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Economics: The Discipline

• Economics is the discipline which studies how individual, society and the
government make their prioritised choices in the process of using the scarce
resources to gratify the various needs and wants of life.
• The first and the most famous work in this direction was by the Scottish philosopher-
economist Adam Smith in The Wealth of Nations (1776)
• Adam Smith is considered as the father of Economics

Organising an Economy

• Capitalist Economy: The capitalist form of economy has its origin in the famous work
of Adam Smith-wealth of Nations (1776)
• Government regulation of commerce and industry of the time which did not allow the
economy to tap its full economic worth and reach the level of well-being.
• Then Adam Smith advocated for “division of labour", ‘laissez faire’ and invisible
hand’ of ‘market forces’
• Adam Smith acknowledged the need of competition in the market.
• By 1800, the economic system called capitalism was established which was later known
by different names- Private Enterprises System, Free Enterprise System or Market
economy
• The decisions of what to produce, how much to produce and at what price to sell
are taken by the market and by the private enterprise in this system.

State Economy

• Proposed by the German philosopher Karl Marx (1818-1883)

• First came up in the erstwhile USSR after the Bolshevik Revolution (1917) and got
its ideal shape in the people republic of China (1949)
• This form of economic system also spread to other countries in eastern Europe
• Here, we see two versions of the state economy-in erstwhile USSR known as the
socialist economy and in the pre-1985, China known as the communist economy

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• While a socialist economist emphasised collective ownership of the means of

production (property and assets), it also ascribed a large role to the state in running
the economy
• While communist economy on the other hand advocated state ownership of all
properties including labour with absolute power to state in running the economy.
• Socialism was a transitional stage to communism which never did happen

Mixed Economy

• The self-correcting quality of the market and the invisible hand of Adam Smith got a
major setback in early 20 th century during the great depression (1929)
• A new approach was needed which came in the famous work, The General theory of
Employment, Interest and Money (1936) by the English economist at Cambridge
University, John Maynard Keynes (1883-1946)
• Keynes suggested strong government intervention in the economy
• To get the economy out of the depression, he suggested an increase in government
expenditures, discretionary fiscal policy (fiscal deficit, lower interest rate, cheap
money supply etc.)
• The process of economic reforms in India started in 1991.
• It was in fact the search for a new state market mix, while India had been a mixed
economy since Independence.

Sectors of an Economy

• Primary Sector: this sector includes all those economic activities where there is the
direct use of natural resources as agriculture, forestry, fishing, fuels, metals,
minerals, etc.
• Secondary Sector: this sector is rightly called the manufacturing sector.
• Tertiary Sector: this sector includes all economic activities where different services
are produced such as education, banking, insurance, transportation, tourism, etc. This
sector is also known as services sector.

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The idea of National Income

• Central Statistical Office (CSO) under the ministry of Statistics and Programmes
calculates national income in India
• There are four ideas/ways to calculate the income of a nation.
• GDP, NDP, GNP and NNP.

GDP

• Gross Domestic Product(GDP) is the value of the all final goods and services
produced within the boundary of a nation during one-year period.
• For India, this calendar year is from 1st April to 31st March.
• It is also calculated by adding national private consumption, gross investment,
government spending and trade balance (exports minus imports).
• C+I+GS+ (E-I)

NDP

• Net Domestic Product(NDP) is the GDP calculated after adjusting the weight of the
value of depreciation.
• This is basically net form of the GDP, i.e. is GDP minus the total value of the ‘wear
and tear’(depreciation) that happened in the assets while the goods and services were
being produced.
• Thus NDP=GDP-Depreciation

GNP

• GROSS National Product (GNP) is the GDP of a country added with its Net
income from abroad.
• Private remittances will be added to GDP
• Interest on External Loans: the net outcome on the front of the interest payments, and
balance of inflow will also be calculated.
• External grants: the net outcome of the external grants i.e., the balance of such grants
which flow to and from India will also be calculated.

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• India’s GNP is lesser than GDP.

NNP

• Net national Product (NNP) of an economy is the GNP after deducting the loss due
to depreciation. The formula to derive it may be written like:
• NNP=GNP-Depreciation. / NNP=GDP+ Income from abroad- Depreciation.

Revision in the Base Year and Method of national income accounting

• The central statistics office(CSO) in January 2015 released the new and revised data
of national Accounts effecting two changes.
• The base year was revised from 2004-2005 to 2011-2012.
• Recently government has proposed to change it to 2017-18

Economic Growth

• A term coming from the life sciences growth.

• We may say that economic growth is a quantitative progress.

Economic Development

• Development indicates the quality of life in the economy, which might be seen in
accordance with the availability of many variables such as:
• The level of nutrition.
• The expansion and reach of healthcare facilities – hospitals, medicines, safe drinking
water, vaccination, sanitation, etc.
• The level education
• Other variables on which the quality of education depends.

Human Development Index

• United Nations Development Programme(UNDP) published its first Human

Development Report(HDR) in 1990. The report had a Human Development Index.
(HDI)

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• The first such team which developed the HDI was led by Mahbub Ul Haq and Inge
Kaul along with Indian economist Amartya Sen.
• The term Human development is a corollary of development in the index.
• The HDR measures development by combining three indicators – Health, Education
and Standard of Living.
• India’s rank at present is …………………………………
• India is placed in the medium human development category
• At present, first rank is……………………………and last rank is ………………….

Happiness

• Gross national Happiness was an idea developed by former King of Bhutan Jigme
Singhya Wangchunck in 1972
• The World Happiness Report was first published in 2012 by the sustainable
Development Solutions Network (an UN body)..
• It ranks nation based on six key factors.
• GDP per capita (at PPP)
• Social support (someone to count)
• Healthy life expectancy at birth
• Freedom to make life choices.
• Generosity, and
• Perception of Corruption
• At present, happiest nation in the world is ………………………………………….
• Lowest happy nation is…………………………………………………………….
• India is placed at…………………………………………………………………….

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Planning in India

Background

• The Visvesvaraya Plan: the credit of proposing the first blueprint of Indian planning
is given to the popular civil engineer and the ex-Dewan of the Mysore state, M.
Visvesvaraya. In his book the planned economy of India, published in 1934.
• This was the first systematic attempt for economic planning in India
• The FICCI Proposal:
• In 1934 a serious need of national planning was recommended by the Federation of
Indian Chambers of Commerce and Industry(FICCI).
• Voicing the views of the capitalist class, it further called for a high powered ‘National
Planning Commission’.

The Congress Plan

• It was on the initiative of the INC president Subhash C. Bose that the National
Planning Commission(NPC) was set up in October 1938 under the chairmanship of
Jawaharlal Nehru to work out concrete programmes for development encompassing
all major areas of the economy.
• The 15-member NPC with 29 sub committees and a total of 350 members
produced 29 volumes of recommendations.

Planning and Development Departments

• After all possible delays, it was in 1944 that the government created a Planning and
Development Department under a separate member of the Viceroy’s executive
council for organising and co-ordinating economic planning in the country.
• Ardeshir Dalal was appointed as one of its acting members

The Bombay Plan

• The Bombay Plan was the popular title of ‘A Plan of Economic Development for
India’ which was prepared by a cross section of India’s leading capitalists.

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The Gandhian Plan

• Espousing the spirit of the Gandhian economic thinking, Sriman Narayan formulated
The Gandhian Plan in 1944.
• The plan laid more emphasis on agriculture.

The People’s Plan

• In 1945 yet another plan was formulated by the radical humanist leader M.N.Roy,
chairman of the post war reconstruction committee of Indian Trade Union.
• The plan was based on Marxist socialism.

The Sarvodaya Plan:

• After the reports of the NPC were published and the government was set to go for the
five-year plans, a lone blue print for the planned development of India was formulated
by the famous socialist leader Jayaprakash Narayan-the Sarvodaya Plan published
in January 1950.
• The plan drew its major inspirations from the Gandhian techniques.
• By the early1960s, Jayaprakash Narayan had become highly critical of the Indian
Planning process.

Six major objectives of planning in India

• Economic Growth.
• Poverty Alleviation.
• Employment Generations.
• Controlling Economic Inequality.
• Self-reliance.
• Modernisation.

Planning Commission of India

• In March 1950, the planning Commission (PC) was set up by the government by a
cabinet resolution.

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• It is an extra- constitutional and non-statutory body.

• An advisory body to the Government.
• A think tank on economic development with the Prime Minister as its ex-officio
Chairman and with the provisions or a Deputy Chairman with the rank of Cabinet
Minister.
• Had an open provision for the number of its membership and their educational
qualifications (as many area experts are required by the proposed period of planning)
• Six union cabinet ministers are elected as its ex-officio members and a Member
Secretary. The Minister of Planning is already an ex-officio member of the PC.
• Planning Commission is an autonomous body entitled to form its own views on
important issues and place them before the governments.
• It works closely with the Union and state cabinets and had full knowledge of their
polices.
• Was invariably consulted on changes proposed in social and economic policies.
• Linked with the Union Cabinet at the secretarial level
• Seated at the Yojana Bhavan, New Delhi.
• The Planning Commission was a technical body with experts and professionals coming
from an array of specific areas as per the need of planning of the concerned period.
• The commission had executive powers.
• The last deputy chairman of Planning Commission was Montek Sing Ahluwalia.

Functions of the Planning Commission

• An assessment of the material, capital and human resources of the country.

• Formulate a plan for the most effective and balanced utilisation of the country’s
resources.
• Indicate the factors which are tending to retard economic development.
• Appraise from time to time the progress achieved in the execution of each stage of
the plan.
• Make such interim or ancillary recommendations as appear to be appropriate.
• On January 1,2015, the government formally abolished the PC by replacing it with the
newly created body – the NITI Aayog

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National Development Council

• The National Development Council (NDC) was set up on August 6 1952 by a

resolution issued from the cabinet Secretariat. The first plan recommended its formation
with a very concise and suitable observations.
• The reconstituted NDC comprises the Prime Minister, all Union Cabinet
Ministers, Chief Minister of all States and Union Territories and the Members of
the Planning Commission.
• Delhi administration is represented in the council by the Lt. Governor and the chief
Executive Councillor and the remaining Union Territories by their respective
Administration
• The NDC had its last meeting held in December 2015 (57th meeting). It is believed
that in coming times the NDC will be merged with the governing council of the NITI
Aayog.
• The Governing Council is a better equipped body than the NDC to establish a better
Union- State co-ordination.
• Five-year plans provide the components for a mixed economy

The Five-Year Plans

First Plan

• The period for this plan was 1951-56. the plan accorded the highest priority to
agriculture including irrigation and power projects.
• About 44.6 per cent of the plan outlay went in favour of the public sector
undertakings (PSU)
• First Deputy Chairman of Planning Commission was Gulzarilal Nanda
• Target growth was 2.1 percent of GDP and achieved was 3.6%

Second Plan

• The plan period was 1956-61. The strategy of growth laid emphasis on rapid
industrialisation with a focus on heavy industries and capital goods.
• The plan was developed by Prof. Mahalanobis.

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• Target Growth: 4.5% Actual Growth: 4.27%

Third Plan

• The plan period was 1961-66. The plan specifically incorporated the development of
agriculture.
• Enough misfortunes awaited this plan- two wars one with China in 1961-62 and the
other with Pakistan in 1965-66 along the Gujrat border and severe drought-led
famine in 1965-66 had to be faced.
• Due to heavy drain and diversions of funds this plan utterly failed to meet its target.
• Then named it as a period of ‘Plan Holiday’, i.e, the planning was on a holiday.
• Target Growth: 5.6% Actual Growth: 2.84%

Fourth Plan

• The Plan period was 1969-74. The plan was based on the Gadgil strategy.
• The strategy was prepared by Dhananjay Ramachandra Gadgil
• The Gadgil strategy was based on allocation of central assistance for state plans
• With special focus to the ideas of growth with stability and progress towards self-
reliance.
• Droughts and the Indo-Pak war of 1971-72 led the economy to capital diversions
creating financial crunch for the plan.
• The politicisation of planning stated from this plan which took serious ‘populist’
design in the coming plans.
• Frequent double-digit inflations, un-reigned increase in the fiscal deficits , subsidy-
induced higher non-plan expenditures and the first move in the direction of
nationalisation and greater control and regulation of the economy were some of the
salient features of this plan, which continued unchanged till the early 1990s
• Target Growth: 5.7% Actual Growth: 3.30%

Fifth Plan

• The Plan (1974-79) has its focus on poverty alleviation and self-reliance.
• Target Growth: 4.4% Actual Growth: 3.8

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• Minimum needs Programme was introduced in this five-year Plan

• It included rural health, rural water supply, rural electrification, elementary
education, adult education, nutrition, environmental improvement of urban
slums and houses for landless labourers
• The havocs of hyper-inflation led the government to hand over a new function to
the Reserve Bank of India to stabilise the inflation (the function which the RBI
carries forward even today)
• The plan period was badly disturbed by the draconian emergency and a change of
the government at the centre. The Janata Party came to power with a thumping
victory in 1977.
• The Janata Government did cut-short the Fifth Plan by a year ahead of its
terminal year, i.e., by the fiscal 1977-78, in place of the decided 1978-79.
• A fresh plan the sixth plan for the period 1978-83 was launched by the new
government which called it the ‘Rolling Plan’.
• In 1980 there was again a change of government at the centre with the return of the
Congress which abandoned the Sixth Plan of Janata government in the year 1980
itself.
• The Annual Plan (1979-80) may be considered the lone independent remnant of the
‘Rolling Plan’ of the Janata Government

Sixth Plan

• this plan (1980-85) was launched with the slogan of Garibi Hatao’ (alleviate
poverty).
• Target Growth: 5.2% Actual Growth: 5.66%
• The minimum amount of calorie-based definition of poverty in India was
accepted in this plan
• Sixth Plan tried to improve the standard of living of the poor masses with the direct
approach.
• National Rural Employment Programme(NREP)- 1980
• Restructured twenty-point Programme-1982.
• Biogas Programme-1982.

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• Development of women and children in rural areas(DWERA)- 1983.

