ECONOMICS

BASIC TERMS
INDIAN ECONOMY TERMS:

Introduction to various terms like - Capitalism: private control, Socialism - govt control, poverty, market
(Demand and supply), sanctions, private monopoly, profit motive, exploitation, etc.

Capitalism:

●​ In capitalistic countries, free markets or the forces of demand and supply decide the nation's economic
fundamentals.
●​ There is more scope for innovation, business freedom, and wealth creation.
●​ But at the same time, capitalism may increase inequality.

Market:

●​ A market is a place where buyers and sellers meet.

●​ The market runs on the forces of demand and supply

Demand:

●​ Demand is not only the willingness to buy a product but also the ability to pay.
●​ Several factors like price, income, preferences, substitutes, complementary items, etc. affect demand.

Regular Law of Demand:

1
 ●​ It talks about an inverse relationship between price and quantity demanded
●​ Law of demand: Statement, explanation and exceptions

Veblen goods (luxury items) are an exception to the regular law of demand where price is also a factor in
demand.

●​ A rightward shift of demand indicates favorable demand and a leftward shift indicates unfavorable

Socialism:

●​ The government owns the factors of production - (land, labor, capital, entrepreneur)
●​ To bridge the inequality between rich and poor.
●​ Land - rent
●​ labor - wage
●​ Capital - interest
●​ Entrepreneur - profit
●​ India adopted socialism after independence- because - of poverty, the drain of wealth.
●​ India's socialism is different from that of the USSR hence India adopted the model of a Mixed economy
(public + private sector).

Mixed Economy:

●​ Both the Public and private sectors move hand-in-hand.

●​ It is a combination of capitalism and socialism
●​ 1st Five-Year Plan - focuses on Agriculture and we were importing cheap food grains from the US -
PL-480
●​ Therefore India wants to become self-sufficient to achieve food security.
●​ In the 1930s in the US, the economic crisis, till capitalism is the panacea for all the solutions, markets
can fail - forces of demand and supply can fail.
●​ The stock market collapsed.
●​ Business can be done in two ways - by borrowing money (loan/debt) and by equity/share (ownership)
through primary market and secondary market.
●​ Money can be borrowed from banks, friends, and family, and debt instruments like bonds.

Primary Market - the company is issuing the shares for the first time through IPO (Initial Public Offering) and
FPO (Follow-on public offering) by already registered companies.

Secondary market - stock exchangeIf the Economy is in bad condition then the companies cannot borrow
from the stock market, thus they have less capital which leads to low production, fewer jobs, reduced
purchasing power, and less demand, and the prices fall.

2
 ●​ This continuous fall in prices is called deflation. During a deflationary situation, the producers may not
be interested in producing more.

Initial Public Offering (IPO):

If a company is raising money by issuing shares for the first time, it is called an IPO.

●​ If the company dilutes its ownership for the second or the third time and issues new shares in the
market it is called a Follow-On Public Offer.
●​ Both IPO and FPO are parts of the Primary market, where shares have to be purchased directly from
the company.

Deflation:

It is a continuous fall in prices, and deflationary cycles are more dangerous than inflation as they are always
associated with unemployment

Inflation:

It is the rate of increase in the prices, a considerable amount of inflation around 2.5% is always required for the

economy to continue production. Such as inflation is known as creeping inflation (good inflation).

Supply: Rightward shift to the graph - favorable

Disinflation: it is nothing but a fall in inflation rates.

Stagflation: inflation associated with the unemployment problem.

Fiscal and Monetary Policy :-

Fiscal Policy - govt's budget

Receipts - incoming money (revenue of the govt)

Revenue - assets that generate income to govt.

Expenditure - payment or spending (outgoing money)

Fiscal stimulus - pumping money to revive the economy which is not doing well

●​ Govt spending increases.

3
Monetary policy - Deals with the supply of money in the economy

Monetary stimulus - by banks by reducing the interest on loans,

●​ RBI handles it

Theory of Market Equilibrium:

●​ The market forces of demand and supply determine the price.

Fiscal Policy :

It is the policy of govt which mainly deals with receipts (incoming money) and expenditures (outgoing money).

