PANACEA Bharti Institute – 9888405906

2012

CONTENTS

· Indian Banking
· Bank Sector Reform
· Public Finance
· Money
· International Organisation
· Important Committees
· Indian Economy
· Liberalization of Indian Economy
· National Income Estimation
· Unemployment & Poverty in
India
· General Financial Terms
· Budget Concept & Terms

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Indian Banking CSO (Central Statistical Organization). Publishes
ORGANISATIONS ESTABLISHMENT NI with 1993 – 94 as base year.
DATE · Product or value added method for
RBI 1935 primary and manufacturing sectors.
Imperial Bank of 1921
India Now SBI · Income method is used in tertiary or
IFCI 1948 service sectors (as compensation (wages and
ICICI 1955 salary) + interest + rent + profits + dividends )
Nationalism of RBI 1.1.1949
SFC 1951
Gross Domestic Product
SBI 1955
LIC 1956 · GDP is a measure of the total flow of
UTI 1964 goods and services produced by the economy
IDBI 1964 over a specified time period, normally a year.
GIC 1972
· Outputs of goods and services are valued
HDFC 1977
NABARD 2982 at market prices and their values aggregated
EXIM 1982 to obtain the GDP.
IRBI 1985 · The values of all intermediate goods is
NHB 1988 excluded (goods used to produced another
SEBI 1988
goods).
SIDBI 1990
IDFC 1997 · Gross means no deduction is made for
wear and tear of the land, building and
machinery used in production.
National Income Estimation
· The income arising from abroad is not
included.
Before Independence
· When deduction is made for the wear and
§ 1st estimate of NI was prepared by
fear of capital (called depreciation or capital
Dadabhai Naoroji for the year 1867 – 68.
consumption) from the G.D.P., it is called
§ 1st scientific estimate of NI (1931-32) by
N.D.P.
Prof. VKRV Rao.
· When we add to the GDP the net earning
Others
from abroad it is called GNP.
§ Findlay Shirras (1911) – Rs. 49 per cap
per yr.
§ Wadia and Joshi (1913-14) – Rs 44.30
GDP at market prices
- indirect taxes
After Independence
+ subsidies
· Natioanl Income Committee in 1949
_________________
chaired by P.C. Mahalandobis.
= GDP at factor cost
· As per the report of the committee the NI
+ net income from abroad
estimations was entrusted to CSO from 1967,
_______________________
a revised methodology was followed taking
= GNP
the base year 1961, the 1971, 1981, 1993- 94.
- depreciation (capital consumption)
Methods of NI
______________________________________
· Product method (used in India)
= NNP at factor cost or NI
· Income method (used in India)
· Expenditure or consumption method. Per Capita Income = NI / Population
Uses (NI)
 PANACEA Bharti Institute – 9888405906
· provides governments with sincere idea at DPI = PI – Direct Taxes
the success of policies.
· Indicator of overall standard of living.
· Standard of comparison of economy
performance over a period.
· Provide a comparison of economy Nature of Unemployment
progress with other countries. & Poverty in India
Unemployment means a situation when able
Variables (NI)
and willing people are not getting jobs as per
· Natural resources their own capabilities.
· Human resources
· Organization of factors of production.
· Population size. Nature/ Types of Unemployment
· Extend of foreign trade. 1. Structural Unemployment : When a
· Political System. large number of persons are unemployed or
· Technological Knowledge. underemployed because the demand for
· Infrastructure - external factors labour falls short to the supply of labour due
to rapidly growing population and their
immobility.
National Income 2. Frictional Unemployment: This types of
unemployment is caused on account of the
DP is the total money value of all final goods immobility of labour, seasonal nature of work,
and services produced within the geographical temporary shortage of raw materials,
boundaries of the country during a given breakdown of machinery, ignorance about job
period of time. opportunities.
3. Cyclical Unemployment : It is caused due to
recession phase of trade cycle. i.e. due to
NNP Net Natural Product nationwide or general business decline.
4. Seasonal Unemployment: It is caused due to
NNP = GNP – Depreciation (Capital Stock
seasonal variation in activities brought about
Consumption) by climate conditions, changes in fashion etc.
5. Technology Unemployment: It is the result
NNP can be calculated in two ways –
of changes in the techniques of production.
(i) at market price. (ii) at factor cost. The substitution of labour by capital causes
When NNP is obtained at factor cost, it is known this.
as NI
NI = NNPmp – Indirect tax + subsidy
Forms of Unemployment
Personal Income
PI = NI – undistributed profits of corporation – 1. Open Unemployment: When the labourers
payments for social securities provisions – live without any work and they don’t find any
corporate taxes + govt transfer payments + work to do. Educated unemployment and
business transfer payments + net interest paid by unskilled labour unemployment are included
govt. in open unemployment. The immigration
from rural to urban areas in search of work
often found in India.
Disposable Personal Income
 PANACEA Bharti Institute – 9888405906
2. Under Employment : It is a solution in · 1. Houselisting or Housing Censes
which a person does not get the type of work (April-Sept.2010)
he is capable of doing; he may possess · 2. Population Enumeration (9 - 28 Feb.2011)
abilities and expertise to do a type of work · Reference Date is 1st March 2011
that could field a larger income, but he may · Administrative Units : States /UTs 35,
be derived this opportunity due to lack of Districts 640, Villages 6.41 lakhs
suitable jobs. · Cost : Rs. 2200 crores, Rs.18.19 per person
3. Disguised Unemployment : If a person does
not contribute anything in the production Important Facts
process or in other words, if he can be · Total Population of the Country (Census
removed from the work without adversely 2011) – 121.02 crore
affecting the productivity adversely. The · Male-62,37,24,248
marginal productivity of such labour is zero. · Female- 58,64,69,174
· Decadal Population Growth- 17.64%
· Percentage of world Population (2011) –
Reasons for unemployment 17.5%
· Sex Ratio (2011) (Female per thousand male)
1. Underdeveloped nature of economy. – 940
2. Inadequate employment planning. · Child Sex Ratio (2011)(Female
3. Rapid growth of population. child/1000male children)- 913
· State with highest Female-Male Ratio (2011)-
Poverty Kerala (1084)
· Labour Force (2011) – 40.22 crore
Poverty is a social phenomenon in which a
· Density of Population (2011) – 382 per sq.
section of society is unable to fulfill even its basic
km.
necessities of life.
· Birth Rate (2009) – 22.5 per thousand
population
Types of Poverty · Death Rate (2009) – 7.3 per thousand
population
The poverty has two aspects (1) Absolute poverty
· TFR per woman (2008)- 2.6 per thousand live
(2) Relative Poverty
births
1. Absolute Poverty: When the level of the · Maternal Mortality Rate – 254
income of people of a country is too low that · (per 100000 live births) (2004-06)
they cannot meet even their basic minimum · Infant Mortality Rate (2009) – 50 per
requirement, it is called the absolute type of thousand live births
poverty. · Male – 49
2. Relative Poverty : If we compare incomes of · Female – 52
different people we find that some people are · Child (0-4) Mortality Rate 2008 (per 1000
poorer than others; this is called relative type Children)- 15.2 years
of poverty. · Life Expectancy (at the time of birth) – 63.5
years
Census of India · Male (2002-06) – 62.6 years
· Female (2002-06) – 64.2 years
· Census 2011 is the 15th Census of India since · Literacy Rate (2011) – 74.4 per cent
1872. · Male – 82.14 pre cent
· Census is conducted under the Ministry of · Female – 65.46 per cent
Home Affairs, GOI. · State with Highest Literacy (2011) – Kerala
· Registrar General of India & Census (93.91%)
Commissioner is C. Chandramauli · State with Lowest Literacy (2011) – Bihar
· Census 2011 was held in two phases: (63.82%)
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· Religion wise Population (2001) action is termed as arbitrage. Purchases are made
· Hindu Population (%) – 80.5% in the market where price is low and at the same
· Muslim Population (%) – 13.4% time, goods are sold in other market where the
· Christian Population (%) – 2.3% price are high. Thus the middleman earns profit
· Sikh Population (%) – 1.8% due to price difference in two markets.
· Religion with Highest population growth
(1991-2001) – Muslim (29.3%) Arbitration
Where there is an industrial dispute, the
· Religion with Lowest population growth
Arbitration comes to the force. The judgment is
(1991-2001) – Sikh (16.9%)
given by the Arbitrator. Both the parties have to
· Religion with Highest literacy (2001) – Jain
accept and honour the Arbitration. Arbitration is
(94.1%)
the settlement of labour disputes that takes place
· Religion with Lowest Literacy (2001) – between employer and the employees.
Muslim (59.1%)
· Religion with Highest Female Literacy (2001) Balanced Budget
– Jain (90.6%) When the total revenue of the government exactly
· Religion with Lowest Female Literacy (2001) equals the total expenditure incurred by the
– Muslim (50.1%) government , the budget becomes a balanced
budget. But it is a conservative view point. In
· Punjab Census 2011 present days, the welfare government has to
regulate a number of economic and social
activities which increase the expenditure burden
on the government and results in deficit budget.

Balance of Payment
Balance of payment of a country is a systematic
record of all economic transactions completed
between its residents and the residents remaining
world during a year. In other words, the balance
of payment shows the relationship between the
one country’s total payment to all other countries
and its total receipts from them. Balance of
payment is a comprehensive term which includes
both visible and invisible terms. Balance of
payment not only include visible export and
imports but also invisible trade like shipping,
banking, insurance, tourism, royalty, payments of
interest on foreign debts.
Economic Terms
Balance of Trade
Administered Price Balance of trade refers to the total value of a
The administrative body e.g. the government a country’s export commodities and total
marketing board or a trading group determines value of imports commodities. Thus
this price. The competitive market force are not balance of trade includes only visible trade
entitled to determine this price. The government i.e. movement of goods (exports and
fixes a price in accordance with demand supply imports of goods). Balance of trade is a part
portion in the market. of balance of payment settlement.
Arbitrage Balance sheet
When a person performs functions of middle man Balance sheet is a statement showing the assets
and buys and sells goods at a particular time to and liabilities of a business at a certain date.
cash the price differences of two markets, this
 PANACEA Bharti Institute – 9888405906
Balance sheet helps in estimating the real
financial situation of a firm. Finance Bill
The Government proposals for the levy of new
Union Budget taxes, alternations in the present tax structure, or
Under article 112 of the constitution, a statement continuance of the current tax structure are placed
of estimated receipts and expenditures, called the before the Parliament in this bill. The bill
‘Annual Financial Statement’, has to be placed contains amendments proposed to direct and
before Parliament for each financial year. indirect taxes.

