Book of SIP+ Indian Economy (English)

Indian Economy
Static Revision Simplified

A quick revision booklet of Economy for
UPSC Prelims and other competitive exams
Study IQ Education Pvt. Ltd.
Indian Economy: Static Revision Simplified 1st Edition by Study IQ Publications
Author/Copyright Owner: Study IQ Education Pvt. Ltd.
© Copyright is reserved by Study IQ Education Pvt. Ltd.
Publisher: Study IQ Publications
Printed at: ATOP Printers Noida
All rights reserved. No part of the text in general and the figures, diagrams, page layout and cover design, in particular,
may be reproduced or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or by
any information storage and retrieval system–without the prior written permission of the Publisher.
This publication in all formats, i.e. via paperback, E-book, or Kindle Ebook, is sold subject to the condition that it shall not,
by way of trade or otherwise, be lent, resold, photocopied, hired out, or otherwise circulated without the prior written
permission of the Publisher.
All images/maps used in this book are illustrations for educational purposes only. The images/maps/table and any
graphical representation have no resemblance with real dimension, area, scale or projections. The information in the
book is not intended to hurt any religious, cultural, or any other feeling of any section of society. Study IQ Publications
stands for affordable education for all sections of society.
Information contained in this publication/book/Ebook/Kindle Ebook has been obtained by a collective effort of the
editorial team of Study IQ and is believed to be accurate and reliable. The information is sourced from contributors whose
work is vetted and checked for plagiarism before use. However, neither Study IQ nor the editorial team guarantees the
accuracy of any information given in this publication. It shall not be responsible for anyone damages arising out of the
use of this information.
Preface
Dear Aspirants,
CSE Prelims is just around the corner. It is considered to be the iron gate toward your goal to become a civil servant. Prelims
is the most competitive part of UPSC CSE, and therefore, reading-revising and testing one’s knowledge is imperative for
clearing Prelims. According to the present competition, around 1 in 100 people who attempt UPSC Prelims clear it. Given
the growing competition, there is an urgent requirement for content specially curated to crack Prelims. The need of the
hour is simplified content that helps in a quick and complete revision of the UPSC syllabus.
Taking inspiration from the overwhelmingly positive response to our UPSC CSE books, we are taking another leap towards
simplifying Prelims preparation. To fulfill our aspirants’ demand, Study IQ Publications is delighted to present you with the
first edition of ‘SIP+ Static Revision Simplified booklets’.
The SIP+ booklet series has been strategically divided into 2 parts; SIP+ Static Revision Simplified and SIP+ Current
Revision Simplified. The UPSC syllabus is huge, it is further complicated by information overload and increasingly difficult
questions. These booklets have been created especially keeping in mind, the concerns and challenges that students face
during their Prelims preparation. This is an honest attempt to tackle all of the student’s issues and save their precious
time before Prelims.
Special Features of This Book:
This booklet aims to make your preparation focused and relevant based on UPSC’s current trends and patterns, revision-
friendly, and up-to-date.
• T he requirements of the UPSC Prelims are the exclusive focus of this book.
• W
e have taken great care to ensure that the material is written in a clear; ready revision format so that students can
learn and recall key concepts and facts to their advantage.
• W
herever necessary, we’ve incorporated relevant tables, charts and mind-maps to help students grasp and revise key
concepts and facts.
• T he special feature of SIP+ booklet series is the availability of ready revision charts which students can take out and
paste on their wall or study table to revise key concepts and facts anytime on their own discretion.
With all sincerity and humility, the StudyIQ team wishes you the best in your preparation, and we are hopeful that this
book will help you in your journey.
Table of Contents
Chapter 1 : BASICS OF ECONOMICS AND NATIONAL INCOME��1
Chapter 2 : ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT ��15
Chapter 3 : MONEY AND BANKING��26
Chapter 4 : MONETARY POLICY AND FINANCIAL MARKET��48
Chapter 5 : BUDGETING AND PUBLIC DEBT��64
Chapter 6 : HUMAN ECONOMICS��75
Chapter 7 : INTERNATIONAL ECONOMICS��91
Chapter 8 : INFLATION AND TAXATION��106
Chapter 9 : INDUSTRIES, INFRASTRUCTURE AND SERVICES��126
Chapter 10 : INTERNATIONAL FINANCIAL INSTITUTIONS��148

Basics of Economics and National Income 1
CHAPTER 1
Basics of Economics and National Income

INTRODUCTION
The term ‘Economics’ is derived from the Greek term ‘Oikonomikos’.
• Oikos means a households.
• Nemein means “management”, “custom” or “law”.
This gives the meaning of Economics as ‘management of the households.’
BASIC CONCEPTS IN ECONOMICS
Goods and Services

In an economy, Goods and Services satisfy the Human wants. Unless otherwise stated, the term ‘goods’ in Economics
also includes the term ‘services.’
Characteristics of Goods and Service
Goods Services
As material things, they are tangible Intangible in nature. Services are non-physical objects that exist in relation to other
things, such as brand image, goodwill, and so on
Have physical dimensions Services vary across regions or cultural backgrounds i.e. services are Heterogeneous.
For example, music, consulting physicians
Exist independently of their owner Services are inextricably connected to their makers. For example, labour and labourer
Are transferable and have value-in exchange
Kinds of Goods and Services

S.no Types Explanations
1 Free Goods Free goods are available in nature and in abundance. Man does not need to incur any expenditure to
own or use them. For example air, and sun shine.
2 Economic Good Economic goods are not available in plenty. They are scarce in supply. Man has to spend money to own
or use them. For example, cars, refrigerators, etc.
3 Public Goods A good available to everyone to consume, regardless of who pays and who doesn’t. For example: National
defence, Law enforcement.
4 Private Goods A good consumed by a single person or Household. For Example: food and drink
5 Consumer Consumer goods are those goods which are purchased by the household for final consumption. They are
Goods not used for the further production process. The common types of the consumer goods are as follows:
a) Durable goods: These goods do not quickly wear out. Durable goods have a longer life span and can
be used repeatedly for several years. For example: TV, car etc.
b) Semi-durable goods: These goods can be used for a period of one year or slightly more. For example:
clothes.
c) Non-durable goods: These goods are single-use consumption goods. They have a short shelf life. For
Example: bread, fruits etc.
© Study IQ Publications
2 Indian Economy: Static Revision Simplified
S.no Types Explanations

6 Capital Goods The goods used in the production process i.e. to produce consumer goods. For Example: Machines used
in a factory
7 Giffen Goods The Giffen good are inferior goods. It is an exception to the law of demand i.e. Its demand increases with
increase in price and vice-versa. Inferior goods are those goods that have inverse relation with income.
Rise in income goods----→ less consumption. Note: all Giffen Goods are inferior goods but not all inferior
goods are Giffen goods. For example: off branded Ketchup
8 Veblen Goods Veblen goods are high-quality premium goods, the demand for which
increases along with its price. This is caused by the exclusive nature of these products. For Examples:
Sports cars, expensive accessories etc.
9 Complementary Goods which are used together. Ex: TV and DVD player, Pen and refill etc.
good
10 Demerit goods Goods that have negative externalities. Ex: Alcohol, cigarettes etc.
What happen If a commodity is provided free to the public by the Government?

When we have the opportunity to access public services for free, this would always come at a cost of somebody paying for it, so
here the opportunity cost is transferred from the consumers of the product to the tax-paying public.
Utility
‘Utility’ means ‘usefulness’. In Economics, utility is the “want” satisfying power of a commodity or a service.
Characteristics of Utility
Characterstics Example
Utility is psychological. A vegetarian derives no utility from mutton
Utility is not equivalent to usefulness a smoker derives utility from a cigarette but, his health gets affected
Utility is not the same as pleasure A sick person derives utility from taking a medicine
Utility is the function of the intensity of An individual consumer faces a tendency of diminishing utility
human want.
Utility is a subjective concept A smoker’s utility from the cigarette cannot be measured numericaaly
Utility has no ethical or moral A cook derives utility from a knife using which he cuts some vegetables; and, a killer wants
significance. to stab his enemy by that knife.
Price
Price is the value of goods stated in terms of money. For example: The money charged for buying a toothpaste is the
price.
Cost
Cost is the expenses incurred to manufacture or acquire a specific quantity of an item.
Cost Concept
Concepts Meanings
Money Cost Production cost expressed in money terms is called as money cost. This includes cost of raw materials, payment
of wages and salaries, etc.
Real Cost Real cost refers to the payment made to compensate the efforts of all factor owners for their services in production.
Opportunity It refers to the cost of next best alternative use. For example, a farmer can cultivate both paddy and sugarcane in
costs a farm land. If he cultivates paddy, the opportunity cost of paddy output is the amount of sugarcane output given
up. Opportunity Cost is also called as ‘Alternative Cost’ or ‘Transfer Cost’.
Concepts Meanings
Direct costs Direct costs, also known as traceable costs, refer to expenses that are associated with a certain process or product.
They can alter as the activity or product changes.
For example: Manufacturing expenses related to production, customer acquisition costs related to sales, and so on.
Indirect costs Indirect costs, often known as untraceable costs, are expenses that are not directly related to a specific company
activity or component.
For example: An increase in power rates or income taxes.
Although indirect expenses are difficult to track, they are significant since they have an impact on total profitability.
Private costs Private costs are those expenses that are incurred by the company in order to achieve its own goals.
Entrepreneurs use them for both personal and business purposes.
For example: Manufacturing, production, sales, and advertising costs.
Social costs Any community suffers the social costs of private interests and business expenses.
For example: Water pollution due to the discharge of wastewater into the river by the factories.
Fixed costs Fixed costs are those that remain constant regardless of production volume.
They are incurred by the company regardless of its degree of production.
For example: Rent, taxes, and interest on a loan.
Variable cost Variable costs will fluctuate depending on the amount of output produced by the company.
For example: Expenses such as raw material purchases and salary payments.
Incremental When a corporation makes a policy decision or policy change , these costs are incurred.
costs For example: Changes in product lines, the acquisition of new consumers, and the update of gear to increase
output are all examples of incremental expenses.
Sunk Cost Sunk costs are expenses that an entrepreneur has already incurred and can no longer recover.
For example: Money spent on advertising, research, and machinery acquisition.
Market
In economics, a market refers to a place where buyers and sellers enter into an exchange of goods and services over
a price.
Revenue
Revenue is income obtained from the sale of goods and services. Total Revenue (TR) represents the money obtained
from the sale of all the units of a good.
Income
Income is the amount of revenue a business earns from selling its goods and services. Income also refers to the money
an individual receives in compensation for their labour, services, or investments.
Indifference curve
An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and
utility. Any combination lying on the indifference curve gives the same level of consumer satisfaction. Each point on an
indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.
CLASSIFICATION OF ECONOMICS
Economics is classified into two categories: microeconomics and macroeconomics.
Microeconomics
Micro Economics is the study of the economic actions of individual units say households, firms or industries. It studies
how business firms operate under different market conditions and how the combined actions of buyers and sellers
determine prices.
Macro-economics
It is concerned with the economy as a whole. It is the study of aggregates such as national output, inflation,
unemployment and taxes.
Difference between Macroeconomics and Microeconomics
Microeconomics Macroeconomics
Domain Microeconomics is the study of a specific market Macroeconomics is the study of the entire
section of the economy. economy that includes a variety of market areas.
Concerned with Demand, supply, factor pricing, product pricing, National income, distribution, employment, general price
economic welfare, production, consumption, etc. level, money etc.
Applications It is concerned with the optimization goals of It is concerned with the optimisation of the growth
individual consumers and producers. process of the entire economy.
Significance It’s useful for managing product prices as well as It maintains broad price stability and addresses significant
the pricing of factors of production (labour, land, economic challenges such as deflation, inflation, rising
entrepreneur, capital, and so on) within the economy. prices (reflation), unemployment, and poverty in general.
It is known as price theory. It is also known as the income theory.
CONCEPTS OF MICROECONOMICS
Demand
Demand is the quantity of things that customers are willing to buy at various prices during a particular period of time.
Determinants of Demand
Determinants Meaning
Product cost As the price of the commodity varies, so does the demand for the product.
Consumer income As consumer income rises, the number of commodities desired rises as well.
Costs of linked goods and services If the price of one item rises, demand for the complementary product falls.
Changes in Expectations The expectation of a price rise in the future results in an increase in demand.
Buyers in the market The demand of a commodity varies based on the quantity of its buyers
The Law of Demand

The law states that quantity demanded of a commodity expands with a fall in price and contracts with a rise in price.
Elasticity of Demand
Elasticity of demand explains the rate of change in quantity demanded due to a given change in price.
Types of Elasticity of Demand
Types Meaning
Price Elasticity of The price elasticity of demand, commonly known as the elasticity of demand refers to the responsiveness
Demand and sensitiveness of demand for a product to the changes in its price.
Income Elasticity of The degree of responsiveness of a change in demand for a product due to the change in the income is
Demand known as income elasticity of demand
Income Elasticity of The cross elasticity of demand refers to the percentage change in quantity demanded for one commodity
Demand as a result of a small change in the price of another commodity.
Advertising Elasticity The responsiveness of the change in demand due to the change in advertising or other promotional
of Demand expenses, is known as advertising elasticity of demand
Exceptions to the Law of Demand

• Giffen Goods: These goods do not obey the demand curve. One of the most notable characteristics of Giffen items
is that as the price rises, the quantity required also rises.
For example: During the Irish Potato famine, the price of potatoes skyrocketed from its normal level. However,
people saved money on more expensive foods like meat and bought more potatoes to stick to their diet. This is
a case of complete inversion of the law of supply and demand.
• Veblen Goods: The demand for these luxury goods rise as their price or cost rises.
For example: A Rolex watch or Porsche car is desirable because of their high price and associated status symbol.
Supply
Supply is the quantity of a product that a seller is willing to give in the market at a specific price and within a certain
time frame. Various elements, such as price, cost of production, government legislation, and technology, have an impact
on a product’s availability.
Determinants of Supply
Determinants Meanings
Price of the commodity Higher the price larger the supply.
Cost of production The cost of production and the supply of goods are inversely proportional.
Taxation policies The supply of goods will be reduced if the tax rates on items are high and vice-versa.
Production techniques Low output due to obsolete production techniques /processes reduces the supply of commodities and
vice versa
Factor prices and their The factors of production, such as raw materials, machinery and equipment, and labour, are all important
availability in the manufacturing of goods
Price of related goods Prices of alternatives and complementary goods have a significant impact on a product’s supply.
Law of Supply
It explains the positive relationship between the price of a commodity and the supply of that commodity. For example,
if the price of cloth increases, the supply of cloth will also increase.
Elasticity of Supply
The elasticity of supply establishes a quantitative relationship between the supply of a commodity and it’s price.
Types of Elasticity of Supply
Types Meanings
Relatively elastic supply One percent change in the price of a commodity causes more than one per cent change in the quantity
supplied of the commodity.
Unitary elastic supply One percent change in the price of a commodity causes an equal (one per cent) change in the quantity
supplied of the commodity.
Relatively inelastic supply One percent change in the price of a commodity causes a less than one per cent change in the quantity
supplied of the commodity
Perfectly inelastic supply One percent change in the price of a commodity causes no change in the quantity supplied of the
commodity.
Perfectly elastic supply One percent change in the price of a commodity causes an infinite change in the quantity supplied of
the commodity.
Market Equilibrium and Competition

Market Equilibrium is an ideal situation where the quantity demanded is equal to the quantity supplied.
Competition in a market refers to a situation in which e sellers compete for the patronage of buyers in order to attain
a certain commercial goal, such as earnings, sales, or market share.
Based on the competition present, the markets can be divided into:
1. Perfectly competitive markets: In such a market, both buyers and sellers are high in numbers and so products
have many substitutes. It means sellers sell identical products at a price fixed by the market. Example: Refrigerator.
2. Monopoly: It is a market with a single seller that sells a product with no close substitute. Example: Indian
railways.
3. Imperfect markets (Monopolistic Competition, Oligopoly, Monopsony):
Monopolistic competition: Here many firms offer products or services that are similar but not perfect substitutes.
For example, there are several laptop manufacturers, but MacBook still enjoys a monopolistic competition and
hence the seller has the freedom of its pricing.
Oligopoly: In this type of market, buyers are many, but sellers are few with intense competition. For example, in
India, domestic civil aviation has very few players like Air India, Indigo, Vistara, GoAir, Spicejet, and AirAsia. Hence,
the price of the air travel is decided by these very few companies as the buyers don’t have alternatives.
Monopsony: In this case, there is only one buyer even though there are many sellers. There is no competition in
buying. For example: in the defence industry, the Indian government is the only Buyer.
Features of different markets:
Perfectly competitive Monopoly Monopolistic Oligopoly Monopsony

competition
Large number of buyers Single sellers. Large number of buyers Few large sellers. Many sellers but one
and sellers. and sellers. buyer.
Products are identical No close substitute of Products are similar Product may No close substitute.
in all aspects. the product. but not identical in all be identical, or
aspects. differentiated.
Entry and exit by sellers There exist restriction Firms are free to entry Barrier to entry of firms -------
are free. to entry of new firms or exit the industry at in the industry.
or exit of existing firms. any time.
INTRODUCTION TO MACRO ECONOMICS
INTRODUCTION
The term macro-economics deals with aggregates such as national income, employment and output. Macro Economics
is also known as ‘Income Theory’. Macro Economics is the study of the economy as a whole.
SCOPE OF MACRO ECONOMICS
Scope Meanings
National Income The trends in National Income and its composition provide a long term understanding of the growth process
of an economy.
Inflation Estimating the general price level by constructing various price index numbers such as Wholesale Price Index,
Consumer Price Index, etc., are
needed.
Business Cycle The cyclical movements (boom, recession, depression and recovery) in the
economy need to be carefully studied based on aggregate economic variables.
Poverty and A clear understanding about the magnitude of poverty and unemployment facilitates
Unemployment Allocation of resources and initiating corrective measures.
Scope Meanings
Economic Growth The growth and development of an economy and the factors determining them could be understood only
through macro analysis.
Economic Policies Economic policies are necessary to solve the basic problems, to overcome the obstacles and to achieve growth.
ECONOMIC SYSTEMS
Economic System refers to the manner in which individuals and institutions are connected together to carry out
economic activities in a particular area. It is the methodology of doing economic activities to meet the needs of the society.
Comparison of Different Economic Systems

S.No Features Capitalism Socialism Mixed Economy
1 Ownership of Means Private Ownership Public Ownership Private Ownership and Public Ownership
of Production
2 Economic Motive Profit Social Welfare Social Welfare and Profit Motive
3 Solution of Central Free Market System Central Planning System Central Planning System and Free Market
Problems System
4 Government Role Interanal Regulation only Complete Involvement Limited Role
5 Nature of Enterprise Private Enterprise Government Enterprise Both Private and State Enterprises
6 Economic Freedom Complete Freedom Lack of Freedom Limited Freedom
7 Major Problem Inequality Inefficiency Inequality and Ineffiency
CONCEPTS OF MACRO ECONOMICS
Concepts Meanings
Stock and Flow Variables used in economic analysis are classified as stock and flow. Both
Variables Stock and flow variables may increase or decrease with time.
Stock Stock refers to a quantity of a commodity measured at a point of time. Money supply, unemployment level,
foreign exchange reserves, capital etc. are examples of stock variables
Flow variables Flow variables are measured over a period of time. National Income,
Imports, exports, consumption, production, investment etc. are examples of flow variables.
Economic Models A model is an explanation of how the economy, or part of the economy, works. Most economic models are built
with mathematics, graphs and equations, and attempt to explain relationships between economic variables. The
commonly used economic models are the supply-demand models and circular flow models and Smith models.
CIRCULAR FLOW OF INCOME

The circular flow of income is a model of an economy showing connections between different sectors of an economy. It
shows flows of income, goods and services and factors of production between economic agents such as firms, households,
government and nations. The circular flow analysis is the basis of national accounts and macroeconomics.
NATIONAL INCOME
INTRODUCTION
National Income means the total money value of all final goods and services produced in a country during a particular
period of time (one year).
CONCEPTS OF NATIONAL INCOME
Concept Meaning Derived

Gross Domestic GDP is the total market value of final goods and services
Product (GDP) produced within the country during a year
Gross National GNP is the total value of final goods and services produced GNP= GDP at Market
Product (GNP) by the citizens of a country in a given financial year, Prices + Net Factor income from Abroad.
irrespective of their location
Net National NNP is a measure of the value of output produced by NNP = GNP-Depreciation
Product (NNP) the Citizens of a country irrespective of the geographical
boundaries. It is obtained after deducting the loss due to
depreciation from GNP.
Net Domestic NDP is the net market value of all the final goods and NDP= GDP- Depreciation
Product (NDP) services produced within the domestic territory of a
country during a financial year.
Personal Income Personal income is the total income received by the Personal Income = National Income
individuals of a country – (Social Security Contribution and
From all sources before payment of direct taxes in a year. undistributed corporate profits) +
Transfer payments
Disposable Disposable Income is also known as Disposable personal Disposable Income = Personal income – Direct Tax.
Income income. It is the individuals income after the payment of
income tax. This is the amount available for households
for consumption.
Concept Meaning Derived

Per Capita The average income of a person of a country in a particular Per capita Income= National Income/ Population
Income year is called Per
Capita Income.
GDP Deflator GDP deflator is an index of price changes of goods and GDP Deflator = Nominal GDP / Real GDP * 100
services included in GDP. It is a price index which is
calculated by dividing the nominal GDP in a given year by
the real GDP for the same year and multiplying it by 100.
TERMS USED IN NATIONAL INCOME ACCOUNTING
Term Meaning
Final and • Final Goods- Final goods are those goods that are purchased for the purpose of consumption or final use.
Intermediate Example:Purchase of wheat, milk, bread by households for consumption.
Goods • Intermediate Goods-Intermediate goods refer to those goods which are used as an input to manufacture
the final goods. Example: Restaurant purchases wheat, milk, bread etc
Domestic Territory Domestic territory is the geographical territory administered by the government within which persons, goods,
services and capital freely flow.
Residents For National Income Accounting, a resident is defined as a person or an institution who normally resides (at
least one year or more) in a country and whose center of economic activity lies in that country.
Factor Income In Economics, the four factors of production are labour, land, capital and enterprise. Each of these factors
gets a return for their input into production and this is called Factor Income. For example, wages, rent, profit,
and interest.
Transfer Income The income received by an individual without rendering any productive service in return is known as Transfer
Income.For example, Old age pension, pocket money, gifts, scholarship, etc.
Depreciation Depreciation refers to a fall in the value of fixed assets due to its normal wear or tear and foreseen obsolescence.
CONCEPT OF REAL AND NOMINAL GDP
Parameters Nominal GDP Real GDP

Definition It refers to the total monetary value of all the final goods and It refers to the total monetary value of all the
services produced in the domestic territory of a country during final goods and services produced in the domestic
a given financial year valued at current year prices. territory of a country during a given financial year
Nominal GDP is the GDP calculated at the current market valued at constant price. In short, Real GDP is the GDP
prices/current prices. calculated at constant prices (or base year price).
Example Suppose a country had produced 200 cars in the year 2011-
12 with the price of Rs 100 per car. In 2021-22 the same
country produced 300 units of a car at a price Rs 110 per
car. The nominal GDP of the economy in the year 2011-12 is
(100x200= 20,000). Nominal GDP in 2021-22 is 33000 (total
units * Current year prices. Suppose the base year is 2011-12.
Therefore the Real GDP in 2021-22 calculated at the price of
the base year 2011-12 is (300*100= 30000).
ESTIMATION OF NATIONAL INCOME

All goods and services produced in the country must be counted and converted against money value during a year.
Thus, whatever is produced is either used for consumption or for saving. Thus, national output can be computed at any
of three levels, viz., production, income and expenditure. Accordingly, there are three methods that are used to measure
national income.
1. Production or value added method

2. Income method or factor earning method
3. Expenditure method
And if these methods are done correctly, the following equation must hold.
Output = Income = Expenditure
This is because the three methods are circular in nature. It begins as production, through recruitments of factors of production,
generating income and going as incomes to factors of production.
GDP - By Sum of Spending, Factor Incomes or Output

GDP (Value of Output) GDP (Factor Incomes) GDP (Expenditure)
Value added from each Income from people in jobs and in self- •
Consumption
of the main economic employment (e.g. wages and salaries) •
Government spending
sectors • Profits of private sector business •
Investment spending
• These sectors are • Rent income from the ownership of land •
Change in value of
• Primary •
Stocks
• Secondary •
Exports
• Manufacturing •
−Imports
• Quaternary •
= GDP (known as aggregate demand)
The Product or Value added method

In this method, GDP is estimated by calculating the value addition done by the firms at each stage of production in
all the three sectors of the economy i.e. agriculture, manufacturing, industries, Services, trade and commerce, etc. The
value of the final product is derived by the summation of all the values added in the productive process.
GDP at Current Market Price (MP) = (Summation of Gross value added of all goods and Services) + Taxes- Subsidies
GDP @ current MP ----- → Adjusted with the base year ---→ GDP at Constant Market Price (official GDP)
Income Method
This method approaches national income from the distribution side. Under this method, national income is calculated
by adding up all the incomes generated in the course of producing national product. The value that is derived is GDP at
Factor Cost.
Factor of Production Factor Income

Land/Building Rent
Labor Wages
Capital Interest/Dividend
Entrepreneur Profit
Thus we derive
GDP at Factor Cost = Rent + Wages + Interest + Profit
Suppose we only produce LPG cylinder in a country. The Factor cost of LPG is Rs 500. However, it is the not the final market value
as it does not include taxes. Now suppose the tax of Rs 500 is added to Factor cost and subsidy of 300 is deducted from the factor
cost. Now final price in the market is (500+500-300= 700). The actual final market value of LPG is 700
GDP at Factor cost + Tax- Subsidy ---→GDP @ Current MP --→ Adjusted with base year---→ GDP at Constant Market Price.
Expenditure Method
In this method, we measure the expenditure incurred on final products produced by production units located within
the economic territory during a given year.
GDP at Current Market Price= C+I+G+(X-M)

Final Private Consumption (C): This includes expenditure on final goods and services by individuals, households, and private firms.
For Example – TV, Car, Food, etc.
Investment Expenditure (I): This includes expenditure on investment or capital goods by firms, households or government. For
Example – Machinery, Residential Property, Capital from share, bond used for investment purpose
Government Expenditure (G): This includes expenditure on final goods and services by the government. For Example – Administrative
expenses, procurement, etc.
Note: widow Pension, scholarship, Unemployment allowance are not included in Government expenditure (G) while calculating GDP.
Net Export (X-M): This refers to the difference between Exports (X) and Imports (M).
GDP @ current MP -----→ Adjusted with the base year ---→ GDP at Constant Market Price (official GDP
Concept of Factor Cost and Market Price
Factor Cost (FC) Market Price (MP)

There are a number of inputs that are included into a production process Once goods and services are produced they are sold in a
when producing goods and services. These inputs are commonly known market place at a set market price.
as factors of production and include things such as land, labour, capital
and entrepreneurship.
Producers of goods and services incur a cost for using these factors It is the price that consumers will pay for the product when
of production. These costs are ultimately added onto the price of the they purchase it from the sellers.
product
The factor cost refer to the cost of production that is incurred by a firm Taxes charged by the government will be added onto the
when producing goods and services. factor price while subsides provided will be reduced from
the factor price to arrive at the market price.
Examples of such production costs include the cost of renting Taxes are added on because taxes are costs that increase
machines, purchasing machinery and land, paying salaries and wages, the price, and subsidies are reduced because subsidies are
cost of obtaining capital, and the profit margins that are added by the already included in the factor cost, and cannot be double
entrepreneur. counted when market price is calculated.
It does not include the taxes that are paid to the government since Thus, MP = FC + Indirect Taxes - Subsidies
taxes are not directly involved in the production process
However, subsidies received are included in the factor cost as subsidies
are direct inputs into the production.
Concept of Current and Constant Price

Concepts Meanings
Current Price It is the actual prices we notice in the economy. Current prices make no adjustment for inflation.
Constant prices It is adjusted for the effects of inflation. It enables us to measure the actual change in output (and not just an
increase due to the effects of inflation.
Gross Value Added (GVA) and GDP Comparison

As per the System of National Accounts (SNA), GVA is defined as the value of output minus the value of intermediate
consumption. Value added represents the contribution of labour and capital to the production
GVA at Basic Prices will include production taxes and exclude production subsidies available on the commodity.
GVA at Factor Prices include production subsidy and exclude production taxes.
GDP at Market Prices include both production and product taxes and excludes both production and product subsidies.
Comparison of GDP and GVA

Gross Value Added (GVA) Gross Domestic Product (GDP)
GVA is the difference between the value of a firm’s output and GDP refers to the total value of final goods and services produced
value of intermediate goods. GVA mp = Value of Output – Value in the domestic territory of a country in a given financial year.
of Intermediate Goods or
or It is the market value of all final goods and
It is the total value of goods and services produced within a services produced within the territorial
country after deducting the cost of inputs and raw materials. boundaries of a country for a given period
It is represented as GVA mp. It is represented as GDP mp.
It is measured by output reach and used as a proxy for GDP. It is measured by the output, income, and
expenditure approaches.
GVA gives a picture of the state of economic activity from the GDP gives a picture of the state of economic activity from the
producer or supplier side. consumer side.
GVA is calculated for all the three sectors individually i.e. GVA When GVA for all the three sectors is combined together, it gives
for Agriculture Sector, GVA for Manufacturing Sector and GVA us the value of GDP i.e.
for Service Sector. GDP = GVA for Agriculture Sector + GVA for Manufacturing Sector
+ GVA for Service Sector.
It’s a sector-based concept. It’s a territory-based concept.
GVA for individual sectors will tell us about the performance of GDP gives us information about the performance of an entire
individual sectors only and not the economy as a whole. economy as a whole.
GDP CALCULATION IN INDIA SINCE 2015

Ministry of Statistics and Programme Implementation, Government of India evaluates GDP in India. National Statistical
Office (NSO) in the Ministry of Statistics and Programme Implementation (MoSP&I) is responsible for the compilation of
National Accounts Statistics (NAS) in India. The department released the new and revised data of National Accounts in
2015. It also incorporated multiple changes in the methodology.
Note: The National Sample Survey Office (NSSO) merged with the Central Statistical Office (CSO) to form the
National Statistical Office (NSO). In 2019, the Government of India has approved the merger of NSSO and CSO.
Comparison of old NAS series before (2015) with new NAS series
S. No. Component Old NAS series Changes made in New NAS series
1. Base Year 2004-2005 2011-2012
2. Measuring of GDP at factor cost GDP at Constant market price.
Growth rates
3 Sector-wise GVA at factor cost GVA at basic price
estimates of gross
value added
3. Database Limited covering of only financial corporations. More comprehensive covering financial
Note: Earlier, estimates for local bodies and institutions and regulatory bodies’ like- SEBI,
autonomous institutions were prepared on PFRDA, and IRDA. Local organizations and
the basis of information received for seven institutions.
autonomous institutions and local bodies of four In the new series, there has been an improved
States – Delhi, Himachal Pradesh, Meghalaya coverage of local bodies and autonomous
and Uttar Pradesh. institutions, covering around 60% of the grants/
transfers provided to these institutions.
S. No. Component Old NAS series Changes made in New NAS series
4. Source of data for Use of the study of company finances by the Use of data captured through e-filing portal of
companies Reserve Bank of India (RBI) based on a thin Ministry of Corporate Affairs (MCA), popularly
sample of around 4,500 companies. known as MCA21 and has data about five lakh
non-financial private companies.
6. Methodology of Labour input (LI) Method. ‘Effective labour input’ (ELI) Method.
capturing income of
the informal sector
7. Changes in Data only included value-added in farm produce. The new data includes value addition in Livestock
calculation of as well.
agricultural income
8. Valuables The net acquisition of valuables by the The net acquisition of valuables by the households
households in the economy was not included has been included as part of Gross Capital
in Gross Capital Formation. Formation.
9. Institutional sectors Entire economy was divided by three Public sector is further classified into public
institutional categories such as public sector, financial corporations, public non-financial
private corporate sector and household sector. corporations, and general government.
Private corporate sector has been split into
private financial corporations and private non-
financial corporations.
The firms registered under Limited Liability
Partnership (LLP) Act and quasi-corporations,
which were hitherto part of households, are now
included under the private corporate sector.
Standing Committee on Economic Statistics

In December, 2019, the statistics ministry has constituted a 28 member Standing Committee on Statistics (SCES) chaired
by former Chief Statistician Pronab Sen to deliberate and develop methodologies for surveys on industry, services and
employment in place of multiple panels on these issues. SCES will subsume in it the four standing committees on labour
force statistics, industrial statistics, services sector and unincorporated sector enterprises.
The committee has been given wide-ranging mandate which includes looking into datasets such as the Periodic Labour
Force Survey, Annual Survey of Industries, Annual Survey of Services Sector Enterprises, Annual Survey of Unorganized
Sector Enterprises, Time Use Survey, Index of Service Production, and Index of Industrial Production, Economic Census
and other surveys or statistics brought before it.
Scholars believe that the Government’s step to set up the SCES came in the backdrop of India’s failure to comply with
the requirements of the SDDS (Special Data Dissemination Standard) of the IMF (International Monetary Fund).
Special Data Dissemination Standard
The Special Data Dissemination Standard (SDDS) was established by the International Monetary Fund (IMF) in 1996. It
is aimed guiding members to enhance data transparency and help financial market participants to assess the economic
statistics of individual countries.
GDP AND WELFARE

We may be tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that
country (to account for price changes, we may take the value of real GDP instead of nominal GDP). But there are at least
three reasons why this may not be correct.
• Distribution of GDP – how uniform is it: If the GDP of the country is rising, the welfare may not rise as a consequence.
This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the
income may in fact have fallen. In such a case the welfare of the entire country cannot be said to have increased.
• Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, the
domestic services women perform at home are not not counted in the Indian GDP. This is a case of underestimation
of GDP.
Hence GDP calculated in the standard manner may not give us a clear indication of the productive activity and
well-being of a country.
• Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are
not paid (or penalized). For example-In carrying out the oil production, a refinery may also be polluting the nearby
river. In this case, the GDP is not taking into account such negative externalities.
• Unequal Contribution: GDP includes different types of products like food articles, houses, clothes, police services
etc. Some of these products contribute more to the welfare of the people, like food, clothes etc. But other products
like police services, military services etc., may comparatively contribute less and may not directly affect the welfare
of people.
OTHER INDICES TO MEASURE DEVELOPMENT AND WELFARE
Indicator Component
Human Development Index (HDI) 1. Health: It is measured by the life expectancy at birth.
By United Nations Development 2. Education: It is measured by mean years of schooling for adults aged 25 years and expected
Programme (UNDP) years of schooling for children of school entering age.
3. Standard of living: It is measured by Gross National Income per capita based on purchasing
power parity in terms of the US dollar.
Gender Inequality Index (GII) 1. Reproductive health: It is measured by maternal mortality ratio and adolescent birth rates;
By UNDP 2. Empowerment: It is measured by the share of parliamentary seats held by each gender,
and by secondary and higher education attainment levels; and
3. Economic status: It is measured by women’s participation rate in the workforce.
Multidimensional Poverty 1. Health- measured through child mortality; and nutrition.
Index (MPI) By United Nations 2. Education -measured through years of schooling; and enrollment.
Development Programme (UNDP) 3. Living standards -measured through water, sanitation, electricity, cooking fuel, floor, and
and the Oxford Poverty and Human assets.
Development Initiative (OPHI
Gross National Happiness 33 indicators categorised under nine domains, namely- psychological wellbeing, health,
Index (GNHI) by Un Sustainable education, time use, cultural diversity and resilience, good governance, community vitality,
Development Solutions Network ecological diversity and resilience, and living standards.
Green GDP
The Green Gross Domestic Product is an indicator of economic growth with environmental factors taken into
consideration along with the standard GDP of a country. In short it is environmentally adjusted domestic product or
monetization of the loss of biodiversity caused by climate change. It is calculated by subtracting resources depletion,
environmental degradation from the traditional GDP figure.
Economic Growth and Economic Development 15
CHAPTER 2
Economic Growth and Economic Development

ECONOMIC GROWTH
Economic growth measures the change in the output or GDP over a period of time.
• It refers to an increase in the production of goods and services in an economy.
• It includes an increase in capital, goods, labour, technology and human capital.
• It implies a process of increase in National Income and Per-Capita Income
• It is measured by increase in real National Income and not just the increase in money income or the nominal national
income.
ECONOMIC DEVELOPMENT
Economic Development is a broader concept that deals with other socio-economic indicators like poverty, unemployment,
gender equity, income equality, health, education etc., along with economic growth.
Determinants of Ecomomic Development
• Economic Factors: Natural Resources, Capital Formation, Size of the market, financial system, Marketable Surplus,
Foreign Trade and Economic System
• Non- Economic Factors: Human Resource, Technical Know how, Political Freedom, Social Organisation, Corruption
free administration, Desire for Development, Moral, ethical and social values, etc.
Economic Growth vs. Economic Development

Parameters Economic Growth Economic Development
Meaning Refers to an increase in the real Output of goods and Implies changes in income, savings and investment along
services in the country. with progressive changes in socio-economic structure of
country
Factors Growth relates to a gradual increase in one of the Development relates to growth of human capital, decrease
components of Gross Domestic Product: consumption, in inequality figures, and structural changes that improve
government spending, investment, net export the quality of life of the population.
Measurement Economic Growth is measured by quantitative factors The qualitative measures such as HDI (Human Development
such as increase in Index), gender- related index, Human poverty index (HPI),
real GDP or per capita income infant mortality, literacy rate etc. are used to measure
economic development.
Effect brings quantitative changes in the economy Leads to qualitative as well as quantitative changes in the
economy.
Relevance Reflects the growth of national or per capita income. Reflects progress in the quality of life in a country.
Major Indices of Economic Development

Indices Meanings
Human Development • HDI is a part of the Human Development Report published annually since 1990 by the United
Index(HDI) Nations Development Programme.
• HDI ranks countries in terms of human development by combining the measurements of 3
dimensions –
1. Long and Healthy life
2. Knowledge
3. Decent standard of living.
• As per the Human Development Report 2021-2022, India ranked 132 out of 191 countries.
Inequality-Adjusted Human • IHDI considers inequality the fourth dimension of HDI.
Development Index (IHDI) • IHDI indicates a percentage loss in HDI due to inequality.
Gender Inequality Index(GII) • UNDP calculates GII as part of its Human Development Report. The index measures gender
disparity and uses three dimensions -
1. Reproductive health
2. Empowerment
3. Labour Market participation.
Challenges to Economic Growth and Economic Development

Low per Capita Income + Huge Dependence on Agriculture + Huge Dependence on Agriculture + Huge Population Burden + Existence
of Chronic Unemployment +Poor Quality of Human Capital + Lack Of Infrastructure
PLANNING
• Economic planning is a “means to secure balance between demand and supply by conscious and thoughtful control
over either production or distribution”.
• Generally, there are two approaches to planning: sectoral and regional.
Sectoral planning means the formulation and implementation of the schemes or programs of aimed at the
development of various sectors of the economy.
Regional planning means reducing regional imbalances in the country.
Types of planning
Democratic Vs. Totalitarian
Democratic planning Totalitarian Planning
• Planning within democracy • All economic activities are centrally controlled and directed
• People are associated at every step in the formulation and in accordance with a single plan.
implementation of the plan. • The state regulates consumption, production, exchange, and
• At the planning stage, the most extensive consultations with distribution.
state governments and private enterprises are possible.
• Plan prepared by the Planning Commission can be accepted,
rejected, or modified by the country’s Parliament.
Centralized Vs. Decentralized
Centralized Planning Decentralized Planning
• A country’s entire planning process is overseen by a central • Without interference from central authorities, local
planning authority. organisations and institutions develop, adopt, implement,
• It is called ‘planning from above’. and monitor the plan.
• It is called ‘planning from below’.
Planning by Direction Vs. Inducement
Planning by Direction Planning by inducement
There is a centralised authority that plans, directs, and orders People are persuaded to act in a certain way by various monetary
the plan’s execution in accordance with predetermined targets and fiscal measures. If the planning authority wants to encourage
and priorities. the production of a commodity, it can provide firms with subsidies.
Indicative Vs. Imperative Planning
Indicative Planning Imperative Planning
• Indicative planning is unique to mixed economies. • The state has complete control over the plan’s preparation
• The outline of the plan is prepared by the government. The and implementation.
issue is then debated with representatives from private • Once a plan has been developed, its implementation is a
management and other experts. matter of enforcement.
• The coordination of various economic units is a critical • The government has complete control over all resources.
function of planning. • There is no such thing as consumer sovereignty.
• The government provides all types of services to the private • The policies and procedures of the government are rigid
sector.
• The state does not compel the private sector to operate in
certain areas or meet certain targets.
Financial Vs. Physical Planning
Financial planning Physical Planning
Financial planning is a planning technique in which resources are Physical planning is concerned with the allocation of resources
allocated in terms of money. such as men, materials, and machinery.
Functional Vs. Structural Planning
Functional Planning Structural Planning
Functional planning is planning that aims to alleviate economic The structural planning refers to a number of changes in the
difficulties by directing all planning activities within the existing county’s socioeconomic framework.
economic and social structure
Comprehensive Vs. Partial Planning
Comprehensive planning is general planning that is concerned Only a few key sectors of the economy are considered in partial
with the major issues for the entire economy planning.
Economic Planning in India

After Independence, in 1948, a declaration of industrial policy was announced. The policy suggested the creation of a
National Planning Commission and the elaboration of the policy of a mixed economic system. The Planning Commission
was created on March 15, 1950 and the plan era began on April 1, 1951 with the launch of the first five year plan (1951-56).
Evolution of Planning in India
Evolutions Explanations
Sir M. Vishveshwarya (1934) Laid foundation for economic planning in India in 1934 through his book, “Planned Economy of
India”. It was a 10 year plan.
Jawaharlal Nehru (1938) Set-up “National Planning Commission” by a committee but due to the changes in the political era
and Second World War, it did not materialize.
Bombay Plan (1940) The “Bombay Plan” was presented by the city’s eight leading industrialists. It was 15 years Investment
Strategy.
S. N Agarwal (1944) Gave the “Gandhian Plan,” which focused on agriculture and rural economies.
M.N. Roy (1945) Drafted the “People’s Plan” Its sole goal was the mechanization of agricultural production and
distribution by the state only.
J.P. Narayan (1950) It advocated, “Sarvodaya Plan” which was inspired by Gandhian Plan and with the idea of Vinoba
Bhave. In the plan, it promoted small and cottage enterprises in addition to agriculture.
Central Planning in India

The Five Year Plans
Plans Explanations
First Plan The First Five-Year Plan was based on the Harrod–Domar model with few modifications
(1951–1956) Objective
• To solve different problems that formed due to the partition of the nation & second world war;
• To lay down the foundation for the industry and agriculture development in the country, and
• To provide affordable healthcare and education at a low price to the folks.
Second Plan The Second Plan followed the Mahalanobis model. This Plan focused on the development of the public sector and
(1956–1961 “Rapid Industrialization”.
• There was a determined thrust towards substituting basic and capital goods industries.
• Hydroelectric power projects, five steel plants at Bhilai, Durgapur, and Rourkela, and Tata Institute of Fundamental
Research(TIFR) and Atomic Energy Commission of India were established
Third Plan It was based on John Sandy and Sukhamoy Chakraborty’s model. This plan is also known as “Gadgil Yojna”. It
(1961 – 66) aimed to make India a ‘self-reliant’ and ‘self-generating’ economy.
Fourth Plan The plan emphasised means to attain self-reliance and Growth with stability. The Government nationalised 14
(1969 – 74) major Indian banks, and the Green Revolution was started.
Fifth Plan The fifth plan was prepared and launched by D.D. Dhar.
(1974-79) • It proposed to achieve two main objectives: removing poverty and attaining self-reliance.
• Promotion of a high growth rate, better income distribution and significant growth in the domestic rate of
savings were key instruments
The Indian national highway system and the Minimum Needs Programme (MNP) was introduced in the first year
of the Fifth Five-Year Plan.
Sixth Plan • This plan ended Nehruvian socialism and marked the beginning of economic liberalisation.
(1980 – 85 Price controls were eliminated, and ration shops were closed.
• Based on the recommendation of the Shivaraman Committee (formed in 1979), the National Bank for Agriculture
and Rural Development (NABARD) was established.
Seventh Plan • The plan stressed improving the productivity level of industries by upgrading technology.
(1985 – 90 Its main objectives were to establish growth in areas of increasing economic productivity, producing food grains,
and generating employment through “Social Justice”.
Annual Plans • The Eighth Plan could not take off in 1990 due to the fast-changing economic situation at the centre and the
(1990–1992) years 1990–91 and 1991–92 were treated as Annual Plans.
• The Eighth Plan was finally formulated for the period 1992–1997.
Eighth Plan • At that time, Dr Manmohan Singh launched India’s free-market reforms, i.e. liberalisation, privatisation and
(1992 – 97) globalisation (LPG).
• The plan focused on achieving Human Resource Development, poverty reduction, employment generation,
controlling population growth, and people’s participation.
Ninth Plan • It was developed in the context of four important dimensions: Quality of life, generation of productive
(1997 – employment, regional balance and self-reliance.
2002) • This plan tried primarily to use the country’s latent and unexplored economic potential to promote economic
and social growth.
Tenth Plan • This plan mostly focused on reducing the poverty ratio and providing gainful and high-quality employment,
(2002 – reducing gender gaps in literacy and wages.
2007) • It followed a regional rather than a sectoral approach to bring down regional inequalities.
A 20-point program was introduced.
There is an Increase in literacy rate to 72% within the plan period and to 80% by 2012.
Infant Mortality Rate (IMR) was reduced to 45 per 1,000 live births by 2007 and 28 by 2012.
Eleventh • It aimed “Towards Faster & More Inclusive Growth”.
Plan (2007 – • The plan focused on incorporating factors of Environmental sustainability.
2012) • The government pursued Skill development goals and steps to increase the agricultural growth rate to 4%
Plans Explanations
Twelfth Five • It aimed at “Faster, Sustainable, and More Inclusive Growth” The plan’s objective was to emphasise sustainable
Year Plan growth.
(2012- 2017) • The government set a target for electrification of all Indian villages.
• Several steps were taken to reduce the social and gender gap in education.
• It mostly focused on connecting each village with electricity supply and ensuring that 50% of the rural population
had access to proper drinking water.
• The government intended to reduce poverty by 10 per cent during the 12th Five Year Plan.
However, the population below the poverty line was 29.8 per cent at the end of 2009–10.
NITI AAYOG
National Institution for Transforming India (NITI Aayog) is a policy think-tank and an advisory organisation to the
government.
• It was established in the same manner as the Planning Commission was created, i.e., by executive resolution. Therefore,
it is neither a statutory nor a constitutional body but an executive body.
• It provides policy-related and directional input to the government of India.
Apart from assisting the government of India, it also helps the states and centers with technical advice.
Composition of NITI Aayog
• Prime Minister (ex-officio Chairperson of NITI Aayog)
• Chief Ministers of all states and union territories, as well as Lieutenant Governors of union territories.
Other Members
Regional Councils The members of regional councils have a fixed tenure and these are convened by the PM. The Regional
Council is composed of chief ministers of states and lieutenant Governors of union territories
Special Invitees Special invitees are nominated by the Prime Minister and are expert practitioners and specialists in a
particular domain
Full-term organizational It consists of the vice-chairpersons, the members, part-time members, ex-officio members, the chief
framework executive officer, and the secretariat.
Difference of Functions between Planning Commission and NITI Aayog

Planning Commission NITI Aayog
It was mandated to prepare Five Year Plans. It drafted:
• Three Year Action Agenda (2017-20).
• Seven Year Strategy Document.
• Fifteen Year Vision Document (2017-32).
• Strategy for New India @ 75 covering the period 2017 to 2022-23.
It decided on: NITI does not decide on the amount of money that should be given to each
• The amount of money should union give to state.
each state for implementation of centrally • That component is decided by the Finance Commission (tax devolution and
sponsored schemes (CSS)? grants) and Finance Ministry (Allocations for schemes).
• The amount of money the union should give to NITI primarily serves as the think tank, helps in policy design.
the five year plans of the state governments. • It also helps in monitoring schemes’ implementation through its dashboard.
Major Achievements of NITI Aayog

1. Measuring performance and ranking states on outcomes in critical sectors
2. Sustainable Action for Transforming Human Capital (SATH)
3. Transformation of 117 identified aspirational districts
4. Reform of central public sector enterprises
5. Partnership with National and International Organisations : ex E-Amrit
6. Vision Document, Strategy & Action Agenda beyond 12th Five Year Plan
7. Digital Payments Movement . Ex: lucky Grahak Yojana and the Digi Dhan Vyapar Yojana
8. Atal Innovation Mission: Ex: Atal Tinkering Labs (ATLs) and Atal Incubation Centres (AICs)
ECONOMIC REFORMS IN INDIA

Economic reforms in India represent the policy change of government of India during 1991 and after.
Need For Economic Reforms
• Major Foreign Exchange Crisis: India met with an economic crisis relating to its external debt in the year 1991. The
government was not able to make repayments on its borrowings from abroad; foreign exchange reserves dropped
to levels that were not sufficient for even a fortnight
• Conditions Imposed by IMF and World Bank: For availing the loan, international agencies expected India to liberalise
and open up the economy by removing restrictions on the private sector, reduce the role of the government in many
areas and remove trade restrictions between India and other countries.
• Fall of USSR: USSR’s political systems collapsed at the end of 1990. The majority of these countries developed market
economies. India was forced to open trade with these countries based on its ability to compete.
• New Economic Policy (NEP): India agreed to the conditionalities of World Bank and IMF and announced the New
Economic Policy (NEP). The NEP paved the way for LPG reforms in India.
Liberalisation, Privatisation and Globalisation