Fiscal Stimulus:

●​ Govt pumping money into the economy through its fiscal policy to revive the economy which is not
doing well.
●​ Fiscal stimulus policies of the govt include - reducing tax rates, increasing subsidies, or bail-out
packages of govt, etc.

Monetary Policy:

●​ It deals with the money supply in the economy.

●​ In India Monetary Policy is handled by RBI.

Money Supply:

It is a total stock of money in the hands of the public at a certain point in time.

Functions of banks - accepting deposits and giving loans

Deposits - demand deposits and Time deposits (fixed deposits and recurring deposits)

For a bank deposits are liabilities, and loans are assets.

4
Non-performing Asset (NPA) - if the principal is not paid back from the due date for 90 days, More NPA
means more loss to the banks.

Balance Sheet indicates assets and liabilities - it is measured over a certain period of time.

Written-off means removing the NPAs from the balance sheet.

Assets - fixed asset and current asset

Liabilities - non-current liability and current liability.

Bank:

●​ The primary function of a bank is to accept deposits and give loans.

●​ Deposits are liabilities for a bank and loans are assets.

Non-Performing Asset (NPA): if the interest payment or principal amount of the loan is not paid for a
period of more than 90 days the loan turns out to become NPA.

●​ Higher the NPAs lower the profitability of the banks.

Balance Sheet of a company indicates assets and liabilities up to a certain period, eg. balance sheet up to
March 31, 2024

Types of Deposits:

●​ Deposits of a bank can be classified into demand deposits and term/time deposits.
●​ Demand deposits can be further classified into - Current accounts and Saving accounts.

Current accounts - business accounts that offer no interest.

Term deposits can be classified into Fixed deposits (FDs) and recurring Deposits (RDs).

Demand deposits are more liquid than term deposits.

Bonds:

●​ Bonds are debt instruments.

●​ Bondholders are creditors or lenders and the bond issuer is the borrower or debtor.
●​ Inflation goes against bondholders

Indian Economy:

●​ After independence, India adopted a socialistic model of a mixed economy

5
 ●​ 1st FYP focussed on agriculture - 2nd FYP focussed on heavy industries or basic industries - PSU-led
growth model
●​ Economic Growth can be measured by the Gross Domestic Product (GDP).
●​ GDP - total value of all goods and services produced within the domestic territory of India in a financial
year.
●​ GDP can be compared year-on-year (2023 - 2024) of the same quarter (Q1 | Q2 | Q3 | Q4) => Q1 of
2023-24 with Q1 of 2024-25
●​ 2018-19 | Q1 | GDP = 100 rs and 2019-20 | Q1 | GDP = 76.7 rs ---> This means the growth becomes
negative
●​ If this negative growth is for two quarters and above then we use the word - recession.

GDP:

Gross Domestic Product (GDP)- the monetary value of all final goods and services produced within the
domestic territory of India in one financial year.

Recession:

Negative growth for two quarters and above is technically termed a recession.

Nominal GDP: GDP calculated at current year prices (2023-2024 prices)

(Quantity of 2023-24) x (price of 2023-24) = P (nominal GDP of 2023-24)

Real GDP: GDP calculated at base year prices or reference year prices.

The base year is selected based on the following criteria -

a) availability of the data

b) it should be a recent year for easy comparisons

c) it should be a stable year

The era of License Raj:

●​ After independence, India adopted the principles of a mixed economy monitored through the
government's planned economic model.
●​ Industrial Policy Resolution (IPR) 1956 was in line with socialistic fundamentals promoting "License
Raj", that is, every new industry that has to be started or for increasing production licenses were
compulsory.
●​ The Govt was controlling the private sector through a license system.
●​ IPR 1956 was considered the bible of all Industrial Policies until the 1991 Industrial Policy Resolution.

6
 ●​ License Raj system created challenges of - easy entry, corruption, domination of Bombay Class
businessmen,

Demand-pull inflation: "too much money chasing too few goods" - demand-pull inflation is the result of an
increase in money supply in the economy whcih is facilitated through higher GDP growth, better employment
opportunities, lower direct tax rates, monetary stimulus, and Fiscal stimulus policies of the govt.

Cost-push Inflation: it is due to the increase in the cost. (raw material cost, labor cost, high indirect tax rates,
inefficient manufacturing techniques, etc.).

India's PSU-led growth model in the 1960s and 70s was highly inefficient leading to increased cost of
production.