• Rural Landless Employment Guarantee Programme(RLEGP)-1983.
• Self-employment to Educated Unemployed Youth Programme(SEEUP)-1983.
• Dairy Development Programme(DDP)-1983.
• Village and Small Industries Development Programme(VSIDP) -1983.
• Tribal Development Agency(TDA)-1983
• National seeds programme(NSP)-1983.
• Intensive Pulses Development Programme(IPDP)-1983.
• Intensive Cotton Development Programme(ICDP)-1983.
• Khadi and Village Industries Programme (KVIP)-1983.
• Programme for Depressed Areas(PDA)-1983.
• Special Programme for Women and Children (SPWC)-1983.

Seventh Plan

• The Plan (1985-90) emphasised on rapid food grain production.

• Growth, modernisation, self-reliance and social justice remained as the guiding
principles.
• The Jawaher Rozgar yojana(JRY) was launched in 1989 with the motive to create
wage-employment for the rural poor.
• Heavy foreign loans on which the governmental expenditures depended heavily
during the period, the economy failed to service.
• Target Growth: 5.0% Actual Growth: 6.01%

Eighth Plan

• The eighth Plan (1992-97) was launched in a typically new economic environment.
• The economic reforms were already started in July 1991 with the initiation of the
structural adjustment and macro-stabilisation policies necessitated by the worsening
balance of payments, higher fiscal deficit and unsustainable rate of inflation.
• An immediate re-definition of the state’s role in the economy was suggested.
• Market based development advised in area which could afford.

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• More investment in the infrastructure sector, especially in the laggard states as the
ongoing emphasis on greater private sector investment.
• Rising non-plan expenditure and fiscal deficits need to be checked.
• Subsides need restructuring and refocusing.
• Planning immediately needs to be decentralised.
• Special emphasis on co-operative federalism suggested.
• Greater focus on agriculture and other rural activities was suggested.
• It recognised human development as the cost of all developmental efforts?

Ninth Plan

• The Ninth Plan (1997-2002) was launched when there was an all-round slowdown in
the economy led by the south east Asian financial crisis (1996-97)
• The motto of the plan was Growth with Social Equity
• Basic Minimum Services(BMS) with additional Central Assistance for these
services with a view to obtaining complete coverage of the population.
• The BMS include: safe drinking water, primary health service, Universalisation of
Primary education, Public housing assistance to the Shelter less poor families,
Nutritional Support to Children, Connectivity of all villages and habitations and
streamlining of the public distribution system.
• Target Growth: 6.5% Actual Growth: 5.35%

Tenth Plan

• The plan (2002- 07) commenced with the objective of greater participation of the NDC
in their formulation.
• Doubling per capita income in 10 years.
• Target growth was 8% and achieved was 7.7%
• Accepting that the higher growth rates are not the only objective
• It should be translated into improving the quality of life of the people.
• Monitorable targets for eleven select indicators of development for the centre.
• National horticultural mission was launched under this plan

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Eleventh Plan (2007-2012)

• The plan targets a growth rate of 10 per cent and emphasises the idea of inclusive
growth
• It achieved 8% growth
• It targeted 10 percent rural tele-density from existing 1.9% by the year 2010
• The planning commission shows its concern regarding realising the growth targets
because the compulsions towards the Fiscal responsibility and Budget Management
Act.
• The commission has been estimating poverty line and poverty ratio since 1997 based
on the methodology contained in the report of the Expert Group on Estimation of
Number And proportion of Poor. (known as Lakdwala Committee Report).
• The PC constituted an Expert group in December 2005 under the chairman ship of Prof.
Suresh D. Tendulkar to review the methodology for estimation of poverty.
• The expert group submitted its report in December 2009.
• While acknowledging the multidimensional nature of poverty, the Expert Group
recommended moving away from anchoring the poverty lines to the calorie intake
norm, adopting the Mixed Reference Period(MRP)

Twelfth Plan

• The Draft Approach Paper of the Twelfth Plan (2012-2017) was prepared by the
Planning commission after widest consultation till date recognising the fact that citizens
are now better informed and keen to engage.
• Growth rate of 8% is targeted for the plan.
• It emphasizes the need to intensify efforts to have 4% average growth in the
agriculture.

Twenty Point Programme

• The twenty-point programme(TPP) is the second central plan which was launched
in july1975

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• The programme was conceived for coordination and intensive monitoring of a

number of schemes implemented by the central and the state governments.
• The basic objective was of improving the quality of life of the people, especially of
those living below the poverty line.
• Poverty alleviation, employment generation in rural arears, housing, education,
family welfare and health, protection of environment and many other schemes
having a bearing on the quality of life in rural area.

MPLADS

• MEMBER OF Parliament Local Area Development Scheme(MPLADS) is the last

of the Central Plans and latest to have been launched on December 23,1993 with only
Rs.5 lakh given to each MPs which was increased to Rs.1 crore in the year 1994-95.
• In April 2011, the corpus was enhanced to Rs.5 crore while announcing the new
guidelines for the scheme.

Multi-Level Planning

• It was by the late 1950s and early 1960s that the states demanded the right to plan
at the state level.
• First Strata: Centre-Level Planning- Central plans evolved over the years – the five-
year plans, the twenty-point programme and the MPLADS.
• Second Strata: state level planning- in 1960s the states were planning at the state level
with their respective planning bodies. State planning Boards with the respective CMs
being their de-facto Chairman.
• Third Strata District Planning: in 1960s all the districts of the states with the District
Planning Boards. District Magistrate being the de-facto chairman.
• Fourth Strata: Block- Level Planning.

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Banking System

Commercial Banks

• It mediates between savers and borrowers

• Its primary liabilities are deposits and primary assets are loans and bonds.

Commercial bank system consists of

• Public sector banks.

• Private sector banks.
• Cooperative banks.

18 Public Sector Banks are there in India (Government holding majority stake)

Public Sector Banks and Private Sector Banks

• Owned by government either totally or as majority stake holder.

• It includes State Bank of India, 17 nationalised banks and most of Regional Rural
Banks.
• Private Sector banks are both domestic and foreign banks.
• Cooperative banks are such bank which are not considered as Commercial Banks
because of their social objectives and they are not profit motive
• Reserve Bank of India lays down norms for bank in India.

Classification of Commercial Banks

• Schedule Banks are the banks included in the 2nd schedule of RBI Act ,1934.
• 2 conditions of RBI for them.

Conditions for them

• Can approach RBI for financial assistance and refinance

• They have Obligations to maintain a certain amount of cash as reserves as prescribed
by the RBI

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Following are included in Scheduled Banks

• SBI
• Nationalised banks
• Foreign banks
• Private sector banks
• Cooperative banks
• RRB
• Total 300 scheduled banks with 79,000 branches.

Non-Scheduled Banks

• They are not included in second schedule of RBI Act,1934.

• They don’t have above privileges and obligations
• There are 4 non-scheduled banks
• They are also called as Local Area Banks
• Following are the four banks
1. Coastal Local Area Bank
2. Capital Local Area Bank
3. Krishna Bhima Samrudhi Local Area Bank
4. Subadhra Local Area Bank

Investment bank

• Asset companies in raising funds in the capital market (equity or debt)

• Provides strategic advisory services for mergers, acquisitions etc.
• Another name is Merchant bank

Development banks

• Financial Institutions which provide long term capital for industries and agriculture.
• Industrial Finance Corporation of India ltd (IFCI) is the first development bank of
India
• Following are the major development banks in India

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• Industrial Development Bank of India

• Industrial Credit and Invest Corporation of India (ICICI) was a development bank
and got merged with ICICI bank in 2000.
• Industrial Invest Bank of India(IIBI)
• Small Industries Development Bank of India(SIDBI)
• National Bank for Agriculture and Rural Development (NABARD)
• National Housing Bank(NHB)
• Commercial Banks are to meet short term capital requirement of Industry and
Agriculture.
• Special Development Financial Institutions (SDFIs are to meet long term financing
requirements of Industry and agriculture.
• They get concessional finance from RBI.
• S.H. Khan committee 1997 appointed by RBI recommended transformation of DFIs
into universal banks. Then they can provide a menu of services

Industrial Finance Corporation of India IFCI

• First Development Bank in India.

• Incorporated immediately after independence in 1948 by Industrial Finance
Corporation Act.
• After regular intervals government started different Development banks.
• Government utilized them for the achievements in planning and development of the
nation.

Cooperative Banks

• Managed on the principal of cooperation, self-help and mutual help.

• One member has one vote in the cooperative banks
• No profit no loss- do not pursue the idea of profit maximisation. Hence, it is not
considered as a commercial bank
• It performs all the main banking functions of deposit mobilization, supply of credit
and remittance facilities.

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• Functionally specialist in agriculture and related products.

• Now providing housing loan also.
• It has a two-tier system; Agricultural and non-agricultural

Regional Rural Banks (RRBs)

• First set up on October 2, 1975 (Only 5 in numbers)

• The aim was to take the banking services into doorstep of rural poor
• The capital of RRBs are shared between Government of India (50%), concerned
state government (15%) and the sponsoring nationalised bank (35%)
• Due to excessive lending to poor, these banks started making losses by 1980s
• Government set up two committees to suggest measure for restructuring the RRBs
• They are Bhandari Committee (1994-95) and Basu Committee (1995-96)
• As per the recommendations of these committees, the government made two policy
changes
1. Concessional loans of RRBs abolished and RRBs started charging commercial
interest rate from its customers
2. The target clients (rural masses and weaker sections) were set free and
RRBs started giving loans to all customers

Bank Nationalization

• In 1969 and 1980 government nationalised private Commercial Bank units.

• By Banking Nationalization Act, 1969, the government nationalized a total number
of 20 private banks
• Out of these 20, 14 banks with more than 50 crore deposits were nationalised in
1969
• 6 banks with more than 200 crore deposits were nationalised in 1980
• In 1993, the loss making New Bank of India was merged with Punjab National Bank
• In 2019, Vijaya Bank and Dena Bank were merged with Bank of Baroda
• Hence, at present, the total number of nationalized banks is 17
• But, none of them have 100 percent government ownership
• After this, government did not allow opening of private banks till the economic reforms

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• Government again started giving license for private banks in 1994. (UTI Bank was
the first private bank after the reforms in India)
• Government also started the process of privatisation of public sector banks after
reforms

Objectives

• Channelized banking into rural areas.

• Check misuse of banking capital from speculative purposes
• Shift from class banking into mass banking.
• Make banking an integral part of the planning.

Narasimham Committee

• The Committee on Banking Reforms under Narasimham has submitted wo reports

on banking sector reforms in 1991and 1998.
• The first committee under Narasimham in 1991 is known as Committee on Financial
System (CFS)
• He suggested large number of reforms in the banking system in the lines new economic
reforms going to be introduced in India during that time
• Narasimham Committee II recommended 3 tier banking system in India
1. Tier 1: 2 to 3 Banks of International Orientation
2. Tier 2: 8 to 10 Banks of National Orientation
3. Tier 3: Large Number of Local Banks

Non- Performing Assets (NPAs)

• It is the bad loans of banks

• Definition: those accounts of borrowers who have defaulted in payment of interest or
instalment of the principal or both for more than 90 days.
• NPAs can be classified into three
1. Sub- Standard: remaining NPAs for less than or equal to 12 months
2. Doubtful: Remaining NPAs for more than 12 months

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3. Loss assets: Loss has been identified by the bank auditors or RBI
inspection, but the amount has not been written off

SARFAESI Act, 2002

• It is Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002
• It gives more power to banks concerning repayment of NPAs from wilful
defaulters
• It gives the bank the power to use security submitted by the borrower
• It also empowers banks to sell bad loans to Asset Reconstruction Companies

Asset reconstruction company (ARC)

• They buy bad loans from banks and collect them.

• They will have built in professional expertise in this task.
• It was recommended by Narasimham committee I.
• ARC 11: 1st asset reconstruction company set up in India.

Prudential Norms

It relates to following matters

• Income recognition: to ensure that banks takes into account, actually realised income.
• Asset classification as NPA and Other.
• Provisioning for NPA.
• Capital Adequacy norms (capital to risk weighted asset ratio, CRWAR)
• It was implemented in India as per the recommendations of Narasimham Committee
I

Basel Norms

• Banks lend to different types of borrowers and each carries its own risk.
• They lend deposits of public and money raised from the market equity and debt.

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• Because of a variety of risk in the intermediation banks have to keep aside a certain
percentage of capital as security against the risk of non-recovery.
• Basel committee provided Basel norms to tackle the risk.
• Capital Risk Weighted Asset ratio is 11.5 as per Basel III norms.
• In India, it will be implemented from 2019

Banks of International Settlement(BIS)

• Faster international monetary and financial cooperation is the aim of it.

• Banks for central banks.
• Provided banking services only to central banks or international organisations.
• Head Quarters is Basel, Switzerland.
• Established by Hague agreements of 1930.
• It seeks to make monetary policy more predictable and transparent among its 60-
member central banks.
• Its main role is to set capital adequacy requirements to safe-guard banks operations

Universal Banking in India

• Recommended by 2nd Narasimham Committee in 1998 and khan Committee (1998)

• Aim- widen and integrate different financial activities
• It is a multipurpose and multi-functional financial super market

Prime Lending Rate

• It was a method of fixing the minimum interest rate a commercial bank can charge from
its most favoured customers
• Under Prime Lending Rate, there were options to give loans for a lower rate for most
trust worthy or most valued customers
• It led to bargaining and misuse of the provision and system was discontinued by RBI
in 2010

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Base Rate (BR)

Definition

• Minimum rate of interest that a scheduled commercial bank is allowed to charge

from its customers.
• No scheduled commercial bank is allowed to charge an interest rate lesser than
base rate from any customer
• It is only for new loans taken or old loans renewed after July 1, 2010.
• In 2010, RBI deregulated the Base Rate and individual banks were given freedom
to fix their Base Rates
• Hence, all bank had different base rates

Marginal Cost of funds-based Lending Rate (MCLR)

• It is a new method for computing the lending rates of banks introduced from financial
year 2016-17
• It has to be reset on annual basis
• Banks will continue to review and publish Base Rate as done earlier
• Under MCLR, there would be impact of change in policy rates of RBI over lending
rates to customers (Policy Rates would be discussed in detail in the chapter on
Monetary Policy)

State Bank of India

• Founded on 27th June 1806 as bank of Calcutta

• In 1921 it changed name to Imperial Bank of India
• In 1955, it got the name State Bank of India
• In 1956, it was Nationalised
• Its Head Quarters is in Mumbai

NABARD: National Bank to Agriculture and Rural Development.

