ere Fete ‘ih gant gach ‘+ This policy prescription i called for asthe Washington Consensus by John Williamson, -tirt--at ere ee a eg A ‘© This suggests that the markets can handle everything, Pushing further the goals of Liberalisation, Privatisation and Globalisation, wai waren & fr arse we ane ea fire, Pat sc Aor ee aT stant ‘© The Adam Smith’s call of free market’ (liberalism) has taken rebirth (as in neo-liberalism). we fa sweat (sear) 3 grr gr ert (Ger Frere #) Sectors of the Economy riers in a country are divided into three broad sectors, fst ri safes naa fr i eave Sat RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 Economy$ RedefEdu Redefine Education Synopsis TAS + Primary Sector - economic activity that exploits the natural resourees like mining, agricultural activities, oil exploration, etc. sates dex - snl afafatr stag, qf afatatiel, der searwar onie aa wegin Wane aT aera ‘© Secondary Seetor- where economic activities under which the raw material extracted out of the primary sector are processed (also called industrial sector, festa &s-wc snitie nif fracas ‘Seen wer a Pear a (ro en ‘© Tertiary Sector- economic activities where services are produced fallin this sector, such as education, healthcare, banking, communication, ete. Experts have created two more sectors of economy— ‘quaternary and quinary that are subsectors ofthe tertiary sector, qatar a sibel aot ari “sea Fearon eta fv, ere err, Fe, ae, ae et ade et oP gente fe a er er Quaternary Sector: it is the ‘knowledge’ sector, the activities related to education, research and ‘development, It defines the quality of the human resources an economy has, sentir i: a Sar ar, rer, pt ati er te fai trae 5 mr AF YT Toe TAL ‘Quinary Sector: The highest level of decision makers falls under it. The ‘brain’ behind socio-economic. performance of an economy, vain ds Five 33 mew sere eat rt te ser Ft ene aie eves ir ae For the Stages of growth, a theory proposed by W.W. Rostow in 1960 where economies grow following five linear stages through the three main sectors i . agriculture, industry and services, Fear a wat % fer, 1960 ‘seeqseey te r we p ee plore erat tA, se erat me oe re ae ee tis offen seen that the countries moved from the stage of agrarian to service economy without much healthier expansion oftheir industrial sector. India has seen transition from the dominance of the agriculture to services sector by late 1990s when the contribution of services was more than the industrial sector, starve ar ar far re ei grees are nicer weg oes 1990 We TPE Sed yor aes argent Sr oer RedefEdu www,synopsisias.in www.redefedu.com youtube. com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 5 +919620206040 EconomyRedefEd > odsine Cdveston SyaopsieJAS Economic systems ane onftat (1) Capitalist Eeonomy start store '* Guided by the Adam Smith principle of "Laissez Faire" or open economy or free market economy ‘where not the government but the forces of the demand and supply determines the economy. " seaire- ie" arg seer ar aa eee ye foe Rr za a eC ae ae mya ons anita ‘+The Factors of Production are owned by merchant or capitalist class. The government has a role of non-interference in the economy. sear area; sant a ard a ener wae fer snore eater ‘© This model has wide support as it reaps the environment for individual success, innovation and business activities. we ster reer wns wee oar seer, era ese APO reser aT Limitations faced- arses er - ‘+ There was almost no tool to look after those who have lower purchasing power. = evi ane 73 fet ‘eer a gee at ar ei er sai ‘© Negligible to (otal absence of welfare actions from the state, 3-4 exert wit -er-reaagrseea e ‘¢ Widening economic inequality snr see sar (2) Socialist Economy warrart terre ‘© Based on the principles of social welfare wera i essai ‘+ The factors of production are guided by community ownership. Thus individual liberty tis compromised in this, serene agree efor ae fre wh ere es eae ear a er Fea a ‘+ Itis mot the forces of demand and supply that determines the market. este sng vast at it sacar Fite et Limitations of the system finex arate ‘* The aim was to serve all, but lacked the idea of wealth creation. ster 4 Garr, Pw For ere ‘+ State used to prioritise the uses of resources—thus the best uses of resources (driven by market forces) were denied leading to their misallocation and wastage. 1 wat ser a anor at ar = FT eM sai itr (arrest cer ea) ere Pere a Fre re see He oh ‘¢ The absence of property rights lead to virtual absence of innovation (ie., esearch and development) —a process of internal decay which has caught attention when USSR disintegrated. vs see seer ‘ara (art, sear i ree) os ee er ea & ss a ae ge a a oe Pear RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS ‘+ There was further evolution of the mixed economic model due to this. «2-5 ier orite steer Free pa (3) Mixed Economy S90 sr ‘© Ithas the characteristics of both the capitalist and socialist economy like India sonore sien serene) srdoraea ih fate ‘© Public + Private participation, arfater-+ rt st ‘© World Bank has arrived on toa conclusion that neither of the economic systems (market and non-market) are fre from Maws and the best economic system is the mixture ofthe both, few te a few wengar t Pe wié sae met Gara st hears) eet pa ata ore one ch a om ‘© Private sector to play those roles where invisible hand (the motive of profit) can work properly, Sf ast erst a ee sree ee (a a sew) her CAA ‘+ The economic roles played by either state or private sector may not remain fixed for all times to come and ‘may get modified as per the needs of the time, rat rea fo oreo ng sas fre sate ei ‘ati ae es st ac ee ee we ‘© Mixed economic system is not a kind of finality which the market or non-market economic systems use. rr asset ee ie a Fc et aa ema eet ‘+ Therefore, in the mixed economy model the distribution system was a hybrid of the former two models of distibution—state and market, caf, fier srismear ier fran ret fon gh oats ar ge He a ster RedefEdu www synopsisias.in www.redefedu.com youtube. com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEd > odsine Cdveston SyaopsieJAS National Income Accounting 13 21 Sis Income is an indicator of progress. To use it as a better measure the idea of the gross domestic product (GDP) was Dut forth by the US economist Simon Kuznets in 1934, sme sonr re ty it keae ane mei ere ere, eae (bd) Fe 1934 enfant eT Why to measure national income? he este? Domestic level: Get an idea about growth, economic prosperity, development and get a tailor-made solution to the problems of each region, terrae: Free, sir af, freer a ge Parca a se aro eT ee Ge ET aaa one ars International level: To compare the situation of different economies, o get an overview about the areas that need ‘major boost and accordingly improvement. steer et: fiir sofort ur °@ year 68 Re, BH ashe creer ae fe fet erg sacar UC seer aA How to measure production in an economy espero i sey ah ‘There are four elassical concepts. 3-0 senate (0) GDP: The final value of all goods and services produced within the geographical limits of a country. Ae: he ose ie aero ep te eT (2) GNP: The ultimate value of all goods and services produced by a citizen anywhere in the world, sem (Sea ah era aera ae she ai a GE (3) NDP: GDP ~ Depreciation weet: eh — eee jon et et — HITE (4) NNP: GNP ~ Depreci National Income Measure ser 270 Fig- Flow of national income Gross Domestic Product (GDP) wer veya (fe) © Market value of all the final goods and services produced within a country for a given time period “ft fier sais fe Fat rssh ae en tr ate ara ATTA ‘© There are three ways of ealeulating GDP - all of which in theory should sum to the same amount: “Prarie aR ae a ee we ae ae Aa RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEd A‘ ea tiee SynopsisTAS GROSS DOMESTIC PRODUCT (GDP) all goods and Consumption ° Firm Profits costs Gross National Product (GNP) or GNI mer ata sears (she) area ‘©The gross national income, previously known as gross national product, While being conceptvally identical, itis caleulated differently, west ange sre weer age see ee ara sae TA we ee + India has transactions with the rest ofthe world in the form of export, imponts loans ete, ver Fi, eur an) se we fered + GNP=GDP +*Net’ factor income from abroad, cr =e + Rear pt mew 3 In ealeulating the GNP trans-boundary economic activities of an economy is also taken into account, The items counted in the segment ‘Income from Abroad? are: gat freer Pt spre free a ies Mt ert ars ra ane aries A a oe (Private Remittances fier (i Interest on External Loans seth (ee) were (Gil) External Grants =e ge ‘+ Net Factor income from abroad = Income earned by the domestic factors of production employed in the rest of the world ~ Factor income eamed by the factors of production of the rest ofthe world employed in the domestic economy. Ft jw are = afar a fat eer eres wh a ae a nore eer fe ree arr are xe RE Fe ‘© India's GNP