Direct and Indirect Taxes

Capital Budget Direct taxes are levied on the income of
The capital budget consists of capital receipts and individuals and corporates. For example, income
payments. Capital receipts are Government loans tax, corporate tax etc. Indirect taxes are paid by
raised from the public, Government borrowings consumer when they buy goods and services.
from the Reserve Bank and treasury bills, These include excise duty, custom duty etc.
divestment of equity holding in public sector
enterprises, loans received from foreign Capital receipt
Governments and bodies, securities against small Loans raised by the Centre from the market.
savings, State provident funds, and special Government borrowings from the Reserve Bank
deposits. and other parties, sale of Treasury Bills, and loans
Capital payments refer to capital received from foreign governments form a part of
expenditures on construction of capital projects capital receipt.
and acquisition assets like land, buildings Other items that also fall under this
machinery and equipment. category include recovery of loans granted by the
Centre to State Governments and proceeds from
Revenue Budget disinvestments of Governments stake in public
The revenue budget consists of revenue receipts sector undertakings.
of the Government and its expenditure. Revenue
receipts are divided in to tax and non-tax revenue. Contingency Fund
Tax revenues constitute taxes like income tax, This is a fund used for meeting emergencies
corporate tax , excise, customs, service and other where the Government cannot wait for an
duties that the Government levies. authorization of the Parliament. The Government
The non-tax revenue sources include interest of subsequently obtains Parliamentary approval for
loans, dividend on investments etc. the expenditure. The amount spent from the
Revenue expenditure is the expenditure incurred contingency fund is returned to the fund later.
on the day-to-day running of the Government and
its various departments, and for services that it Monetary policy
provides. This comprises action taken by the central bank to
It also includes interest on its borrowings, regulate the level of money or liquidity in the
subsidies and grants given to State Governments economy, or change the interest rates.
and other parties.
Bank Rate
Fiscal Deficit Bank Rate is the rate of discount at which the
This is the gap between the Government’s total central bank of the country discount first class
spending and the sum of its revenue receipts and bills. It is the rate of interest at which the RBI
non-debt capital receipts. lends money to the lower banking institutions.
Bank rate is a direct quantitative method of credit
Primary deficit control in the economy.
The primary deficit is the fiscal deficit minus
interest payments. It tells how much of the Black Money
Government’s borrowings are going towards It is unaccounted money which is concealed from
meeting expenses other than interest payments. tax authorities. All illegal economic activities are
 PANACEA Bharti Institute – 9888405906
dealt with this black money. Hawala market has unemployment. Every trade cycle have five
deep roots with this black money. Black money different sub-phases depression, recovery, full
creates parallel economy. It puts an adverse employment, prosperity (boom) and recession.
pressure on equitable distribution of wealth and
income in the economy. Call Money
Call money is in the form of loans and advances
Blue Chip which are payable on demand or within the
It is concerned with such equity shares whose number of days specified for the purpose.
purchase is extremely safe. It is a safe investment.
It does not involve any risk. Capital Budgeting
Capital budgeting represents the process of
Bridge Loan preparing budget for a period of a year or even for
A loan made by a bank for a short period to make several years allocating capital outlays for the
up for a temporary shortage of cash. On the part various investment projects. In other words, it is
of borrower, mostly the companies for example, a the process of budgeting capital expenditure by
business organization wants to install a new means of an annual or longer period capital
company with new equipments etc. while his budget.
present installed company/equipments etc. are not
yet disposed off. Bridge loan covers this period Capital labour Ratio
between the buying the new and disposing of the Latest models of machinery and equipment raise
old one. the labour efficiency and the output is maximized.
Capital labour ratio is the amount of capital
Budget against the given labours that a firm employs.
It is a document containing a preliminary Capital labour ratio is the ratio of capital to
approved plan of public revenue and public labour.
expenditure. It is a statement of the estimated
receipt and expenses during a fixed period, it is a Capital Market
comparative table giving the accounts of the Capital market is the market which gives medium
receipts to the realized and of the expenses to be term and long term loans. It is different from
incurred. money market such deals only in short terms
loans.
Budget Deficit
Budget may take a shape of deficit when the
public revenue falls short to public expenditure.
Budget deficit is the difference between the Census
estimated public expenditure and public revenue. Census gives us estimates of population. Census
The government meets this deficit by way of is of great economic importance for the country.
printing new currency or by borrowing. It tells us the rate at which the total population is
increasing among different age groups. In India
Bull census is done after 10 years. The latest census in
Bull is that type of speculator who gains with the India has been done in 2001.
rise in prices of shares and stocks. He buys share
or commodities in anticipation of rising prices Clearing Bank
and sells them later at a profit. Clearing bank is one, which settles the debits and
credits of the commercial banks. Even of the cash
Business Cycle balances are lesser, clearing bank facilitates
Business cycle (also known as trade cycle) are banking operation of the commercial bank.
species of fluctuations in the economic activity of
organized communities. It is composed of period Clearing House
of good trade characterized by rising prices and Clearing house is an institutions which helps to
low unemployment, alternating with period of settle the mutual indebtedness that occurs among
bad trade characterized by falling prices and high the members of its organization.
 PANACEA Bharti Institute – 9888405906

Closed Economy Deficit Financing

Closed economy refers to the economy having no It is a practice resorted to by modern government
foreign trade (i.e. export and import. Such of spending more money that it receives in
economies depend exclusively on their own revenue. It is a policy of bridging a deficit
internal domestic resources and have no between governments expenditure and revenue.
dependence on outside world. Deliberately budgeting for a deficit is called
deficit financing. This practice was popularized
Collusion by Prof. J.M. Keynes to deal with the depression
Producers of an industry reduce competition and unemployment situation and to stimulate
among themselves to raise their profits. They fix economic activity. Deficit financing, though
the price themselves with a clear understanding in having inflationary effects, has now become a
this regard. This understanding among different common practice in all countries.
firms is called collusion.

Credit Rationing Devaluation

Credit rationing takes place when the banks The loss of value of currency of a country relative
discriminates between the borrowers. Credit to other foreign currency is known as devaluation.
rationing empowers the bank to lend to some and Devaluation is a process in which the government
to refuse to lend to others. In this way credit deliberately cheapens the exchange value of its
rationing restricts lending on the part of bank. own currency in terms of other currency by
giving it a lower exchange value. Devaluation is
Credit Squeeze used for improving, the balance of payment
Monetary authorities restrict credit as and when situation in the country.
required. This credit restriction is called credit
squeeze. Monetary authorities adopt the policy of
credit squeeze to control inflationary pressure in Direct Tax
the economy. A tax is said to be a direct tax when it is not
intended to be shifted to anybody else. The
Dear Money person who pays it in the first instance is also
Dear money is that money which can only be excepted to bear it. Thus the impact and incidence
borrowed at a high rate of interest. In dear money of direct tax fall on the same person shifting of
policy, bank rate and other rates of interest are direct tax is not possible Income Tax is an
high and as a result borrowing becomes example of direct tax.
expensive. Dear money policy is deliberate policy
which is adopted by the monetary authorities to Dissaving
check inflation in the economy. Dissaving occurs when expenditure exceeds
income. Raising of loans or utilization of past
Decentralization accumulated savings takes place in such
Decentralization means the establishment of eventuality.
various unit of the same industry at different
places. Large scale organization or industry can Dividend
not be run at one particular place or territory. In Dividend is the amount which the company
order to increase the efficiency of the industry, distributes to shareholders when the profits of the
various units at different places are located. company are calculated by the board of directors.

Debt Service (Total) Estate Duty

The sum of principal repayments and interest It is a tax, which is levied on the estate of a
actually paid in foreign currency, goods and decreased person. It is also known as death duty.
services on long term debt (having maturity of The ownership of state changes hands only after
more than one year), interest paid on short term the payments of the estate duty. It is an
debt and repayment to IMF. progressive tax in nature.
 PANACEA Bharti Institute – 9888405906

Excise Duty
It is a tax which is imposed on certain indigenous Gross Domestic Product (GDP)
production (e.g. petroleum products, cigarettes It is the money value of all final goods and
etc.) of the country. Excise duty may be imposed services produced within the geographical
either to raise revenue or to check the boundaries of the country during a given period
consumption of the commodities on which they of time (usually a year). GDP can be calculated
are imposed. Excise duty is progressive in nature. both at current prices and at constant prices. If we
add net factor income from abroad to the GDP,
Fiduciary Issue we get ‘Gross National Product’ (GNP).
Generally bank-note are backed by gold. But
when they are not backed by gold and HDI
government securities replace gold, it is called HDI (Human Development Index) is a composite
fiduciary issue. Such fiduciary issue results in index measuring average achievement in three
inflation. basic dimensions of human life – a long and
healthy life, knowledge and a decent standard of
Fiscal Policy living.
Fiscal policy is that part of government policy
which deals with taxation, expenditure, Laissez Faire
borrowing and the management of public debt in It is a French world meaning ‘non-interference’.
the economy. Fiscal policy primarily concerns This doctrine was popularized by classical
itself with the flow of funds in the economy. economists who gave the view that government
Fiscal policy primarily concerns itself with the should interfere as little as possible in the
flow of funds in the economy. It exerts a very economic activities of the individuals.
powerful influence of the working of economy as
a whole. Liquidation
It refers to the termination (or winding up) of a
GEM registered company. Liquidation takes place
GEM (Gender Empowerment Measure) is a because of company’s insolvency. In liquidation
composite index measuring gender inequality in assets are turned into cash for settling outstanding
three basic dimensions of empowerment debts and for apportioning the balance, if any,
economic participation and decision making, amongst the owners.
political participation and decision making, and Liquidity
power over economic resources. Assets, which can easily be converted into cash
money, are said to have liquidity. Land does not
GDI possess liquidity at it takes longer time to get
GDI (Gender Related Development Index) is a converted into cash.
composite index measuring average achievement
in the three basic dimensions captured in the Liquidity Ratio
human development index – a long and healthy The commercial banks under banking regulation
life, knowledge and a decent standard of living – have to maintain a certain specified proportion of
adjusted to account for inequalities between men their total deposits of various categories in liquid
and women. assets. This maintainable proportion is called
liquidity ratio.

Giffen Goods Lock out

Giffen goods have the positive relationship Lock out refers to such a situation when the
between price and quantity demanded and as a management does not permit the workers to work
result demand curve of Giffen goods slopes unless they agree to accept the employer’s term.
upward from left to right. This phenomenon was Lock out is the closing of work by the
first observed by Sir Robert Giffen the relation to management for an uncertain period of time to
the demand for bread by poor labours.
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put pressure on the labour union. It is an action by incidence falls more on people having lower
the employer equivalent to a strike by employees. incomes than that of those having higher incomes.

Monetary reforms Reserve Asset Ratio

When a new currency is introduced in a country It is the ratio of a bank’s reserve asset to its
due to hyperinflation or due to a deliberate policy eligible liabilities.
measure (such as decimalization) it is termed as
monetary reform. Revolving Credit
It is a bank credit that is renewed automatically
Monopoly until notice of cancellation is received. Revolving
Monopoly refers to that market structure where credits may be sanctioned for an unlimited
there is only one seller in the market who control amount in total but with a limit on the amount
the entire market supply no substitute of the that may be drawn at any one time or within a
product is available in the market. specified period, e.g. one month.