Backward and Forward Integration:

●​ Backward Integration is a mechanism where the entity is integrated with the supplier base, for eg. the
Lays manufacturer is integrated with farmers who are supplying potatoes.
●​ Forward Integration is a mechanism where the entity is integrated with the final consumer through
retail shops, efficient distribution networks, etc.
●​ Supply chain management involves efficient backward and forward integration.

Elastic Demand :- (%ΔD / %ΔP) >1

●​ The change in demand is more responsive to the change in price.

Inelastic Demand :- (%ΔD / %ΔP) <1

●​ The change in demand is less responsive to the change in price, necessities generally have inelastic
demand

Investment:

According to economists is something that leads to capital formation which is an accumulation of capital goods
in a country.

Capital Goods - are those goods which are used for producing other goods.

●​ Capital goods are a result of a man-made process and they do not change their size and shape during
the process of production.
●​ But capital goods lose their value due to usage or wear and tear which is also called depreciation (it is
loss of value of the good or machine due to usage or wear and tear)
●​ Depreciation does not consider natural calamities or disasters.

7
India's Trade in the 1960s:

Open Economy: Where there is trade

●​ There are no completely open or completely closed economies

●​ India was more of a closed economy in the 1960s and 70s.
●​ India is more of an open economy today

Trade Barriers:

Tariff barriers - in the form of tax, for example, import or customs duties on Harley Davidson motorcycles.

Non-tariff barriers - are non-tax barriers, they can be in the form of quantitative restriction, sanitary and
phytosanitary measures, rules of origin, etc.

Import Substitution Industrialization (ISI) : India followed this model in the 1960s to protect the
domestic manufacturing industries which were in the nascent stage of development.

TRADE:

●​ Import and export

●​ In terms of foreign currency, or
●​ Liquidity - which can be converted easily
●​ Forex reserve - Foreign Currency asset, gold, SDRs
●​ Negative interest - eg. Japan - customer has to give money instead of putting their money in the banks,
thus the banks are not encouraging saving rather they encourage consumption.
●​ Trade Deficit = imports > export
●​ Exchange rate - appreciation and depreciation of currency

Negative Interest Rate:

●​ It is generally followed in Japan where banks pay -0.1% on the deposits made.
●​ A negative interest rate discourages savings and encourages consumption
●​ A negative interest rate is also used to handle liquidity traps.

Liquidity Trap:

●​ It is a situation where liquidity or cash gets trapped in the bank.

●​ Under a Liquidity trap situation, monetary policy becomes futile.

Real Interest Rate:

●​ It is the interest rate that the depositors receive after considering inflation.

8
 ●​ Trade Deficit: Imports > Exports (trade deals with import and export of goods)
●​ A higher trade deficit leads to the outflow of foreign currency.

Appreciation and Depreciation of currency:

●​ Exchange Rate - it is a rate at which one currency is exchanged with another.

●​ The currency exchange rate can be fixed by the government or monetary authority (fixed exchange
rates) and also, a flexible system where the exchange rates are decided based on the forces of demand
and supply.
●​ Depreciation of currency - fall in value of currency due to forces of demand and supply
●​ Let's consider two cases - 1) 1$ = 50 Rs and 2) 1$ = 100 Rs.
●​ Moving from case 1 to case 2 Rs value has depreciated and $ value has appreciated.
●​ Depreciation of currency makes exports cheaper and imports costly.
●​ Devaluation of Currency - it is a fall in the value of a currency due to the decision of monetary
authority.
●​ Devaluation is done in a fixed exchange rate system where currency values are decided by the
monetary authority or the government.
●​ Currency War - competitive devaluation of currencies making exports cheaper.

Dutch Disease:

●​ Over-appreciation of currency makes exports non-competitive in the market.

Economic Planning from 1951 to 1980:

●​ 1951-56 - emphasis on agriculture

●​ 1956 - 61 - emphasis on heavy industries/basic industries
●​ 1961 - 67 - emphasis on food security, Food Corporation of India (1965) to maintain buffer stock
●​ 1st Green Revolution - (M.S.Swaminathan) - HYV, Chemical fertilizers, irrigation facilities, credit/loans to
farmers
●​ Nationalization of Banks 1969 - 14 banks were nationalized - for better regulation, and financial
inclusion.
●​ 1980 - 6 more banks were nationalized
●​ Financial Inclusion:
●​ Spreading of banking services to every nook and corner of India.
●​ In simple words, everybody should have a bank account.