is always lower than its GDP, se odsine Cdveston SyaopsieJAS Gross vs Net aes a0 Ts Net sross — Depreciation 17x = wee" sage Net GDP (NDP) = GDP — Depreciation apr steps (Cre) = eRe we Fe — ETT Net National Product (NNP) = GNP — depreciation 7:2-1ee are (gre) = inert — Fem ‘Net National Product (NNP) or NNI patie sere (ere) arose tis the value of GNP after deducting depreciation of plant and machinery, eer sts sexes Smet earch rer NNP = GNP — Depreciation erent = terete Net National Product (@Market Price) = Gross National Product — Depreciation a7 (@=ar=3 yarn ee INP (@Market Price) ~ Net indirect taxes ere (@=e=019) NAP (@Factor Cost) INP (@arae Fe) eo Depreciation includes the ‘wear and teat” that happens to the assets while the goods and services were being produced. Every asset depreciates in the process of their uses. Heme # "7 — ye" ser tt ahaa “area ee he era a sere Perr er ee a re ae re A ‘The Net National Product at factor cost is known as National Income, (NCERT) wren sre we arg meer ‘sere ar re seers wet ara (ere) This isthe purest form of the income of a nation, xe wee mea sere TS aT ‘While dividing the NNP by the total population of a nation we get the ‘per capita income’ (PCI) of that nation, ic, “income per head per year" ect at Pi ae 4 ga a a ae ee a AT (ato) sme ae, sri, Sara sa ‘The Central Statistics Office (CSO) under the Ministry of Statistics and Program Implementation defines National Income of India as Net National Income at Market Price wife ofr-mrirmaiena a (eat en er rer aE Ee I Ge eH z Relation between Factor Cost, Base Price and Market Price scr or, smacer ste wpne erie dnr [en] oe er RedefEdu www synopsisias.in www.redefedu.com youtube.com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi—5 +919620206040 EconomyRedefEd > kecetae cduecien Synopsis AS Factor cost eer Factor Price is total cost ofall factors of production (such as labour, capital, land ete) used in producing goods or services, en sex ear ai ett (38 a, se gree eer ier api rans ae Fear ‘© Iris the price of the commodity from the producer's side we sr ae fe 6 err © Land > Rent sf (Rea) © Capital > Interests ra) © Labour > Wagessort (eet) ‘+ Entrepreneurship > Profit str (=r) ‘© Factor cost is the input cost that the producer incurs in the process of producing something (such as cost of capital, i, interest on loans, raw materials, labor, rent, power, ele.) This i also termed as “factory price’ or ‘production costprice’. serene gee it friar a per seacrc Fsoai (Fe AA “ae, et, CATH) TR, TA, a, PRT, FA, ee ea er eM gee Basie Price weryer ‘© Income can be derived at two prices Constant and Current. The difference in the constant and current prices is only that of the impact of inflation. sx twa fee ste rr ese Ra ar wear Fae freee eg ot eer es TT ‘© Inflation is considered stand still ata year ofthe past. the “base year’ in the ease ofthe constant price, \hile in the current price, present day inflation is added, reife sre gra ae eee pr a ae ca wc feces rn et, fe es te © Current price is the maximum retail price (MRP) =i, sera gre (eM) ‘© Its the value or amount which a producer expects to receive from the consumer by selling one unit of produ. et ar ae i eae Se Ae aE A eH Tw AT Se ATA Basie price = Factor cost + (Production taxes ~ Production subsidy) 3eraex = wes + (sere ssrer fart) Basie price (producer's price) is equal to prtction cost ETE (STEW En) TTT STITT A ‘Where production tx and production subsidy are determined in reference o production and don’t necessarily Aepend upon the volume of actual production, severe se seney wie rer rete Pn ee pede sree tt reine a E.g stamp duty, registration fee, land revenues, et. ety rizr, i Bega Market price ware Also known as buyer's price or Consumer price is a measure ofthe amount at which goods or commodities are ‘made available othe general consumer for sal. siti 6 ar seer yea ee aT ar aE rer ea a et ee zr fe ee a Market pr Basic price + (product taxes - product subsidy) wine yeu = yoryou + (sere we - sere ate) RedefEdu www,synopsisias.in www.redefedu.com youtube. com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi Economy +919620206040RedefEd > odsine Cdveston SyaopsieJAS Product taxes or subsidies are paid or received on per unit of product, Some examples of product taxes are excise tax, sales tax, service tax and import and export duties. sari =r weed rear 0 of w opra-ar Per Us FU ROT HR, fe 7, ar ate a ate el TEA Market price = Factor cost + (Production taxes ~ Production subsidy) + (produet taxes - product subsidy) seme ep ame + (seer e-card) + (sere e war) Market price = Factor cost + Net Indireet Taxes stare er = sere + sree Net Indirect Taxes = (Production taxes ~ Production subsidy) + (product taxes - product subsidy) == as B= (Bae BUR PBT) + (see = aE) Base Year smareat ‘© The base year of the national accounts is chosen to enable inter-year comparisons. sive gear ere “eet gga er smrcad gern ‘© Te aives an idea about changes in purchasing power and allows calculation of inflation-adjusted growth estimates, we meter i err tra we rare ar ste emai er set aT srg eart ‘©The last series has changed the base to 2011-12 from 2004-08, fest ren sre 2004-05 # 2011-12 steerer The Ministry of Statistics and Programme Implementation (MOSPI) is considering changing of base year for GDP calculation from 2011-12 to 2017-18, wife ste wrens eure seer (wre) 2011-128 2017-18 sam a a ET fe Ta a ee eT ‘+ In 2015, the Central Statisties Office (CSO) did away with GDP at fictor cost and adopted the international practice of GDP at market price and the Gross Value Addition (GVA) measure to better estimate economic activity, 2015 %, ax ifort rae (hee ance cre wee Tea Pet sit sf fae TA AC SIE TT Se AC TET TT (TT Headline growth rate will be measured by the GDP at constant market prices, which will henceforth be referred tos “GDP" (as isthe practice internationally). Earlier, growth was measured in terms of growth rate in GDP at factor cost and at constant prices, whe =o ears ad Mee zr a oe, a ret Meh ae a Ree a fe sire ae we ere) Fa, ARTA se Re carer ae a ac i RedefEdu www,synopsisias.in www.redefedu.com youtube. com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi Economy +919620206040RedefEd 4 peccinecdvecin SynopsisIAS Economic policy 21ft-%r + Every economy goes through a eycle of ups and downs and transitional phase is always a situation of dilemmas, x see sree or eH irra aT Ae aT © Government being the sole caretaker of the country and fulfilling its democratic goals retains an eagle eye on the different economic fundamentals like inflation, employment, and growth etc. wae 21-8 4rAry -srde 3 te on caer cet a ron fe TE, ere he Reo a Fa ales are fc etter th ‘© Ir ascertains that different stakcholder's interest in kept intact and trade-off between different interest {groups can be balanced as per the requirement. afar sr Pe ere a fe sgt ai Ree ater rt area ge afr Pea ATH ‘Two types as standard procedures operated across countries iui oreo sheet eee see Monetary policy ize Framed in order to ensure circulation of money in economy from the demand side to supply side and viee versa a er sa er tg tea ler ero GP ea fee So that various purposes like production activities and other aspects related to assistance of fiscal policy can be censured. area natu tara were a te eg 4 ae ag Far a Is framed by the central bank of the country like RBI. 3 seth erp ihe tw ae Pears Framed in order to ensure circulation of money in economy from the demand side to supply side and vice versa, a er sar at ae Pte lore aero aT a aT FeTT? | Iis framed by the central bank of the country like RBI. 3 stent rawr tare iter rae fears ‘The objective of monetary policy isto primarily maintain price stability and keeping the objective of growth, sips ste ger ee Feces fre seer TATA It ensures allocation of funds from the financial system. The monetary policy is prepared and it ensures the “monetary transmission,» fafa fear sade finer er et ae se ee A Considered as the most dynamic and sensitive function of a central bank (i.e., RBI in case of India) this macroeconomic policy is related fo monetary matters—that regulates the size and cost of fund/money in the economic system. rire (ar, er sme sre nei se ere eke aT Ta, ae aS “eRe ie i nee / wr ae eT cA ‘Monetary policy isa bi-monthly affair announced 6 times ina financial year by the monetary policy committee (MPC) that came into being in 2016, sr se fore io = (et) are era % 6 oer ear a 2016 5% ft ae There are few types of monetary policy stanees which keep coming nto media from ime to time—ierstn-eg pacha terns afer ont (Neutral stance means interest rates may move ether way-—upward or downward, wer were woe mT ‘af ec ew RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi ~ 5 4919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS Gi) Calibrated tightening means interes rates can only move upward. as reer a ree Ps var at er He stews wed (Gil) Accommodative stance (also known as