Multinational Company Share Capital

It is a large scale company which has its It is the amount of money raised by a company by
production base in several countries and the bulk issuing shares. The authorized share capital is the
of the production is produced in produced in amount that a company is allowed to issue as laid
outside nations. This company produces more down in its Articles of Association. The issued
overseas than they do in its parent country. share capital is the amount actually issued i.e. the
Increased trade and economies of scale have number of issued shared multiplied by their par
encouraged such type of companies in the recent value. Fully paid share capital is the amount
years. raised by payment of the full par value of the
issued shares.
Oligopoly
Oligopoly is that form of imperfect competition Socialism
in which there are only a few firms in the industry The political doctrine that the means of
(or group) producing either homogenous products production (machines, materials and output)
or may be having product differentiation in a should be owned by society and specifically
given line of production. either by the state, as in the case of nationalized
industries or by the workers directly, as in the
Poverty Line case of producer cooperatives.
Poverty line is a virtual line demarcating persons
living below and above it. In India all those Special Drawing Rights (SDRs)
persons are treated living below poverty line who It is a reserve asset (known as ‘Paper Gold’)
are not able to earn that much of income which is created within the framework of the International
sufficient to acquire food equivalent to 2100 Monetary Fund in an attempt to increase
calories per person per day in urban areas and international liquidity, and now forming a part of
2400 calories per person per day in rural areas. countries official reserves along with gold,
reserve positions in the IMF and convertible
As per UNDP, one US dollar (1993 PPP US$) per foreign currencies.
persons per day is treated as poverty line.
Stagflation
Public Debt It is a state of the economy in which economic
Public debt represents borrowing by the state and activity is slowing down, but wages and prices
public authorities. All loans taken by the public continue to rise. The term is blend of the words
authorities constitute public debt. stagnation and inflation.

Regressive Tax Tariff

It is the tax in which rate of taxation falls with an It is a tax or a duty on imports, which can be
increase in income. In regressive taxation levied either on physical units, e.g. per tonne
 PANACEA Bharti Institute – 9888405906
(specific), or on value (ad-valorem). Tariffs may excessive degree of central direction (in terms of
be imposed for a variety of reasons including; to investment and credit allocation).
raise government revenue, to protect domestic
industry from subsidized or low wage imports, to Interest rates of banks and term lending
boost domestic employment, or to ease a deficit institutions were regulated, pricing of public
on the balance of payments. issues in the capital market was controlled and
insurance business was under Government
Transfer payment monopoly. Reforms were necessary in each of the
It is a payment made by public authority other three sectors viz. banking, insurance and capital
than one made in exchange for goods or services market, to streamline the functioning of the
produced. Transfer payments are not the part of financial system and increase the efficiency of
National Income. Examples includes capital usage.
unemployment benefit and child benefits.
· I. Banking Sector
VAT (Value Added Tax) · II. Insurance Sector
VAT seeks to tax the value added at every stage · III. Capital Market
of manufacturing and sale, with a provision of
refunding the amount of VAT already paid at the I. BANKING SECTOR
earlier stages to avoid double taxation. In other
words, the tax already paid can be claimed at the  Backdrop
next stage of value addition.