• Headquarters: Mumbai.

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• Established on 12th July 1982

• Present chairman: Dr Harsh Kumar Bhauwala.
• Main programme is credit for agricultural and fiscal inclusion.
• Recommended B. Sivaraman Committee (1981)

Financial Inclusion

Business Correspondence model advocated by RBI.

• Business Correspondence enable banks to extend banking services to the locality

without setting up a branch inside a building.
• Banks use various types of hand-held services.
• Aptly nicknamed micro ATMs to authenticate transactions at the Business
Correspondence location.

Differential Rate of Interest (DRI)

• It is a lending programme launched by the government in 1972

• It makes all Public Sector Banks obligatory to lend 1 percent of total lending per year
to the poorest of poor for an interest rate 4% per annum

Swabhiman 2011

• It is a government programme to ensure banking facilities in habitation with a

population in excess of 2000 by March 2012.

Priority Sector Lending

• All banks in India have to follow the compulsory target of priority sector lending
• It includes loans to following sectors
Agriculture, Small and Medium Enterprises, road and water transport, retail
trade, small business, small housing loans (less than 10 lakh), software industries,
Self Help Groups (SHGs), education loans, agro-processing, artisans, distressed
urban poor, Non-institutional debtors from SCs, STs, women and other weaker
sections

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• In 2007, RBI included five minorities also (Buddhists, Christians, Muslims, Parsis
and Sikhs)
• In 2015, RBI has added medium enterprises, sanitation and renewable energy
under PSL

PSL for Indian Banks and Foreign Banks with more than 20 Branches

• They have to give 40% of total lending to Priority sector

• 18% of the total lending must go for agriculture
• 10% of the total lending must be lent out to the weaker sections
• 7.5% of the total lending to micro enterprises
• Other areas of priority sector must be covered with the remaining amount
• Other areas of priority sector must be covered with the remaining amount (10%)
• For foreign banks with less than 20 branches, there is no sub target out of their 40
percent priority sector

Nachiket Mor Committee

• RBI constituted it in the name of Committee on Comprehensive Financial Services

for Small Businesses and Low-Income Households
• The report was released in 2014
• Committee recommended suggestions for financial inclusion
• It suggested establishment of Small Finance Banks for financial inclusion

Pradhan Mantri Jan Dhan Yojana

• Prime Minister Jan Dhan Yojana stated in 2014, August.

• Managed by Ministry of Finance (Department of Financial Services)
• Its aim is financial Inclusion
• 15 million accounts were opened on inauguration day and it got a Guinness World
Record.
• Ru Pay debit cards are also issued for account holders s
• Account holders can also get accident Insurance cover of Rs. 1 lakh.

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• Mobile banking for poor.

• Largest number of accounts are in SBI.

Mudra Bank

• Launched in 2015
• Micro Units Development and Refinance Agency Bank (Mudra Bank) aims to fund
unfunded non-corporate enterprises
• Under this scheme, micro units can get upto Rs.10 lakh loan through refinance
route
• The loan would be provided through public or private sector banks, NBFSc, MFIs,
RRBs and District banks
• There are three categories of services under this scheme
1. Shisu: Loan upto Rs. 50,000
2. Kishor: Loans between 50,000 and 5 lakhs
3. Tarun: Loans between 5 lakh and 10 lakhs
• The scheme covers traders of fruits and vegetables, but it does not refinance
agricultural sector
• Interest rates on this loan vary for different businesses based on their respective risk

Non- Banking Financial Companies

• Non-Banking Financial Companies are largely referred to as shadow banking system.

• They have become major financial intermediaries.
• They do not accept demand deposits and therefore not subject to the same
regulations.
• Hence, it does not allow its depositors to withdraw the money from their accounts
any time they wish
• Best example of Non-Banking financial company is Microfinance Institutions
• RBI is the regulator of Non-Banking Financial Companies
• It is mandatory for NBFCs to register with RBI as deposit taking companies
• For registration they should be a company registered under Companies Act, 1956
and should also have a Net Owned Fund of Rs. 2 crores

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• Some important regulations for NBFCs are as follows

1. Allowed to accept or renew public deposits for a minimum period of 12
months and maximum period of 60 months
2. Cannot accept demand deposit (Savings or Current Account)
3. Cannot offer interest rates higher than the ceiling of RBI
4. Cannot offer gifts or additional incentives to the customers
5. No insurance for deposits

Labels of ATM

• Bank’s Own ATMs: These are owned and operated by the concerned bank and carry
the bank’s logo
• Brown Label ATMs: These are owned by a third party or a non-banking firm. The
concerned bank handle cash processing and it carries the logo of the bank which
outsources the services
• White Label ATMs: These are owned and operated by a third party or a non banking
firm. They do not bear logo of any bank.
• It carries the logo of the firm which owns it (For Example: TATA Indicash was first
such ATM)
• They serve customers of all banks for a service charge

Some Other Points on Banking

• Largest public-sector bank in India is State Bank of India

• First commercial bank in India is Bank of Hindostan (1770)
• Banker of Banks is Reserve Bank of India
• First Women Bank in India is Bharatiya Mahila bank (Mumbai) (2013) (In the
memory of Indira Gandhi)
• Now, it has merged with State Bank of India
• Oldest and still existing public-sector bank in India-Allahabad bank (1865)

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Indian Financial Market

• It is the market of the economy where funds are transferred between fund surplus
and fund scarce individuals
• It is also known as working capital market
• Financial markets can be classified into two
1. Money Market: It provides short term funds for a period less than 364 days
2. Capital Market: It provides long term funds for a period above 364 days

Indian Money Market

• Money Market in India was first recommended in India by Chakravarthy Committee

(1985)
• The bleu print for the development of money market in India was made by Vahul
Committee (1987)
• In Indian money market, money is traded either between individuals or groups
(financial institutions, banks, government, companies etc.)
• Trading is done for a discounted rate which is guided by the repo rate of that time
(Repo rate means the rate at which banks can borrow from RBI)
• Borrowing in this market may or may not be supported by collateral
• In this market, close substitutes for money will also be traded (Financial assets
which have quick conversion quality into money and carry minimal transaction
cost like gold)
• The need of money market is to meet day to day shortfall of working capital for
industries
• Then credit would be needed for short term (days, fortnights or few months)
• The money market in India can be classified into two: Unorganized Sector and
Organized Sector

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Unorganized Money Market in India

• It exists in India from ancient times. They are:

1. Un regulated Non-Bank Financial Intermediaries
Eg: Chit Fund and Nidhis
2. Indigenous Bankers. In India, there were four such bankers
a) Gujarati Shroffs
b) Multani or Shikarpuri Shroffs (Operated in Assam tea gardens and
North East India)
c) Marwari kayas
d) Chettiars
3. Money Lenders
• They are exploitative local money lenders

Organized Money Market in India

• Government started developing the organized money market in mid 1980s

• Presently, there are 8 different instruments designed to be used by different categories
of businessmen and industrialist
• Following are the 8 different instruments
1. Treasury Bills: it is used by the Central Government to fulfill short term
liquidity requirements up to a period of 364 days
There are five types of Treasury Bills
a) 14-Day Intermediate TBs
b) 14-Day Auctionable TBs
c) 91-Day TBs
d) 182-Day TBs
e) 364-Day TBs

In 2001, the government discontinued 2 varieties of 14-day TBs. Hence, only

other three TBs are in function now

TBs provide a short-term cushion to the government and also provides short
term investment avenues for banks and financial institutions

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2. Certificate of Deposits: it was introduced in 1989

It is used by the banks and issued to the depositors for a specified period
ranging less than one year
Some financial institutions like IFCI, IDBI, IRBI, IIBI and Exim Bank can
issue CDs for 3 years
3. Commercial Paper: it was organized in 1990 and is used by the corporate
houses (it should be a listed company with a working capital of minimum 5
crore)
4. Commercial Bills: it was introduced in 1990
Used by All India Financial Institutions, Non-Banking Finance Companies,
Cooperative Banks and Mutual Funds
5. Call Money Market: It is an inter-bank money market where funds are
borrowed and lent overnight
The transactions are done normally for one day
The transactions can be done for a maximum period of 14 days
It is also called as ‘Overnight Borrowing Market’ or ‘Money at a Call’
The principle of charging interest in this transaction is that ‘longer the period,
higher the interest rate’
Scheduled commercial banks and cooperative banks operate in this market
as both borrowers and lenders while LIC, GIC, Mutual Funds, IDBI and
NABARD are allowed as lenders only and not as borrowers
6. Money Market Mutual Fund: It is popular as Mutual Fund
It was introduced in 1992 to provide short term investment opportunity to
individuals
Mutual fund is a professionally managed investment scheme that brings
together a group of people and invest their money in stocks
Mutual Funds are regulated by Securities Exchange Board of India (SEBI)
7. Repos and Reverse Repos
They are most dynamic instrument of Indian money market
Repo was introduced by RBI in 1992 and reverse repo in 1996
Repo allows banks and financial institutions to borrow from RBI for short-
term (by selling government securities to RBI)

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In reverse repo, banks and financial institutions purchase government

securities from RBI. Here RBI is borrowing form banks and financial
institutions
In 2014, Urgit Patel Committee has recommended Term Repo and Term
Reverse Repo. It will bring higher stability in interest rates across different loan
market in the country
8. Cash Management Bill (CMB)
It was introduced in 2009
The aim is to meet temporary cash flow mismatches of the government
It is issued for maturities less than 91 days
CMBs have generic character of Treasury Bills

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Inflation
• Inflation means persistent rise in price of goods and services.
• It reduces purchasing power of money.
• Hurts poor the most.
• Reduces saving and pushes up interest rate.
• Depreciation of currency and makes imports costlier.

Types of Inflation

1. Creeping Inflation:
• Inflation which increases gradually from 0% to 10%. It is also called as Low Inflation
2. Might lead to galloping inflation
• An inflation between 10% to 20%. if not controlled it will lead to Runaway inflation
3. Runway inflation

• More severe-inflation. It is also called as Galloping Inflation, hopping inflation,

jumping inflation
4. Hyper-inflation
• When inflation becomes out of control, it is called as Hyper Inflation
• Monthly inflation of 20% or 30% more leads to a monetary collapse.
5. Demand Pull Inflation
• it is Caused by increase in demand due to increased private and government
spending.
• Rises as real GDP rises and unemployment falls
• Too much money chasing too few goods
6. Cost push inflation/ supply-shock inflation
• It is Caused by reduced supplies due to increased price of inputs.
• For example, crude prices globally have gone up causing supply constraints.
• Higher cost of production also results in higher prices. For example, higher cost of
crude, higher cost of capital increase in prices of imported raw materials.

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7. Structural Inflations
• a type of persistent inflation caused by deficiencies in certain conditions in the
economy. For Example, agriculture in backward sector is unable to respond to people’s
increased demand for food.
• Inefficient distributors and storage facilities leads to inflation
• It is also known as Bottleneck Inflation
8. Core Inflation
• It shows price rise in all goods and services excluding food and energy. It is mostly
used in western countries where inflation of food and energy is largely neglected

Related concepts

• Deflation: General fall in the level of price.

• Disinflation: Reduction in the rate of inflation.
• Stagflation: Inflation and rising unemployment.
• Reflation: Attempt to raise price to counteract deflationary pressures and t reduce
unemployment
• Open Inflation: Government does not attempt to prevent price rise.
• Repressed Inflation: When government interrupts a price rise through price controls
and rationing
• But price will rise on the removal of those controls.
• It also results in evils like black marketing and economic diversion
• Inflation Targeting: The announcement of an official target range for inflation is
known as inflation targeting.

Measurement of Inflation

WPI (Wholesale Price index)

• Measures change in price of a selection of goods at wholesale.

• It excludes GST
• It is the major measurement of inflation in India at macro level
• It is available every month and published on 14th day of every month

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• Base year is 2011-12 (Revised in 2017 from earlier 2004-05)

• Total number of commodities in the basket for measuring WPI is 697 (Revised in
2017 from earlier 676)
• The revision in the base year and basket was done as per the recommendations of the
Working Group for Revision of WPI under Prof. Abhijit Sen
• It is prepared by the office of Economic Adviser in the Department of Industrial
policy and promotion under the Ministry of Commerce and Industry
• WPI does not include cost of servicess

CPI (Consumer Price Index)

• Measures changes in price paid by the consumer.

• It is the used for measuring food inflation in India
• The base year is 2012
• It is available weekly
• It includes services also

Problems of high inflation

• Low income groups are particularly hurt.

• People with fixed income (Example: pensioners and students) will worse off.
• Inflation discourages export as domestic sales are attractive.
• It may also erode external competitiveness of domestic product. As a result, Balance
of Payment problems can be caused.
• Increasing uncertainty may discourage investment and saving
• With the declining value of money people would be more inclined to spend than
save.
• Inflation tax happens: when government borrows and spend the cash held by people
erodes in value due to inflation.
• Strikes can take place for higher wages which can cause a wage spiral

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Measures to Control Inflation

• Fiscal, monetary, supply side and Administrative measures can be used to control
inflations to ideal/optional rates.
• Fiscal measures include Reduction in individual taxes
• Monetary Measures include changes in rates and reserve requirements.
Open market operations can control prices under normal conditions.
Sterilization through government bond transactions like Market Stabilization
Bonds.
• Supply side factors include making goods available
• Administrative Measures needed are implementing de-hoarding and anti-black-
marketing measures.
• Wage and price controls can also be used

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Fiscal System
Definitions
• It is also called as Public Finance
• Arthasastra of Kautilya is one of the oldest texts in India which mentions about public
finance
• Fiscal policy is the Policy of government concerned with raising revenue through
taxation and deciding as the amount and purposes of government spending.
• Government policy for dealing with the budget especially with taxation and
borrowing.
• Means by which a government adjusts its level of revenue spending to monitor and
influence a nation economy.
• Fiscal policy of the government is declared through Annual Financial Statement or
Budget.

