MACRO-ECONOMICS

You no longer live in a society you live in an economy!

TYPES OF ECONOMY
Economic System How, what, where and by whom are the goods & services produced in a country

Market Economy(Laissez-faire) Limited regulation, no pre-price determination, Self-correcting efficient markets

e.g. US All prices are marked to market The lessons from the financial crisis of 2008

Socialist (Planned) Economy Centrally planned for better distribution of goods & services

India before 1991(nationalization phase), China India after 1991

Mixed Economy Elements of both

THE 3 SECTORS OF ECONOMY

Primary agriculture, forestry, fishery, animal husbandry (extraction of raw materials) Secondary mineral, power, mining, manufacturing industries. Services (tertiary) transport, trade, communication, banking, other services

Three Sector Hypothesis & the curious case of India

INDICATORS OF ECONOMY

GDP total final value of goods and services produced in a country in one year.

Calculation Income & Expenditure Approaches Exp Approach more common C+I+GS+NE

GNP = GDP +Net factor income from abroad GDP-PPP = GDP based on Purchasing Power Parity

PPP Comparing the price of a basket of goods in different countries e.g. The Big Mac Index India ranks 11th in nominal GDP, but 4th in GDP by PPP Doesnt reflect income distribution

PCI = Per capita GDP

INDICATORS OF ECONOMY

WPI - WHOLESALE PRICE INDEX (producers index)

The factory gate price of a representative basket of wholesale goods (Used by India) Importance the change in this index is a measure of inflation Disadvantage doesnt reflect the service sector

New WPI Series in India (since Sept 2010) - Measures increase / decrease in industrial, commercial prices of commodities under 3 broad categories.

Primary articles Fuel, power etc.

- 102 items (15% weightage) - 19 items (20% weightage)

Manufactured products - 555 items (65% weightage) Certain weight to each category of commodities Base year - 2004-05

INDICATORS OF ECONOMY
CPICONSUMER PRICE INDEX Measure of the final price of a basket of goods (used by most developed countries)

Calculates increase / decrease in retail price. Direct bearing on consumers. Different types of CPIs for various consumers.

for agricultural laborers. for industrial workers. for urban non-manual employees.

Hence the problem in using CPI to calculate inflation in India

INDICATORS OF ECONOMY
INFLATION

Steady rise in prices, resulting in decline in purchasing power of the money. 2 types - cost push & demand pull. In India it is measured in terms of WPI Controlling Inflation Fiscal & Monetary policies Moderate inflation (2-3%) is good for economy.

FACTORS BEHIND INFLATION

Heavy non-plan expenditure by Govt. High fiscal deficits and deficit financing Large parallel economy Fluctuation in agricultural output Govt.s attempts to bridge deficits by higher indirect taxes rise in costs. Increase in Money Supply

INDICATORS OF ECONOMY
HDI - HUMAN DEVELOPMENT INDEX

Developed by UNDP in 1990 Measures physical quality of life in a country along 3 key parameters

Life expectancy at birth measure of health Adult literacy rate & gross enrollment ratio measures of access to knowledge Per capita income measure of std. of living

Indias rank is 134/187 (2011) very low

INDICATORS OF ECONOMY
POVERTY LINE

Consumption expenditure required for getting 2100 calories per person in urban area and 2400 calories in rural areas. Indias predicament which estimate to follow?

Even by the most optimistic estimate (Suresh Tendulkar Committee of Planning Commission), 37% Indians are BPL World Banks parameter of 1.25$ per day 80% Indians are BPL No. of people BPL % of population BPL

Key parameters

INDICATORS OF ECONOMY
EMPLOYMENT

Standard person year of 273 days. Person working at least 8 hours a day is considered employed. Indian unemployment rate hovers around 10%

60% of our workforce is self-employed, 30% are casual & only 10% are regular employees in the organized sector

Manufacturing sector not keeping pace with population growth Seasonal and disguised unemployment in agri. sector. Government waking up to the reality - MGNREGA

MONEY SUPPLY

M1 = currency in circulation - cash with banks + demand deposits with banks ( also called narrow money most liquid ) M2 = M1+ small saving deposits in POs M3 = M1+ time deposits with banks ( also called broad money ) M3 > GDP Inflation.