Wealth Tax Directed investments in form of Statutory

Wealth tax is that tax which is imposed on the Liquidity Ratio (SLR)
value of total assets but the wealth upto a certain Directed credit programs
limit is exempted from such tax. Cash Reserve Ratio (CRR)
 Reform Measures
Reduction in Statutory Liquidity Ratio (SLR)
Reduction in CRR
FINANCIAL SECTOR REFORMS Priority Sector Lending
Freeing of Interest rates on Deposits and
The financial system has to play a crucial role in Advances
mobilization of funds and their allocation to most Capital Adequacy Norms
productive use to fulfill its role as an essential Access to Capital Markets
adjunct to economic growth. The financial Prudential Accounting norms
services industry needs to operate on the basis of Competition through permission to Private
operational flexibility and functional autonomy sector banks
with a view to enhance efficiency and Backdrop
profitability. Despite impressive quantitative A critical ingredient in development of the
achievements, several distortions have crept into economy of a country is the building up of a
India's financial sector especially in respect of financial infrastructure, geographically wide and
allocation of resources. Productivity and functionally diverse to help in the process of
efficiency have suffered, profitability eroded and resource mobilisation. India has 277 commercial
portfolio quality has deteriorated. Work banks with over 61000 branches (one branch per
technology is outdated and transaction costs are 12000 people) spread across the country to
high. Several banks and financial institutions achieve a balanced spatial distribution of credit.
have become financially weak and are unable to Banks' deposits account for 35% of GDP and
meet challenges of a competitive environment. advances for 31% indicating the extent to which
Most important factor contributing to this state of banking system is intertwined with the growth of
affairs are the policy induced rigidities such as the economy. Today there are over 300 million
deposit accounts with banks, and public sector
banks account for 87% of deposits and loans.
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Other than banks which essentially meet working
capital need of industry, there are specialised Reform Measures
developments financial institutions (DFIs) to The Government realised that the banking sector
meet medium term and long term finance needs would have to play a key role in the economic
for industry. The network of DFI's, include 3 all reforms process by adapting to the liberalised
India development banks (IDBI, ICICI, IFCI), 18 environment. Therefore the Narsimham
State Finance Corporations and 26 state Industrial Committee was formed to recommend reforms in
Finance Corporations. the banking sector, with the objective of granting
Over the years, the banking sector had to operate autonomy & operational flexibility to the banking
under several constrains due to social banking and financial services industry & improving the
objectives as well as controlled regime on both sector's efficiency and profitability.
income and expenditure side. Some of the
controls on the banking sector were in the form of The significant reform measures recommended
: by the committee were :
(a) Directed investments in form of Statutory
Liquidity Ratio (SLR) - whereby a bank is i) Reduction in Statutory Liquidity Ratio
required to invest a certain specified percentage (SLR): The funds of banks were invested in SLR
(38.5% in 1991) of Net Demand and Time Government approved securities which earned
Liabilities (NDTL) in government and other lower rate of interest as compared to other
specified securities. investments. This also put pressure on
profitability as increase in interest rates
(b) Directed credit programs - in the form of depreciated these investments. SLR funds were
Priority Sector Lending whereby a bank is used by the Government to finance budgetary
required to lend almost 40% of advances to deficits.
specified sectors, including agriculture, at (c)
Cash Reserve Ratio (CRR)- Banks are required The committee recommended that since SLR was
to keep a minimum CRR, whereby a certain originally introduced as a prudential requirement
percentage (15% in 1991) specified rates.of for banks and not as a mode of financing public
NDTL is to be maintained as cash with Reserve deficits, it should be reduce to the ratio of 25% as
Bank of India (RBI). against ratio of 38.5% existent in FY91. On these
lines effective SLR has been reduced to about
As a result, CRR and SLR together accounted for 28.2% till FY96.
preemption of well over half of total resources
mobilized by the banking system. This led to SLR requirement of 10% of deposit was extended
banks resorting to high interest lending to to Non Banking Finance Companies as a
commercial sector (cross subsidization) making prudential norm in 1993.
India a high cost and thereby a noncompetitive
economy. ii) Reduction in CRR :CRR funds virtually earn
no interest. Thus every reduction in CRR would
In the 90s, with the Governmental objective of improve the profitability of Banks as more
reduction of controls, liberalisation of the lendable funds would be available to them. The
economy, growth through private participation committee has recommended reduction of CRR
and globalisation of economy it became from the level of 15%. It also recommended that
imperative to bring about reforms in the financial RBI's open market operations and not CRR
sector in order to provide infrastructure for should be used as a tool to control money supply.
growth. Thus reforms were aimed at removing the But this has not been implemented as the debt
bottlenecks and controls in the financial system market in India is not adequately developed as
(such as reduction in preemption of funds), yet. However, CRR has been progressively
development of money markets, promotion of reduced to 13% of domestic deposits and CRR
competition through private participation, requirement on various NRI and foreign currency
cleansing the non performing asset portfolio in deposits was eliminated.
order to generate a healthy financial system.
 PANACEA Bharti Institute – 9888405906
iii) Priority Sector Lending:Banks are required vii) Prudential Accounting norms: Prudential
to direct 40% (32% for Foreign Banks) of their norms for income recognition, asset classification
advances towards priority sector lending. and provisioning for bad debts were introduced in
Narsimham committee has recommended order to cleanse the bank balance sheets. The
reduction of priority sector lending to 10% and norms provided for uniform accounting practices
also suggested concessional refinance facility for banks and financial institutions.
from RBI for such advances. However, as this
issue can be very politically sensitive, this viii) Competition through permission to
recommendation has not been implemented so Private sector banks: In order to encourage
far. competition and promote efficiency, Narsimham
Committee recommended entry of private sector
iv) Freeing of Interest rates on Deposits and banks. Nine private sector banks have been set up
Advances: The committee has recommended a since then and two more approvals have been
gradual and cautious approach to deregulation of given for establishment of banks.
interest rates offered by banks.
II. INSURANCE SECTOR
This was also to promote competition among the
banks. Interest rates on advances above Rs 0.2 Backdrop :While most of the areas previously
mn. were decontrolled in FY95, whereas interest reserved for public sector have been thrown open
rates on domestic deposits over 2 years duration to strengthen the forces of competition, life and
and on NRNR and NRE accounts were general insurance remains state monopolies
deregulated in FY96. This measure will promote where a consumer does not have benefit from
competition in the financial sector and interest competition in terms of wider choice, better
rates would be governed by the market forces. It insurance products, lower price of insurance
will also attract foreign funds into the country. cover and better service. While government is
reducing its holding in most public sector
v) Capital Adequacy Norms:The Narsimham companies including some of the profitable
committee has recommended that all banks, banks, insurance companies are yet to become
financial institutions and non banking finance operationally autonomous. While regulation over
companies operating in India have to attain 8% capital market and banking sector has been
Capital Adequacy Ratio by end of FY96, in line considerably strengthened yet simplified,
with international banking norms. This regulation of insurance industry has atrophied.
recommendation has been implemented in full There is high preemption of insurance funds
and most of the major banks and FIs have already through government mandated investments.
achieved 8% capital adequacy. This affects the financial health of insurance
companies and has implications on rates of
vi) Access to Capital Markets:Non Banking insurance premium and return on savings invested
Finance Companies could raise funds through the in life insurance. Preemption of commercial
Capital market but it was not extended to banks. banks' funds is already being reduced, insurance
Once the Capital Adequacy stipulation was sector should follow.
specified it became imperative to allow banks and
financial institutions to raise money from the Reform Measures
public. State Bank Of India went public in
December, 1993 followed by Oriental Bank Of In line with above background, R. N. Malhotra
Commerce in October, 1994. Industrial Finance committee was appointed by the Government of
Corporation of India (IFCI) was converted into a India for creating an efficient and viable
company and Industrial Development Bank of insurance industry.
India (IDBI) Act was amended in order to allow
these institutions to raise money through public Some of the principal recommendations of the
issue. committee :
 PANACEA Bharti Institute – 9888405906
· Private sector should be allowed to enter corporates which are the final instruments of
insurance business. Foreign insurance investment. The success of regulator is seen in
companies should be permitted to enter the terms of the extent to which they can build
insurance business in India preferably through investor confidence in the integrity and
Joint Venture with an Indian partner. These fairness of transactions in capital market and
two measures are expected to increase the the extent to which they are able to develop
competition in the sector. the markets in the direction of better
transparency, greater competition and hence
· As there is little or no regulation over greater efficiency.
insurance companies as on date, a strong and
effective Insurance regulatory authority An agenda for development and reform of capital
should be set up and all the insurance market has to aim at efficiency in the cost of
companies should be governed by a uniform raising capital, reducing transaction costs,
Insurance Act. ensuring liquidity and maintaining fairness and
integrity of the capital market. The Indian
· It was recommended that all the existing scenario for raising money from the capital
insurance companies viz. Life Insurance market was rather foggy with controls imposed
Corporation (LIC), General Insurance under Controller of Capital Issues (CCI). The CCI
Corporation (GIC) and its subsidiaries should controlled the quantum and pricing of the issues.
be converted to widely held public limited The secondary market operations were shrouded
companies with the Government holding a under a cloak of mystery with hidden transaction
50% stake. costs, unknown jobbing margins, forward
transactions leading to rampant speculation and if
· Large part of funds (75% for Life this was not enough the system's unregulated
Insurance Corporation and 70% for General nature was brought forth in form of astonishing
Insurance Corporation) of Insurance 'Big Bull Scam' in 1992.
companies was pre-empted by the
Government thus putting a pressure on their For the intended economic growth to be achieved,
profitability. The committee suggested there was no alternative but to institute a spate of
changes to make larger funds available to the reforms to tap the tremendous potential of
insurance companies and in turn generate household savings through the capital market.
higher profits. A beginning was done in FY96
when the limit of pre-empted funds was The government was and is looking forward to
reduced from 70% to 45% for General raising substantial amount of money through PSU
Insurance Corporation and its subsidiaries. disinvestment. What was needed was an
independent body to regulate the market, to offer
III. CAPITAL MARKETS fair pricing for shares for companies to tap the
Reform Measures market and to provide better transparency to
Securities Exchange Board of India (SEBI) instill confidence in public to participate in the
Foreign Investment Allowed market. It was also necessary to make far
Euro Issues Allowed reaching changes in the market infrastructure and
The National Stock Exchange (NSE) and laws to allow foreign institutional investors to
Over The Counter Exchange of India bring in funds into the country in form of direct
(OTCEI) equity or investible portfolio funds.
Depositories ordinance
Private Sector allowed entry in Mutual Reform Measures
Funds
Free Pricing of primary issues allowed Some of the major reforms carried out in the
capital market were as follows :
· Backdrop : The role of capital market is
to provide intermediation between households i) Securities Exchange Board of India (SEBI) -
which are the main source of savings and SEBI was constituted as an administrative body
 PANACEA Bharti Institute – 9888405906
in April, 1988 for regulation of stock markets and set up Mutual Funds.
to protect the investors from malpractice as stock
markets experienced accelerated growth. vii) Free Pricing of primary issues allowed
However, it had remained nothing more than a -Companies intending to raise money through
paper tiger till 1992, when SEBI became a public or rights issue were given the freedom to
statutory body and the office of CCI was price their issues subject to certain guidelines.
abolished. Power to regulate stock exchanges was This measure was intended to let corporate raise
delegated to SEBI and it was also granted the money at a fair rate. However, companies went
authority to bring about Capital Market Reforms. overboard in pricing their issues and soon the
bubble burst with most of the premium issues
ii) Foreign Investment Allowed - In FY 93, in a being quoted at below their issue price.
major step towards opening up the economy, Notwithstanding this, the fact remains that this
Foreign Institutional Investors (FIIs) were measure is indeed a boon for good companies
allowed to invest in the capital markets with a wanting to raise funds from the market.
limit of 5% stake in a single company for an
individual FII. Similarly Non Resident Indians Economic Reforms
(NRIs) and Overseas Corporate Bodies (OCBs)
were individually allowed to invest up to 1% of A Crisis and a response to the crisis
equity capital of a particular company. A
The essence of economic reforms is the
collective limit was set at 24% for FIIs, NRIs and
dismantling of controls over the economy with
OCBs.
the state yielding to market forces. It was 1991
that a comprehensive economic reforms package
iii) Euro Issues Allowed - Indian companies
was drawn up and attempted to be implemented
were allowed to raise capital abroad through