Budget

• Article 112 of the constitution discusses the budget

• It is the annual financial statement of the government and hence not considered as a
bill
• The budget is prepared by the Department of Economic Affairs in the Ministry of
Finance
• Conventionally, it was presented by the Finance Minister in the last working day of
February, but in 2017 the government changed the date into first working day of
February
• Economic Survey explains the achievements of last year’s budget. It is presented in
the parliament before the presentation of the budget

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Main channels of fiscal resources

• Taxes, user charges (power, water, transport), disinvestment and borrowings

(internal and external)
• Receipt and expenditure are divided into revenue and capital accounts (expenditure
into plan and non-Plan)
• The division of expenditure into plan and non-plan has been discontinued by 2017-
18 Budget
• Fiscal system deals with quality of public finances also i.e., how money is raised
and how it is used; wastefully or productive

Developmental and Non-Developmental Expenditure

• Developmental expenditure includes all expenditure of productive nature such as

establishment of new factories, dams and bridges
• In other terms, we can call it as government investments
• It is also known as Plan Expenditure (from 1987-88 Budget)
• Non-Developmental expenditure is the consumptive kind of expenditure like paying
salaries, pensions, interest on loans, subsidies and defence
• It is also known as Non-Plan Expenditure (from 1987-88 Budget)
• The change of term into Plan and Non-Plan expenditure from 1987-88 budget was
suggested by Sukhomoy Chakravarty Committee
• In 2017 Budget, the finance Minister scrapped this classification of expenditure
• It was suggested by Dr. C Rangarajan Committee appointed in 2011
• He suggested that public expenditures should be redefined to ‘Capital and Revenue
Expenditure’

Revenue and capital

• Revenue Receipts: recurrent receipts include taxes and non-taxes resources.

• Taxes: income tax, corporation tax, GST, custom duty etc.
• Non-tax revenue includes user charges, interest receipts, dividends, profits, fiscal
services like printing money and stamps etc.

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Revenue expenditure

• Essentially non-plan expenditure that does not create asset.

• Interest payment, defence management, subsidies, grants of union government to
state governments and public administration,
• Plan components like MNREGA also

Capital Account Receipts

• Any receipt which brings a liability or loss of asset

• Recoveries of loans made by centre to states, UTs and PSUs.
• Fresh borrowings disinvestment and etc.

Capital Account Expenditure

• Loans made to states, UTs and PSU, loan repayment by the government and other
liabilities of the government
• Plan expenditure for asset creation in infrastructure, capital expenditure on
defence,

Goals of Fiscal Policy

• Growth, equality, promotion of small scale industries, encouragement to

agriculture, location of industries in rural areas, labour intensive growth, export
promotion, development of sound social and physical infrastructure.

Definition of Deficits

Revenue Deficit

• Difference between revenue receipts and revenue expenditure.

• Revenue expenditure: consumption and non-development. But in India flagship
programmes like NREGA is Revenue Expenditure.
• FRBM (Fiscal Responsibility and Budgetary Management Act, 2003 demanded
revenue deficit should be zero by the end of 2008-09.

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• Objective of this goal is to fund for consumption from government’s own resources and
not borrowing.
• If FRBM implemented well there would have been revenue surplus from 2009-10.
• But the financial crisis in 2008 has prevented the achievement of this target
• Revenue deficit at present is………………………………………………………

Effective Revenue Deficit

• The term was introduced in 2011-12 Union Budget

• Some money out of the central grants to state governments may be spent for asset
creation
• Effective revenue deficit excludes such grants to states for creation of capital assets

Fiscal Deficit

• Difference between what government earn and total expenditure.

• Earns: revenue receipts and non-debt creating capital receipt.
• It amounts to all borrowing of the government
• Fiscal deficit: total expenditure of a government in a budget – (revenue receipts and
non-debt creating capital receipts).
• Fiscal deficit at present is………………………………………………………………

Budget deficit

• Difference between total budgeted receipts and expenditure.

• Abolished in 1997.
• Fiscal deficit mirrors health of government finances most accurately than Budget
deficit.
• That portion of the borrowings for which government relies on printing money by
RBI.

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Monetised Deficit

• Borrowings made from RBI through printing money.

• Only when government cannot borrow from banks and FI, due to pressure on interest
rates.
• It corresponds Budget Deficit.

Primary deficit

• The difference between Fiscal deficit and interest payment.

• To assess the progress of government in its fiscal control efforts.

Deficit Financing

• Financing of gap between government receipts and expenditure

• Deficit financing may be different forms like external aid, external borrowings,
internal borrowings, printing currency etc.
• Gap can be deliberate because government wants to spend on welfare and infrastructure
or due to bad finance of government.
• Government cannot borrow above a certain level from market as it may push up
interest rates and crowd out private investment.
• RBI prints money when the resources from taxes, user charges, Public Sector
Enterprises, public Borrowings, small scale borrowings and others are not enough.
• It’s called deficit financing.
• High powered money or Reserve Money is money printed by RBI.
• Deficit Financing was dropped with Budget Deficit in 1997.
• FRBM disallows RBI printing money to finance government deficit in normal
conditions.
• But after crisis in 2008 government abandoned FRBM mandate and borrowed much
and spent.
• Keynesian stimuli include massive borrowing to arrest slowdown and stimulate growth.
• That is money creation is called monetary expansion.

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Large fiscal deficit causes following concerns

• Macroeconomic instability due to inflation.

• Corporate sector is crowded out because inadequate fund in market as government
borrowing increases.
• Interest rate is high because of pressure on money available in market after
government borrowing.
• If funding is by RBI monetisation, it causes inflation.
• Inflation may mean less saving, less investment and hurts the sustainability.
• It will require higher taxes in future, i.e., intergenerational disparity as said by FRBM
act.

Kelkar Task force to implement FRBM Act 2003 recommended re-examination of plan and
non- plan difference (it was discontinued from 2017-18 Union Budget

Rangarajan Panel on Public expenditure 2010.

• It is an 18 members committee set up by Planning Commission.

• To suggest measures for efficient management of public expenditure.
• It will see the plan and non-plan classification and whether it is rational.

Public debt and other liabilities

• Internal debt: Borrowing inside the country. For example, market loan and borrowing
from RBI.
• External Debt: loans from foreign country and Foreign Institutions and NRI deposits.
• Other liabilities: outstanding against the various small saving schemes, provident
funds etc.
• It’s justified as government does not have adequate resources and taxation cannot be
beyond a level.
• It should be used for welfare activities.

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Internal Debt

• Loan raised by government in open market through T-bills and government

securities.
• Special securities issued to RBI
• Various bonds: For Example, oil bonds and fertilizer bonds.
• Money sucked in by market stabilization Bond (It was introduced in2004)
• Other liabilities: outstanding against small savings, provident funds, deposits under
special deposit schemes.
• Debt trap: government borrows to service the debt already created.

Zero Base Budgeting

• 10th plan approach paper says that Zero Base Budgeting will be followed .
• First taken up in 1987 in Union Budget.
• Many states applied it like Rajasthan and Maharashtra.
• Maharashtra called it development-based budget.
• Definition: a close and critical examination is made of existing government
programs.
• Increase funds to high priority items.
• Eliminate outdated items
• Reduce funds to low priority items.
• Programs are discarded if the cost benefit ratio is below the prescribed norms.

Fiscal Divergence

• A situation where inflation pushes income into higher tax brackets and it is called
as bracket creep.
• It results in increase in income taxes but no increase in real purchasing power.

Fiscal Neutrality

• When net effect of taxation and public spending is neutral neither stimulating nor
dampening demand.

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• Tax revenue equals total spending.

Crowding Out

• If government borrows excessively it leads to shrinkage of liquidity in market.

• Then Interest Rates go up and private investment is crowded out because of 2
reasons.
• Less liquidity and interest rate are high

Pump Priming

• Deficit financing and spending by government on public work to revive economy

during recession- it is a counter cyclical measures.
• It can raise purchasing power of people and stimulate economy.

Emerging Markets

• Definition: countries that are restructuring their economics along market oriented
lines.
• Offer a wealth of opportunities for trade technology transfer and FDI.
• Four biggest country: China, India, Indonesia, Brazil.

Characteristics

• Regional power Houses.

• They are transitional societies.
• World fastest growing economics.
• Critical participation in worlds major political economic and social affairs. For
Example, G20.

NK Singh Panel on Fiscal Deficit or FRBM Act

• It is the latest committee appointed by the Ministry of Finance on implementation

of FRBM Act and Fiscal road map
• Submitted report on January 23, 2017

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• It was composed chairman and four members

• Members were Urgit Patel, Sumit Bose, Aravind Subrahmaniam (CEA) and
Rathin Roy
• Major recommendations are as follows
1. Combined debt to GDP ratio of the centre and states together should be 60
percent of GDP by 2023
2. Out of this, there is a sub target of 40 percent for the centre and 20 percent for
states
3. Reduce fiscal deficit to 2.5 percent of GDP by 2023
4. Reduce revenue deficit to 0.8 percent of GDP by the year 2023

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Monetary and Credit Policy

Definitions

• Strategy of influencing movement of money supply and interest rates to affect

output and inflation
• In India, these functions are done by RBI
• The actions of Central bank which determine the size and rate of growth of money
supply
• The regulation of money supply and interest rates by a central bank to control inflation
and stabilise currency.

Goals of Monetary Policy

• Constrain inflation/ price stability and Balance savings

• Maintain exchange rate
• Generate jobs
• Economic growth

Components of Monetary Policy

• Changing interest rate

• Setting reserve requirements
• Trading in foreign exchange markets

Monetary Policy Tools Available for RBI

Policy Rates

Bank Rate

• Rate at which RBI lends long term to commercial banks.

• Any revision of it is a signal to banks to revise deposit rates and prime lending rate
or Base rate or marginal cost lending rate.
• Bank Rate is a blunt instrument and not changed usually.

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• Not changed in 2008-09 recession.

• At present Bank rate is………………………………………………………………

Ready Forward Contracts or Repos.

• Definition: a transaction in which two parties agree to sell and repurchase the
same security.
• Seller sells with an agreement to repurchase the same at a mutually decided future
date and price
• Buyer purchases with an agreement to sell the same to the seller an agreed future
date and price.
• RBI lends to banks as the security of government as collateral (repro)
• Banks repurchase the security over night or after few days.
• RBI changes a repo rate for the money it lends regularly
• Repo rate at present is………………………………………………………………..
• Reverse Repo: when RBI borrows from the banks
• It is presently ………………………………………………………………………..
• Repo and Reverse Repo: only done at Mumbai.
• Only in securities approved by RBI. i.e, T Bills, Central/state government securities.

MSF: Marginal Standing Facility

• A window through which commercial banks can borrow from the RBI at a rate
that is up to 1% more than Repo rate.
• It is to ease liquidity.
• 1% of the value of deposits is the limit for the MSF for cash bank.
• Present rate is…………………………………………………………………………..

Reserve Requirements

• Fractional reserve banking: banks keep a fraction of total deposits managed by a bank
as reserves and are not to be lent.
• Reserve ratios are periodically changed by RBI

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• It is for various needs like: provide loan to the government(SLR), inflation

management (CRR)
• Either in the form of RBI approved securities (SLR) or in the form of cash kept with
RBI(CRR).

Statutory Liquidity Ratio (SLR)

• It is the portion of time and demand liabilities of banks

• Kept in the form of designated liquid assets.
• For Example, government and other RBI approved securities and public sector bond.
• Aim of SLR is that the need for government fund is partially but surely met with
this reserve.
• Progressively brought down from 38.5%(1991) to 19.5% (2018)
• It is a blunt instrument and was unchanged for more than a decade and half till 2008.
• RBI Act, 1934 and Banking Regulation Act, 1949, fixed floor and cap on SLR at 25%
and 40%.
• Amendment in 2006 removed this cap and floor
• Present rate is …………………………………………………………………….

Cash Reserve Ratio (CRR)

• A portion of bank deposits that a bank should keep with RBI in cash form.
• RBI Act ,1934 and Banking Regulation Act ,1949 fixed floor and cap at 3% and 20%.
• This was removed in 2006.
• CRR is adjusted to manage liquidity and inflation.
• More CRR means that less money available for lending.
• It has been reduced from 15% in 1991 to 4% in 2019.
• Used only when there is a relatively serious need.
• Otherwise RBI relies on Open Market Operations.
• CRR at present is…………………………………………………………………….

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Open Market Operations of RBI

• Open Market means Banks and Financial Institutions.

• Definition: purchases and sales of government securities and certain other
securities in open market by RBI to influence the volume of money and credit in the
economy.
• By purchase inject money into market and expands credit
• By sale absorbs money and shrinks credit.
• Most important and flexible tools of RBI.

Reserve Bank of India

• Established in 1934 with share capital of 5 crore.

• recommended by Hilton young commission.
• Nationalised in 1949. Then, it became central banking body of India and did not remain
as a bank in technical sense
• Superintendence and direction by: Central board of directors 20 members.
• There is One Governor and 4 department Governors.
• One government official from Ministry of Finance.
• 10 nominated directors by the government.
• 4 nominated directors by the government to represent four local boards in Mumbai,
Kolkata, Chennai and Delhi.
• RBI Act ,1934 came into effect in 1935.

Functions

• All functions are given by RBI Act ,1934

1. Bank of Issue
• Section 22 of RBI Act authorises RBI to issue notes of all denominations except rupee
1 currency
• Rupee One currency is issued by Ministry of Finance with the signature of finance
secretary

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• Then, Distribution of one-rupee notes and coins and small coins are undertaken by RBI
as an agent of government.
• RBI has separate issue department to issue currency notes.
• RBI should maintain Gold and Foreign exchange reserves for the currency it issues
• Restriction to print: it should not create instability not too much on too less
2. Banker to Government
• Government banker agent and adviser.
• It has the obligatory to transact government business to receive and make
payments on behalf of government
• It makes ways and means advances to government.
• Gives loans and advances to state and local governments.
3. Banker’s bank and Lender of the Last Resort
• Scheduled banks can borrow from RBI through eligible securities.
• CRR of banks are kept with RBI
• It is lender of last resort. Lends in the time of crisis.
4. Controller of Credit
• Power to influence the volume of credit created by banks.
• Banking Regulation Act,1949 tells that RBI can ask any bank not to lend
group/person.
• Since 1956 elective credit controls are increasingly being used by RBI.
• Every bank must get license from RBI. License can be cancelled by RBI.
• Permission from RBI is needed to open a new branch.
• Every bank must send a weekly return to RBI showing in detail its asset and
liabilities.
• Power to inspect accounts of any commercial bank.
• Since 2008, RBI followed expansionary policy to make credit more in quantity and
cheaper.
• All rates and reserves were reduced except bank rate.