expansionary stance) means injection of more funds into the financial system, Falling ‘headline inflation’ inspires RBI for it and such a stance is aimed at expansion in lending, investment and growth. ore a (Tt ear ve a1 MS aT 8) anh @ a ae aT SN er re a Fre sn ae eee errs errs, Fe eee enc iv) Contractionary stance means syphoning out of fund from the financial system. Such a stance is generally followed once more than optimum fund is believed to be available in the financial system. At times, itis also ‘aimed at taming inflation in longterm, agar ears Fre me rae Rear eA TTT eer fe + fog fri ec 8 a, ert peti sant tart (¥) Hawkish stance means the contractionary stance aimed at checking inflation from rising (linked to the statutory goals of inflation targeting the ‘headline inflation’). To put in place the desired kind of monetary policy, RBI uses a range of instruments and tools. wee wer sere ee ae ee Br ee shape a (3 Nr {Bree afr ara pre ae at gp ao re a a aM wT fey, etn fame “separ aire Fiscal policy w=rint=-tr Basically, framed by the government keeping in consideration the needs and demands of the economy primarily macroeconomic consideration, 35°64 #, wear wer spforsea sec tc HH AT OT ea aE, FS RTT aT sae fra, Fear Fiscal policy has been defined as ‘the policy of the government with regard to the level of govemment purchases, the level of transfers, and the tax structure, xe sft ‘wet tie ar, ee ar te ea Fe Hue “aie ee oats fear Fiscal policy is also defined as the policy which handles public expenditure and tax to direct and stimulate the level of economic activity (numerically denoted by the Gross Domestic Product). sre =1-a0 ft sh fone ferrari sie na ea ear ey eda ae ea ae Cee wT aS A, “see area a 2) twas J. M. Keynes, the first economist who developed a theory linking fiscal policy and economic performance. Se ee wee on i ad et tt ae se aT a ca Fea Fe Fiscal policy is also defined as ‘changes in goverment expenditures and taxes that are designed to achieve macroeconomic policy goals” (such as growth, employment, investment, ete). Therefore, we say that ‘fiscal policy denotes the use of taxes and government expenditures” rors a ace oer aac erg a tes Rarer ar sr at (er, Fe, se) eT a ee Fer Porn 1 fe, ora ee At ti ete eae a RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEd > kecetae cduecien Synopsis AS Public receipt were: Ex. Union budget, taxation norms, 27. ite =r, war =n Key concepts involved in fiscal poliey area ss rer ger sexe Mandates of union budget Ss e121 I is also known as the annual financial statement, @ constitutional obligation under art. 112 of Indian Constitution, sare faci freer eo aaa te er seg 112 aa era a AT ‘The statements of receipts and expenditure of the government of India are shown under three heads of government accounts ser ea met tk aerate a eRe Public receipt sister Receipts 8 /sifrat Every receiving or accrual of money to @ government by revenue and non-revenue sources is a receipt. It includes all incomes as well as non-income accruals of a government. 1 seers rae a erro sar sinkr ae tt ee tse areane gee Ree io eT Revenue receipts: wer srs © These are recurrent receipts. stat ‘© These include revenue raised from tax and non-tax sources. =e fh eee ere arose aes © Ex: Tax resourees: Income tax, corporation tax, corporation tax, excise duty ete, se: worst sams, er 7, fea, fr, SEE ah Non-Tax resources: User charges, interest receipts, interest dividends ete, Aearrstane: avira aes, ssf, ‘seers a Revenue Receipts eri Revenue receipts of a goverment are of two kinds Tax Revenue Receipts and Non-tax Revenue Receipts, pene A ase ie ae tg cer ore ee ‘Tax Revenue Receipts This includes all money earned by the government via the different taxes the government collects, ie. all direct and indirect tax collections ws araex sara weer ror fe fier emo were HT art cr ener @, eh, AT re sa EW Non-tax Revenue Receipts This includes all money earned by the government from sources other than taxes. In India they are: teanearaea seat si a5 sera sex ar wee ae ee rH TE, () Profits and dividends from its public sector undertakings (PSUs). 3 anise sop (fogay @me sheers i Interests received by the government out of all loans forwarded by it, be it inside the country (Le, internal Tending) or outside the country (ie., extemal lending). It means this income might be in both domestic and foreign currencies, wear-a fer Pg n ni(cs)Htme fe, rae aie o CA, iter aa Te CH, TTT per fe one ci te Pa at a A, (ii) Fiscal serviees also generate incomes forthe government, e., cutency printing, stamp printing, coinage and ‘medals minting ete. wai a ace sara rf TM, ra er see eT, RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi ~ 5 +919620206040 EconomyA Ree syeapsisdAS Gv) Gent Seis so cm mony fr te governments the por dso ing, tanking isu, emma sev ce. re eee teehee ee wnt (0 Fes Pics and nese by te orem or (v9 Gras wich te governs evi is ays eal in cs of he Cl Goren ad inane fae grees, er sec we wer en oor saint arte eens blge se + nk nen icome and expenditure incurred regularly i the running of businesses. Sra strc + Ex: sales, purchase, salaries, wages, and rent. sc. Pow, r,s, se Pena «Revenue Budget The part ofthe Budget which deals with the income and expenditure of revenue by the government, etre, sae era rato grr TEA eh a ae Capital Budget the part of the Budget which deals with the receipts and expenditures of the capital by the government. This shows the means by which the capital is managed and the areas where capital is spent, yr Be, ea me EAT A wT aT GAT Ya aa a a a a me ar Pear ta bir eater ara ae Gat Ae Capital Budgets Gt: ‘© A capital budget estimates inflows and outflows on account of capital expenses (re se ie 27 Sine it er ser re ‘© Capital expenses means those expenses which will be incurred for asset creation, ‘sve 2011 sn wal +t vi Fr re Peach ‘© Ex:plant & machinery, shares, furniture ete. sr: wi shew, et, la sa © Capital Budget the part of the Budget which deals with the receipts and expenditures of the capital by the government, This shows the means by which the capital is managed and the areas where capital is spent, stra ae, wae rar Rear acer A A at a ser fae ene a ar ee AT ‘wer Fearn ato ai Rear are ae a eA Capital account receipts: rarer + These are money raised through borrowing (deb) or sale of assets (non-ebt) #7 (2) we et (ee ome emt + x: Recoveries of loan; borrowing from India and abroad disinvestment proceeds at) A= ssc fier omc, fir sre Capital Receipts All non-revenuerecips ofa goverament are known as capital eceips. They are for investment purpose and are supposed to be spent on plan-development by a government. xref wer nf exe SE “arbre ee ara a far ste ee a wee Hera me Fa RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEd 4 nederina Education SynapsisTAS ‘The capital receipts in India include the following capital kind of accruals to the government: wes ese ea wee a fst racer rae ar ( Loan Recovery This is one source ofthe capital receipts. xfs) septa ire fer st i) Borrowings by the Government This includes all Jong-term loans raised by the government inside the country (Ge, intemal borrowings) and outside the country (ie, extemal borrowings). weme arn sa Fsee (HA, TE aur) st ares (a, a) wee Se ere MSA) eT A i) Other Receipts by the Government, wr xr Sere Non-debt capital receipts =e Fret Following are the Components of the non-debt capital receipts. fia me x Per © Recovery of loans. =Hi(si) -fr=%et) ‘© Disinvestment other than PSU (Public Sector Units. sow (arister 8 rte reer PEIN ‘There has been a National Investment Fund (NIF) that is created by the government to deposit proceeds from wvestment of PSUs. The proceeds are credited to the “Public Account of India. The fund is utilised for = a can) mere ey rr ET A er “Sit errr eri few Subscribing tothe shares being issued by the Central Public Service Enterprises. ts arr era ca fae ihrer den ‘+ Recapitalization of Public sector banks and insurance companies. a sfrwinrs et stestereata arte ‘© Investment by the government inthe RRBs. srt wee en ‘+ Equity infusion in various met projects ete, x =z stare se afer Public expenditure sist The different sources via which the government makes any expense be it any agenda of public welfare, infrastructure creation, poverty reduction or driving growth. frais ere moma enw ot ew, aE ae “wee, afte ei in tse fear awe ETA Subsidy, construction of roads and railways et. wid, we fret fs a Revenue expenditure: w#ea =r 4 Itdoes not create any assets ew er + Itisincurred on maintenance and consumption of the govemment. wre rare stra eas fare * Ex: Salaries, interest payments, defense, 5.0, eam 0, + subsidies werent Revenue Expenditure eros All expenditures incurred by the government are either of revenue kind or current kind or compulsive kind, The basic identity of such expenditures is that they are of consumptive kind and do not involve creation of productive assets. They are either used in running