MONETARY POLICY
Regulates the money supply in the economy

Bank Rate - official rate of interest charged by RBI as the lender of last resort. Current rate 6% Open market operations - RBI buying and selling securities to regulate money supply. Repo rate the rate at which the banks borrow money from the central bank (RBI). Current rate 8.5% Reverse repo rate the rate at which the central bank borrows money from the banks. Current rate 7.5%

Increase in repo or reverse repo controls inflation How?

MONETARY POLICY
1. A) CRR - every commercial bank to keep a certain percent of its demand and time deposits with the RBI Current rate 6% B) SLR - commercial banks keep a fixed percentage of their demand and time deposits in liquid assets ( cash, securities, gold ) Current rate 24% 2. Priority sector lending Agriculture, SSIs, Education, MFIs, etc 40% for Indian banks & 32% for Foreign banks RBIs dilemma global realities vs local concerns

ROLE OF THE RBI

Issue of bank notes of all denominations Regulates money supply Lender of last resort to banks Controls FOREX operations

To sum up:

Three objectives of RBI Credit Regulation, Financial Stability & Inflation Control Believes in gradualism helped in decoupling during recession

TRADE CYCLE

Refers to fluctuation in economic activity which forms a regular pattern Parameters Inflation, Unemployment, GDP

TRADE CYCLE

BOOM - Refers to a particularly sharp upwards turn in demand and output. RECESSION -Two consecutive quarters of falling GDP in an economy. Beginning of slump or depression. Occurs due to over production during earlier phase, rise in fuel and raw material prices, etc.

SLUMP - Severe down-turn phase. Opposite of boom, e.g., the great US slump

TRADE CYCLE

DIS-INFLATIONARY MEASURES: Steps taken by govt. to BRING DOWN prices in face of chronic inflation. STAGFLATION: Decline in economic activity even in face of inflation. Mostly seen in LDCs. HYPERINFLATION: Out of Control Inflation

The Curious Case of Zimbabwean Dollar

MONEY MARKETS

Market in short term securities, loans, gold and FOREX. Mainly commercial banks are involved. Inter-bank call money market, the most significant part. An over-the-phone market. Usually for lending lasting less than a week Basic objectives

To even out short term surpluses and deficits

To provide easy access to short term money to meet commercial requirements at a realistic price.

CAPITAL MARKET

Market for long term loans. Consists of a) Govt. securities b) Industrial securities Govt. securities aimed at bridging fiscal deficit and financing public sector projects. Major holders are RBI, commercial banks, insurance cos. etc.

CAPITAL MARKET
Industrial securities

Aimed at mobilizing long term funds for corporate to finance capital expenditures, e.g. new projects, acquisitions etc. Equities market consists of primary and secondary markets. Equity shares traded through stock exchanges by brokers in an online environment. BSE and NSE the two largest stock exchanges.

Total number of stock exchanges in India?

CAPITAL MARKET

STOCK EXCHANGE - an organized market for trading of stocks and bonds. 22 in India. Facilitate financing for corporates. BSE- estd. 1875. Oldest in Asia. Getting overshadowed by newer NSE. 4000 listed companies. Sensex represents top 30 companies on free float basis. NSE - Also located in Mumbai. Nifty top 50 companies on total market cap basis. SEBI- estd. 1992. Regulates working of stock exchanges, brokers and mutual funds. Registers FPI.

BANKING SECTOR IN INDIA

RBI- guides, controls and regulates other commercial banks. Formulates monetary and credit policies. COMMERCIAL BANKS- mobilize savings and lend to borrowers ensuring maximum possible spread rate. They keep demand deposits ( current a/c), savings deposits and time deposits ( FDs). Nationalised in 1969 & in 1980. These include

A) PSU banks ( 7 SBI group + 19 nationalized )

B) Pvt. Sector banks ( Indian and foreign )

STRUCTURE OF UNION BUDGET

REVENUE SIDE 1. Revenue receipts

A) tax revenue central excise, customs duty, corporation tax, income tax, service tax, FBT, CTT, STT. B) non-tax revenue interest receipts on loans , profits from PSUs.