Liberalisation
• Its major purpose was to free the large private corporate sector from bureaucratic controls.
• Policy of Liberalisation includes:
The industrial policy of 1991 abolished industrial licensing for all projects except for a short set of 18 industries.
Industrial location policy Liberalised
Mergers, takeovers, and the separation of industrial units, among other restrictions, have been greatly reduced.
Capital Market was liberalised
Reforms in Foreign exchange Market
The private sector has been granted permission to enter and develop infrastructure such as power, roads,
communications, shipping, civil aviation, and banking
Privatisation
• It indicates a transfer of ownership of a public sector undertaking to the private sector, either wholly or partially.
• Policy of Privatisation includes:
Policy of Dereservation. For example: The Industrial Policy Resolution of 1956 designated 17 industries for public
ownership. The number of such industries was reduced to eight by the Industrial Policy of 1991.
Revival/rehabilitation of sick industries in India. The Board for Industrial and Financial Reconstruction (BIFR)
has been charged with the revival of sick public sector enterprises since 1992.
Navaratna and Miniratna Policy
To reduce the number of excess workers in the public sector, the government has implemented a voluntary
retirement scheme.
The disinvestment policy is a key component of the privatisation programme under the Industrial Policy of 1991.
A portion of the government’s stake in the selected public sector enterprises would be made available to private
investors, financial institutions, mutual funds, workers, and the general public. It is done in order to raise resources
with the goal of reducing the public debt burden.
Globalisation
• It is primarily an economic phenomenon involving the increasing interaction, or integration, of national economic
systems through the growth in international trade, investment and capital flow.
• Policy of Globalisation includes
Switch from a fixed exchange rate to a market-determined exchange rate. In August 1994, the Indian rupee
achieved full trade account convertibility.
The import licencing system has been dismantled, and quantitative restrictions on imports have been almost
entirely eliminated in accordance with WTO agreements.
Encouragement of foreign investment,
Encouragement to foreign technology agreement
INCLUSIVE GROWTH
MEANING OF INCLUSIVE GROWTH

• As per OECD (Organization for Economic Co-operation and Development), Inclusive Growth is economic growth that
is distributed fairly across society and creates opportunities for all.
• It reflects economic growth, the benefits of which percolate to all sections of the society regardless of their economic
class, sex, caste, creed, region or religion.
Elements of Inclusive growth
Elements
Employment Generetion + Agricultural Development + Poverty Reduction + Equal Distribution of Income + Social Sector Development
+ Reduction in Regional Disparities+ Industrial Development + Environment Protection
MEASURING INCLUSIVE GROWTH
Inclusive Development Index

Inclusive Development Index
Meaning It is an annual assessment of 103 countries’ economic performance that measures how countries perform on eleven
dimensions of economic progress in addition to GDP.
Published by World Economic Forum
Indicators It gives a measure of inequality based on three parameters:
Pillars Indicators
Growth and development GDP (Per capita) + Labor Productivity + Employment + Healthy
Life Expectancy
Inclusion Median Household Income + Income Gini + Poverty Rate+ Wealth
Gini
Intergenerational Equity and sustainability Adjusted Net Savings + Dependency Ratio+ Public Debt (as a share
of GDP) + Carbon Intensity of GDP
India’s rank India ranked 62nd out of 74 emerging countries and was least inclusive among G-20 countries (2018)
Social Progress Index

Meaning It is an aggregate index of social and environmental indicator.
Published by Social Progress Imperative: NGO

Indicators It measures the outcomes of government measures rather than money spent. It also takes account of efficiency
by which money spent by the government has been used.
Indicators:
• Basic human need
• Foundation of human well being
• Opportunity
Global Slavery Index

Global Slavery Index
Meaning It is an index that measure the extent and risk of modern slavery and the effectiveness of our global efforts
to end it.
Published by Walk Free foundation of Australia
Meaning of Modern Slavery means a situation where one person has taken away another person’s freedom, to control
Modern Slavery their body so that they can be exploited.
• Factors responsible for modern slavery:
Absence of rights
Lack of physical safety
Access to basic services such as health, education etc.
Pattern of migration
India’s Position •
The Global Slavery Index (2018) estimates that on any given day in 2016 there were nearly 8 million people
living in modern slavery in India.
•
In terms of prevalence of modern slavery in India, there were 6.1 victims for every thousand people
•
Among 167 countries, India ranked 53 with North Korea at the top of the list and Japan at lowest Slavery
prevalence rate of 03. per 1,000
MEASURES TO PROMOTE INCLUSIVE GROWTH IN INDIA
Measures Explanations
11th Five year plan Components of Inclusive Growth: Access to essential services + Employment Generation + Women
empowerment + Good governance + Skill-building + Equality of opportunity + Poverty Reduction.
12th Five Year Plan It discusses the following aspects of inclusiveness:
Inclusiveness as Poverty Reduction + Inclusiveness as Group Equality + Inclusiveness as Regional Balance +
Inclusiveness as Reducing Inequality + Inclusiveness as Empowerment + Inclusiveness through Employment
Programmes
NITI Aayog’s New India @75 vision has the following objectives for the inclusive growth:
strategy for • Rapid growth, which reaches 9-10% by 2022-23, which is inclusive, clean, sustained and formalized.
inclusive growth • To Leverage technology for inclusive, sustainable and participatory development by 2022-23.
• To have an inclusive development in the cities to ensure that urban poor and slum dwellers including
recent migrants can avail city services.
• To make schools more inclusive by addressing the barriers related to the physical environment (e.g.
accessible toilets), admission procedures as well as curriculum design.
• To make higher education more inclusive for the most vulnerable groups
• To provide quality ambulatory services for an inclusive package of diagnostic, curative, rehabilitative and
palliative care, close to the people.
Schemes •
Mahatma Gandhi National Rural Employment Guarantee Act + Prime Minister Employment Generation
implemented Programme (PMEGP) +Sarva Shiksha Abhiyan + National Rural Health Mission + Bharat Nirman + Mission
Ayushman + Pradhan Mantri Jan Dhan Yojana + Deen Dayal Upadhyaya Grameen Kaushalya Yojana +
Mudra Yojna
Policy approaches for inclusive growth

• Growth Oriented Policy
• Direct Intervention
• Capacity building
• Welfare schemes
• Public participation
UNIVERSAL BASIC INCOME

Universal Basic Income is a radical and compelling paradigm shift in thinking about both social justice and a productive
economy.
Arguments in Favor and Against UBI:
Favour Against
Poverty and vulnerability reduction Conspicuous spending
Poverty, and vulnerability will be reduced in one fell swoop. Households, especially male members, may spend this additional
income on wasteful activities
Choice: A UBI treats beneficiaries as agents and entrusts citizens Moral hazard (reduction in labour supply): A minimum guaranteed
with the responsibility of using welfare spending as they see income might make people lazy and opt out of the labour market
best; this may not be the case with in-kind transfers.
Better targeting of poor: As all individuals are targeted, Gender disparity induced by cash: Gender norms may
exclusion error (poor being left out) is zero though inclusion regulate the sharing of UBI within a household – men are
error (rich gaining access to the scheme) is 60 percent likely to exercise control over the spending of the UBI. This
may not always be the case with other in-kind transfers.
Insurance against shocks: This income floor will provide a safety Implementation: Given the current status of financial access among
net against health, income and other shocks. the poor, a UBI may put too much stress on the banking system
Improvement in financial inclusion: Payment – transfers will Fiscal cost given the political economy of exit: Once introduced,
encourage greater usage of bank accounts, leading to higher it may become difficult for the
profits for banking correspondents (BC) and an endogenous Government to wind up a UBI in case of failure.
improvement in financial inclusion. Credit – increased income
will release the constraints
on access to credit for those with low-income levels.
SUSTAINABLE DEVELOPMENT
Sustainable Development
Meaning Development that meets the needs of the present without compromising the ability of the future generations to meet
their own needs. (World Commission on Environment and development)
Origin • Concept originated in the 1972 “United Nations Conference on Human Environment.
• It began to gather momentum following the 1987 Brundtland report “Our Common Future”. For the first time, the
Brundtland Report introduced the need for the integration of economic development, environmental protection,
and social justice and inclusion.
• Earth Summit: At the 1992 UN Conference on Environment and Development (UNCED), Rio declaration was passed.
It recognised the right of states to economic and social development and contained 27 principles of sustainable
development, including the well-known precautionary and polluter pays principles.
Concept • Emphasizes that the rate of consumption and use of natural resources must balance.
• Economic and industrial development must go on in such a way that no irreparable damage be done to the
environment
• Economic development should not be at the cost of environmental degradation
An environmentally sustainable society meets the current needs of its people without compromising the ability of
future generations to meet their needs.
Principles • Common governing principles are:
Living within environmental limits;
Integrated decision making (policy and legislation that works in a complementary way);
‘Good’ governance that is democratic, transparent, inclusive, participatory and accountable; and
Responsible use of robust and credible scientific evidence in decision making
• The Precautionary Principle: It used when a risk has been identified that human activities may cause morally
unacceptable harm.
• The Polluter Pays principle: It is used to ensure third parties do not bear the external costs of other people’s
activities, such as air pollution or the impacts of climate change, where these are a by-product of certain business
activities.
Sustainable Development Goals (SDGs)

• The Sustainable Development Goals are the blueprint to achieve a better and more sustainable future for all.
• They address the global challenges we face, including poverty, inequality, climate change, environmental degradation,
peace and justice.
Origin
Developments Outcomes
Earth Summit (1992 Adopted Agenda 21, a comprehensive plan of action to build a global partnership for sustainable
development to improve human lives and protect the environment. Held in Rio de Janeiro.
Millennium Summit (2000) The Summit led to the elaboration of eight Millennium Development Goals (MDGs) to reduce
extreme poverty by 2015. Held in New York.
World Summit on Sustainable Johannesburg Declaration on Sustainable Development and the Plan of Implementation was
Development 2002 adopted. It reaffirmed the global community’s commitments to poverty eradication and the
environment. Held in South Africa
United Nations Conference Adopted the outcome document “The Future We Want” in which they decided to launch a process
on Sustainable Development to develop a set of SDGs to build upon the MDGs and to establish the UN High-level Political Forum
(Rio+20), 2012 on Sustainable Development
UN Sustainable Development The General Assembly began the negotiation process on the post-2015 development agenda. The
Summit (2015) process culminated in the subsequent adoption of the 2030 Agenda for Sustainable Development,
with 17 SDGs at its core
Adoption of major 2015 was a landmark year for multilateralism and international policy shaping, with the adoption
agreements in 2015 of several major agreements:
• Sendai Framework for Disaster Risk Reduction (March 2015)
• Addis Ababa Action Agenda on Financing for Development (July 2015)
• Transforming our world: the 2030 Agenda for Sustainable Development with its 17 SDGs was
adopted at the UN Sustainable Development Summit in New York in September 2015.
• Paris Agreement on Climate Change (December 2015)
The 17 Goals
1. No Poverty: End poverty in all its forms everywhere
2. Zero Hunger: End hunger, achieve food security and improved nutrition and promote sustainable agriculture
3. Good Health and Well-being: Ensure healthy lives and promote well-being for all at all ages
4. Quality Education: Ensure inclusive and equitable quality education and promote lifelong learning opportunities
for all
5. Gender Equality: Achieve gender equality and empower all women and girls
6. Clean Water and Sanitation: Ensure availability and sustainable management of water and sanitation for all
7. Affordable and Clean Energy : Ensure access to affordable, reliable, sustainable and modern energy for all
8. Decent Work and Economic Growth: Promote sustained, inclusive and sustainable economic growth, full and
productive employment and decent work for all
9. Industry, Innovation and Infrastructure: Build resilient infrastructure, promote inclusive and sustainable
industrialization and foster innovation
10. Reduced Inequalities: Reduce inequality within and among countries
11. Sustainable cities and communities: Make cities and human settlements inclusive, safe, resilient and sustainable
12. Responsible consumption and Production: Ensure sustainable consumption and production pattern.
13. Climate Action: Take urgent action to combat climate change and its impacts
14. Life below Water: Conserve and sustainably use the oceans, seas and marine resources for sustainable
development
15. Life on Land: Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably
manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss
16. Peace, Justice and Strong institutions: Promote peaceful and inclusive societies for sustainable development,
provide access to justice for all and build effective, accountable and inclusive institutions at all levels
17. Partnerships for the Goals: Strengthen the means of implementation and revitalize the Global Partnership for
MILLENNIUM DEVELOPMENT GOALS (MDGS)

• MDGs are 8 goals that UN Member States had agreed to try to achieve by the year 2015.
• The United Nations Millennium Declaration was signed in September 2000.
• It commits world leaders to combat poverty, hunger, disease, illiteracy, environmental degradation, and discrimination
against women.
Millennium Development Goals are
• To eliminate extreme poverty and hunger
• Achieve Universal Primary Education
• Promote Gender Equality And Empower Women
• Reduce Child Mortality
• Improve Maternal Health
• Combat HIV/AIDS, Malaria And Other Diseases
• Ensure Environmental Sustainability
• Develop A Global Partnership For Development
CHAPTER 3
Money and Banking

MONEY
Money is anything that is generally accepted as payment for goods and services and repayment of debts and that
serves as a medium of exchange.
Evolution of Money
Commodity Money
Commodity money is a physical item that is readily interchangeable with another item of the same type. Example:
Iron Nails, Bear Pelts, Cocoa Beans, Whale Teeth, Gold Nugget
Features
• It has intrinsic Value
Challenges associated
• Nature of commodities: Few commodities are perishable in nature and result in loss of value. Few are bulky to transport
• Can lead to Hyperinflation.
• Do not promote division of labor
• It does not promote international trade
Metallic Standard
Under metallic standard, some kind of metal either gold or silver is used to determine the standard value of the money
and currency. Under the gold standard, the value of the monetary unit or the standard currency is directly linked with
gold. Under the silver standard, a standard economic unit of account is a fixed weight of silver. Example: Silver Tanka,
Sher Shah Suri Rupiyah silver coin
Full Bodied Coins Token Coins

Full bodied coins are those coin that has a higher intrinsic value Token coins are those coins that has lower intrinsic value (steel)
(metal) than its face value. For example: 1 rupee silver coin than its face value. Example: 1 rupee stainless steel Coins
Features
• It has intrinsic value
Challenges associated
• Hoarding: When intrinsic value is higher than face value, People start hoarding the money.
• Melting: When intrinsic value is higher, coins will be melted down and sold as bullion.
• Problem of debasement: When intrinsic value is higher, decreasing the amount of metal in coins. Usually happens
when treasury of any issuing authority gets poor. It will further lead to inflation.
• Demonetization is possible in Full Bodied coins and Token Coins as well.
Paper Currency Standard
It refers to the monetary system in which a country’s central bank issues paper currency notes and coins as a legal
tender. It is also called as Fiat Money. In India, the Reserve Bank of India issues currency notes on behalf of the central
government. Note: It has no intrinsic value.
Money and Banking 27
Two types of legal tenders
Limited legal tenders Unlimited legal tender

Coins Currency Notes
Settle limited amount of Debt Settle any amount of debt.
Note: However Government can put reasonable restriction into this. For Example: Finance
Act 2017: Cash transaction for less than 2 lakh only.
Government issues with powers RBI issues Currency notes other than 1 rupee note
of Coinage Act
Features of Legal Tender

•
A legal Tender is a coin or a banknote legally tenderable for discharge of debt or obligation.
•
It is legally valid for all debts & transactions throughout the country.
•
They cannot be refused by any citizen of the country for settlement of any kind of transaction.
•
Note: G-Sec, T-Bill, Shares, Bonds, DD, Cheque, ATM, Cards, Bitcoins etc are not legal tender
Bank Money
The balance in savings, or current account deposits, held by the public in commercial banks is also considered money
since cheques drawn on these accounts are used to settle transactions. Example: Current Account, Savings acccount
Type Meaning
Cheque, Demand Draft A cheque is a bill of exchange drawn on a specified bank and not expressed to be payable otherwise
than on demand. It is defined in Negotiable Instruments Act 1881.
Demand Draft is an order to pay money drawn by one office of a bank upon another office of the same
bank for a sum of money payable to order on demand. It is defined by Negotiable Instruments Act 1881.
Over Draft: When a person’s bank balance is zero, still he is allowed to draw money (as loan).
Electronic Orders / Digital Payment

Digital payments are payments done through digital or online modes, with no exchange of hard cash being involved.
Such a payment, sometimes also called an electronic payment (e-payment). Core banking solution is a banking software
with a web platform for centralized data management & branchless banking. E-kuber is the core banking solution of the
Reserve Bank of India (RBI).
Classification of Digital Payments
Real Time settlement Delayed Settlement
• Immediate Payment Service (IMPS): Maintained by NPCI • National Electronic Fund Transfer (NEFT): maintained by RBI
• Real Time Gross Settlement (RTGS): maintained by RBI • National Electronic Clearing Service (NECS): Maintained by
RBI
• National Automatic Clearing House (NACH): maintained by
NPCI
• Card System
Features
• Regulation: Regulated under Payment and Settlement
Systems Act, 2007
• Banks in India can directly access all the above mentioned
system through IFSC code.
• For Non-Banking entity, it has to tie up with member bank.
For example: Phonepe, UPI
National Payments Corporation of India (NPCI)

It is an umbrella organization for operating retail payments and settlement systems in India. It is an initiative of Reserve
Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems
Act, 2007, for creating a robust Payment & Settlement Infrastructure in India. It has been incorporated as a “Not for
Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013).
Products of NPCI
Product Meaning
RuPay RuPay is an indigenously developed Payment System – designed to meet the expectation and needs of the Indian
consumer, banks and merchant eco-system. It supports the issuance of debit, credit and prepaid cards by banks
in India. Launched in 2016
National Common Mobility Card
Also known as Rupay Contactless card, it is a contactless payment technology that allows cardholders to use their card in the
contactless payment terminals without the need to physically swipe or insert the card.
IMPS IMPS provides robust & real time fund transfer which offers an instant, 24X7, interbank electronic fund transfer
service. It could be accessed on multiple channels like Mobile, Internet, ATM, SMS.
Unified It was launched in 2016. It’s a technology for building digital payment apps based on IMPS with following features:
Payments QR Scan & Pay to merchants.
Interface (UPI) Linking Current Account (CA) Savings Account (SA) for direct transfer of money without storing in ‘wallet’ first.
1.0
Bharat Bill Bharat Bill Payment System is offering one-stop bill payment solution for all recurring payments with 200+ Billers
Payment in the categories Viz. Electricity, Gas, Water, Telecom, DTH, Loan Repayments, Insurance, FASTag Recharge, Cable
System etc. across India.
Aadhaar Aadhaar Payment Bridge (APB) System is helping the Government and Government agencies in making the Direct
Payment Bridge Benefit Transfers for various Central as well as State sponsored schemes. Launched in 2011
(APB)
Bharat Interface Bharat Interface for Money (BHIM) is a mobile payments application based on NPCI’s Unified Payments Interface
for Money (UPI). It provides the facility to easily send or receive money from other customers using the UPI. It was launched
(BHIM) in 2016
Bharat QR With Bharat QR, merchants can accept digital payments even without a card swiping machine. To pay using
Bharat QR, the customer just needs to be on the mobile app of one of the banks and scan the QR code displayed
at merchant outlet to transfer payment. It was launched in 2016
NACH NACH provides electronic mandate platform to register mandates facilitating paper less collection process for the
corporates and banks. It provides for both account based and Aadhaar based transactions. Launched in 2012.
Note: In 2013, Aadhaar Payment Bridge (APB) system migrated to NACH Platform.
Points to note about Digital Payments

• Unified Payments Interface (UPI) is currently the single largest retail payment system in the country in terms of
volume of transactions, indicating its wide acceptance.
• RBI and Blockchain Authority of Singapore announced a project to link UPI and Pay Now, which is targeted for
operationalization by July 2022.
• Bhutan recently became the first country to adopt UPI standards for its QR code. It is also the second country after
Singapore to have BHIM-UPI acceptance at merchant locations.
• Another real-time fund transfer platform available 24x7x365 is Immediate Payment Service (IMPS).
• On 8th October 21, RBI increased the daily limit of IMPS transactions from `2 lakh to `5 lakh, which should further
help boost digital payment.
• Another digital payment solution launched in August 2021, e-RUPI. It is a person-specific, purpose-specific digital
voucher where it is not required for the customer to have a bank account and is operable on basic phones, even in areas
without an internet connection. The first use case of e-RUPI was implemented for COVID-19 vaccination program.
• The Digital Payments Index of RBI captures the extent of digitization of payments across the country. The Digital
Payments Index increased from 100 in March 2018 (base period) to 304.06 in September 2021.
Crypto Currency
Crypto currency is a digital currency that uses encryption techniques to regulate the generation of a unit of currency.
It is based on blockchain technology, where the transactions and the value of money are recorded digitally in anonymous
and encrypted forms.
Regulation of Crypto Currencies in India
FUNCTIONS OF MONEY
Primary Function
Medium of Exchange Money acts as the medium to facilitate the exchange of goods and services in an economy.
Measure of Value The value of all goods and services can be expressed in monetary units, and thus money acts as a
convenient unit of account.
Secondary Function
Store of value Money can be saved and spent in the future. Money is not perishable, and its storage costs are also
considerably lower.
Standard of Deferred Money acts as a means/standard of deferred payments during lending and borrowing because it has a
Payments store of value.
Transfer of Value This function of money is derived from the store of value function of money. Money is used to transfer
value from one place to another or from one person to another.
Other Functions
Distribution of National The distribution of national income is measured in monetary terms by using the income method. It
Income should be noted that wage, rent, interest and profit are paid by the firms in money terms and received
by the respective suppliers as factor incomes
Liquidity Money can be easily carried and is easily divisible into smaller units as per convenience.
Uniformity of Value Money brings uniformity in value of different goods and services which are not comparable physically
due to their differences in the units of measurement.
Dual Dimension of Cash (Survey 2016-17)
Transactions White Black
Company pays employee salary Small enterprise pays for input in cash; neither declares the transaction
in cash; payment and receipt are to tax authorities
declared to tax authorities
Store of Value Household keeps savings in cash Businessman hoards undeclared cash, with a view to distributing it to
for emergencies his candidate during elections
Concept: Barter Exchange

Under this system commodities and services were directly exchanged for other commodities and services.
Challenges Associated
• Lack of double coincidence of wants: Double coincidence of wants means that if one wants to exchange some goods with
another person then the latter must also be willing to exchange his/her goods with the former
• Search Cost: one has to spend a lot of time searching for the person who is willing to exchange the goods at the given terms
and conditions
• Lack of division of goods: Certain goods are not physically divisible into small pieces
• Problem of Storage: In the barter system, a person must store a large volume of his own goods in order to exchange for his/
her desired goods with others on a day to day basis.
• Loss of Value: A good loses its original quality and value if it is stored for a long period. Many goods, such as salt, vegetables
etc. Hence, goods were never accepted for trading in the future because they could not be used as stores of value
• Lack of common unit of measurement: Under barter system, it was difficult to equate the values of different goods which were
traded because of lack of common unit of measurement
SUPPLY OF MONEY
Money supply means the total amount of money in an economy. It refers to the amount of money which is in circulation
in an economy at any given time. Money supply plays a crucial role in the determination of price level and interest rates.
Money supply viewed at a given point of time is a stock and over a period of time it is a flow. RBI publishes figures for
four alternative measures of money supply, viz. M1, M2, M3 and M4. They are defined as follows
S.No. Measure of Money Formula

supply
1. M1 M1 = CU (Currency notes plus coins held by the public) + DD (Net demand deposits held by
commercial banks)
2. M2 M2 = M1 + Savings deposits with Post Office savings banks
3. M3 M3 = M1 + Net time deposits of commercial banks
4. M4 M4 = M3 + Total deposits with Post Office savings organizations (excluding National Savings
Certificates)
Points to note
• M1 and M2 are known as narrow money. M3 and M4 are known as broad money.
• These measures are in decreasing order of liquidity. M1 is most liquid and easiest for transactions whereas M4 is
least liquid of all.
• M3 is the most commonly used measure of money supply. It is also known as aggregate monetary resource
• In practical sense, M2 and M4 are not much focused.
Reserve Money (M0)

It is Currency in circulation + Bankers’ deposits with the RBI. It is the total liability of the monetary authority of the
country (RBI in India). The components in Reserve Money (M0) are claims which the general public, government or banks
have on RBI and hence are considered to be the liability of RBI.
Note: The currency issued by the central bank (RBI in Indian context) can be held by the public or by the commercial
banks, and is called the ‘high-powered money’ or ‘reserve money’ or ‘monetary base’ as it acts as a basis for credit
creation.
Why is there a demand of Money? 3 motives to hold money (in cash).

most liquid of all assets+ is Transaction Motive: Money is needed for conducting day-to-day transactions. One cannot
universally acceptable + exchanged spend their entire monthly income in buying property or in savings account, or in paying bills.
for other commodities very easily. The money in the liquid form i.e. cash is needed for day to day transactions. Note: higher the
level of income, larger would be the size of money holdings (in cash) for transactions (According
to Keynes). Also it is directly proportional to real GDP and price level.
Why is there a demand of Money? 3 motives to hold money (in cash).

it has an opportunity cost (if, Speculative Motive: It is a tactic used by investors/ traders to hold cash so as to make the best
instead of holding on to a certain use of any investment opportunity that arises later on. An investor will not spend the entire
cash balance, you put the money in income of his in buying any asset rather he will wait for the prices to fall and then invest. The
a fixed deposits in some bank you decisions regarding holding of asset or cash balances depend upon the expectations about
can earn interest on that money). changes in the rate of interest or capital value of assets in future. Note: It is inversely related
to the market rate of interest.
—-------------------------------- Precautionary Motive: A desire to hold cash in order to meet unexpected events sickness,
accident, etc. that require cash outlay.
Determinants of Money Supply

Determinants Explanations
Currency It is the ratio of money held by the public in currency to that they hold in bank deposits.
Deposit Ratio CDR = C/D (where C- currency with public and D- deposits with the banks)
(CDR) Points to note
• It reflects people’s preference of liquidity.
• It depends on the seasonal pattern of expenditure.
• CDR will increases during the festive season as people will convert their deposits of Banks to cash for meeting
extra expenditures during such periods.
Reserve Reserve Money consists of two things (a) vault cash in banks and (b) deposits of commercial banks with RBI.
deposit Ratio RDR = Reserves of bank / Total deposits of banks. Where Reserve money consists of two things – vault cash
(RDR) in banks and deposits of commercial banks with RBI. Banks use this reserve to meet the demand for cash by
account holders.
RBI requires commercial banks to keep reserves to ensure that banks have a safe cushion of assets to draw on
when account holders want to be paid.
Policy instruments used by RBI to bring forth a healthy RDR in commercial banks:
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)
Cash Reserve It is the fraction of the deposits the banks must keep with RBI
Ratio (CRR)
Statutory It is the fraction of the total demand and time deposits of the commercial banks in the form of specified liquid
Liquidity Ratio assests.
(SLR)
Note • An increase in the RDR reduces the supply of money with commercial banks and a decrease in required
reserve ratio increases the money supply.
• When money supply with commercial bank decreases--------> lending power of Commercial Bank
decreases---------> The money supply in an economy reduces--------> Thus, inflation can be controlled in the
economy
• When money supply with commercial bank Increases-------- lending power of Commercial Bank increases---
---->commercial banks have higher funds to disburse as loans-------> Money supply in an economy Increases.
MONEY MULTIPLIER
The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit
of central bank money. It refers to how a deposit can lead to an increase in the total effect of the money supply.
DEMONETISATION
Demonetization is the process through which a nation’s economic unit of exchange loses its legally enforceable validity.
Currencies that are terminated are no more legally considered exchanges and have no financial value
Demonetisation was a new initiative taken by the Government of India in November 2016. Old currency notes of Rs 500,
and Rs 1000 were no longer legal tender. New currency notes in the denomination of Rs 500 and Rs 2000 were launched.
Impact of Demonetisation according to Economic Survey 2016-17

Sector Short term Impact Long term
Money/interest rate Cash declined sharply. Cash will recover but settle at a lower level.
RBI’s balance sheet largely unchanged: RBI’s balance sheet will shrink, after the deadline for
• Return of currency reduced the central bank’s cash redeeming outstanding notes.
liabilities, but increased its deposit liabilities to
commercial banks.
•
Interest rates on deposits, loans, and government Loan rates could fall further, if much of the deposit
securities declined. increase proves durable.
•
Implicit rate on cash increased.
Financial System Increased. They will increase to the extent that the cash deposit
Savings ratio falls permanently.
Private Wealth Private sector wealth declined, since some high Wealth could fall further, if real estate prices
denomination notes were not returned and real estate continue to decline.
prices fell.
Formalization/ Digital transactions amongst new users (RuPay/ Some return to cash as supply normalises, but the
digitalization AEPS) increased sharply; existing users’ transactions now-launched
increased in line with historical trend. digital revolution will continue.
GDP Growth slowed, as demonetisation reduced the The demonetisation could be beneficial in the long
demand (cash, private wealth), supply (reduced run if formalisation increases and
liquidity and working capital, and disrupted supply corruption falls.
chains), and increased uncertainty.
ATM (AUTOMATED TELLER MACHINE)
ATM Years
Meaning An ATM is a computerised machine that provides customers of banks the facility of accessing their accounts for dispensing
cash and to carry out other financial & non-financial transactions without the need to visit the bank branch.
Type of ATMs
Location 1. Onsite ATMs: Located within the bank premises.
2. Offsite ATMs: Set up on a standalone basis and are not on the premises of a bank’s branch. These are generally
set up near places like Bus stands, Railway stations, Airports, Market places etc., to provide easy access to the general
public
Labels assigned to ATM
White Label ATM Brown Label ATM Green Label Yellow Label Pink Label ATM
ATM ATM
Set up, owned and operated Set up and operated by a third party Used for Used for Used exclusively for
by non-banks (but they are not other than a bank (banks outsourced agricultural e-commerce women’s banking.
doing ‘outsourcing-contract’ the ATM operations to a third party). transactions. transactions. Such ATMs are
from a particular bank). Non- The bank takes them on lease to provide monitored by guards
bank ATM operators are the service to the customer. However, a who ensure that only
authorised under the Payment sponsor bank whose brand is used on women access these
& Settlement Systems Act, 2007 the ATM provides cash management and ATMs.
by the RBI. connectivity to banking networks.
BANKING
Banks are financial institutions that accept deposits and make loans. Banks are authorized by the government.
History of Indian Banks

Year Banks
1770 First bank of India as Bank of Hindustan (Under British rule)
1809 + 1840 + 1843 Bank of Bengal + Bank of Bombay + Bank of Madras
All three were called as Presidential Banks
1921 The three presidency banks merged to form Imperial Bank of India in 1921.
1955 Imperial Bank of India changed to SBI
CLASSIFICATION OF BANKS
Several types of banks operate in our country to meet the financial requirements of different categories of people
engaged in agriculture, business, profession etc. These banks can be classified under the following categories:
S.No. Classification Types of Banks

Based on:
1. Ownership 1. Public Sector Banks: These are the banks where majority ownership is held by the Government of India
or RBI.
Examples: SBI, Bank of Baroda, Canara Bank etc.
2. Private Sector Banks: These are the banks where the majority of ownership of the Bank is held by
private individuals.
Examples: ICICI, Kotak, Axis etc.
2. Function 1. Commercial Banks: These banks accept deposits and grant short-term loans and advances to their
customers, thus helping the development of trade and commerce.
Examples: SBI, ICICI Bank, HDFC Bank, Citibank etc.
2. Development Banks: These banks are engaged in the promotion and development of industry, agriculture
and other key sectors. They provide medium and long-term loans for the same.
Examples: Industrial Finance Corporation of India (IFCI), State Financial Corporations (SFCs) etc.
3. Co-operative Banks: A co-operative Bank is a financial entity which belongs to its members, who are
simultaneously the owners and the customers of their bank. Cooperative banks are based on the
principles of cooperation - mutual help, democratic decision making and open membership.
Example: State Cooperative Banks
4. Specialised Banks: Specialised banks are foreign exchange banks, industrial banks, development banks,
and export-import banks catering to specific needs.
Examples: EXIM Bank, SIDBI, NABARD etc.
5. Differentiated Banks: These banks operate under different licences for different sub-components of the
banking sector, such as Limited Banking Licence, Commercial Banking Licence etc. A differentiated licence
will allow a bank to offer products only in select areas.
Examples: Small Finance Banks and Payment Banks in India.
6. Central Bank: The Central bank of any country supervises, controls and regulates the activities of all the
country’s commercial banks. The Reserve Bank of India (RBI) is the central bank of our country.
3. Schedules 1. Scheduled Banks: Any bank which is listed in the 2nd schedule of the RBI Act, 1934 is a scheduled bank.
facilities enjoyed by scheduled banks are:
eligible for obtaining debt/loans on bank rate from RBI
can avail the facility of rediscount of first class exchange bills from RB
Examples: All Nationalised banks.
2. Non-Scheduled Banks: The banks, which are not covered by the second schedule of RBI Act, 1934, are
called as non-scheduled banks.
Examples: Bangalore City Co-operative Bank Ltd; Baroda City Co-op. Bank Limited etc.
BANKING STRUCTURE IN INDIA
Reserve Bank of India

Reserve Bank of India
History Administration
Formed on April 1, 1935 in It is the Central Bank/Regulator for all bank in India
accordance with the RBI Act, 1934
Nationalized on January 1, 1949 Also called “Lender of Last Resort”
(Fully owned by GOI)
Headquarter moved from Governors and 4 Deputy Governors along with a central board of directors appointed by the GOI
Calcutta to Mumbai in 1937
Osborne Smith was the first --------------------
Governor of RBI
Function of Reserve Bank of India
Issuer of currency It is the sole authority to issue currency. It also takes action to control the circulation of fake currency.
Monetary Authority RBI formulates, implements and monitors the monetary policy to regulate the supply of money and
thus controls the credit creation in India.
Lender of last resort RBI assumes the responsibility of meeting directly or indirectly all reasonable demands of commercial
banks for funds in times of difficulty and financial crisis.
Banker to the Government The RBI accepts deposits on behalf of the government and maintains banking accounts of both the
government departments and government enterprises
Bankers’ Bank RBI acts as a bank to the banking system and thus maintains banking accounts of all scheduled banks.
Manager of Foreign RBI manages the Foreign Exchange Management Act, 1999 to facilitate external trade and payment and
Exchange promote orderly development and maintenance of the foreign exchange market in India.
Regulator and Supervisor RBI introduces and upgrades safe and efficient modes of payment systems in the country to meet the
of Payment and requirements of the public at large.
Settlement Systems
Commercial Banks
Commercial Banks
Meaning Commercial Banks are the oldest and the largest banking institutions in India. They accept deposits from the public
and lend out part of these funds to those who want to borrow.
Regulation They are regulated and managed by the RBI under the Banking Regulation Act, 1949.
Function of • Primary Functions: Accepting Deposits + Advancing Loans
commercial • Secondary Functions: Collecting Cheques + Paying Expenses +Providing Locker Facilities , etc.
Banks • Other Function: Money Supply + Credit Creation + Collection of Statistics, etc
Types of Commercial Bank in India

Category Descriptions
Public Sector Banks • At least 51% share/ownership of these banks is held by the RBI/Government.
• As of April 2022, there are 12 public sector Banks in India.
Examples: SBI, Union Bank of India, Canara Bank etc.
Private Sector Banks • Private shareholders hold majority stakes/ownership in these banks.
• As of April 2022, there are 21 private sector banks in India.
Examples: Axis Bank, Yes Bank, ICICI, HDFC etc.

Category Descriptions
Foreign Banks •
These banks have branches in India but are headquartered in a foreign country.
•
As of April 2022, there are 46 Foreign Banks in India in 2022. Examples: HSBC Bank
Differential Banks • Differentiated banks are banking institutions licensed by the RBI to provide specific banking services
and products.
• Example: Local Area Bank, Payment Bank, RRB, etc.
Differential Banks
Differentiated banks are banking institutions licensed by the RBI to provide specific banking services and products.
The term differentiated banks indicates that they are different from the usual universal banks.
The differentiation could be on account of capital requirement, the scope of activities or the area of operations.
Differential vs. Universal Banks

Differential Universal Banks
Meaning Banking institutions licensed by the RBI to provide specific banking It is the combination of commercial
services and products. banking and investment banking
Open Branches They operate in localized areas. Geographical restrictions for Local area Anywhere after 25% of rural mandate.
Banks and RRBs
Accept There are restriction. for example: Payment Bank cannot accept demand Can accept Time and demand deposit
deposits of more than Rs 1 lakh of any amount
Loan There are restrictions. For example: Payment Bank cannot give loan, Can give loan of any amount after 40%
RRB has to give 75% of its loan in priority sector lending. in priority sector lending.
Example Payments Bank, RRBs, Small Finance Bank, Local Area Bank SBI, Canara Bank, etc
Categories of Differential Banks

Terms Meanings
Payment Banks A payments bank is like any other bank, but operating on a smaller scale without involving any credit risk.
2015 Note: Nachiket Mor committee in 2014 suggested to introduce specialised banks or ‘payments bank’ to cater to
the lower income groups and small businesses.
Small Finance Small finance Bank are a type of Financial institution that provide financial services to the unserved and unbanked
Bank (SFBs) region of the country.
2015 Note: Nachiket Mor committee in 2014 suggested to introduce SFB and Usha Thorat committee processed the
application of SFBs and 10 SFBs were given license.
Local Area Bank LABs are non–scheduled commercial banks which were established as local banks in the private sector with
(LAB) 1996 jurisdiction over two to three contiguous districts. They were introduced in 1996.
Points to note:
• They are registered under the Companies Act 1956 as a public limited company. They have to take license
from RBI under Banking Regulation Act. Thus has to maintain Statutory Liquidity Ratio (SLR).
• LAB are also required to fulfil Priority sector lending obligations.
• In 2014, RBI permitted LABs to be converted into small finance banks subject to them meeting the prescribed
eligibility criteria. Local area banks in India need to maintain CRR and SLR
Regional Rural RRBs were developed to serve the rural areas and agricultural sectors with basic banking and adequate financial
Banks (RRBs) services. The purpose was development of agriculture, trade, commerce, industry and other productive activities
1976 in the rural areas, credit and other facilities, particularly to small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs.
Regional Rural Banks (RRB) was set up on the recommendation of M. Narasimham committee on Financial
Inclusion. The share capital of RRB is subscribed by the Central Government (50%), the State Government
concerned (15%), and the sponsoring commercial bank (35%).
Its authorised capital is 2000 crore.
Differences
Commercial Banks Vs. RRBs
Type Commercial Banks RRBs
Banking Regulation Act Regulated under Banking Regulation Act Regulated under Banking Regulation Act and RRB Act, 1976
CRR, SLR Follow CRR and SLR rules Follow CRR and SLR rules
Marginal Standing Applicable for commercial Banks Not applicable for RRBs
facility
Priority sector lending 40% of Loan in PSL 75% of loan in PSL
(PSL) norms
Presence Presence all around the country Confined to few districts
Voting Power Share holding Central Government (50%), the State Government concerned
(15%), and the sponsoring commercial bank (35%).
Payment Banks Vs. Small Finance Banks

S. No Particulars Payment Banks Small Finance Banks
1. Objective To promote financial inclusion by providing To promote financial inclusion by:
small savings accounts and payments/ (i) provision of savings vehicles and;
remittance services. (ii) supply of credit.
2. Legal • Registered as a public limited company • Registered as a public limited company under the
Framework under the Companies Act, 2013. Companies Act, 2013.
• Must be scheduled under RBI act, 1934. • Must be scheduled under RBI act, 1934. Thus have
Thus have to follow CRR obligation to follow obligation
• Fall under Banking Regulation Act, 1949. • Fall under Banking Regulation Act, 1949. Thus have
Thus have to comply with SLR obligations to comply with SLR obligations
• B anking ombudsman, 2006 have • Banking ombudsman, 2006 have jurisdiction over SFB
jurisdiction over payments bank • Deposits are insured under Deposit Insurance and
• D eposits are insured under Deposit Credit Guarantee Corporation, 1961
Insurance and Credit Guarantee • Have to comply with Payment and Settlement system
Corporation, 1961 Act, 2007
• H ave to comply with Payment and • BASEL III norms are tighter i.e. capital to risk weight
Settlement system Act, 2007 asset ratio must be 15%
• BASEL III norms are tighter i.e. capital to
risk weight asset ratio must be 15%
3. Activities • Acceptance of demand deposits only and • Acceptance of all kinds of deposits. There is no limit
Permitted restricted to holding a maximum balance on holding a maximum balance per customer.
/Scope of Rs. 100,000 per individual customer. • Lending to unserved and underserved sections, including
• Issuance of ATM / Debit Cards but cannot small business units, small and marginal farmers, micro
issue credit cards. and small industries and unorganised sector entities.
• Payments and remittance services through • Can issue both credit and debit cards.
ATMs, Business Correspondents (BCs) and • Non-risk sharing simple financial services activities like
mobile banking. distribution of mutual fund units, insurance products,
• Non-risk sharing simple financial services pension products, etc. with the prior approval of the
activities like distribution of mutual RBI.
fund units, insurance products, pension • SFBs can also transit to universal banks subject
products, etc. to fulfilling minimum paid-up capital/net worth
• Utility bill payments on behalf of its requirements as applicable to universal banks.
customers and the general public.
4. Restrictions •
No NRI deposits should be accepted. •
It can give loans but 75% of its Adjusted Net Bank
•
No Time Deposits like FD and RD are Credit should be in the form of priority sector lending.
accepted. •
50 percent of its loans should be up to Rs. 25 lakhs
•
No loans can be offered. only.
Payment Banks Vs. Small Finance Banks

S. No Particulars Payment Banks Small Finance Banks
5 CRR and SLR •
Need to maintain a Cash Reserve Ratio SFBs have to maintain both CRR and SLR.
(CRR).
•
In case of SLR, 75% of its demand deposit
must be invested in government securities
and treasury bills.
6 Repo Can access repo market Can access repo market
7 Client Base Migrant labourers Unserved population
Low income Households Small and Marginal farmers
Unorganised sector Micro small industries
Small Business
7 Foreign Direct 49% Automatic with 74% approval 49% Automatic with 74% approval
Investment
8 Capital The minimum paid-up equity capital of the The minimum paid-up voting equity capital for small
Requirement payments bank is Rs. 100 crores. finance banks is Rs.100 crore.
7. Examples Airtel Payment Bank, India Post Payment Bank, Ujjivan Small Finance Bank, AU Small Finance Bank etc.
Paytm Payment Bank etc.
India Post Payments Bank (IPPB)

Type IPPB is a wholly owned payments bank and a subsidiary of the Indian postal department. It was established
under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India.
Minimum balance Only 100 Rs while opening account. After that no minimum balance requirement
Who can open the 10 year and above can open accounts.
account
Types of Account SAFAL, SUGAM and SARAL
Services •
Doorstep, mobile and internet banking
•
Pre-paid instruments such as PoS, mobile wallets, MPoS
•
ATMs/micro ATMs
•
Can be used for e commerce
•
Cheque book
•
DBT subsidies
Achievements In January 2022, IPPB announced that it had crossed the five-crore customer mark in 3 years of commencement
of operations. With this, IPPB has achieved the world’s largest digital ﬁnancial literacy programme. Out of
the total account holders, around 48% were women account holders; while 52% were male indicating the
Bank’s focus on bringing the women customers under the banking network.
COOPERATIVE BANKS
Cooperative Banks
What are When a co-operative society engages itself in the banking business it is called a Co-operative Bank. In India,
Cooperative Banks all banks registered under the Cooperative Societies Act, 1912 are considered co-operative banks. Unlike
commercial banks, which are driven by profit, cooperative banks work on a “no profit, no loss” basis.
Establishment They are established by state laws - registered under the Cooperative Societies Act, 1912.
Regulation Governed under Banking regulation Act of 1949 along with Banking Laws (Application to Cooperative Societies)
Act, 1965 and the cooperative societies act 1965.
Apex body NABARD is the apex body for Cooperative Banks.
Cooperative Banks
Commercial banks Vs. Cooperative banks
Commercial banks Cooperative banks
Regulation Banking regulation Act of 1949 Banking regulation Act of 1949 and the cooperative Societies act 1965.
CRR and SLR applicable applicable
norms
Marginal Standing Scheduled Commercial banks can take Not applicable
Facility (MSF) loan From RBI under MSF window
Priority Sector Have to follow PSL norms Not applicable
Lending Norms
Who can Borrow? Anyone Only members of the bank
Voting Power Voting rights depend on shareholding One member one vote.
of the member
Moto Profit Making Provide mutual help to its members. No Profit no loss
Existence All India Limited states like Gujarat, Maharashtra
The Banking Regulation (Amendment) Act, 2020

• It brought the co-operative banks under the direct supervision of the RBI. The amendments now equip the RBI with
sufficient power to efficiently resolve the financially distressed cooperative banks as well as to effectively regulate
the conduct of the co-operative banks.
Comparison of the Old and New Framework

Subject Old Framework New Framework after the Amendment Act,
2020
Applicability of the BR Act Only on primary cooperative banks and multi On all the cooperative banks except primary
state cooperative banks. agricultural credit societies.
Power to make a scheme for A moratorium had to be imposed on A reconstruction/ amalgamation plan scheme
reconstruction /amalgamation the business of a financially distressed under Section 45 can now be implemented
without imposing moratorium cooperative bank, while implementing a without imposing a moratorium on the
scheme under Section 45 of the Act. business of the bank.
Power to remove ceiling on RBI had no power to relax such a ceiling. RBI was granted with power to relax such a
issuance of shares and securities ceiling on issuance of securities in consultation
to existing members of cooperative with the Central Government.
society.
Power to supersede Board of RBI had the power to supersede the BOD of RBI can supersede the BOD of primary and
Directors(BOD) only primary cooperative banks. multi state cooperative banks.
NABARD and its role in Agricultural credit

National Bank for Agriculture and Rural Development (NABARD)
Established Was established on 12 July 1982 by an Act of Parliament.
Who regulates? NABARD’s affairs are governed by a Board of Directors. The Board of Directors are appointed by the Government
of India in consonance with NABARD Act. The Chairperson and other directors (except elected ones by share-
holders and officials of the Central Government) shall be appointed by the Central Government in consultation
with the R
Purpose for its to take over the functions of the Agricultural Refinance Development Corporation (ARDC) and the refinancing
establishment functions of RBI in relation to co-operative banks and RRBs.
National Bank for Agriculture and Rural Development (NABARD)

Functions of • Acts as a refinancing institution for all kinds of production and investment credit to agriculture, small-scale
NABARD industries, cottage and village industries, handicrafts and rural crafts and real artisans and other allied
economic activities.
• Provides short-term, medium-term and long-term credits to state co-operative Banks (:SCBs), RRBs, LDBs
and other financial institutions approved by RBI
• Gives long-term loans (up to 20 Years) to State Government to enable them to subscribe to the share capital
of co-operative credit societies.
• has the responsibility of co-ordinating the activities of Central and State Governments, the NITI Aayog
and other all India and State level institutions entrusted with the development of small scale industries,
village and cottage industries, rural crafts, industries in the tiny and decentralized sectors.
• It has the responsibility to inspect RRBs and co-operative banks, other than primary co-operative societies.
• It maintains a Research and Development Fund to promote research in agriculture and rural development,
NABARD (Amendment) Act, 2017

purpose It seeks to amend the National Bank for Agriculture and Rural Development Act, 1981.
Key provision from the amendment

Increase in capital of Amendment in Act enabled Union Government to increase the authorized capital of NABARD from Rs.
NABARD 5,000 crore to Rs. 30,000 crore.
Transfer of the RBI’s Under the 1981 Act, the central government and the RBI together must hold at least 51% of the share
share to the central capital of NABARD.
government The amendment provides that the central government alone must hold at least 51% of the share capital
of NABARD. The amendment transfers the share capital held by the RBI and valued at Rs 20 crore to the
central government.
Micro, small and The Act replaces the terms ‘small-scale industry’ and ‘industry in the tiny and decentralised sector’
medium enterprises with the terms ‘micro enterprise’, ‘small enterprise’ and ‘medium enterprise’ as defined in the MSME
(MSME) Development Act, 2006.
Under the 1981 Act, NABARD was responsible for providing credit and other facilities to industries having
an investment of up to Rs 20 lakh in machinery and plant.
o The amendment extends this to apply to enterprises with investment upto Rs 10 crore in the
manufacturing sector and Rs five crore in the services sector.
Consistency with the The amendment substitutes references to provisions of the Companies Act, 1956 under the NABARD Act,
Companies Act, 2013 1981, with references to the Companies Act, 2013. These include provisions that deal with: (i) definition
of a government company, and (ii) qualifications of auditors.
NON-BANKING FINANCIAL COMPANY (NBFC)
Non-Banking Financial Company (NBFC)

What are NBFCs? As per the RBI, NBFC is a company registered under the Companies Act, 1956 and is engaged in the business of:
• Loan and advances;
• Acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority;
• Other marketable securities;
• Leasing; hire purchase;
• Insurance business;
• Chit business
NBFC does not •
NBFCs does not include any institution whose principal business is of agriculture activity or industrial
include activity.
•
purchase or sale of any goods (other than securities)
•
Providing any services and sale/purchase/construction of immovable property.
Non-Banking Financial Company (NBFC)

Residuary non- Residuary Non-Banking Companies (RNBCs) are another category of NBFCs whose principal business is
banking company acceptance of deposits and investing in approved securities. In the interest of depositors, RBI has evolved a
regulatory framework the salient features of which are outlined below for the guidance of depositors
How is it different • A NBFC cannot accept demand deposits (savings accounts or current accounts).
from Commercial • NBFCs do not form part of the payment and settlement system which includes clearing house services
Banks? and facilities like NEFT, RTGS, IMPS and cannot issue cheques drawn on itself.
• NBFCs cannot issue cheque books to its customers.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in the case of commercial banks.
• The repayment of deposits by NBFCs is not guaranteed by the RBI. If a company defaults in repayment of a
deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit to recover
the deposits.
Classification •
NBFCs accepting public deposit (NBFCs-D)
•
NBFCs not accepting/holding public deposit (NBFCs-ND).
Regulation Of • The Department of Non-Banking Supervision (DNBS) of RBI is entrusted with the responsibility of regulation
NBFCS registered and supervision of NBFCs under the Reserve Bank of India Act, 1934.
under RBI • Under this, RBI provides for
Registration of NBFCs,
Prudential regulation of various categories of NBFC,
Issue of directions on acceptance of deposits by NBFCs and
Surveillance of the sector through off-site and on-site supervision.
• RBI is also empowered to take punitive action which includes:
Cancellation of Certificate of Registration,
Issue of prohibitory orders from accepting deposits,
Filing criminal cases or winding up petitions under provisions of the Companies Act in extreme cases.
• On 22 October 2021, the RBI issued a notification on ‘Scale Based Regulation (SBR): A Revised Regulatory
Framework for NBFCs’ (SBR Framework). The SBR Framework came into effect on 1 October 2022.
The SBR framework is aimed at protecting financial stability while ensuring that smaller NBFCs continue to
enjoy light regulations and grow with ease.
Categorization •
Certain NBFCs businesses are involved in providing financial activities but do not need to obtain a registration
for NBFCs not with RBI.
registered under •
These types of entities are regulated by other financial sector regulators, and to avoid dual regulation, they
RBI: are not required to obtain an NBFC Licence from RBI. They are:
Insurance Companies: Regulated by the Insurance Regulatory and Development Authority of India
(IRDA).
Housing Finance Companies: Regulated by the National Housing Bank (NHB),
Stock-Broking Companies; Merchant Banking Companies; Mutual Funds; Venture Capital Companies;
Companies running Collective Investment Schemes; and Chit Fund Companies: Regulated by the
Securities and Exchange Board of India (SEBI).
Nidhi Companies: Regulated by the Ministry of Corporate Affairs (MCA).
Revised Categorisation under the SBR Framework