in India. In w a way, the reforms became
American Depository Receipts /Global
inevitable in the face of the crisis that had
Depository Receipts/bond issues. This step,
engulfed the Indian economy by 1990-91.
besides increasing the funds availability to the
Indian corporate, put India firmly on the plans of The problems did not develop suddenly but
all the major financial intermediaries in the world. accumulated over several years and may be
attributed to the cavalier macro management
iv) The National Stock Exchange (NSE) and during the 1980s. The widening gap between the
The Over The Counter Exchange of India income and expenditure of the government led to
(OTCEI) were formed with nationwide stock mounting fiscal deficits, which had to be met by
trading and electronic display, clearing and borrowing at home. This steady increase in the
settlement facilities making trading more gap led to large current account deficits in the
transparent. Faced with competition, the Bombay balance of payments (BoP) which were financed
Stock Exchange also introduced a computerised by borrowing from abroad. Both internal
trading system. imbalance in fiscal situation and external
imbalance in BoP were caused by imprudence in
v) Depositories ordinance- In a major step the macro management of economy. The attempt
towards solving the registration and transfer to life beyond one’s means pushed to country into
problems faced by investors, an Ordinance was a deep economic crisis.
promulgated in September, 1995 to set up a The gulf war in 1990 sharply accentuated the
Depository System. This would reduce the paper problems. In addition, there was political
work and hindrances in trading on Indian bourses instability in that period. These developments led
thus in turn attract larger investments in India. to an erosion of international confidence in India.
The economy which had withstood much larger
vi) Private Sector allowed entry in Mutual and more sustained oil shocks earlier crumbled
Funds - In a move to ensure healthy competition during the Gulf crisis due to macro-economics
in the field of Mutual Funds, which was the situation that was already fragile for three reasons
monopoly of Unit Trust of India and a few public
sector banks and the private sector was allowed to
 PANACEA Bharti Institute – 9888405906
(i) fiscal crisis (ii) unmanageable BoP and (iii) through borrowing to support consumption
high rate of inflation expenditure did not fetch tangible returns.
The fiscal crisis in 1990 was not an accident or a Furthermore, external resources were used in part
coincidence. The fiscal situation had deteriorated as a substitute for domestic resources.
through out the 1980s due to the growing burden The government had two major goals
of non-development expenditure.
(a) restoration of stability in the economy by
The BoP crisis too was neither sudden nor cutting down the fiscal deficits and bringing
unexpected. The policies followed in 1970s and stability BoP, and (b) to make structural changes
1980s created incentive for import-intensive or adjustments in the economy; a process of
industrialization and production while export reform which had been going on for the last
performance was at best modest. Consequently, decade but at an insignificant pace whose impact
the current account deficit doubled from an would be direct and seen in the long term.
annual average of $ 2.3 billion or 1.3 % of GDP
during the early 1980s to an annual or 1.3% of The objectives of the structural reforms were to
GDP during the early 1980s to an annual average shift resources (a) from the non-traded goods
of $5.5 billion 2.2% of GDP during the late sector to the traded goods sectors (and within the
1980s. These persistent deficits were financed by traded goods sector, from import to export
borrowing from abroad leading to increase in activities); (b) from the government sector to
external debt. private sectors. It also sought to improve resource
utilization (a) by increasing the degree of
The vulnerability of the BoP was accentuated by openness of the economy and (b) by changing the
two other factors (i) difficulty in rolling over structure of incentives and institutions which
existing short-term debt in the range of $6 billion, would reduce the role of state intervention to rely
and (ii) massive net outflow of $1.3 billion of more on the market place, dismantle controls to
non-resident Indian deposits in 1991. rely more on prices and wind down the pubic
The price situation too came under severe sector To achieve these ends (a) trade and foreign
pressure. The rate of inflation in terms of investment policies (b) industrial deregulation
wholesale price index (WPI) climbed from 4.5% and public sector reforms and (c) financial
in 1985-86 to more than 10% in 1990-91. The reforms were enunciated. The main endevour was
consumer price index (CPI) rose by 11.2% per to raise the rate of growth of output in the
annum during this period. This was despite three medium term.
good monsoons in a row. This was attributable to The reform programme is aimed at improving
the large deficits which were inevitably efficiency in resource use and resource allocation,
associated with a monetisation of budget deficits and at creating a macro economic environment
and an excessive growth of money supply. The
which facilitates and is conducive to rapid growth
liquidity overhand in conjunction with structural
rigidities and underlying supply demand The key areas of policy reforms are
imbalances was bound to fuel inflation. v Deregulation and reliance on
market forces in the economy.
In a fundamental sense, the crisis was attributable v Privatization/commercialization
to the mounting imbalances as the fiscal regime of public sector enterprises.
shied away from domestic resource mobilization v Measures to stimulate domestic
direct taxes were progressively reduced while production and broaden the supply base of the
indirect taxes could not be raised any further economy.
because such a step could be inflationary and v Adoption of realistic exchange
compounded by a profligate increase in public rate policy.
expenditures in the form of explicit subsidies or v Trade and payment liberalization.
unbridled consumption expenditure driven by v Promotion of industrial
policies of populism and policies of soft options. diversification.
However, the root cause of the fiscal crisis was v Boosting exports and imports.
the revenue expenditure outpacing the revenue
receipts. The financing of the revenue deficit
 PANACEA Bharti Institute – 9888405906
v Reform of the banking and highways; and several concessions in the telecom
finance sector. sector.
Trade has been considerably liberalized with
Review of First Generation Reforms many export-promoting measures such as the
First , India’s economic growth is at preset one of abolition of duty drawback rates on export items,
the fastest in the world. From frustratingly slow rationalization of interest rates on export credit,
growth rates of 3.5 percent and 4 percent in the setting up of special agri-economic zones, and
first three decades since independence, the removal of quantitative restrictions.
country is today growing at an average of 6
percent per year. The GDP grew at an average of Capital account reforms include the permission
5.8 percent in the 1980s. It accelerated to around for FDI in practically all sectors, in many up to
6.5 percent in Eighth Plan Period (1992-93 to 100 percent. International financial institutions
1996-97) and this is expected to be maintained in have been allowed to invest in domestic
the Ninth Plan Period (1997-98 to 2001-2001). companies subject to SEBI/RBI guidelines.
Secondly, human resources is a very important A Clearing Corporation of India ltd. has been set
factor on which the future growth prospects of the up, badla has been banned, and rolling settlement
country depend. Though India has prided itself on introduced in stock market reforms. Trading in
the quality of its highly skilled workforce of index options and stock futures have been
scientists, manager, and more recently, software allowed.
professionals, the general level of education of These reforms have resulted in growth in
the majority of its population has been very low. improvement in many sectors of the economy.
Thirdly, the growth rate of population will However, critics feel they have had a negative
determine how much benefit of growth will be impact on the social sector. The reforms have not
available per person. Though India’s population improved the lot of the poor; they have resulted in
today has crossed the one billion mark, one a widening gap between the rich and poor;
positive development is that growth of population employment growth has not taken place; on the
which remained stubbornly above two percent for other hand, unemployment has increased. Health,
many years has now come down. education, women’s welfare-all have suffered due
to unbridled and thoughtless reforms, say the
Structural reforms since 2001 have included critics.
reduction of interest rates on small savings;
government disinvestments in select PSUs; Second Generation Reforms
reducing staff by offering voluntary retirement 1. Extending Reforms to the States The
schemes; reduction of items under the Essential reforms in the central government need to be
Commodities Act; Sugar decontrol; items of extended to the state, health, education,
manufacture deserved; removal of various agricultural extension and agriculture related
licensing requirements; and attempts to reform services, irrigation power distribution rural
labour laws. state and district roads, municipal services in
urban areas, which directly affect the life of
Fiscal measures have been directed towards the people. Some states have directly affect
downsizing government departments; the life of the people. Some states have
rationalizing excise duty structure; reducing recognized the need for reforms in particular
customs duties; offering concessions to EOUs and sectors such as power to have initiated some
other export zones; rationalizing tax rates; steps in this regard. This is a welcome
encouraging certain sectors with financial = development but more states should identify
incentives; and creating an incentive fund for the areas for reform and involve themselves in
encouraging fiscal reforms in states. the process. The poor financial health of the
In the infrastructure sector, reforms have covered states is a major hindrance; however this is
tax holidays for infrastructure projects; legislation not the only problem. The efficiency levels in
on electricity communications and energy government system have deteriorated in many
conservation; roadways projects –rural, urban and states. Administrative reforms designed to
improve performance and increase
 PANACEA Bharti Institute – 9888405906
accountability are essential if resources are to update our laws, scrap the obsolete ones and
be translated into effective development work. redraft the ones vulnerable to multiple
interpretations to improve clarity. The legal
2. Labour Legislation An area that has not been
procedures in India are enormously time
touched by reforms so far relates to the
consuming. The seem to be designed to help
reforms in the labour market. India’s labour
those seeking postponements. There are
laws deny firms the flexibility needed to
presently more than 2000 cases pending per
operate successfully in the highly competitive
judge. Therefore, there is a need for reforms
markets. PSUs do not have the freedom to
at two levels: administrative problems of how
retrench labour or close down a particular unit
courts work and redrafting of fossilized
in the company in response to changing
legislations. Reform of our legal system is
market conditions without government
vital for economic progress as well as social
permission. Labour laws also specify the
justice.
service rules which govern employment and
which cannot be changed easily. This makes it 4. IPR Regime India needs to establish a good
difficult even to re deploy workers to different intellectual property rights (IPR) regime to
workers activities when needed. The open up possibilities of huge rewards for
liberalized market oriented set-up of today innovation. We also need to create a database
require industry to be flexible enough to deal of our traditional wealth of knowledge to
with new and competitive situations to be able safeguard it from being pirated by other
to downsize when needed, restructure and re countries.
organize business through sale, acquisition 5. Education Human resource is that most
and mergers. crucial resource for forthcoming the economic
The provisions relating to contract labour also growth of a country. The new age of
need to be amended. Greater flexibility in this knowledge industries requires an educated
area would lead to profusion of smaller population. The country needs to expand both
businesses which provide services to existing the quantity and quality of educational
firms which are not willing to increase their services in the country. This requires not only
own labour force. This will not lead to universal and compulsory primary education
increased employment generation but even as a first step but also empowerment of
enterprise development. parents and local governments such as
pancayats for effective results Primary
Labour laws should be amended to bring them
education is critical and its importance cannot
in line with the practices in other countries.
be over-emphasized. But for running a
The existing laws only apply to the organized
technology driven economy we need to go
sector which constitutes only 8 percent of the
beyond primary education and build
labour force. Ninety-two percent of the labour
institutions for higher education. The recent
population derives no benefit from these laws.
experiences have shown that a few high
In fact labour laws discourage the growth of
quality engineers and manager have made a
high quality employment. Simultaneously, the
string impact in various industries and on the
laws also need to be amended to ensure a
economy as a whole. The splendid
particular level of labour protection and
achievements of our software engineers, both
welfare measure the effectiveness of measures
in India and in the Silicon Valley, have won
relating to social security, occupational health
appreciation all over the world. However the
and safety, minimum wages and linkage of
institution of higher education in the country
wages with productivity and the safeguards
today face enormous constraints in terms of
and facilities required for women and
finance and operational autonomy. The
handicapped persons in employment.
student intake is pitifully small when
3. Legal System In the present scenario when compared to the size of India’s economy.
India is fast integrating with the world There is a need to not only increase the
economy and there are large inflows of number of such institutions but also brings
foreign investment, there is an urgent need to them at part with international standards to
 PANACEA Bharti Institute – 9888405906
have a powerful impact upon our economic person or business to another. Using banks and
growth. the many services they offer saves an incredible
amount of time, and ensures that the funds of
6. Social Security Nets India needs to
micro as well as macroeconomic agents “pass
consolidate various anti-poverty measures
hands” in a legal and structured manner. There
into a coherent targeted safety net for the
are also other types of financial institutions that