of a produetive process or n ning a government, A broad category of RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS things that fall under such expenditures in India are: wre xn Poy ean oe arene rae TE Set pean bon degree age fe tania mene sheet eT i Fr me a a ‘ere ar er ue de art er ar ee ee on a Pg oa ee ( Imerest payment by the government on the internal and external loans; stor ste area sa(s) we were ger =F wor, ii) Salaries, Pension and Provident Fund paid by the government-to-government employees; wore are reheat ro a cea, er si Fa, i) Subsidies forwarded to all sectors by the government; wear zr a it anf wt, Gv) Defence expenditures by the government; were xerest=, (¥) Postal Deficits ofthe government; arse =r 2, (vi) Law and order expenditures (i.., police & paramilitary), 775 st ore oer (=r, Gee se nF), (vil) Expenditures on social services (includes all social sector expenditures as education, health care, social secuiy, poveny alleviation, et.) and general services (ax collection, te); wae ait sro a, eer, oni gu, ogee ees Fae Fae 2 aE (oi) Grants given by the government fo the Indian states and foreign countries, were ahr i ser sears Capital account expenditure: ser 2 + Expenditure made for asset creation, vires fe fear = + Ex: Loans repaid, asset reation in infastructre and social areas > prereset), eee Sta ee 25 at Fa Nature of government budget. si =e 4 seh) ‘Thee 1ypes of goverment budget sree TE Surplus budget arr Deficit budget eer Balanced budget vgtrreee incl consolidations wes ‘To maintain balance between income and expenditure side in government budgetary process, we xr aFeTi sa shes ar sh eMC ‘Types of government budget sesihrre (1) Zoro-base budgeting Based on periodic evaluation sare seis aac vegan en (2) Performance budgeting Based on the performance of the expenditure involved. fie ae fer sree fers (2) Outcome budget Based on the ouput, S024 sw Fiscal policy is that part of government policy concerned with raising revenue through taxation and spending Drograms sreaitesis were erae fart ters stead ari mo ea a wer RedefEdu www synopsisias.in www.redefedu.com youtube. com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEd > odsine Cdveston SyaopsieJAS ‘Whatever that seems relevant from the angle of economic consideration from the side of Government ofa country like taxation policies, union budget ete comes under the ambit of Fiscal Policy. sr, 24 see sie eh ea er wee snes ee i ag or ar, ae a TA Objectives of fiscal policy «eit ® te © Tocensure the national priorities. 2re anise wr gains fe ‘+ To rationalise the effective use of limited resources, say Resource optimization sie sine et se ar gre ai ey, Ae EA ‘© Just and effective taxation policies. =r ste sant ener ‘© Toascertain the welfare of the economy. snisrasr trea ar war een Components of budget sv Fur ‘Annual Financial Statement [Article 112]: This document comprises the receipts and expenditures of the government of eurrent year, previous year, and budget year in thee separate parts as-is Peet [og LQ} reer, oda stew wh er acre att i a ere re Fea ‘Consolidated Fund of India, wes Fi, Contingency Fund of India sear seer fr ‘© Public Account of India. srr wre ea ‘The consolidated fund of India (Art.266) sr#rifer (9% 266) ‘+ All the revenues received by the government, loans raised by it and receipts from recoveries of loans granted by it wer emr mm wa, AT TMCNET eT RT RMT) A AT ‘© Noamount ean be withdrawn from this account without the due authorization from the Parliament, si “fer nerf arnt fa era roe are ‘The Contingency fund of India (Art.267) ses sete Fr (see 267) ‘+ Itis placed at the disposal of the President of India fo meet the unforeseen expenditure by the government pending authorization from the Parliament, xis # afte yer eres scatter sera TT eae hres reser fra carmarh © Currently stands at Rs. $000 crores, xii $000 sig ‘The Public Account of India (Art.266(2) sre sta (559% 266(2)) ‘© Moneys held by government in trust. Ex. Provident funds, small saving collections, income of government set apart for expenditure on specific objects. wee zr rr ear tr, fen, ry er ing, Foe core em re aE ‘+ Money held by government in trust. Ex. Provident funds, small saving collections, income of government set apart for expenditure on specific objects, wea ze Fare # carr er i, ae, AO ‘cane rw a re ‘© Does not requite parliamentary approval. ct fest str serena RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS ‘* Requires approval if the money kept in Public account is withdrawn from consolidated fund of India. seer reer arta a eae eg a ra Free aA Other documents presented along with the budget = ure Prey se sa + Demand for grants (Art 113), Finance Bill (Ar110(A)), 9924 (R711), Fw (39H 110 oon + Rest other documents presented are not constitutional obligations rather those are considered legal or statuory obligations under FRBM (Fiscal Responsibility and Budget Management) act. Ex Macroeconomic Framework statement, Medium term fiscal policy cum strategy statement, eqn fmere 3 ‘on hes eee ee 3 ero (ee Fert ahr ty afer en a te eM sh sara fay =I siti ee, HoT sa era TET RedefEdu www,synopsisias.in www.redefedu.com youtube. com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEd 4 peccinecdvecin SynopsisIAS Fiscal Policy we -fy Receipts — Debt Capital Receipts 2 ser sitet Borrowings Public debts are money raised on the security of consolidated fund of India and repayable out of it parc eae FARA CT Har ga AR oe Ha Deficit financing became an established part of public finance around the world, the means of going for it were also evolved by that time, They are the ways in which the goverment utilizes the amount of money created as the deficit to sustain its budget for developmental or political needs, These are done through a source of Extemal (Ai free rr ue Pera ea ar, Sc ut Pa Fe A ae fe ee reer refer we ec ue fra we et ee eT eaera inca ‘Types of Borrowings 7m re". © Intemal sister © Extemal ne Internal Borrowings sew 37 ‘Money borrowed within the same country ffom various sources and various instruments, Market loans by issuing bonds to public and financial institutions, long-term, interest bearing, farsa te Par erat wa @ er 2 sere rae Fear aru ner ie Fr ear ae at er ara see, ene, sa 1, Treasury bills: Securities issued by government treasury, Short—term in nature, non- interest-bearing instrument, zero coupons, issued ata discount rate, 2 fre weet ar crud afi, op see, Sr AT, ETERS, BACT 2. Funded securities: Short term treasury bills are converted to long ferm market loans to defer the repayment, frst aff: sere at fa pier a ee ae shar ara a) aa fo awh 3. Other Special securities issued to RBI: Bonds issued outside government's annual borrowing programme. e.g. oil bonds. ss wtf ns ie ug: ere ae i ee Pr ‘eters 4. Ways and Means Advances: Ifthe government account balance goes negative, RBI lends short interest- bearing advance to government, like an overdraft facility. faa ty feat eae ere ‘ant, a sedtond weet sere yer ae re e Ta ta 5. Special floating and other loans: Launched to raise money and their interest is subject to revision periodically. few} fe sari): a eer Rear ar eure We Ha a 6. Securities against small savings: National Small Savings fund under Public account of Ii, i=" “eran ofa a # ete one ee meson a 7. Compensation Bonds and others: Bonds issued by government to affeeted persons by its policy decison. arerarae ese wena rf emi a Fm RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEd > kecetae cduecien Synopsis AS 8. Non ~ negotiable, non- interest-bearing securities issued to International Financial Institutions: World Bank, Asian Development Bank. sinter rai st ng e-wcae, ewan are at fr 2s, aft fae Internal Borrowings come as the third preferred route of fiscal deficit management. But going for it in a huge ‘way hampers the investment prospects of the public and the corporate seetor. Economy heads for a double negative impact—lower investment and lower demands in the economy—the economy moves either for stagnation or fora slowdown, fer us ft water mr eae st 8 Pe Few a we RT sae eo pitt at sora grb sere oe rca or fb a reo rare Recents External Borrowings 0-22 ‘Money borrowed fom outside the country from various sources and instruments fifi ai fre er ‘eae at | Mulilateral loans: ike IMF, World bank, not borrowed against securities eens): nee, fren “r,s ere fer Bilateral loans: Raised ffom foreign government directly, fete m0: wh aa wees Extemal Borrowings are the best way to manage fiscal deficit with the condition thatthe extemal Toans are comparatively cheaper and long-term. Extemal loans are considered an erosion in the nation’s sovereign decision making process esr ew ae ath a ae a Se A HC) TST wT a esi if fer (esc); st (©) Macroeconomic Framework Statement (MFS). 