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5. Custodian of foreign reserves

• Takes up operations in India’s Forex Markets to stabilize exchange-rate of rupee
and to ensure that there are no speculations.
• For this it holds forex reserves.
• RBI has $421.8 billion forex reserves in 2019
• Including currency, gold and IMF’s SDRs.
• Gold amounts only to 3-4% of total reserves and the rest is foreign currency
(specially US Dollar)
6. Supervisory Functions
• RBI Act ,1934 and Banking Regulation Act,1949 give supervisory powers.
• For Example, Licensing branch expansion and selling reserve ratios.

Pictures Shown on Different Currency Notes

• 5 Rupees: Farmer sitting on a tractor

• 10 Rupees: Tiger, Elephant and Rhinoceros (Fauna of India)
• 10 Rupees New: Konark Sun Temple
• 20 Rupees: Mount Harriet and Port Blair light house as seen from Megapode
Resort, Port Blair
• 50 Rupees: Indian parliament (Old)
• 50 rupees: Theme of Hampi with a Chariot
• 100 Rupees: View from Goecha La (It is a range in Himalaya) in Sikkim
• 100 Rupees New: Rani ki Vav from Gujrat
• 200 Rupees: Sanchi Stupa
• 500 Rupees: Red fort
• 2000 Rupees: Mangalyaan

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Stock Market in India

Definition

• A platform for trading shares either physical or virtual.

• Originated in 1602 at Amsterdam stock exchange.
• Biggest stock market in the world is the New York Stock Exchange followed by
Nasdaq and Japan Stock Exchange respectively
• Investors buy and sell through brokers.
• Stocks mean capital raised by a corporation through sale and issuance of shares.
• Commonly stock and share are used interchangeably
• Market capitalisation means the aggregate value of a corporation’s issued shares at
current market price.

Stock exchange in India

• First company which issued shares in India was VOC or Dutch East India company
(1602)
• Today India is the 3rd largest investor base in the world after USA and Japan
• India has a total number of 23 stock exchanges

Important stock exchanges

• Bombay Stock Exchange and National Stock Exchange are in Mumbai.

Bombay Stock Exchange

• Oldest in Asia. Located at Dalal street, Mumbai.

• Established in 1875 by Premchand Roychand
• Largest securities exchange in India with more than 6000 listed Indian companies.
• 10th in the world with market capitalisation of $2.3 trillion.
• Overall performance is measured by BSE SENSEX or BSE 30 INDEX which were
introduced in 1986
• BSE30 composed of most developed 30 stocks. They are selected based on market
capital, liquidity, trading frequency and industry.

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• Automatic online trading system of BSE is known as BOLT

• In 2005, status of BSE changed from an Association of persons (AoP) to a full-fledged
corporations and name also changed into BSE LTD.

SENSEX/Sensitive Index

• Largest and most active 30 Companies are selected from Various Section
• Base Year is 1978-79=100
• Inclusion of a company is based on market capitalisation
• Revised Periodically

National Stock Exchange

• In 1991, Manohar J Pherwani committee recommended it

• In 1992, Government of India authorised IDBI to established it
• In 1993, it was recognised as a stock exchange
• In 1994, commenced operation as a stock exchange
• It is based in Mumbai.

Indexes of NSE

• Standard and Poor’s CRISIL NSE Index 50

• S&P CNX Nifty or Nifty 50 is another important index
• Nifty is the leading index for large companies on NSE
• Nifty 50 stock index has companies from 12 sectors.
• CNX Nifty Junior 50 is for junior companies on NSE.

Inter Connected Stock Exchange

• Promoted by 12 regional stock exchanges

• The aim is to set up a new national level stock exchange

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Indonext:

• BSE and Federation of India Stock Exchange which represents 20 regional Stock
Exchanges promoted it.
• It has more than 300 companies listed on it.

Over the counter exchange of India (OTCEI)

• Under companies act 1956, it’s a public limited company

• Listing of small and medium companies are done here.
• Promoted by Unit Trust of India (UTI), IDBI, IFC and others
• It is not functional now as SEBI de-recognized it in 2015

NASDAQ: National Association of Securities Dealers Automated Quotation

System.

• It is the stock exchange in the US

• Electronic stock means market that uses a computerised system to provide brokers
and dealers with price quotes.
• First electronic stock market in the world
• Run by National Association of Securities Dealers
• Many of stocks traded are in technology field

Dow Jones Index

• New York Stock Exchange index

• Reflects movement of world’s largest stock market
• Composed 30 most traded stocks of New York Stock Exchange
• It is the largest stock market in the world

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Securities Exchange Board of India (SEBI)

• Established in 1988.
• Statutory basis in 1992 by SEBI Act 1992

Functions of SEBI

• Regulate working of Stock Exchanges and intermediaries like brokers and merchant
brokers.
• Accord approval for Mutual Funds
• Register Financial Institutions as investors
• Section 11(1) of SEBI Act tells that it shall be the duty of the board to protect the
interest of investors in securities
• Promotes investors education and intermediaries training.
• Prevent fraudulent and unfair trade practices, with imposition of monetary
penalties.
• Regulates substantial acquisition of shares and takeover of company
• Conducts audit and inquiries
• Head office in Mumbai
• Reginal offices: New Delhi, Calcutta and Chennai

FMC (Forward Market Commission)

• Head Quarters Mumbai.

• It functions under Ministry of Consumer Affairs and Public distributions.
• Set up by Forward Contracts Regulation Act ,1952

Functions of FMC

• Monitors discipline working of the commodity exchanges

• Recognises an Exchange and withdraw recognitions
• Collects and publishes information regarding trading condition in respect of goods.
• Make inspection of records of any recognised associations.

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Mutual Fund

• It is a financial intermediary which raises money from investors to invest in capital

market
• It performs these functions for a fee
• Two types of Mutual Funds are there

Hedge Fund

• Investment fund open to only limited investors

• It is mostly unregulated
• Not allowed legally in India.
• Some are registered as FIIs
• It invests in anything like land, real estate and stocks

Dematerialisation

• It is the process of converting physical shares into electronic shares

Equity

• Common Stock and Preferred Stock are shares issued by companies.

• Funds provided to business by sale of stock.

Share

• A certificate representing ownership of the company that issued it.

• Can yield dividends and entitle to vote.
• Company may be listed in Stock Exchange.
• Other names are stock or equity.

Bond

• A debt instrument issued at least for more than one year.

• Purpose: raising capital by borrowing.

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Debenture

• It is debt not secured by specific asset of corporation.

• Otherwise it is called as unsecured debt.
• It can earn an interest.

Market Signals

• Bear: Investors believe market will go down. It is pessimistic

• Bull: Investors believe market will go up. It is optimistic market

GILT

• Bond Issued by Central Bank of a Government on Behalf of Government

• RBI does this In India.
• Other Name: Treasury Bills.
• Gilt Edged Market: Market for Government Securities.

Blue Chip

• Shares of most valuable profit making and usually dividend paying companies.
• Liquid in market (always in demand.)

Treasury Stock

• Company buy their own stock and put it in treasury

• It is called as buy back.
• If company makes large buy back, it is known as creeping acquisitions.

Ponzi schemes/ Pyramid Scheme

• A fraudulent investment scheme that pays high returns to investors and provides
higher to those who join later.
• Paid from investors own money, not from profit

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• Detained to collapse.
• Named after Charles Ponzi who became notorious by this activity

Sweat Equity

• Definition: shares given to a company employees or directors on favourable terms in

recognition of this work.
• Issued at discount.

QFIs (Related to FII)

• An individual group or association resident in a foreign country that is complaint with

Financial Action Task Force (FATF) standards.
• Till 2012, they invested in India through FIIs registered with SEBI.
• Now they are allowed to invest directly in India.

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Taxation System
Tax

• A payment compulsorily collected by government from individuals or firms.

• Two types:
• Direct tax: Burden of tax payment falls on the individual or the company paying the
tax. For Example, income tax, corporate tax and wealth tax
• Indirect tax: Burden of such tax is not born by the individual or firm paying it. It is
passed on to customer. For Example, GST, customs duty and previous sales tax and
excise duty.

Taxation system in India

• Tax is levied either by centre or state

Direct and indirect taxes in India- The changing scenario

• In 1990-91, direct tax was 33% percent of total tax collection and indirect tax was 66%
• In 2018, share of direct tax in total tax collection was 51.3% and indirect tax was
48.7
• General level of prosperity is increasing, then more people pay tax
• Companies are growing so corporate tax is increasing.
• Stock market and wealth built up also contribute to direct tax by way Capital gain tax
and income tax.

Service Tax

• First imposed in 1994.

• Now it merged with GST
• Widening service tax base was the initial step towards GST.
• Major services currently taxed: telephone, insurance brokerage, banking and financial
services, courier, port services etc.
• Minor services on which recently imposed- beauty parlour, pandals, Tent house
services, dry-cleaning, cable operators etc.

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• Maximum collected from telephone services

Service Tax and Indian constitution

• Tax on services is not mentioned in any list of 7th Schedule

• Entry 97 of UL empowers union government to make laws on any other matter not
mentioned in SL OR CL.
• Hence, tax on services which is not mentioned on any of the three lists was levied by
central government with exercising the powers under entry 97 of UL

Goods and Service Tax

• Introduced in India from July 1, 2017

• It is a multi-point sale tax with set off for tax paid on purchases of inputs
• No cascading (tax on tax) effect
• There is a deduction or credit mechanism for taxes paid for the inputs
• The GST has a three-tier system
Central GST (CGST): to be administered by the Centre
State GST (SGST) to be administered by the State Governments
Integrated GST (IGST): To be levied on inter-state trade and administered and
collected by the centre. The proceeds would be transferred accordingly

• Constitution Amendment for GST

Constitution 101st Amendment Act was passed. It was also ratified by more than half
of the states
• Key Features of Constitution Amendment
Concurrent Jurisdiction for levy and collection of GST by the centre and states
Centre would levy and collect Integrated GST and assign to the state accordingly
• Exemptions from GST
Alcohol for human consumption (State Excise+ VAT)
Electricity: It will have electricity charge only
Petroleum crude, high speed diesel, Petrol, Natural Gas and Aviation fuel would
be brought under GST on a later date

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• GST Council (Art. 279A)

Composition: Union Finance Minister (Chairman)
Union Minister of State for Revenue
Finance Ministers of States
Finance Minister of state by rotation will be the deputy chairman
Quorum to hold the meeting is 50%
Decision can be taken by 75% of the votes of members present and voting
Weightage of votes: 1/3 is for centre and 2/3 is for all states collectively

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Concepts Related to Taxation

Tax Indices

• The entity on whom tax is imposed.

• It is mostly the company who pay the taxes.
• It is different from tax burden. Tax burden is on the people who actually pay the tax,
• For example, government increase tax on oil. Oil companies may pass it to private
customers.
• Here tax indices are on companies and tax burden is on customers.

Tax Burden

• Who actually pay taxes.

• Tax can be absorbed by seller or by the buyer (in the forms of higher prices) or by a
third party like employees (in the form of lower wages).

Tax base

• The value of goods services and income on which tax is imposed

• Income tax: tax base is taxable income. Some kinds of income like saving are excluded
from taxable income.
• Sales tax: value/Volume of items subject to tax. Some items like essential goods are
not taxable.

Tax rate

• How much tax is due from each source

• Some tax systems have high rates and narrow base allowing generous deduction of
business expenses.
• Other systems have wide base few exemption and lower rates.

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Tax Shelters

• A technique which allows one to legally reduce or avoid tax liabilities.

• For Example, tax Payer invest his income in a particular kind of investment that gives
tax concessions.

Tax avoidance and Tax evasion

• Avoidance: save or invest in a manner that leads to reduction in taxable income.

• It is lawful to take all available tax deductions.
• Evasion: it is failing to report income or improperly claiming deductions. It is a
punishable offence.

Hidden Taxes

• Taxes conceded in the price of article that one buys

• Other name: Implicit tax
• It is the most common form of tax. For Example, Indirect taxes and import duties.

Proportional, Progressive and regressive tax

• Proportional: Tax as a percentage of income is constant over all income levels.

• Progressive: tax as a percentage of Income, rises as income rises (Income tax slabs in
India)
• Regressive: Tax, as a percentage of income fall as income rises.

Ad Valorem

• Latin word: meaning “According to worth”

• Taxes levied on the basis of value.
• Taxes in real estate and personal property are Ad valorem.
• For Example, Luxury goods are taxes higher even if they weigh or number the same as
ordinary goods

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Excise Duty

• Tax levied on the manufacture of goods.

Custom duty

• Imposed by central government when goods are imported or exported

• Peak customs duty is 10%.

Negative income tax

• For Example, subsidy.

• Taxation system where income subsidies are given to persons or families that are below
the poverty line.
• Government will send financial aid to persons who file an income tax return reporting
an income below a certain level.

Pigouvian tax

• Imposed on body that have negative externality. For Example, pollution

Externality

• Impact of on person’s action on the wellbeing of an outsider (by stander or 3 rd

party)
• For Example, seller and consumer of cigarettes influence a third party.
• Negative externality is found for example in fumes from automobiles.
• Positive externality is good effect on 3rd party. For Example, Restoration of Historic
buildings and research into new technologies.
• Carbon tax is one example of Pigouvian tax.

Octroi

• Entry 52 of SL in 7th schedule.

• Tax on entry of goods into a local area.
• Main source of revenue for most of urban local bodies.

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• Criticized for: it is an obsolete method of tax collection. Involves stoppage of vehicles

at check posts. Obstruct free flow of vehicles. Wastage of business hours, loss of fuel
etc.

Tax Buoyancy

• The percentage change in tax revenue with the growth of national income
• Growth based increased in tax collections.

Tax elasticity

• Percentage change in tax revenue in response to change in tax rate and the
extension of coverage.

Tax Stability

• No frequent changes in the tax rate.

• There is a continuity of policy in a predictable and transparent manner.
• Revenue stability is desirable because it makes it easier for a government to build a
credible spending and borrowing plan for the year ahead.
• Taxes stability contributes to overall revenue stability.
• Market players also can plan better.

Tobin Tax

• Economist James Tobin proposed it.