poor. There is also the challenge of fulfilling
operate just like banks.
social obligations towards the huge middle
Ø FUNCTIONS OF A BANK
class which has been hit hard with inflation
Banking regulation act of India, 1949
and mass unemployment among the educated.
defines banking as “accepting, for the
The increase in life expectancy, the purpose of lending or investment of
breakdown of the joint family system and the deposits of money from the public,
desire for modern medical care have created repayable on demand or otherwise and
several problems for the aged. We need to set withdraw able by cheques, draft, and order
up a system for old age income security. The or otherwise”. Deriving from this
preset system of provident funds (PFs), even definition and viewed solely from the
for those few who have the facility, is grossly point of view of the customers, banks
inadequate largely because of early essentially perform the following
withdrawals and low rate of returns. A system functions:
based on empowering people through a · Accepting deposits from public/others
lifetime of saving is preferable to one that (deposits)
provides doles in old age. · Lending money to public (Loans)
To meet all these obligations, the government · Transferring money from one pace to
should withdraw from most areas of another (Remittances)
commercial activity and restrict itself to · Credit creation
overall governance and social · Acting as trustees
responsibilities . · Keeping valuables in safe custody
7. Environment Sustainability Economic · Investment decisions and analysis
growth along with environmental degradation · Government business
does not increase social welfare. We need to · Other types of lending and transactions.
institute effective policies to preserve and In addition to providing a safe custodian
regenerate environmental resources. A of money, banks also loan money to
combination of economic incentives, liability business and consumers. A large portion
laws and an awareness campaign can help of a bank’s business is lending.
clean up air and water. Polices need to be put The objective of commercial banks
in place to control industrial, vehicular and like any other organization is profit
household emissions. The use of dirty bio- maximization. This profit generally
fuels leads to half a million premature deaths originates from the interest differential
each year. There is also a need for developing borrowers and lenders. In the present day,
a large and efficient public transport system however, the banking operation has
and stipulating stricter emission standards for extended much beyond simple lending
private as well as new vehicles. exercise. So there are other different
channels of profit ensuring from other
The degraded land and forests can be investment programs as well.
regenerated through participatory However, it should be mentioned
programmes (for example by housing in this context that the entire deposit held
societies, schools, panchayats) by a bank cannot be given as loans as the
BANKING STRUCTURE IN INDIA Central Bank retains a portion of this
A bank is a financial institution where an money in the form of cash-reserve for
individual can deposit money. Banks provide a unforeseen circumstances.
system for easily transferring money from one Ø TYPES OF BANKS
 PANACEA Bharti Institute – 9888405906
· Central Bank loans to purchase land, to effect
A central bank, reserve bank, or permanent improvements on the land to
monetary authority is the entity buy equipment & to provide for irrigation
responsible for the monetary policy of a works.
country or of a group of member states. Its · Foreign Exchange Banks
primary responsibility is to maintain the Their main function is to make
stability of the national currency and international payments through the
money supply, but more active duties purchase and sale of exchange bills. As is
include controlling subsidized loan well known, the exporters of a country
interest rates, and acting as a lender of last prefer to receive the payment for their
resort to the banking sector during times exports in their own currency. Hence,
of financial crisis (private banks often there arises the problem of converting the
being integral to the national financial currency of one country into the currency
system). It may also have supervisy of another. The foreign exchange banks
powers, to ensure that banks and other try to sole this problem. These banks
financial institutions do not behave specialize in financing foreign trade.
recklessly or fraudulently. · Indigenous Banks
· Commercial Banks According to the Indian Enquiry
A commercial bank performs all kinds Committee, “ Indigenous banker is a
of banking functions such as accepting person or a firm which accepts deposits,
deposits, advancing loans, credit creation transacts business in hundies and
& agency functions. They generally advances loans etc.”
advance short term loans to their Ø BANKS IN INDIA
customers; in some cases they may give · Central Bank
medium term loans also The Reserve Bank of India is the central bank
· Industrial Banks that is fully owned by the government. It is
Ordinarily, the industrial bank perform governed by a central board
three main functions: (headed by a governor) appointed by the central
First, Acceptance of long term government. It issues guidelines for the
deposits: since the industrial bank give functioning of all banks operating within the
long term loans, they cannot accept short country.
term deposits from the public. · Public Sector Banks
Secondly, Meeting the credit § State Bank of India and its associate banks
requirements of companies – first he called the state bank group
industries require to purchase land to erect § 19 nationalized banks
buildings and purchase heavy machinery. § Regional rural banks mainly sponsored by
Secondly the industries require short term public sector banks
loans to buy raw materials & to make · Private Sector Banks
payment of wages to workers. § Old generation private banks
Thirdly it does some other functions – § New generation private banks
The industrial banks tender advice to big § Foreign banks operating in India
industries firms regarding the sale & · Co-operative Banks
purchase of shares & debentures. The co-operative sector is very much
· Agricultural Banks useful for rural people. The co-operative
As the commercial & the industrial banking sector is divided into the
banks are not in a position to meet the following categories:
credit requirements of agriculture, there § State co-operative banks
arises the need for setting up special types § Central co-operative banks
of banks to finance agriculture. First, the § Primary Agriculture Credit
farmers require short term loans to buy Societies
seeds, fertilizers, ploughs and other inputs. · Development Banks/Financial Institutions
Secondly, the farmers require long term
 PANACEA Bharti Institute – 9888405906
§ IFCI, IDBI, ICICI Bank, SCICI Ltd., 1961 Insurance cover extended to deposits
NABARD, Export-Import Bank of India, 1971 Creation of credit guarantee corporation
National Housing Bank, Small Industries 1975 Creation of RRB
1980 Nationalization of 7 banks with deposits
Development Bank of India, North over 200 crore.
Eastern Development Finance · Phase III:- (After 1991)
Corporation. § Liberalization started in 1991.
Ø HISTORY OF BANKING IN INDIA:- § Private sector was allowed to open banks
In India, the beginning of banking system in 1993-94.
dates back to 1770, when first bank called § Foreign banks were allowed to expand
“Bank of Hindustan” was established. It their business & open branches in country.
was followed by setting up of 3 § First bank of new generation was Global
presidency banks. From 1770, till today, Trust Bank which later, amalgamated with
the journey of Indian Banking system can OBC, ICICI, HDFC, AXIS Bank.
be segregated into 3 phases:-
· Phase I:- ( From 1770 to 1969) Ø SOME FACTS ON INDIAN BANKING
§ Bank of Hindustan was established in
1770. First bank in India to be given an ISO CANARA
§ Oldest bank in existence is SBI. certificate Bank
§ Foreign banks started to arrive in Calcutta First bank in northern India to get Punjab &
in 1860. ISO 9002 certification for their Sind Bank
§ HSBC established in Bengal in 1869. selected branches
First Indian bank to have been started PNB
§ Indian merchants in Calcutta established solely with Indian Cap.
the Union Bank in 1839, it failed due to India’s second largest private sector Federal Bank
economic crisis. bank & is now the largest scheduled Ltd.
§ Allahabad Bank, established in 1865, is commercial bank in India.
oldest joint stock bank in India. First among private sector bank in South Indian
Kerala to become scheduled bank in Bank
§ Central Bank of India was established in
1946 under RBI Act.
1911 by Sir Sorabji Pochkanawala and Bank which started as private Imperial
was first commercial Indian Bank owned shareholders, mostly Europeans Bank of India
& managed by Indians. shareholders
§ RBI came into existence in 1935. Imperial Bank of India SBI
§ Growth was very slow & banks Scheduled Commercial Banks 290 (233-
PSU
experienced failure b/w 1913 & 1948. From which
§ Indian govt. took major steps in banking 196-RRB
sector reforms after independence. & 27 – are
§ First major step was nationalization of commercial
RBI in 1949. Other reforms include RBI banks)
scheduled bank in 1951, nationalization of
Imperial Bank of India in 1955. BANKING TERMS
· Phase II:- (Upto 1991)
§ On 19 July, 1969, the govt. of India · Repo Rate : Repo Rate is the rate at which
nationalized 14 major banks. our banks borrow rupees from RBI.
§ SBI & 7 subsidiaries were nationalized Whenever the banks have any shortage of
under SBI Act of 1955. funds they can borrow it from RBI. A
§ Indian govt. controlled 91% of banking reduction in the repo rate will help banks to
business of India. get money at a cheaper rate. When the repo
§ The following steps are taken by govt. in rate increases, borrowing from RBI becomes
India to regulate banking institution. more expensive.
Year Steps · Reverse Repo Rate: This is exact
1949 Enactment of Banking Regulation Act opposite of Repo rate. Reverse repo rate is the
1955 Nationalization of SBI rate at which commercial banks park their
1959 Nationalization of SBI subsidiaries surplus funds with RBI. RBI uses this tool
 PANACEA Bharti Institute – 9888405906
when it feels there is too much money floating · FII : (Foreign Institutional Investment ) used
in the banking system. Banks are always to denote an investor, mostly in the form of an
happy to keep money with RBI since their institution. An institution established outside
money is in the safe hands with a good India, which proposes to invest in Indian
interest. An increase in Reverse repo rate can market, in other words buying Indian stocks.
cause the banks to transfer more funds to RBI FII's generally buy in large volumes which
due to these attractive interest rates. has an impact on the stock markets.
· Cash Reserve Ratio (CRR): The commercial Institutional Investors includes pension funds,
banks are required to keep a certain amount of mutual funds, Insurance Companies, Banks
cash reserves at the central bank. This etc.
percentage amount is called CRR. It · FDI : (Foreign Direct Investment) occurs
influences the commercial bank's volume of with the purchase of the “physical assets or a
credit because variation in CRR affects the significant amount of ownership (stock) of a
liquidity position of the banks and hence their company in another country in order to gain a
ability to lend. measure of management control” (or) A
· SLR: SLR (Statutory Liquidity Ratio) is the foreign company having a stake in an Indian
amount a commercial bank needs to maintain company.
in the form of cash, or gold or government · SEZ : A Special Economic Zone is a
approved securities (Bonds) before providing geographical region that has economic and
credit to its customers. other laws which are more liberal than the
· SLR is determined and maintained by the RBI usual economic laws in the country. The basic
in order to control the expansion of bank motto behind this is to increase foreign
credit. SLR is determined as the percentage of investment, development of infrastructure, job
total demand and time liabilities. Time opportunities and increase the income level of
Liabilities are the liabilities a commercial the people.
bank is liable to pay to the customers after a
specific time period. SLR is used to control · Gresham's Law: “Bad money (if not limited
inflation and proper growth. Through SLR in quantity) drives good money out of
tuning, the money supply in the system can be circulation” This statement was given by Sir
controlled efficiently. Thomas Gresham, the economic adviser of
· Bank Rate: Also referred to as the discount Queen Elizabeth. This law states that people
rate, is the rate of interest which a central always want to hoard good money and spend
bank charges on the loans and advances that it bad money when two forms of money are in
extends to commercial banks and other circulation at the same time.
financial intermediaries. Changes in the bank · Monetary Policy: Monetary policy comprises
rate are often used by central banks to control all measures applied by the monetary
the money supply. authorities with a view to produce a deliberate
· Inflation is as an increase in the price of impact on the nature and volume of money so
bunch of goods and services that projects the as to achieve the objectives of general
Indian economy. An increase in inflation economic policy. It aims at regulating the
figures occurs when there is an increase in the flow of currency, credit and other money
average level of prices in goods and services. substitutes in an economy with a view to
Inflation happens when there are fewer goods affect the total stock of such assets as well as
and more buyers; this will result in increase in to influence the demand of the community for
the price of goods, since there is more such assets.
demand and less supply of the goods.
· Deflation: is the continuous decrease in · Shadow Price: It is an imputed value for a
prices of goods and services. Deflation occurs good based on the opportunity costs of the
when the inflation rate becomes negative resources used to produce it such values are of
(below zero) and stays there for a longer particular significance in resolving problems
period.
 PANACEA Bharti Institute – 9888405906
of resource allocating with respect to the · Issues of currency
effect on welfare. · Manager of foreign exchange.
· Regulator & Supervisor of financial system.
· Devaluation: The loss of value of currency of · Banker to the govt.
a country relative to other foreign currency is · Bankers to Banks
known as devaluation. Devaluation is a · Developmental role.
process in which the government deliberately o RBI Rates
cheapens the exchange value of its own
· Bank Rate-6.0%
currency in terms of other currency by giving
· Repo Rate-8.50%
it a lower exchange value. Devaluation is used
for improving, the balance of payment · Reverse Repo Rate- 7.50%
situation in the country. o Reserve Ratio
· Scheduled Banks: They are banks which are · CRR-4.75%
included in second schedule of the Reserve · SLR-24.0%
Bank on India Act, 1934. These banks enjoy o Lending/Deposit Rate
certain privileges such as free concessional · Base Rate- 10.00%-10.75%
remittance facilities and financial · Saving Bank Rate-4.0%
accommodation from the RBI. They also have · Deposit Rate- 8.50%-9.25%
certain obligations like minimum cash reserve
ratio (CRR) to be kept with the RBI. INFLATION