39 40 41 42 saws safe-e war a (eHEREH) 39 40 41 a2 ‘* The Finance Minister fo make quarterly review of trends in receipts and expenditure in relation to the ‘Budget and place the review before the Parliament, fesse iba sft it ser io row ea toteaher deme As per the Budget, the government must remain committed to fiscal prudence and consolidation but a time has ‘come when the working of the FRBMA needs a review—especially in the context ofthe uncertainty and volatility which have become the new norms of global economy. #2 % age, wre a ast ie ie we fe TT sain, SAT ar ert se geo ORT oA TETRA fe eT be a od a Ae adarereacars are ‘Terminologies: rex: Fiscal drag: It is a situation where inflation pushes income into higher tax bracket. The result is inerease in income taxes but no inerease in real purchasing power, watt Reta: 1c fete # ae re sre a Tare seat irae fs rH a Ba a a ga AT ‘The restraining effect ofthe progressive taxation economies feel on their expansion —fall in the total demand in the economy due to people moving from lower to higher tax brackets and the government tax receipts go on increasing, To neutralise this negative impact, governments usually increase personal tax allowances, snftsieaarr nae rues se Pre we r= rr gare aH ee dere rw fee eT “we fait ro ner a ora fee, ee eo a Fiscal neutrality: When the net effect of taxation and public spending is neutral weve exam: wre a wither erga merece A stance in policy making by governments when the net effect of taxation and public spending is neutral neither encouraging nor discouraging the demand. As for example, a balanced budget isthe same attempt of fiscal policy ‘when the total tax revere equals the total public expenditure, seni ant Rata va apna ate ater eT {emer reer ta a seer ha tear ee, er ere prec preteen rect ‘Crowding out: Excessive government borrowing can lead to shrinkage of the liquidity in the market, it forces the interest rates to go up which in tur affect private investment. gemrr mar see weet ne ree rea ‘egg ar eon wear fr seat eee ar Ree ee aa Hf at ma TAL RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEd > kecetae cduecien Synopsis AS ‘Twin deficit: Worsening of both Current Account deficit (CAD) and Fiscal deficit (FD) simultancously in the economy. ter ue sdereear ir ee are rar ur (at teeter er (edt) FM Fiscal cliff The fiscal cliff refers to a combination of expiring tax cuts an aeross-the-board government. zr ae era ced on staf een aT ei eo A RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEd > odsine Cdveston SyaopsieJAS ‘Monetary policy sir Monetary Policy is a macroeconomic policy by RBI. Framed in order (o ensure circulation of money in ‘economy from the demand side to supply side and vice versa by the central bank of the country like RBI, Is, objective is to primarily maintain price stability, Growth, and Development, It is used to control inflation, interest rates, supply of money and credit availability. shi sree feet Soe war gr Sacer sine yer ‘fer seas fa, sonar eer ofa ne eg Roe a re ere er Rea are ster ger er ef, ae Fre oan nar 21 Ie EA, AT Ae ae te eT) -reroxar a ii 08 fe fer sat 1 ensures allocation of funds from the finaneial system, The monetary policy is prepared and it ensures the “monetary wansmission. The most dynamic and sensitive funetion ofa central bank this macroeconomic policy {s elated to monetary matters that regulates the size and cost of fund/money inthe economic system. Monetary policy isa bi-monthly affair announced 6 times in a financial year by the monetary poliey committee (MPC) constituted by the RBI it is tasked with framing monetary policy using tools like the repo rate, reverse repo ate, bank rate, Cash Reserve Ratio (CRR) i came into being in 2016. eh at Aw ner yer wet arte toe a Pie eat ee ee te erm eer aie =e i i er eH / ee eT ea ee a A se ae zm a Coser teat # 6a 2, tara etary, arc, sere are arg (eT) “a se a er TC eT a He 2016 H ae TT ‘Monetary Policy Committee si 7 ah ‘© [tis statutory and insttutionalized framework under the RBI Act, 1934. se ct ors suf, 1934 “sinks ge afte steer ert ‘+ Excofficio Chairman of the committee - The Governor of RBI. ait 92 sony - ssi ra ‘+The committee comprises six members - three officials of the RBI and three external members sted by the Government of India. wir we were mer = sang ft st se wer ae r= “aereetr en ‘+The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%). “a ee (4) a ee a (aT) Per aT «The meetings ofthe MPC are held at least times a year, if tik eerste are tier a ‘© The committe is answerable to the Government of India. we eft wre ere fr rare ‘© Urjit Patel committee in 2014 recommended the establishment of the MPC. 2014 % af erat rene “Sree friars ‘© It regulates the money supplies in market for which eredit control is important, =1=% 3 3 si ier a fe ez Peer ne 8 RedefEdu www,synopsisias.in www.redefedu.com youtube. com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi ~ 5 4919620206040 EconomyRedefEdu 4 Redefine Education Synopsis TAS + Credit contol refers to control of lending and deposit creating capacity of the bank these contol result in control of money supply. fz re er amr ae mee rr Fre i Fe ce ap a The method of credit control (Instrument of monetary policy) is of 2 type one is quantitative method, and another is qualitative method, fz frien fe (stews eens) 2 ner ar re ar tee Fr a ‘There are few types of monetary policy stances which keep coming into media from time to time— sre sar Seep wee arr wear eee (i) Neutral stance means interest rates may move either way—upward or downward, wee rer ref emg ea rer a RC a eA Gi) Calibrated tightening means interes rates can only move upward, ies reefer arse Pre ater He a stewg wed (Gil) Accommodative stance (also known as expansionary stance) means injection of more funds into the financial system. Falling ‘headline inflation’ inspires RBI for it and such a stance is aimed at expansion in lending, investment and growth. see a (Tt ear va a1 MS aT) aT nh # ae en TSN er Te ee ss a eee errr rare my, fe fe Fe eC AL (iv) Contractionary stance means syphoning out of fund from the financial system, Such a stance is generally followed once more than optimum fund is believed to be available in the financial system. At times, itis also ‘aimed at taming inflation in long-term, aparece fs oe Rr a ae esr ae er rh we ‘ae fear sar aT art gee A oe free ear, rT ee eee ea ATA eT sare tart (¥) Hawkish stance means the contractionary stance aimed at checking inflation from rising (linked to the statutory goals of inflation targeting the ‘headline inflation’). To put in place the desired kind of monetary policy, RBI uses a range of instruments and tools, wate war ar woe a igen we rer stew yen at we ea (oie re re ae pe eager Ear ar aw Yat se Ye fey sé UN a IT rate RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS Cosh Reserve Ratio. — Quantitative ‘Methods Reporte iui Adjudent aity alitati inal Standing Fac RedefEdu www .synopsisias.in www.redefedu.com ‘youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi —5 ++919620206040 EconomyRedefEd 4 nederina Education SynapsisTAS Quantitative Tool weiss see Bank Rate == ‘© Tho bank rate is the minimum lending/ interest rate charge by the central bank for loans of reserve funds to commercial banks. The interest rate which the RBI charges on its long-term lendings is known as the Bank Rate. seca et artsy ait amet) 9 fe ie epee rae es th eee fed de ont triste ont eats dart, ae ee sera © Penal rates are linked with Bank rate, wore 2t aera ahaa ‘© Forexample, fa bank does not maintain CRR, SLR as per the prescribed limit, penalty is prescribed as per bank rate, sarer fy, fife Pater ar sega dr, que Toe eT, ae ee yA pb fatter fears ‘©The clients who borrow through this route are the Government of India, state governments, banks, financial institutions, co-operative banks, NBFCs, etc. The rate has a direct impact on long term lending activities ofthe concemed lending bodies operating inthe Indian financial system. eww xroer its aera oer NE, THT AT, ey, Fhe, a, RT sa Ae a a Pe a at _ aa serge fe aaron aed eat TAL Open Market Operations sar=rar- sara [It refers to sale and purchase of securities in the money market by the central bank of the country. OMOs are conducted by the RBI via the sale/purchase of government securities (G-Sec) to/from the market with the primary ‘im of modulating rupee liquidity conditions in the market. OMOs are an effective quantitative policy tool in the armory of the RBI, but are constrained by the stock of government securities available with it ata point in time. “ae ee ders ene fe Fk ae ete ace ea aera er foe rar “Er fe i ae aa eT a (a) A et eR RATA 2 aT re ge nt armen seer, afer ee (eT re Tee ae Ta Variable Reserve Ratios: CRR, SLR 2 str jar: wares, ewes ‘Under this method, CRR and SLR are two main deposit ratios, yx fife ars, Hortore sft eer zt your aqaTh ‘© Which reduce or increases the idle eash balance of the commercial banks, xu et fest fewer erage Every bank is required to keep a certain percentage of its total deposits in the Form of a reserve fund in its vaults (SLR) and also a certain percentage with the central bank (CRR). wetness er or ee HT aT ‘aera fe sr (queer) terse & de tee (sore) TAL Banks operating in the country are under regulatory obligation to maintain ‘reserve ratios’ of two kinds, one of it being the cash reserve ratio (the other being ‘statutory liquidity ratio") reer et ora we ef arg ET, at fac afr afte, gee nf gu (qe ae aT TA 2) RedefEdu www,synopsisias.in www.redefedu.com youtube. com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi Economy +919620206040RedefEd 4 nederina Education SynapsisTAS Under it all scheduled commercial banks operating in the country are supposed to maintain part of their total deposits with the RBI in cash form as the cash reserve ratio (CRR). 