• Worldwide tax on all foreign exchange transactions
• When foreign capital enters the country and when it leaves
• Aim: To check speculative inflows of FIIs
• FDI will not suffer because it will not invest for speculative reasons
• It is also known as Robin Hood Tax

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Tax Rebate

• A tax refund or tax rebate is a refund on taxes when the tax liability is less than the
taxes paid.
• Vijay Kelkar Committee has suggested to abolish it in India

Cess

• Generally, means Tax

• It’s an additional levy on tax for a specific purpose. For Example, education cess
and Swatchh Bharat Cess

Difference between Cess and Surcharge

• Surcharge is General and can be used for any purposes

• Cess is specific and can be used only for designated purpose like education cess.

Value Added Tax

• It is charged both on goods and services

• It is imposed on at all levels of manufacture of goods and services based on increase
in price

• Similar goods and services are taxed equally. So, a similar television from all brands
will be taxed the same
• VAT is levied at each stage of production and hence makes the taxation process
easier and more transparent
• VAT reduces chances of tax evasion and fosters compliance
• Encourages transparency in sale of goods and services at the tiniest level

Fringe Benefit Tax(FBT).

• Fringe Benefits: benefits enjoyed by employees collectively not individually.

• Taxed in the hands of employer. For Example, transport services, gym, club etc.
• Abolished in 2009-10 budget.

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Perquisite

• Individual benefits given to employees by the employer

• Employee has a right by virtue of his employment.
• Perks (colloquial name) are benefits generally in cash/kind.
• Taxable as per India income tax laws.

It includes:

• Value of rent free accommodations

• Value of concession in the rent of accommodation
• Car
• Membership of Club.
• Travel.

Tax from States 2010-2015

• Maharashtra is the highest tax paying state in India

• Andhra Pradesh and Telengana is at the second place
• Mumbai is the highest tax paying city in India

Major Subsidies in India

• Food in Public Distribution System

• Petroleum Products including Petrol and LPG
• Fertilizers
• These three products are subsidised pan India

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Different Government Committees

Poverty Estimation Committees

• Dadabai Naorji was the first person to estimate poverty in India

He put forward the idea of demarcating a poverty line
• YK Alagh Committee
He Suggested the consumption method for estimating poverty first time in
1979
It suggested that people consuming less 2400 calorie food per day in rural
area and those consuming below 2100 calorie in urban area are poor
• Lakdawala Committee 1993
It also suggested the consumption method as mentioned in YK Alagh
report
It suggested that people consuming less 2400 calorie food per day in rural
area and those consuming below 2100 calorie in urban area are poor
• Suresh Tendulkar Committee 2005
He opted cost of living as a method to measure poverty. It includes
expenditure on education, healthcare, electricity and transport
He fixed the poverty line at Rupees 27 per capita expenditure for rural
population and rupees 33 per capita expenditure for urban population
Estimated the poverty of India as 22 percent of population
• C Rangarajan Panel
Estimated poverty at 30 percent in 2011
He fixed the poverty line at Rupees 32 per capita expenditure for rural
population and rupees 47 per capita expenditure for urban population
• Aravind Pangariya Task Force on Poverty Estimation
Constituted by NITI Aayog in 2015
Aravind Pangariya was the Vice Chairperson of NITI Aayog
Could not reach into a conclusion
It recommended Government to constitute another committee for this
purpose

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Other Committees
• Raja Chelliah Committee on Tax Reforms
• Vijay Kelkar Committee on Tax Reforms
• Sukhmoy Chakravarty Committee on Monetary Policy
• BK Chaturvedi Committee on restricting Centrally Sponsored Programmes

Foreign Trade of India

Imports and Exports

• Largest trading partner of India is China (Export and Import)

• US is the second largest trade partner
• Largest imports of India are form China (India has largest BOT with China)
• Largest export of India is to United States
• India’s share in the world export is 2%
• India’s share in the export of services is 3.3%

FDI and FII

• Largest flow of FDI to India is from Mauritius followed by the US and the UK at
second and third positions respectively (2018)
• Largest amount of FDI in India is in Telecommunication (2018)
• 2nd largest is in computer hardware and software (2018)
• Largest FII flow to India is from Euro Pacific Growth Fund
• Second largest is from Singapore Government
• India is the 7th largest FII destination in the world
• Brazil is the largest FII destination

FDI Confidence Index 2018

• US is ranked first, and Canada is second

• India’s rank is 11. It is first time India goes beyond 10

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• In 2017, India’s rank was 8 and in 2016 it was 9

Forex Reserves

• Forex reserve of an economy is its foreign currency assets added with its gold
reserves, SDRs and reserve Tranche in the IMF
• The present forex reserve of India is above 421 billion USD
• The reserve cover for imports is 12 months now. It means that India’s total forex
reserves can finance India’s future import bills for 12 months

Methods of Calculating Currency Value

Fixed Currency Regime

• It is method brought by IMF for regulating exchange rate of world currencies

• In this system, exchange rate of a currency was fixed by the IMF keeping the currency
in front of a basket of important world currencies including UK Pound Sterling, US
Dollar, Japanese Yen, German Mark and French Franc)
• In this system, IMF modifies exchange rate from time to time

Floating Currency Regime

• In this system currency value is fixed on the market mechanism based on demand
and supply
• UK was the first country to switch over into the floating currency mechanism in 1973
• In this year, IMF allowed its member countries to follow either fixed on floating
currency value
• It is called as market driven exchange rate
• It is fixed by the demand and supply of the domestic and the foreign currencies in
the concerned economy
• For example, USA and EU currencies’ value is free floating

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Managed Exchange Rate

• It is a mixture of fixed and flexible exchange rate systems

• In this system, government of the economy attempts to affect the exchange rate
directly by selling or buying foreign currencies or indirectly through monetary
policy (by lowering or raising interest rates on foreign currency bank accounts affecting
foreign investment)
• Canada, Japan and India are examples of this system

Pegging of the Currencies

• Some countries peg their currency to a major currency or a basket of currencies

• Gliding or crawling peg means that peg is allowed to glide smoothly upward or
downward

Hard Fix by Currency Board

• In some countries, a currency board is working to fix the value of the currency
• Hong Kong is the best example
• This system failed in Argentina in 2002

Exchange Rate in India

• Indian currency was linked to British Pound Sterling till 1948

• After that India followed different systems like IMF Fixed Currency regime and RBI
fixing the value in comparison to different international currencies
• After 1992, India moved to a floating currency regime
• India has its own method known as ‘dual exchange rate’.
• There are two exchange rates for rupee one is the official rate and the other is the
market rate
• But RBI may intervene in the forex market to influence to value of the currency

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Trade Balance or Balance of Trade

• The monetary difference of the total export and import of an economy in one
financial year is called as trade balance.
• it might be either positive (Surplus) or negative (Deficit)

Depreciation

• It is a situation when domestic currency loses its value in front of a foreign currency
if the exchange rate is market driven

Devaluation

• It is a situation when exchange rate of domestic currency is cut down by its

government against any foreign currency
• Official depreciation is devaluation

Appreciation

• It is a situation when domestic currency increases its value in front of a foreign

currency if the exchange rate is market driven

Revaluation

• It is a situation when exchange rate of domestic currency is increased by its

government against any foreign currency
• Official appreciation is revaluation

Current Account and Capital Account of External Sector

Current Account

• It is an account maintained by the RBI in which every current transaction is shown

• Current transactions of an economy in foreign currency all over the world are export,
import, interest payment, private remittances and transfers

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• If the inflow through current is more in an economy, it is known as current account

surplus
• If outflow is more it is known as current account deficit
• Presently, India has a current account deficit of 1.9 percent of GDP (2018)

Current Account Convertibility

• It is the possibility of converting a foreign currency in a market for the purpose of

current account transactions
• If the market permits 100 percent convertibility for current account transactions, then
the market has full current account convertibility
• After 1991, India follows full current account convertibility

Capital Account

• It is an account maintained by every economy and shows the capital kind of

transactions
• Capital account transactions include lending and borrowing, foreign currency
deposits of banks, external bonds issued by government of India, FDI, Portfolio
Investment Scheme (It is investment in banks and stock market) and Qualified
Foreign Investments

Capital Account Convertibility

• It is the possibility for converting foreign currency in a market for the capital
account transactions
• India started moving towards full convertibility in capital account after the
recommendations of SS Tarapore Committee in 1997
• India still does not offer full convertibility in this regard
• Corporates are allowed to convert up to USD 500 million through automatic route
• Individuals are allowed to invest in foreign assets and shares up to 2.5 lakh USD

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Balance of Payment

• The outcome of total transactions of an economy with the outside world in one year is
known as Balance of Payment (BoP)
• It is the net outcome of current and capital accounts of an economy
• It may be either balance or deficit
• If the outcome is positive at the end of the year, the money is automatically
transferred to the forex reserve of the country
• If the outcome is negative, the same amount is drawn out of the foreign exchange
reserve of the country
• If the forex reserves are not capable of fulfilling the negativity created by the BoP,
the situation is known as the BoP Crisis.
• India had a BoP crisis in 1990

LERMS (Liberalised Exchange Rate Mechanism System)

• India followed it from Union Budget 1992-93

• India moved from fixed currency exchange rate to floating rate

NEER (Nominal Effective Exchange Rate

• It is the weighted average exchange rate of rupee before the currencies of India’s major
trade partners

REER (Real Effective Exchange Rate)

• It is the rate after the weight of inflation is adjusted with NEER

EFF (The Extended Fund Facility)

• It is a service of provided by IMF to its member countries to raise any amount of

foreign exchange from it to fulfil their BoP Crisis
• To get this, countries have to introduce structural reforms in the economy as per the
recommendations of IMF
• India signed it 1981 -82

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Hard Currency

• It is the international currency in which the highest faith is shown and is needed by
every economy
• The currency will have highest level of liquidity all over the world
• Up to Second World War, the best hard currency was Pound Sterling
• Soon after the war, it was replaced by the US Dollar

Soft Currency
• It is a currency which is easily available in any economy
• For Example, Indian rupee is a soft currency in Indian market

Hot Currency

• If a foreign currency or hard currency leaves an economy in a fast pace for certain
reasons, then it is called as Hot Currency

Heated Currency

• When the domestic currency is under enough pressure (heat) of depreciation due
to the hard currencies’ high tendency of exiting the economy (It becomes hot)
• It is also known as currency under heat or under hammering

Cheap Currency

• The term was introduced by JM Keynes in 1930s

• If a government starts re-purchasing its bonds before their maturities at full
maturity price, then the money which flows into the economy is known as cheap
currency or cheap money

Dear Currency

• This term was also popularised by economists in 1930s

• It is the opposite of cheap currency

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• When the government issues bonds, the money which flows from the public to the
government is called dear currency or dear money

Public Sector Units in India

• They are known as Personal Milch cow in India

Maharatna, Navaratna and Mini-Ratnas

Mahartna Companies
Terms and Conditions
1. Company should possess Navaratna Status
2. It should be listed in the stock exchange
3. Average annual turnover of more than 20000 crores during last 3 years
4. Average annual net worth of more than 10000 crores during last 3 years
5. Average annual net profit after tax of more than 2500 crores during last 3 years
6. The entity should have significant global presence or international operations
Benefits of Maharatna Companies
Rs. 1,000 crore - Rs. 5,000 crores, or free to decide on investments up to 15% of their net worth
in a project
8 Central Public-Sector Enterprises are categorised as Maharatna Companies
1. Bharat Heavy Electricals Limited
2. Coal India Limited
3. Gas Authority of India Limited (GAIL)
4. Indian Oil Corporation Limited
5. National Thermal Power Corporation (NTPC Limited)
6. Oil and natural Gas Corporation (ONGC)
7. Steel Authority of India Limited
8. Bharat Petroleum Corporation Limited (BPCL)

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Navaratna Company
• A score of 60 (out of 100), based on six parameters which include net profit, net
worth, total manpower cost, total cost of production, cost of services, PBDIT
(Profit Before Depreciation, Interest and Taxes), capital employed, etc.
• A company must first be a Miniratna and have 4 independent directors on its board
before it can be made a Navratna.

Benefits of Navaratna Company

• Up to Rs. 1,000 crore or 15% of their net worth on a single project or 30% of their
net worth in the whole year (not exceeding Rs. 1,000 crores).

16 Companies are categorised as Navaratna Companies

• 59 companies are included in Miniratna I Category

• 15 Companies are included Miniratna II Category

Agriculture and Food Management in India

• Share of agriculture in the India economy is more than 17% of the GDP
• But, about 48 percent of our population depends on agriculture
• At the time of independence, it was 55.4% of the GDP

Cropping Seasons of India

Kharif, Rabi and Zaid

• Kharif is the agriculture season from July to October during South West or Summer
monsoon
• Crops of this season include rice, maize, sorghum, pearl millet (bajra), finger millet
(ragi), pulses, soybean, ground nut, cotton etc.
• Rabi is the season between October and March during the time of North East and
Retreating monsoon
• Rabi crops include wheat, barely, oats, chickpea, linseed, mustard etc.
• The season between Mach and June is known as Zaid/Jayad

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Green Revolution

• It was the introduction of new scientific techniques into agriculture

• First introduced in wheat cultivation and then extended to the rice
• The Green revolution was centered around the use of High Yielding Variety of seeds
developed US agro-scientist Norman Borlung
• The programme was started in India with the help of US based Rockfeller Foundation
• MS Swaminathan is known as the father of green revolution in India

Components of Green Revolution in India

1. High Yielding Variety of seeds popularly called as dwarf variety of seeds

• These seeds were non-photosynthetic and hence non-dependent on sun rays for
targeted yield
2. Chemical Fertilizers
• Urea, Phosphate and Potash were used as chemical fertilizers
3. The Irrigation
4. Chemical Pesticides and germicides
5. Chemical Herbicides and Weedicides
6. Credit, Storage, Marketing and Distribution

Pradhan Mantri Krishi Sinchayee Yojana

• It is a new irrigation programme by the government to increase productivity

• The programme motto is “Har Khet Ko Pani”
• It is project of rupees 500 billion for five years between 2015-2020
• It is implemented under 3 ministries: Ministry of Water Resources, Ministry of
Rural Development and Ministry of Agriculture
• It has amalgamated different ongoing programmes like Accelerated Irrigation Benefit
Programme of Ministry of Water Resources, River Development and Ganga
Rejuvenation, Integrated Watershed Management Programme of Department of
Land resources and the On-Farm Water Management of Department of
Agriculture and Cooperation