Inflation is understood as a substantial and rapid

RBI (Reserve Bank of India) general increase in the level of prices and
deterioration in the value of money over a period
· RBI is a Central Bank of India. The Central of time.
Bank is the apex bank in India. It was A persistent and appreciable rise in the general
established in April 1, 1935. level of prices.
· The central office of the RBI was established Measured as percentage increase in the price
in Calcutta but was permanently moved to index per unit of time.
Mumbai in 1937. i. Demand pull inflation
o RBI was nationalised in 1949. ii. Cost push inflation.
o Regional Offices-22 Reflation : is a situation of rising prices,
o Subsidiaries-NHB-National Housing Bank deliberately undertaken to relieve depression.
o DICGC-Deposit Insurance & Credit With rising prices, employment, output and
Guarantee Corporation of India income till full employment.
o BRBNMPL- Bhartiya Reserve Bank Note Disinflation : When prices are felling due to anti
Mudran Pvt. Ltd. inflationary measures with no corresponding
o NABARD - National Bank for decline in N, O, income.
Agriculture & Rural Development. Deflation: is opposite of inflation is falling prices
o Governor-Dr. Duvveri Subbarao. RBI with decreasing N, O and I
Value of money goes up and prices falls.
Governor is appointed/nominated for a
An under employ phenomena.
period of 4 years.
Stagflation : a situation in which price level has
o Deputy Governors
been continuously rising, but simultaneously
· Mr. Subir Gokarn there has been a rise in the rate of unemployment
· Shri Anand Sinha and stagnation in the rate of growth.
· Dr. K. C. Chakrabarty Stagflation involves rises in prices and wages at
· H.R. Khan the same time so that people are unable to find
o Main Functions of RBI jobs and firms and unable to find customers for
· Monetary Authority: formulates, implement what their plants can produce.
& monitors the monetary policy. It is recession + inflation.
 PANACEA Bharti Institute – 9888405906
Types of Inflation · Reserve requirement ratio may be
Major categories increased CRR and SLR.
1. Creeping, walking, running, and galloping 1- i.e. Total volume of credit is depleted.
3% yr, 3-4% > 10% >100%. Fiscal Policy
2. Excessive, cost, deficit, · Taxations
Flight inf. money supply, factor cost rise, · Borrowing
deficit financing because of money supply · Public Expenditure
and goods · Increase in taxation to cut pvt. Spending
3. War, Post War and peace times inflation · Decrease in government spending.
4. Comprehensive : economy wise information
· A progressive direct tax
for all goods
· Deferred pay
5. Sporadic Information or sectional information
for few goods. · Forced Savings
6. Open : no govt. interaction and Repressed
Info : When good interrupts a price rise.
7. Profit inflation BUDGET TERMS & FACTS
8. Foreign trade induced information – export
boom information, Import price like Finance Minister Palaniappan Chidambaram
information, Key current information delivered budget speech in Lok Sabha on
CAUSES OF INFLATIONARY TRENDS IN February 28, 2007
INDIA
What is the Union Budget?
1. Over expansion of money supply.
2. Expansion of bank credit.
In India, the Union Budget is also popularly
3. Deficit financing.
4. Ordinary Monetary Factors known as the General Budget. It is presented each
year normally on February 28 in the Lok Sabha.
a. Cont increase in public factors.
b. Huge planned investment Most of the taxation proposals would become
operative beginning April 1,the start of India's
c. Black money
d. Incidence of high community taxation. financial year.
5. Non Monetary factors
a. Population growth in India. What are the major components?
b. Vagaries of monsoon.
c. Natural Calamites. Budget is the statement on finances of the Union
Government. It has a summary of receipts and
d. Hoarding and speculative activities.
f. Import content used by our industries. expenditures of the central government for the
g. Monopoly profits and unfair practices previous year and estimates for the following
h. Non utilization of installed capacities in year. Budget would essentially articulate the
Government’s long term economic policy, vision
large industries.
Control of inflation and immediate taxation proposals.
1. Monetary Policy
2. Fiscal Policy Who makes the budget?
3. Direct Control
• Credit availability of loans to firms and The Budget division in the Finance Ministry is
responsible for sewing up the final budget
household
• Interest rate document. Proposals from various ministries and
departments are taken in consideration. Based on
• Public debt and its management
• Monetary standards availability of funds, the final document is
drafted. However, final approval rests with the
A dear money policy Prime Minister and the Union Cabinet.
· Bank rate may be raised
FM’s budget day speech
· Open Marketing sales operation may be
undertaken .
 PANACEA Bharti Institute – 9888405906
Finance Minister’s budget speech till recently was cabinet decision, has empowered the RBI with all
in two separate sections. Part A dealt with macro- powers to fix or revise the Cash Reserve Ratio
economic issues, major schemes and programmes (CRR) as and when required.
sought to be implemented by the Government in
next financial year. And, Part – B contains the
taxation proposals. But, in the past three years, Capital payment: Expenses incurred on
beginning with Jaswant Singh, the Finance acquisition of assets are termed capital payments.
Minister’s speech has been combined into one
single document. It is more simplified and direct. CENVAT: Designed to reduce the cascading
effect of indirect taxes on final products. This is a
Now, let us examine all the terms in an more liberal and extensive scheme than the
alphabetical order: erstwhile MODVAT scheme with most goods
brought within its ambit and no declarations or
Assets with banking system: This term is used statutory records needed.
to define collectively the current account balances
with other banks, advances to other banks and Custom duties: Duty levied on the imports of
money at call on a short notice of a fortnight or certain goods. It includes excise duty equivalents
less. charged on domestic industry products. Customs
duties are used mainly as a means to raise
Ad-Valorem duties: This is a Latin word which revenue for the government rather than protecting
means tax levied on a property or a product after domestic producers from foreign competition.
assessing the value of a property.
Countervailing duties: These duties that are
Minimum Alternative Tax (MAT): A imposed to counteract subsidies provided to a
mechanism created to ensure that high-income foreign producer. The main purpose here is to
individuals, corporations, trusts, and estates pay discourage unfair trading practices by other
at least some amount of tax, regardless of countries.
deductions, credits or exemptions. MAT operates
by adding certain tax-preference items back into Consolidated fund: All revenues received by
adjusted gross income government, the loans raised by it, and receipts
from recoveries of loans granted by it, form the
Budgetary deficit: It is the amount by which consolidated fund. All expenditure of government
government spending exceeds government is incurred from the consolidated fund and no
income during the financial year. amount can be withdrawn from the fund without
authorisation from the Parliament. This
Budget estimates: These estimates are authorization is obtained by Finance Minister
projections on spending across various sectors through his budget.
during the financial year together with an
estimate of the income in the form of tax and non- Capital expenditure: Long-term in nature, these
tax revenues. It also has the estimates for the expenses are used to acquire fixed assets such as
fiscal deficit and revenue deficit during the year. land, building, machinery and equipment. Other
items that also fall under this category include
Bear: An investor with a pessimistic market loans and advances sanctioned by the centre to
outlook; an investor who expects prices to fall the State governments, union territories and
and so sells now in order to buy later at a lower public sector undertakings.
price.
Central plan: A detailed economic blueprint that
Cash balances with RBI: This term is used to sets out what will be produced, how, when and
indicate cash balances maintained by scheduled where it will be produced, and who will get what
banks with RBI. These balances are made based is produced, and that establishes a set of sanctions
on CRR requirements made by the RBI. Only a and rewards designed to ensure that the plan is
fortnight back, the Union Government through a fulfilled as fully as possible.
 PANACEA Bharti Institute – 9888405906
margins against letter of credit/guarantees.
Consumer price index: The consumer price
index is one way the government measures the Deposit money: This term depicts the demand
general level of inflation. The CPI represents the deposits with commercial and cooperative banks,
cost of a basket of goods and services used by the also, current deposits portion of savings bank
average consumer. The annual percentage change deposits. The deposits coming under this
in the value of this index is one way of measuring umbrella are non-interest earning in nature.
the annual inflation rate. This reflects the price
situation in the country. Finance Bill : It consists of the government's
proposals for the imposition of new taxes,
Corporate tax: Corporate tax refers to direct modification to existing tax rates or continuance
taxes charged by various jurisdictions on the of the existing tax structure beyond the period
profits made by companies or associations. approved by the Parliament. This is the most
important document of the Finance Minister’s
Currency liability: The currency liability of budget.
Central government constitutes one-two-five
rupee coins, small coins, and other Foreign direct investment : The term depicts
commemorative coins issued by the government investment made by a foreign individual or
mints. company in productive capacities.

Gross national product: The value of all final

Current account: It is an overall record of goods and services produced within a nation in a
receipts from the sale of goods and services to given year, plus income earned abroad, minus
foreigners, payments for goods and services income earned by foreigners from domestic
bought from foreigners, and factor income (such production.
as interest and profits) and current transfers (such
as foreign aid) received from and paid to Income tax: Income tax is a direct tax which is
foreigners. levied on the income of private individuals.