3 ne, ee eer wt saa ater tr sre se er aor re ee ae (TO) em Hae AT Ha AT ‘The RBI could fix it between 3 to 15 percent ofthe ‘net demand and time liabilities’ (NDTL) ofthe banks. sen ‘Baa HT aha ta” (CEN) 3H 1S we te ATA, Policy Repo Rate = ‘© Also known as the benchmark interest rate is the rate at which the RBI lends money tothe banks for 8 short term. ar amnés oar ac yes st ar rare a fe en Se tea fe er Ie aT ‘© When the repo rate increases, borrowing from RBI becomes more expensive. rtarzrayarit ase aanarsteeseraaaA © The rate of interest the RBI charges from its client isthe repo rate in India, sare se ret ast ex ze art, aera © The Call Money Market of India (inter-bank market) operates at this rate and banks use this route for ovemight borrowings, r= ae (se ra) erg mm ar se esa ee rae eT wth Reverse Repo rate fer ¥ar2t ‘© RRR is the short-term borrowing rate at which RBI borrows money from banks, sor seem parce ea aetna ear saree ‘© The Reserve bank uses this tool when it eels there is too much money floating in the banking system. ‘oe ee eo at mn ee Ps A set i ee Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks. Taree seers eth ewe sso ‘aor amet err kee fn, Rea ae ser ce a ere te ea aera eae ar [In practice, financial institutions operating in India park their surplus funds with the RBI for short-term period and earn money. It has a direct bearing on the interest rates charged by the banks and the financial institutions om their different forms of loans. This tool was utilised by the RBI in the wake of over money supply withthe Indian banks and lower loan disbursal to serve twin purposes of cutting down banks losses and the prevailing interest rate It has emerged as a very important tool in direction of following cheap interest regime—the general policy of the RBI since reform process started, ei, seria 2 a fe eure sr it ore ra fe po ape ar te a Beer eh ek Fe etme a CS) IC aT ‘were esr re ret ee err ree a une we a tee) Free a te swf oe re eae i Fer a eA oar ee Fa a eT eer ont questo ge aa ae a orton eT RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEd > odsine Cdveston SyaopsieJAS (MSF - Marginal Standing facility wees ~ i earihfaur ‘+ Iisa special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage, 15 a fc Fr fg Fe free i et oe fe spew oi ones aT wT ‘¢ MSF rate is higher than Repo rate. was eet 20 sf ‘© Only scheduled commercial bank, *1 sqafer-uiifore eo ‘© Bank can also use its SLR quota securities, & are worse er ahha se ee we ‘Market Stabilization scheme (MSS) are atta srr (eres) ‘* MSS is a monetary policy intervention by the RBI to withdraw excess liquidity (or money supply) by selling government securities in the economy. eens sleet i emt fe ee ator ear (aT sr ogy aca fe son eT a eT, ‘¢ The MSS was introduced in April 2004, snes ster 2004 3 er fare ‘+ MSS is used witen there is high liquidity in the system. The Market Stabilization Scheme (which was abolished in 2014) crear ar afar ar ef Here a aa eso aa (FR 2014 ‘eefeerar an) ‘The issued securities are government bonds and they are called as Market Stabilisation Bonds (MSBs). =r ks et ae at rae tse ae (et) warner Qualitative Method yer fhe Selective eredit controls are used to influence specific types of eredit for particular purposes. They usually take the form of changing margin requirements to control speculative activities within the economy, fier fee era hee phe var wi fe 2 sche andar ar ar aa aber ecm are are aT TATA Margin Requirements fis sreeremt RBI can prescribe margin against collateral. For instance, lend only 70 Rs for 100 Rs value gold, margin requirement being 30%. In case if RBI raises the margin requirement, customers will be able to borrow less as prescribing to a loan will become more expensive. In case if the margin is reduced the loan subscription will ‘become cheaper and thus could be easily availed, sie toe ee aie esis Fler ere semen ry, 100 ye ee ee eae 70 ir, A sere 30% Hwa eer SET SUPE ET _pa a ee fe er ae a a a eM Ha CT TERT aersmer reer Consumer eredit Regulation sitar iz (mutes ‘© Refers to a personal debt taken by a consumer on the purchase of goods and services forthe satisfaction of wants, fea ost arr ae sh Rast at wfc ea sr a eRe ar eT AT AERC A ‘© Iisa qualitative credit contro! measure of the central bank. The Code provides clear, coherent, and speedy process for carly identification of financial distress and resolution of entities if the underlying business is found tobe vile. =r ar site Pri “areca firmer eee, ea af ew ei ae ea > Ie suggests two options ~ a restructuring ifthe firm is viable and liquidation i itis not financially Viable. eRe rye er gan of oe i eer fe Ree ee RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi 4919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS > Timeframe: 180 days ater the process is initiated, plus a 90-day extension — for resolving insolvency. re eee 5 180 fer, RM 90 rer Re er ea ey Amendments in the Code fear vine ‘The Government has been proactively addressed the issue that come up in implementation of the TBC, 2016 ‘To ensure proper operationalisation there have been three important amendments init ss, 2016 e-rer aa ee a er fi Pa ee ae fee ea Pee |, The first amendment introduced in Section 29A, that deals with the provision introduced to bar promoters from bidding for their own companies. It prevented defaulters from regaining control of their companies at a cheaper value ur 29 ar fer ee, iw set ei f hent re eer r @er {gat gems at gee et rer ger A eed 2. The second amendment introduced in Section 12. to provide creditors the option to withdraw insolvency application within 30 days of fling the petition, The amendment also stated that home buyers shall be treated as financial creditors. This move was aimed at mainly two issues—firstly, giving home buyers a voice in the insolvency proceedings as they, also provide funding for projects by making advance payments, and secondly. to discourage real estate developers from defaulting on commitments not only to banks but also to their customers sr 1 er er a re, Tm RTT 30 RATH Mie Ree e a ET TTIR CATIT sae ay aren fe cat ee Se are seer ge a ag Ce AT ‘ee ee sara as, sr raw est fee Mr c,h ger, fer a era a er a ‘ewer ae ee ace eee ee Fe 3. The third amendment has been primarily focused upon the revival of a CD (Corporate Debtor) by ensuring, timely admission and completion of the resolution process. The amendment ensures that 14 days period deadline siven (o the NCLT for admitting of rejecting a resolution application shall be strictly adhered to. The amendment further specifying the mandatory time frame of 330 days to complete the Corporate Insolvency Resolution Process (CIRP) without exception, tries fo instil discipline amongst the stakeholders to avoid inordinate delays in the insolvency resolution process. ater erie or er we west emu nar Geet gr eh (we ae) goes we Rr ae en ar aT ae a eT Tere ee 14 Pat ART Sree sree ara er (se fe Re fe 330 aT i te at eo er rr tes ee ra rg er far a Performance of the Code IBC boasts ofa trong ecosystem performing much beter than the previous regimes — the debtors and creditors alike ae initiating the processes under the Code. we wen an ere ee et “ward fet he gperibagraac sa sr rete reco er ae eae TTA RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi ~ 5 4919620206040 EconomySRE syeepngas Basel norms weer » Basel Committee on Banking Supervision is an international committee formed in 1974 to develop standards for banking regulation, *é were ae terer wf Fame Fe ra Fe se = ee 1974 ater es sic ae a > Itconsists of central bankers from 27 countries and the European Union, 33% 27 st stcgiteae > sorrder mA > Itis headquartered in the office of Bank for International Settlements (BIS) in Basel, Switzerland. ‘eee eer er, Renz sia ei ete) ers o It developed a series of policy recommendations wrt, Capital risk, market risk and operational risk known as Basel Accords. rife fei ea seer Fre nar afr, ara fre i aerere “ie te et aa Tier 1 capital which can absorb losses without a bank being required to cease ruling, ae 1 yaa ase se ‘eae fre gree eer ‘Tier 2 eapital absorb losses in the event of winding up, which provide lesser degree of protection to depositors. ene 2 st mre Re st pear reer te 8 or ge