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White Revolution

• Operation Flood is the programme behind the white revolution

• It was launched in 1966 by National Dairy Development Board
• It is the largest dairy development programme in the world
• Anand Pattern of experiment at Amul dairy was the engine behind the success of the
programme
• Vargheese Kurian established Anand pattern as a cooperative dairy development
system

Food Management in India

Minimum Support Price

• It is a form of market intervention by the government to insure agricultural producers

against any sharp fall in farm prices
• The MSP are announced at the is beginning of the sowing season for certain crops
• The price would be recommended by Commission for Agricultural Costs and Prices
• Presently MSP is announced for 24 commodities

Market Intervention Scheme

• It is an intervention by the central government in the market on the request of state

governments for procurement of perishable horticulture commodities in the event of
fall in market prices

Buffer Stock

• It is a system of keeping a food reserve of wheat and rice only at Food Corporation
of India
• Foods crops are distributed from FCI to Public Distribution Shops

National Food Security Act, 2013

• Aim is to provide subsidized food crops to approximately two thirds of India

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• It covers 2/3 of rural population and half of urban population

• It gives legal entitlements for existing food security programmes of the government
including Midday Meal Scheme, Integrated Child Development Services and
Public Distribution System
• It also recognizes maternity entitlements
• The programme offers 5 kg of food crops per person under Public Distribution
System at fixed price of rupees 3 for rice, rupees 2 for wheat and rupees 1 for millet
per one kilogram
• Pregnant women, lactating mothers and certain categories of children are eligible
for daily free cereals

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Economic Reforms

• Economic reforms are a process in which a government prescribes declining role for
the state and expanding role for the private sector in an economy
• After independence, India followed planned economy
• During this time, we followed protectionist economic policy with import
substitution as a method
• By 1980s a new development strategy called as Washington Consensus emerged
• It supported private sector instead of stated-dominated economy
• This consensus is called as economic reforms and was followed by all planned
economies during 1980s
• By 1990s, the countries again started shifting towards a mixed economy which a
middle way between planned system and Washington Consensus

Economic Reforms in India

• India launched it on July 23, 1991

• It is called as Rao Manmoham model of reforms

IMF Conditions for India to get EFF

• Devaluation of rupee by 22%. Indian rupee fell down from Rs. 21 for a USD to Rs.
27
• Drastic reduction of peak import tariff from130 percent to a maximum 30 percent
• Hike excise duties by 20 percent to neutralize the revenue shortfalls from customs
• Cut down government expenditure by 10 percent

Liberalization,

• Liberalization is the pro market and pro capitalist inclination in the economic
policies of India
• In other terms, it can be called as a model of Laissez-faire
• It means decreasing traits of a state economy and increasing traits of market
economy in India

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• India attempted to strike its own balance of the state-market mix

Privatization

• Under this policy state assets were transferred to the private

• It means denationalization of state assets
• India started disinvestment of public sector enterprises after introducing
economic reforms

Globalization

• It is an increase in economic integration among nations

• The concept was popularized by Organization of Economic Cooperation and
Development (OECD) in early 1980s
• WTO is the highest international body which controls globalization at present
• India is a founding member of WTO and follows its rules and regulations

Industry and Infrastructure in India

• First industrial policy of independent India was declared through Industrial Policy
resolution, 1948
• The policy put some of the important industries in Central List like railway, power,
civil aviation, arms and ammunition, defense etc.
• Industries of medium category were put in State List like paper, medicines, textiles,
cycles, two wheelers etc.
• The remaining industries were left open for private sector
• In 1956, the Industrial policy was reformed again.
• The new policy of 1956 reserved 17 industries (Schedule A) for the center and 12
industries (Schedule B) for the states and the remaining (Schedule C) were left open
for the private
• The policy made licensing compulsory for all schedule A and Schedule B industries
• This policy was later reformed several number of times till the new Industrial Policy
adopted in 1991

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New Industrial Policy 1991

• The policy had following major features

1. De-Reservation of the Industries
 The industries reserved for central government was cut down into 8
 6 among them were de-reserved in the coming years
 At present, only two industries are reserved for the central government
 They are atomic energy and nuclear research and other related activities
and railways
2. De-Licensing of the Industries
 Under the new policy compulsory licensing was cut down to only 18
industries (Earlier it was compulsory for all Schedule B and Schedule C
industries
 Presently, licensing is compulsory only for following 5 businesses
1) Aerospace and defense related electronics
2) Gun powder, industrial explosives, and detonating fuse
3) Dangerous chemicals
4) Tobacco, cigarette, and related products
5) Alcoholic drinks
3. Promotion to Foreign Investment
 Foreign Direct investment, portfolio investment and Foreign
Institutional Invest were promoted in India
 Replaced the draconian Foreign Exchange Regulation Act (FERA) with
more liberal Foreign Exchange Management Act (FEMA)

Disinvestment

• It is the process of selling shares of public sector enterprises

• It can be classified into two; Token Disinvestment and Strategic Disinvestment
• Token Disinvestment means the sale of shares up to 49 percent and the management
is kept with the government

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• Strategic disinvestment means selling more than 51 percent of shares and handing
over the management into the private sector

Micro, Small and Medium Enterprises (MSME)

• They contribute to 37.5 percent of India’s GDP

Ease of Doing Business

• World Bank prepares the Ease of Doing Business Index every year
• It measures the easiness of doing business in a country
• India’s position in the index in 2018 is 100 (In 2017, it was 130)

Make in India

• It was launched by the government in 2014 to encourage multinational and Indian

companies to manufacture their products in India
• Vision of the scheme is to enable India to be the top FDI destination surpassing China
and the US
• It aims to create jobs in following 25 key sectors of the economy
1) Automobiles
2) Auto components
3) Aviation
4) Biotechnology
5) Chemicals
6) Construction;
7) Défense manufacturing
8) Electrical machinery
9) Electronic system design and manufacturing
10) Food processing
11) IT and BPM
12) Leather
13) Media and entertainment
14) Mining

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15) Oil and gas

16) Pharmaceuticals
17) Ports
18) Railways
19) Renewable energy
20) Roads and highways
21) Space
22) Textiles
23) Thermal power
24) Tourism & Hospitality
25) Wellness
• Key Policies to be followed in the programme are:
1) Ease of Doing Business
2) 100 Smart Cities
3) Disinvestment of PSUs
4) Skills and jobs for youth
• The initiative is based on four Pillars
1) New Process
2) New Infrastructure
3) New Sectors
4) New Mindset

Start Up India

• The scheme was launched in 2016 with the motto ‘Start-Up India and Stand-Up
India’
• Its aim was to bring innovation, sustainable economic growth and large-scale
employment opportunities
• It is based on an action plan, aimed at promoting bank financing for start-up
ventures to boost entrepreneurship and encourages tart-ups with jobs creation
• Start-Up India Hub is a common online platform for all stakeholders of the
entrepreneurial ecosystem like start-ups, investors, mentors, academia, incubators,

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accelerators, corporates, Government bodies in India, etc. to discover, connect and

engage with each other

Infrastructure Development Programmes in India

UDAY Scheme
• The aim is hundred percentage electrification of India
• The full form is Ujwal DISCOM Assurance Yojana
• The scheme aims to reduce interest burden on the DISCOMs and cost of power
National LED Programme
• Launched in 2015 in 100 cities
• It has 2 components
1) Domestic Efficient Lighting Programme (DELP) which aims to replace
filament bulbs from houses by providing LED bulbs
2) Street Lighting National Programme (SLNP) for replacing all street lights
with LED

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WTO AND GATT

General Agreement on Tariffs and Trade. (GATT)

• Formed in 1947 by 23 countries in Geneva and came into operational stage 1948
• The aim of this agreement was to establish free and fair international trade among
members.
• It wanted to dismantle all trade barriers either in the form of tariff and non-
tariff(quotas).
• The agreement progressed and expanded through discussions called as trade rounds
• Head Quarters of GATT was Geneva, Switzerland
• A total number of 8 rounds held under GATT.
• 1st was Geneva Round in 1947 in which 23 members established it.
• The last round was Uruguay Round (1986-94) which resulted in the establishment
of WTO

World Trade Organization (WTO)

• Came into existence in 1995.

• 1st round of discussions was Doha round (2001) and it is still continuing.
• Initially developing countries were reluctant and resisted expansion agenda but
gradually they agreed.
• Director general of that time Arthur Dunkel was asked to draft an agreement for
consideration of members. It is called Dunkel Draft.
• It was signed in Marakesh (Morocco) in 1994 and paved way for establishment of
WTO.
• Hence, it is called Marakesh Treaty

Differences between GATT and WTO

• GATT= it is a TREATY and had no dispute settlement process.

• WTO = it is an ORGANISATION and has dispute settlement process.

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• GATT is Concerned with traditional issues like tariffs and quotas. It had only a
Small secretariat with no institutional foundation to implement these rules.

WTO as founded in 1995

• Geneva is the Head Quarters

• WTO has a total number of 164-member countries (2018)
• Afghanistan was the last member to join the club in 2016
• Present Director General is………………………………………………………..
• WTO aims to increase international trade by slashing trade barriers.
• WTO has played a crucial role in setting up rule based multilateral trade.

Principals guiding WTO

• Non-discriminating and rule-based trading system.

• Same treatment to foreign and domestic goods and services.
• Trade barriers should be dismantled and free international trade
• Less developed countries should receive preferential terms.
• No weighted voting like IMF and WB
• One country one vote- Relatively more democratic
• WTO is not a part of the UN.

Structure of WTO
Descending order of Authority of WTO structure.
Ministerial Conference

• Ministerial conference is usually held once in every 2 years.

• The conference is represented by commerce ministers of member countries
• Last ministerial conference was held in……………………………………..
• 1st ministerial conference was in Singapore in 1996.

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General Council

• General Council is responsible to carry out decisions of ministerial conference

• It is seated in Geneva
• Represented by ambassador/equivalents of member countries
• It has the authority to act on behalf of ministerial conference
• Dispute settlement body- Ambassadors/ Equivalents
• Trade policy review body- General council meets as TPRB to undertake trade
policy review of members.

Councils of trade.

Work under General council.

Three councils.

• Council for trade in goods.

• Council for trade related aspects of intellectual property right.
• Councils for trade in Services.

Subsidiary bodies: various committees and working groups related to various fields

WTO Agreements

• There are about 60 agreements under WTO

• All the agreements of WTO have the status of international legal texts.

Agreement on Agriculture (AoA)

• Agriculture was one of the most contentious issue in Uruguay round.

• In 1994, when Marrakesh treaty was being signed, AOA was resisted by developing
countries.
• They won some concessional features and flexibilities

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Three pillars of it.

Domestic support

• Subsidies given by government too farmers like food, fertilizer, power, water etc.
• Grouped in 3 “boxes”
a) Green box: - subsidies to Research and Development and
infrastructure like universities. There is no limit on them.
b) Amber box: - Domestic subsidies to impact market price. For
Example, food subsidies
• Need to be limited, otherwise product of developing
countries will not have access into market of
developed country.
• Developed countries are allowed less than developing
countries in percentage terms.

C) Blue box: - Subsidies that are direct payment to farmers to

limit their production for environmental stability For Example,
leaving land fallow etc.

• U. S.A and Europe give more subsidies than

statutory level and make good so cheap in their
market that their markets are inaccessible to
export from developing countries.
• So, benefit for than from free trade.
• It’s one of concerns being discussed in Doha
Round.

Export subsidies

• It must be limited by developed countries

• To protect international prices from being too low.
• The export of developing countries will be priced out.

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Market Access

• All members should open their market for agricultural imports.

• By reduction of tariffs and removal of non-tariff barriers
• Countries should undertake: -
1. Tariffication :- converts non – tariff barriers into tariffs.
2. Bind tariffs: - limit them for maintaining international competition
Under this scheme, a reduction of 36% in the tariffs by developed countries
and 24% by developing countries is recommended

Trade Related Aspects of Intellectual Property Rights (TRIPs)

• Intellectual property: - it’s the work of intellect or mind that have commercial
uses. For Example, drugs, literature, painting etc.
• Protected with trademarks and patents etc.
• Patent is given for a specified time

Types of IP

1. Patent: - It is granted for a new useful and non –obvious invention. For certain
periods holder can commercially exploit the invention (typically 20 years from the
date of application)
2. Copy right: - for creative and artistic works (book, movie, music, photograph
painting and software) for certain periods
3. Trademark: - used to distinguish the products or services of different business.

TRIPS and Patents

• It’s an exclusionary right and it grants the right to exclude other from making use of
patented invention for 20 years from filing date
• Inventors put the knowledge with commercial use in public domain after 20 years.
• It’s an incentive to research and development
• Generic medicine: - It is unbranded drugs for which there is only a process patent or
its product is expired.

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Geographical Indication (GI)

• Some goods own their origin to their region.

• Climate, soil and native effort account for their fame and quality
• For Example, Basmati rice, Darjeeling Tea and Malabar Pepper
• GI is given to an institution, community or group and not to individual.
• It is given for a specific period, mostly 10 years
• To agricultural, natural or manufactured good (Tirupati Ladu)
• If registered in GI, commercial proceeds can accrue to the holder of GI.
• GI maintain quality in market and prevent spurious good.
• In 1999, India passed GI of good (registration and protection) act ,1999
• It came into force in 2003
• Registration in India is done by GI registry in Chennai

Following are the products with Geographic Indication from Assam

• Tezpur Litchi
• Joha Rice
• Karbi Anglong Ginger
• Muga Silk
• Assam Tea

GATS: - General Agreement on Trade in Services

• Set in regulation for trade in services among WTO members.

• Adopted in 1995 with AOA and TRIPs
• It covers many economic activities such as healthcare, education,
telecommunication, banking, insurance, business process off shoring (BPO),
tourism and so on.
• GATT did not cover services. It was an innovation introduced by WTO later
• Members off one another the status of most founded Nation (MFN) as in good
• MFN grant of no discriminatory trade and it means only normal trade

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Doha Round

• Began in 2001 in Doha, Qatar.