Under the SBR Framework, the RBI has introduced four scale-based layers for regulating NBFCs (base layer, middle
layer, upper layer, and top layer). From October, 2022, all NBFCs are bucketed and regulated under one of these layers.
Scale Based Layers Composition and Related Conditions

Base Layer (NBFC-BL) •
This layer includes Non-deposit accepting NBFCs with asset size of less than INR 1,000 crores.
•
For NBFCs in this layer, least regulatory intervention is warranted.
Scale Based Layers Composition and Related Conditions

Middle Layer (NBFC-ML) •
This layer includes Non-deposit accepting NBFCs (including NBFC-ICC, NBFC-MFI, NBFC-Factor and
NBFC-MGC) with asset size of more than INR 1,000 crores.
•
The regulatory regime for this layer will be stricter compared to the base layer.
•
Adverse regulatory arbitrage vis-à-vis banks can be addressed for NBFCs falling in this layer in order
to reduce systemic risk spill-overs, where required.
Upper Layer (NBFC-UL) • This layer includes NBFCs which are specifically identified by the RBI for being subject to enhanced
regulatory requirements.
• NBFCs which have large potential of systemic spill-over of risks and have the ability to impact
financial stability.
• Top 10 NBFCs based on their asset size will always fall in the upper layer.
• RBI will scrutinise top 50 NBFCs based on their total exposure or identify any other NBFCs (as per
its supervisory judgement) for inclusion in the upper layer.
• Once categorised in the upper layer, NBFCs must mandatorily remain in the upper layer
for a period of five years, irrespective of whether they meet the scoring criteria or not.
• The regulatory framework for NBFCs falling in this layer will be bank-like, albeit with suitable and
appropriate modifications.
Top Layer (NBFC-TL) •
RBI will identify and shift NBFCs from upper layer to top layer if it is of the opinion that such NBFCs
carry substantial potential systemic risk.
•
RBI will specifically communicate higher capital requirements for such NBFCs at the time of their
categorisation into the top layer.
•
Such NBFCs will be subject to enhanced and intensive supervisory engagement by the RBI.
•
RBI may not categorise any entity in the top layer if it does not perceive any systemic
risk with respect to NBFCs in the upper layer. Ideally this layer is supposed to be empty.
MISCELLANEOUS TERMS
Terms Meanings
Micro Units Development MUDRA is a financial institution set up by the Government of India in 2015.
& Refinance Agency Ltd Purpose
(MUDRA) • Providing loans up to 10 lakh to the non-corporate, non-farm small/micro enterprises through
through financial institutions like Banks, Non-Banking Financial Companies (NBFCs) and Micro
Finance Institutions (MFIs).
• Mudra does not lend directly to micro-entrepreneurs/individuals. The loans are given by Commercial
Banks, RRBs, Small Finance Banks, MFIs and NBFCs.
• MUDRA has created three products namely ‘Shishu’, ‘Kishore’ and ‘Tarun’ to signify the stage of
growth / development and funding needs of the beneficiary micro unit
Systemically important NBFCs whose asset size is of ₹ 500 cr or more are called systemically important as their activities have
NBFCs a bearing on the financial stability of the overall economy.
Society for Worldwide SWIFT is a vast and secure messaging system that allows banks and other financial institutions from
Interbank Financial all around the world to send and receive encrypted information, namely cross-border money transfer
Telecommunications instructions. It is governed by the G10 countries, the European Central Bank, and the National Bank
(SWIFT) of Belgium.
IFSC code IFSC is short for Indian Financial System Code and represents the 11 digit character that we can usually
see on our bank’s cheque leaves, or other bank sponsored material. This 11 character code helps
identify the individual bank branches that participate in the various online money transfer options
like NEFT and RTGS.
MICR MICR stands for Magnetic Ink Character Recognition. It is a 9 digit code printed on the bottom of the
cheque and aids in the identification of the cheque. MICR is used to speed up the processing of cheques.
NRI deposit NRI deposits are foreign currency deposits made in an Indian bank by a non-resident Indian. These
deposits can be repatriated by the NRI on maturity along with the interest earned. From the balance of
payments -the country’s external sector balance sheet -perspective, NRI deposits are capital flows and
hence, vulnerable to outflows. They have been an important source of foreign exchange at times of crisis.
Terms Meanings
NRI remittances Remittances are foreign currency funds sent by NRIs to their folks in India. These funds are essentially
in the name of relatives, mostly immediate family. These are meant for their maintenance and upkeep
and hence, cannot be repatriated.
Priority sector Lending It is an important role given by the RBI to the banks for providing a specified portion of the bank loans to
a few specific sectors. There are eight broad categories of the Priority Sector Lending: Agriculture, Micro,
Small and Medium Enterprises, Housing, Education, Export Credit, Social Infrastructure, Renewable
Energy, and others. The other category includes loans to state-sponsored organisations for SC/ST,
personal loans to weaker sections, and loans to distressed persons.
Note: All scheduled commercial banks and foreign banks with a significant presence in India must
reserve 40% of their Adjusted Net Bank Credit (ANDC) for lending to Priority sectors.
RRBs and cooperative banks, and small finance banks reserve 75% of their Adjusted Net Bank Credit
(ANDC) for lending to Priority sectors.
Priority Sector Lending Priority Sector Lending Certificates (PSLCs) are instruments that enable banks to achieve their priority
Certificates (PSLCs) sector lending targets without actually disbursing loans to sectors outside their comfort zone. PSL
certificates allow banks sitting on surplus loans to a priority sector to sell certificates to banks that
haven’t met their targets, pocketing a sizeable fee for this trade. The said loans however do not change
hands.
Merchant Bank A merchant bank is a financial institution that conducts underwriting, loan services, financial advising,
and fundraising services for large corporations and high-net-worth individuals (HWNIs).
Key Characteristics:
• do not generally provide services for the general public
• Are non-depository financial institution that specializes in international trade.
• Example: J.P. Morgan Chase, Goldman Sachs, and Citigroup.
Marginal Cost Of Lending This is a reference rate or internal benchmark for the various financial institutions. The RBI brought
Rate the MCLR in 2016 by replacing the base rate system. Renewal of credit limits and sanctioning of loans
is done as per MCLR norms. It is fixed by the Reserve Bank of India (RBI). It helps banks define the
minimum interest rate on different types of loans.
White Label ATMs White Label ATM means the machines established, owned, and operated by non-bank entities.
Customers from any bank will be able to withdraw money from such White Label ATMs, but will be
charged a fee for the services.
Shadow banks Shadow banks are organisations that operate in the same way as banks but are not subject to banking
regulation. These institutions function as intermediaries between the investors and the borrowers,
providing credit and generating liquidity in the system.
Lead bank Scheme Envisages assignment of lead roles to individual banks for the districts allotted to them. It was
introduced in 1969. The lead bank acts as a leader for coordinating the efforts of all credit institutions
in the allotted districts to increase the flow of credit to agriculture, MSE and other economic activities
with the district being the basic unit in terms of geographical area.
Domestic systemically These are those bank that hold economic and national importance. Due to their size, cross-jurisdictional
important bank activities, complexity and lack of substitute and interconnection, these banks become systemically
important. Failure of any of these banks can result in significant disruption in essential economic
activities across the country.
Wholesale Banks Wholesale banking services are those services that are sold to large clients such as other banks, financial
institutions, government agencies, large corporations, and real estate developers. The wholesale
Banking services include:
Specialised Finance + Loan Syndications + Structured Transactions + Securitisation + Credit Structuring
+ Public Sector Infrastructure financing
Net Demand and Time It is the difference between the sum of demand and time liabilities (deposits) of a bank (with the public
Liabilities (NDTL) or the other bank) and the deposits in the form of assets held by the other banks.
Core Banking Solutions •
It is the networking of bank branches, which allows customers to manage their accounts, and use
various banking facilities from any part of the world.
Terms Meanings
Deposit Insurance In Under the Deposit Insurance Act, 1961, the Deposit Insurance and Credit Guarantee Corporation
India (DICGC) is liable to pay the insured deposit amount to depositors of an insured bank.
• Such liability may arise when an insured bank undergoes:
• Liquidation (sale of all assets on closing down of the bank);
• Reconstruction or any other arrangement under a scheme, or
• Merger or acquisition by another bank.
• Deposit insurance provided by DICGC covers all commercial banks, including Payment Banks,
Small Finance Banks, Regional Rural Banks, Foreign Bank branches in India, Local Area Banks
and Co-operative Banks in all States and Union Territories.
ISSUES OF NPA
NON-PERFORMING ASSETS (NPA)

An asset becomes non-performing when it ceases to generate income for the bank. Banks give loans and advances
to borrowers. NPAs are loans and advances where the borrower has stopped making interest or principal repayments
for over 90 days.
Categories of NPAs
• Special mention account: If the borrower does not pay for 90 days after the end of quarter.
• Substandard Assets: An asset which remains as NPAs for less than or equal to 12 months.
• Doubtful Assets: An asset which remained in substandard category for 12 months
• Loss Assets: Asset where loss has been identified by the bank or the RBI, however, there may be some value remaining
in it. Therefore, loan has not been completely written off.
Terms Related to NPAs
Terms Meanings
Bad Loan • All such loans which banks failed to recover are categorised as Bad debts/ Bad loans. In technical terms,
Bad loans are also referred to as NPAs.
Write-off • Bad loans which remain for longer times without any foreseeable possibility of recovery can be dropped
from the balance sheets of banks by way of a write-off. Thus, a write-off is an accounting practice.
• However, the borrowers of written-off loans continue to be liable for repayment
Provisioning • As per RBI mandate, banks must set aside a certain proportion of their asset value to cover bad loans. This
process is called provisioning.
• Banks are expected to make provisions that range from 15% of the outstanding sum to 100%, depending
on the NPA classification and its period of non-performance (over 4 years
Provisioning • PCR is essentially the ratio of provisioning to gross NPAs and indicates the extent of funds a bank has kept
Coverage Ratio aside to cover loan losses.
(PCR)
Tackling of the NPA Crisis in India

• Asset Reconstruction Companies (ARC): These companies are created under SARFAESI Act of 2002 to unlock value
from stressed loans. It buys bad loans and NPAs from banks and financial institution to clear the balance sheet of
the banks and financial institutions.
• 5:25 rule (2014): Allows banks to extend the tenure of loans to 20-25 years to match the cash flow of projects, while
refinancing them every 5 or 7 years making long-term infrastructure projects viable.
• Strategic debt restructuring (SDR) (2015): Under this scheme banks who have given loans to a corporate borrower
gets the right to convert the complete or part of their loans into equity shares in the loan taken company.
• Sustainable structuring of stressed assets (S4A)(2016): Under this scheme, loans are divide into two part i.e. sustainable
and unsustainable. Sustainable debt is that debt which bank thinks that a firm/company can service with its current
cash flows. The outstanding debt that are not sustainable are converted into equity instruments.
• Insolvency and Bankruptcy code Act (2016): IBC 2016 is India’s bankruptcy law; it was enacted with the view to
establish a consolidated framework for insolvency resolution of individuals, corporations, partnership firms in a time
bound manner.
• Steps Advised by Finance Standing Committee of the Parliament (2016): The committee has requested an immediate
forensic audit of all restructured loans that have become bad debts. For willful defaults, forensic auditing is also
required.
The panel also suggested creating a “vibrant bond market” to finance infrastructure projects.
The Panel added that there is no justification for keeping the names of wilful defaulters secret and asked the RBI to
change its guidelines.
• Bad Bank: A bad bank is an asset reconstruction company that takes over the bad loans of commercial banks. It then
manages bad loans and recovers the money over a period of time. However, it is not involved in lending or receiving
deposit as performed by commercial banks rather it helps commercial banks resolve bad loans and clean up their
balance sheets.
• Project Sashakt: It is a strategy suggested by PNB chairman Sunil Mehta to resolve bad loans.
Bad loans up to ₹50 crore: It will be managed at the bank level, with a deadline of 90 days.
Bad loans of ₹ 50-500 crore: banks will enter an inter-creditor agreement in which lead bank would be authorised
to implement a resolution plan in 180 days, or refer the asset to NCLT.
Loans above ₹ 500 crore: Asset management company would be set up by the banks that will include alternative
investment fund (AIFs). AIF will raise resources from banks and institutional investors to bid for the insolvent
assets under insolvency and bankruptcy
Insolvency and Bankruptcy code Act, 2016
Purpose •
To streamline and speed up the resolution process of failed businesses
•
The code aims to protect the interests of small investors and make the process of doing business less
cumbersome.
Coverage •
Individual, companies, limited Liability partnership and Partnership firms
Who facilitates resolution of insolvency?
Insolvency These professionals administer the resolution process, manage the assets of the debtor, and provide information
Professionals for creditors to assist them in decision making.
Insolvency The agencies conduct examinations to certify the insolvency professionals and enforce a code of conduct for
Professional their performance.
Agencies
Information Creditors will report financial information of the debt owed to them by the debtor. Such information will include
Utilities records of debt, liabilities and defaults.
Adjudicating • National Companies Law Tribunal (NCLT), for companies; and the Debt Recovery Tribunal (DRT), for
authorities individuals.
• The duties of the authorities will include:
Approval to initiate the resolution process,
Appoint the insolvency professional, and
Approve the final decision of creditors.
Insolvency and • The Board will regulate:
Bankruptcy Insolvency professionals,
Board Insolvency professional agencies and
Information utilities set up under the Code.
• The Board will consist of:
Representatives of Reserve Bank of India, and the Ministries of Finance, Corporate Affairs and Law.

Procedure to resolve insolvency in the Code
Initiation The resolution process may be initiated by the debtor or creditor. The insolvency professional administers the
process. This process lasts for 180 days and any legal action against the debtor is prohibited during this period.
Decision •
A committee consisting of the financial creditors who lent money to the debtor will be formed by the
to resolve insolvency professional.
insolvency •
The creditors committee will take a decision regarding the future of the outstanding debt owed to them.
They may choose to revive the debt owed to them by changing the repayment schedule, or sell (liquidate)
the assets of the debtor to repay the debts owed to them.
•
If a decision is not taken in 180 days, the debtor’s assets go into liquidation.
Liquidation • If the debtor goes into liquidation, an insolvency professional administers the liquidation process.
• Proceeds from the sale of the debtor’s assets are distributed in the following order of precedence:
i) insolvency resolution costs, including the remuneration to the insolvency professional,
ii) secured creditors, whose loans are backed by collateral, dues to workers, other employees,
iii) unsecured creditors,
iv) dues to government,
v) priority shareholders and
vi) Equity shareholders.
The Insolvency and Bankruptcy Code (Amendment) Act, 2021
Purpose It amends the Insolvency and Bankruptcy Code, 2016.
• A time-bound process for resolving the insolvency of corporate debtors (within 330 days) called the corporate
insolvency resolution process (CIRP)
• To provide an alternate insolvency resolution process for micro, small, and medium enterprises (MSMEs),
called the pre-packaged insolvency resolution process (PIRP)
New Provision included
Corporate •
The debtor himself or its creditors may apply for initiation of CIRP in the event of a default of at least one
insolvency lakh rupees.
resolution •
Under CIRP, a committee of creditors is constituted to decide on the insolvency resolution.
process (CIRP) •
The committee may consider a resolution plan which typically provides for the payoff of debt by merger,
acquisition, or restructuring of the company.
•
If a resolution plan is not approved by the committee of creditors within the specified time, the company
is liquidated.
•
During CIRP, the affairs of the company are managed by the resolution professional (RP), who is appointed
to conduct CIRP.
Pre-packaged • It is an alternate insolvency resolution process for micro, small, and medium enterprises (MSMEs).
insolvency • PIRP may be initiated only by debtors.
resolution • The debtor should have a base resolution plan in place. During PIRP, the management of the company will
(PIRP) remain with the debtor.
Minimum • Application for initiating PIRP may be filed in the event of a default of at least one lakh rupees.
default amount • The central government may increase the threshold of minimum default up to one crore rupees through a
notification
Debtors eligible •
PIRP may be initiated in the event of a default by a corporate debtor classified as an MSME under the MSME
for PIRP Development Act, 2006.
•
The corporate debtor himself must apply to the National Company Law Tribunal (NCLT).
•
The authority must approve or reject the application for PIRP within 14 days of its receipt.
Approval •
For applying for PIRP, the debtor must obtain approval of at least 66% of its financial creditors (in value of
of financial debt due to creditors) who are not related parties of the debtor
creditors

Proceedings • The debtor will submit the base resolution plan to the Resolution Professional (RP) within two days of the
under PIRP commencement of the PIRP.
• A committee of creditors will be constituted within seven days of the PIRP commencement date, which will
consider the base resolution plan.
• The committee may provide the debtor with an opportunity to revise the plan.
• The RP may also invite resolution plans from other persons.
• Alternative resolution plans may be invited if the base plan: (i) is not approved by the committee, or (ii) is
unable to pay the debt of operational creditors (claims related to the provision of goods and services).
• A resolution plan must be approved by the committee (with at least 66% of the voting shares) within 90 days
from the commencement date of PIRP.
• The resolution plan approved by the committee will be examined by the NCLT.
• If no resolution plan is approved by the committee, the RP may apply for the termination of PIRP.
Moratorium •
During PIRP, the debtor is provided with a moratorium under which certain actions against the debtor will be
prohibited. These include filing or continuation of suits, execution of court orders, or recovery of property.
Management During PIRP, the board of directors or partners of the debtor will continue to manage the affairs of the debtor.
of debtor
during PIRP
Initiation of At any time from the PIRP commencement date but before the approval of the resolution plan, the committee
CIRP of creditors may decide (with at least 66% of the voting shares) to terminate PIRP and instead initiate CIRP.
MISCELLANEOUS TERMS
Terms Meanings
Bank Run Bank runs are situations where depositors withdraw their deposits from banks for the fear of the safety of their
deposits. As more and more people withdraw, the chances of the bank going Defaulter increases, compelling
more people to withdraw their money. In extreme situations, the reserves of the bank might not be sufficient
to cover all the withdrawals. As a result, the bank would collapse.
Capital Capital adequacy Ratio is the ratio of banks capital to risk. It is the percentage of bank’s total capital to the total
Adequacy Ratio risk weighted asset. It measures a bank’s financial strength by using its capital and assets.
(CAR) In India, RBI tracks a bank’s CAR to ensure that the bank can absorb a reasonable amount of loss and complies
with statutory Capital requirements. Higher CAR indicates a bank is better capitalized. CAR ensures that a layer of
safety is present for the bank to manage its own risk weighted assets before it can manage its depositors’ assets
Basel Norms Basel Norms are the norms issued by the Basel Committee on Banking Supervision (BCBS) for the international
banking regulations. The Basel norms have three aims: Make the banking sector strong enough to withstand
economic and financial stress; reduce risk in the system, and improve transparency in banks. The Basel Committee
has issued 3 such guidelines to realize its objective which are known as Basel I, II and III norms.
Basel I Introduced in 1988, these norms focused on the credit risk faced by the banks. To overcome an unexpected credit
risk, the minimum capital requirement was fixed at 8% of risk weighted assets (RWA).
Basel II Introduced in the year 2004, these norms aimed at more regulation than Basel I. It introduced 3 pillars upon
which regulation was to be conducted by the banks:
i. Minimum Capital Requirements: Banks have to maintain CAR of 8%. Tier 3 capital was introduced.
ii. Supervisory Review Process: Banks have to place better risk management techniques in monitoring all three
kinds of risks namely credit, market and operations risks.
Disclosure & Market Discipline: Bank’s disclosure and compliance requirements are increased. It meant
iii.
greater transparency in the banks. It is mandatory for the banks to disclose their CAR, risk exposure and
other such risk assessment parameters to the Central Bank periodically
Terms Meanings
Basel III These norms were introduced in 2010 because of the 2008 financial crisis with an objective to make a resilient
and transparent banking system, improve banking sector shock-absorbing capacity and more focus on CAR. It
was based on 3 main parameters.
i. Capital requirements: Capital Conservation Buffer under which financial institutions will be required to hold
a capital conservation buffer of 2.5% to withstand future periods of stress. CAR requirements remained at
8%, but increased the portion of that capital that must be in the form of Tier 1 assets, from 4% to 6%. It also
eliminated Tier 3 from the calculation.
ii. Liquidity requirements: Two liquidity ratios were introduced namely: Liquidity Coverage Ratio (LCR) i.e., to
have a high-quality liquid asset to meet short term requirements (30 days) and Net Stable Funds Rate (NSFR)
requires banks to maintain a stable funding profile to meet medium-term requirements (1 year).
iii. Leverage ratio: Basel III introduced a minimum “leverage ratio”. The leverage ratio was calculated by dividing
Tier 1 capital by the bank’s average total consolidated assets; the banks were expected to maintain a leverage
ratio in excess of 3% under Basel III.
India and Basel •
The RBI introduced the Basel norms (Basel I) in India in 1999
Norms •
The implementation of Basel II was announced in 2007.
•
Basel III norms were to be introduced in March 2019 but RBI extended the deadline to March 2020 and in
light of COVID19 pandemic it was further extended by 6 months to April 2021.
•
Indian banks are following Basel II norms at present and Basel III norms are being implemented at present
in phases.
Teaser Loan A teaser loan is any loan that offers a lower interest rate for a fixed amount of time as a purchase incentive.
Teaser loans can include personal loans, home loans, car loans, etc. These loans are considered as the aspect of
subprime lending as it lends to borrowers of low credit ratings. RBI is cautious about these teaser loans and hence
has increased the standard asset provisioning of teaser loans to discourage the banks from offering these loans
Public Credit The RBI had constituted a High Level Task Force (Chair: Mr. Y. M. Deosthalee) to assess the need and scope of
Registry setting up a Public Credit Registry in India. The task force submitted its report on April 4, 2018. A public credit
registry refers to an extensive database of credit information of borrowers that is accessible to all lending and
credit decision-making institutions. Typically, the registry is managed by a public authority like the central bank
of the country.
Willful Defaulter According To RBI, a unit is Willful Defaulter when:
a. The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the
capacity to honour the said obligations.
b. The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilized the
finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for
other purposes.
c. The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off
the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor
are the funds available with the unit in the form of other assets.”
FINANCIAL INCLUSION
Financial inclusion is defined as the process of ensuring access to financial services and products needed by vulnerable
groups (such as weaker sections) and low-income groups at an affordable cost.
Measures taken to promote financial inclusion in India

Measures taken to promote financial inclusion in India
Measures taken to promote Nationalisation of Bank + SHG-Bank Linkage Programme + Microfinance Institutions (MFIs) + Business
financial inclusion in India Correspondents (BCs) + Aadhaar-enabled Payment Systems (AEPS) + Pradhan Mantri Jan Dhan Yojana
(PMJDY) + Pradhan Mantri Jan Dhan Yojana (PMJDY) + National Strategy for Financial Inclusion
2019-2024
National Strategy for It sets forth the vision and objectives of financial inclusion policies in India. RBI identified 6 strategic
Financial Inclusion 2019- objectives of financial inclusion which are as follows:
2024 Universal access to financial services + Providing basic bouquet of financial services + Access to
livelihood and skill development + Financial literacy and education + Customer protection and
grievance redressal + Effective coordination.
CHAPTER 4
Monetary Policy and Financial Market

Monetary Policy
Meaning Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply
and interest rate. It is the demand side economic policy used by the government of a country to achieve macroeconomic
objectives like inflation, consumption, growth and liquidity.
India The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit
control policy, and moral persuasion and through many other instruments. Using any of these instruments will lead to
changes in the interest rate, or the money supply in the economy.
Under the Reserve Bank of India, Act,1934 (RBI Act,1934) (as amended in 2016), RBI is entrusted with the responsibility
of conducting monetary policy in India with the primary objective of maintaining price stability while keeping in mind
the objective of growth.
GOALS OF MONETARY POLICY
Goals Explanations
Economic growth RBI adopts cheap credit policy by reducing interest rates------→Investment in the economy is
encouraged-------→ results in economic growth.
Price Stability Price stability is the primary goal of monetary policy. When the economy suffers from recession-----
→monetary policy followed by RBI is cheap money policy or easy money policy
Exchange Rate By altering the foreign exchange reserves, RBI tries to influence the demand for foreign exchange and tries
Stability to maintain exchange rate stability. RBI intervenes in the market by buying or selling foreign currencies.
When RBI sells dollars------→increase dollar supply in the market------→ it reduces the rupee liquidity in
the system-------→ Dollar inflow into the market will strengthen the rupee.
Generating Cheap money policy followed by RBI-----→ credit supply can be encouraged------→ Investment is encouraged
Employment in the market--------→ create new jobs in different sectors of the economy.
Broad objective of As defined by former RBI governor C. Rangarajan:

Monetary Policy in • To regulate monetary expansion so as to maintain a reasonable degree of price stability
India • To ensure adequate expansion in credit to assist economic growth
CLASSIFICATION OF MONETARY POLICY
Expansionary/Cheap Monetary Policy

Meaning The expansionary monetary policy means injecting more money into the market and economy so that it can
expand. If a country is facing a slowdown or recession, the monetary authority can go for an expansionary
policy that aims to increase economic growth and activity.
Monetary Policy and Financial Market 49
Working of • Lower interest rate by the banks--------→ Borrowing becomes cheaper-----→ encourages firms to invest and
expansionary consumers to spend.
monetary policy • Lower interest rates-------→ reduces the cost of interest repayments-------→ Households have greater
disposable income -------→encourages spending.
• Lower interest rates reduce the incentive to save.
Note: In addition to cutting interest rates, quantitative easing is also pursued by the government. Under
quantitative easing, Central bank creates money to buy government bonds from commercial banks.
The RBI infuses money into the economy by buying financial assets from commercial banks and private
entities--------→ leads to an increase in banks’ reserves-----→Lending of credit by the bank increases----→ Thus
encouraging firms to invest and consumers to spend.
Contractionary/ Tight/ Dear Monetary Policy
Meaning It is a kind of policy which lays emphasis on reduction in the level of money supply in the economy for a lesser
spending and investment. Thus to slow down an economy.
Working of Tight Raising Interest Rates
monetary policy • Raising Interest Rates by the banks-------→ Borrowing becomes more expensive-------→ Firms and consumers
are discouraged from investing and spending.
• Higher interest rates-------→Saving becomes more attractive--------→ Firms and consumers are more likely
to keep saving money in the bank rather than spend.
• Higher Interest rates-------→Reduced disposable income---→Consumer spends less.
Open Market Operation
Besides, Central banks can also sell long-dated government bonds to the banking sector. By selling bonds, banks
see a reduction in liquidity and therefore reduce lending.
INSTRUMENTS OF MONETARY POLICY
Quantitative Methods
These instruments are designed to control the aggregate volume/money of the bank credit in the economy. It includes
bank rate, repo rate, reverse repo rate, CRR, SLR, open market operations etc. It includes bank rate, repo rate, reverse
repo rate, CRR, SLR, open market operations etc.
Bank rate It is the interest rate at which RBI extends advances to commercial banks.
Mechanism
Increase in bank rate--------→ increases the cost of borrowing by the commercial Banks-------→ reduces
commercial banks borrowing from the central bank-------→ deposit rate and other lending rates in the market
will go up-------→ the flow of money from the commercial banks to the public gets reduced-------→ lead to
contraction of overall credit in the economy
Open Market Under OMO, the Central Bank buys and sells government securities in the financial market to influence the
Operation (OMO) money supply in the economy. It is conducted by the Reserve Bank of India (RBI).
Mechanism
• When there is excess liquidity in the market, RBI resorts to the sale of securities, thereby absorbing the
extra rupee liquidity in the market.
• Similarly, when the liquidity is tight in the market, RBI buys back the securities, thereby increasing liquidity
in the market.
Liquidity Adjustment Facility
Repo Rate (short- It is the rate at which commercial banks borrow money from RBI in case of a shortage of funds. Whenever
term borrowings) banks have any shortage of funds they can borrow from the RBI, against securities.
Mechanism
• When RBI increases the repo rate---------→ borrowing money from the RBI becomes costly by
the banks----------→ commercial banks increases the interest rates they charge (on their loans)
----------→discourages people from spending-------→ Thus, RBI controls inflation by reducing the money
supply in the market.
• Contrary, when the RBI wants to encourage economic activity and increase the money supply in the
economy, it reduces the repo rates.
Reverse Repo It is the interest rate that the RBI pays commercial banks when they park their excess cash with the central
bank.
Mechanism
• When the RBI increases the reverse repo rate------→banks get a higher rate of interest from RBI-------→
banks prefer to lend their money to RBI instead of lending to public and business firms------→Money
supply in the market is reduced and inflation is controlled.
• Contrary, when the RBI wants to encourage economic activity and increase the money supply in the
economy, it reduces the Reverse repo rate.
Note: Repo rates and reverse repo rates form a part of the liquid adjustment facility (LAF). Repo and Reverse
Repo Rates are also referred to as the Policy rates.
Variable Reserve Ratio
Cash Reserve Ratio It is the amount of minimum deposit that the commercial banks are required to maintain with RBI. Banks
(CRR) don’t earn any interest on this money.
Statutory Liquid It is the amount which a bank has to maintain in the form of cash, gold or approved securities. These are not
Ratio (SLR) reserved with the Reserve Bank of India (RBI) but with banks themselves.
Mechanism
• ↓ SLR/CRR→ ↑ money supply with banks → ↓ interest rate → ↑ consumption→ ↑ investment→ ↑
output→ ↑ growth.
• CRR and SLR regulate liquidity and credit growth in the economy.
• When SLR/CRR increases, the money supply with banks decreases. Opposite happens when SLR/CRR
decreases.
Other measures
Standing Deposit SDF is an additional tool introduced by the RBI recently for absorbing liquidity without any collateral. By
Facility (SDF) removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of
monetary policy.
In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF.
The SDF would replace the Fixed Rate Reverse Repo (FRRR) as the floor of the Liquidity Adjustment Facility(LAF)
corridor.
The fixed rate reverse repo (FRRR) rate will remain part of the RBI’s toolkit and its operation will be
at the discretion of the RBI for purposes specified from time to time.
This means that FRRR along with the SDF will impart flexibility to the RBI’s liquidity management
framework
Marginal Standing It is a facility under which scheduled commercial banks can borrow an additional amount of money overnight
Facility (MSF) from the Reserve Bank at a penal rate of interest.
Characteristics
• Under MSF, banks can borrow funds up to one per cent of their net demand and time liabilities (NDTL).
• The banks use this window in an emergency when interbank liquidity dries completely.
• It is the last resort for banks once they exhaust all other borrowing options, including the liquidity
adjustment facility.
• MSF is always fixed above the repo rate.
Long-Term Reverse •
It is a mechanism to facilitate the transmission of monetary policy actions and the flow of credit to the
Repo Operation economy.
(LTRO) This helps in injecting liquidity into the banking system.
Funds through LTRO are provided at the repo rate.
It will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing
Facility (MSF) operations.
LTROs are conducted on Core Banking Solution (E-KUBER) platform.
Difference between SLR and CRR

CRR SLR
It requires banks to have only cash reserves with the RBI. Banks are asked to have reserves of assets like RBI approved securities,
cash and gold.
Either stored in the bank’s vault or is sent to the RBI. SLR has to be maintained with the bank itself.
Banks earn no return under CRR Banks earn returns under SLR.
It helps mainly in controlling liquidity by trapping cash with It controls excess credit growth by making banks invest in a few
RBI. instruments which are SLR permissible avoiding credit to the public
Difference between Repo Rate and Bank Rate
Repo Rate Bank Rate
It is charged for the repurchasing of securities sold by the It is charged against the loan offered by the central bank to commercial
commercial bank to the central bank. banks.
Government securities as collateral are required under repo Collaterals are not required for taking loan under bank rates
rate for taking loan
It is a short-term financial instrument used by commercial It is a long-term financial instrument used by commercial banks
banks to fulfil their financial needs.
Qualitative Measures
Rationing of Credit • It aims to control the purpose for which the credit is being granted by commercial banks.
• For example, a central bank can fix the maximum amount of loan and advances for every
commercial bank.
• Quotas are also fixed by RBI for various sectors of the economy. It is done to restrict all
liberalized loan conditions for a particular sector.
Direct Action The central bank may refuse to sanction further financial accommodation to a bank whose existing
borrowing are found to be in excess of its capital and reserves.
Moral Suasion Under this method, RBI may give advice or persuade commercial banks to cooperate with it in
implementing its credit policies. These are only suggestions and banks are not legally obliged to
follow.
Publicity A policy can be effectively successful only when an effective public opinion is created in its favor.
Regulation of Consumer’s The down payment is raised and the number of installments reduced for the credit sale.
Credit
Changes in the Marginal A central bank can prescribe margin requirements for the purpose of preventing an excessive use
Requirements on Security of credit for stock exchange speculation. In India, RBI increases margin requirements for a particular
Loans: sector to restrict the flow of money in that sector.
MONETARY POLICY FRAMEWORK IN INDIA
Monetary Policy Framework in India

The Framework •
The Government of India and Reserve Bank of India signed a Monetary Policy Framework Agreement
in 2015. The framework targets fixing the policy rates based on evaluating the current and evolving
macroeconomic situation.
•
The Reserve Bank of India (RBI) Act, 1934 was amended In May 2016 to provide a statutory basis for the
implementation of the flexible inflation-targeting framework. Under the framework, the target of inflation
is to be set by the Government of India, on the advice of the Reserve Bank, once every five years. The
targeted range of inflation should be 2% to 6% (4±2%).
Monetary Policy According to section 45ZB of the amended RBI Act, 1934, an empowered six-member monetary policy
Committee (MPC) committee (MPC) is constituted by the Central Government. The first such MPC was constituted on September
29, 2016. The Committee is responsible for fixing the benchmark interest rate in India.
Composition
1. Governor of the Reserve Bank of India—Chairperson, ex officio;
2. Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy—Member, ex officio;
3. One officer of the Reserve Bank of India to be nominated by the Central Board—Member, ex officio;
4. Three members nominated by the central government.
a. These members (nominated by the central government) are recommended by a selection cum search
committee headed by the cabinet secretary. RBI governor is also a member of this committee.
b. They hold office for four years or until further orders. They are not eligible for reappointment.
NOTE:
• The quorum for a meeting shall be four members, and each member has one vote.
• In case of a tie, the RBI governor will have a casting vote, but there is no veto to the governor.
• RBI has to organize at least four meetings of the MPC in a year
MISCELLANEOUS TERMS
Terms Meanings
Liquidity trap It is a situation when expansionary monetary policy (increase in money supply) does not increase the
(Monetary policy interest rate, income and hence does not stimulate economic growth. It is a situation in which the general
becomes ineffective) public is prepared to hold on to whatever amount of money is supplied, at a given rate of interest. They
do so because of the fear of adverse events like deflation, war.
A liquidity trap is characterized by
• Very low-interest rates
• Low inflation
• Slow/negative economic growth
• Preference for saving rather than spending and investment
• Monetary policy becomes ineffective in boosting demand
Terms Meanings
Monetary Policy Despite reduction in policy rates by RBI (since January 2011) the credit growth of banks in India have
Transmission in India slowed down. Some of the major reasons behind weak transmissions of monetary policy in India are:
and Related Issues Health of the banking sector: Banks with high NPAs face liquidity crunch that further impacts
effective monetary transmission.
Financial inclusion: Banking habits among a large proportion of the vast rural population is still
weak. The influence of RBI’s monetary policy instruments touches only the deposit segment.
Competition from other financial saving instruments: Instruments like Public provident fund,
national savings certificate are risk-free, and people tend to divert a part of their savings to these
instruments rather than bank deposits.
Different views on Experts have also questioned policy of increasing interest rates to combat inflation.
increasing interest
rates by RBI to curtail Views against increasing interest rates Views by RBI for increasing interest rates
Inflation Curtailing inflation can sometimes come at the RBI believes that there is sufficient liquidity in the
expense of economic growth. High Interest rates system, so deposit and lending rates will not rise
can become major barrier to boosting growth. immediately.
Investors do not invest rather hold their Banks have seen significant inflows of FCNR
investment plans pending any easing of deposits and are looking for ways to deploy those
monetary policy by the RBI. funds.
Industrial growth is also hampered due to huge Tighter policy action to combat the inflation will
cost of fund borrowing in the market help revive growth.
Urjit Patel Committee In January 2014, RBI appointed an expert committee headed by Urjit Patel to examine the existing
monetary policy framework. Few of the recommendations are as follows:
• Inflation should serve as the nominal anchor for framing monetary policy.
• The inflation target should be set at 4%, with a 2% margin of error around it.
• The inflation target should be defined in terms of headline CPI inflation.
• Monetary policy committee should make monetary policy decisions
FINANCIAL MARKETS
Financial Markets
Meaning A financial market is a market for the creation and exchange of financial assets. Financial
markets exist wherever a financial transaction occurs.
Functions
Mobilisation of Savings and It gives savers the choice of different investments and thus helps to channelize surplus funds
Channelling them into the most into the most productive use.
Productive Uses
Facilitating Price Discovery In the financial market, the households are suppliers of funds and business firms represent
the demand. The interaction between them helps to establish a price for the financial asset
which is being traded in that particular market
Providing Liquidity to Financial Financial markets facilitate easy purchase and sale of financial assets. In doing so they provide
Assets liquidity to financial assets, so that they can be easily converted into cash whenever required.
Classification
Money market • A market for short-term debt securities.
• Istruments: Treasury bills, Commercial papers, Cash Management Bills etc
Capital Market • A market for long-term debt and equity instruments.
• Instruments:
1. Primary Market: Initial public offer (IPO), Follow on public offer (FPO)
2. Secondary Market: Bond, Share, Debenture, etc
MONEY MARKET
Organised Money Market

Money Market
Meaning •
The money market is a market for short-term funds.
•
It deals in financial assets whose period of maturity is below 1 year
Consist Reserve Bank of India, Commercial Banks, Cooperative Banks and other specialised financial institutions. The
RBI is the leader of the money market in India
Segments Unorganized Money Market and Organised Money Market.
Role of RBI in •
Maintain liquidity and short-term interest rates at levels consistent with the monetary policy objectives of
organised Money price stability
Market RBI influences liquidity and interest rates are through cash reserve requirements (CRRs),
open market operations (OMOs), repos, changes in bank rates, and, on occasion, foreign
exchange swap operations
Instruments of Organized Money Market
Treasury bills • It is a short-term instrument (Not exceeding 364 days) issued by the Reserve Bank on behalf of the
(T-bills government to meet the short-term requirement of funds.
• Currently, the Government of India issues four types of treasury bills, namely, 14-day, 91-day, 182-day and
364-day
Features of Treasury Bill
• Sold on discount of the face value and repurchased at face value.
• are highly liquid instruments
• Banks are allowed to keep Treasury Bills as part of their SLR requirements
Cash • It is short-term security sold by RBI on behalf of the Government of India to raise money for the temporary
Management needs of the Central Government.
Bills Features:
• The maturity is less than 91 days
• issued at a discount to the face value and repurchased at face value
• Banks are allowed to keep CMBs as part of their SLR requirements
Certificate of • They are issued by commercial banks and selected Financial Institutions that have been permitted by RBI
Deposits (CDS) to raise short-term funds.
Features:
• Maturity period of CDs issued by banks is more than 7 days and less than 364 day.
• Regional Rural Banks (RRBs) was permitted to issue Certificates of Deposit (CDs) on 2021.
• issued in a minimum denomination of Rs 5 lakh and in multiples of Rs 5 lakh thereafter
Commercial • CP is a popular instrument for financing the working capital requirements of companies.
Papers (CP) Features:
• issued for a period ranging from 15 days up to one year
• CP can be issued in denominations of Rs.5 lakh or multiples thereof
Commercial Bill In a business transaction, If any seller does not want to wait or is in immediate need of money, he can draw a
bill of exchange in favour of the buyer.
Features:
• The maximum allowed period is 90 days
Call Money and •
When money is borrowed or lent for a day, it is known as call (overnight) money. It is repayable on demand
Notice money and its maturity period is one day. The rate of interest paid on call money is called the call rate.
•
When money is borrowed or lent for more than a day and up to 14 days, it is known as notice money. No
collateral security is required to cover these transactions.
•
Mainly used by the banks to meet their temporary requirements of cash. It is the inter-bank funds market
in India.
Comparisons
Call Money Treasury Bills Certificate of Commercial Paper Cash Management
And Notice Deposit Bills.
Money
Who can issue Banks Reserve Bank Scheduled Highly rated corporate Reserve Bank
it? on behalf of the Commercial Banks, borrowers, All-India financial on behalf of the
government Regional Rural institutions (FIs) government.
Banks and Small
finance bank
Who can buy? Banks Individuals, trusts, All persons resident Individuals, banking Individuals,
institutions and in India. companies, Foreign trusts, institutions
banks can purchase Institutional Investors (FIIs) and banks can
T-Bills. with limitations, corporate purchase Cash
bodies registered or management bills.
incorporated in India.
Maturity Call money Maximum maturity Shall not be less Minimum of 15 days and a Less than 91 days
– 1 day period of 364 days than seven days maximum up to one year
Notice In 4 maturities: and shall not from the date of issue.
money – 2 14 days, 91-day, exceed one year.
to 14 days 182-day and 364-
day.
Denominations Minimum issued in denominations of
denomination of Rs.5 lakh or multiples thereof
₹5 lakh and in
multiples of ₹5 lakh
thereafter.
Terms associated with organised Money Market

Terms associated with organised Money Market
Banker’s acceptances •
It is a bill of exchange drawn on by a bank and ‘accepted’ as its commitment to pay a third party.
Time draft •
It is a document that acknowledges a promise to pay after a certain period of time.
Bill of Exchange A bill of exchange is defined as a written instrument containing an unconditional order signed by the maker
(creditor) directing a specific person to pay a specific sum of money only to, or to the order of, a specific
person.
Promissory note A promissory note is a document that is used when a person makes a written promise to pay a certain sum
of money unconditionally to another person or according to his order.
It can be negotiable or non-negotiable
Money market •
These funds are a collective pool of various investors’ savings who want to make money with their
mutual funds savings. It is regulated by SEBI.
•
These funds invest in liquid assets of high quality, such as treasury bills (T-Bills), repurchase agreements
(Repos), commercial papers, and certificates of deposit.
Repurchase •
Acts as a borrowing instrument by selling securities with an agreement to repurchase the securities at
agreements (Repos) a mutually agreed future date at an agreed price that includes interest on the borrowed funds.
Unorganised Money Market

Meaning In unorganised money market, activities are not regulated like organised money markets in India, but few are
recognized by the government.