et ‘Tier 3 capital tertiary capital of banks which are used to meet market risk, commodity risk and foreign currency risk, fee 3 fat tre at Pree ara, we Aa i a ra aT fe aa Classification of assets sisi writer Stressed Assets: It is a broader term and comprises of NPAs, restructured loans and writen off asses. are a: ae Te AT, Ga MT) AE a a TA > Restructured Loans: Assets/loans which have been restructured by giving a longer duration for repayment, lowering interest or by converting them to equity, grifar ata): fet sateribmn(et) fe “pret ae, sa or a i ee a Ree ara v Written off Assets: Assets/loans which aren't counted as dues, but recovery efforts are continued at branch level Done by banks to clean up their balance books, 3 wri arer wet eat: ae mC) ea rar a Ma a, a aT eC = eo Tg a ae oer > Non-Performing Assets (NPAs) are the bad loans of the banks. The criteria to identify such assets have been changing over the time. In order to follow international best practices and to ensure greater transparency, the RBI considers a loan as an NPA ifit has not been serviced for one term (i.e, 90 days). This is known as °90 day’ overdue norm. For agriculture loans the period is tied with the period of the concemed crops ranging from two erop seasons to one year overdue norm, *e-Rraer sat (et) ah {eye ence) et ea re eer ee em a she ee TE aE “ear gir fe, sn ee are A EC, 90 Fi eee “90 fet afr rear arr gS ca rear Ae ge Be ee a wal titer ae ie Aa RedefEdu www,synopsisias.in www.redefedu.com youtube. com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi Economy +919620206040RedefEd 4 nederina Education SynapsisTAS > NPAs were classified into three types: wnt ¥ veer fi ee: 1. Substandard: remaining NPAs for less than or equal to 12 months; 365 12 estore ae wate, > 2, Doubtful remaining NPAs for more than 12 months; and few: 12 fr terme rete, > 3. Lows assets: where he loss has been identified by the bank or interal/extemal auditors oF the RBI inspetion, but the amount has not been writen fT: e-ymartere /t ar ‘ton tec 6 rc aa ee eT Non-Performing Asset irritate Priority Sector Lending All Indian banks have to follow the compulsory target of priority sector lending (PSL). ‘The priority sector in India are at present the sectors—agricultuc, small and medium enterprises (SMES), road and water transport, etal trade, small business, small housing loans (not more than 210 lakhs), software industries, sel help groups (SHGs), agro-processing, small and marginal farmers, anisans, distressed urban poor and indebted non-instttional debors besides the SCs, STs and other weaker sections of society. srafewar tx emer et he a ac (ee eT aT Ee 2 a a eR aera stare see A, CAT (GED, A 1 IST, arr) (10 cer eM, a, a CHET, A, att atc em ee In 2007, the RBI included five minorities— Buddhists, Christians, Muslims, Parsis and Sikhs under the PSL. In its new guidelines of March 2015, the RBI added “medium enterprise, sanitation and renewable energy" under it ‘The PSL target must be met by the banks operating in India in the following way: 2007 #, snefané unter wer vi serdar, fa, on, te cara 2015 3 nie Ren, ses 3 a or I, “eco attend Wa eee ses ee Pe fer (© Indian Banks need to lend 40 per cent to the priority sector every year (public sector as well as private sector banks, bott) oftheir otal ending. Thee isa sub-turge also—I8 per cent ofthe total ending must goto agriculture and 10 per cen of the foal lending or 25 percent ofthe priority sector lending (whichever be higher) must be lent out to the weaker sections. Other areas of the priority sector to be covered inthe left amount, ie, 12 per cent of the total lending, sre tw wer eer erat eft i, a) oe FT 40 oT soc sere wR ew eer A eT a 18 rg gr Tt 10 fee ee Aerie 25 sr Ct ioe Hyer ee aig meee a ea ae a ne, a 12 near Perera (i Foreign Banks (having less than 20 branches) have to full only 32 percent PSL target which has sub-argets for the exports (12 percent and small and medium enterprises (10 percent. It means they need to disburse other areas ofthe PSL from the remaining 10 percent oftheir otal lending (lesser burden). The commiteeon financial System (CFS, 1991) had suggested to immediately cat it downto 10 percent fra banks and completely phasing out ofthis policy for the betemment of the banking industry in particular and the economy in general. The committe also suggested o shuffle the sectors covered under PSL every three years. No follow up has been done from the government except cutting down PSL target for the foreign banks from 40 per cent to 32 per cent RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi ~ 5 4919620206040 EconomyRedefEd > odsine Cdveston SyaopsieJAS (remaining same for those which have less than 20 branches), Meanwhile, some new areas have been added 10 the PSL. Se 4 (era 20 rr) exer 32 oar eee re ee (12 ae) i ay Si ERT (10s 3 eer ea re Fee 3 i a au ea 1 re rT (1 7) -acafr (ater, 1991) eet res ger ere 10 sierra aie anforeea ft fee sg a Fare AAT A ee a a eT TT af et re tee rer 40 fe re 32 ae a tee ee a ae ee kg EE iva a fees 20 aera Ay wr, eT a ara TA Differentiated Banking friter tier > The banks which could be differentiated on the account of capital requirement, seope of activities and serve the needs of a certain demographic segment of the population are called as Differentiated Banks or Niche Banks, fe et wr oto serve, fac aa wor Pit sar ar near ae a seria ym fos aan reat a a Fe Pees ea sere > The idea of Differentiated Bank was given by Nachiket Mor Committee 2014, for Financial Inclusion. ‘erie eo Praca te a 2014 rer Per cr FF ar v It can be classified as Payment Banks, Small Finance Banks, Regional Rural Banks, Local Area Banks Wholesale and Long-Term Finance (WLTF) banks ete, 3 qrare et, ry faa, aster ‘et ars ee deste er (sec) et ew tp Far a AT 1 . Wholesale and long-term finance banks focused primarily on lending to infrastructure sector and small, medium and corporate businesses, sive t-te Faw ee yee dr grad za 2 aft ot fhe eat eo ae fea Domestically Systematic Important Banks(D-SIB) stsy=1 i rata wrong (Shewsré) ‘+ Based on the principle to to0 big to fail. IF they fail the entire economy will be clamped down. swe a> ‘eager er fcr ese a Fer at ea anor a Fe IT © Assets cross 2 % of GDP. svt esr it.se i896 rr ‘© Ex SBI, HDFC and ICICI Bank = wont, wade te nena NBFC: Non-Banking Financial Companies wite=t: ttfer frites NBFC: A Non-Banking Financial Company (NBEC) is a company wei: eA Feet (eet) ‘+ Registered under the Companies Act, 1956 #4 suber, 1956 ara ey ‘+ Engaged in the business of loans and advances, acquisition "5 (#) aft fim, fae ears ete ‘+ of shares/stocks/bonds/debentures/seeurities issued by Government or local but does not include any ipal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) eer arevie sar nf aiariisaait, Aese wi ot institution whose pp ‘deur ener Per a eA, fe A, Pa a6 te a (a eT) TAL ‘Small banks and Payment banks are established with a common objective of furthering financial inclusion. vr ai ra A eer Re aE gE GE eae aA RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS ‘The guidelines to set up both the banks are same 21 si wt wafer ct Fy Fee ee ‘© The minimum capital requirement would be 2100 crore. steer =F 100 IE mM ‘+ Promoter contribution would be at least 40 per cent forthe fist five years, Excess shareholding should be brought down to 40 per cent by the end of fifth year, o 30 per cent by the end of 10th year and to 26 per cent in 12 years from the date of commencement of business iter aa ware ai fea a 40 afar ft euita win at sire 40 sfs, LOS a sa 30 srs ora ge aH aera 12 wi 26 srr eT aD ‘* Foreign shareholding in these banks will be as per current FDI policy. =e it anuter sg scion “tie age ‘© Voting rights to be line with the existing guideline for private banks, oar sihrax fa) eh foe ster ena age eae ‘© Entities other than promoters will not be permitted to have shareholding in excess of 10 per cent sei ser er eae 6 10 ater dow aera rasa oh ‘+ The bank should comply with the corporate governance guidelines, including “ft and proper’ eriteia for Directors as issued by RBI, ea sree ts ra fer eee sta twee feet agree aieo ‘© Operations of the bank should be fully networked and technology driven from the beginning, 3% eer dare far ark se sin ae rate ‘Small Banks 32% ‘The purpose of the small banks will be o provide a whole suite of basie banking products such as deposits and supply of credit, but ina limited area of operation, vi: vt stern sic afte sift afr i rt ETT sec ra er, AP er oe Se ‘The objective ofthe Small Banks to inerease financial inelusion by provision of savings vehicles to under-served ‘and unserved sections of the population, supply of credit to small farmers, micro and small industries, and other ‘unorganised sector entities through high technology low-cost operations. sy eter ster rien % sear ae oe ‘ed i 2 a eat ce Pr rr a eer, we Fe, MT cy she ear nae 6 et ir sor sain reer are meer aE A Other features of the small banks are as follows: 2 ah or Patent () Resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters to set up small banks. NBFCs, microfinance institutions (MFIs), and Local Area Banks (LABS) that can convert their operations into those of a small bank. Local focus and ability to serve smaller customers will bea key criterion in licensing such banks. ar tf, Pr tater! 