Food Corporation of India (FCI):

●​ Institutionalization of the public distribution system was achieved through the establishment of FCI.
●​ FCI procures grains from farmers at minimum support price (MSP).

9
 ●​ FCI helps in achieving food security through the distribution of grains through TPDS (targetted Public
Distribution System started in 1997).

Public Distribution System (PDS):

●​ Farmer ---> FCI ---> State civil supplies dept ---> Ration Shops (aka Fair Price Shops (FPS))
●​ Food Security - availability, affordability, stable
●​ Manufacturing sector - PSU-led growth, capital intensive, therefore jobs are not created in the
secondary sectors, stringent labor laws
●​ Marginal productivity is zero-disguised unemployment

Disguised unemployment:

●​ It can be associated with Indian agriculture.

●​ There are more people than required who are working on the farm or the marginal productivity of the
labor is almost zero

Labor Laws:

●​ During the British period, labor was exploited therefore after independence we had to protect the
labor therefore stringent labor laws were brought like the Industrial Dispute Act, Trade Union Act, etc.
●​ Stringent labor laws like the Industrial Disputes Act encouraged contract labor (if there are 100
permanent workers in a firm, if the labor has to be retrenched the firm has to get the permission of the
Ministry of Labor and Employment).
●​ Due to this reason, firms recruited contract labor and this has reduced the number of permanent jobs
in the manufacturing sector.

JOBLESS GROWTH:

●​ Tertiarization of Industries
●​ Stringent labor laws
●​ The manufacturing sector is capital-intensive
●​ Lack of skills
●​ Lack of infrastructure
●​ Increasing Labor force

Unemployment Rate (UR):

Labor Force : All those people who are between 15 to 59 who are already working (workforce) + 15 to
59 who are looking for work but no work.

●​ Students, prisoners, etc. are not part of the labor force.

10
 Unemployment rate (UR) - it is always measured over the labor force

●​ UR = [(LF - Work Force) / LF] x 100

Fiscal Deficit (FD):

●​ It is nothing but borrowings of the govt in one fiscal year.

●​ FD is not always bad for the economy as borrowings can lead to capital formation whcih is
instrumental for economic growth.

Debt Trap:

●​ It is a situation where the earnings of the govt or the company are diverted to interest payments.
●​ Increased interest payments will reduce govt's ability to build infrastructure, spend on health and
education, etc.
●​ Which may distort inter-generational equity.

Jobless Growth:

●​ It is a situation where economic growth is increasing but in proportion to the economic growth jobs are
not created.
●​ In simple words, proportionate change in employment is less than the proportionate change in GDP.

Taxation System:

●​ More formalization of the sector more tax collection

●​ With more informalization of the sector, less will be the tax collection
●​ Tax base, tax rate, GST
●​ Levy, collection, appropriation of tax
●​ Sales tax (levied, collected, and appropriated by state) and production tax (by center)
●​ 4 Es of bureaucracy - effectiveness, efficiency, equity, and economy
●​ 1960s and 70s - high tax rates
●​ Revenue will increase up to a certain limit of tax rate but after that, if there is any further increase in
tax rate the revenue will fall (Laffer Curve)
●​ Tax avoidance

Laffer's Curve:

●​ It talks about the relationship between the tax rate and tax revenue
●​ The optimum tax rate is the rate at which the government receives the maximum revenue

11
Tax Evasion - escaping from paying tax and it is illegal.

Tax Avoidance - it is a mechanism of saving tax using the tax loopholes in the system. It is generally legal.

Tax Revenue: Govt can increase tax revenues by increasing tax rates, widening the tax base, and reducing tax
inefficiency.

Increasing the tax rate is not an option in a welfare state and a high tax rate may lead to a long-term revenue
reduction due to tax evasion, avoidance, or lack of incentive to work.

The tax base is the reference with respect to which the tax is collected. For example, for Income tax income of
the individual, is the base.

Tax inefficiency reduces tax revenues for the govt example of cascading effect. (cascading effect - a tax on
tax, increasing the final burden).