Different types of unorganised market are as follows
Traditional Money •
People can go to traditional money lenders to borrow money during an emergency situation. They can
Lenders borrow without using collateral.
•
The Interest rates charged are very high.
Chit Fund •
In a chit fund scheme, a group of people contribute periodically towards the chit value for a duration equal
to the number of investors (members or subscribers).
The amount collected is given to the person, through a lucky draw (lottery system) or an auction.
In the auction allotment system (aka Reverse Auction), the person who bids the lowest bid (agrees to
claim the lowest amount) gets the money.
The amount forgone by the winning bidder is then distributed among the other members equally after
deducting the foreman’s commission and other charges
Ponzi Schemes •
It is a fraudulent investing scam promising high rates of return with little risk to investors.
• It works like a pyramid scheme and generates returns for older investors by acquiring new investors, who
are promised a large profit at little to no risk.
•
It relies on a constant flow of new investments to continue to provide returns to older investors, and when
the flow of fresh investments runs out, the scheme falls apart.
CAPITAL MARKET
Capital Market
Meaning •
Capital market is a market for long-term funds.
•
It includes both- Equity and Debt markets.
Types • Primary markets and secondary markets

• Another important division in the capital market is made based on the nature of security traded, i.e. stock
market and bond market
Primary Market •
Deals with new securities being issued for the first time.
•
Investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals
Secondary •
It is a market for the purchase and sale of existing securities
market •
Securities are traded, cleared and settled within the regulatory framework prescribed by SEBI
Instruments of • Pure instruments: Shares, bonds, and debentures are examples of pure instruments. They do not have any
Capital Market similarities.
• Hybrid instruments: Hybrid instruments combine features such as a bond and an equity investment.
• Derivatives: Derivative Instruments have no intrinsic value and are derived from one or more financial assets.
Futures and options are two examples of derivatives.
Capital Market Instruments

Share
Meaning •
Shares are units into which the total share capital of a company is divided.
One share is the smallest unit of the entire share capital.
•
The shareholders receive dividends (not interest) as return from the company. They also suffer losses if the
price of shares go down.
Share
Classifications • Equity shares: It is also referred to as an ordinary share.
It gives the shareholder ownership proportional to the amount of shareholding
Dividends to equity shareholders depend on the profit and company policy.
Equity share holders can vote in the Annual General Meeting of the company.
Equity share are traded in stock Market.
Equity share holders share the loss (if any) incurred by the company.
• Preference shares: Preference shareholders earn only dividends, which are fixed but have no voting rights.
However, they have ownership in the company, but they cannot be part of its management.
They receive dividends first, i.e. before equity shareholders.
When a company is liquidated, preference shareholders are paid first.
These are a lesser risk instrument as they offer fixed dividends.
Debentures
Meaning • Debentures are the debt instruments with a fixed rate of Interest issued by a company to raise long-term and
medium-term loans.
Debentures are fully repayable on the maturity date.
• Many Investors prefer debentures because they generally offer a higher interest rate than fixed deposits.
Types of • Convertible debentures - Which can be converted into equity shares of the company at a future date.
debentures • Non-Convertible Debentures - These cannot be converted into shares. Most debentures issued by companies
fall in this category.
• Redeemable debentures - Which are redeemed by the issuer at maturity. This means the principal amount
along with interest will be paid at maturity.
• Irredeemable debentures - Which are not redeemed by the issuer. This means that only interest and not
principal amount will be paid at maturity.
Derivative
Meaning •
. It is a financial instrument which derives its value/price from the underlying asset.
•
Generally stocks, bonds, currency, commodities and interest rates form the underlying asset.
•
The value of the underlying asset is bound to change as the value of the underlying assets keep changing
continuously.
•
A derivative can traded on an exchange or over-the-counter
Types of • Future: It is an agreement between two parties for the purchase and delivery of an asset at an agreed upon
Derivatives price at a future date
• Option: An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract
they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they decide
against it.
• Swaps: Another popular class of derivative, swaps are frequently utilised to exchange one type of cash flow
for another. A fixed cash flow is typically exchanged for a floating cash flow in swaps. For example – India
and Srilanka signed a currency swap agreement wherein they decide to pay for their import and export at
predetermined rates of exchange without bringing in third country currency like the USA dollar.
• Forwards: It is an agreement or contract between two parties to buy or sell a particular asset at a certain price
and date. They are unregulated and are traded over the counter (OTC). They can be customised according to
the needs of the parties involved
Bond
Meaning • A bond is a debt instrument through which government, government agencies borrow funds for a definite
period of time at fixed or floating interest rates.
When bonds are backed by an underlying asset, it is known as secured bonds.
Unsecured bonds are not backed by any asset.
Type of Bond Instrument
Coupons Bond •
Coupons are the interest rate paid on the bonds.
•
Bonds having detachable coupons are called coupon bonds.
•
Coupons are presented to the issuer to claim the interest
Share
Zero-coupon •
These are the bonds that pay zero interest.
bond •
These bonds are often sold at a discount and repaid at face value upon maturity
•
In other words, there is no periodic interest payment on these bonds.
Municipal •
They are debt securities issued by the municipal corporation of a city to raise funds from investors.
bond
Sovereign •
It is a debt instrument issued by the government to meet its expenditures.
bonds •
Sovereign bonds also promise to pay its buyer a certain amount of interest for a stipulated number of years
and repay the face value on maturity.
Sovereign • These bonds are government securities that are denominated in gold grams.
Gold Bond • The scheme was launched by the government in 2015 under Gold Monetisation Scheme.
• They are substitutes for holding physical gold.
• Features:
To be issued by Reserve Bank India on behalf of the Government of India.
The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
The tenor of the Bond will be for a period of 8 years with exit option in 5th, 6th and 7th year,
to be exercised on the interest payment dates.
Minimum permissible investment will be 1 gram of gold
The maximum limit of subscribed shall be 4 KG for individual, 4 Kg for HUF and 20 Kg for trusts
Payment for the Bonds will be through cash payment (up to a maximum of Rs. 20,000/-) or
demand draft or cheque or electronic banking
The Gold Bonds will be issued as Government of India Stocks under Government Security Act,
2006
The Bonds are eligible for conversion into Demat form.
Bonds can be used as collateral for loans.
Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as
notified by the RBI
Green Bond •
A green bond is a debt instrument with which capital is being raised to fund ‘green’ projects, which typically
include those relating to renewable energy, clean transportation, sustainable water management etc.
Blue Bond • It is a debt instrument issued by governments, development banks etc. to raise capital from investors to
finance marine and ocean-based projects.
• Seychelles became the first country (2018) in the world to launch sovereign Blue Bonds. It will help in expansion
of marine protected areas.
• They are a subset of the green bonds.
Social Impact •
It is basically a contract with public sector authority where it pays for better social outcomes.
Bond •
It aims at improving social outcomes for a specific group of citizens.
•
For example - The World Bank, UN Women and Small Industries Development Bank of India (SIDBI) have come
together to launch a five-year tenor women’s livelihood bond (WLB).
Convertible •
A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted
Bond into a predetermined number of common stock or equity shares.
•
The investors get interest payment until the bonds are converted in equity shares.
•
The conversion from the bond to stock can be done at certain times during the bond’s life and is usually at
the discretion of the bondholder.
Inflation •
IIBs are government-issued bonds that guarantee a steady yield regardless of the amount of inflation in the
Indexed economy.
Bonds (IIBs) •
These are designed to provide a hedge and protect investors against macroeconomic risks in a given economy.
•
IIBs will provide inflation protection to both principal and interest payments.
•
IIBs are treated as government securities (G-Sec) and hence they are eligible for repo transactions and short
sales.
Share
Concept of Bond Yield
Meaning It is the rate of return realised on the bond. The return is inversely proportional to the price of the bond, i.e. the
bond yield is not fixed.
Relation More seller-----→ Bonds are in large supply------→ the bond price will go down-----→ bond yield will increase.
between • When bond yield increases, more and more buying of the bonds will occur.
Bond yield This will lead to increased demand for the bonds.
and Bond
Price
Increased demand will propel the bond prices up, thereby leading to a reduction in bond yield,
which will further lead to a reduction in demand.
This goes on in a cyclical form.
Masala Bond
These are rupee-denominated bonds that are issued outside India to raise funds from foreign investors. Both government and
private entities can issue this bond.
• The World Bank’s sister agency International Financial Corporation (IFC) launched ‘Masala Bonds for the first time in 2014.
• The first Masala bond was issued in 2014 by IFC for the infrastructure project in India
• As the bond is pegged into Indian currency, if the rupee rates falls, investors bear the risk.
• IFC used the term ‘Masala’ to evoke the cuisine and culture of India.
• Note: Kerala is the first Indian state to tap into the market for masala bonds. In 2019, state-owned Kerala Infrastructure
Investment Fund Board (KIIFB) issued its ‘masala bond’ of Rs 2,150 crore.
Features:
According to RBI
• Any corporate and Indian bank is eligible to issue rupee denominated bonds overseas
• RBI mandates the proceeds raised from these bonds cannot be used:
In real estate activities, not including the development of integrated townships and affordable housing projects.
Activities prohibited according to Foreign Direct Investment guidelines.
Investing in capital markets and usage of the proceeds for equity investment domestically.
Purchase of land.
On-lending to other entities for any of the above purposes.
• The minimum maturity period for masala bonds raised up to rupee equivalent of USD 50 million in a financial year should be
3 years and for bonds raised above USD 50 million equivalent in INR per financial year should be 5 years.
About KIIB
KIIFB came into existence in November 1999 to handle the investment bonds of the state government, as per the Kerala Infrastructure
Investment Fund Act.
Fund-raising in the primary market

Fund-raising in the primary market
Initial public offer •
IPO is the selling of securities to the public in the primary market for first time.
(IPO) •
After listing on the stock exchange, the company becomes a publicly-traded company, and the shares
of the firm can be traded freely in the open market.
•
Example: 2021- Zomato raised ₹9,375 crores through IPO
Follow on public offer • If a company had already issued IPO shares previously and is again issuing more additional shares to
(FPO) obtain more capital, then it is called FPO.
Preferential Issues •
When an unlisted company offers issues of shares or convertible securities to a select group of investors,
it is known as preferential Issues.
•
A person holding preferential shares has the right to be paid from company assets before common
stockholders if the company goes into bankruptcy.
They usually do not have voting rights and are rewarded only by dividends.
Rights Issue •
It is an offer of new securities by a listed company to its existing shareholders at a discounted price.
•
Unlike IPO, a rights issue is not offered to the general public but only to the existing shareholders in
proportion to their existing holdings
Comparisons
Money Market and Capital Market
Money Market Capital Market
It deals with short-term funds (having maturity up to 1 year or It deals with medium and long-term funds (having a maturity of
less). more than 1 year).
Examples: T- bills, commercial papers, and Certificate of Deposit Examples: Equity shares, preference shares, debentures, bonds
are the main instruments. etc., are the main instruments.
Funds are raised for short-term needs like working capital Funds are raised for long-term commitments like starting a
requirements or cash flow mismatches. business or expansion of the business
Lesser risk due to less maturity period. Greater risk due to a lengthy maturity period.
There is a lesser return in the money market. There is a greater return in the capital market.
RBI is the major regulator. SEBI is the major regulator
Primary and Secondary Market
Primary Market Secondary Market
There is sale of securities by new companies or further (new There is trading of existing shares only
issues of securities by existing companies to investors).
Securities are sold by the company to the investor directly (or Ownership of existing securities is exchanged between investors.
through an intermediary). The company is not involved at all.
The flow of funds is from savers to investors, i.e. the primary Enhances liquidity of shares, i.e. the secondary market indirectly
market directly promotes capital formation promotes capital formation.
Only buying of securities takes place in the primary market, Both the buying and the selling of securities can take place on
securities cannot be sold there the stock exchange.
Prices are determined and decided by the management of the Prices are determined by demand and supply for the security.
company
Shares and Debentures
Shares Debentures
Part of capital of the company. Part of loan of the company.
Holders are the owners of the company Holders are the creditors of the company.
Shareholders participate in the management of the company and Shareholders do not participate in the management of the
control the affairs of the company company and do not control the affairs of the company.
They have voting rights They do not have voting rights.
Dividend on equity shares is paid at variable rates affected by the Interest is paid at pre-determined fixed rates, whether there is
profits of the company. any profit or not.
INVESTMENT FUNDS
Investment Funds
Meaning •
Investment Fund is a way of investing funds (belonging to numerous investors).
•
It pools money from different investors and uses the pooled money to buy securities in the financial
market, where each investor retains ownership and control of their own shares
Investment Funds
Types of Investment Funds
Mutual fund •
A mutual fund is a financial instrument in which money is collected from many investors to form a pool
of money which is then invested in financial assets like stocks, government and PSU bonds, corporate
bonds etc.
•
Its liquidity is high as the mutual funds can be sold easily.
•
The income or profits generated from the pool of money are distributed among the investors after
deducting the management expenses of the fund managers
Hedge Funds •
A hedge fund is a similar investment option catering to high-net-worth individuals.
•
High net worth individuals pool their money into high risky options to earn a high return on investment.
Alternative •
Alternative Investment Funds (AIF for short) are those funds created or established in India as a privately
Investment Fund pooled investment vehicle in order to collect funds from specific investors as per defined investment
policy.
Real Estate •
REIT is similar to a mutual fund where a trust or an Asset management pools a sum of money from
Investment Trust investors to invest in physical real estate assets.
(REIT) •
The return is in the form of rent on real estate projects that in turn is distributed to the unit holders
(investors).
•
The minimum investment in REIT is Rs 50000.
Investment Trust •
INVIT is similar to REIT and the mutual funds.
(INVIT) However, in INVIT the collected sum of money from investors goes towards financing infrastructure
projects.
The return to investors is in the form of profits or revenue generated from these infrastructure projects.
Social Venture •
Social Venture Fund is an impact-first fund that invests in early-stage social enterprises that improve
Fund livelihoods and provide basic goods and services to the poor.
•
It comes under the category of alternate investment fund that invests 75 per cent or more of its corpus
in unlisted securities or partnership interests of social ventures.
Exchange-traded •
An exchange-traded fund (ETF) is a pooled investment security that functions similarly to a mutual fund.
fund (ETF) •
It is a collection of securities that trades on a stock exchange in the same way that a stock does.
•
ETF share prices fluctuate throughout the day as the ETF is bought and sold, as opposed to mutual funds,
which only trade once a day after the market closes.
•
ETFs can hold any type of investment, such as stocks, commodities, or bonds
Types of Investors
Types of Investors
Qualified Institutional • Those Investors that have the expertise and required finance to make large investments in the capital
Investors(QII) market.
• For example - Mutual funds, Insurance companies, Foreign Venture Capital Funds etc. SEBI has separate
registration forms for them.
Foreign Institutional • Foreign investors can be classified in terms of the nature of the investment viz. Foreign Direct Investment
Investors(FFIs) (FDI) and Foreign Portfolio Investment (FPI).
• Foreign portfolio investment (FPI) is a common way to invest in overseas economies. It is an investment
by non-residents in the Indian stock market. Foreign institutional investors are a type of foreign portfolio
investors.
• The FIIs comprises institutions like Pension Funds, Mutual Funds, Insurance Companies etc.
• They are allowed to invest in the primary and secondary capital markets in India through the portfolio
investment scheme (PIS).
Note: Participatory note (P-Notes) are financial instruments issued by a registered foreign institutional
investor (FII) to an overseas investor who wishes to invest in Indian stock markets without registering
themselves with the market regulator, the Securities and Exchange Board of India (SEBI).
Retail investors •
These investors buy shares in lesser quantities and also have lesser money at their disposal.
Types of Investors
Angel investors •
Angel investors are high-net-worth individuals who invest their personal income in business start-ups
or small and medium-scale companies.
Investors Based On Their Buying Behaviour
Jobbers •
These are full time engaged in buying or selling Securities/shares using money from their own pockets.
Stag •
Stag investor buys newly issued Securities from the primary market and sells them in the secondary
market for quick profit.
Bull • Bull investor is that investor who speculates that share prices will rise in the future, so he purchases
them now.
For example – the Price Of HDFC Bank share today is Rs 1500. However, the investor speculates it to rise
to Rs 2000 in the future. So, he will buy more HDFC Bank shares now.
Bear •
Bear investor is that investor who speculates that prices will fall down in the future, so he sells them
now.
TERMS ASSOCIATED WITH FINANCIAL MARKET
Terms Meanings
Securities It was announced in budget 2021, wherein a single new law named “Securities Markets Code” will be created
Market Code by merging older acts: SEBI Act, 199208887, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956
and Government Securities Act, 2007.
Circuit Breaker •
Circuit breakers are triggered to prevent markets from crashing.
System •
The system is triggered if fluctuation in the share prices is more than “x%” than the previous day, then the
stock exchange must stop trading for “y” minutes
Investor •
SEBI requires Stock exchanges (BSE, NSE etc) and commodity exchanges (NSEL, MCX etc) to set up Investor
Protection Fund Protection Fund.
•
IPF covers investors’ ‘non-speculative’ type of losses. For example - If the other party is not delivering shares
because of some court case. It also promotes investor education and awareness.
Unified Bond •
At present, the government bonds’ (G-Sec) market and private sector / Corporate Bonds market are
Market functioning separately.
•
Therefore Budget-2019 promised reform to connect these two platforms, to facilitate increased retail
investors’ participation.
•
In 2020, SEBI proposed “unified bond market” where both G-sec & Corporate Bonds will be available for
buying/selling.
Electronic Gold • Gold companies deposit their gold in the warehouses authorised by Warehousing Development and
Receipts (EGRs) Regulatory Authority (WDRA) and the Warehouse manager in turn generates Electronic Gold Receipts
(EGRs).
• EGRs are then listed on the SEBI regulated electronic gold exchanges from where buyer can purchase the
gold electronically and be assured of the quality.
• Later the buyer may even sell this EGR to another investor or he may go to a warehouse to collect physical
gold.
Commodity •
It is a marketplace where buyers & sellers trade goods in bulk like food grains, cotton, precious metals or
Market energy resources (coal, oil gas).
•
Physical trading and derivatives trading in commodity markets can include spot prices, forwards, futures,
and options on futures.
•
Commodity exchanges were regulated by SEBI since 2015.
Terms Meanings
Options •
It is a contract where the buyer has a right to buy or sell the underlying asset at a certain price during a
certain period of time. There is no obligation on the buyer to perform the contract.
•
The 2 types of Options are as follows-
Call option - It gives a right to the buyer to ‘buy’ the underlying asset at a certain price and
time. It is purchased when the prices are expected to rise.
Put option - It gives a right to the buyer to sell the underlying asset at a certain price and
time. It is purchased when prices are expected to fall down.
Dabba Trading / •
While share trade occurs at stock exchange linked with DEMAT accounts, the Dabba Trades occur in the
Bucketing / Box unofficial books/ledgers of an unscrupulous broker.
Trading •
The broker may or may not execute those orders in the actual DEMAT account. Hence, an investor might
be prone to scam. So, SEBI declared it illegal.
Insider Trading •
Whenever company launches new products, wins unique patents, or undergoes merger/acquisition etc, its
share prices may increase.
•
A person associated with company might use such insider confidential information for buying/selling
shares to make windfall gains.
•
Such insider trading is declared illegal by SEBI.
Algo Trading & • Algo-Trading means some large brokers/companies use algorithmic trading computer programmes to
Co-Location automatically buy/sell securities at a speed and frequency that is impossible for a human trader.
This can be misused for manipulating share prices.
While SEBI has not banned it, but issued technical measures e.g. a single broker/investor
can’t place more than 100 online orders per second.
• Co-location means stock exchange allowing the share broker to install their office/computer systems very
close to Stock Exchange.
Depository • They are a type of negotiable (transferable) financial security certificates which allow investors to hold
Receipts (Drs) shares in equity of other Foreign Public Listed Companies.
• American Depository Receipt- traded on a US National Stock Exchange such as New York Stock Exchange
or American Stock Exchange to raise money by Domestic companies without registering it in USA.
• Global Depository Receipt- GDRs are commonly listed on European stock exchange such as London Stock
Exchange.
• Both ADRs and GDRs are usually denominated in dollars but these can also be denominated in Euros.
• Bharat Depository Receipt- In this case, Non – Indian company will raise money from India without
registering here. For example – A Chinese Company Xiaomi wants to raise money from India.
G-sec Government Securities (G-Sec) are securities issued by Central Government to borrow from financial market
to meet its fiscal deficit. Securities are issued for short term as well as long term
Venture A venture capitalist (VC) is a private equity investor who lends money to companies with high growth potential
Capitalist in exchange for equity stake in the company. This could include funding startup ventures or assisting small
businesses that want to grow but lack access to equity markets.
Public Credit •
PCR refers to a large database of borrowers’ credit information that is accessible to all lending and credit
Registry (PCR) decision-making institutions.
•
It will cover payments, restructuring, defaults, resolutions and even the altering terms of a contract midway
during the life of a credit relationship.
•
All of this would be registered in a single data registry, which is being developed and maintained at the RBI.
•
The Reserve Bank of India (RBI) recommended the formation of a PCR through the Y.M. Deosthalee
committee in 2018.
Foreign Currency •
A convertible bond issued in a currency other than the issuer’s domestic currency is known as a foreign
Convertible currency convertible bond (FCCB). In other words, the issuing company is raising funds in the form of foreign
Bonds currency.
•
It is a hybrid of a debt and equity instrument. It functions similarly to a bond in that it makes regular coupon
and principal payments, but these bonds also allow the bondholder to convert the bond into stock.
Sustainable stock The Sustainable Stock Exchanges (SSE) initiative is a peer-to-peer learning platform for examining how exchanges,
Exchange in collaboration with investors, regulators, and companies, can improve corporate transparency on ESG
(environmental, social, and corporate governance) issues and encourage sustainable investment.
CHAPTER 5
Budgeting and Public Debt

A budget/annual financial statement refers to a statement of the estimated receipts and expenditure of the government
for that particular year. There is a constitutional requirement in India (Article 112) to present before the Parliament a
statement of estimated receipts and expenditures of the government in respect of every financial year which runs from
1 April to 31 March.
Parts of Budget Speech

Part A is the macroeconomic part of the budget where various schemes Part B deals with the Finance Bill, which contains
are announced, and allocations are made to several sectors. The priorities taxation proposals such as income tax revisions and
of the government are also announced in this part. indirect taxes.
COMPONENTS OF BUDGET
Budget Receipts
It includes all the money received by the government of India. They are further divided into Revenue receipts and
Capital Receipts
Revenue Receipt
Revenue Receipts It includes the receipts which are regular. They are further subdivided into Tax Revenue and
Non-Tax Revenue.
Tax Revenue Non-Tax Revenue
• It has all the taxes imposed by the Government • The revenue obtained by the government from sources other than tax is
of India on the People and the Businesses. called Non-Tax Revenue. The sources of non-tax revenue are. Example:
• They are further subdivided into the Direct and Fines, penalties, dividends and profits, Earnings from Public Enterprises,
Indirect Taxes tax revenues Gifts, Grants and Aids, Escheats
Examples of direct taxes are Corporate Tax, • Sources of Non-Tax Revenue: Interest of loans given to states and union
Income Tax etc. territories + Interest on loans advanced to Public Sector Enterprises
Examples of indirect taxes are Goods and (PSEs), Port Trusts and other statutory bodies etc. + Dividends and profits
Service Tax, Excise Duty etc. + Petroleum license + Power supply fees + Fees for Communication
• Sources of Tax Revenue: Income tax + Corporate Services + Broadcasting fees + Road, Bridges usage fees + Examination
tax + Sales tax + Surcharge + Cess etc. fees + Fee for police services + Sale of stationery, gazettes etc. + Fee
for Administrative Services + Receipts relating to Defence Services
Budgeting and Public Debt 65
Sources of Non-Tax revenue of State Government

Police services + Home guards + Electricity + Administrative services + Municipal services + Jobs through state public services boards
+ Sale of stationery + Gazettes
Capital Receipt
Capital Receipts They include Receipts which are not regular in nature.
• It creates liability or reduces financial assets for the Government.
Liability is created when the government receives money
by way of loans.
The sale of government assets reduces the financial
assets of the government.
•
Capital Receipts are further divided into Debt Capital Receipts and
Non-debt Capital Receipts.
Debt Capital Receipts Non-debt Capital Receipts
•
It is the money which the government of India borrows •
These are the Capital Receipts which need not be paid back.
•
It includes borrowing within the territory of the •
It includes the disinvestment proceeds from the sale of Public
country as well as borrowings from the International Sector Enterprises (PSEs) as well as the Recovery of Loans and
Organisations like IMF. Advances made by the Government of India in the Past.
•
It needs to be paid back at some later point in time by
the future generations.
•
If this borrowing is used for regular expenses, then it
may disturb the fiscal position of the country.
•
It might lead to hyperinflation and hurt the economy in
the long term.
Example of Debt Capital Receipt Examples of Non debt capital receipt
•
Loans raised from the public •
Disinvestment proceeds from the sale of Public Sector Enterprises
•
Borrowings from RBI •
Recovery of Loans and Advances made by the Government of India
•
Borrowing from other financial institutions through sale in the Past
of treasury bills
•
Borrowings from the International Organisations like IMF
•
Money kept in public account of India (Post-Office
Savings Accounts, National Savings Certificates, etc),
provident funds.
Budget Expenditure
It includes all the money spent by the Government of India in performing various functions. It includes Revenue
Expenditure and Capital Expenditure.
Revenue Expenditure Capital Expenditure.

•
These expenses are recurring in nature. • These expenses are undertaken for the creation of capital
•
They cannot vary much, except in the case of a financial assets and the socio-economic welfare of the people.
emergency. • For example: Money spent on the creation of schools,
•
Payment of Interest on the Loans taken by the Government hospitals, national highways, railways, ports etc. are included
of India, Salaries and Pensions, Subsidies etc. fall in the in the Capital Expenditure of the government.
category of Revenue Expenditure.
Component of Revenue Expenditure Component of Capital Expenditure
Expenditure which neither creates assets nor reduces liabilities Expenditure which creates assets or reduces liabilities
a) Payment of interest a) Construction of roads, bridges, buildings
b) Payment of salaries and pensions b) Purchase of land and machinery
c) Grants and subsidies c) Investment in shares
d) Education and health services d) Loans to states and foreign government
e) Defence services e) Repayment of loans
TYPES OF BUDGET
Types Meaning
Balanced Budget A government budget is said to be balanced if the expected expenditure of the government is equal to the
anticipated receipts of the government in a particular financial year.
Surplus Budget A budget is said to be surplus when the expected revenues surpass the estimated expenditure for a particular
business year.
Deficit Budget A deficit budget is when expenditure surpasses the revenue for a particular year.
Other Types of Budgets
Zero-Based In this method of budgeting, all expenses are evaluated every time a budget is made. It requires expenses to
Budgeting be justified for each new period
Outcome Budget The major feature of the outcome budget is that it measures the outcome in terms of physical units.
For e.g., the performance of the Ministry of Road Transport and Highways can be measured in the number of
Kms of Highway construction in a year.
Gender This involves gender-based assessment of the budget and involves gender perspective at all levels of the
Budgeting budgetary process to promote gender equality
Performance It measures the performance of a scheme in the last fiscal and uses the data for the allocation and management
Budgeting of the government’s financial resources. In such a budget, every unit of input (like money) is measured against
the corresponding effect it produced on the ground.
Participatory Participatory Budgeting is a democratic process in which community members directly decide how to spend
Budgeting part of a public budget.
E-Budgeting It refers to the digitalisation of budgetary procedures, the diffusion of Open Data (i.e. the diffusion of budgetary
information to the public in an open format) and Big Data (i.e. the use of complex databases of budgetary
information to inform policy- making).
DEFICITS
A budget deficit occurs when budget receipts exceed budget expenditures. This situation is also well known as a
government deficit. Budget Deficits can be classified into the following categories. 1) Revenue Deficit 2) Fiscal Deficit 3)
Primary Deficit
Types of Deficits
Revenue Deficit
Meaning It refers to the excess of total revenue expenditure over total revenue receipts. When government spending
does not result in the production of fixed assets, the spending is termed revenue expenditure.
How to calculate? Revenue Deficit (RD) = Total Revenue Expenditure (RE) - Total Revenue Receipts (RR)
Implication Revenue deficit implies:
• Government is unable to cover its regular and recurrent expenditures under the projected budget.
• It means that the government is dissaving,
• Government will have to borrow to finance its investment and its consumption requirements.
Approaches • The first is to reduce revenue expenditure.
to deal with a •
The second is to increase revenue receipts. Government revenue could be increased through taxes and
revenue shortfall other non-tax sources
Fiscal Deficit
Meaning It is the difference between total expenditure and total receipts (excluding borrowings) throughout a
fiscal year
Fiscal Deficit
How to calculate? Fiscal Deficit =Total Expenditure (Revenue Expenditure+ Capital Expenditure)-Total Receipts other than
borrowings (Revenue Receipts + Capital Receipts other than borrowings).
Implication • Debt Trap: The fiscal deficit represents the government’s total borrowing needs. Borrowing involves
repayment of principal amount and payment of interest as well. Interest payments increase revenue
expenditure, resulting in a revenue deficit. It creates a vicious circle of fiscal and revenue deficits in
which the government takes out more loans to repay the previous loan.
• Inflation: To cover fiscal deficit, government borrows from the Reserve Bank of India (RBI). To meet
the deficit requirements, the RBI prints new currency. It expands the economy’s money supply and
causes inflationary pressures.
• Foreign Dependency: The government also borrows from the rest of the world, increasing its reliance
on other countries.
Approaches to deal •
Fiscal Deficit can be met by Borrowings from internal sources (commercial banks, etc.) or borrowings
with a revenue shortfall from external sources (foreign governments, international organizations etc.)
•
To cover the fiscal deficit, the government may borrow from the RBI using its securities.
Primary Deficit
Meaning It is known as the difference between the current year’s fiscal deficit and the interest payment on the earlier
borrowings. It just shows how much current year budget expenditure is in excess of current year budget
receipts. Its goal is to measure present fiscal imbalances.
How to calculate? Primary Deficit =Fiscal Deficit-Interest Payments

Implication •
It indicates how much of the government’s borrowings will be used for expenses other than interest
payments.
•
A low or zero primary deficit indicates that the government has been forced to borrow due to interest
commitments (on previous loans).
Comparisons between various Deficits

Primary Deficit and Fiscal Deficit
Primary Deficit Fiscal Deficit
Meaning Depicts the distinction between fiscal deficit and It shows difference between total expenditure and total
interest payment. receipts, excluding borrowings
Indicator It represents the government’s total borrowing needs, It represents the government’s total borrowing needs,
excluding interest.
Fiscal Deficit and Revenue Deficit
Meaning Fiscal Deficit Revenue Deficit
Indicator It displays the difference between total expenditure It displays the difference between revenue expenditure and
and total receipts, excluding borrowings. revenue receipts.
Indicator It calculates the government’s total borrowing needs. It indicates the government’s inability to meet its regular and
recurring expenditures.
Other types of Deficits

Types Meaning
Effective It is the difference between revenue deficit and grants for the creation of capital assets. The Rangarajan Committee
Revenue on Public Expenditure proposed it, and later it was introduced in the Union Budget 2011-12. In 2012-13, Effective
Deficit Revenue Deficit was introduced as a fiscal parameter.
Effective Revenue Deficit=Revenue Deficit-Grants in aid for the creation of capital assets
Types Meaning
Monetised It represents the increase in the net RBI credit to the Union Government which is the sum of increases in the RBI’s
Deficit holding of Government debt plus any drawdown by the Government of its cash balance with RBI. To say simply, the
monetised deficit represents the expansion in money by the RBI.
Monetised Deficit=Borrowings from RBI + Draw down balance of government from RBI
DEFICIT FINANCING
The practice of raising funds to offset a deficit generated by an excess of expenditure over receipts, is known as deficit
financing.
Deficit Financing
Meaning The practice of raising funds to offset a deficit generated by an excess of expenditure over receipts, is known
as deficit financing.
When it It happens when the total income of the government (revenue account + capital account) falls below its total
Happens? expenditure. This gap is filled by borrowing from the public through bond sales or the printing of fresh money.
Purposes of •
During a war, to finance defence expenditure
deficit financing •
To bring the economy out of a slump so that incomes, employment, and investment all rise.
•
To stimulate capital formation by mobilising forced savings generated by deficit financing.
•
mobilize resources for massive plan expenditure
How is Deficit • Borrowing from Foreign Governments
financing met? • Borrowing from the banking system
• Obtaining funds from the Reserve Bank of India. When the government borrows from the RBI, the latter
lends by printing more money. As a result, ‘new money’ enters the market in both cases.
Note: It is important to remember that borrowing from the public by selling bonds is not considered deficit
financing.
Effect of Deficit • Inflation: The circulation of money in the economy is increased by the printing of new currency notes. This
Financing causes inflationary pressures to rise, causing prices of goods and services in the country to rise.
• Development is accelerated: When the government needs to finance a deficit, it usually borrows from
the Reserve Bank. The interest paid to the Reserve Bank is actually returned to the government as profits.
Deficit financing allows resources to be used much sooner than they would otherwise. The development is
accelerated.
• Forced savings: Public consumption tends to be reduced by deficit-led inflation. This is known as ‘forced
savings,’ and it can be used to produce capital goods.
• Income Distribution: It is claimed that deficit financing exacerbates income inequality. This is due to the
fact that it generates surplus purchasing power.
• Effects on investment: Investment suffers as a result of deficit financing. When the economy experiences
inflation, employees demand higher wages in order to survive. If their demands are met, the cost of
production rises, demotivating investors. Lower investment in the economy leads to lower production of
goods and services and lower GDP.
• Crowding out effect: Deficit financing also leads to crowding out effect i.e. if the government itself goes on
borrowing from the banks of the country, the other investors may be left out.
Advantage and Disadvantage of Deficit Financing

Advantages Disadvantage
•
The surplus money of the taxpayer is lent to the government in • It causes inflation and a rise in prices which can prove to
deficit financing, so the taxpayer is not impacted. be a vicious cycle.
•
B orrowing from the RBI creates more money, and the • Individuals with fixed sources of income are not benefited,
interest payments linked with the borrowing are repaid to the which can lead to income inequality.
government. • It disrupts the entire investment system since most
•
It strengthens the government’s financial position. investment is drawn to industries that produce rapid
•
It pushes the government to use unemployed resources, which profits which are not conducive to long-term growth.
can have a multiplier effect on economic development. • Money’s purchasing power may deteriorate, resulting in
a capital loss from the country.
PUBLIC DEBT
Public debt refers to the sum of total borrowings of the government from internal and external sources.
Public Debt
Types of Public Debt 1). Internal public debt: It is a loan obtained by the government from citizens or various institutions within
the country. It only involves transfer of wealth.
The internal sources can be divided as follow:
• Individuals, who purchase government bonds and securities
• Banks, both private and public, purchase government bonds.
• Non-financial institutions such as UTI, LIC, GIC, and others also purchase government bonds.
• The Central Bank has the authority to lend money to the government.
2). External public debt: When a loan is obtained from another country or an international organization, it
is referred to as external public debt. External Sources:
• Foreign governments: For e.g., India borrowed money from Japan to finance the Bullet train project
between Mumbai and Ahmedabad
• International Institutions: World Bank, IMF, Asian Development bank etc.
Causes for the Increase in Public debt
Economic Many projects (Construction of railways, power projects, etc.) for the country’s economic development must
Development and be undertaken by the government. Governments are always in deficit due to high government spending. Such
Deficit deficits can only be financed through borrowing.
Employment The government has to spend a lot of money to solve the unemployment problem and fight the recession.
The government rely on public debt to accomplish this.
Controlling inflation The government can remove excess money from circulation by increasing public debt, thereby preventing
price increases.
Fighting economic Private investment is scarce during the depression period. The government uses internal and external
depression borrowing to fund compensatory public spending.
Methods of Redemption of Public Debt
Sinking Fund The government uses this method to create a separate fund known as the “Sinking Fund.” Every
year, the government contributes a set amount of money to this fund. By the time the debt
matures, the fund has amassed sufficient amount to pay off the principal as well as interest.
Conversion It denotes the conversion of an old loan into a new loan. A high interest public debt is converted into a low
interest public debt under this system.
Budgetary Surplus When the government presents a surplus budget, it can be used to pay down debt.
Terminal Annuity In this method, the government repays the public debt in equal annual instalments based on a terminal annuity.
Reduction in Rate of Another method of debt redemption is the mandatory reduction in interest rates during a financial crisis.
Interest
Capital Levy A capital levy is imposed by the government on capital assets owned by an individual or an institution. The
collected funds will be used by the government to pay off wartime debts.
Different aspects of Public Debt

Positive Aspects of Public Debt
• Post 1930, public debt became an essential characteristic of the national fiscal policy due to its various positive aspects.
• For huge infrastructure projects, the governments started raising loans from external and internal sources.
These infrastructure projects create a multiplier effect on the economy by providing employment and decreasing logistic costs
of transportation.
They also attract further investment for another similar project.
• At the same time, the investment in technology increases production efficiency and imparts labor skills.
• Public debt from external sources acts as a foreign exchange reserve and helps import goods and services.
• Recently, India provided a 1-billion-dollar loan to Sri Lanka to enhance its foreign exchange reserves to import essential goods and
services
Negative Aspects of Public Debt

•
The first negative aspect is Inflation. The government uses public debt to finance its capital or revenue expenditure. This
expenditure increases the money supply in the economy
•
Public debt may be used for public welfare schemes. Although these schemes are good for social welfare but do not have sound
economic returns. Thus becoming a tax burden on future generations.
•
Public debt raised from international institutions and foreign countries may lead to a compromise in the sovereignty of the
nation. Such financial institutions dictate their own terms and try to influence the policy in return of debt
TERMS RELATED TO PUBLIC DEBT
Terms Meaning
Liabilities of •
Public debt is the total liabilities of the central government contracted against the Consolidated Fund of
the Union India.
Government •
In India the total debt includes debt taken by Central government and state governments.
The central government is allowed to raise debt from external and internal sources.
On the other hand, the state governments can raise debt only from internal sources. They need
permission of the Central government to raise debt from external sources.
•
The Fiscal Responsibility and Budget Management Act, 2003 sets limitations on the amount of debt that
can be taken by both central and state governments.
Public Account •
Liabilities in the Public Account include provident funds, National Small Saving Fund (NSSF).
liabilities •
This fund has to be paid back at some time to their rightful owner and they do not belong to the government.
Debt to GDP •
The debt to GDP ratio is defined as the total debt of a particular to the gross domestic product of a country.
Ratio •
It indicates the ability of a country to pay back its outstanding debt. It gives a clear picture how much a
debt a government owes and how much it produces to pay off its debts.
•
The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of
default.
•
In India, as per FRBM act the Debt to GDP ratio should be around 60% i.e. 40% for Central Government
and 20% for the State Government.
Laffer Curve •
It is a graphical representation showing the relationship between the tax rates and the actual tax revenue
realized. It shows that if the tax rates are kept low, actual tax revenue realized for the government may go
up. This is because more citizens come in the tax net and tax avoidance decreases.
BUDGETARY REFORMS AND FISCAL POLICY
RECENT BUDGETARY CHANGES
Early date of the Budget Presentation

Early date of the Since 2017-18, it is presented on 1 February every year. This means the presentation of the budget is
Budget Presentation advanced by 27 days from the earlier practice. Earlier it was 28 February
Merger of Union Budget and the Railway Budget
Merger The Government of India has merged the presentation of General Budget and Railway Budget in Parliament from the
financial year 2017-18. The merger is based on the recommendations of the Committee headed by Shri Bibek Debroy.
Elimination of Plan and Non-Plan classification

Meaning The government eliminated classification of plan and non-plan budgetary allocation from 2017-18. Henceforth, the
expenditures of the Government are reclassified as Capital and Revenue spending.
Rationalisation of Centrally Sponsored Schemes
Meaning The Union Budget 2016-17 introduced a new classification of Centrally Sponsored Schemes (CSSs).
The 15th Finance Commission also recommended rationalisation of CSSs
New • Core schemes: Focus of CSSs should be on schemes that comprise the National Development Agenda where
classification the Centre and States will work together in the spirit of Team India. Example- Green Revolution.
• Core of the Core Schemes: Those schemes which are for social protection and social inclusion should form
the core of core and be the first charge on available funds for the National Development Agenda. Example-
National Social Assistance Progamme.
• Optional Schemes: The Schemes where States would be free to choose the ones they wish to implement.
Funds for these schemes would be allocated to States by the Ministry of Finance as a lump sum. Example-
Border Area Development Programme.
Rationalisation •
The Union Budget 2022-2023 had also declared a major revamping / ‘rationalisation’ of centrally sponsored
of CSSs in the schemes (CSS).
Budget 2022- •
According to the Budget document, 130 CSSs spanning all ministries have been “rationalized / revamped” into
23 65 schemes.
•
CSSs declared after April 1, 2020 have not been included in the list.
•
The Union Ministry of Women and Child Development that had 19 CSSs is left with only three:
Mission Shakti, Mission Vatsalya, Saksham Anganwadi and POSHAN 2.0
•
Under the Ministry of Animal Husbandry and Dairying, 12 CSSs have been revamped into two schemes; three
have been shut down. The two news schemes are:
Infrastructure Development Fund and Development programmes (Animal Husbandry)
•
Under the Ministry of Agriculture and Farmers’ Welfare, 20 CSSs have been rationalised into three schemes:
Krishionati Yojana, Integrated Scheme on Agricultural Cooperativeand Rashtriya Krishi Vikash Yojana
FISCAL POLICY
Fiscal policy means the budgetary manipulations affecting the macro economic variables – output, employment,
saving, investment etc.
Objective of Fiscal Policy
Full Employment + Price Stability + Economic Growth + External Stability + Equatable Distribution + Capital Formation
+ Regional Balance
Tools of Fiscal Policy

Tools Meaning
Government spending It includes acquiring goods and services for the benefit of the community, it can be classified as Government
Final Consumption Expenditure.
Transfer Payments It is used to describe government payments to individuals via social welfare or development schemes.
Taxes These are fiscal tools. Any changes in taxes affect the average consumer’s income and changes in
consumption lead to changes in real GDP.
Types of Fiscal Policy

Expansionary and Contractionary fiscal policy
Expansionary It is a fiscal policy that aims to stimulate an economy by increasing demand via monetary and fiscal stimulus.
fiscal policy Characteristics:
• It leads to the government lowering taxes and spending more.
• It is designed to boost the economy in time of high unemployment and recession.
• The idea is to put more money in the hands of the consumer to increase the aggregate demands. The increased
demands forces firms to produce more goods and services, resulting in employment generation

Contractionary When the government cuts spending or raises taxes, this is referred to as contractionary fiscal policy. Its name
fiscal Policy derives from the way it contracts the economy. It reduces the amount of money available for spending by
businesses and consumers.
Characteristics:
• It is designed to slow economic growth in case of high inflation.
• In this situation, taxes are raised and government spending is reduced.
Automatic and Discretionary Fiscal Policy
Automatic Automatic stabilization occurs when changing economic conditions cause government expenditures and taxes to
Fiscal Policy/ change automatically, aiding in the fight against unemployment and demand-pull inflation.
Automatic Income taxes and transfers payments such as unemployment benefits, are important automatic stabilisers.
Stabilisers For example: During a recession when people lose their jobs and their earned incomes fall, some significant
changes in government spending and taxes occur automatically. To begin, some unemployed people become
eligible for a variety of transfer payments, particularly unemployment benefits. Second, because the personal
income tax is typically progressive with multiple rates, some unemployed people see a decrease in the percentage
of their income that is taxed, resulting in lower tax payments or a tax refund. These automatic responses to a
recession provide additional money to households for spending through increased transfer payments and lower
taxes. Without this, household spending would plummet even further, and the economy would almost certainly
enter a deeper recession.
Discretionary Discretionary fiscal policy refers to changes in tax rates and/or government spending levels made by the
Fiscal Policy government. When the central government identifies an unemployment or inflation problem, it establishes a policy
objective to address that problem, and then deliberately adjusts taxes and/or spending to address that problem.
For example, the central government could implement a tax cut or raise the tax rate, change personal income tax
exemptions or deductions, grant tax rebates or credits, levy surcharges, initiate or postpone transfer programmes,
and initiate or eliminate direct spending projects.
FISCAL CONSOLIDATION IN INDIA

Fiscal consolidation is a set of policies undertaken by the government to reduce fiscal deficit and debt accumulation.
Increasing the receipts and decreasing the expenditure of the government helps in achieving the target of fiscal consolidation.
How to achieve Fiscal Consolidation?
• Increasing the receipts and decreasing the expenditure of the government helps in achieving the target of fiscal
consolidation.
• Improving tax efficiency can be done by undertaking measures such as eliminating tax evasion, increasing tax compliance
and reducing tax avoidance.
• Broadening the tax GDP ratio by increasing tax base and minimizing tax concessions and exemptions also improves
tax revenues.
• At the same time, a higher economic growth rate will help the government get higher tax revenues.
• Augmentation of tax revenues is crucial in order to bring about fiscal consolidation as there are limitations on reducing
the government expenditure in a country.
Fiscal Responsibility and Budget Management (FRBM) Act, 2003

What is FRBM Act? The FRBM Act, 2003 provides the targets for fiscal consolidation in India.

Key features of the •
The FRBM Act made it mandatory for the government to place the following along with the Union Budget
FRBM Act documents in Parliament annually:
Medium Term Fiscal Policy Statement
Macroeconomic Framework Statement
Fiscal Policy Strategy Statement
•
The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding
liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy
statement.
•
The Act requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the revenue deficit
by 0.5 per cent. If this is not achieved through tax revenues, the necessary adjustment has to come from
a reduction in expenditure.
•
The actual deficits may exceed the targets specified only on grounds of national security or natural
calamity or such other exceptional grounds as the central government may specify.
•
The central government shall not borrow from the Reserve Bank of India except by way of advances to
meet temporary excess of cash disbursements over cash receipts.
•
The Reserve Bank of India must not subscribe to the primary issues of central government securities
from the year 2006-07.
Implementation of •
Since the FRBM Act was enacted, the Government of India has not been able to achieve targets set
the FRBM Act under it. The Act has been amended several times.
For Example, the targets that were to be achieved by 2008-09 were relaxed because of financial
crisis of 2008.
•
As per the latest target of the FRBM Act:
Government is required to limit the fiscal deficit to 3% of the GDP by March 31, 2021.
Government is required to limit debt of the central government to 40% of the GDP by the year
2024-25.
•
However, in the Budget speech of the year 2020, Finance Minister revised the target for fiscal deficit by
invoking the escape clause to 3.8% for FY20 and 3.5% for FY21.
The recourse that had to be taken due to the COVID pandemic.
FRBM Review The FRBM Review Committee (Chairperson: Mr. N.K. Singh) submitted its report in January 2017. The
Committee (2016) Committee proposed a draft Debt Management and Fiscal Responsibility Bill, 2017 to replace the Fiscal
Responsibility and Budget Management Act, 2003 (FRBM Act).
Recommendation:
• Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt
to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for the states.
To achieve the targeted debt to GDP ratio, it proposed yearly targets to progressively reduce the
fiscal and revenue deficits till 2023
• Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson
and two members appointed by the centre. To maintain its independence, it proposed a non-renewable
four-year term for the Chairperson and members. The role of the Council would include: (i) preparing
multi-year fiscal forecasts, (ii) recommending changes to the fiscal strategy, (iii) improving quality of fiscal
data, (iv) advising the government if conditions exist to deviate from the fiscal target
• Deviations: The Committee noted that under the FRBM Act, the government can deviate from the
targets in case of a national calamity, national security or other exceptional circumstances notified by
it. Allowing the government to notify these grounds diluted the 2003 Act. The Committee suggested
that grounds in which the government can deviate from the targets should be clearly specified, and
the government should not be allowed to notify other circumstances
• Debt trajectory for individual states: The Committee recommended that the 15th Finance Commission
should be asked to recommend the debt trajectory for individual states. This should be based on their
track record of fiscal prudence and health.
• Borrowings from the RBI: The committee restricted the government from borrowing from the Reserve
Bank of India (RBI) except when: (i) the centre has to meet a temporary shortfall in receipts, (ii) RBI
subscribes to government securities to finance any deviations from the specified targets, or (iii) RBI
purchases government securities from the secondary market.

Escape clause The Center is permitted to exceed the yearly budget deficit objective under Section 4(2) of the FRBM Act
on given grounds: National security+ war + National calamity+ Collapse of agriculture+ Structural reforms+
Decline in real output growth of a quarter by at least three percentage points below the average of the
previous four quarters.
Medium-Term Fiscal Reform Programs (MTFRPs)

• The concept of Medium-Term Fiscal Reform Programs (MTFRPs) was introduced by the Ministry of Finance in 2000-01.
It was focused on improving the management of tax administration.
• The Eleventh Finance Commission created a Fiscal reform facility (FRF) for fiscal adjustment.
It was based on a 15 percent grant to states by linking it with improved fiscal performance.
The debt write-off scheme for better fiscal governance by the states was laid down by the Twelfth Finance
Commission (TWFC).
Recommendations of the 15h finance commission

Recommendations of the 15h finance commission
Recommendations • The central government should reduce its fiscal deficit to 4% of its Gross Domestic Product by 2025-06
against 6.8% in FY 22.
• The Fiscal deficit of state governments should be at 4% of Gross State Domestic Product in 2021-22, 3.5%
in the following year, and 3% for the next three years.
• Borrowing limits for state governments should be fixed at 4% of Gross State Domestic Product in 2021-
22, 3.5% in 2022-23 and at 3% of GSDP from 2023-24 to 2025-26.
factors to be • Improved tax revenue generation by implementing measures like increasing efficiency of tax administration
taken into by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance.
account in order • Increasing tax-GDP ratio by broadening the tax base, reducing tax concessions and exemptions.
to achieve fiscal • Better targeting of government subsidies and extending Direct Benefit Transfer schemes for more
consolidation subsidies.
TERM RELATED TO FISCAL POLICY
Terms Meaning
Fiscal Stimulus Fiscal stimulus refers to policy measures undertaken by a government that typically reduce taxes or regulations—
or increase government spending—in order to boost economic activity. This is the last resort to achieve price
stability, steady economic growth and promote employment.
Fiscal Multiplier The fiscal multiplier calculates the impact of increased fiscal spending on a country’s economic output (or GDP)
(GDP). Fiscal multipliers are important because they can help guide a government’s policies during an economic
downturn and lay the groundwork for economic recovery.
Twin Deficit The twin deficit problem is an increase in both the fiscal and current account deficits simultaneously.
Current account A current account deficit is a shortfall between the money received by selling products to other countries and
deficits the money spent to buy goods and services from other nations. It is a measure of a country’s trade in which the
value of goods and services imported exceeds the value of products exported.
Low Equilibrium It is an economic situation in which the per capita income is too low to save or invest a part of it. The individuals
trap in such economies live hand to mouth.
Debt vs. Deficit While deficit measures the expenditure revenue gap in a particular year, debt tells the status of the entire
economy, which the government totally owes.
In simple terms, all deficits over the years add to become the total debt.
Human Economics 75
CHAPTER 6
Human Economics
UNEMPLOYMENT
Unemployment
Definition • The National Statistical Office (Previously it was known as National Sample Survey Organisation) defines
unemployment as:
“ A situation in which all those who, owing to lack of work, are not working but either seek work through
employment exchanges, intermediaries, friends or relatives or by making applications to prospective
employers or express their willingness or availability for work under the prevailing condition of work
and remunerations”.
Measure of • The unemployment rate is the most frequent measure of unemployment.
Unemployment The unemployment rate is the number of people unemployed divided by the working population or
people working in the labour force.
Types of Unemployment
Types Meaning
Disguised Under this type of unemployment, more people are employed than actually needed. Marginal productivity
Unemployment of labour is zero in this type of unemployment and is mostly found in the agriculture sector
Structural Under this type of unemployment, there is a mismatch between the worker’s skills and the availability of
Unemployment jobs in the market. Many people in India do not get jobs matching their skills.
Seasonal Under this type of unemployment, people do not have work during certain seasons of the year. For
Unemployment example – Construction Workers
Technological Under this type of unemployment people lose their jobs due to advancements in technologies. For example,
Unemployment Automation is leading to a decrease in jobs in the IT sector.
Cyclical Under this type of unemployment, people lose jobs during the recession (down phase in a business cycle)
Unemployment and get jobs during the boom (growth phase in a business cycle).
Frictional Under this type of unemployment, people are unemployed for a short span of time while searching for a
Unemployment new job or switching between jobs. It is actually the time lag between the jobs. Frictional unemployment
is considered voluntary unemployment because the reason for unemployment is not a shortage of jobs,
but in fact, the workers themselves quit their jobs in search of better opportunities.
Voluntary A person is out of a job on his own choice. Either he wants higher wages or doesn’t want to work at all.
Unemployment
Involuntary It is a situation where a person is willing to work at the prevailing wage rates, but unable to find work due
unemployment to factors beyond his control.
Measurement of Unemployment
Who National Statistical Office (NSO) under the Ministry of Statistics, and Programme Implementation (MoSPI).
Measures?
Daily Status According to this method, a person’s unemployment status is determined for each day of a reference week.
Approach • An individual working for 4 hours or more but up to 8 hours on a day is recorded as employed for the full
day.
• An individual working for 1 hour or more but less than 4 hours is recorded as employed for the half day.
• Accordingly, a person having no gainful work even for 1 hour a day is described as unemployed for a full
day.
It is beneficial in sectors like farming and non-farming households where employment often fluctuates over a
small period within a week.
Weekly Status • This approach is relates to the activity status of a person in the week preceding the date of the survey.
Approach • A person who is engaged in any economic activity for at least one hour and for at least one day in the last
seven days preceding the date of the survey is regarded as employed.
• This same criterion is also considered to determine if a person has made efforts to find employment or not
and is marked ‘seeking/available for work or ‘not available for work’ accordingly
Usual Status • The Usual Status Approach captures long-term unemployment prevalent in the economy
Approach • This approach measures the number of persons who remained unemployed for a major part of the year.
• It records only those persons as being unemployed who had no gainful work for a major time during the
365 days preceding the date of the survey and are actively seeking work
• It gives lowest estimates of unemployment
Sources of data on unemployment

Sources Explanations
Reports of • A census is a procedure of systematically acquiring, recording, and calculating information about the members
Census of of a given population.
India • In India (post-1949), the census has been conducted by the Registrar General and Census Commissioner of
India under the Ministry of Home Affairs, Government of India.
• The data provided by the census is comprehensive but there is a huge delay due to the 10-year gap between
the consecutive censuses.
Periodic • Reliable estimates of employment and unemployment are obtained through labor force surveys. NSO launched
Labour Force the Periodic Labour Force Survey (PLFS) in April 2017.
Survey (PLFS) • The objective of PLFS is primarily two fold-
First, to estimate the key employment and unemployment indicators (viz. Worker Population Ratio, Labour
Force Participation Rate, Unemployment Rate) in the short time interval of three months for the urban
areas only in the ‘Current Weekly Status’ (CWS).
Second one was, for both rural and urban areas, to measure the labor force estimates on key parameters
in both usual status and Current Weekly Status.
• The Periodic Labour Force Survey (PLFS) gives estimates of Key employment and unemployment Indicators:
Labour Force Participation Rate (LFPR): LFPR is defined as the percentage of persons in labour force (i.e.
working or seeking or available for work) in the population.
Worker Population Ratio (WPR): WPR is defined as the percentage of employed persons in the population.
Unemployment Rate (UR): UR is defined as the percentage of persons unemployed among the persons
in the labour force.
Current Weekly Status (CWS): The activity status determined on the basis of a reference period of last 7
days preceding the date of survey is known as the current weekly status (CWS) of the person.
Terms Related to Unemployment

Terms Meanings
Casual worker A casual worker is a worker on a temporary employment contract with generally limited entitlements to
benefits and little or no security of employment. The main attribute is the absence of a continuing relationship
of any stability with an employer, which could lead to their not being considered ‘employees’ at all.
Self-employed Workers who own and operate an enterprise to earn their livelihood are known as self-employed.
Human Economics 77
Terms Meanings
Regular salaried When a worker is engaged by someone or an enterprise and paid his or her wages
employees On a regular basis, they are known as regular salaried employees.
Informal Sector Informal sector represents unregistered businesses where the employers do not offer their workers social
security. All the private enterprises that hire less than 10 employees come under the Informal/Unorganized
Sector category.
Informal sector includes millions of farmers, agricultural labourers, owners of small enterprises, and people
working in those enterprises as also the self-employed who do not have any hired workers.
Formal/Organised All the public sector establishments and those private sector establishments which employ 10 hired workers
Sector or more are called formal sector establishments and those who work in such establishments are formal sector
workers. They enjoy social security benefits
Informalisation of Situation where the workforce in the informal sector increases to the total workforce of the country.
workforce
Employment Percentage changes in employment brought on by changes in GDP, which reflects the labour market’s
elasticity responsiveness.
Gig workers • Gig workers are independent contractors, online platform workers, contract firm workers, on-call workers,
and temporary workers.
• Gig workers enter into formal agreements with on-demand companies to provide services to the company’s clients.
• Examples of Gig Workers include-Cab drivers in Ola and Ubar, Delivery boys in Swiggy and Zomato etc.
• Gig workers can be broadly classified into platform and non-platform-based workers.
Platform workers are those whose work is based on online software apps or digital platforms.
Non-platform gig workers are generally casual wage workers and own-account workers in the
conventional sectors, working part-time or full time
CAUSES OF UNEMPLOYMENT IN INDIA