• It was 4th ministerial meet after WTO formation.
• Singapore, Geneva, Seattle and Doha.
• Called Doha development Round because it promised to address the issues of
developing countries like India
• Developing countries believe that they received a raw deal under Marrakesh Treaty
in agriculture, patents etc.
• Hence, Doha Round is called as Development Round to pacify them.
• The aim of Doha round is to further liberalize international Trade for agriculture,
industry and services

MFN

• The tariff policy that one county receives in an organisation should be extended to
all others
• Some countries may form a preferential trading block within the larger body.
• But all the other should receive normal treatment.
• It does not mean giving special treatment to inputs from another county.
• WTO members normally accord MFN status to each other.

Countervailing duties

• Special duties imposed on imports.

• To offset the actual or potential injurious effects (price undercutting) of subsidies to
producers or exporters in the country of export.
• Dumping: export goods at a lower price than the price of domestic market
• Government in importing country may levy anti-dumping duty.

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Bretton Woods Institution.

• IMF and World Bank were formed in the UN monetary and financial conference
known as Bretton Wood conference.
• 730 delegates from 44 Allied Nations participated in the conference held at Bretton
woods, New Hampshire, USA.
• The conference resulted in the formation two organisations
• International Bank for Reconstruction and Development (IBRD) and
International Monetary Fund (IMF).

Aims

• IBRD aimed to speed up post war reconstruction

• IMF aims to foster monetary stability at global level known as Benetton woods twins.

IMF

• IMF is a UN specialised agency established in 1944 along with world Bank.

• Total number of members is 189 (2018).
• Nauru island is the last country to join
• Washington DC is the Head Quarters of IMF
• Present managing director of IMF is…………………………………………………
• Christine Lagarde is a French lawyer and politician
• Managing director is assisted by 24 directors appointed by member countries or
group of countries
• Subir Vithal Gorkhan is the Indian among 24 directors of IMF
• He represents India, Bangladesh, Sri Lanka and Bhutan in the IMF
• IMF started functioning in 1947
• Each member is assigned a quota based upon its relative size in the world economy
• Each member country is represented by a governor and alternate governor in IMF.
For India, Finance Minister is the ex officio governor and RBI governor is the
alternate governor

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Major Functions of IMF

• To facilitate international monetary cooperation

• To promote exchange rate stability
• To assist countries to correct Balance of Payment crisis

Special Drawing Rights (SDR)

• It is an International Reserve Asset created by IMF in 1969.

• The aim is to supplement its member countries official reserves.
• Its value is based on a basket of 4 key currencies- US dollar, Japanese Yan, Euro and
Chinese Renminbi/Yuan and Pound Sterling
• SDR can be exchanged for national currencies
• It is neither a currency nor a claim on IMF
• It is potential claim on the freely usable currencies of IMF members

IMF does not lend for specific project

India and the IMF

• India joined in 1945 as original member.

• At present India is donor to IMF
• India has a voting value of 2.64 percent and is positioned in 8th rank among members
• Value of the vote is decided based on donation
• India signed the Extended Fund Facility with IMF (discussed in the class on Foreign
Trade)

World Bank Group and World Bank

World Bank group:

• A family of five international organisations
• Gives loan generally to poor countries
• Established in 1945 following Bretton woods agreement
• Responsible to Prepare World Development Report

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• Commenced operation in 1946 by post-war reconstructions

• Currently it lends to poor countries for development and to fight poverty.
• Washington DC is the Headquarters of World Bank
• World Bank is a part of UN, but each institution of WB group is owned by
member government
• Membership gives certain voting rights that are same for all countries
• But there are additional voting rights which depends upon contributions
• President is conventionally an American
• Present president of the World Bank is………………………………………

5 Agencies of World Bank Group

• 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 (ICSID)

World Bank Means IBRD +IDA.

Focuses on developing countries in following fields

• Human development (Education and Health)

• Agriculture and rural development (Irrigation, Rural services etc.)
• Environmental protection (Pollution reduction, Enforce regulation)
• Infrastructure (Roads, Urban regeneration, Electricity)
• Governance (Anti-corruption, Legal institutions development)

India’s voting share at present is………………………………………………………………..

The International Bank for Reconstruction and Development (IBRD)

• It is the oldest of World Bank institutions which started functioning in 1945

• Original Mission was the reconstruction after 2nd world war

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• Current mission is to fight poverty by financing states

• It commenced lending for India in 1949

The International Development Agency (IDA)

• It is also known as the soft window of the World Bank

• It was established in 1960 with the aim of developing infrastructure support among
member nations
• It provides long term interest free loan (for 35-40 Years) for economies with low per
capita income
• Repayment of the loan starts after a grace period of 10 years
• IBRD raises funds on world’s financial market and IDA raises Funds through
contribution from rich members

The International Finance Corporation (IFC)

• IFC was established in 1956

• It is also known as the private arm of the World Bank
• It lends money only to private sector companies in its member countries
• It also finances and advises for private public partnership ventures also
• It charges commercial but comparatively less interest rate
• It aims economic development by promoting productive enterprises and efficient
capital market in the member countries
• Headquarters of IFC is located at Washington DC
• Largest multilateral source of loans and equity financing for private sector projects
in developing world.
• It has recently issued Masala Bond for Indian Business owners (It is first rupee
convertible international bond)

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The Multilateral Investment Guarantee Agency (MIGA)

• It was Founded In 1988 to encourage foreign investment in developing countries by

offering insurance (guarantees) for investors for loss caused by non-commercial
(political) risks
• Non-commercial risks include currency transfer, expropriation, war and
disturbance
• The aim is to promote FDI Into Developing Countries.
• Headquarters of MIGA is also in Washington DC
• MIGA can cover only new investments. These include New Greenfield investment and
new investment associated with expansion, modernisation, or financial restructuring of
existing projects.
• It also guarantees acquisition involving privatisation of state enterprises.

The International Centre for Settlement of investment Disputes (ICSID)

• It was set up in 1966 as an investment settlement body whose decisions are binding
on the parties
• It was established under the Convention on the Settlement of Investment Disputes
between States and Nationals of other States in 1966
• India is not a member of ICSID
• Its headquarters in based in Washington.
• WB President functions as the chairman of ICSID
• Provides facilities of conciliation and arbitration of investment disputes between
members and individual.

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International Economic Organizations and programmes

Organization for Economic Cooperation and Development

• It was established after World War II to encourage cooperation and reconstruction

rather than punishing the defeated
• The original version of the organization was founded in 1947 in the name of
Organization for European Economic Cooperation to run the US financed Marshal
Plan for reconstruction after the war
• In 1960, when Canada and the US joined the organization, the name was changed
into OECD
• The new organization OECD was officially born in 1961 with 30 members
• Presently, the organization has 36-member countries and they help each other in
formulating economic policy
• India is not a member in OECD
• OECD Headquarters is in Paris

BRICS Bank

• BRICS is the organization of Brazil, Russia, India, China and South Africa
• In Fortaleza (City in Brazil) Declaration of BRICS head of States, they proclaimed
to create a new bank in the name of New Development Bank or BRICS Bank
• Following are the major highlights of the bank
1. The bank will have initial subscribed capital of $50 billion shared equally by
all the 5-member countries
2. The capital is used for funding infrastructure and sustainable devilment
projects in BRICS member countries
3. Other low and middle-income countries would also get funds in the future
4. A contingent reserve arrangement of $100 billion will also be created for to
give additional protection to nations during BOP crisis
5. CRA funding would be 41% by china, 18% by Russia, India and Brazil and
5% by South Africa
6. The bank would follow one member-one vote system

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Asian Infrastructure Investment Bank (AIIB)

• It was first proposed by Chinese President Xi Jinping in 2013

• It opened business in 2016
• Presently, the bank has 87 members
• India is a member in AIIB
• It has members from Asia and outside Asia as well
• Beijing is the headquarters of AIIB
• Present President is………………………………………………….
• The aim is to finance infrastructure development programmes in different Asian
countries
• It is a commercial bank than a development bank

World Economic Forum

• It is Swiss based non-profit foundation

• The motto is “committed to improving the state of the world”
• It was found by a German economist Klaus Schwab and he is also the present executive
chairman of WEF
• The forum is known for its annual meeting at Davos, a mountain resort on Alps in
Switzerland
• The meeting brings together more than 2500 businessmen and political leaders from
the world

International Organizations

Commonwealth of States

• It is the organization of earlier British Colonies except Mozambique

• Headquarters is in Marlborough House in London
• In total there are 53 members
• British Queen Elizabeth II is the present head of the organization
• Assembles in every 2 years

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South Asian Association for Regional Cooperation

• Katmandu is the permanent headquarters

• It was founded in 1985 in Dhakka, Bangladesh
• It has 8 members (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan
and Sri Lanka
• It was suggested Zia ul Rahman, the ex-president of Bangladesh
• Present Secretary General is…………………………………………………………

NATO (North Atlantic Treaty Organization)

• Brussels in Belgium is the headquarters

• It is the most powerful defense organization in the world
• “A Mind Unfettered in Deliberation” is the motto of NATO
• It has 29 permanent members
• Present Secretary General is………………………………………………………….

ASEAN (Association of Southeast Asian Nations)

• Jakarta is the headquarters

• It has 10 members
• One Vision, One Identity, One Community is the motto of ASEAN
• Its basic aim is economic protection in the field of banking

EU (European Union)

• Brussels in Belgium is the headquarters

• “United in Diversity” is the motto of the organization
• It has 28 members
• United Kingdom is currently undergoing exist procedure due to Brexit
• The common currency of EU is Euro

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Organization of Petroleum Exporting Countries (OPEC)

• Headquarters is in Vienna, Austria

• It has 15 members
• Equatorial Guinea was the last country to join in 2017
• Present Secretary General is ……………………………………………………………

Asian Development Bank

• Headquarters in Manila, Philippines

• “Fighting Poverty in Asia and the Pacific” is the motto of the bank
• It has 67-member countries
• Present President is……………………………………………………………………
• Aim is to lend money to Asian countries at low interest rates

World Conservation Unit/ International Union for Conservation of Nature

• It is shortly called as IUCN

• Largest body to protect nature
• Headquarters is in Glant, Switzerland.
• It has 1400-member organizations from different parts of the world
• Present Director General of IUCN is……………………………………………………

Organization of Islamic Cooperation

• Its headquarters is in Jeddah, Saudi Arabia

• It has 57 members
• Present Chairman is……………………………………………………………………...

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The United Nations

• The name was coined by the US President Franklin D. Roosvelt during the declaration
of United Nations on 1st January 1942.
• The forerunner of UN was League of Nations
• It has total 193 members (South Sudan was last to join in 2011) and 2 observers
(Holy See and the State of Palestine) today
• Headquarters is New York in the US
• UN has declared October 2 (Birthday of Mahatma Gandhi) as International day of
Non-Violence
• Present Secretary General is …………………………………………………………….
• It has six official languages: Arabic, Chinese, English, French, Russian and Spanish

Organizations of the UN

The General Assembly of the UN

• All members are represented in the General Assembly

• It is called town meeting of the world
• It approves UN Budget
• It meets every year

The Security Council

• It has primary responsibility to maintain international peace and security

• It has total fifteen members and five of them are permanent members
• China, France, Russia, the UK and the US are the permanent members
• Permanent members have a special voting power called Veto

The Economic and Social Council

• It coordinates the work of 14 UN Specialized organizations

• It has 54-member governments which are elected for 3-year terms by the General
Assembly

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• Present President of Economic and Social Council is………………………………….

The international Court of Justice

• Any member country can bring a case in the court

• It is composed of 15 judges selected for a term of 9 years by the General Assembly
and Security Council sitting separately
• One nation will not get more than one Judge.
• Dalveer Bhandari is the Indian member now
• Present President is……………………………………………………………………
• Headquarters is in Hague, Netherlands

The UN Peacekeeping

• UN Peacekeepers are generally known as Blue Berets because of their light blue berets
or helmets
• Present head of Peacekeeping is………………………………………………………..

The United Nations Development Programme

• Present head is …………………………………………………………………………...

• New York City is the headquarters
• It is for administering technical assistance for less developed states
• Came into existence in 1965
• It prepares Human Development Index ranking every year
• India’s rank in 2016 is 131

UNICEF (The United Nations Children’s Fund)

• Its headquarters is in New York

• It aids children in more than 150 countries
• Present President of UNICEF is…………………………………………………………

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The Food and Agriculture Organization (FAO)

• Headquarters in Rome, Italy

• Director General of FAO at present is……………………………………………….
• He is a Brazilian American agronomist

UN Women

• It was established in 2010. It is the last established organ of UN

• Headquarters is in New York
• Present head is…………………………………………………………………………
United nations Environment Programme UNEP
• It works for the protection of environment
• Headquarters is in Nairobi, Kenya.
• Present head is …………………………………………………………………………
International Labour Organization (ILO)

• It stands for social justice and internationally recognized human and labour rights
• It was founded in 1919 and is the only surviving creation of treaty of Versailles (it
created league of nations)
• Headquarter is at Geneva in Switzerland
• India is a founding member of ILO
• Present chief is…………………………………………………………………………

The United Nations Educational, Scientific and Cultural Organization

• The headquarters is in Paris, France

• It manages the World Heritage List
• Present Director General is……………………………………………………………..

World Health Organization

• It is the specialized agency of UN for health-related activities

• Headquarters is at Geneva, Switzerland

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• Present Director General is……………………………………………………………….

International Atomic Energy Agency

• It is also known as Atoms for Peace Agency

• Headquarters is in Vienna, Austria
• It manages Non-Proliferation Treaty
• It has frozen the number of declared nuclear weapon states at five; USA, Russia, UK,
France and China.
• The present head is…………………………………………………………………….

Some Other Organizations

Non-Aligned Movement

• The term was coined by Jawahar Lal Nehru

• Jawaharlal Nehru, Sukarno (first President of Indonesia), Tito (President of
Yugoslavia) and Gamal Abdel Nasser (President of Egypt) are considered as founding
fathers of NAM
• It has 120 members and 17 observers
• It does not have a permanent secretariat
• Meets every 3 years and the chair is passed to the host country at the time of meeting
• 18th NAM Summit will be held in Azerbaijan in 2019.
• Present Chair is………………………………………………………………….

Mekong- Ganga Cooperation (MGC)

• It was established in 2000 by six countries

• India, Myanmar, Thailand, Laos, Cambodia and Vietnam
• First steps are tourism, culture and the development of human resources

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The Nuclear Suppliers Group (NSG)

• It has 48 members
• It was established in 1975
• If aims to prevent misuse of nuclear export for peaceful and commercial purposes

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