10 eer sper a fra ais ae Rat ear feesmizc er or an BA Fara (EME), se Ae er (Ge) aM aT TE er ee eae a NT RT ATT A AT a HT A i) For the initial three years, prior approval will be required for branch expansion, jest strat ft, rer fear fae anger saree RedefEdu www synopsisias.in www.redefedu.com youtube. com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi Economy 5 +919620206040RedefEdu 4 Redefine Education Synapsis IAS (Gi) The area of operations would normally be restricted to contiguous districts in a homogenous cluster of states ‘or union teritories so that the Small Bank has a “local feel” and culture, tere am wr a a afte se peer Reread fac ae a ae aRE DE ae a eM ate (Gv) The bank shal primarily undertake basic banking activities of accepting deposits and lending to small farmers, stmall businesses, micro and small industries, and unorganised sector entities, te gor era oe fear, Gz rani, ye sean aah st infor 6 eit er etre see a aor aa ar eT HT (¥) The promoters other financial and non-financial service activities should be distinctly ring-fenced and not co- ‘mingled with banking business. izi= aft tee ar ofa -# ae wr far Pom er ae te ET it ear a fer fears (vi) A robust risk management framework is required and the banks would be subject to all prudential norms and BI regulations that apply to existing commercial banks, including maintenance of CRR and SLR. wr sees seer ‘vir oid A srere & sc esse sie eee ea ar wi rp arte sn Fa snl tT safe dai eer (vii) In view of concentration of area of operations, the Small Bank would need a diversified portfolio of loans, spread over its area of operations, ser abr gar a cx wa, ya see) Fa aT AT sree, sive rarer bar gare Payments Banks The objective of payments banks is to increase financial inclusion by providing small savings accounts, paymentitemittance services to migrant labor, low-income households, small businesses, other ‘unorganized sector entities and other users by enabling high volume-low value transactions in deposits and payments/remitance services in a secured technology-riven environment, rar tar gran er seer ow air seer aren fe te pre ent rare i ee eae a ce rt fa, rer er, we ‘sear, ot afer de he ea ye, TOP a er Fc re Hae wT ‘© Those who can promote a payments bank can be a non-bank Pls, NBFCS, corporate’s, mobile telephone companies, super market chains, eal sector cooperatives companies and public sector entities. Even banks ccan take equity in Payments Banks, st it yar at ear wir, test stn, res, a, scr ‘aera, great Sy, ee do ed a se mee a ec eet ake ar ae awa ‘© Payments Banks can accept demand deposits (only current account and savings accounts). They would initially be restricted to holding a maximum balance of 2100,000 per customer. Based on performance, the RBI could enhance this limit. yrs esi -pn Gora afer an) ele eC AEH aT 100,000 fer ee ca re wee aT Se TATA ‘* The banks can offer payments and remittance services, issuance of prepaid payment instruments, internet banking, functioning as business correspondent for other banks. dre-par stenor eat serrec ert, sts prot sant at at cat fee en, ser dat co ee veel awe ‘© Asin the case of small banks, other financial and non-financial services activities ofthe promoters should be ring-fenced, oat mot, we fr ete fc Pts erat = ae esr Caer-mtsn) PeaT vate RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias Synopsis IAS, 207, Apsara Arcade, Karolbagh, Dethi ~ 5 4919620206040 EconomyRedefEdu 4 Redefine Education Synapsis IAS ‘© The Payments Banks would be required to use the word ‘Payments’ in its name to differentiate it from other banks. rar a eae a err fl ear ra ew eT AT ‘© No credit ending is allowed for Payments Banks, rare fe ft se sonar ete ‘© The float funds can be parked only in less than one year G-Secs. By April 2020, a total of 6 Payment Banks were operating in the country, wiz 6x tera & ore sr Haar wa A ther 2020, BO 6 gmrtewr ea RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi Economy +919620206040RedefEdu FP Redefine Education Synopsis IAS Inflation ser ‘+ Inflation refers to a sustained/continuous rise in the general price level of goods and services in an ‘economy over a period of time, 3pRSir er art fs aera era sear ae te at eT IT wach enntin gat ‘Types of Inflation efi ame Different Inflations Based on Rate of Rise in Prices swat i af Gray sae we far ares ‘© Creeping Inflation or Low Inflation et ere arene ere Price rise at very slow rate (less than 3%) aga ccsear a (3% a5) * Regarded safe and essential for economic growth sate Free fees se rar © Walking or Trotting Inflation ateorarcifer gents Price rise moderately atthe rte of 3% to 7% 3% 796 sraeryes ate am eee + Running inflation aeerarer geri Rapid price rise at arate 10-20% 10.20% aac aaa yr ae * Hyperinflation or Runaway or Galloping inflation ify wer ar wexe yey The price rise is at very fast rate 20-100% year age tar =e 20-100% we = Itbrings total collapse of monetary system we sfer sent en ot we era ‘Some important terms related to inflation sem #4 ser Deflation 21 + genera level of prices is falling over a period, of sierra ge ee fear + Also referred as disinflation means reduction inthe level of national income and output in policy terms. “ee recs sterner, freeones one ae oa FT + Inflationary Gap: Excess of total government spending above national income (ie, fiscal deficit, _grefr erie ge i sec ger weet EA fer (aH + Deflationary Gap: Shorfll in total spending of the government over the national income (fiscal surplus), ses: ge se eee pre ao re) Inflation Tax (seignories) yw (a) + Inflation erodes the value of money and the people who hold the money suffer inthe process. t reduces the purchasing power ofthe money. It scems tata general rise inthe prices of the poods and the services puts an addtional pressure on the pockets ofthe people and that i's a tax been paid to the government. “preter ore tat cir tre, ae er a a eS A Th tare “epi sia ae ET ec aC ae Te RCE TT CEH + Asthe government isthe authority of printing and circulating money in economy (asin deficit financing) ‘iru we slo a 6 aw fle (ere Res) RedefEdu www. synopsisias.in www.redefedu.com youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 Economy& RedefEdu Redefine Education Synapsis IAS Inflation Spiral yi sie A situation where “wages push prices up and prices pull wages up". or te festa ert Farr Seri sieeet age sree The cause-and-effect relationship between rising wages and rising prices, or inflation =ei1-ay stat “Soa, ea Me AE HE The wage-price spiral suggests that rising wages inctease disposable income raising the demand for goods and causing prices to rise, wagt-sjer afte # var wer fr weet wong atom rr gee i & Frat ig eh het tae Rising prices increases the demand for higher wages, which leads to higher production costs and further ‘upward pressure on prices creating a conceptual spiral wea si seregh Aira age, ser se aT “f stcrart shee dace aera ata se SRC tC TL Inflation Accounting eeAifr seer A situation where due to inflation the profit of corporates gets overstated, ta feu Feit aft nr switch rane fae far A term popular in the arca of corporate profit accounting, Basically, due to inflation the profit of firms/companies gets overstated. When a firm calculates its profits after adjusting the effects of current level of inflation, this process is known as inflation accounting. Such profits are the real profit of the firm Which could be compared toa historic rate of inflation (inflation o the base yar), too. weet et “ponistrgena perm ape oor chee aonb gett eee er “Sen 96 es pe Tt A a es Ste ee Ee FN asin a ast pe ee A a Aa ah ar Inflation Premium =sreaife sir Bonus brought to borrowers due to inflation, BEE ser sarees Fe TAT Rising inflation premium shows depleting profits of the lenders. git uefa ster reas wei pe at vain To calculate the real cost a borrower is paying on its loan, the nominal rate of interest is adjusted with the effect of inflation and thus the interest rate we get is known as the real interest rate. wut rw srt ser egress a fe, A ToT CAT A ee Fa oe wrnri fetadiam eataatesnra series Real interest is always lower than the nominal interest rae, ifthe inflation is taking place—the difference {is the inflation premium, sreaer sar eta amr (Ae) ore ces ar, sme TEA ee le fe AL times, to neutralise the effects of inflation premium, the lender takes the recourse to inerease the nominal rate of interest. 9-3, ees oa ener Fe, eT CA) area RT AT weardart RedefEdu www synopsisias.in www redefedu.com ‘youtube,com/synopsisias ynopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi +919620206040 Economy