Tax Havens - these are the places where the tax rules are liberal, source of the money is not questioned, eg.
Mauritius, Cayman Islands, Cyprus, Swiss bank accounts, etc.

Transfer Pricing - it is a pricing mechanism between two known entities. It is used as a mechanism to avoid
tax and shift profits to tax havens.

Direct Tax - it is a tax where the burden cannot be shifted, it is paid by the person or the entity on whom it is
levied.

The impact and the incidence of the tax are at the same point, eg. income tax, corporate tax, etc.

Indirect Tax - where the burden of the tax can be shifted, the impact and incidence of the tax are at different
points, eg. GST.

Capital Gains Tax - it is also a direct tax, it is a tax paid on capital gain, and it is paid by the seller on physical
assets like buildings and financial assets like shares, bonds, mutual funds, etc.

12
Shell Company - these companies are used for saving tax.

●​ Their front-end business is not important and their primary function is to facilitate tax avoidance.

INDIAN ECONOMY FROM 1970s TO 1991:

●​ Financial Crisis
●​ The 1970s - Emergency - pulled the Indian economy back by 8 years
●​ The 1990s - Balance of Payment Crisis - reduced forex.
●​ 1991 - LPG reforms
●​ Before 1991 - Hindu Rate of Growth
●​ Agriculture was contributing more to GDP but after 1991 it was the service sector
●​ The Indian economy was closed before 1991 but after 1991 reforms - open economy - entry of FDI, FI,
etc. - the market became inclusive, with financial inclusion in GDP.
●​ Black money, FERA, and FEMA
●​ MRTP Act 1969 - Anti-competitive measures - Dumping, predatory pricing (eg. JIO), Ambush marketing -
regulated by the Competition Commission of India (1991)
●​ Unemployment and poverty were high
●​ The exchange rate changed from fixed to floating.
●​ Industrial Policy 1956 - License Raj - Industrial Policy 1991 - reduced license raj - liberal industrial
policy.
●​ Growth system before 1991 - PSU led growth, and now it is "govt has no business to stay in business"
which means the private sector will lead the growth (inclusive growth)

Dumping (cost dumping or predatory dumping):

It is a mechanism of selling a product at a price lower than the cost of production, eg. China resorts to dumping
by selling products at a price lower than its cost in its nation. India can prevent dumping by levying
anti-dumping duty.

FERA and FEMA:

●​ The Foreign Exchange Regulation Act was a stringent Act regulating foreign exchange.
●​ Any foreign exchange-related crime was considered a criminal offense under FERA.
●​ FEMA (Foreign Exchange Management Act) replaced FERA in 1999-2000, FEMA was more liberal in
comparison to FERA as it facilitated the movement of Foreign exchange.
●​ Absolute Poverty: deprivation of basic requirements for leading a dignified life.

13
BoP Crisis:

●​ Balance of Payment crisis

●​ BoP - an accounting statement - credit (inflow) and debit (outflow).
●​ It Records the economic transactions of Indian residents with the rest of the world in one financial year
●​ Trade Surplus = export > import
●​ Trade deficit = imports > export
●​ Balanced trade = import = export
●​ Transfer payments - A transfer payment is a payment for which there are no goods and services are
exchanged, like foreign aid, grants, gifts, donations, remittances, etc.
●​ Factor income - productive income (in terms of wages, interest, rent, and profits)

BoP - Current account and Capital Account

●​ Current Account - Trade, Transfer, income, Services

●​ Current Account Deficit
●​ Capital Account - deals with investments and borrowings.
●​ Investments - FDI, FPI (share market or bond market) - hot money, volatile,
●​ Borrowing - External Commercial Borrowing (ECB), External assistance, NRI Deposits

BALANCE OF PAYMENT:

●​ It is an accounting statement that records the economic transactions of Indian residents with the rest
of the world in one financial year.
●​ It is a double-entry system that records credit and debit transactions.
●​ India's BoP account can be divided into a current account and a capital account.

Current account transactions do not have future implications and are settled then and there or settled
immediately.

●​ The current account covers - trade accounts, remittances, income, and services.
●​ India's current account deficit (CAD) is due to trade deficit.

Capital account deals with the assets and liabilities.