Large population + Social Factors + Stagnant Agriculture Sector + Loss of small-scale/Cottage Industries + Low investments
in the manufacturing sector + Lack of proper Education and Skills
GOVERNMENT INITIATIVE TO CONTROL UNEMPLOYMENT

MGNREGA + PMKVY – Pradhan Mantri Kaushal Vikas Yojana + Start-Up India Scheme + Stand up India Scheme +
National Skill Development Mission + Pradhan Mantri Mudra Yojana (PMMY) + Garib Kalyan Rojgar Abhiyaan (GKRA) +
Garib Kalyan Rojgar Abhiyaan (GKRA) + Production-Linked Incentive (PLI) Scheme + Aajeevika - National Rural Livelihoods
Mission (NRLM) + National Career Service (NCS) Project.
Note: The schemes would be covered in different booklet
LABOUR REFORMS IN INDIA
Constitution of Second National Labour Commission

Task • To suggest rationalization of existing laws relating to labour in the organised sector, and
• To suggest an umbrella legislation for ensuring a minimum level of protection to the workers in the
unorganized sector.
Report submission The commission submitted its report in 2002.
Major It recommended:
Recommendations • That at the Central level multiple Labour Laws should be codified in 4 or 5 Labour Codes. The integration
should be in group like: Industrial relations; Wages; Social security; Safety; and Welfare and working
conditions.
• Central Government and the State Government should have a uniform policy
• Flexibility in the hours of work per week
• To provide minimum level of protection to managerial and other (excluded) employees too against unfair
dismissal or removal.
Note The first National Labour Commission 1929.
Labour codes introduced by the Government

Code on Wages, 2019
Objective Seeks to regulate wage and bonus payments in all employments where any industry, business, trade or
manufacture is carried out.
Wage Include Include salary, allowance, or any other component expressed in monetary terms. This does not include bonus
payable to employees or any travelling allowance, among others.
Few Features of the Code on Wages
Coverage • The Code will apply to all employees.
Floor wage To remove regional disparity in minimum wages the provision of floor wage has been introduced.
• The central government will fix a floor wage. It may set different floor wages for different geographical
areas.
The minimum wages must be higher than the floor wage.
Advisory Boards • The central and state governments will constitute advisory boards.
Payment of wages • Wages can be paid in coins, currency notes, by cheques, by directly crediting into the bank account or
through electronic mode.
Overtime • The central or state government may fix the number of hours that constitute a normal working day.
Offences • The Code specifies penalties for offences committed by an employer.
Code on Social Security, 2020

Objective To ensure security for all workers, the Central Government has amalgamated 9 Labour Laws into the Social
Security Code in order to secure the right of workers for insurance, pension, gratuity, maternity benefit etc.
Major Features
Applicability The central government may apply the Code to any establishment .
Social Security Fund • The central government will set up a fund for unorganised workers, gig workers and platform workers.
National Social The Board will be created for the purposes of the welfare of the workers (unorganised, gig and platform).
Security Board
Changes in definitions • Expands the definition of ‘employees’ to include contract workers.
• Expands the definition of ‘inter-state migrants’ to include self-employed workers from another state.
• Expands the definition of “platform worker” to additional categories of services or activities as may be
notified by the government.
• Expands the definition of audio-visual productions to include films, web-based serials, talk shows, reality
shows and sports shows.
Code on Occupational Safety, Health and Working Conditions, 2020

Objective To provide a better and safe environment along with occupational health and safety to workers at the
workplace, 13 existing Labour Laws have been subsumed in the Occupational, Safety, Health and Working
Conditions Code, 2020.
Few Major Features
Definition of • Any premises which employs over 20 workers where manufacturing process is carried out using power.
Factory • 40 workers where manufacturing process is carried out using without power
Establishments • It includes all establishments where any hazardous activity is carried out regardless of the number of
engaged in workers.
hazardous activity • Emergency standards may be set
Daily Work hour • The code limits the maximum daily work hours limit for workers at 8 hours
limit
Age • No person below the age of 14 may be allowed to work.
• Mines: No worker below the age of 18 or apprentice/trainee below the age of 16, may work in a mine.
Human Economics 79
Code on Occupational Safety, Health and Working Conditions, 2020

Disability Construction work: No employer can hire workers with defective vision, deafness, or a tendency for giddiness,
if there is a risk of accident.
Code on Industrial Relations, 2020

Objective In this Code, all possible steps have been taken for industrial units and workers so that disputes
can be prevented in future.
Major Features
Definition of worker • It defines a ‘worker’ as any person who works for hire or reward. It excludes persons employed
in a managerial or administrative capacity or in a supervisory capacity with wages exceeding
Rs 18,000.
The definition is broadened to include journalists
Prior permission of the • An establishment having at least 300 workers is required to seek prior permission of the
government for closure, lay- government before closure, lay-off, or retrenchment.
off and retrenchment
Strikes and lockouts • The code requires all persons to give prior notice of 14 days before a strike or lock-out.
Tribunals for settlement of The Code provides for the constitution of Industrial Tribunals and a National Industrial Tribunal to
disputes decide industrial disputes.
Comparison between fixed term employment, permanent employment and contract labour
Feature Fixed Term Employee Permanent Employee Contract Labour
Type of • Employment under written • Employment directly • Engaged in an establishment
employment contract. No contractor or agency under a written contract. through a contractor or agency.
is involved. • On the payroll of the • Not on the payroll of the
• On the payroll of the establishment. establishment. establishment
Term • Stipulated fixed term. • Employed on a • Based on terms negotiated with the
• Employment lapses on completion permanent basis contractor.
of term, unless renewed. No • Notice has to be given
notice is required to be given for for termination of
retrenchment employment.
Nature of • Not specified. • Hired for routine work. • Employment may be prohibited in
work certain cases, e.g., if similar work is
carried out by regular workmen.
POVERTY
Definition of Poverty
Poverty is a state or condition in which a person or community lacks the financial resources and essentials for a
minimum standard of living.
World Bank defines poverty
• As an unacceptable deprivation in human well-being and comprises many dimensions.
• It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity.
• Poverty also encompasses low levels of health and education, poor access to clean water and sanitation, inadequate
physical security, lack of voice, and insufficient capacity and opportunity to better one’s life.
Types of Poverty
Types of Poverty
Absolute Poverty A condition where household income is below a necessary level to maintain basic living standards (food,
shelter, housing).
• It was first introduced in 1990, the “dollar a day” poverty line measured absolute poverty by the standards
of the world’s poorest countries.
• In October 2015, the World Bank reset it to $1.90 a day.
Relative Poverty It is defined from the social perspective that is living standard compared to the economic standards of population
living in surroundings. Hence it is a measure of income inequality.
Multidimensional It measures poverty as an acute deprivation of essential aspects of life. It measures three key targets – living
Poverty standards, education and healthcare.
Situational Situational poverty is when an individual falls below the poverty line because of a sudden event. Situational
Poverty poverty can be caused by various factors, such as a divorce, death of the family head, illness, a natural
disaster or loss of job.
Generational Generational Poverty means staying impoverished for two or more generations.
Poverty
Rural poverty Refers to poverty in rural areas, including factors of rural society, rural economy, and political systems that
give rise to poverty.
Urban poverty It is a form of poverty that is particularly visible in megacities, characterised by poor living circumstances and
income, as well as a lack of essential utilities for a decent standard of life.
Poverty Estimation Approaches

Poverty Estimation Approaches
Well-being Approach Given by Erik Allard, it includes three dimensions as:
• Having (Material),
• Loving (Social), and
• Being (Spiritual-emotional)
Capabilities Approach Given by Amartya Sen, as an alternative to income and consumption approach, OECD has developed
multidimensional capabilities framework with five capabilities as:
• Economic Capabilities, Human Capabilities, Political Capabilities, Socio-Cultural Capabilities and Security
Capabilities
Multidimensional • Given by UNDP and Oxford Poverty and Human Development Initiative (OPHI) in 2010.
Poverty Index • It is an international measure of acute multidimensional poverty at household-level based on 3
dimensions (with 10 indicators) as:
Education (Years of Schooling and School Attendance),
Health (Child Mortality and Nutrition), and
Standard of Living (Electricity, Drinking Water, Sanitation, Flooring, Cooking Fuel and Assets).
• The MPI value is calculated by multiplying the poverty headcount or incidence of multidimensional
poverty and the Intensity of multidimensional poverty
Poverty Estimation in India

Poverty Estimation in India: History
Working group by Developed distinct poverty thresholds (line) for rural and urban areas (of 20 and 25, respectively, per
Planning commission capita per year).
(1962)
Human Economics 81
Poverty Estimation in India: History

VM Dandekar and N They argued that the poverty line must be derived from the expenditure that was adequate to provide
Rath (1971) 2250 calories per day in both rural and urban areas.
Alagh Committee It determined a poverty line based on a minimum daily requirement of 2400 and 2100 calories for an
(1979) adult in Rural and Urban areas respectively
Lakdawala Committee This committee defined poverty line on the basis of household per capita consumption expenditure. It
(1993) used calculate Consumer Price Index-Industrial Workers (CPI-IW) and Consumer Price Index-Agricultural
Labourers (CPI-AL) for estimation of Povert line.
Tendulkar Committee Recommendations
(2009) • A shift away from calorie consumption-based poverty estimation.
• A uniform poverty line basket (PLB) across rural and urban India.
• A change in the price adjustment procedure to correct spatial and temporal issues with price
adjustment.
• Incorporation of private expenditure on health and education while estimating poverty.
• Used the Mixed Reference Period as opposed to Universal Reference Period used by earlier
committees.
C. Rangarajan(2012) Recommendations include:
• The poverty line should be based on certain normative levels of adequate nourishment, clothing,
house rent, conveyance and education, and a behaviorally determined level of other non-food
expenses.
• The committee computed the average calories, proteins and fats requirements based on ICMR
norms differentiated by age, gender and activity for all-India rural and urban regions.
• Poverty Threshold: People spending below ₹47 a day in cities and ₹32 in villages are considered poor.
• It recommended Modified Mixed Recall Period consumption expenditure instead of Mixed Reference
Period (MRP).
365-days for clothing, footwear, education, institutional medical care, and durable goods.
7-days for edible oil, egg, fish and meat, vegetables, fruits, spices, beverages, refreshments,
processed food, pan, tobacco and intoxicants
30-days for the remaining food items, fuel and light, miscellaneous goods and services including
non-institutional medical; rents and taxes..
Arvind Panagariya Task The task force suggested setting up a committee to identify people “Below Poverty Line (BPL)” It also
Force (2015) suggested participation of states. The report by the task force talked of considering four options for
tracking the poor.
• First, continue with the Tendulkar poverty line.
• Second, switch to the Rangarajan or other higher rural and urban poverty lines.
• Third, the bottom 30% of the population is tracking over time.
• Fourth, tracking the bottom 30% on specific components, such as housing, sanitation, electricity,
nutritional intake, etc.
Current Poverty Estimation in India

Estimated by NITI Aayog Task Force
How Poverty is estimated? Calculation of poverty line based on the data captured by the National Sample Survey Office under
the Ministry of Statistics and Programme Implementation (MOSPI).
What is Poverty Line? The poverty line defines a threshold income. Households earning below this threshold are considered
poor. Different countries have different methods of defining the threshold income depending on local
socio-economic needs.
Poverty line estimation in • Poverty line estimation in India is based on the consumption expenditure and not on the income
India levels.
• Poverty is measured based on consumer expenditure surveys of the National Sample Survey
Organisation.
• A poor household is defined as one with an expenditure level below a specific poverty line.
• The incidence of poverty is measured by the poverty ratio, which is the ratio of the number of poor
to the total population expressed as a percentage. It is also known as head-count ratio.
Current Poverty Estimation in India

Data Collection Methods • Mixed Reference Period (MRP): From 2000 onwards, the NSSO relied on an MRP method which
for Poverty Estimation measured consumption of five-low frequency items over a period of 30 days. These items are
clothing, durables, education and institutional health expenditure.
Note: From 1993 -1994, the poverty line was based on a Uniform Resource Period, which involved
asking people about their consumption expenditure across a period of over 30-days.
National Multidimensional Poverty Index

National Multidimensional Poverty Index
Purpose The National MPI Project is aimed at deconstructing the Global MPI and creating a globally aligned and yet
customised India MPI. This could help in formulating comprehensive Reform Action Plans with the larger goal of
improving India’s position in the Global MPI rankings.
Prepared by NITI Aayog is the nodal think tank for the Multidimensional Poverty Index (MPI).
• NITI Aayog is also responsible for engaging with the publishing agencies of the index (Oxford University’s Oxford
Poverty and Human Development Initiative (OPHI) and United Nations Development Programme (UNDP)
• Ranking States and Union Territories based on their performance
• NITI Aayog has also constituted an inter-ministerial MPI Coordination Committee (MPICC) to consult twelve
Line Ministries mapped to each National MPI indicator
Dimensions • At the core of the MPI is the Alkire-Foster (AF) methodology.
and • The AF methodology is a general framework for measuring multidimensional poverty that identifies people as
Indicators poor or not poor based on a dual-cut off counting method
1) Health • Nutrition: weight (1/6)
• Child-Adolescent Mortality: weight (1/12)
• Maternal Health: weight (1/12)
2) Education • Years of Schooling: weight (1/6)
• School Attendance: weight (1/6)
3) Standard of • Cooking Fuel: weight (1/21)
Living • Sanitation: weight (1/21)
• Drinking Water: weight (1/21)
• Electricity: weight (1/21)
• Housing: weight (1/21)
• Ownership of Assets: weight (1/21)
• Bank Account: weight (1/21)
TERMS ASSOCIATED WITH POVERTY
Terms Meaning
Chronic poor The term “chronic poor” refers to people who live in persistent poverty and who are typically impoverished
but occasionally have some money on hand (for instance, Casual labourers).
Churning poor The poor who regularly move in and out of poverty (example: small farmers and seasonal workers).
Occasionally poor Occasionally poor are those poor who are rich most of the time but may sometimes have a patch of bad luck.
They are called the transient poor.
Poverty Line Basket The basket of goods and services necessary to satisfy basic human needs is the Poverty Line Basket (PLB)
Poverty Trap A poverty trap refers to an economic system in which it is difficult to escape poverty. A poverty trap is not
merely the absence of economic means. It is created due to a mix of factors, such as access to education and
healthcare, working together to keep an individual or family in poverty.
Human Economics 83
POVERTY ALLEVIATION PROGRAMS IN INDIA

Integrated Rural Development Programme (IRDP) + Jawahar Rozgar Yojana/Jawahar Gram Samridhi Yojana + Rural
Housing – Indira Awaas Yojana + Food for Work Programme + National Old Age Pension Scheme (NOAPS) + Annapurna
Scheme + Sampoorna Gramin Rozgar Yojana (SGRY) + Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGA) 2005 +National Rural Livelihood Mission: Aajeevika (2011) + National Urban Livelihood Mission + Pradhan
Mantri Kaushal Vikas Yojana + Pradhan Mantri Jan Dhan Yojana
INEQUALITY AND HUNGER
INEQUALITY
Inequality
Definition The United Nations describes inequality as “the state of not being equal, especially in status, rights and opportunities.
Classification • Inequality can be broadly classified in to:
Economic inequality: Economic inequality is the unequal distribution of income and opportunity between
individuals or different groups in society.
Social inequality: It occurs when resources in a given society are distributed unevenly based on norms
of a society that creates specific patterns along lines of socially defined categories e.g. religion, kinship,
prestige, race, caste, ethnicity, gender etc. have different access to resources of power, prestige and wealth
depending on the norms of a society.
Methods to measure income inequality

Lorenz curve
• A Lorenz curve is a graphical representation of the distribution of income or wealth within a population.
• The Lorenz Curve can be used to calculate the Gini coefficient – another measure of inequality.
Gini coefficient
• The Gini coefficient is the gap between the line of equality and the Lorenz curve
• Its value varies between 0 and 1, with 0 corresponding to a perfectly egalitarian (equal) distribution of total income,
and 1 corresponding to a perfectly unequal distribution of total income.
• Thus, the higher the coefficient, the greater the income inequality.
Theil’s index
• The Theil index is a statistic used to measure economic inequality.
• An index of 0 indicates absolute equality, and an index of 1 indicates inequality.
The Atkinson Index
• It is a welfare-based measure of inequality
• It represents the percentage of total income that a given society would have to forego to have more equal income
shares between its citizens.
Hoover index
• It is an inequality metrics that are used to measure the deviation from the preferred equal distribution.
• It shows the proportion of all income which would have to be redistributed to achieve a state of perfect equality
• Higher values indicate more inequality and that more redistribution is needed to achieve income equality
Kuznets Curve
• It hypothesizes that industrializing nations experience a rise and subsequent decline in income inequality. The curve
is characterized by an inverted “U”
• A modification of the Kuznets curve is known as environmental Kuznets curve.

Environmental Kuznets curve suggests that economic development initially leads to a deterioration in the
environment.
Palma Ratio
It measures inequality between the extremes of the distribution, i.e. between households at the top and the bottom.
HUNGER
Definition
• Hunger is a condition in which a person cannot eat sufficient food to meet basic nutritional needs for a sustained period.
• Hunger can manifest itself in different ways – undernourishment, malnutrition and wasting.
Undernourishment, according to the World Food Programme (WFP), occurs when people do not take in enough
calories to meet minimum physiological needs.
Malnutrition is when people have an inadequate intake of protein, energy and micronutrients. Starved of the
right nutrition, they can die from common infections such as measles or diarrhoea.
Wasting, usually the result of starvation or disease, is an indicator of acute malnutrition with substantial weight loss.
Malnutrition and Hidden Hunger

• Malnutrition, according to the World Health Organization (WHO), refers to deficiencies, excesses, or imbalances in
a person’s intake of energy and/or nutrients.
• Hidden hunger is the presence of multiple micronutrient deficiencies (particularly iron, zinc, iodine and vitamin A),
which can occur without a deficit in energy intake as a result of consuming an energy-dense, but nutrient-poor diet.
Causes of Malnutrition in India

• Calorific deficiency + Protein Hunger + Micronutrient deficiency (hidden hunger) + Unidentified Hunger + Lack of
Immunization + Lack of Audit for Nutritional Programmes
Initiatives taken by the Indian Government

Direct targeted interventions + Poshan Abhiyaan + Anaemia Mukt Bharat (AMB) strategy + Nutrition Smart Village +
Mission Indradhanush (MI) + Food Fortification + Integrated Child Development Services (ICDS) Scheme
Global Initiatives against Poverty and Hunger

• Zero Hunger By World Food Programme
• Fight Hunger First
• Zero Hunger Challenge (Save Food) by FAO
• Feed the future
• Hunger By World Food ProgrammeZero
• Sustainable Development Goals 2
POPULATION, DEMOGRAPHY AND HUMAN CAPITAL
DEFINITION
• A population is defined as a group of individuals of the same species living and interbreeding within a given area.
• Demography is the statistical study of human populations. Demographers use census data, surveys, and statistical
models to analyze the size, movement, and structure of populations
Human Economics 85
Components that affect Population and Demography

Components Meaning
Fertility • It is a measure noting the number of children born
• Sociologists measure fertility using the crude birth rate (the number of live births per 1,000 people per year).
• The fertility number is generally lower than the fecundity number, which measures the potential number of
children that could be born to women of childbearing age.
Mortality • The mortality rate is a measure of the number of people who die.
• A crude death rate is derived from the number of deaths per 1,000 people per year.
• When analyzed together, fertility and mortality rates help researchers understand the overall growth occurring
in a population.
Migration • Migration is the movement of people into and out of an area
• It is a key element in studying populations.
• Migration may take the form of immigration or emigration.
Immigration describes movement into an area to take up permanent residence.
Emigration refers to movement from an area to another place of permanent residence
• Migration might be voluntary (as when college students’ study abroad), involuntary (as when Syrians evacuated
war-torn areas),
Or forced (as when many Native American tribes were removed from the lands they’d lived in for generations).
Term Explanation
Birth rate • The birth rate is the total number of live births in a particular area during a specified period divided by
the total population of that area in thousands.
• In 2020, the birth rate for India was 17.4 per 1,000 people.
• The birth rate of India fell gradually from 38.8 per 1,000 people in 1971 to 17.4 per 1,000 people in 2020.
Death rate • Death rate is the number of deaths in a given area during a given time per 1000 population.
• In 2020, the death rate for India was 7.3 per 1,000 people.
• Between 1971 and 2020, India’s death rate declined at a moderate rate to shrink from 16.7 per 1,000
people in 1971 to 7.2 per 1,000 people in 2020.
Crude Birth Rate • The annual number of live births per 1,000 people.
General • The annual number of live births per 1,000 women of childbearing age (often taken to be from 15 to 49
Fertility Rate years, but sometimes from 15 to 44).
Age-Specific • The annual number of live births per 1,000 women in particular age groups (usually 15-19, 20-24 and so
Fertility Rates on).
Total fertility rate • It refers to the total number of live births that a hypothetical woman would have if she lived through
(TFR) the reproductive age group and had the average number of babies in each segment of this age group as
determined by the age-specific fertility rates for that area.
Crude Death Rate • The annual number of deaths per 1,000 people.
Infant • The annual number of deaths of children of age less than 1-year-old per 1,000 live births.
Mortality Rate
Life Expectancy • The number of years which an individual at a given age can expect to live at present mortality levels.
• Life expectancy of India is 69.16 years (2017).
Gross • The number of daughters who would be born to a woman completing her reproductive life at current
Reproduction age-specific fertility rates.
Rate
Net Reproduction • The number of daughters who would be born to a woman according to current age-specific fertility and
Rate mortality rates.
Maternal • Maternal Mortality Rate (MMR) is defined as the number of maternal deaths per 100,000 live births due
Mortality Rate to pregnancy or termination of pregnancy, regardless of the site or duration of pregnancy.
(MMR)
Term Explanation
Population • A population pyramid, also called an “age-gender-pyramid”, is a graphical illustration that shows the
pyramid distribution of various age groups in a population (typically that of a country or region of the world), which
forms the shape of a pyramid when the population is growing.
Sex ratio • The number of females per thousand males is referred to as sex ratio.
Child mortality • Number of child deaths under the age of 5 Years per 1000 live births.
rate (CMR)
Dependency ratio • The dependency ratio is a measure comparing the portion of a population which is composed of dependents
(i.e., elderly people who are too old to work, and children who are too young to work) with the portion
that is in the working age group, generally defined as 15 to 64 years.
Demographic • Defined to be that period of time in a nation’s demographic evolution when the proportion of population
window of working age group is particularly prominent.
Demographic • The economic growth potential that can result from shifts in a population’s age structure, mainly when the
dividend share of the working-age population (15 to 64) is larger than the non-working-age share of the population
(14 and younger, and 65 and older)”.
Theories of Population
Theories • Meaning
Malthusian Theory • According to him population rises in geometric progression (i.e., like 2, 4, 8, 16, 32 etc.) but agricultural
production can only grow in arithmetic progression (i.e., like 2, 4, 6, 8, 10 etc.)
• As population growth always outstrips growth in production of subsistence resources, the only way
to increase prosperity is by controlling the growth of population.
• He believed only three factors would control the human population: war, famine, and disease
• He termed them “positive checks” because they increase mortality rates, thus keeping the population
in check
• They are countered by “preventive checks,” which also control the population by reducing fertility
rates; preventive checks include birth control and celibacy
The Optimum Theory Of • It was developed in response to criticism of the Malthusian Theory of Population’s methodology.
Population • The theory states that “Given the natural resources, stock of capital and the state of technical
knowledge, there will be a definite size of population with the per capita income. The population
which has the highest per capita income is known as optimum population”.
• It is concerned with the relation between the size of the population and the production of wealth.
Zero Population Growth • Ehrlich’s ideas suggest that the human population is moving rapidly toward complete environmental
collapse, as privileged people use up or pollute a number of environmental resources such as water
and air.
• He advocated for a goal of zero population growth (ZPG), in which the number of people entering a
population through birth or immigration is equal to the number of people leaving it via death or emigration.
Demographic Transition Demographic transition theory suggests that future population growth will develop along with a
Theory predictable four-stage model.
Demographic Transition Theory

The theory suggests that population growth is linked to overall levels of economic development. Every society follows
a typical pattern of development related population growth. Four stages of demographic transition are:
Stages Meaning
Stage I • There is a high birth and death rate.
• Birth rates and death rates are effectively in balance.
• There is a lack of food availability, adequate medical care and effective sanitation and hygiene.
• Thus population does not grow very much due to disease and starvation
• Majority of people are concentrated in rural regions, primarily on agriculture.
• The poor experience the highest mortality rates of any demographic, but life expectancies are short overall.
Human Economics 87
Stages Meaning
Stage II • Population Explosion
• The death rates drop quickly.
• At this stage, the country begins to experience social and economic development.
• It means more productive agriculture (and thus more food supply), better medical care, and more effective sanitation
and hygiene, death rates fall quickly and lifespans are longer.
• Birth rates far outpace death rates with the result that the population grows rapidly
Stage III • Population Growth Starts to Level Off
• Birth rates decline
• This is due to Contraception access, higher wages, fewer families participating in agriculture, and improvement in
education and the social status of women.
• Death rate also declines with further improvements in health and sanitation.
• As a result, population growth starts to decline as compared to the second stage.
• Example: Mexico began to arrive at stage three at the beginning of the 21st century.
Additionally, China used its One-Child Policy to attempt to move toward the third and fourth stages more
quickly than the country might otherwise have done.
Stage IV • Stationary Population
• Stage of Low Birth Rate and Low Death Rate.
• The population may remain the same or even decrease as birth rates come to be lower than the “replacement
level”—families have an average of fewer than two children each.
• At this time, we expect that the generation born during the second stage of demographic transition is ageing.
• Meanwhile, the potentially shrinking working population must support these elderly members of society
• The majority of developed nations, including Australia, Western European nations, and Japan, are at this stage.
Stage V • At this stage, demographers say that fertility rates will experience shifts to either above or below replacement
levels.
• This depends on the society, too: while populations in China and Australia are expected to fall due to lower birth
rates, those in the U.S., India, and Mexico are expected to increase
Comparison Chart
Stage I Stage II Stage III Stage IV
High birth rate and death rate High birth rate and low death birth rates decline and stable Low Birth Rate and Low Death
and Infant mortality rate rate death rate Rate
Stable population Population Explosion Population growth slows Population growth slows
down down
Low life expectancy life expectancy is High life expectancy is High
High fertility rate High fertility rate Fertility rate declines Fertility rate is close to or
below 2.1
Population P yramid is Population Pyramid is rapidly Population Pyramid is Population Pyramid is
expanding at the bottom expanding stationary Contracting
The Population Pyramid

• It is a graphical representation of age and sex composition (number of females and males in different age groups)
of specific population.
• The shape of the population pyramid reflects the characteristics of the population.
• The shape of the population pyramid gradually evolves over time based on fertility, mortality, and international
migration trends.
Types of Population Pyramid

Expanding Population Constant Population Declining Population
• The age-sex pyramid in such a case is • In this case, the age-sex pyramid • This pyramid has a narrow base and
a triangular-shaped pyramid with a wide is bell-shaped and tapered towards a tapered top showing low birth and
base and is typical of less developed the top. death rates.
countries. • This shows birth and death rates • The population growth in developed
• These have larger populations in lower are almost equal leading to a near- countries is usually zero or negative.
age groups due to high birth rates. constant population
PHASES OF POPULATION GROWTH IN INDIA
Phases Observations
Period of • The population growth during the 19th century is termed more or less stagnant. The major characteristics
stagnant or of this phase were:
stationary • India witnessed sporadic, irregular, and slow population growth. This drifted into the twentieth century until
phase (1901- 1921.
1921) • The birth rate and death rate were high due to poor health and medical services, illiteracy, and an inefficient
distribution system of food and other necessities.
• The high birth rate and the death rate counterbalanced each other. The census year 1921 is called the year
of the Great Demographic Divide. It registered a negative growth rate of -0.31 per cent, which happened
only once throughout the demographic history of India
Period of • With declining deaths and relatively higher births after 1921, India entered the early expanding stage of
Steady Growth demographic transition.
(1921-1951) • The crude death rate peaked at 48 per thousand in 1921 and fell to 27 per thousand in 1951.
• The crude birth rate remained abnormally high and declined only to 41 per thousand in 1951 as against 48
per thousand in 1921.
Period of Rapid • This period is often referred to as the period of population explosion.
High Growth • 1951 marks the beginning of rapid growth in the country’s population due to a sharper decline in death rate
(1951-1981) and high fertility rate.
period of High • From the post-1981 till the present, the growth rate of the country’s population remained high. But it has
Growth with started slowing down gradually.
Definite Signs • A decline in the crude birth rate is responsible for such population decline.
of Slowing • There was an increase in the mean age at marriage, and the family planning program also expanded quickly.
Down (1981- • During this period, quality of life improved, and female education was encouraged in the country.
2011) • This phase corresponds to the third phase of demographic transition, indicating a declining population growth
rate trend.
At Present • At present, the growth rate of the population is still high in the country. The World Development Report has
projected that the population of India will touch 1,350 million by 2025
DEMOGRAPHIC DIVIDEND
According to United Nations Population Fund (UNFPA), demographic dividend means, “the economic growth potential
that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to
64) is larger than the non-working-age share of the population (14 and younger, and 65 and older)”.
India’s Demographic Dividend
• In India, 62.5% of the population is between the ages of 15 and 59. This percentage is steadily rising and will reach
its peak in 2036, when it would be around 65%.
• These demographic indicators point to an ongoing demographic dividend in India, which began in 2005–06 and will
continue until 2055–56
• According to Economic Survey 2018-19, India’s Demographic Dividend will peak around 2041, when the share of
working-age, i.e. 20-59 years, population is expected to hit 59%.
Human Economics 89
Policies that capture India’s dividend

• First, investments in human and physical infrastructure will need to be scaled up dramatically to promote
entrepreneurship and create jobs. Investment in education is crucial for ensuring that working-age people are prepared
for the demands of the economy. As industry and services have come to have considerably larger roles, the need for
an educated workforce has grown.
• Second, promote entrepreneurship and job creation. India needs to facilitate the absorption of labour into productive
employment, promote relevant programmes and policies, and have well-trained people in place to reach these
objectives. Governments that ensure respect for property rights, the sanctity of contracts and the rule of law are
more likely to be able to create an economic environment that will facilitate the realization of the dividend sought.
• Third, it is now time to implement the next generation of economic reforms to deliver efficient public services,
particularly focused on long-neglected social needs related to nutrition and health services, primary and secondary
schooling, quality enhancement of tertiary education, water supply and sanitation, and urban development.
Steps taken by the Government to Reap India’s Demographic Dividend
• Better Skill Development: National Skill Development Corporation (NSDC) + National Skill Development Agency
• Better Healthcare: Ayushman Bharat Pradhan Mantri Jan AarogyaYojana
• Better Education: National Education Policy 2020
• Better Startup Ecosystem : Startup India
Miscellaneous Terms
Terms Meanings
National Skills • NSQF is a nationally integrated education and competency-based framework that enables persons to
Qualifications acquire desired competency levels.
Framework (NSQF) • It organizes qualifications according to a series of levels of knowledge, skills and aptitude.
• These levels, graded from one to ten, are defined in terms of learning outcomes which the learner must
possess regardless of whether they were acquired through formal, non-formal or informal learning.
• It is a nationally integrated education and competency-based skill and quality assurance framework that
will provide for multiple pathways, horizontal as well as vertical, including vocational education, vocational
training, general education and technical education, thus linking one level of learning to another higher
level.
Son “Meta” • Parents when choose to keep having children until they get the desired number of sons. This is called
Preference son “meta” preference.
• A son “meta” preference does not lead to sex-selective abortion. It may be detrimental to female
children because it may lead to fewer resources devoted to them. Such Meta preference gives rise to
“unwanted” girls–girls whose parents wanted a boy, but instead had a girl.
• It is computed as the gap between the benchmark sex ratio and the actual sex ratio among families
that do not stop fertility
United Nations It is a sexual and reproductive health agency of the United Nations. In 1967, UNFPA was established. UNFPA
Population Fund works directly to tackle Sustainable Development Goals on health (SDG3), education (SDG4) and gender
(UNFPA) equality (SDG5).
UNFPA is not supported by the UN budget, instead, it is entirely supported by voluntary contributions of
donor governments, intergovernmental organizations, the private sector, foundations and individuals. It
publishes State of World Population Report
HUMAN CAPITAL
Human Capital
Meaning The term human capital refers to the economic value of a worker’s experience and skills. Human capital
includes assets like education, training, intelligence, skills, health, and other things employers value such
as loyalty and punctuality.
Human Capital
Characteristics • It is an intangible asset not listed on a company’s balance sheet.
• Include qualities like an employee’s experience and skills.
• Relationship with economic growth, productivity, and profitability.
• Has the ability to depreciate through long periods of unemployment, and the inability to keep up with
technology and innovation.
Sources Of Human Expenditure on Health, Education, Skilling, Job training, etc
Capital
Human Capital and • There is a strong relationship between human capital and economic growth, which is why it can help
Economic boost the economy
Growth • Education and health, along with many other factors like on-the-job training, job market information
and migration, increase an individual’s income generating capacity.
• This enhanced productivity of human beings or human capital contributes substantially towards
economic growth.
Depreciation of • The most common ways human capital can depreciate are through unemployment, injury, mental
Human Capital decline, or the inability to keep up with innovation.
• Think about a worker with a distinct talent. He might not be able to maintain these levels of specialisation
if he experience a long spell of unemployment.
Human Capital And • Human capital considers education and health as a means to increase labour productivity. Human
Human capital treats human beings as a means to an end; the end being the increase in productivity. In this
Development view, any investment in education and health is unproductive if it does not enhance output of goods
and services.
• Human development is based on the idea that education and health are integral to human well-being
because only when people have the ability to read and write and the ability to lead a long and healthy
life, they will be able to make other choices which they value.
In the human development perspective, human beings are ends in themselves. Human welfare
should be increased through investments in education and health even if such investments do not
result in higher labour productivity.
Therefore, basic education and basic health are important in themselves, irrespective of their
contribution to labour productivity.
In such a view, every individual has a right to get basic education and basic health care
Human Capital Index

Human Capital Index
Purpose The index compares essential facets of human capital across nations. It claims to seek to measure the amount of
human capital that a child born today can expect to attain by age 18.
Released by It is released by World Bank
Components The HCI has three components
Survival Expected years of Quality-Adjusted School Health environment
Measured by Combines information on the quantity and quality Using two proxies of
under-5 mortality of education. (a) Adult survival rates and
rates • Quality is measured by harmonizing test scores (b) the rate of stunting for children
from major international student achievement under age
testing programs and
• Quantity from number of years of school that a
child can expect to obtain by age 18 given the
prevailing pattern of enrolment rates across
grades in respective countries
India and HCI India ranked at the 116th position in the HCI 2020.
International Economics 91
CHAPTER 7
International Economics
International Economics
Meaning International Economics is the branch of economics that deals with the exchange of goods
and services between two or more countries. As a result, the subject is primarily concerned
with international trade.
Subject Matter of International Theory of Trade + Policy Issues + Trade Blocks + International Financial and Trade Regulatory
Economics Institutions
TRADE
Trade
Meaning The term “trade” refers to the exchange of goods, wares, or merchandise between people.
Types a) Internal Trade and b) International Trade.
Internal Trade Vs. International Trade
Internal Trade International Trade
takes place between different individuals and firms takes place between different individuals and firms in different countries
within the same nation
Labour and capital move freely from one region to Labour and capital do not move easily from one nation to another
another
There will be no restrictions on the free flow of goods Because of restrictions such as tariffs and quotas, goods and services do not
and services. easily move from one country to another.
There is only one standard currency. There are various currencies.
Trade and financial regulations are nearly identical. Trade and financial regulations, such as interest rates and trade laws, vary
by country.
Balance of Trade Vs Balance of Payments
The balance of trade (BOT) is the total value of a The balance of payments (BoP) is a systematic record of a country’s economic
country’s commodity exports minus the total value and financial transactions with the rest of the world over time.
of commodity imports.
Only commodity exports and imports are included The main items shown on the credit side are exports of goods and services,
in a country’s Balance of Trade statement. transfer receipts from foreigners in the form of gifts, etc., borrowing from
abroad, foreign direct investment, and official sale of reserves assets to foreign
countries and international agencies, including gold.
BALANCE OF PAYMENTS (BOP)

The balance of payments (BoP) records the transactions in goods, services and assets between residents of a country
with the rest of the world for a specified time period typically a year.
Balance of Payments (BoP)

Meaning It is a systematic record of a country’s economic and financial transactions with the rest of the world over time.
Balance of Payments (BoP)

Component a) The current account,
b) The capital account and
c) The official settlements account or official reserve assets account
Current Account
Meaning It is the record of trade in goods and services and transfer payments.
Components It includes all international trade transactions of goods and services, international service transactions (i.e.
tourism, transportation and royalty fees) and international unilateral transfers (i.e. gifts and foreign aid).
Balance of • Current Account is in balance when receipts on current account are equal to the payments on the current
Current Account account.
• A surplus current account means that the nation is a lender to other countries.
• A deficit current account means that the nation is a borrower from other countries.
Measures to • A deficit in the current account is funded by various capital inflows, including portfolio investments, external
Fund Current commercial borrowings, foreign direct investments and NRI deposits.
Account Deficit
Impact of Large • growing demand for foreign currencies + causing the domestic currency (Rupee in India’s case) to depreciate+
CAD a falling Indian rupee will increase inflation.
Note: If rising CAD is due to technological up gradation, It would support long-term growth.
Capital Account
Meaning Capital Account records all international transactions of assets.
Components The capital account includes financial activities such as direct investments, purchases of interest-bearing financial
instruments, non-interest-bearing demand deposits, and gold.
Balance of • Capital account is in balance when capital inflows (like receipt of loans from abroad, sale of assets or shares
Capital Account in foreign companies) are equal to capital outflows (like repayment of loans, purchase of assets or shares
in foreign countries).
• Surplus in capital account arises when capital inflows are greater than capital outflows.
• Deficit in capital account arises when capital inflows are lesser than capital outflows.
The Official Reserve Assets Account
Meaning It records adjustments to the quantity of “official” reserve assets held by that nation’s central bank.
Component The official reserve assets of a country include its gold stock, holdings of its convertible foreign currencies and
Special Drawing Rights (SDRs) and its net position in the International Monetary Fund (IMF).
Foreign Trade Policy

Foreign Trade Policy
Meaning It is a set of guidelines and instructions established by the DGFT in matters related to the import and export of
goods in India.
Measures since A new Foreign Trade Policy (FTP) 2015-20 was launched on 1st April 2015
2014 to boost Introduced two new schemes:
the India’s • Merchandise Exports from India Scheme (MEIS) for improving export of goods and ‘Services Exports from
export India Scheme (SEIS)’ for increasing exports of services.
• Duty credit scrips issued under these schemes were made fully transferable.
• New Logistics Division was created in the Department of Commerce for integrated development of the logistics
sector.
• Interest Equalization Scheme on pre and post shipment rupee export credit was introduced to provide cheaper
credit to exporters.
• Niryat Bandhu Scheme was introduced to reach out to the new and potential exporters including exporters
from Micro, Small & Medium Enterprises (MSMEs).
• Trade Infrastructure for Export Scheme (TIES) and Market Access Initiatives (MAI) Scheme to promote export.
• “Agriculture Export Policy” was launched in 2018 to provide an impetus to agricultural exports.
• Transport and Marketing Assistance for Specified Agriculture Products’ was launched for providing assistance
for the international component of freight to mitigate the freight disadvantage for the export of agriculture
products.
• Remission of Duties and Taxes on Exported Products (RoDTEP) scheme and Rebate of State and Central Levies
and Taxes (RoSCTL) Scheme have been implemented since 2021.
• Common Digital Platform for Certificate of Origin has been launched to facilitate trade and increase Free Trade
Agreement (FTA) utilization by exporters.
• 12 Champion Services Sectors have been identified for promoting and diversifying services exports by pursuing
specific action plans.
• Districts as Export Hubs has been launched by identifying products with export potential in each district.
Export Credit • A government of India enterprise under Ministry of Commerce and Industry
Guarantee • Objective is to promote exports from India by providing credit risk insurance and related services for exports.
Corporation • Also administers the National Export Insurance Account (NEIA) Trust which caters to project exports of strategic
and national importance.
It provides:
• Insurance covers to Indian exporters against the risk of non-realization of export proceeds due to commercial
or political risks
• Different types of credit insurance covers to banks and other financial institutions to enable them to extend
credit facilities to exporters
• Export Factoring facility for MSME sector
Equilibrium and Disequilibrium in BoP

Balance of payments equilibrium
Meaning When demand and supply of any foreign currency in any country is equal in a given time period, it is termed
as ‘Equilibrium position’ in the balance of payment.
When is country at The country is said to be in a balance of payments equilibrium when the sum of its current account and
Balance of payments its non-reserve capital account equals zero so that the current account balance is financed entirely by
equilibrium? international lending.
Balance of payments disequilibrium
Meaning A disequilibrium means that the condition is either deficit or surplus in BoP.
Balance of payments equilibrium

When is country at • A Balance of payment deficit can occur when it imports more goods and services than it exports. It
Balance of payments denotes that a country is a borrower.
disequilibrium? It can be balanced by utilizing the country’s foreign exchange reserves (sale of foreign exchange
by the central Bank (RBI in case of India)) to meet the BoP shortfall.
• A balance of payment surplus occurs when total exports are higher than its imports.
It means that there is an inflow of foreign currency resulting in an increase in Forex reserve.
This helps to generate capital to fund its domestic productions. A surplus BOP can boost the short-
term economic growth of the country.
When there is an excess supply of foreign currency (Example: Dollar) in the Indian Forex market,
the RBI will automatically intervene on the Forex and buy foreign currency, i.e. dollar in this case
(increase its Forex reserve).
Measures To Correct BoP Disequilibrium: Automatic
Price Adjustment • When there is an outflow of foreign exchange from a deficit country to a surplus country, there will
be a fall in the money supply in the deficit country and an increase in the money supply in the surplus
country.
This will result in a rise in the price in the surplus country which will encourage imports and
discourage exports.
Fall in prices in the deficit country will encourage exports and discourage imports, leading to
restoration of BoP equilibrium
Interest Rate • A rise in interest rate in the deficit country will encourage them to withdraw their funds from abroad
Adjustments and invest in their home country.
• The opposite happens in the surplus country
Income Adjustments • There is an increase in income when the country has a BoP surplus.
• This increased income will encourage imports, and thereby equilibrium is maintained in the balance of
payment.
Capital Flows • Changes in the interest rate consequent to the BoP disequilibrium will encourage capital flows from
the surplus nations to deficit nations helping restoration of the BoP equilibrium
Deliberate Measures
Devaluation • A country with a fundamental balance of payments disequilibrium may weaken its currency in an effort
to increase exports while reducing imports in an effort to redress the imbalance. Export prices drop and
import prices rise as a result of devaluation. This entails raising the price of foreign items for Indians
while lowering the price of Indian goods for foreigners.
Foreign Exchange • Under exchange control, the government or central bank assumes complete control over the foreign
exchange reserves
Monetary Measures • High imports and low exports are caused by high domestic price levels. The central monetary authority
manages credit to prevent inflation. Prices decline as a result, and exports will rise. BoP disequilibrium
will be improved as a result.
Trade Measure • Measures are taken by the government to promote exports and control imports.
Gold Monetization • It seeks to decrease imports of gold over time as well, helping to stabilize the balance of payments.
Scheme
FOREIGN EXCHANGE RATE
Foreign Exchange Rate

Meaning • Foreign Exchange Rate (also called Forex Rate) is the price of one currency in terms of another.
• It links the currencies of different countries and enables comparison of international costs and prices.
For example, if we have to pay Rs 50 for $1 then the exchange rate is Rs 50 per dollar.

Demand • People demand foreign exchange as :
for Foreign To purchase goods and services from other countries;
Exchange To send gifts abroad; and,
To purchase financial assets of a certain country.
• A rise in the price of foreign exchange will increase the cost (in terms of rupees) of purchasing a foreign
good.
• This reduces demand for imports and hence demand for foreign exchange also decreases, other things
remaining constant.
Supply of Foreign • Foreign currency flows into the home country due to the following reasons:
Exchange Exports by a country lead to the purchase of its domestic goods and services by the foreigners;
Foreigners send gifts or make transfers; and,
Assets of a home country are bought by the foreigners.
• A rise in the price of foreign exchange will reduce the foreigner’s cost (in terms of USD) while purchasing
products from India, other things remaining constant.
This increases country’s exports and hence supply for foreign exchange may increase.
Exchange Rate Systems
Flexible Exchange • Under the flexible exchange rate (also known as floating exchange rate) system, exchange rates are freely
Rate determined in an open market by market forces of demand and supply.
Fixed Exchange • Countries following the fixed exchange rate (also known as stable exchange rate and pegged exchange rate)
Rate system agree to keep their currencies at a fixed rate as determined by the Government.
Managed Floating • Managed A floating exchange rate is one in which the central bank of a nation occasionally intervenes to
Exchange Rate alter the rate or pace of change of that nation’s currency value. Most of the time, the central bank serves
as a safety net against an external economic shock before its effects damage the domestic economy.
Types of Exchange Rates
Nominal Defined as the number of units of the domestic currency that can purchase a unit of a given foreign currency.
exchange Let us understand:
rate and Real If 1 US Dollar = ₹ 90
exchange Rate Nominal exchange rate = 90/1 = 90. This is the bilateral nominal exchange rate.
Now, if a pencil cost Rs 30 in India and 5 US dollar in USA.
Real exchange rate= (90x5)/30=15
If real exchange rate is equal to 1, the currencies are at purchasing power parity.
If the real exchange rises above one, this means that goods abroad have become more expensive than goods
at home.
Nominal • NEER is the weighted average of the home currency’s bilateral nominal exchange rates in foreign currencies.
Effective • In simple terms, NEER is an index that measures the change in the foreign exchange rates.
Exchange Rate It is mainly market driven exchange rate.
(NEER) A decrease in this index denotes depreciation in rupee’s value whereas an increase reflects appreciation.
Real Effective • The Real Effective Exchange Rate (REER) is calculated as the weighted average of the real exchange rates
Exchange Rate of all its trade partners, the weights being the shares of the respective countries in its foreign trade.
(REER) It is interpreted as the quantity of domestic goods required to purchase one unit of a given basket of
foreign goods.
• Domestic and foreign currencies are rearranged with the help of NEER values to obtain REER values.
• In simple words, REER is nothing but NEER adjusted for Inflation.
Concepts related to Currency Exchange Rate
Depreciation • In Flexible exchange rate regime, Increase in the exchange rate implies that the price of foreign currency
(dollar) in terms of domestic currency (rupees) has increased.
This is called Depreciation of domestic currency ( Ex: rupees) in terms of foreign currency (Ex: dollars).
Appreciation When the price of domestic currency (rupees) in terms of foreign currency (dollars) increases, it is called
Appreciation of the domestic currency (rupees) in terms of foreign currency (dollars).