2. Capital receipts from non-trading activities: Dividends from PSUs, principal repayment from debtors, disinvestment proceeds , market borrowings.

STRUCTURE OF UNION BUDGET

EXPENDITURE SIDE

1. Plan expenditure Incurred in central development schemes. Costs around 25% of total expenditure. - Revenue and Capital
2. Non-plan expenditure Interest payments, defence, subsidies, salary of govt. employees. Accounts for approx. 75% of total expenditure.

DEFICITS

Revenue deficit: when the actual amount of expenditure and actual amount of received revenue do not tally with the anticipated expenditure and revenue figures Budget deficit: when the government does not plan its expenses, after taking into account its entire savings

= Total expenditure - total receipts Budget deficit + borrowings from banks and public

Fiscal deficit: the truest reflector of countrys financial health

DEFICIT FINANCING AND IMPACT

Govt. borrows from RBI by transferring securities. RBI prints new currency and puts it into circulation on behalf of the govt.

Increases money supply. Adds inflationary pressure in economy.

In some countries, market borrowing is also termed as deficit financing.

Evacuates funds available for pvt. investors. Also, Govt. ends up paying more interest in future. Development expenditure takes back seat.

TAXES

DIRECT TAXES Direct incidence of tax on the person who pays the tax. liability to pay tax is NOT passed on to someone else. e.g. INCOME TAX, CORPORATION TAX, WEALTH TAX, LAND REVENUE, GIFT TAX etc.

INDIRECT TAXES Levied on goods and services. traders / producers pay it. Liability passed on to end customer. e.g. VAT, EXCISE TAX, CUSTOMS DUTY, SERVICE TAX

KEY GOVT. INTERVENTIONS

APM Govt. determines prices through either monopoly production or through regulation. various measures like procurement prices, support prices, PDS etc. are adopted for the same.

MSP Floor price. minimum guaranteed price for the producer. Announced in order to encourage production of certain goods e.g. pulses, oilseeds, sugarcane etc.

TYPES OF PSUs

Departmental undertakings - Railways, P&T Fully Govt.-owned: LIC, HAL etc. Govt. majority-owned - Indian Oil, BHEL, HPCL, Govt. minority owned MUL, BALCO, VSNL Holding company - GIC, Coal India

EXTERNAL SECTOR

B.O.T. = net export value - net import value

Deficits and Surpluses India had a trade deficit of $118b in 2009-10

B.O.P. = an accounting record of all monetary transactions between a country and the rest of the world

Current a/c = trade balance + net factor income+ cash transfers Capital a/c = FDI + Loans from abroad + NRI deposits

BOP Crisis of India

OTHER KEY TERMS

DEVALUATION OF CURRENCY

Deliberate decision to reduce the value of a currency against other. Makes exports more price competitive in international market. Eases BOP situation.

China vs US

DEPRECIATION OF CURRENCY

Has same effect as devaluation. But it is brought about by the market forces.

OTHER KEY TERMS

SDR: Special Drawing Rights

An international reserve asset introduced by IMF to support expansion in global trade. IMF creates, allocates and cancels SDRs as and when necessary. Basket of Currencies Yen, USD, Euro & GBP

EMBARGO

Prohibition of entry to goods from a particular country. Shows strained relations between two nations.

OTHER KEY TERMS

GILT EDGED SECURTIES

Securities with minimum risk - Govt. securities.

BARTER

Trade in goods and services by exchange method, without use of money.

COUNTER-TRADE

Barter in international trade in order to avoid FOREX outgo.

OTHER KEY TERMS

DUMPING

When an entity sells product below cost price to injure others.

ANTI-DUMPING DUTY

Additional import duty levied when dumping takes place to protect local industry.

THE WORLD BANK GROUP

the International Bank for Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees; the International Finance Corporation (IFC), established in 1956, which provides various forms of financing without sovereign guarantees, primarily to the private sector; the International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees;

the International Centre for Settlement of Investment Disputes (ICSID), established in 1966, which works with governments to reduce investment risk;
the Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risk, including political risk, primarily to the private sector.

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