●​ It can be further divided into investments and borrowings

Foreign Direct Investment (FDI): Foreign investment moving into a country to do business, acquiring an
existing firm, setting up a subsidiary company, etc.

●​ FDI brings in technology and creates employment opportunities.

14
 ●​ New definition - any investment into a single listed entity that is greater than or equal to 10% is treated
as FDI.
●​ Any investment into an unlisted company is treated as FDI.

Foriegn Portfolio Investement (FPI):

It is an institutional investment that moves into the Indian stock market (Portfolio investment can move into
shares as well as bonds)

External Commercial Borrowing (ECB):

Indian Corporations/private entities borrowing loans from outside India for a long-term period (generally 3
years)

Causes of BoP

●​ LPG Reforms - Structural Reforms which include -

●​ Fiscal Reforms (CAD, FD, Debt to GDP ratio, Tax), Financial reforms (Banking Sector), Exchange rate
(Market determined rate), Foreign Investment (FII, FDI)
●​ 1992-93 - Introduction of LERMs
●​ Industrial Policy Reforms - end of license raj, disinvestment,
●​ ECB: Corporates borrowing money from outside India for a long-term period (Capital Purpose).
●​ ECBs are commercial loans that help corporations make new investments, acquire new technologies,
etc.
●​ External Assitance - these are soft loans from outside India (interest rates lower than the market
rate).
●​ Disinvestment (in a government context) is a mechanism of selling shares or assets to earn
revenue. If an entity disinvests above 50%, it leads to privatization.
●​ Liberalized Exchange Rate Management System (LERMS) - Currently India's Rupee is partially
convertible, that is it is fully convertible for the current account and partially convertible for the Capital
Account.
●​ India introduced LERMS in 1992 (Liberalized exchange rate management system) (60:40 rule or dual
rate system), LERMS was an intermediary phase before moving towards complete current account
convertibility.

First-generation reforms - LPG, IPR.

●​ Benefits - crossed the Hindu rate of growth

●​ Slowly increase our forex
●​ Increased investment in India
●​ Reforms in SEBI, RBI, IRDA

15
2nd generation Reforms - reforms after 1999 -

●​ Agriculture reforms,
●​ Legal reforms - factor market reforms - FEMA,
●​ Difficult to implement.

Second Generation Reforms:

●​ All reforms implemented after 1999 - 2000 are called 2nd generation reforms.
●​ It mainly focused on factor market reforms, agriculture-related reforms, legal reforms, etc.
●​ 2003-04 - GDP increases, debt to equity ratio increases.
●​ 2007-08 - US financial crisis - Sub-prime crisis - Lehman Brothers collapsed (big bank)

Recession - negative growth for two quarters and above

●​ If the recession continues for long then it leads to depression

How the economy is revived - fiscal stimulus or monetary stimulus.

●​ Federal Bank of the US came up with a bond-buying program from banks and othe financial
institutions.
●​ Easy loans - loans at lesser interest rates (quantitative easing) - risk of inflation - dollar becomes weak -
Rupee appreciated
●​ 2011-12 - The US was out of financial crisis and the Federal Bank announced a reduction in quantitative
easing.
●​ This is known as tightening the monetary policy (less money circulation in the economy - dollar supply
decreases, interest rates start increasing) - the dollar becomes stronger - Rupee depreciated

Urijit Patel Committee - on Monetary Policy ( to focus on the dilemma between inflation and growth (GDP)).

Twin Deficit hypothesis - if CAD is increasing Fiscal deficit increases and FD leading to CAD.

Agriculture @ independence:

●​ 1st five-year plan focuses on agriculture

●​ 1961-66 - food security
●​ 1965 - FCI (APC) ---> (CACP 1985) - to recommend MSP
●​ 1966-69 - 1st green revolution
●​ 1975 - net exporter
●​ 1992 - RPDS - NE

16
 ●​ 1997 - TPDS - BPL and APL
●​ 2000+ - 2nd generation reforms - APMC model Act (agriculture marketing)
●​ Antyodya Anna Yojana - BPL
●​ 2002-03 - fertilizer subsidy (NBS - 2010) - N:P: K = 4:2:1
●​ 2008 - warehouses cold storage - PEG scheme
●​ DFI - cartels, commission agents, no direct sales

●​ 2018 - Ashok Dalwai committee - doubling the farmer's income

17