Devaluation In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making
domestic currency cheaper) is called Devaluation.
Revaluation Revaluation is said to occur, when the Government decreases the exchange rate (thereby, making domestic
currency costlier) in a fixed exchange rate system.
EXCHANGE RATE MANAGEMENT IN INDIA
Evolution of Exchange Rate Management in India

Systems Meanings
Par value system India was obliged to adopt the Bretton Woods system of exchange rate determination. Also known as par
(1947-71) value system.
1971 The Bretton Woods system collapsed in 1971.
Pegged Regime The rupee was fixed to the pound sterling for four years. Then Rupee was linked to a basket of 14 currencies,
(1971-1992) which was later reduced to 5 main trading partners of India.
External payment India faced external payments crisis of 1991.As the part of macro-economic stabilisation programme, the
crisis (1991) exchange rate of rupee was devalued (in two stages) by 18% in terms of the US dollar in July 1991. Consequently,
India started a new phase of managing its exchange rate.
LERMS (1992) Liberalised Exchange Rate Management System (LERMs) was introduced in 1992.
UERS (1993) LERMs was later replaced by Unified Exchange Rate System (UERS) in 1993
Exchange Rate Management in India

Reforms LERMS and UERS
Feature of LERMS
Partly Convertible The rupee became partly convertible under this scheme.
dual exchange • 40% percent of foreign exchange earnings had to be surrendered (given) at an official rate determined by
rate system the Reserve Bank.
• The balance of 60 percent of exchange earnings was to be converted at rates determined by the market.
• Foreign exchange given at the official rate was made available for importing essential items or products,
including petroleum, fertilisers and life-saving drugs.
Note: LERM was replaced UERS in 1993.
Features of Current Regime (unified exchange rate or a market-determined management system)
• The market determines the exchange rates.
• The US Dollar serves as the primary currency for RBI transactions.
• The banking system accepts current receipts as deposits, which in turn satisfies the need for foreign currency.
• RBI can take action in the market to reduce the rupee’s volatility and sharp depreciation. It effects transactions at an exchange
rate that may fluctuate by up to 5% from the going market rate.
Factors That Determine the Exchange Rates

Factors Meanings
Inflation A country with a consistently lower inflation rate exhibits a rising currency value as its purchasing power increases
relative to other currencies.
Interest rates Higher interest rates attract foreign capital and cause the exchange rate to rise and vice versa.
For example: if India offers better interest rates on savings than the US, investors from the US would shift their
fund in India to get a better return. This would increase the demand for Indian rupees in the Indian market. As a
result, the rupee would appreciate.
Factors Meanings
Current A Country with current account deficit requires more foreign currency than it receives through export. This excess
Account demand of foreign currency lowers the country’s exchange rate. As a result, currency is depreciated
Deficits
Public Debt Government goes for large-scale deficit financing like market borrowing or borrowing from foreign countries in case
of public debt. This can increase the money supply in the economy resulting in inflation. As a result, the exchange
rate will be lowered.
Recession During recession, interest rates are lowered on savings. This discourage the inflow of foreign capital. As a result, a
currency will be depreciated against other currencies, thereby lowering the exchange rate
Speculation If a country’s currency value is expected to rise, investors will demand more of that currency in order to make a
profit in the near future. This results in an appreciation of the exchange rate.
Income and When income increases, consumer spending increases.
the Exchange Spending on imported goods is also likely to increase.
Rate When imports increase, the demand curve for foreign exchange shifts to the right. There is a depreciation of the
domestic currency.
If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange
shifts outward.
Exchange The purchasing Power (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange
Rates in the rate system.
Long Run According to the theory, as long as there are no barriers to trade like tariffs and quotas, exchange rates should
eventually adjust so that the same product costs the same whether measured in rupees in India, or dollars in the
US, yen in Japan and so on, except for differences in transportation.
TERMS ASSOCIATED WITH EXCHANGE RATE
Terms Meanings
Par value System In accordance with this system, each IMF member nation was expected to specify the value of its currency
in terms of either gold or the US dollar and to keep (or peg) the market value of that currency within a
percentage of the specified (par) value.
The Gold Standard • It links the value of a nation’s currency or paper money directly to the price of gold.
• A country that adheres to the gold standard establishes a fixed gold price and buys and sells gold at that
rate.
• The value of the currency is established using that fixed price of gold.
• The gold standard is not currently used by any government
Triffin Dilemma According to the Triffin Dilemma, there may be inconsistencies between domestically focused short-term
goals and globally focused long-term goals when a national currency also functions as an international
reserve currency.
Special Drawing The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member
Rights (SDRs) countries. It is not a currency. It is a potential claim on the freely usable currencies of IMF members.
A basket of currencies defines the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound.
INTERNATIONAL ECONOMICS II
CURRENCY CONVERTIBILITY
Currency Convertibility
Meaning The ease of exchanging one currency for that of another nation’s currency or gold is called Currency Convertibility
Convertibility 1. Current Account Convertibility
of a rupee 2. Capital Account Convertibility
Currency Convertibility
Current Account Convertibility
Meaning Freedom to convert domestic currency into foreign currency and vice versa for trade in goods and Invisibles
(services, transfers or income from investment).
Includes Current Account Transactions
• due in connection with foreign trade
• Payments due as interest on loans
• Payments due as net income from other investments;
• remittances for family living
Status in India India has full convertibility of rupee on current account (100%) since 1993.
Capital Account Convertibility
Meaning Freedom to convert local financial assets into foreign financial assets and vice versa.
Include Capital Account Transactions
• FDI
• FPI
• External commercial Borrowing
• Aid
Status in India There is partial capital account convertibility in India. According to the recommendation of the second Committee
on the Capital Account Convertibility (CAC) chaired by S.S.Tarapore (2006), India has been moving towards full
capital account convertibility with some additional safeguards
Reason Due to the unpredictability of local and foreign capital inflows and outflows, developing nations are typically
for Partial cautious when opening up their capital accounts. This may result in an excessive rate of currency appreciation or
Convertibility depreciation, which would affect the country’s monetary and financial stability.
Note India has come a long way in liberating the capital account transactions in the last three decades and currently
has partial capital account convertibility. For example:
• Increasing the foreign portfolio investment limits in the Indian debt markets,
• introducing the Fully Accessible Route (FAR) — through which non-residents can invest in specified government
securities without any restrictions
• easing of the external commercial borrowing framework by relaxing end-user restrictions
• Inward FDI is allowed in most sectors
FOREIGN INVESTMENT
Foreign Investment
Meaning Foreign investments are substantial investments made by a company into a foreign concern
Type Foreign Direct Investment (FDI); Foreign Portfolio Investment(FPI); Foreign institutional
Investment(FII)
Foreign Direct Investment (FDI)
Meaning FDI means an investment in a foreign country that involves some degree of control and participation
in management. It corresponds to the investment made by a multinational enterprise in a foreign
country.
Foreign Portfolio Investment(FPI)
Meaning FPI means the entry of funds into a nation where foreigners deposit money in a nation’s bank or make
purchase in the stock and bond markets, sometimes for speculation. The investor under portfolio
investment does not get directly involved into production and marketing operations. There is no
control and participation in the management.
Foreign institutional Investment(FII)

Meaning Foreign Institutional Investors is an important type of the Foreign Portfolio Investors. Foreign
institutional investors are companies located outside India that make investment proposals in
India. FII is an investment in hedge funds, insurance companies, pension funds and mutual funds.
For example, a mutual fund in the United States can make investment in an India-based company
Comparison: FDI Vs. FII
Foreign Direct Investment Foreign Portfolio Investment
Long term interest in mind Sort term Interest in mind of the investors for short term financial gains
of Investors for making long
term financial gains
some degree of control No control and participation in the management.
and participation in
management
investor usually acquires involves the purchase of securities
foreign business assets
It is long term stable Short term investment. Considered as hot money
investment
bringing money with No such obligation
knowledge, skills and
technology
Foreign Investment Promotion Board (FIPB)
Meaning It was an inter-ministerial body, responsible for processing of FDI proposals and making
recommendations for Government approval.
Function It considered Foreign Direct Investment (FDI) proposals requiring Government approval.
Permanent members of 1. Secretary to the Government of India, DEA, Ministry of Finance - Chairman
the Board 2. Secretary to the Government of India, Department for Promotion of Industry and Internal Trade
(DPIIT).
3. Secretary to the Government of India, Department of Commerce (DoC).
4. Secretary to the Government of India (Economic Relations), Ministry of External Affairs (MEA).
5. Secretary to the Government of India, Ministry of Overseas Indian Affairs (MOIA)
6. Secretary, Department of Revenue (DoR), Ministry of Finance (co-opted permanently).
7. Secretary, Ministry of Small and Medium & Micro Enterprises (co-opted permanently).
Abolished It was abolished in 2017. Subsequent to the abolition, the work of granting government approval
for foreign investment under the extant FDI Policy and FEMA Regulations, has been entrusted to the
concerned Administrative Ministries/Departments.
Foreign Investment Facilitation Portal
Meaning The Foreign Investment Facilitation Portal (FIFP) is the new online single point interface
of the Government of India for investors to facilitate Foreign Direct Investment.
Administered by Administered by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of
Commerce & Industry.
How does it work? • After FIPB abolition, the FDI proposals were required to be filed only on Foreign Investment
Facilitation Portal (FIF Portal)
• Proposals filed on FIF Portal are forwarded to the concerned Administrative Ministry and are also
simultaneously marked to Ministry of External Affairs (MEA) and Reserve Bank of India (RBI) for
comments and to Ministry of Home Affairs (MHA) for necessary security clearance.
• A Standard Operating Procedure (SOP) for processing of FDI proposals are laid down by DPIIT.
REGULATION OF FOREIGN INVESTMENT IN INDIA
Regulation Foreign Investment in India is governed by the FDI policy announced by the Government of India and
the provisions of the Foreign Exchange Management Act (FEMA) 1999.
Objective of FEMA The main objective of FEMA is to regulate, consolidate and amend the law relating to foreign exchange
to facilitate foreign investment, external trade and payments and promote the orderly development
and maintenance of the foreign exchange market in India within the broad policy framework on
foreign investment issued by the Government from time to time.
Liberalised policy for FDI To enhance the inflows of foreign investment, some policies further liberalised are:
in India • The ‘construction’ and ‘real estate brokerage’ open to receive 100% FDI under an automatic
route.
• ‘Aviation’ sector allowed receiving 49% FDI under automatic route which also includes the public
sector aviation company Air India.
• The ‘single-brand retail trading’ (SBRT) is now open for 100 per cent FDI under an automatic
route.
• Foreign institutional investments/foreign portfolio investments (FIIs/FPIs) have been allowed in
‘power distribution’ over and above the FDI limit of 49% under the automatic route. Earlier, it
used to be allowed but under the overall FDI limit.
• The marketplace-based model of the ‘e-Commerce’ sector has been allowed to receive 100% FDI
under the automatic route. But this ease came with a rider—sales of any vendor through them
or its group companies are limited to 25% of the total sales of such vendor.
Entry Routes For FDI
Automatic route Automatic route means the entry route through which investment by a person resident outside
India does not require the prior approval of the Reserve Bank of India or the Central Government.
Government Route Government Route means the entry route through which investment by a person resident outside
India requires prior Government approval. Foreign investment received under this route shall be
under the conditions stipulated by the Government.
Items
Automatic route Government route Prohibited
Medical devices: up to 100% Banking & Public Lottery Business
sector: 20%
Petroleum Refining (By PSUs): Broadcasting Content Gambling and Betting including
49% Services: 49% casinos
Infrastructure Company in the Multi-Brand Retail Chit funds
Securities Market: 49% Trading: 51%
Power exchange: 49% Core Investment Manufacturing of cigars, cheroots,
Company: 100% cigarillos and cigarettes, of tobacco
or tobacco substitutes
Pension: 49% Satellite Atomic Energy Generation
(Establishment and
operations): 100%
Services under Civil Aviation Food Products Retail Trading in Transferable Development
Services such as Maintenance & Trading: 100% Rights (TDRs)
Repair Organizations
Thermal power: up to 100% Nidhi Company
Sterilisation by RBI
Meaning • Refers to the Central Bank’s operation of removing the excess money supply created as a result of its intervention
in the foreign exchange market. RBI performs this in case of India.
• In this case, an excessive amount of money was created when the RBI exchanged rupees for dollars on the
foreign exchange market
Involves Buying and selling of financial asset in the open market by RBI
Reason for • When there is high value of foreign currency in forex market (due to capital inflows (like foreign investment
Sterilisation inflows)), ---------the rupee may appreciate.
• An excessive amount of rupees appreciation will boost imports while deterring exporters.
• RBI will purchases foreign dollars from the foreign exchange market
• In exchange, the RBI has to give rupee.
• Thereby raising money supply (rupees) and decreasing the dollar supply.
• The excess rupee supply created in the market will result in inflation
• To end inflation, this extra money supply must be removed.
• The act of removing surplus money from circulation is known as sterilization.
Instruments • Open Market Operations (OMO), Liquidity Adjustment Facility (LAF), Forex Swaps etc.
used by RBI
TRADE AGREEMENTS
Classification Of Trade Agreements

Based on Preferential trade agreements (PTA)
degree of • When a country gives preference to export or import a particular product from a particular country then
integration both of the country sign an agreement called preferential trade Agreement.
Partial Scope Agreement (PSA)
• A PSA is only partial in scope, meaning it allows for trade between countries on a small number of goods.
Free trade agreements (FTA)
• Free trade agreements (FTA) are aimed to reduce the obstacles to trade between two or more countries,
which support protecting local markets and industries.
• Under a FTAs, goods and services can be bought and sold across international borders with little or no
government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
Custom union (CU)
• An agreement among countries to allow free trade between them and to create common external barriers
to any other country interested in exporting to them. E.g.-Gulf cooperation council (GCC).
Common Market
• A type of custom union where there are common policies on product regulation and free movement
of goods and services, capital and labour also. E.g. - Southern Common Market (Mercosur).
Economic union
• It is a type of trade bloc which is composed of a common market with a customs union.
Based on • Bilateral - It is the trade agreement between two countries: E.g.: Preferential trade agreement between
country India and Mercosur etc.
participation • Multilateral- It is the trade agreement between more than two countries: E.g.: RCEP, APTA etc.
Trade Barriers
Tariff Barriers • Tariff barriers are taxes and duties/tariffs on some specific products’ imports.
• If these are increased, then it would be costlier to import such products making them out of demand and
competition.
• For Example-If a country (USA) announced 50% tariff on imported steel, and aluminium & other commodities
from China, India and other nations
Non-Tariff • Non-Tariff barriers are ‘Specific Rules’ that make trading hard to survive. There are various types of Non-tariff
Barriers Barriers. They are:
• Licenses: Only when a company receives a trade license, it is allowed to import products.
• Quotas: This is to fix a limit on the amount of imports/ exports so that it becomes tough to trade
• Embargoes: When a nation–or a group of countries–officially bans the exchange of goods and services with
another country, it is known as an embargo.
• Sanitary and Phytosanitary (SPS): It sets out the basic rules for food safety and animal and plant health
standards. These precautions are taken to protect against food safety, animal health, and plant protection
threats. But these can be misused to restrict certain products on the lines of poor quality etc.
• Subsidies It is special support by a government in terms of money to help a local company/ firm with a
competitive advantage in the international market.
India and Trade Agreements

India and Free Trade Agreement
India has signed 13 Free Trade Agreements (FTAs) with its trading partners, including the 3 agreements, namely
India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA), India-UAE Comprehensive
Partnership Agreement (CEPA) and India-Australia Economic Cooperation and Trade Agreement (IndAus ECTA) signed
during the last five years.
The list of FTAs signed by India is as under
India-Sri Lanka Free Trade Agreement (FTA) + Agreement on South Asian Free Trade Area (SAFTA) + India-Nepal Treaty
of Trade + India-Bhutan Agreement on Trade, Commerce and Transit + India-Thailand FTA - Early Harvest Scheme (EHS) +
India-Singapore Comprehensive Economic Cooperation Agreement (CECA) + India-ASEAN CECA - Trade in Goods, Services
and Investment Agreement (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and
Vietnam) + India-South Korea Comprehensive Economic Partnership Agreement (CEPA) + India-Japan CEPA + India-Malaysia
CECA + India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA) + India-UAE CEPA (*)
Signed, but yet to be implemented. + India-Australia Economic Cooperation and Trade Agreement (ECTA) (*)Signed, but
yet to be implemented.
Regional Comprehensive Economic Partnership (RCEP)
Regional Comprehensive Economic Partnership (RCEP)
Meaning It is a trade agreement between the member states of the Association of Southeast Asian Nations (ASEAN) and its
free trade agreement (FTA) partners. The pact aims to cover trade in goods and services, intellectual property, etc.
Introduced introduced during the 19th ASEAN meet held in November 2011
Member states Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, China,
Japan, South Korea, Australia and New Zealand.
Objective To create an integrated market with 16 countries, making it easier for products and services of each of these
countries to be available across this region.
India’s concern • On November 4, 2019 India decided against joining the 16-nation Regional Comprehensive Economic
Partnership (RCEP) trade deal.
Indian industries would be unable to compete with China.
Chinese goods would flood Indian markets.
Comprehensive Economic Cooperation and Partnership Agreement (CECPA)

Comprehensive Economic Cooperation and Partnership Agreement (CECPA)
Meaning It is a form of free trade agreement that intends to offer a formal system for promoting and enhancing trade between
the two countries.
Introduced India and Mauritius signed the Comprehensive Economic Cooperation and Partnership Agreement (CECPA) on 22
February 2021. The CECPA is the first trade Agreement signed by India with a country in Africa.
Coverage • The Agreement is a limited agreement. It will cover:
Trade in Goods, Rules of Origin, Trade-in Services, Technical Barriers to Trade (TBT), Sanitary and Phytosanitary
(SPS) measures, Dispute Settlement, Movement of Natural Persons, Telecom, Financial services, Customs
Procedures and Cooperation in other Areas.
Benefits for • Export items includes food stuff and beverages, agricultural products, textile and textile articles, base metals and
India articles thereof, electricals and electronic item, plastics and chemicals, wood and articles, etc.
• Indian service providers will have access to around 115 sub sectors from the 11 broad service sectors such
as professional services, computer related services, research & development, other business services,
telecommunication, construction, distribution, education, environmental, financial, tourism & travel related,
recreational, yoga, audio-visual services, etc.
South Asian Free Trade Area (SAFTA)

South Asian Free Trade Area (SAFTA)
Meaning It is the free trade arrangement of the South Asian Association for Regional Cooperation (SAARC).
Note: SAFTA recognizes the need for special and differential treatment for LDCs in its preamble.
Introduced The agreement came into force in 2006, succeeding the 1993 SAARC Preferential Trading Arrangement.
Membership SAFTA signatory countries are Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
Asia-Pacific Trade Agreement (APTA)

Asia-Pacific Trade Agreement (APTA)
Meaning • It is a preferential regional trade agreement formerly known as the Bangkok Agreement.
• APTA aims to promote economic development of its members through the adoption of mutually beneficial
trade liberalization measures.
• The United Nations Economic and Social Commission for Asia and the Pacific’s Trade, Investment and Innovation
Division (TIID) (UNESCAP) is the APTAS secretariat.
Introduced Introduced in 1975.
Membership Bangladesh, China, India, Korea, Lao PDR, Republic of Korea and Sri Lanka. Mongolia acceded to the Asia Pacific
Trade Agreement (APTA) in 2020.
TRADE: INDIA’S TRENDS
Top 10 export and Import commodities in India

Rank Top 10 export commodities according to economic survey Top 10 import commodity according to economic survey
2021-2022 2021-2022
1 Petroleum products Petroleum Crud
2 Pearl, Precious, Semiprecious Stones Gold
3 Iron and Steel Petroleum Products
4 Drug Formulations, Biologicals Pearl, Precious, Semiprecious Stones
5 Gold and other precious metal jewellery Coal, Coke and Briquittes, etc.
6 Organic Chemicals Electronics Components
7 Electric Machinery and equipment Vegetable Oils
8 Aluminium, Products of Aluminium Organic Chemicals
9 Products of Iron and Steel Computer Hardware, Peripherals
10 Marine Products Plastic Raw Materials
Top 10 export and Import destinations of India

S.no Export Destinations Import Destination
1 USA China
2 UAE UAE
3 China USA
S.no Export Destinations Import Destination

4 Bangladesh Saudi Arabia
5 Hong Kong Iraq
6 Singapore Switzerland
7 Netherlands Hong Kong
8 UK Indonesia
9 Belgium Singapore
10 Germany South Korea
Capital Account Balance of India is shown in the figure for the year 2019-20 and 2020-21
S. No. Year/Item (Net) 2019-20 2020-21
1. Capital Account 83.2 63.7
2. Foreign Investment 44.4 80.1
3. Foreign Direct Investment (FDI) 43.0 44.0
Foreign Portfolio Investment (FPI) 1.4 36.1
4. Loans 25.7 6.9
5. Banking Capital -5.3 -21.1
6. Rupee Debt Service -0.1 -0.1
7. Other Capital 18.5 -2.1
8. Capital Account Balance to GDP ratio (Percent) 2.9 2.4
TERMS ASSOCIATED WITH INTERNATIONAL ECONOMICS
Protectionism And Currency Manipulations

Meaning • Government acts and policies that restrict or restrain international trade are known as protectionism.
• Government actions to affect the value of their currencies in relation to other currencies are referred to as
currency manipulation.
Implication of Protectionism And Currency Manipulations
Inflation • Currency manipulation leads to higher import costs, limiting consumer choice and forcing them to pay more
for a limited supply of goods and services, resulting in inflation.
• Protectionism raises import costs by forcing businesses and producers to pay more for equipment,
commodities, and intermediate items imported from other countries. This will result in a drop in real GDP.
• Protectionism affects not only the flow of products and services, but also the availability of skilled labour.
Any restrictions on this will not only increase unemployment but also stifle economic growth.
Impact on • Protectionism may encourage inefficiencies in the growing business because it will have no motivation to
Industries become more efficient through the use of technology and long-term investments.
Deficit in the • Protectionism makes intermediate commodities that are part of the global supply chain more expensive in
Current Account the absence of a strong export base, resulting in a widening CAD.
Quantitative Easing
Meaning • Quantitative easing means buying of assets by a nation’s central bank in order to inject money into the
financial system. Central Bank purchases securities from the open market to reduce interest rates and
increase the money supply.
Implication • Inflation: As money is increased in an economy, the risk of inflation looms.
• Devalued Currency: As the money supply expands as a result of quantitative easing, the domestic currency
may devalue. A devalued currency makes imports more expensive.
Protectionism And Currency Manipulations

Other Terms
Fed Tapering In the process of quantitative easing, central banks can’t endlessly buy securities and pump money into the
economy. When they believe the economy has recovered sufficiently, they work on winding down asset purchases.
This process is called “tapering.” It does not imply selling the assets acquired, but is instead seen as a sign of
tighter monetary policy or a sign that interest rates will rise.
External ECBs are the commercial loans which can be in the form of bank loans, securitized instruments such as floating
Commercial or fixed rate bonds, partially, optionally or non - convertible preference shares, buyer’s credit or supplier’s credit
Borrowings availed from the non-resident lenders.
Forex Swaps: A foreign currency swap is an agreement between two parties to swap interest payments on a loan made in
Foreign one currency for interest payments on a loan made in another currency.
Currency Swap
CHAPTER 8
Inflation and Taxation

MEANING OF INFLATION
Inflation refers to the persistent increase in the average price of goods and services over a period of time. It reflects
on the declining purchasing power of money.
Rate of Inflation
The rate of inflation is the rate of change in the average prices of goods and services over a period of time. It is
represented in percentage terms or in digits/points. It is calculated in the following way:
(where x is the current year, and x-1 is the previous year)
Types of Inflation
On the basis of speed
Creeping Inflation Creeping inflation is slow-moving and very mild. Inflation rate is in the range of 1% to 5%.
Walking Inflation When prices rise moderately and the annual inflation rate is a single digit (3% - 9%).
Running Inflation When prices rise rapidly like the running of a horse at a rate of speed of 10% - 20% per annum.
Galloping inflation Galloping inflation or hyper-inflation points out to unmanageably high inflation rates that run into two or
three digits. By high inflation the percentage of the
same is almost 20% to 100% from an overall perspective. The first hyperinflation of the 21st century Zimbabwe’s
annual inflation rate surged to an unprecendented 3714 percent at the end of April 2007.
Based on the Causes
Demand-Pull If the demand is high for a product and supply is low, the price of the products increases. This is called
Inflation Demand pull Inflation.
Cost-Push Inflation This inflation occurs when there is reduction of supply of goods and services due to increased prices of inputs.
This is also known as supply shock inflation.
Structural Inflation This inflation occurs due to the operation of the structural weakness (supply bottleneck, lack of infrastructure,
etc.) existing in an economy. Structural inflation prevails in most developing countries. Inflation in India is
largely due to structural factors.
On the basis of inducement
Currency inflation The excess supply of money in circulation causes rise in price level.
Credit inflation When banks increase its lending credit, the money supply increases and thereby rising prices
Deficit induced The deficit budget is generally financed through printing of currency by the Central Bank. As a result, prices rise.
inflation
Scarcity induced Scarcity of goods happens either due to fall in production (example. farm goods) or due to hoarding and
inflation black marketing. This also pushes up the price. Example: This has happened is Venezula in the year 2018
Tax induced Increase in indirect taxes like excise duty, custom duty and sales tax may lead to rise in price (eg. petrol and
inflation diesel). This is also called taxflation.
Inflation and Taxation 107
Causes of Inflation
Factors Impacts
Money Supply When Money Supply increases—------> aggregate demand increases—-----> Leads to Inflation.
Disposable Income When disposable income increases demand of Goods and services increases—-----> Leads to inflation. Note:
Disposable income may increase with the rise in national income or reduction in taxes or reduction in the
saving of the people.
Public Expenditure Government spending on social welfare program & developmental activities increases—---->Price level
increases
Cheap Money Policy Policy of credit expansion —----> money supply in the market increases-- demand of Goods and Services
increases----> Price of Goods and services increases.
Deficit Financing Deficit financing by borrowing from the public and even by printing more notes—------> aggregate demand
increases in relation to aggregate supply—-------> Price of Goods and services increases
Repayment of Public When government repays its past internal debt to the public—--> money supply with the public increases—---->
Debt aggregate demand for goods and services increases—- —>Price of Goods and services increases
Increase in Exports When exports increases—----> domestic supply of goods can decline—---> Price level rises.
Measures of Inflation in India

Wholesale Price Index (WPI)
Wholesale Price Index (WPI) represents the price of goods at a wholesale stage.
Characteristics of WPI
• WPI helps in measuring the macroeconomic and microeconomic conditions of the economy.
• WPI provides estimates of inflation at the wholesale transaction level for the overall economy. Thus, it helps in timely
intervention by the government to monitor inflation before the price hike spills over to retail prices.
• Business organizations, policymakers, accountants, and statisticians use WPI as an indexing tool to formulate price
adjustment
Commodity Basket of WPI
Compiled by: Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade, Ministry of Commerce
& Industry.
Base Year: The current base year is 2011-12 (Earlier 2004-05).
Primary Articles Fuel and Power Manufactured Products
Food Items and non-food Items Coal, Electricity, petrol, diesel, etc. Textiles, Apparels, Paper, Chemical, also include
and Minerals Weightage- from 14.9% (2004-5 manufacture food like sugar, vegetable oil
Weightage- from 20.1% (2004-5 series) to 13.15 % (2011-12 series) Weightage-from 64.9% (2004-5 series) to 64.2% (2011-
series) to 22.6 % (2011-12) 12 series)
New Changes since 2017
Government in 2012 appointed the Saumitra Chaudhary committee to review the Wholesale Price Index Methodology which
suggested changes in base year, weightage of commodities and number of commodities.
Highlights of the changes
• Change in base year: from 2004-5 to 2011-12
• Change in the weightage in the commodity Basket. (mentioned above)
• WPI Food Index- It measures the rate of inflation in food items at the wholesale level. It comprises of “Food Articles” under
“Primary Articles” and “Food Products” under “Manufactured Products”. Along with Consumer Food Price Index (released by
NSO), WPI food Index would help monitor the price situation of food items better.
Working Group for Revision of WPI

Working Group for Revision of WPI
• A Working Group (WG) for revision of Wholesale Price Index (WPI) was set up under the Chairmanship of Prof. Ramesh Chand,
Member, NITI Aayog on 25th June, 2019 with the mandate to revise the base year from 2011-12 to 2017-18.
• The base year revision of WPI is a periodical exercise. The last revision has been done considering 2011-12 as a base year which
was introduced in 2017 on which the current series of WPI is based.
Key recommendations of the Working Group are as follows:
• The year 2017-18 may be considered as new base year of WPI.
• The Weighting Diagram derived based on triennium average may be adopted in new series of WPI.
• Re-examination of the weighting diagrams and bringing out the reason of increasing weight of rising relative share of Primary
Articles and Food Index.
• The new sources for collection of WPI data may be explored to make price indices more representative.
Consumer Price Index (CPI)

The CPI measures changes in the general level of prices of goods and services that households acquire for consumption
over a period of time. In short, it measures the average change in retail prices of goods and services.
Types of CPI compiled in India

CPI All India rural This index tracks the price level of goods and services consumed by the rural population in India.
Base Year: 2012 Compiled by: The Price Statistics Division of the National Statistical Office, Ministry of Statistics and Programme
Implementation compile this index.
CPI All India It tracks the prices of goods and services consumed by urban consumers in India.
(Urban) Compiled by: The Price Statistics Division of the National Statistical Office, Ministry of Statistics and Programme
Base Year: 2012 Implementation compile this index.
CPI All India • This index tracks the prices of goods and services consumed by all retail consumers in India.
(Combined) • Compiled by: The Price Statistics Division of the National Statistical Office, Ministry of Statistics and
Base Year: 2012 Programme Implementation compile this index
• This index is a general representation of the price rise in the Economy.
• The RBI uses the CPI (combined) as the sole inflation measure for the purpose of targeting inflation.
Components of CPI (All India Combined) in decreasing order
In 2015, the Central Statistics Organization (now NSO) in the Ministry of Statistics and Programme Implementation (MOSPI) revised
the base year of CPI from 2010 to 2012. The weights of the components have thus been revised since 2015.
1. Food and Beverages
2. Miscellaneous category: Health, education, transport, recreation etc.
3. Housing. Only counted for Urban areas and not rural.
4. Fuel and light
5. Clothing and Footwear
6. Pan, tobacco and intoxicants
Note: The six components are in decreasing order of their weight.
• Headline Inflation: When all the 6 components are taken into consideration to tracks the prices, it is called as headline Inflation.
• Core Inflation: When Food inflation (first Category) and fuel inflation (4th category) is deducted from the headline Inflation, it
is core inflation.
• Consumer Food Price Index: It is food inflation shown separately
CPI for Industrial • The CPI (IW) tracks the prices of goods and services consumed by industrial workers.
Workers • Compiled by the Labour Bureau under the Ministry of Labour & Employment.
Base Year: 2016 • Significance of this index is that:
• The Dearness Allowance (DA) of government employees is announced twice a year based on the changes
in this index.
• Pay Commissions refer to this index while considering revisions in the pay structures of government
employees.
CPI for Agricultural •
The CPI (AL) tracks the prices of goods and services consumed by agricultural labourers.
Labourers •
It is compiled by the Labour Bureau under the Ministry of Labour & Employment.
Base Year: 1986- •
It is based on this index, the minimum wages of agricultural labourers are revised in the different states
87 in India
Types of CPI compiled in India

CPI for Rural •
The CPI (RL) tracks the prices of goods and services consumed by rural labourers.
Labourers Base •
It is compiled by the Labour Bureau under the Ministry of Labour & Employment
Year: 1986- 87.
Difference between WPI and CPI:

WPI CPI
Tracks inflation at producer level. Tracks prices at the consumer level.
WPI does not include Services. CPI includes both Goods and Services
More weightage is given to manufactured goods. More weightage is given to food items.
GDP Deflator
It is the ratio of the value of the final goods and services that a country produces domestically during a particular year
(GDP) at current prices to that of the value of the final goods and services that a country produces domestically during a
particular year (GDP) at constant prices. It is also referred to as the Implicit Price Deflator. If the GDP deflator is greater
than 1, it implies a rise in price (inflation) levels compared to the base year.
Comparison of WPI, CPI and GDP Deflator
WPI CPI GDP deflator
Measures inflation at the wholesale Measures inflation at the retail level. Measures inflation at the level of overall economy.
level.
Includes a representative list of goods in Includes a representative list of Includes only domestically produced goods and
the Indian wholesale market. goods and services consumed. services.
Covers only goods. It covers both goods and services Measures overall goods and services produced
which are consumed by the customers in the economy.
in the representative basket.
Published by the Office of Economic Published by CSO. Published by the Ministry of Statistics and
Advisor, Ministry of Commerce. Programme implementation.
Released every month. Released every month. Available only on a quarterly basis when GDP
figures are available.
IMPACTS OF INFLATION
Areas Meanings
On Purchasing It implies that people spend more money to purchase the same quantity of commodities they purchased
Power earlier at a lower price.
On Savings In the short-run, inflation increases the rate of savings in an economy. This is because as the value of money
falls, households begin to deposit it in banks in the hope of drawing interest from the money
In the medium and long run, the effect of inflation on the rate of savings in an economy reverses. The reason
is that due to inflation, there is a fall in the purchasing power of money and a rise in the cost of living of
people, which leads to lower household savings.
On The Rate of As the rate of savings falls due to inflation, the availability of money in the banks declines and credit becomes
Interest costlier. Consequently, the banks raise the rate of interest to match the demand
On Lending As inflation rates continue to rise, in the medium and long-run, banks are forced to revise their lending rate
and thus the credit from the lending institutions is lower.
Areas Meanings
On Investment In the short run, inflation increases the aggregate demand for goods and services. This encourages greater
production, and entrepreneurs invest in their businesses further to expand the level of production. In the
medium and long run, as the rate of inflation rises further, credit becomes costlier due to higher interest rates.
It dampens the investment sentiment in the economy and hampers the process of growth in the economy.
On The Level of As inflation rises, costs for raw materials increase and the level of aggregate supply sees a downfall. In the
Aggregate Demand medium and long run, as the rate of inflation continues to rise and the purchasing power of money keeps
And Supply eroding further, the aggregate demand falls.
On Employment • In the short- run, mild inflation leads to an increase in the aggregate demand for goods and services.
This encourages greater production, creates greater employment opportunities, and increases workers’
wages.
• In the medium and long run, as the rate of inflation continues to rise and the purchasing power of money
keeps eroding further, the workers start demanding higher wages. Simultaneously, the investment in
business falls due to the rising cost of credit. As a result, employment generation is affected.
On The Salaried When there is a rise in the general price level of goods and services, then each unit of a currency will buy
Section Of The lesser units of goods and services. This has a negative impact on the standard of living of people.
Society
On The Fixed This section of society suffers severely due to inflation since their incomes remain constant while the prices
Income Group of goods and services are rising.
On Imports As the value of the currency falls due to inflation, imports becomes costlier. This is because we are now
required to pay more domestic currency to import the same quantities of goods and services.
On Exports • In general, exports benefit from inflation and the volume of exports increases. This is because the value
of the currency falls, and more goods can be purchased by international buyers while spending the same
amount of money.
• In real terms, the value of exports decreases.
• Higher domestic prices may lure the exporters to sell within the domestic market rather than export their
goods and services.
• Further, higher costs of production, higher interest rates and lower investments may negatively impact
the supply chain and curtail the exports from a country.
On Balance Of In the short term, it appears that inflation has a favourable impact on the balance of trade of a country as
Trade the volume of exports rise and that of imports falls.
On Creditors And Debtors benefit as the value of money falls while the creditors suffer. Debtors had borrowed when the
Debtors purchasing power of money was high and now repay the loans when the purchasing power of money is low
due to rising prices
On Taxpayers • Taxpayers of a country are adversely affected due to inflation. This is because both direct as well as
indirect taxes increase with a rise in the rate of inflation.
• Due to inflation, government employees are provided with a Dearness Allowance (DA) twice a year. This
increases their income.
• Higher-income implies that their gross income now falls within the higher slabs of the income tax brackets.
Thus, they are required to pay higher direct taxes.
• However, in reality, the value of money is falling due to inflation. Similarly, indirect taxes also rise.
• As indirect taxes are imposed on the value of goods and services, they rise with the prices of goods and
services.
• Overall, the taxation burden on people increases due to inflation. This is called inflation tax .
MEASURES TO CONTROL INFLATION
Measures By RBI
Monetary RBI goes for higher policy rates (which include Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), Statutory
Policy Liquidity Ratio (SLR) etc.). High policy rates increase the cost of borrowing and limit the supply, availability and
flow of money in the economy, thereby decreasing inflation.
High Policy rates-----→Cost of Borrowing increases--→aggregate demand decreases-----→ inflation is controlled
Open Market RBI sells government securities to banks------→ cash with commercial banks would be spent on purchasing
Operations government securities-----→ Money supply in the market decreases-------> commercial bank would reduce credit
(OMOs) supply for the general public--------> aggregate demand decreases------→ inflation is controlled
Moral Suasion RBI may nudge the banks to increase their interest rates to comply with a tight monetary policy regime to curb
the animal spirits in the Economy.
Credit Control RBI can direct banks to increase lending in one sector while decreasing lending in another. For example, if food
inflation is rising, the RBI can direct banks to increase loans in agricultural sectors in order to bring prices down
in the medium term.
Measures By the Government
Fiscal The Government can bring about price stability either through its spending (public expenditure) and/or its taxation
Measures policies in the annual budget.
• Reduction of Government Expenditure-→reduce the money supply in the economy--→price rise can be
checked
• Increase in direct tax---→ the total disposable income would reduce-→ the total spending of individuals’
decreases---→ reduces money supply in the market---→Inflation can be controlled.
• Increase in Savings----→ reduce disposable income with the people---→ personal consumption expenditure
decreases---→aggregate demand decreases-→Price rise can be checked.
Note: government can introduce compulsory provident fund, provident fund-cum-pension schemes, etc. with high
rates of interest to increase the public savings.
Administrative Measures
Food grains Government can partially offload the food grains stocked by the FCI in the open market to keep the rising prices
with Food of food grains in check.
Corporation
of India (FCI)
Wage Control The slowing of pay growth may be an effective way to control inflation if it is the root reason. Cost-push inflation
is lessened by slower wage growth, and demand-pull inflation is kept in check.
Essential Under the Essential Commodity Act of 1955, the Government can declare a commodity to be an essential
Commodities commodity and ensure that it is sold at a reasonable price. At the same time, the government also imposes stock
Act limits on essential commodities from time to time.
Export Ban The government goes for a ban or put a limit on the exports of food items exported if such goods are in short
supply in the domestic market.
At the same time, the government may also reduce import duties or allow duty-free import of essential
commodities or a commodity in demand in the domestic market.
De-hoarding The government can detain individuals who engage in activities such as hoarding, creating artificial scarcity of
essential commodities in the market, and price rigging.
MISCELLANEOUS CONCEPTS RELATED TO INFLATION
Concepts Meanings
Deflation Deflation refers to the decrease in the general price levels of goods and services. Deflation occurs when the
aggregate prices in an Economy fall from the previous level. It reflects the contraction in an Economy.
Note: Deflation discourages consumer spending as they expect further price decline in the future
Concepts Meanings
Disinflation Disinflation refers to a slowdown in the economic growth of an Economy. It means that the growth rate of an
Economy has decreased. Usually, it is a temporary phase in an economy.
Note: disinflation does not mean inflation is negative/deflation. On the contrary, the Economy is still growing, but
the growth rate is slowing down compared to the previous period.
Stagflation Stagflation refers to a situation of an increase in inflation with high unemployment. It happens when the economic
growth of the country is slow.
Note: The problem with stagflation is that it leads to a policy logjam in the country.
• If the government chooses to lower the interest rates, it will lead to higher production, thereby decreasing
unemployment. But at the same time, inflation would rise.
• On the contrary, if the government goes for higher interest rates, it would decrease inflation but also lead to
higher unemployment.
Reflation Reflation refers to the policy of providing fiscal stimulus by the government to recover from recession. It represents
an expansionary fiscal policy by the government. This means that the government increases the money supply,
lowers the taxes and increases its own expenditure.
Open Open Inflation refers to the rise in prices in a free market economy where an increase in aggregate demand leads
Inflation to an increase in the general level of prices in an Economy.
Free market economy is an economy in which the prices of goods are not controlled by the government or any
other Central Authority
Headline Headline Inflation refers to the inflation measured in terms of all goods and services sold in an Economy. Headline
Inflation inflation is measured in India through the Consumer Price Index.
Core Inflation Core Inflation refers to the non-food, non-energy inflation in the Economy. It does not consider the changes in the
food products and energy sources like crude oil. This is because the prices of food and energy products are volatile.
Base Effect It is an effect that takes place by choosing a different reference point for a comparison of two data sets that can
have an impact on the result of the comparison.
Inflationary •
An inflationary gap is the difference between the real GDP and the potential GDP obtained when the economy
Gap has full employment. It was explained by an economist named JM Keynes.
•
For the inflationary gap to exist, there must be a demand for goods and services that exceeds the production
due to the factors such as increased trade activities, increased government expenditure, higher level of overall
employment etc.
•
The inflationary gap indicates the point of expansion in an economy.
Deflationary •
When the potential GDP is higher and the real GDP is lower then this difference is referred to as a deflationary
Gap gap. It is a gap between real GDP and GDP at full employment.
•
For the deflationary gap to exist there must be a decreased demand for goods and services that reduces the
production due to the factors such as decreased trade activities, decreased government expenditure, lower
level of overall employment etc.
•
The deflationary gap indicates the point of contraction in an economy.
Phillips’s •
Philip’s curve states that inflation and unemployment have an inverse relationship. It was propounded by
Curve William Phillips.
•
As inflation rises, unemployment decreases.
•
However, in the long run, there is no ultimate relationship between inflation and unemployment.
This is because sustained inflation can lead to stagnation, causing a loss of jobs. There could be a situation
where inflation may cause lesser or no employment.
•
This theory was true till the 1970s but in the 70s the United States faced the stagflation situation and then
Phillips theory was criticised throughout the world.
Inflation •
Inflation reduces the real rate of return on an investment at the time of its maturity. Inflation Premium is the
Premium bonus brought by inflation to the borrowers. Borrowers now have to return a lesser value of the currency as
inflation has eroded the value of the currency.
TAXATION
INTRODUCTION
Taxation is an instrument used by the Governments to garner resources. These resources are used by the governments
to pay for the expenditure that the government incurs in order to provide services to the people.
Classification of Taxes
Based On Fairness
Progressive Taxation The taxes which increase with an increase in the income level of the person.
Regressive Taxation Regressive taxes are those taxes which make the poor people pay more taxes as compared to the Rich.
Proportional Taxation Proportional taxes are independent of the earnings of an individual. This is also called Flat tax. Goods and
Services Tax (GST) is an example of Proportional tax.
On the basis of who Pays the Taxes
Direct Tax A tax levied on an individual’s income and wealth that is paid directly to the government. Example: Income
Tax
Indirect Tax It is the tax charged on a person who purchases the goods and services and it is paid indirectly to the
government. Example: GST
Comparison between Direct Tax and Indirect Tax

Parameter Direct Tax Indirect Tax
Meaning Tax, levied on person’s income and wealth and is paid Tax levied on a person who consumes the goods and
directly to the government. services and is paid indirectly to the government
Nature Progressive Regressive
Incidence and Falls on the same person Falls on different persons
Impact
Tax base Income or wealth of the Purchase/sale/manufacture of goods and provision
assesse of services
Evasion possible Tax evasion is hardly possible
Inflation Helps in controlling the inflation. Push up price inflation.
Imposition and Imposed on and collected from assesses, i.e. Individual, Imposed on and collected from consumers of goods
collection HUF (Hindu Undivided Family), Company, Firm etc. and services but paid and deposited by the assesse
Burden Cannot be shifted Can be shifted
TAXATION IN INDIA
Taxes in India are levied at three levels by Central Government, State Government and Local authorities such as
panchayats and municipalities.
Direct Taxes in India

Types Meanings
1. Personal •
It is governed by the Income Tax Act, 1961 and is levied on individuals, Hindu Undivided Family (HUF),
Income Tax partnership firms etc.
•
It is levied on taxable income i.e. gross income minus standard deductions and exemptions allowed as per
IT Act.
•
Incomes covered under income tax include- salary, profits from business, rent income , Long term and
short term capital gains from sale of assets and income from other sources like interest , royalty etc.
Types Meanings
2. Corporate Tax •
It is levied on profits earned by companies.
•
Companies (both public and private) which are registered in India under the Companies Act, 2019 are
liable to pay corporate tax.
•
At Present, the corporate tax rate is 25% for domestic corporations with gross turnover up to 400 crores
and 30 % for more than 400 crores.
3. Minimum •
It was introduced from 1997-98.
Alternate Tax •
It is imposed on zero-tax companies at 18.5% of their book profit.
•
(IT Act allows several kinds of exemptions, depreciation, deductions from gross income or book profit,
companies in many instances can show their taxable income as very less, on which the amount of taxes
comes out to be very low. Therefore, for these zero taxes or very less tax Companies, MAT was introduced.)
4. Dividend •
Dividend Distribution Tax (DDT) is a tax levied on dividends distributed by companies out of their profits
Distribution among their shareholders. The Dividend Distribution Tax is taxable at source and is deducted at the time
Tax of the distribution.
•
DDT has been abolished from April 1, 2020.
5.Secuities •
It was introduced in 2004. It is levied at the time of purchase or sale of securities listed on stock exchange.
Transaction Tax •
The intention behind levying STT is to curb evasion of capital gains tax on profits earned by transacting in
securities.
•
The rate of STT varies across the types of securities.
6. Wealth Tax • It was governed by the Wealth Tax act 1957.
• It was levied on the net wealth owned by an individual, a HUF or a company on the date of valuation (31st
March).
However, wealth tax was not applicable to trusts, partnership firms, cooperative societies, political parties etc.
• It was abolished w.e.f 1 April 2016
7. Professinal Tax •
It is levied and collected by the state governments (unlike other direct taxes).
•
It is imposed on professionals or employees who earn a salary. Examples of professional tax payee include
CA, Lawyers, and Doctors etc.
8. Fringe Benefit •
It was introduced in 2005.
Tax •
It was fundamentally a tax that an employer had to pay in lieu of the benefits that were given by him to
his employees like telephone reimbursements, free or confessional tickets etc.
•
Fringe Benefit Tax was withdrawn in 2009.
9. B
anking Cash •
It was introduced in 2005 and was levied at 0.1% on cash withdrawal exceeding Rs. 25, 000 in a day by an
Transaction individual or HUF from a bank account (other than savings bank account).
Tax •
BCTT was withdrawn in 2009.
10. Capital Gains • Any profit or gain arising from the sale of “capital assets“ is a capital gain.
tax • It is taxed in the year in which the transfer of the capital asset takes place. It can be either short- or long-
term.
• Long-term capital gains tax: Tax on gains made in assets held for over 3 years. For shares and mutual funds,
it is 1 years.
• Short-term capital gains tax: Tax on gains made in assets held for 3 years or less.
11. Agriculture Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural
Income Tax income generally means:
• Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
• Any income derived from such land by agriculture operations including processing of agricultural produce
so as to render it fit for the market or sale of such produce.
• Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard
in section 2(1A).
• Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income
As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax.
Indirect Taxes in India
Types Meaning
1. Excise Duty • It was implemented in 1944.
• It is collected on the manufacturing of products in India.
• Except for alcoholic drinks and narcotics, the central government imposes an explicit excise levy.
• It has now been replaced by GST.
Three kinds of excise duties existed in India are:
Basic Excise Duty Additional Excise Duty Special Excise Duty

Levied on goods that were classified Levied on goods of high Levied on special goods classified
under the first schedule of the importance, under the Additional under the Second Schedule to the
Central Excise Tariff Act, 1985. It Duties of Excise (Goods of Special Central Excise Tariff Act, 1985.
was applied on all goods except salt. Importance) Act, 1957.
2. C
entral Sales •
It was implemented in 1956.
Tax •
It was the Union tax levied on sale of items in inter-state trade, and it was assigned to the ‘Origin state’.
•
It’s now replaced by GST.
3.Customs Duty •
It was implemented in 1962.
•
When commodities are transferred across international boundaries, customs duty is applied as a tariff or
tax.
•
Its goal is to safeguard the country’s economy.
4. Basics •
This is imposed on imported commodities under Section 12 of the 1962 Customs Act.
Custom Duty •
The tax rate is determined by the First Schedule of the 1975 Customs Act.
5. Protective •
This is imposed when customs authorities believe that exporting a specific good will harm the country’s
Duty economy.
6. Safeguard •
This is levied if the customs authorities feel that the exports of a particular good can damage the economy
Duty of the country.
7.Countervailing •
Countervailing duties are levied to compensate for the negative effects of import subsidies and to protect
Duty domestic producers.
•
The countervailing measures in India are administered by the Directorate General of Anti-dumping and Allied
Duties (DGAD).
8. Anti-Dumping •
It is a customs duty on imports providing a protection against the dumping of goods at prices substantially
Duty lower than the normal value.
•
Anti-dumping duty is a protectionist tariff on such products.
•
India has initiated maximum anti-dumping cases against dumped imports from China.
9. Service Tax • In India, a service tax is levied on all services rendered.
It also had a ‘negative list’ exclusion criterion, where some services are excluded from the tax net.
• It is now subsumed under GST.
10. Value Added •
VAT is a multipoint consumption tax levied by states on a commodity whenever it adds value at any point
Tax in the supply chain, from production to sale.
•
Here, tax is levied at each stage of the transaction in the production/ distribution chain.
•
The tax paid at an earlier stage is called ‘Input tax credit (ITC)’, and this credit can be used against a tax at
a later stage.
•
It has now been subsumed under GST.
Goods and Services Tax (GST)

About GST
Meaning Comprehensive, multi-stage, destination-based tax that is levied on every value addition. It is an indirect
tax levied on the supply of goods and services.
Implementation The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect
on 1st July 2017.
About GST
Amendment to the •
GST was introduced in 2017 as a comprehensive indirect tax for the entire country by the 101st
Constitution for GST Constitutional Amendment Act.
•
Under Article 246A of the Constitution, the GST is charged and administered by the Centre and the
States
Constitutional • Article 246A- States given power to tax goods and services. Note- Only Union has power to tax inter-
provisions related state supply of goods and services in the form of IGST
to GST • Article 269A- IGST will be distributed between Union and States as per the formula given by GST Council
• Article 270: CGST will be distributed between Union and States as per the formula given by Finance
Commission.
• Article 279A: President of India to appoint a constitutional body – GST Council
Components of GST 1. Central GST (CGST): It is imposed by the Centre.
2. State GST (SGST): It is imposed by the States.
3. Integrated GST (IGST): It is imposed on inter-state supplies of goods and services.
Taxes subsumed Central taxes subsumed under GST: Excise Duty, Additional Excise Duty, Service Tax, Additional Customs
under GST Duty commonly known as Countervailing Duty; and Special Additional Duty of Customs.
State taxes subsumed under GST: State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax
levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and
Entry tax, Purchase Tax, Luxury tax; and Taxes on lottery, betting and gambling
Items outside the •
Petrol, high-speed diesel, aviation turbine fuel, crude oil.
purview of GST in •
Electricity
India •
Alcohol used for human consumption
•
Natural Gas.
GST slab •
0%, 5%, 12%, 18% & 28%.
No tax (0%) Goods •
items like jute, fresh meat, fish chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and
vegetables, flour, besan, bread, prasad, salt, bindi, etc.
GST Council
Meaning •
Goods and Services Tax Council (GST Council) is a constitutional body.
•
It is tasked with making recommendations to the Union and State governments on matters pertaining
to the Goods and Services Tax.
Function •
Determination of the principles of levying the taxes, cesses, and surcharges.
•
Listing the items and services that are either subject to GST or are exempt from GST.
•
Determining the annual revenue threshold below which goods and services are excluded from GST.
•
Providing special provisions for the Hilly states of Arunachal Pradesh, Assam, Jammu and Kashmir,
Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, and Uttarakhand
Composition of GST • Union Finance Minister as Chairperson.
council • The Minister of State in charge of Revenue or Finance in the Union.
• Each state’s Finance or Taxation Minister, or any other Minister appointed by the state government.
Note
• The members of the Council from the states must elect a Vice-Chairperson of the Council from among
themselves.
• Secretary (Revenue) is the ex-officio secretary to the GST Council.
• Inclusion of the Chairperson, Central Board of Excise and Customs (CBEC), as a permanent invitee (non-
voting) to all proceedings of the GST Council;
E-Way Bill
Meaning •
E-way bill refers to the tool created for ease of movement of goods across the country.
•
It is carried by the transporters of goods across India if the value of goods is more than Rs. 50,000
Purpose •
It provides for pre-registration of goods being transported from one location to another.
•
The bill is carried physically for inspection by the authorities.
•
QR Code is provided on the bill for quick inspection by the authorities
About GST
Benefits • It relaxes the need for constant inspection and frequent interruptions in the trip, which had earlier
led to delays and an increase in the costs for the transporters.
•
It also contains the vehicle number, which makes it easy to trace the movement of vehicles across the
territory of India.
•
At the same time, e-way bill is not required for non-motorized transport, thus, easing the compliance
for the small traders
Goods and Services Tax (Compensation to States) Act, 2017
Purpose •
The Act provides for revenue compensation to the States for any revenue loss incurred due to the
enactment of GST for five years or for the duration decided by the GST Council.
•
To garner revenues for the compensation, GST compensation cess was initiated on the supply of select
goods and services.
•
Goods subject to GST compensation cess include tobacco and its products, aerated waters, motor
vehicles etc.
IT Infrastructure for GST implementation
Goods and Services •
It provides IT infrastructure and services to the Central and State Governments, taxpayers and other
Tax Network (GSTN): stakeholders for implementation of the Goods and Services Tax (GST) in India.
•
It is wholly owned government corporation with equal shares held by the state and federal governments.
•
GSTN in 2019 decided to make Aadhaar authentication mandatory for new dealers from January 2020
to check malpractices in GST.
Project Saksham It is the Central Board of Excise and Customs’ New Indirect Tax Network (Systems Integration). By integrating
CBEC’s IT system with GSTN, it will aid in the implementation of the Goods and Services Tax (GST). It will
also aid in the expansion of Indian Customs’ Single Window Interface for Trade Facilitation (SWIFT)
Other terms associated with GST
Input tax credit Input credit means that when you pay tax on your output, you can deduct the tax you already paid on
your inputs. Assume you are a manufacturer whose output tax (Final Product) is Rs 450. The tax paid on
purchases is Rs 300. You can claim Input Credit of Rs 300 and only pay Rs 150 in taxes. When you are subject
to the GST Act, you have access to the Input Credit Mechanism.
To claim GST input credit -
• One must have a tax invoice (or debit note) issued by a registered dealer.
• One should have received the products/services
Reverse Charge Reverse charge is a mechanism that requires the recipient of goods or services to pay Goods and Services
Mechanism Tax (GST) rather than the supplier.
National Anti- •
National Anti-profiteering Authority was constituted under section 171 of the Central Goods and Services
Profiteering Tax Act, 2017.
Authority •
It was constituted by the Central Government to examine whether additional input tax credits availed
by any registered person or the reduction in the tax rate have actually resulted in a commensurate
reduction in prices to the consumers.
Comparisons
PAN/GSTIN vs. Aadhar
Full Form Permanent Account Number Goods and Services Tax Identification Number
Issued by Income Tax Department Central Board of Indirect Taxes & Customs (CBIC)
Format 10 digit alphanumeric number (=containing both 2 digit state code+ 10 digits PAN number + 3 characters =
alphabets and numbers) total 15 characters
Who has to Every income tax assesse-individual, HUF, firm, IF Individuals / firms registered under the Pre-GST law Sellers
Get it? company, trust who sell through e-commerce aggregators such as Amazon.
Do all taxpayers Every PAN cardholder is not required to get GSTIN Every GSTIN holder has to get a PAN card number.
have it?

Purpose Prevent the evasion of direct Prevent GST evasion and assist entrepreneurs in claiming
Taxes. input credits
Issued by Issued by direct and indirect tax authorities under Issued by a statutory body – UIDAI (Unique Identification
Ministry Of Finance respectively Authority Of India)
Derive power These tax authorities derive power from – The authority derives powers from Aadhaar Targeted Delivery
Income Tax Act , 1961 Of Financial and Other Subsidies, Benefits and Services Act,
Goods and Services Tax Act , 2017 2017.
Primary Primary objective of these numbers is to reduce Primary objective of Aadhaar is to eliminate bogus
Objective tax evasion by tracking the transactions. beneficiaries in government schemes and reduce leakage
which can in turn help in optimising government expenditure
Format Their format contains both numbers and Aadhar is a 12 digit number. It has no alphabets
alphabets.
Who has to Issued for individual humans – HUF /Firms/ It is issued for living resident humans of India only and not
Get it? Companies/Trusts companies
Tax Reforms in India

Direct Tax Reforms
Administrative • Computerisation involving allotment of a unique identification number to taxpayers which is emerging
reforms as a unique business identification number.
• Creation of Tax Information Network (TIN) by National Securities Depository Limited (NSDL) to modernise
the income tax department through information technology for collection, processing, monitoring, and
accounting of direct taxes.
Computerisation • The computerisation in the Income-tax Department was initiated in 1981, with the setting up of the
Directorate of Income tax (Systems).
• The computerised activities were subsequently extended to allotment of Permanent Account Number
(PAN) under the old series, allotment of Tax Deduction Account Number (TAN), and pay roll accounting.
Restructuring of • In 2000, the ITD was restructured to- Enhance effectiveness and productivity; Increase revenue
the Income Tax collection; Improvement in services to taxpayers; Reduction in expenditure by downsizing the workforce;
Department Introduction of information technology; and Standardisation of work norms.
Recent initiatives • Project Insight, launched in 2017, is an income tax department initiative to monitor high value
transactions.
• The Faceless Assessment Scheme, 2019 was introduced to impart efficiency, transparency and
accountability to the assessment process. It eliminates the interface between the Assessing Officer
and the assessee.
• In 2020, Government has launched ‘Transparent Taxation–Honouring the Honest, which is a platform
to meet the requirements of the 21st century taxation system.
• The Government of India in September 2021 has launched a new e-filing web portal for taxpayers.
Taxpayers’ Charter • It emphasises the importance of fair, courteous and reasonable treatment to the taxpayer.
Tax grievance • The present tax grievance redressal system consists of grievance cells headed by department officials/
redressal system Aaykar Sewa Kendras (ASK), e-nivaran portal.
• It is a separate and dedicated window for grievance redressal in the Income Tax Business Application,
and CPGRAMS (Central Public Grievance Redress and Monitoring System).
Indirect Tax Reforms
Introduction of GST Introduced in 2017 to replace a host of other Indirect taxes such as value added tax, service tax, purchase
tax, excise duty, and so on.
Project Saksham It is an indirect Tax Network of the Central Board of Excise and Customs (CBEC). It integrates the tax systems
of the Central Board of Excise and Customs (CBEC) with the Goods and Services Tax Network (GSTN).
CONCEPTS RELATED TO TAXATION
Concept Meaning
Advalorem tax Ad Valorem tax is a tax imposed as percentage of the value of the product. For example, customs duty of 20%
on solar panel cells costing Rs 10,000.
Specific tax Specific tax is fixed amount of tax based upon the quantity of unit sold. For example, excise duty of Rs 10 on
per litre of Petrol.
Tax multiplier It refers to change in GDP due to changes in tax rates
Tax to GDP •
Tax to gross domestic product (GDP) ratio is the ratio of total government tax collection to the GDP of the
ratio nation.
•
It indicates how much tax collection as a percentage of GDP has gone up for a given country.
•
A high tax to GDP ratio signifies the government’s ability to manage its spending effectively, without relying
on excess borrowing.
•
A low tax to GDP ratio puts pressure on the government’s financial ability to spend on developmental and
other administrative activities.
Tax buoyancy •
It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue
increases without increasing the tax rate.
•
Tax buoyancy explains this relationship between the changes in the government’s tax revenue growth and
the changes in GDP.
Fiscal Drag •
Fiscal drag is an economic term that refers to the process by which inflation or income growth pushes
taxpayers into higher tax brackets. This effectively increases government tax revenue without raising tax
rates.
•
Tax hikes reduce aggregate demand and consumer spending as a larger share of taxpayer’s income now goes
to taxes. This results in deflationary policies or a drag on the economy.
•
This situation is fiscal drag
Tax Elasticity •
It refers to change in tax revenue with change in tax rates.
Inverted Duty •
It refers to tariff structure where customs duty on finished goods is lower than customs duty on raw materials.
Structure It promotes import of cheaper finished goods & discourages domestic manufacturing
Tax Evasion •
Individuals and corporates have to pay taxes to the government for the transactions they undertake in the
economy.
•
While filing tax, it is in the interest of people if the value of tax comes out to be minimum. There are two
ways of doing that.
First way is to hide the income from the government, which is called Under-reporting of Income.
As the net taxable income becomes lower, the tax liability of the individual or the company decreases.
This is referred to as Tax Evasion.
•
Tax evasion is illegal and might lead to problems in the future as and when the under-reporting is captured
by the authorities.
Tax Avoidance •
The government provides for certain exemptions on the net taxable income for the people as well as
corporates.
•
Taking the benefit of such exemptions to decrease the tax liability is referred to as Tax Avoidance.
•
Tax avoidance is a legal activity and involves the computation of income in such a way that the net taxable
income is kept at a minimum.
Equaisation In 2016, India implemented the Equalisation Levy with the intention of taxing digital transactions, i.e. income
Levy Tax accruing to foreign e-commerce companies from India. Its goal is to tax business-to-business transactions. It is
a direct tax, which is withheld at the time of payment by the service recipient.
Buyback Tax •
A buyback is a scheme by which a company repurchases a certain amount of its outstanding shares. Once
taken back, these shares are extinguished by the company.
•
It can be done to improve the earnings per share for continuing shareholders.
•
It can also be done if promoters want to hike their stake in the company, sometimes to avoid any takeover
threats.
•
To escape dividend distribution tax, listed companies resort to buybacks.
Concept Meaning
Advance Tax •
Advance tax is the amount of income tax that is paid much in advance rather than a lump-sum payment at
the year-end. Also known as earn tax, advance tax is to be paid in installments as per the due dates decided
by the income tax department.
Tax Expenditure •
Tax Expenditure corresponds to relaxations given when tax burden becomes difficult for the sustainability of
a particular sector. Tax exemptions or incentives are given in the form of lower rates of tax relative to normal
rates. Tax expenditures are revenue losses attributable to tax provisions that often result from the use of the
tax system to promote social goals without incurring tax expenditures.
Tax Terrorism •
Tax terrorism is a way to terrorise honest taxpayers to pay unreasonable taxes but through legal means.
•
The discourse on tax terrorism in India is usually discussed in reference to the infamous move of the
Government of India to levy taxes through retrospective amendment in Section 9 of the Finance Act, 2012
on foreign companies.
•
The background in which the government decided to levy retrospective taxes was to force the Vodafone
company to pay taxes for a transaction that took place as a part of an offshore share transfer agreement
Sin Tax •
Sin tax is a tax levied on undesired activity like alcohol, ciagrettes
GAFA Tax • GAFA tax—named after Google, Apple, Facebook, Amazon—is a proposed digital tax to be levied on large
technology and internet companies. France has decided to introduce the tax (3% tax on revenues from
digital activities).
The rationale for having separate taxation on digital firms-
• Existing tax norms that are framed envisaging brick and mortar business models are not suitable to regulate
online services.
• The technology companies differ from traditional businesses as a result of user participation in creating value,
which, in turn, translates into revenue.
• The often complex corporate structures set up by several companies that derive huge revenues from major
European economies but allow them slash their tax bills by shifting profits to low-tax jurisdictions. (Base
Erosion and Profit Sharing issue)
Indirect •
Indirect transfers refer to situations where when foreign entities own shares or assets in India, the shares of
Transfers such foreign entities are transferred instead of a direct transfer of the underlying assets in India.
•
There are innumerable permutations to such indirect transfers, many of which have been sought to be taxed
by the Indian Government in the recent past as seen in Vodafone case involving a tax demand of approximately
USD 2.1 billion.
•
The Taxation Laws (Amendment) Act, 2021 provides that no tax demand shall be raised in future on the
basis of the amendment to section 9 of the Income-tax Act made vide Finance Act, 2012 for any offshore
indirect transfer of Indian assets if the transaction was undertaken before 28th May, 2012.
Transfer pricing •
Transfer pricing is the pricing rules and methods followed for transactions by the different business divisions
under common ownership. It basically refers to the pricing rules set for the different subsidiary companies or
different branches or business divisions within a single corporation. For instance, when a subsidiary company
sells some goods or services to its parent company, the transfer price is the cost of the goods or services the
parent pays to the subsidiary company.
Pigovian Tax • It is a tax on externalities.
• It is a type of tax collected by the government on activities that create a negative effect on others in a society
but not necessarily the person who does that activity.
• For example Carbon taxes.
• Countries impose carbon taxes on companies that burn coal, oil, or gas, which produce greenhouse gas
emissions
Tobin Tax •
Tobin tax is a tax levied on spot currency conversions, with the intention of disincentivizing short-term
currency speculation, named after economist James Tobin.
Ghetto Tax •
It describes how people with low income pay higher prices for goods and services.
Concept Meaning
Cess and
Criteria Surcharge Cess
Surcharge
Meaning Additional Tax Tax on Tax.
When it is imposed? Tax Income level above a certain Payment of tax.
threshold
Calculated as Percentage of Income Tax Percentage of (Income Tax + Surcharge)
Purpose of Utilisation Government’s prerogative Utilized for specific purpose the cess is
collected
Part of Central Divisible No No
Pool
Examples Surcharge on Income Tax: • Health and Education Cess: 4% on
• Greater than 50 lakhs and less majorcentral taxes such as Corporate
than 1 crore -10% Tax, Income Tax etc.
• Greater than 1 crore and less than • Health Cess: Imported Medical
2 crores – 15% Devices.
• Greater than 2 crores and less • Road and Infrastructure Cess: Rs 10
than 5 crores – 25% per litre on imported and domestic
• Greater than 5 crores– 37% sale of petrol and high-speed diesel.
Tax collected
Tax Collected at Source Tax Deducted at Source
at source and
Tax deducted at Tax which is collected at the time of selling certain Tax that is deducted at the time of making payment
Source Goods and services
Collected by the entity that sell the Goods and Deducted by the entity that makes the payment
services
Collected on sale of certain specified goods such Deducted on Payments like salary, Interest, professional
as tendu leaves, scrap, Mineral ores, Motor fee, Lottery prize, payment to contractors, Rent, purchase
vehicles etc. of immovable property etc
BLACK MONEY
The income which is not reported to the tax authorities is referred to as black money. The source of black money can
be both legitimate and illegitimate.
Ways for generation of Black Money

Hawala system •
It refers to the exchange of funds in distant locations, without paying the legal transaction charges.
•
Hawala is an informal method of transferring money from one place to another without using a banking
system.
•
The system is totally based on trust and is done outside the ambit of the formal financial system.
•
The transaction could be done within the country or outside the country
Round Tripping •
It means transferring money into one’s owned company by routing it through a foreign jurisdiction. It
can be accomplished through:
P-Notes: Instruments issued by the RBI to let foreign institutions anonymously invest in the Indian
market.
DTAA: These jurisdictions make it easier for the people to evade taxes by diverting the resources to
the other country.
Ways for generation of Black Money

Tax Havens •
These countries have policies that make it easier for people to maintain anonymity and transfer the black
money as assets to these countries.
•
As per IMF, tax haven has ‘financial institutions’ engaged primarily in ‘business with non-residents’.
•
Technically speaking, tax havens are financial systems with ‘external assets and liabilities’ designed to
finance the domestic economy.
•
For e.g., Cayman Islands, British Virgin Islands and Mauritius
Global Treaties and Agreements & Indexes Related To Taxation
Double Taxation •
Double taxation is levying of tax by two countries on the same income of an assessee.
Avoidance •
DTAA is a bilateral treaty between two countries which allows the two countries to eliminate the incidence
Agreement of double taxation between their respective jurisdictions for encouraging trade.
•
As of now, India has signed DTAA with 88 countries.
•
However, the problem with DTAA is the use of such agreements for exclusively tax saving purposes.
•
It was found that rather than engaging in gainful trade, companies were setting up fake offices in the hope
of saving taxes in the countries.
Base Erosion And •
It refers to the practice of exploiting favourable tax legislation by the corporates.
Profit Shifting •
It is a tax evasion method that take advantage of gaps and mismatches in tax legislation to shift earnings
(BEPS) to low- or no-tax jurisdictions.
•
The concept of BEPS refers to companies shifting their main offices to countries which have lower tax
regimes.
Countries like Ireland engage in such activates by offering lower corporate tax rates and enticing big
corporates to set up their offices in low tax jurisdictions.
Global Minimum • To combat the activities of corporates aimed at tax avoidance in their home jurisdictions, the global
Tax community has proposed a Global Minimum Tax on corporates, irrespective of their location.
• The idea was proposed by Organisation for Economic Cooperation and Development (OECD).
• As of now, it has been supported by almost 136 countries, which have agreed to a global agreement to
ensure that large corporations pay a 15% Global Minimum Tax (GMT).
This includes India.
Advance Pricing • APAs are agreements which aim to provide certainty to taxpayers regarding their tax liability in international
Agreement (APA) deals.
• The home country’s tax authorities evaluate the deal in advance and let the corporates know the amount
of tax that they will be subjected to, in advance.
• APAs have been necessitated due to multiple incidents of corporates finalizing the deal in such a way where
the corporates believe their tax liability to be lower, while the authorities come to a different amount.
This leads to miscalculations and lowering of profit for the corporates.
General Anti- • GAAR is a concept that allows a country’s Revenue Authorities to refuse tax advantages to transactions or
Avoidance arrangements that have no economic substance and are specifically for the purpose of gaining a tax benefit.
Rules(GAAR)
Transfer pricing •
Transfer pricing is the pricing rules and methods followed for transactions by the different business divisions
under common ownership. It basically refers to the pricing rules set for the different subsidiary companies
or different branches or business divisions within a single corporation. For instance, when a subsidiary
company sells some goods or services to its parent company, the transfer price is the cost of the goods or
services the parent pays to the subsidiary company.
Legislation to Prevent Black Money in India

The Fugitive Economic Offenders Act , 2018
Purpose It seeks to confiscate properties of economic offenders who have left the country to avoid facing criminal
prosecution or refuse to return to the country to face prosecution.
Who is an Economic A person against whom an arrest warrant has been issued for committing an offence listed in the Act and
Offenders? the value of the offence is at least Rs. 100 crore.

Offences listed in the •
Counterfeiting government stamps or currency.
act are •
Cheque dishonour.
•
Money laundering.
•
Transactions defrauding creditors
Declaration of a •
After hearing the application, a special court (designated under the PMLA, 2002) may declare an
Fugitive Economic individual as a fugitive economic offender.
Offender •
It may confiscate properties which are proceeds of crime, Benami properties and any other property,
in India or abroad.
•
Upon confiscation, all rights and titles of the property will vest in the central government, free from
encumbrances (such as any charges on the property).
Bar on Filing or •
The Act allows any civil court or tribunal to prohibit a declared fugitive economic offender, from filing
Defending Civil Claims or defending any civil claim.
Powers •
The authorities under the PMLA, 2002 will exercise powers given to them under the Fugitive Economic
Offenders Act.
•
These powers will be similar to those of a civil court, including the search of persons in possession of
records or proceeds of crime, the search of premises on the belief that a person is an FEO and seizure
of documents.
Benami Transactions (Prohibition) Act , 2016
Purpose • To stop black money from circulating in the system.
• Increase tax revenue by bringing down corruption and false trade practices.
• Increase transparency and honesty in Indian businesses
Note: The Act amended the Original Act (Benami Transaction (Prohibition) Act 1988) and renamed it as
Prohibition of Benami Property Transaction Act, 1988.
What is Benami The Act defines a benami transaction as a transaction where:
Transaction? • A property is held by or transferred to a person, but has been provided for or paid by another person.
• The transaction is made in a fictitious name
• The owner is not aware of or denies knowledge of the ownership of the property,
• The person providing the consideration for the property is not traceable.
Appellate Tribunal •
The Act provides for an Appellate Tribunal to hear appeals against any orders passed by the Adjudicating
Authority.
•
Appeals against the orders of the Appellate Tribunal will lie to the high court.
•
The special court should conclude the trial within six months from the date of filing of the complaint.
Authorities •
The Act established four authorities to conduct inquiries or investigations regarding benami transactions:
Initiating Officer
Approving Authority
Administrator
Adjudicating Authority
•
If an Initiating Officer believes that a person is a benamidar, he may issue a notice to that person.
The Initiating Officer may hold the property for 90 days from the date of issue of the
notice, subject to permission from the Approving Authority.
At the end of the notice period, the Initiating Officer may pass an order to continue
holding the property.
•
If an order is passed to continue holding the property, the Initiating Officer will refer the case to the
Adjudicating Authority.
The Adjudicating Authority will examine all documents and evidence relating to the matter
and then pass an order on whether or not to hold the property as benami.
Based on an order to confiscate the Benami property, the Administrator will receive and
manage the property in a manner and subject to conditions as prescribed.
•
The amended law empowers the specified authorities to provisionally attach benami properties which
can eventually be confiscated.

Penalty •
If a person is found guilty of the offence of the Benami transaction by the competent court, he shall
be punishable with rigorous imprisonment for a term not less than one year but which may extend
to 7 years.
•
He shall also be liable to a fine which may extend to 25% of the fair market value of the property
Terms related to Act: 1. Benami Property: Any property which is the subject matter of a Benami Transaction and also includes
the proceeds from such property.
2. Benamidar: A person or a fictitious person as the case may be, in whose name the Benami Property
is transferred or held and includes a person who lends his name.
3. Beneficial Owner: A person, whether his identity is known or not, for whose benefit the Benami
Property is held by a Benamidar.
Prevention Of Money Laundering Act , 2002
Purpose • Preventing money laundering.
• Combating the channelizing of money into illegal activities and economic crimes.
• Providing for the confiscation of property derived from or involved in money laundering.
• Providing for any other matters connected with or incidental to the act of money laundering
Note: The PLMA has been amended three times, that is, in 2009, 2009 and 2012. Under the PMLA, the
burden of proof lies with the accused, who has to prove that the suspect property/assets have not been
obtained through proceeds of crime.
Offenses under PLMA Offences mentioned under Part A and C of the Schedule of this Act will attract its provisions.
• Part A includes offences under acts namely:
Indian Penal Code, Prevention of Corruption Act, Narcotics Drugs and Psychotropic
Substances Act, Antiquities and Art Treasures Act, Trademark Act, Wildlife Protection
Act, Copyright Act and Information Technology Act.
• Part B includes offences that are mentioned in Part A, but are of a value of Rs 1 crore or more.
• Part C includes trans-border crimes
Penalties under Various actions can be initiated against persons found to be guilty of money laundering, such as:
PMLA • Freezing or seizing of property and records, and/or attachment of property obtained through crime
proceeds.
• Money laundering is punishable with:
Rigorous imprisonment for a minimum of 3 years and a maximum of 7 years.
Fine.
•
If the crime of money laundering is involved with the Narcotic Drugs and Psychotropic Substances Act,
1985, the punishment can go up to 10 years, along with fine.
Authorities that can The Enforcement Directorate (ED) is responsible for investigating offences under the PMLA. Also, the
Investigate under Financial Intelligence Unit – India (FIU-IND) is the national agency that receives, processes, analyses and
PMLA disseminates information related to suspect financial transactions.
Recent Amendments • Money Laundering Redefined: Money Laundering was not an independent crime rather depended on
in the Act another crime, known as the predicate offence or scheduled offence.
• The amendment seeks to treat money laundering as a stand-alone crime.
• Under Section 3 of PMLA, the person shall be accused of money laundering if in any manner that
person is directly or indirectly involved in the proceeds of the crime.
Concealment
Possession
Acquisition
Use or projecting as untainted property
Claiming as untainted property
• Continuing Nature of Offence: This amendment further mentioned that the person will be considered
to be involved in the offence of money laundering till the time that person is getting the fruits of
activities related to money laundering as this offence is of a continuing nature.

Black Money and Imposition of Tax (Undisclosed Foreign Income and Assets) Act ,2015
Purpose It penalizes the concealment of foreign income, and provides for criminal liability for attempting to evade
tax in relation to foreign income.
Tax rate A flat rate of 30 per cent tax would apply to undisclosed foreign income or assets of the previous assessment
year.
Scope of income to •
Income, from a source located outside India, which has not been disclosed in the tax returns filed;
be taxed •
Income, from a source outside India, for which no tax returns have been filed;
•
Value of an undisclosed asset, located outside India.
One – time The Act gave a one-time opportunity to Indian residents to declare undisclosed foreign income and assets.
compliance Such persons would be permitted to file a declaration before a tax authority, and pay a penalty at the rate
opportunity of 100%.
Tax Authorities The relevant tax authorities and their jurisdiction would be as specified under the IT Act. They would have
powers of inspection of documents, and evidence. The proceedings are to be judicial.
Penalty for offences • Undisclosed foreign income/assets: The penalty for nondisclosure of foreign income or assets would
be equal to three times the amount of tax payable, in addition to tax payable at 30%.
• Failure to furnish returns: The penalty for not furnishing income tax returns in relation to foreign
income or assets is a fine of Rs 10 lakh.
• Second time defaulter: Any person, who continues to default in paying tax that is due, would be liable
to pay an amount equal to the amount of tax arrears.
• Other defaults: If a person fails to abide by the tax authority in (i) answering questions, (ii) signing off
on a statement, (iii) attending or producing relevant documents, he is to pay a fine between Rs 50,000
to two lakh rupees.
Prosecution for • Wilful attempt to evade tax: The punishment would be rigorous imprisonment from three to 10 years,
certain offences and a fine.
• Wilful attempt to evade payment of tax: The punishment would be rigorous imprisonment from three
months to three years, and a fine.
• Failure to furnish returns: or non-disclosure of foreign assets in returns: The punishment is rigorous
imprisonment of six months to seven years, and fine.
• Punishment for abetment: The punishment is rigorous imprisonment of six months to seven years,
and fine.
• Liability of company: For any offence under this Act, every person responsible to the company is to
be liable for punishment. His liability is absolved if he proves that the offence was committed without
his knowledge.
CHAPTER 9
Industries, Infrastructure and Services

INTRODUCTION
Industrial Policy refers to the policy of the government regarding the industrial development of the country.
INDIAN INDUSTRIAL POLICY
Evolution of Indian Industrial Policy

Pre-1991 Industrial The first phase starting with the Industrial Policy Resolution (IPR) of 1948 continued with some modifications
Policy made now and again till the major modification made in 1973 and again in 1980.
New Industrial Policy, The statement on Industrial Policy in 1991 marked a major reversal by giving emphasis to private sector.
1991
Major Features of Pre-1991 Industrial Policy
Major Features of Pre- Increased role of the State + Focus on capital goods sector + restrictions on the import of foreign
1991 Industrial Policy technology by Indian companies + System of Licensing +
Restrictions on foreign investmen + Development of Financial Infrastructure
Pre-1991 policies
Industrial Policy Division in sectors: Industries with monopoly of State, Mixed sector, sectors of government control and
Resolution, 1948 private enterprises
Industrial Policy Division in three schedules:
Resolution, 1956 Schedule A: exclusive monopolies of the State
Schedule B: Mixed sector
Schedule C: Private sector
Industrial Policy A new classification : core industries was created containing industries which were of fundamental
Statement, 1973 importance
Industrial Policy Three categories small and cottage industries: cottage and household industries, tiny sector and small-
Statement, 1977 scale industries (SSIs)
Large-scale sector: Basic industries, Capital goods industries, High technological industries
Industrial Policy No such divisions
Statement, 1980
New Industrial Policy (NIP), 1991

Major Policy Measures of NIP, 1991
Major Policy 1. Liberalization of state control over the Industrial sector: currently, an industrial license is only necessary
Measures of NIP, in 4 sectors linked to security, strategy, and environmental concerns
1991 2. De-reservation of Public sector: Only three industries remains exclusively reserved for public sector under
the new industrial policy: mining, atomic energy, and railroads.
3. Disinvestment of Public Sector
4. Promotion of Foreign Investment
5. Amendment to MRTP Act
6. Foreign Technology Agreement
Industries, Infrastructure and Services 127
INITIATIVES FOR INDUSTRIAL DEVELOPMENT
Disinvestment of CPSUs
Meaning Disinvestment means the government or an organisation is liquidating or selling its stake in a
company. But it will be less than 50% and the government or the organisation will still be in the
saddle.
Reason for disinvestment •
To reduce their fiscal burden of the government
•
Re-allocate resources into other productive areas within a government-funded project or an
organisation.
Announced •
The government announces its targets for disinvestment each year during the Union Budget.
For the fiscal year FY22, the government set a disinvestment target of Rs 1.75 lakh crore.
Department concerned The Department of Investment and Public Asset Management (DIPAM) under the Ministry of
Finance deals with all matters relating to the disinvestment of equity in Central Public Sector
Undertakings (CPSUs) in India.
Types Minority disinvestment, Majority disinvestment, Complete privatization
Methods of Disinvestment 1) Initial Public Offering (IPO)
2) Further Public Offering (FPO)
3) Offer for sale (OFS) of shares by Promoters through Stock Exchange mechanism: This
method allows auction of shares on the stock exchange platform. It is extensively used by
the Government since 2012.
4) Strategic sale: When the government sale 50%, or higher percentage of its shareholding of a
central public sector enterprise (CPSE) along with transfer of management control, it is termed
as strategic sale. It is uundertaken through a consultation process among different Ministries/
Departments, including NITI Aayog.
5) CPSE Exchange Traded Fund (ETF): An ETF is a basket of stocks. This route allows simultaneous
sale of GoI’s stake (part of the ETF basket) in various CPSEs across diverse sectors through
single offering.
Privatisation of CPSUs
Meaning Privatisation implies shedding of the ownership or management of a government owned enterprise
Method i. By withdrawal of the government from ownership and management of public sector companies
and or
ii. By outright sale of public sector companies
Privatisation Vs. Disinvestment
Privatisation Disinvestment
Implies that there will be a It can entail reducing the government’s share to a point where management is transferred, or it
change in management due to might be limited to a point where the government can continue to have control over the company.
a change of ownership.
Only take place when the Disinvestment below 50% would result in the government still having a significant influence over
government transfers more the enterprise, but disinvestment above 50% means the transfer of management.
than 51% of its ownership to
private business owners.
National Manufacturing Policy (NMP), 2011

Purpose The policy is based on the principle of industrial growth in partnership with the States
instruments under •
Setting of National Investment & Manufacturing Zones (NIMZs) using clean energy efficient technology
the NMP with incentive like easy land acquisitions.
•
Industrial Township as self-governing bodies
•
Creation of special Purpose Vehicle to carry out the functions mentioned in the policy.
•
Technology Acquisition and Development Fund for production of environment-friendly machines
•
The government will provide a policy framework and incentives for infrastructure development on a
Public-Private Partnership(PPP) basis through appropriate financing
National Manufacturing Policy (NMP), 2011

NIMZ The NIMZs are envisioned as fully integrated industrial townships with cutting-edge infrastructure, zoning-
based land use, clean and energy-efficient technology, essential social infrastructure, and facilities for skill
development, among other things, to support high-caliber manufacturing activities.
Features:
• to be developed in the nature of green field industrial townships,
• Benchmarked with the best manufacturing hubs in the world.
• Preferably, these zones’ land will be leftover, infertile, and unusable for farming.
• The nodal agency for NIMZ is the Department for Promotion of Industry and Internal Trade
NIMZs in India Eight Investment Regions has to be created along the Delhi Mumbai Industrial Corridor (DMIC) project as
National Investment and Manufacturing Zones (NIMZs). They are:
1) Ahmedabad-Dholera Investment Region, Gujarat
2) Shendra-Bidkin Industrial Part city near Aurangabad, Maharashtra
3) Manesar-Bawal Investment Region, Haryana
4) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan
5) Pithampur-Dhar-Mhow Investment Regioin, Madhya Pradesh
6) Dadri-Noida-Ghaziabad investment Region, Uttar Pradesh
7) Dighi Port Industrial Area, Maharashtra, and
8) Jodhpur-Pali-Marwar Region in Rajasthan.
There are fourteen NIMZs outside the DMIC region:
Nagpur in Maharashtra, (ii) Prakasam in Andhra Pradesh, (iii) Chittoor in Andhra Pradesh, (iv) Medak in
Telangana, (v) Hyderabad Pharma NIM in Rangareddy and Mahbubnagar Districts of Telangana, (vi) Tumkur
in Karnataka, (vii) Kolar in Karnataka, (viii) Bidar in Karnataka, (ix) Gulbarga in Karnataka, (x) Kalinganagar,
Jajpur District in Odisha, (xi) Ramanathapuram District of Tamil Nadu, (xii) Ponneri, Thiruvallur District, Tamil
Nadu, (xiii) Auraiya District in Uttar Pradesh, and (xiv) Jhansi District in Uttar Pradesh.
NIMZ Vs. SEZ
National Investment & Special Economic Zones (SEZ)
Manufacturing Zones
(NIMZs)
Established under NMP, Established under the Special Economic Zones Act, 2005
2011
Income tax exemption to 100% income tax exemption for the first five year and 50% for the following five.
small medium enterprise
Environmental Impact Environmental Impact Assessment (EIA) Provided by central government
Assessment (EIA) Provided
by state government
Make in India
purpose launched in 2014 to facilitate investment, foster innovation, build best
in class infrastructure, and make India a hub for manufacturing, design, and innovation
schemes launched to Skill India Mission + Startup India + Digital India + Pradhan Mantri Jan Dhan Yojana (PMJDY) + Smart
support the Make in India Cities + AMRUT
Program
National Industrial Corridor Development Programme

Purpose Aimed at development of futuristic industrial cities in India. It can compete with the best manufacturing and
investment destinations in the world. The same will create employment opportunities and economic growth
leading to overall socio-economic development
Industrial Delhi Mumbai Industrial Corridor (DMIC), Chennai Bengaluru Industrial Corridor (CBIC), Extension of CBIC to
Corridors in Kochi via Coimbatore, Amritsar Kolkata Industrial Corridor (AKIC), Hyderabad Nagpur Industrial Corridor (HNIC),
India Hyderabad Warangal Industrial Corridor (HWIC), Hyderabad Bengaluru Industrial Corridor (HBIC), Bengaluru
Mumbai Industrial Corridor (BMIC), East Coast Economic Corridor (ECEC) with Vizag Chennai Industrial Corridor
(VCIC) as Phase-1, Odisha Economic Corridor (OEC), Delhi Nagpur Industrial Corridor (DNIC)
CORE INDUSTRIES OF INDIA

In India, there are eight sectors that are considered the core sectors. These sectors have a major impact on the Indian
economy and significantly affect most other industries as well.
Core Industries of India

Meaning Key industries in the economy
Industries and •
Petroleum and Refinery Products- 28.04
weightage •
Electricity generation- 19.85
•
Steel Production- 17.92
•
Coal Production- 10.33
•
crude oil production- 8.98
•
Natural Gas Production-6.88
•
Cement Production-5.37
•
Fertiliser Production-2.63
Weightage in IIP Eight core industries comprise 40.27% of the weight of items included in the Index of Industrial Production
(IIP).
Index of Industrial Production (IIP)

Purpose Indicator that tracks variations in the volume of industrial product output over a specific time period.
Method It is a composite indicator that measures growth rate under 2 sectors:
• Broad sectors like manufacturing, electricity, mining
• Use based sectors like basic goods, capital goods and intermediate goods
Releases by CSO every month
Who uses IIP Ministry of Finance, the Reserve Bank of India (RBI), private firms and analyst. The data is also used while compiling
data? GVA of Manufacturing Sector.
IIP base year 2011-12
Industries
Classification of Industries (based on ownerships)

Private sector owned and run by a single person or a group of individual
Public sector Government-owned and -operated
Joint sector Owned and run by both the government, as well as by an individual or group of individuals.
Cooperative sector owned and run by raw material producers or suppliers, employees, or both
Maharatna, Navratna, and Miniratna Category
Maharatna eligibility a) Having Navratna status.
b) Listed on Indian stock exchange with minimum prescribed public shareholding under SEBI regulations.
c) An average annual turnover of more than Rs 25,000 crore during the last three years.
d) annual net worth of more than Rs 15,000
e) average annual net profit of over rupees 5,000 crore during last 3 years
Navratna Eligibility The CPSEs which are Miniratna I, Schedule ‘A’ and have obtained ‘excellent’ or ‘very good’ MOU rating in
three of the last five years.
Miniratna eligibility • Category-I Miniratna CPSEs:
Should have made profit in the last three years continuously,
The pre-tax profit should have been Rs 30 crore or more in at least one of the three years and
Should have a positive net worth.
• Category-II Miniratna CPSEs:
Should have made profit for the last three years continuously and
Should have a positive net worth.
Classification of Industries (based on ownerships)

Industries which require compulsory licensing involves
Drugs and pharmaceuticals, Hazardous chemicals, Gun powder, industrial explosives etc., Aerospace and
defence related electronics, Alcohol drinks. Tobacco, cigarette and related products.
Terms associated with Industries
Cross holdings Cross holding is a situation in which a publicly-traded corporation owns stock in another publicly-traded
company. So, technically, listed corporations own securities issued by other listed corporations.
Bharath -22 It is Exchange Traded Fund (ETF). It comprise of 22 stocks including those of central public sector enterprises
(CPSEs) + public sector banks (PSBs) + its holdings under the Specified Undertaking of Unit Trust of India
(SUUTI). It will aid in accelerating the government’s programme of disinvestment.
Few Industries in India

Iron and Steel
Iron and Steel
Iron and Steel •
These are feeder industries, supplying other industries’ raw resources with their products.
•
India is currently the largest producer of sponge Iron or DRI in the world and the 2nd largest
finished steel consumer in the world after China.
Trends in Trade During last five years, India was a net exporter of total finished steel from (2017-2021).
Challenges of Steel Sector Finance+ logistic+ Raw materials+ Environment and energy consumption
Reforms • National Steel Policy, 2017: It will focus in enhancing domestic consumption, high quality steel
production and making the sector globally competitive.
Key features of the NSP 2017:
Encourage adequate capacity additions
Cost-efficient production
Domestic availability of iron ore, coking coal & natural gas,
Facilitating foreign investment
Asset acquisitions of raw materials &
Enhancing the domestic steel demand.
• ChintanShivir: Towards a Vibrant, Efficient and Globally Competitive Indian Steel Sector: It
focusses on domestic capacity expansion, demand generation and high grade steel production.
• Introduction of digital and analytics in the steel making
• Promotion of R&D in Iron & Steel Sector: Measures such as Domestically Manufactured Iron and
Steel Products (DMI&SP) Policy, Quality Control Order (QCO) covering carbon steel, alloy steel, tin
plate, tin free steel and stainless steel has been taken
Coal Production
• The all India Production of coal during 2021-22 were 778.19 MT (Provisional) with a positive growth of 8.67%.
• India is the second largest coal producer in the world.
• As per the coal directory 2020-21, India is the second largest importer
• Major countries from where the coal is being imported are Indonesia, Australia, South Africa & USA.
• The export of coal from India is meagre
• Indian coal is mainly exported to Nepal, Bangladesh and Bhutan
Details of import of coal and products i.e. coke during the last 4 years is as under:
Coal 2018-19 2019-20 2020-21 2021-22
Total Import 234.35 248.53 215.25 208.93
Non-cooking Coal 183.51 196.70 164.05 151.77
Procedure established in coal Mining

National Coal Establishment of the National Coal Development Corporation (NCDC) (1956) with the collieries owned
Development Corporation by the railways.
(NCDC)
Nationalisation of Coal Nationalization took place in two stages:
Mines 1) The first in 1971-72 with the coking coal mines
2) The second in 1973 with the non-coking coal mines
• The Coking Coal Mines (Emergency Provisions) Act of 1971
• The Coking Coal Mines (Nationalisation) Act, 1972
• The Coal Mines (Taking over of Management) Act, 1973
• The Coal Mines (Nationalisation) Act, 1973
Liberalization reforms in The government made the decision to give coal mines to different parties for captive use. In captive
1993 mining, a corporation extracts coal from a captive mine for its own use and it is unable to sell it on
the open market.
Coal Mines Special The Coal Mines Act, passed by the GoI, allows for the allocation of coal mines through auctions.
Provisions Act, 2015
Private entry In February 2018, CCEA permitted entry of private firms in commercial coal mining in the country.
Reforms in the Sector
Reforms in the Sector Unlocking Transparency via Third Party Assessment of Mined Coal) application for coal quality
monitoring in April 2018 + New coal linkage strategy + Online Coal Clearances System + Coal Allocation
Monitoring System (CAMS)
National coal Index The NCI is a price index that measures how the price of coal has changed during a given month in
relation to a fixed base year. The base year is 2017-18. And it was started in 2020. It was developed
by Indian statistical Institute, Kolkata
Mineral Laws (Amendment) Act, 2020
•
The act amends Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) and
the Coal Mines (Special Provisions) Act, 2015 (CMSP Act).
MMDR Act regulates the overall mining sector in India
The CMSP Act provides for the auction and allocation of mines whose allocation was
cancelled by the Supreme Court in 2014.
Removal of restriction on Previously, companies acquiring Schedule II and Schedule III coal mines through auctions can use the
end-use of coal coal produced only for specified end-uses such as power generation and steel production.
• The Act removes this restriction on the use of coal mined by such companies.
• Companies are allowed to carry on coal mining operation for own consumption, sale or for any
other purpose
Eligibility for auction of The Act clarifies that the companies need not possess any prior coal mining experience in India in
coal and lignite blocks: order to participate in the auction of coal and lignite blocks.
• Further, the competitive bidding process for auction of coal and lignite blocks will not apply
to mines considered for allotment to: (i) a government company or its joint venture for own
consumption, sale or any other specified purpose; and (ii) a company that has been awarded a
power project on the basis of a competitive bid for tariff
Composite license for Previously, separate licenses are provided for prospecting and mining of coal and lignite, called
prospecting and mining prospecting license, and mining lease, respectively.
• The Act adds a new type of license, called prospecting license-cum-mining lease. This will be a
composite license providing for both prospecting and mining activities.
Advance action for 1) Under the MMDR Act, mining leases for specified minerals (minerals other than coal, lignite, and
auction atomic minerals) are auctioned on the expiry of the lease period.
• The Act provides that state governments can take advance action for auction of a mining lease
before its expiry.
Procedure established in coal Mining

Prior approval from the Under the MMDR Act, state governments require prior approval of the central government for granting
central government reconnaissance permit, prospecting license, or mining lease for coal and lignite.
• The Act provides that prior approval of the central government will not be required in granting
these licenses for coal and lignite, in certain cases. These include cases where: (i) the allocation
has been done by the central government, and (ii) the mining block has been reserved to conserve
a mineral.
Reallocation after The CMSP Act provides for the termination of allotment orders of coal mines in certain cases.
termination of the The act adds that such mines may be reallocated through auction or allotment as may be
allocations determined by the central government.
The central government will appoint a designated custodian to manage these mines until
they are reallocated.
• Note: Prospecting includes exploring, locating, or finding mineral deposit.
Schedule I of the Act provides a list of all such mines;
Schedule II mines are those where production had already started then, and
Schedule III mines are ones that had been earmarked for a specified end-use.
Rupee per Tonne model to This methodology provides that bid parameter will be revenue share. The bidders would be required to
revenue-sharing model bid for a percentage share of revenue payable to the Government. The floor price shall be 4% of the
revenue share. There shall be no restriction on the sale and/or utilization of coal from the coal mine.
Crude oil
Crude oil
Trends •
Domestic crude oil production in India has been steadily declining. It decreased to 28.4 million metric
tonnes in FY2021-22 (MMT). Since more than two decades, domestic oil production has never been as
low. The third-largest oil consumer in the world is India.
•
In FY 2018-19 (P), the share of offshore crude oil production is about 50.01%. The remaining crude oil
production was from 6 States viz., Andhra Pradesh (0.87%), Arunachal Pradesh (0.13%), Assam (12.50%),
Gujarat (13.53%), Rajasthan (21.82%) and Tamil Nadu (1.15%).
Policy Hydrocarbon Exploration and Licensing Policy (HELP) (2016): It replaced New Exploration Licensing Policy
framework for (NELP). Its features are:
Oil Exploration • Open Acreage Licensing (OAL): Under HELP Open Acreage Licensing (OAL) mechanism has been launched
and Production which allows the investors to carve out blocks of their choice by assessing E&P data available at NDR & by
in India submitting an Expression of Interest (EoI).
EOI can be submitted throughout the year without waiting for a formal bid round from the government.
These blocks would be subsequently offered through biannual formal bidding process.
• Uniform license: Single license will cover exploration and production of all types of hydrocarbon viz.
conventional oil and gas, coal-bed methane, shale oil, gas hydrates, etc.
• Revenue Sharing Model: The earlier contracts were based on the concept of profit sharing where profits are
shared between Government and the contractor after recovery of cost. Under the profit sharing methodology,
it became necessary for the Government to scrutinize cost details of private participants and this led to
many delays and disputes.
Under Revenue Sharing model, the Government will not be concerned with the cost incurred and will
receive a share of the gross revenue from the sale of oil, gas etc. This is in tune with Government’s
policy of “Ease of Doing Business”.
• Marketing and pricing freedom for the crude oil and natural gas produced
National Data It is a government-sponsored data bank for oil exploration and production that has cutting-edge infrastructure
Repository for data preservation, maintenance, and dissemination to allow for its systematic usage for upcoming exploration
and development. It falls under the General Directorate of Hydrocarbons (DGH). It started in July 2017.
Reforms in the •
Reforming Exploration & Licensing
sector •
National Data Repository (NDR)
•
Hydrocarbon Exploration and Licensing Policy (HELP) (2016)
Natural Gas
Natural Gas
Trends • Natural Gas production in 2018-19 (Provisional) is about 90.1 Million Metric Standard Cubic Meter per
Day.
• The share of offshore natural gas production in FY 2018-19 (P) is about 67.3%. The remaining natural gas
production including CBM was from 10 States viz., Andhra Pradesh (3%), Arunachal Pradesh (0.1%), Assam
(10%), Gujarat (4%), Rajasthan (5%), Tamil Nadu (4%), Tripura (5%), Jharkhand, Madhya Pradesh and West
Bengal (2%),.
• In financial year 2021, the volume of natural gas production in India amounted to over 28 billion cubic
meters. The production was estimated to decrease in the following year
• Government had planned a $60-billion investment for creating gas infrastructure in the country till 2024
Various Government initiatives in exploration
Government Hydrocarbon Exploration and Licensing Policy (HELP) + Developing and expanding the National Gas Grid +
initiatives in Pradhan Mantri Urja Ganga (PMUG) pipeline project + Turkmenistan-Afghanistan-Pakistan-India (TAPI)
exploration
Natural Gas It aims to provide standard procedure for sale of natural gas in a transparent and competitive manner.
Marketing • To discover market price by issuing guidelines for sale by contractor through e-bidding
Reforms 2020 This will bring uniformity in the bidding process across the various contractual regimes and policies to
avoid ambiguity and contribute towards ease of doing business.
• The policy has also permitted Affiliate companies to participate in the bidding process in view of the
open, transparent and electronic bidding.
This will facilitate and promote more competition in marketing of gas. However, rebidding will have to
be done in case only affiliates participate, and there are no other bidders.
• The policy will also grant marketing freedom to the Field Development Plans (FDPs) of those Blocks in
which Production Sharing Contracts already provide pricing freedom.
Cement Production
Cement Production
Trends • India is the second largest cement producer in the world and accounted for over 7% of the global
installed capacity. (according to IBEF)
• Of the total capacity, 98% lies with the private sector and the rest with public sector.
Note: It operates as a weight-loss industry. The industry has therefore localized in the area of raw
material
Primary raw Material used •
Coal+ limestone +gypsum
•
Recently, raw resources such as seashells, waste from chemical fertilisers, and slag from the iron
and steel industry have been used as raw materials.
Electronics Industry
Electronics Industry
Trends •
The Indian electronics industry is booming, with demand anticipated to reach $400 billion by 2023- 24.
•
From USD 29 billion in 2014-15 to over USD 70 billion in 2019-20, domestic output has increased dramatically
(Compounded Annual Growth Rate of 25 percent).
•
This industry is accepted as a key enabler in the country’s economic development. It impacts infrastructure
development and enables social transformation.
Reforms National Policy on Electronics 2019 + PLI (Production Linked Incentive) + Electronic Components and Semiconductors
Manufacturing Promotion Scheme (SPECS) + EMC 2.0 (Modified Electronics Manufacturing Clusters) Scheme + PARAKH
- A Unified Laboratory Network
Pharmaceutical Industry
Pharmaceuticals
Trends •
India’s pharmaceutical sector is one of the country’s oldest industries.
•
The Indian pharmaceutical sector ranks first among India’s science-based industries
•
India is renowned as the world’s pharmacy capital.
•
India is the largest supplier of generic medicines with a 20 percent share in the global supply
Reforms • Clinical Research Organization (CRO) is being extensively pursued by Indian pharmaceutical corporations in
partnership with overseas companies.
• Scheme for Promotion of Bulk Drug Parks
• Production linked incentive (PLI) scheme for Bulk drug
• Production linked incentive (PLI) scheme for Pharmaceuticals
• Production Linked Incentive (PLI) Scheme for Promoting Domestic Manufacturing of Medical Devices
• Promotion of pharmaceutical industry educational institutes
INFRASTRUCTURE
Infrastructure is the foundation upon which a contemporary industrial economy may operate effectively.
CLASSIFICATION
Classfication of Infrastructure
Category Sectors granted ‘infrastructure’ status by Finance Ministry; Dept. of Economic Affairs.
Transport & Logistics Roads and bridges, Ports, Shipyard, Inland Waterways, Airport, Railway, tunnels, bridges, Transport, Logistics
Infrastructure.
Energy Electricity, Oil, Gas
Water & Sanitation Water supply & treatment, Sewage/Solid Waste Management, Irrigation
Communication Telecommunication
Social & Commercial Hospitals, Education Institutions, Sports Infrastructure, Tourism infrastructure -hotels, ropeways and cable
Infrastructure cars etc.
Industrial Parks, food parks, textile parks, SEZ etc.
Cold storage, Soil-testing laboratories
Affordable Housing
ENERGY
Total Installed Capacity
Installed Generation Capacity (Sector Wise) As On 30.09.2022
Sector MW % of Total
Central Sector 99,005 24.3%
State Sector 1,04,966 25.7%
Private Sector 2,03,825 50.0%
Installed generation capacity(fuel wise): Fossil Fuel
Coal 204.079 50.0%
Lignite 6.620 1.6%
Gas 24,824 6.1%
Disel 562 0.1%
Installed Generation Capacity (Sector Wise) As On 30.09.2022

Non-Fossil Fuel
Hydro 46,850 11.5%
Wind 41.666 10.2%
Solar 60,814 14.9%
BM Power/Cogen 10,206 2.5%
Waste to Energy 495 0.1%
Small Hydro Power 4899 1.2%
Nuclear 6,780 1.7%
Electricity
Electricity
Status India is the third-largest producer and second-largest consumer of electricity worldwide, with an installed power capacity
of 395.07 GW, as of January 2022.
At present around 69.5 per cent of India’s power generation capacity is based on coal.
Note: The peak power deficit during financial year 2001-02 was 12.2 per cent,
approximately 9,252 MW, however, at the end of 2014-15, the peak power deficit decreased to the order of 2.4 per cent
Ministry The Ministry of Power is primarily responsible for the development of electrical energy in the country.
Concerned • Assisted by the Central Electricity Authority (CEA).
• Construction and operation of generation and transmission projects in the central sector are entrusted to Central
Sector Corporations like the National Thermal Power Corporation (NTPC).
Initiative in the sector
Initiative in Electricity Act 2003 + Integrated Power Development Scheme (2014) +Ujwal Discom Assurance Yojana Scheme (2015)
the sector +Ujwal Discom Assurance Yojana Scheme (2015) + Development of National Grid + Energy Conservation Building Code
(ECBC) (2017 + Unnat Jyoti by Affordable LEDs (2015) + Pradhan Mantri Sahaj Bijli Har Ghar Yojana + Deen Dayal Upadhyaya
Gram Jyoti Yojana + Privatization of Power Departments/Utilities +Go Electric Campaign (2021)
Amendments to ensure 24X7 affordable Power for all
in Power Tariff Electricity
Policy (2016) • 24X7 supply will be ensured to all consumers and State Governments and regulators will devise a power supply
trajectory to achieve this.
• Power to be provided to remote unconnected villages through micro grids with provision for purchase of power into
the grid as and when the grid reaches there.
Efficiency
• Reduce power cost to consumers through expansion of existing power plants.
• Benefit from sale of un-requisitioned power to be shared allowing for reduction in overall power cost.
• Transmission projects to be developed through competitive bidding process to ensure faster completion at lower
cost.
• Faster installation of Smart meters to enable “Time of Day” metering, reduce theft and allow net-metering.
Environment
• Renewable Power Obligation (RPO): In order to promote renewable energy and energy security, 8% of electricity
consumption excluding hydro power, shall be from solar energy by March 2022.
• Renewable Generation Obligation (RGO): New coal/lignite based thermal plants after specified date to also establish/
procure/purchase renewable capacity
• Affordable renewable power through bundling of renewable power with power from plants whose PPAs have expired
or completed their useful life.
• No inter-State transmission charges and losses to be levied for solar and wind power.
• Swachh Bharat Mission to get a big boost with procurement of 100% power produced from Waste-to-Energy plants.
Digital • Garv II App: To ensure transparency in implementation of rural electrification programme to provide real time data
initiatives of all six lakh villages of the country.
by Power • Merit and Vidyut Pravah app: Consumers can find out whether states are charging them a fair price. Merit app gives
Ministry users information on whether states are actually giving priority to cheaper sources of power. Often they don’t do this.
• Tarang App: to keep an eye on stalled and future electricity projects
Renewable Energy
Renewable energy
Status •
As of 31st August 2022, Renewable energy sources, including large hydropower, have a combined installed
capacity of 163 GW.
Solar Wind Small hydro Power Bio-power Large Hydro Waste to Energy
59.34 GW 41.2 GW 4.88 GW 10.2 GW 46.85 GW 0.47 GW
India now has 4th global position in the world for overall installed renewable energy capacity.
• 4th in Wind power, and 5th in Solar Power capacity.
• Renewable energy has a share of 26.53% in the total installed generation capacity in the country
Ministry concerned Ministry of New and Renewable Energy (MNRE) is the nodal Ministry at the federal level.
• In 1982, a separate Department of Non-Conventional Energy Sources (DNES) was created in the Ministry
of Energy to look after all the aspects relating to New and Renewable Energy.
• The Department was upgraded into a separate Ministry of Non-Conventional Energy Sources (MNES)
in 1992.
• MNES was renamed as Ministry of New and Renewable Energy (MNRE)
Initiative in the KUSUM (Solar for farmers) 2019 + Roof Top Solar (RTS) Programme + Solar Parks + National Solar Mission +
sector Green Energy Corridors + Renewable Purchase Obligations (RPO) + Renewable energy certificates (RECs) +
One Sun One World One Grid + Hydrogen Energy Mission + National Policy On Biofuels 2018.
Explanations
Renewable Purchase It is a type of obligation imposed on certain entitles to purchase energy from renewable sources. It is imposed
Obligations (RPO) by the Central/State Regulatory Commission (SERC).
Renewable energy •
Renewable Purchase Obligations (RPO) provide for purchase of renewable energy certificates (RECs) in
certificates (RECs) lieu of purchasing renewable power by obligated entities.
•
Renewable energy certificates (REC) ensure that all actions related to renewable electricity generation
and consumption, such as accounting, tracking, and assigning ownership, are completed efficiently.
One Sun One World A transnational electricity grid supplying solar power across the globe in order to make use of availability of
One Grid sunshine in different neighbouring countries at different times.
A tripartite Memorandum of Understanding (MoU) between the International Solar Alliance (ISA), the
Government of India, and the World Bank was signed in 2020 to implement the OSOWOG initiative.
National Policy On •
The Policy categorizes biofuels as “Basic Biofuels” viz.
Biofuels 2018 First Generation (1G) bioethanol & biodiesel and “Advanced Biofuels” –
Second Generation (2G) ethanol, Municipal Solid Waste (MSW) to drop-in fuels,
Third Generation (3G) biofuels, bio-CNG etc. to enable extension of appropriate financial and fiscal
incentives under each category.
•
Policy expands the scope of raw material for ethanol production by allowing use of Sugarcane Juice,
Sugar containing materials like Sugar Beet, Sweet Sorghum, Starch containing materials like Corn,
Cassava, Damaged food grains like wheat, broken rice, Rotten Potatoes, unfit for human consumption
for ethanol production.
•
The Policy allows use of surplus food grains for production of ethanol for blending with petrol with the
approval of National Biofuel Coordination Committee.
•
the Policy indicates a viability gap funding scheme for 2G ethanol Bio refineries of Rs.5000 crore in 6
years in addition to additional tax incentives, higher purchase price as compared to 1G biofuel
•
The Policy encourages setting up of supply chain mechanisms for biodiesel production from non-edible
oilseeds, Used Cooking Oil, short gestation crops.
•
Roles and responsibilities of all the concerned Ministries/Departments with respect to biofuels has been
captured in the Policy document to synergise efforts
Cooking
Cooking
Status •
On 7th September 2019, Prime Minister of India handed over the 8th Crore LPG connection in Aurangabad,
Maharashtra. It also helped in increasing the LPG coverage from 62% on 1st May 2016 to 99.8% as on 1st
April 2021.
•
Under the Union Budget for FY 21-22, provision for release of additional 1 Crore LPG connections under the
PMUY scheme has been made. In this phase, special facilities has been given to migrant families.
Initiative in the Pradhan Mantri Ujjwala Yojana + PAHAL + Ujjwala 2.0 + PM LPG Panchayat Scheme + National Biogas and Organic
sector Manure Programme + PM Urja Ganga 2016 + Compost Scheme (2016) + GOBARdhan (2018)
Note: All the schemes and Programmes will be covered in the different booklet.
TRANSPORT
Road
Road
Status •
India has about 62.16 lakh km of road network, which is the second largest in the world. Comprises
national highways, expressways, state highways, major district roads, other district roads and village roads.
•
The break-up is: national highways/expressways–1,36,440 km; state highways–1,76,818 km; other roads–59,02,539
km
Ministry •
Ministry of Road Transport and Highways
concerned •
It was formed in 2009 by bifurcating the erstwhile Ministry of Shipping, Road Transport and Highways into two
independent ministries
Initiatives taken in the sector
Initiatives Pradhan Mantri Gram Sadak Yojana + National Highways Development Project +
Bharatmala Pariyojana + Green National Highways Corridor Project + Bhoomi Rashi + Char Dham Mahamarg Vikas
Pariyojana + Indian Academy of Highway Engineers + Indian Road Congress + PM Gati Shakti Plan + National Registry
of Vehicle and License Records + e-tolling.
Ports
Ports
Status • India has a long coastline of about 7,517 km, spread on the western and eastern shelves of the mainland
and also along the Islands.
• There are 12 major ports and about 200 non-major ports.
• Approximately 95 per cent of the country’s trade by volume and 68 per cent by value is moved through
maritime
• India is the sixteenth-largest maritime country in the world e transport
Ministry concerned Ministry of Ports, Shipping and Watersays.
Initiative Sagarmala Programme + Maritime India Vision + Ship Building + Ship Recycling + Major Port Authorities Act
2021 + Indian Maritime University + Lighthouses and Lightships
Inland Water Transport (IWT)

Inland Water Transport
Status In 2016, the government notified 111 inland waterways as National Waterways of India under the National
Waterways Act, 2016. Of these, 13 National Waterways are operational for shipping and navigation and
cargo/passenger vessels are moving on them.
Inland Water Transport

Ministry concerned Inland Waterways Authority of India (IWAI) was constituted in 1986, for the development and regulation
of inland waterways for shipping and navigation. It is under ministry of shipping.
Initiatives in the sector
Initiatives Jal Marg Vikas Project + Interlinking of Rivers programme (ILR) programme +Interlinking of Rivers
programme (ILR) programme + Installation of navigational aids
Railways
Railway
Status Indian Railways have grown into a vast network of 7,325 stations spread over a route length of 67,956 km.
Ministry concerned There are 13 undertakings under the administrative control of the Ministry of Railways.
The Research Design and Standards Organisation (RDSO) at Lucknow is the R&D wing of Indian Railways
Categories • Indian Railways is a multi-gauge transport system. On the basis of the width of track of the Indian Railways,
three categories have been made:
1. Broad gauge: The distance between rails in broad gauge is 1.676 metres.
2. Metre gauge: The distance between rails is one metre. Its total length was 3880 km.
3. Narrow gauge: The distance between the rails, in this case, is 0.762 metre or 0.610 metre
Initiatives • Foreign Direct Investment (FDI): 100% FDI in activities such as: (i) suburban corridor projects through
Public Private Partnerships; (ii) high speed train projects; (iii) dedicated freight lines; (iv) rolling stock; (v)
passenger terminals; (vi) mass rapid transit systems, etc.
• Flexi-fare system
• Merging of the Budget
• National Railway Plan, 2030
• Dedicated Freight Corridors
• High Speed Rail
• Rail Development Authority
• Catering Services
• Rail Tourism
Civil Aviation
Civil Aviation
Status •
India has become the third largest domestic aviation market in the world and is expected to overtake
the UK to become the third largest air passenger market by 2024.
•
India’s commercial airline fleet is currently among the top ten nations in the world.
•
India’s airport capacity is expected to handle 1 billion trips annually by 2023.
Ministry concerned The Ministry of Civil Aviation. It is responsible for the administration of the Aircraft Act, 1934, Aircraft Rules,
1937, etc
Initiatives Regional Connectivity Scheme + Air Sewa + FDI Liberalisation + Krishi Udan + Air Navigation Service + Drones
or Unmanned Aircraft System (UAS) +Digi Yatra + Vande Bharat Mission + Lifeline UDAN + National Civil
Aviation Policy
COMMUNICATION & INFORMATION TECHNOLOGY
Communication
Status • In terms of overall internet users, India came in third place in 2016.
• Number of active wireless subscribers (on the date of peak VLR#) in December, 2021 was 1000.63 million.
• The number of telephone subscribers in India decreased from 1,191.05 million at the end of November-21
to 1,178.41 million at the end of December-21.
• The overall Tele-density in India decreased from 86.90% at the end of November-21 to 85.91% at the
end of December-21.
• Total wireless subscribers decreased from 1,167.50 million at the end of November-21 to 1,154.62 million
at the end of December-21, thereby registering a monthly decline rate of 1.10%
• India climbed 21 spots in Network Readiness Index 2021 (released in December 2021), and reached to
67th position.
Note: Tele-density, denotes the number of telephones per 100 population, is an important indicator of
telecom penetration.
Ministry concerned Ministry of Communications and the Ministry of Electronics and Information Technology
Initiatives in the sector: Telecom
Initiatives Rationalisation of Adjusted Gross Revenue + Telecom Commission + New National Digital Communications
Policy (2018) + National Broadband Mission + Internet and Broadband Penetration + Harnessing Emerging
Technologies
New National A new National Digital Communications Policy - 2018 (NDCP-2018) was introduced in October 2018.
Digital The policy aims to
Communications • Provide universal broadband connectivity at 50 Mbps to every citizen;
Policy • Provide 1 Gbps connectivity to all Gram Panchayats by 2020 and 10 Gbps by 2022;
• Ensure connectivity to all uncovered areas;
• Attract investments of USD 100 billion in the Digital Communications Sector;
• Train one million manpower for building New Age Skill;
• Expand IoT ecosystem to 5 billion connected devices;
• Establish a comprehensive data protection regime for digital communications that safeguards the privacy,
autonomy and choice of individuals
• Facilitate India’s effective participation in the global digital economy;
• Enforce accountability through appropriate institutional mechanisms to assure citizens of safe and
• Secure digital communications infrastructure and services.
Strategies
• Establishment of a National Digital Grid by creating a National Fibre Authority;
• Establishing Common Service Ducts and utility corridors in all new city and highway road projects;
• Creating a collaborative institutional mechanism between Centre, States and Local Bodies for Common
Rights of Way, standardization of costs and timelines;
• Removal of barriers to approvals; and
• Facilitating development of Open Access Next Generation Networks
Initiative in the sector: Post
Initiative in Post Core Banking Solution in all the Departmental Post Offices + India Post Payments Bank + Post Office Common
Service Centre + Postman Mobile Application + Gangajal through Post Offices + e-Post Office + Deen Dayal
SPARSH Yojana
Initiative in the sector: IT
Initiative in IT sector Aadhaar Enabled Payments + e-Sampark Database + e-Taal + Aadhaar-Enabled Biometric Attendance
System (AEBS) + e-Districts + State Wide Area Network (SWAN) + GI Cloud + e-Pramaan + Online e-Sign
(e-Hastakshar) + e-Sangam + National Knowledge Network + UMANG + PRAGATI
Explanations
e-Sampark to send messages and emails to public representatives and government employees
Database
e-Taal It is a web portal for dissemination of e-transactions statistics of national and state level e-governance projects
including mission mode projects.
Communication
State Wide Area Under the National e-Governance Action Plan, it is proposed to extend connectivity to the block level through
Network (SWAN) NICNET/State Wide Area Network (SWAN
e-Pramaan The objective is to electronically deliver the government services to its intended recipients in a secure manner.
e-Sangam The National e-Governance Plan (NeGP) of the Govt. of India aims to make all Government services accessible
to the common man in his locality
UMANG Has been developed as a single mobile platform to deliver major government services.
PRAGATI This video conferencing facility brings the Secretaries to Government of India
and the Chief Secretaries of the states on single platform on every fourth Wednesday of the month
HOUSING
Housing
Status • India has 246.7 million households, according to the 2011 census.
Rural households account for 68 percent of the total, while urban families account for 32 percent.
According to data, the majority of households in both rural (95%) and urban (95%) areas own their homes
(69 percent).
In all, 213.5 million people lived in their own homes, accounting for roughly 86 percent of all households. When
compared to the 2001 census results, this is a rise
Ministry Urban: The Ministry of Housing and Urban Affairs (MoHUA) is entrusted with the responsibility of broad policy
concerned formulation and monitoring of
programmes regarding urban housing and urban development
Rural: Ministry of Rural Development
Initiatives Pradhan Mantri Awas Yojana (URBAN) + Pradhan Mantri Awas Yojana (RURAL) + Affordable Rental Housing Complexes
(ARHCs) + Smart Cities Mission + Jawaharlal Nehru National Urban Renewal Mission + Model Tenancy Act, 2021
MISCELLANEOUS
Universal Service Obligation Fund

• The Universal Service Obligation Fund (USOF) aims to provide for quality and affordable mobile and digital services
across the rural and remote areas of the country;
• allowing non-discriminatory access to mobile and network services along with equitable access to knowledge and
information dissemination,
• Leading to rapid socio-economic development with improved standard of living.
• The Universal Service Obligation (USO) Fund is headed by the Administrator, USO Fund who is appointed by the Central
Government, for the administration of the fund. It is an attached office of the Department of Telecommunications
(DoT), Ministry of Communications.
• The Universal Service Obligation shall be the sole purpose of the Fund. The latter is described in the Act as the obligation
to make telegraph services available to individuals in rural and isolated locations at fair and reasonable pricing.
• USOF officially launched Telecom Technology Development Fund (TTDF) Scheme on October 01st, 2022.
Net Neutrality
Net neutrality is the idea that people should have unrestricted access to any content and apps from any source without
Internet service providers favouring any particular online businesses or websites. In an effort to protect the principles of
net neutrality, the telecom regulator TRAI banned differential pricing for internet services provided by telecom providers
to mobile customers, dealing Facebook’s Free Basics and other zero-rated platforms like Airtel Zero a severe hit.
IPv6 (Internet Protocol Version 6)

It is necessary to switch to IPv6, which offers a large address space and a variety of capabilities for future needs, as IPv4
(Internet Protocol Version 4) has reached its limit and is no longer able to supply any additional address space. Countries
all around the world have begun switching to IPv6.
NOFN –National Optical Fiber Network)
National Optical Fibre Network (NOFN) is an ambitious initiative to trigger a broadband revolution in rural areas. NOFN
was envisaged as an information super-highway through the creation of a robust middle-mile infrastructure for reaching
broadband connectivity to Gram Panchayats.
The National Optical Fibre Network (NOFN) aims to
• Connect all the 2,50,000 Gram panchayats in the country and provide 100 Mbps connectivity to all gram panchayats
(GPs).
• To achieve this, the existing fibres of PSUs (BSNL, Railtel and Power Grid) were utilised and incremental fibre was laid
to connect to Gram Panchayats wherever necessary.
• Dark fibre network thus created was lit by appropriate technology thus creating sufficient bandwidth at the Gram
Panchayats.
TRAI
With the entry of private sector in the provision of telecommunication services a need was felt to have an independent
regulatory body. The above requirement was indicated in the guidelines issued for entry of private sector in basic telecom
service. Accordingly, Telecom Regulatory Authority of India (TRAI) was established in the year 1997.
Functions of TRAI
To make recommendations on the need and timing for introduction of new service provider, on the terms and conditions
of license to a service provider,
Ensure compliance of terms and conditions of license,
Effective management of spectrum,
Lay down the standards of quality of service to be provided by the service providers and ensure the quality of service
Ensure effective compliance of Universal Service Obligations, notify the rates at which telecommunication services
within India and outside India shall be provided under this Act etc.
A Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) was established to take over the adjudicatory
and disputes powers from TRAI after the TRAI Act was amended by an ordinance in 2000.
SERVICE SECTOR IN INDIA
INTRODUCTION
The service/Tertiary sector covers a wide range of activities from the most sophisticated in the field of Information and
Communication Technology to simple services pursued by the informal sector workers, for example, vegetable sellers,
hawkers, rickshaw pullers, etc.
IT-BPM / Software Sector

Status of Service •
At present Services, sector contributes over 50 per cent to India’s GDP.
Sector in the •
The services sector contributed 53% to India’s Gross Value Added at current prices in FY22 (until January
economy 2022).
•
Accounts for two-thirds of total FDI inflows into India and about 38% of total exports.
•
In India, the proportion of services in total employment is predicted to increase to 48% by 2030.
SECTORS IN INDIA’S SERVICES SECTOR

Status •
Contribute 9.3% to the country’s GDP and public welfare
•
India‘s IT and business services market is projected to reach US$ 19.93 billion by 2025
Initiatives in IT-BPM/ 1) MeghRaj 2) Digital India programme 3) new revised and simplified Other Service Providers (OSPs)
Software Sector guidelines.
Tourism and Hospitality
Tourism and Hospitality

Status •
23rd in the world for the number of visitors from outside.
•
12th in terms of earnings from foreign exchange.
•
The sector was responsible for 13% of all employment
•
5% contributor in India’s GDP
•
India ranks 34 out of 140 countries as per WEF travel and tourism development index, 2019
Top five states attracting Tamil Nadu, Maharashtra, Uttar Pradesh, Delhi and Rajasthan;
foreign tourists
Initiatives 1) National Mission on Pilgrimage Rejuvenation and Spiritual Heritage Augmentation Drive (PRASHAD);
2) Liberalized visa regime; 3) Incredible India 2.0 ; 4) 24x7 toll-free multi-lingual tourist helpline; 5) Adarsh
Smarak scheme; 6) Annual International Tourism Mart
Real Estate Sector in India

Real Estate sector
Status • In India, the real estate sector is the second-highest employment generator, after the agriculture
sector.
• According to NITI Aayog, by 2030, the Indian real estate market is predicted to be worth US$1 trillion
from US$ 200 billion in 2021 and will contribute 13% of the country’s GDP by 2025.
Initiatives floor space index (FSI)+ Real Estate (Regulation and Development) Act, 2016 (RERA)+ Housing for All
initiative + special Window for Affordable & Mid-Income Housing (SWAMIH) fund + Real estate debt
restructuring+ affordable housing fund
Explanations
Affordable housing Fund 1. Introduced in 2018 budget as a dedicated fund under National Housing Banks.
2. Supposed to be funded by the priority sector lending shortfall
3. Objective: NHB will provide refinance assistance to eligible primary lending institutions in respect
of their loans extended in urban areas for Purchase /construction/ Repair/ renovate of dwelling units.
• Eligible primary lending Institutes for refinance under Affordable Housing Fund
Housing Finance Companies (HFCs)
Scheduled Commercial Banks (SCBs)
Scheduled Urban Cooperative Banks (UCBs)
Regional Rural Banks (RRBs)
Scheduled Cooperative Banks (SCoBs)
Small Finance Banks (SFBs)
Apex Cooperative Housing Finance Societies (ACHFS)
Agricultural & Rural Development Banks (ARDBs)]
• Eligible individual housing loans
Urban: Annual household income not exceeding 6 lakh.
Rural: (i) Weaker Sections as defined in the RBI’s priority sector guidelines (as amended from
time to time); (ii) Annual household income not exceeding 3 lakh; and (iii) Women
Real Estate sector

features of Real •
Establishes state level regulatory authorities called Real Estate Regulatory Authorities (RERAs) with the
Estate Regulation task of registering real estate projects, maintaining a database of them, and defending the interests
and development Act of buyers.
(RERA), 2016 •
Establishes state level tribunals called Real Estate Appellate Tribunals. Decisions of RERAs can be
appealed in these tribunals.
•
If developers, brokers, and promoters disobey the RERA, the Authorities may deliver show cause
warnings to them.
•
70% of the money received from buyers must be placed in an exclusive escrow account (separate
dedicated account) intended specifically for that project.
•
The developer must provide particular project information, such as the sanctioned plan, the
anticipated completion date, etc., at the time of project registration. Terms like Carpet Area, Common
Area, etc. are defined by the Act
•
Any structural issues that arise within five years of purchase are the developer’s responsibility to fix.
Space Sector
Space Sector
Status India’s space industry is predicted to be worth approximately USD 13 billion by 2025.
The rising demand for smaller satellites is expected to increase satellite manufacturing in India and attract international
start-ups. (report published by the Indian Space Association (ISpA) and Ernst and Young)
Initiatives Empowering New Space India Limited (NSIL)+ Creation of the Indian National Space Promotion and Authorization Centre
(IN-SPACe)+ Private sector in space sector
Pharmaceuticals
Pharmaceuticals
Status •
India is the largest provider of generic drugs globally. It supplies over 50% of the global demand for various vaccines,
40% of generic demand in the US, and 25% of all medicine in the UK.
•
Globally, India ranks 3rd in terms of pharmaceutical production by volume and 14th by value.
•
India has more than 30% share in the global generic market.
Initiative Contract Research+ Scheme for Promotion of Bulk Drug Parks+ Production linked incentive (PLI) scheme for Bulk drug+
Production linked incentive (PLI) scheme for Pharmaceuticals+ Production Linked Incentive (PLI) Scheme for Promoting
Domestic Manufacturing of Medical Devices
MISCELLANEOUS TOPICS
1) Floor space index (FSI): It is basically a ratio that helps in deciding how much construction must be done on a piece
of land. Higher the FSI, greater is the number of floor that can be constructed in the building.
2) National Teleconsultation Service: National Teleconsultation Service of Ministry of Health and Family Welfare is first
of its kind onlineOPD service offered by a country government to its citizens. It aims to provide healthcare services
to patients in their homes. Safe & structured video based clinical consultations between a doctor in a hospital and
a patient in the confines of his home are being enabled.
3) eSanjeevaniOPD: Stay Home OPD has been developed by Centre for Development of Advanced Computing (C-DAC)
in Mohali. Salient features of this Service are: Patient registration, Token Generation, Queue Management, Audio-
Video Consultation with a Doctor, ePrescription SMS/Email Notifications etc.
4) Champion Services Sector (CSS): It refers to the 12 identified sectors where the Government wants to give focused
attention to promoting their development and realizing their potential.
• It is a Central Sector Scheme of the Department of Commerce.
Department of Industrial Policy and Promotion (DIPP) is the nodal department for the Champion Sectors in
manufacturing.
The Department of Commerce would coordinate the proposed initiative for the Champion Sectors in Services.
• A dedicated fund of Rs. 5000 crores has been proposed to be established to support initiatives for sectoral Action
Plans of the Champion Sectors.
• 12 Champion service sectors include: IT & ITES, Tourism and Hospitality Services Communication Services, Medical
Value Travel, Construction, and Related Engineering Services, Transport, and Logistics Services, Environment -al Services,
Accounting and Finance Services, Financial Services, Audio Visual Services, Education Services and Legal Services
5) BharatNet programme: The programme has been launched to provide high-speed digital connectivity of the internet
in rural areas at a very affordable price. This high-speed digital connectivity will be provided through optical Fibre.
It is the world’s largest rural broadband connectivity project.
6) National Broadband Mission: Government of India has launched the National Broadband Mission with an aim to
provide Broadband access to all villages by 2022. Its principals are:
• Universality: Ubiquitous availability of broadband services to bridge digital divide
• Affordability: Availability of affordable broadband services to every citizen of India to bridge the socio-economic divide
• Quality: Availability of high speed and highly reliable broadband access to all
MICRO SMALL AND MEDIUM ENTERPRISES (MSME)
DEFINITION
A new composite classification for manufacturing and service MSME units was notified in 2020. It changed the limits
for investments in plant and machinery and introduced the concept of annual turnover limits.
New composite classification, 2020
Parameter Micro Small Medium

Investment in plant and Does not exceed 1 crore rupee does not exceed 10 crore rupees does not exceed 50 crore rupees
Machinery
Turnover Does not exceed 5 crore turnover does not exceed 50 not more than Rs. 250 crore
rupees crore rupees
Old classification
Parameter Micro Small Medium
Manufacturing Enterprises Investment < 25 lakh Investment < 5 crore Investment < 10 crore
Service Enterprises Investment < 10 lakh Investment < 2 crore Investment < 10 crore
New definition better than the old one

Old definition New Definition
distinct upper and lower bounds for the manufacturing and service sectors uniform thresholds in the service and industrial sectors
retail and wholesale sectors weren’t included retail and wholesale sectors are included
Equipment cost not depreciation-adjusted Depreciation-adjusted
Upward limits of turnovers and investments were too low The upper limitations for investments and turnovers have
been increased.
Export turnover included in total turnover Export turnover excluded from total turnover
Initiatives for development of MSME sector in India

Initiative Explanation
MSME Development •
The National Board for Micro, Small and Medium Enterprises was established with 47 members
Act, 2006 with the Minister of MSME serving as an ex-officio chairman.
•
The role of the Board is:
• to examine the factors affecting the promotion and development of MSMEs,
• to review the policies and programmes of the Central Government and
• Make recommendations in regard to facilitating MSMEs promotion and development enhancing
their competitiveness.
•
It empowers the Central Government to constitute an Advisory Committee to give recommendations
to the Board, Central and State government on the matters referred to it.
•
It empowers the Central Government to undertake programmes and issue guidelines and instructions
to promote, develop and enhance the competitiveness of MSMEs.
Merger • In 2007, the Ministry of Small-Scale Industries and the Ministry of Agro and Rural Industries were
merged to form the Ministry of Micro, Small and Medium Enterprises.
• The MSME Ministry heads five statutory bodies-
Khadi and Village Industries Commission
Coir Board
National Small Industries Corporation
National Institute for MSME and
Mahatma Gandhi Institute for Rural Industrialization
• These bodies are responsible for aiding MSMEs with respect to government schemes and policies.
Note: The primary responsibility of promotion and development of MSMEs is of the State Governments.
However, the Government of India supplements efforts of the State Governments through various
initiatives.
Small Industries •
SIDBI was established as an All India Financial Institution (AIFI) in 1990 for promotion and financing
Development Bank of of the MSME sector.
India (SIDBI) •
SIDBI acts as the principal financial Institution for Promotion, Financing and Development of the
Micro, Small and Medium Enterprise (MSME) sector as well as for coordination of functions of
institutions engaged in similar activities.
Credit Guarantee Fund •
Jointly set up by the Ministry of Micro, Small and Medium Enterprises and SIDBI to catalyse flow of
Trust of Micro and Small institutional credit to MSEs
Enterprises (CGTMSE) •
has been instrumental in providing guarantee cover to collateral free loans extended by Financial
Institutions to MSEs
Government schemes for the development of MSME sector
Government schemes Raising and Accelerating MSME Performance (RAMP) scheme + MSMEs in North Eastern Region and
Sikkim scheme + Prime Minister’s Employment Generation Programme (PMEGP) + PM MUDRA Yojana
+ Interest Subvention Scheme + Special Credit Linked Capital Subsidy Scheme (SCLCSS) for the services
sector + Credit Linked Capital Subsidy and Technology Upgradation Scheme + Zero Defect and Zero Effect
scheme + MSME Innovation scheme + SFURTI scheme + ASPIRE scheme +
Micro & Small Enterprises Cluster Development Programme + Government e-Marketplace (GeM) Portal
+ Trade Receivables Discounting System (TReDS)
Portals related to MSMEs
Udyam Portal for online registration of MSMEs
MSME Samadhan portal For empowering micro and small entrepreneurs across the country to directly register their cases relating
to delayed payments.
MSME Sambandh Portal It helps in monitoring the implementation of public procurement policy for micro and small enterprises.
MSME Sampark Portal To bridge the gap between job seekers and recruiters.
Udyog Aadhar Portal It facilitates the registration of entrepreneurs in the MSME sector Upon the registration, the user is
allocated a unique 12-digit Udyog Aadhar Number (UAN
CHAMPIONS portal to make the smaller units big by helping and hand holding them
INVESTMENT MODELS
MODELS USED IN THE PLANNING PROCESS
Models Used in the Planning Process

Harrod Domar 1. According to the model, economic growth depends on: Level of savings + Productivity of investment
Model 2. Assumes: no government intervention+ fixed prices + no institutional changes
3. It was more or less the One Sector Model.
Solow Swan 1. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population
Model growth, and increases in productivity largely driven by technological progress.
Feldman– 1. This strategy focuses on increasing the domestic consumer goods sector where capital goods have sufficient
Mahalanobis capacity.
model 2. It suggest that initial investment is required to create a capacity for producing capital goods.
Mahalanobis 1. Large investment in basic heavy industry +Capital Industry to achieve self-sustained economic growth.
Strategy of 2. The Mahalanobis model had divided the capital goods sector into further two types of capital goods: C-type
Economic capital goods that produce consumer goods, and K-type capital goods that produce other capital goods, or
Growth ‘machines that produce other machines
Rao 1. This model is based on the 1991 economic liberalization and FDI policies.
Manmohan 2. This model of development abolished licensing in all industries except a few of 18 industries.
Model 3. Immediate measures taken were: Devaluation of the rupee + Pledging gold holdings to shore up forex reserves
INFRASTRUCTURE INVESTMENT MODELS
Model Meaning
Public 1. In this model, Government requires revenue for investment that mainly comes through taxes.
Investment 2. Properly targeted public investment can do much to boost economic performance, generating aggregate
Model demand quickly, fuelling productivity
Private 1. For a country to grow and increase its production investment is required. Presently tax revenue of India is not
Investment adequate to meet this demand so the government requires private investment.
Model 2. Private investment can be sourced from domestic or international markets.
3. From abroad private investment comes in the form of FDI or FPI.
4. Private investment can generate more efficiency by creating more competition
Public-Private 1. Project based on a contract or concession agreement, between a Government or statutory entity on the one
Partnership side and a private sector company on the other side, for delivering an infrastructure service on payment of
Model user charges.
Models of Public Private Partnership (PPP)

Types Meanings
Engineer-Procure- •
Under this model, the project cost is completely borne by the government. Procurement of raw material
Construct (EPC) and construction costs are met by the government.
•
The private sector’s participation is minimum and is limited to the provision of engineering expertise
Build-Operate- • Private sector operator designs, builds, finances, owns and constructs the facility and operates it
Transfer (BOT) commercially for the concession period, after which the facility is transferred to the public sector
• BOT models used for two-thirds of the total PPP projects in India
build-own-operate •
Under BOO, the private party will retain ownership of the newly constructed facility.
(BOO) •
On mutually agreed terms and conditions public sector partner agrees to ‘purchase’ the goods and
services produced by the project.
Types Meanings
build, own, operate •
In this variation, the project is transferred to the government or to a private operator after the negotiated
and transfer period of time.
(BOOT) •
The BOOT model is employed in the building of ports and motorways.
Build-lease- •
Here, the government gives a concession (project sanction) to a private entity to build a facility (and
operate-transfer possibly design it as well), own the facility, lease the facility to the public sector and then at the end of
(BLOT) the lease period transfer the ownership of the facility to the government.
Lease-develop- •
In this case, the public sector organisation or the government retains ownership of the newly built
operate (LDO) infrastructure facility and gets payments under the conditions of a lease with the private promoter. The
majority of airport facility development uses this strategy.
Hybrid Annuity •
Under this model the government has to pay 40% of expenses incurred in the form of five annual
Model (HAM) instalments (annuity) in the construction stage, and the developer needs to arrange the rest of the
money at this stage. The rest of the payment is made after the completion of the project on the basis of
the value generated and assets created
Some other investment models

Domestic Investment Model Can be a Public or a Private-Public Partnership venture
Foreign Investment Model It can be a majority foreign or foreign-domestic mix
Sector-Specific Investment Models Where investments are made in Special Economic Zones or other allied sectors
Cluster Investment Models Investment in Manufacturing Industries is an example.
MISCELLANEOUS TERMS
Terms Meanings
Swiss Challenge It is a method of bidding, often used in public projects, in which an interested party initiates a proposal
for a contract or the bid for a project. The government then puts the details of the project out in the
public and invites proposals from others interested in executing it. On the receipt of these bids, the
original contractor gets an opportunity to match the best bid.
Turnkey Project A turnkey project is one which is designed, developed and equipped with all facilities by a company
under a contract. It is handed over to a buyer when it becomes ready to operate business.
Viability Gap Funding It is designed to provide capital support to PPP projects which would not otherwise be financially viable.
(VGF) Viability Gap Funding of up to 40% of the cost of the project can be accessed in the form of a capital grant
India Infrastructure Scheme supports the Central and the State Governments and local bodies through financial support for
Project Development project development activities (feasibility reports, project structuring etc.) for PPP projects
Fund (IIPDF)
India Infrastructure It provides long-term debt for financing infrastructure projects that typically involve long gestation
Finance Company Ltd periods. It raises funds from domestic as well as external markets.
(IIFCL)
CHAPTER 10
International Financial Institutions

INTERNATIONAL MONETARY FUND (IMF)
International Monetary Fund (IMF)

Established 1944
Membership 188 countries
Publications World Economic Outlook
Global Financial Stability Report
IMF and Quota •
The IMF is a quota-based institution. A member country’s subscription to the IMF’s capital fund, or contribution
to the IMF, is referred to as a quota.
•
The quota also determines the IMF’s drawing rights for the country.
•
The quota also determines voting power; for example, if the quota is 10%, voting rights will have a 10%
weight
Special • They are a form of international reserves created by the IMF in 1969 to solve the problem of international
Drawing Rights liquidity.
• In this, a fixed amount of dollars and a fixed amount of gold could be purchased for each unit of currency.
• It is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies
of IMF members. SDRs can be exchanged for these currencies
• Allocated to the IMF members in proportion to their Fund quotas.
• used as a means of payment by Fund members to meet balance of payments deficit and their total reserve
position with the Fund
• Act both as an international unit of account and a means of payment
• The SDR’s value is determined by a basket of major foreign currencies (weighted average value). The SDR
basket contains five currencies: the dollar, yen, euro, pound-sterling and Renminbi.
Structure
Board of • Composed of as many governors as there are member states. Each member state appoints one governor and
Governors one alternate governor, who may vote when the principal governor is absent.
• Voting power of governors: one nation, one vote—does not apply in the IMF Board of Governors
• Function:
basic matters as admission of new members, quota changes
Amendments to the By-Laws and Articles of Agreements
• Advisory committee of Board of Governors: the International Monetary and Financial Committee (IMFC) and
development committee
Executive •
It is composed of 24 executive directors elected by the Board of Governors.
Board •
It manages the IMF’s daily operations and exercises the authority granted to it by the Board of Governors
•
Each member’s votes are equal to the sum of both its basic votes, which are distributed equally among all
members, and its quota-based votes.
Ministerial International Monetary and Financial Committee (IMFC) and Development committee
Committees • It oversees the global financial and monetary system
• Help address the problems of economic development in emerging nations
International Financial Institutions 149
International Monetary Fund (IMF)

India and IMF
•
India became a member of the IMF in 1945. It is one of the original founding members.
•
In order to resolve the foreign exchange crisis, India received a sizable loan in the amount of approximately Rs. 5,000 crores in
1981.
•
For the goal of evaluating the state of its economy, India has used the expertise of IMF professionals.
Miscellaneous topic related to IMF
Rapid Credit The Rapid Credit Facility (RCF) provides rapid concessional financial assistance to low-income countries (LICs)
Facility (RCF) facing an urgent balance of payments need with no ex-post conditionality where a full-fledged economic program
is neither necessary nor feasible.
Rapid It is a system designed by the IMF to provide quick financial assistance to its member countries with urgent BoP
Financing (Balance of Payment) needs.
Instrument
Gold Tranche/ It is the component of a member country’s quota with the IMF that is in the form of gold or foreign currency.
Reserve
Tranche
WORLD BANK
World Bank
Established 1944
Total Members 189
Headquarters Washington, D.C.
Publications- •
Global economic prospects,
•
World Development Report
•
Logistics Performance Index
•
Ease of Living Index
•
World Bank Paper on India’s Poverty
•
South Asia Economic Focus
World Bank Group •
The International Bank for Reconstruction and Development (IBRD)
•
International Development Association (IDA)
•
International Finance Corporation (IFC)
•
Multilateral Investment Guarantee Agency (MIGA)
•
International Centre for Settlement of Investment Disputes
Functions
IBRD (1944) •
Provides loans, guarantees, advisory services, and risk management products to middle-income countries
and low income countries
•
India is a founding member of IDA
IDA (1960) •
Non-profit organization
•
It provides grants and low-interest loans to the world’s poorest countries.
•
India is a founding member of IDA.
IFC (1956) • It is a non-profit organization that promotes private enterprise in developing nations.
• India is a founding member of the International Finance Corporation (IFC).
MIGA (1988) •
Protects investors and lenders from political risk, such as war.
•
Assists developing country governments in attracting foreign investment
ICSID (1966) •
It is used to resolve conflicts between investors and governments.
•
India is not a member of the ICSID
World Bank
India and World Bank
•
India is a member of four of the five constituents of the World Bank Group.
•
World Bank assistance in India started from 1948 when a funding for Agricultural Machinery Project was approved.
•
First investment of IFC in India took place in 1959 with US$ 1.5 million
•
India has an Executive Director, in the Board of Directors of IBRD / IFC / IDA/ MIGA
WORLD TRADE ORGANIZATION (WTO)
World Trade Organization (WTO)
Established Established in 1995 as a successor to the General Agreement on Tariffs and Trade (GATT) (Uruguay Round of
the GATT).The agreement which established the World Trade Organization (WTO), known as the “Marrakesh
Agreement,” was signed in 1994.
Total Members •
Established in 1995 as a successor to the General Agreement on Tariffs and Trade (GATT) (Uruguay
Round of the GATT).
•
The agreement which established the World Trade Organization (WTO), known as the “Marrakesh
Agreement,” was signed in 1994.
Headquarters New York
Functions of the WTO •
Administering WTO trade agreements
•
Forum for trade negotiations
•
Handling trade disputes
•
Monitoring national trade policies
•
Technical assistance and training for developing countries
•
Cooperation with other international organizations
WTO Agreements
Agreement On Executed in 1995. The important aspects of the agreement are Tariffication, Tariff cuts and Subsidy
Agriculture (AoA) reduction.
Three pillars of AoA
1. Only up to Reasonable level of domestic support: Three types of subsidies are discussed under this.
• Green Box: Subsidies which do not distort trade and are given by the government in order to
compensate them for deficiency in agricultural environment. Examples include - payment for lack of
access to research.
Green Box subsidies are allowed under AoA with no prescribed limit
• Blue Box: These subsidies are tied to programmes that limit production. At present, there are no limits
prescribed under AoA on spending by Government for Blue Box subsidies.
• Amber Box: Subsidies under this box are considered trade-distorting. Example: subsidies on fertilizers,
seeds, irrigation and power.
As per AoA, these subsidies are subject to limitations. For developed countries, the subsidy
limit is 5 percent of the value of agricultural production and for developing countries, the limit
is 10 per cent.
2. Enhanced Market Access: All member countries should open their domestic market by reducing tariffs
on imports by converting non-tariff members into tariff members.
3. Phase-out Export Subsidies - For six years, developed countries have to reduce the value by 36 per
cent, the volume by 24 per cent of export subsidies.
Meanwhile, for a period of 10 years, developing countries have to reduce the value by 24 Percent
and the volume by 10 per cent of export subsidies.
Peace Clause in •
Peace Clause holds that domestic support measures and export subsidies of a WTO member, which
Agreement on are legal under the provisions of the Agreement on Agriculture cannot be challenged by other WTO
Agriculture of WTO members on grounds of being illegal under the provisions of another WTO agreement.
International Financial Institutions 151
World Trade Organization (WTO)
General Agreement • These regulations govern the trade in services among WTO members.
on Trade in Services • All member countries should extend MFN (Most Favoured Nation) status to all other countries without
(GATS) any discrimination.
• Transparency should be maintained by publishing all relevant laws and regulations over services
• The GATS agreement covers four modes of delivery of services -
a) Cross border supply - which includes Business Process Outsourcing, transportations, distance education
and training etc.
b) Local delivery of services - by foreign banks, insurance companies
c) Consumption abroad - includes services availed by tourists in foreign countries
d) Movement of personnel - for delivery of services
Agreement on Trade •
The TRIPS Agreement helps ease trade tensions about IP issues while leaving WTO members ample
Related Aspects of space to pursue diverse domestic policies.
Intellectual Property •
It contains rules governing copyrights, patents, trademarks, geographical indications, industrial designs
Rights (TRIPS) etc.
Trade Related •
TRIMs are related to conditions or restrictions in respect of foreign investment in the country.
Investment Measures •
Restrictions on foreign investment on following grounds are to be removed.
(TRIMS) No restriction on area of investment.
No binding on use of local material.
No mandatory exports.
No restriction on repatriation of royalty, dividend and interest.
No trade balancing requirement
Sanitary and •
The SPS agreement allows member countries to set their own standards on food safety and animal
Phytosanitary and plant health. But it also states that regulations must be scientific.
Measures Agreement •
The various forms in which SPS may be applied are:
Product to come from a disease free area.
Specified treatment of the product.
Setting an allowable level of pesticide residue in the product.
Permitted use of only certain additives in the food.
Agreement on • It addresses two topics: multilateral disciplines regulating the provision of subsidies, and the use of
Subsidies and countervailing measures to offset injury caused by subsidized imports.
Countervailing • Only “specific” subsidies are subject to the SCM Agreement disciplines. There are four types of
Measures (SCM) “specificity” within the meaning of the SCM Agreement:
1. Enterprise-specificity. A government targets a particular company or companies for subsidization;
2. Industry-specificity. A government targets a particular sector or sectors for subsidization.
3. Regional specificity. A government targets producers in specified parts of its territory for subsidization.
4. Prohibited subsidies. A government targets export goods or goods using domestic inputs for subsidization.
• A Member may not impose a countervailing measure unless it determines that there are subsidized
imports, injury to a domestic industry, and a causal link between the subsidized imports and the injury.
ASIAN INFRASTRUCTURE INVESTMENT BANK (AIIB)
Asian Infrastructure Bank

Established 2015
Headquarter Beijing
Membership • 103 countries are its members.
• Membership in the AIIB is open to all members of the World Bank or the Asian Development Bank and is divided
into regional and non-regional members.
• Regional members are those who live in territories categorized by the United Nations as Asia and Oceania.
• The AIIB also allows for non-sovereign entities to apply for AIIB membership, assuming their home country is a
member
Note: China is the Bank’s largest contributor
Asian Infrastructure Bank

India – AIIB • The AIIB has funded 6.7 billion USD worth of projects to India. Currently, it is helping India in several of its green
projects and also in its COVID initiatives.
• India had applied for a loan from AIIB and Asia Development Bank (ADB) to procure 667 million COVID doses.
• ADB is expected to lend 1.5 billion USD under its APVAX initiative. APVAX is Asia Pacific Vaccine Access Facility.
AIIB is to lend 500 million USD.
• In 2021, AIIB approved 356.67 million USD for the expansion of the Chennai metro rail system.
Urjit Patel (24th Governor of RBI ) was recently appointed as the Vice President of Asian Infrastructure Investment Bank.
ASIAN DEVELOPMENT BANK (ADB)
Asian Development Bank

Established 1966
Headquarter Manila, Philippines
Membership It has 68 members, of which 48 are from within Asia and the Pacific. India is a founding member of the Asian
Development Bank (ADB).
ADB’s five largest Japan and the United States (each with 15.6% of total shares), the People’s Republic of China (6.4%), India
shareholders (6.3%), and Australia (5.8%).
Function •
Supports projects in developing member countries that create economic and development impact.
•
In order to support social and economic growth, it offers loans, grants, technical support, and equity
investments to members and partners
NEW DEVELOPMENT BANK (NDB)
New Development Bank

Established 2014, BRICS Summit in Fortaleza, Brazil.
Headquarter Shanghai, China
Membership BRICS countries and Bangladesh, United Arab Emirates, Egypt and Uruguay
Note NDB was granted observer status in the United Nations General Assembly in 2018, laying the groundwork for active
and effective collaboration with the UN.
Function To support infrastructure and sustainable development efforts in the BRICS and other underdeveloped emerging
economies, with a focus on innovation and cutting-edge technology, in order to accelerate growth.
NDB and 1) The NDB has authorized 14 Indian projects totaling roughly USD 4.2 billion so far.
India 2) India announced a one-billion-dollar financing agreement with the NDB in 2020 to improve rural jobs and
infrastructure.
3) India requested that the scope of the NDB (New Development Bank) be broadened to include strengthening
social infrastructure in addition to encouraging industry.
EUROPEAN BANK OF RECONSTRUCTION AND DEVELOPMENT (EBRD)
European Bank of Reconstruction and Development

Established 1991
Membership Member countries from five continents (North America, Africa, Asia, and Australia. India was inducted as 69th
member of EBRD
Headquarter London
Function •
Uses investment as a tool to help developing countries construct market economies.
•
Expanded to help development in more than 30 countries spanning Central Europe and Central Asia.

Book of SIP+ Indian Economy (English)

Uploaded by

Copyright:

Available Formats

You might also like

Book of SIP+ Indian Economy (English)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Book of SIP+ Indian Economy (English)

Uploaded by

Copyright:

Available Formats

Indian Economy

Static Revision Simplified

Chapter 1 : BASICS OF ECONOMICS AND NATIONAL INCOME�������������������������������������������������������������������������1

Chapter 2 : ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT ������������������������������������������������������������15

Chapter 4 : MONETARY POLICY AND FINANCIAL MARKET����������������������������������������������������������������������������48

Chapter 9 : INDUSTRIES, INFRASTRUCTURE AND SERVICES������������������������������������������������������������������������126

Chapter 10 : INTERNATIONAL FINANCIAL INSTITUTIONS������������������������������������������������������������������������������148

Basics of Economics and National Income

BASIC CONCEPTS IN ECONOMICS

Goods and Services

Characteristics of Goods and Service

Kinds of Goods and Services

S.no Types Explanations

What happen If a commodity is provided free to the public by the Government?

The Law of Demand

Exceptions to the Law of Demand

Market Equilibrium and Competition

Perfectly competitive Monopoly Monopolistic Oligopoly Monopsony

INTRODUCTION TO MACRO ECONOMICS

SCOPE OF MACRO ECONOMICS

Comparison of Different Economic Systems

CONCEPTS OF MACRO ECONOMICS

CIRCULAR FLOW OF INCOME

CONCEPTS OF NATIONAL INCOME

Concept Meaning Derived

Concept Meaning Derived

TERMS USED IN NATIONAL INCOME ACCOUNTING

CONCEPT OF REAL AND NOMINAL GDP

Parameters Nominal GDP Real GDP

ESTIMATION OF NATIONAL INCOME

1. Production or value added method

GDP - By Sum of Spending, Factor Incomes or Output

The Product or Value added method

Factor of Production Factor Income

GDP at Current Market Price= C+I+G+(X-M)

Concept of Factor Cost and Market Price

Factor Cost (FC) Market Price (MP)

Concept of Current and Constant Price

Gross Value Added (GVA) and GDP Comparison

Comparison of GDP and GVA

GDP CALCULATION IN INDIA SINCE 2015

Standing Committee on Economic Statistics

GDP AND WELFARE

OTHER INDICES TO MEASURE DEVELOPMENT AND WELFARE

Economic Growth and Economic Development

Economic Growth vs. Economic Development

Major Indices of Economic Development

Challenges to Economic Growth and Economic Development

Economic Planning in India

Central Planning in India

Difference of Functions between Planning Commission and NITI Aayog

Major Achievements of NITI Aayog

ECONOMIC REFORMS IN INDIA

Liberalisation, Privatisation and Globalisation

MEANING OF INCLUSIVE GROWTH

MEASURING INCLUSIVE GROWTH

Inclusive Development Index

Social Progress Index

Social Progress Index

Chapter 1 : BASICS OF ECONOMICS AND NATIONAL INCOME��1

Chapter 2 : ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT ��15

Chapter 4 : MONETARY POLICY AND FINANCIAL MARKET��48

Chapter 9 : INDUSTRIES, INFRASTRUCTURE AND SERVICES��126

Chapter 10 : INTERNATIONAL FINANCIAL INSTITUTIONS��148

Types • Primary markets and secondary markets