Current account deficit: The current account of

the balance of payments is in deficit when a MODVAT: It stands for Modified Value Added
country imports more goods and services than it Tax and it is a way of giving some relief to the
exports. final manufacturers of goods on Excise Duties
borne by their suppliers. It has now been replaced
Current account surplus: The current account by the CENVAT scheme.
of the balance of payments is in surplus when a
country exports more goods and services than it Monetised deficit: It is a measurement that
imports. reflects the amount of support which the Reserve
Bank of India provides to the centre’s borrowing
programme.
Disinvestment: Sale of government’s shares in
the Public Sector Undertakings. M1: The most liquid forms of money, namely
currency in circulation and checkable deposits.
Demand for grants: It is a statement of estimate
of expenditure from the consolidated fund. This M3: Also known as broad money, it includes M1
requires the approval of the both Lok Sabha and plus time deposits with the banks.
Rajya Sabha.
Medium term loans: Loans granted for a short
Demand deposits: It includes current deposits, term, ranging between one to three years.
demand liabilities portion of savings bank
deposits, overdue deposits and cash certificates, Merchandise account : The part of balance-of-
outstanding telegraphic and mail transfers and
 PANACEA Bharti Institute – 9888405906
payments accounts referring to visible trade, or
imports and exports of goods. Per Capita real GDP: A country’s real GDP per
member of the population. This may be calculated
using the total population, adults only, or ‘adult`
Non-plan expenditure: It covers all expenditure equivalents’, giving children of various ages
of government not included in the Plan. It weightage points to a fraction of an adult. Per
includes both development and non-development capita real GDP is lower than per capita income
expenditure. Part of the expenditure is obligatory in a country with net external assets which yield
in nature. For example, the interest payments, an income, and greater than per capita income in
pension charges, defence and internal security, a country with a lot of inward investment, so that
transfers to States, etc fall under this category. net property income payments have to be made
Expenditure on maintaining the assets created in abroad.
previous Plans is also treated as non-plan
expenditure. Normally, this is the head under Purchasing Power Parity: A method of
which all populist or popular programmes of the measuring the relative purchasing power of
government are launched. different countries' currencies over the same types
of goods and services. Because goods and
Net bank credit: It includes total credit given to services may cost more in one country than in
central and state governments by RBI and another, it allows us to make more accurate
commercial banks. It indicates the investments by comparisons of standards of living across
banks in government securities. countries. PPP projections use price comparisons
of comparable items but since not all items can be
“Other deposits”: Other deposits held with RBI matched exactly across countries and time, the
those other than balances held in IMF Account estimates are not always "robust."
No.1, RBI employee provident and
superannuation funds, and CDS deposits. The Reserve money: It refers to money supplied by
balances under these accounts are excluded, as RBI and Central government. This indicates
they are non-monetary liabilities of RBI. monetary liability of RBI and the government of
India to public including banks. The reserve
Peak rate: It is the highest rate of Customs duty money, or currency notes and coins, is held by
applicable on an item. public and banks in their currency chests and as
deposits with RBI. It also includes "other"
Performance budget: It is a budget format that deposits with RBI.
relates the input of resources and the output of
services for each organisational unit individually. Revenue deficit: It shows the shortfall of
Sometimes used synonymously with programmes government’s current receipts over current
laid out in budget. Performance budget includes expenditure.
expenditures that are based primarily upon
measurable performance of activities. Revenue surplus: It is the excess of revenue
receipts over revenue expenditure.
Public account: It is an account where money
received through transactions not relating to Revised estimates: Budget estimates need not
consolidated fund is kept . always be right, and the difference between the
budget estimates and the actual
Plan expenditure: The expenditure of the expenditure/revenues are reflected in the revised
government can be broken up into plan and non- estimates, which is usually presented in the
plan expenditure. Money given from the following budget.
government’s account for the central plan is
called plan expenditure. This is developmental in Revenue receipts: Additions to assets that do not
nature and is spent on schemes detailed in the incur an obligation that must be met at some
plan. future date and do not represent exchanges of
property for money. Assets must be available for
 PANACEA Bharti Institute – 9888405906
expenditures. These include proceeds of taxes and
duties levied by the government, interest and
dividend on investments made by the
government, fees and other receipts for services INTERNATIONAL ORGANISATIONS
rendered by the government.
1. International Monetary Fund (IMF):
Revenue expenditure: This is expenditure on a) Date of Establishment: 27 Dec, 1945
recurring items, including the running of services b) Started its operation: 1 March, 1947
and financing capital spending that is paid for by c) Headquarter: Washington DC
borrowing. This is meant for normal running of
governments' maintenance expenditures, interest Objectives of IMF:
payments, subsidies and transfers etc. It is current (i) To promote international monetary
expenditure which does not result in the creation cooperation
of assets. (ii) To ensure exchange rate stability.
(iii) To ensure balanced international
Scheduled banks: They are banks which are trade.
included in second schedule of the Reserve Bank (iv) To grant economic assistance to member
on India Act, 1934. These banks enjoy certain countries for eliminating adverse
privileges such as free concessional remittance imbalance in Balance of Payments.
facilities and financial accommodation from the d) India occupies 11th place in IMF general
RBI. They also have certain obligations like quota.
minimum cash reserve ratio (CRR) to be kept e) IMF’s financial year starts from 1st May to
with the RBI. 30 April.
f) currently having 186 Member countries.
Subsidies: It is cash or other incentives given to a g) Last added member-KOSOVO
producer of goods that the government would like h) India is founder member of IMF
to attract to another area or maintain in its i) The finance minister is Ex-officio
established location. Governor in IMF Board of Governors.
j) Till 1970, India was among the first five
Term deposits: They are deposits with a fixed nations having the highest quota with IMF
maturity of not less than 15 days. This would also and due to this status India was allotted
include cash certificates, and cumulative or permanent place in Executive Board of
recurring deposits, but would exclude interest Directors.
accrued and payable on these deposits
2. International Bank for Reconstruction
Value Added Tax : A form of indirect sales tax &Development (IBRD)
paid on products and services at each stage of (a) IBRD & its Associate institutions as a group
production or distribution, based on the value are known as World Bank
added at that stage and included in the cost to the (b) Date of Establishment:- Dec 1945 with IMF
ultimate customer. on the Basis of Recommendation of Bretton
Wood Conference. That is why IMF and
Wholesale Price Index: It measures changes in IBRD are called Bretton Wood Conference.
prices in the manufacturing and distribution (c) started functioning:-In June 1946
sector of the economy and tends to lead the (d) IMF and World Bank are complementary
consumer price index by 60 to 90 days. The index institution.
is often quoted separately for food and industrial (e) last added Member:- KOSOVO
products. (f) No. of Member Countries-187
(g) India is member of four constituents of
World Bank Group, i.e. IBRD, IDA, IFC
and MIGA (Multi-Lateral Investment
Guarantee Agency), But not of its fifth
 PANACEA Bharti Institute – 9888405906
constituent ICSID (International Centre for or invests its own funds and borrowed
Settlement of Investment Disputes) funds to its customers and expects to
make a sufficient risk-adjusted return
on its global portfolio of projects.
(h) OBJECTIVES · IFC provides both investment and
a) To provide long-run capital to the advisory services.
member countries for economic · IFC's Advisory Services focus on five
reconstruction & development. core areas: Access to Finance, Business
b) to promote capital investment in the Enabling Environment, Environmental
member countries. & Social Sustainability, Infrastructure
c) To ensure the implementation of Advisory, and Corporate Advice.
development projects so as to bring 6) OWNERSHIP AND MANAGEMENT:
about smooth transference from war · IFC has 182 member countries, which
time to peace economy collectively determine its policies and
(i) World Bank, like IMF has also 2 types of approve investments. To join IFC, a
members: - (i) Founder member (ii) General country must first be a member of the
member International Bank for Reconstruction
(j) Head quarter-Washington, DC and Development (IBRD).
· IFC's corporate powers are vested in its
IMF Vs. World Bank Board of Governors, to which member
a) IMF and World Bank are Bretton Wood countries appoint representatives.
Twins. · IFC's share capital, which is paid in, is
b) IMF provides short-term loans to the provided by its member countries, and
member countries and world bank voting is in proportion to the number of
provides long term loan. shares held. As of June 30, 2010 and
2009,
· IFC’s authorized capital(the sums
INTERNATIONAL FINANCE CORPORATION:
contributed by its members over the
1) ESTABLISHED IN: July 1956.
years) was $2.45 billion, of which $2.37
2) MAIN OBJECTIVES:
billion was subscribed and paid in.
· To provide loans to private
industries of developing ASIAN DEVELOPMENT BANK( ADB):
nations without any
government guarantee. 1) INTRODUCTION:
· Also promotes additional The Asian Development Bank (ADB) is a
capital investment in these regional development bank established on
countries. 22 August 1966 to facilitate economic
3) HEADQUARTER: Washington D.C development of countries in Asia.The bank
4) CURRENT MEMBERS: admits the members of the United Nations
Members of the IFC are 181 of the UN Economic and Social Commission for Asia
members and Kosovo. and the Pacific. From 31 members at its
Non-members are: Andorra, Brunei, establishment, ADB now has 67 members -
Cook Islands, Cuba, Liechtenstein, of which 48 are from within Asia and the
Monaco, Nauru, Niue, North Korea, Pacific and 19 outside.
Saint Vincent and the Grenadines, San 2) HEADQUARTER: Manilla, Philippines.
Marino, Tuvalu and Vatican City. The 3) MAIN FUNCTIONS:
remaining non-members are all states · To make loans and equity investments for
with limited recognition the economic and social advancement of
5) ACTIVITIES: its developing member countries.
· Private sector financing is IFC's main
activity, and in this respect is a profit-
oriented financial institution. IFC lends
 PANACEA Bharti Institute – 9888405906
· To provide technical assistance for the · IDA provides loans to its member
preparation and execution of countries and no interest is charged on
development projects. these long term loans.
· Asian development bank constituted · These soft loans are provided to the
ASIAN DEVELOPMENT FUND in poor countries of the world.
1974, which provides loans to Asian
countries on concessional interest rates. SOUTH ASIAN FREE TRADE AREA
(SAFTA):
INTERNATIONAL DEVELOPMENT 1) INTRODUCTION:
ASSOCIATION: · The South Asian Free Trade Area is a pact
1) INTRODUCTION: signed in 6 January 2004 that would
· The International Development gradually eliminate most tariffs and other
Association (IDA), is the part of the trade barriers on products and services
World Bank that helps the world’s passing between Bangladesh, Bhutan,
poorest countries. It complements the India, Maldives, Nepal, Pakistan,
World Bank's other lending arm — the Afghanistan and Sri Lanka.
International Bank for Reconstruction · The pact would effectively create a free-
and Development (IBRD) — which trade bloc among the eight countries of
serves middle-income countries with South Asia.
capital investment and advisory
services. · The SAFTA agreement came into force on
· IDA was created on September 24, 1 January 2006 and is operational
1960 and is responsible for providing following the ratification of the
long-term, interest-free loans to the agreement by the seven governments.
world's 78 poorest countries, 39 of
which are in Africa. IDA provides 2) HISTORY:
grants and credit with repayment · The Agreement on SAARC Preferential
periods of 35 to 40 years. Trading Arrangement (SAPTA) was
2) MEMBERS: signed on 11 April 1994 and entered into
· Members of the IDA are 170 of the force on 7 December 1995, with the desire
UN members and Kosovo. of the Member States of SAARC (India,
· Non-members are: Andorra, Antigua Pakistan, Nepal, Sri Lanka, Bangladesh,
and Barbuda, Bahrain, Belarus, Bhutan and the Maldives) to promote and
Brunei, Bulgaria, Cook Islands, Cuba, sustain mutual trade and economic
Jamaica, Liechtenstein, Malta, cooperation within the SAARC region
Monaco, Namibia, Nauru, Niue, North through the exchange of concessions.
Korea, Qatar, Romania, San Marino,
Seychelles, Suriname, Turkmenistan, · The establishment of an Inter-
Uganda, Uruguay, Vatican City and Governmental Group (IGG) to formulate
Venezuela. The remaining non- an agreement to establish a SAPTA by
members are states with limited 1997 was approved in the Sixth Summit
recognition. of SAARC held in Colombo in December
3) HISTORY: 1991.
· IDA is an associate institution of World
Bank known as SOFT LOAN The basic principles underlying SAPTA are:
WINDOW OF WORLD BANK. · overall reciprocity and mutuality of
· DATE OF ESTABLISHMENT: 24 advantages so as to benefit equitably all
SEP, 1960. Contracting States.
· HEADQUARTER: Washington D.C. · negotiation of tariff reform step by step,
4) MAIN FUNCTIONS: improved and extended in successive
stages through periodic reviews;
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· recognition of the special needs of the · The organization is currently
Least Developed Contracting States and endeavouring to persist with a trade
agreement on concrete preferential negotiation called the Doha Development
measures in their favour; Agenda (or Doha Round), which was
3) PURPOSE: launched in 2001.
The purpose of SAFTA is to encourage and 2) HISTORY:
elevate common contract among the countries The WTO's predecessor, the General
such as medium and long term contracts. Agreement on Tariffs and Trade (GATT), was
Contracts involving trade operated by states, established after World War II in the wake of
supply and import assurance in respect of specific other new multilateral institutions dedicated
products etc. It involves agreement on tariff to international economic cooperation —
concession like national duties concession and notably the Bretton Woods institutions known
non-tariff concession. as the World Bank and the International
4) OBJECTIVES: Monetary Fund.
· The objective of the agreement is to 3) FUNCTIONS OF WTO:
promote good competition in the free · It oversees the implementation,
trade area and to provide equitable administration and operation of the
benefits to all the countries involved in the covered agreements.
contracts. · It provides a forum for negotiations and
· It aimed to benefit the people of the for settling disputes.
country by bringing transparency and · To implement rules and provisions cesses
integrity among the nations. related to dispute settlement.
· SAFTA was also formed in order to · To assist IMF and IBRD for establishing
increase the level of trade and economic coherence in universal economic policy
cooperation among the SAARC nations determination.
by reducing the tariff and barriers. 4) IMPORTANT BODIES OF WTO:
5) INSTRUMENTS INVOLVED: a) Council for trade in goods.
Following are the instrument involved in b) Council for trade in services.
SAFTA:- c) Council for trade related aspects of
· Trade Liberalisation Programme intellectual property rights.
· Rules of Origin
· Institutional Arrangements NAFTA AMERICAN FREE TRADE
· Consultations and Dispute Settlement AGREEMENT ( NAFTA):
Procedures 1) INTRODUCTION:
· Safeguard Measures. · The North American Free Trade
Agreement (NAFTA) is an agreement
WORLD TRADE ORGANISATION (WTO): signed by the governments of Canada,
Mexico, and the United States, creating a
1) INTRODUCTION: trilateral trade bloc in North America.
· The World Trade Organization (WTO) is · The agreement came into force on January
an organization that intends to supervise 1, 1994. It superseded the Canada –
and liberalize international trade. The United States Free Trade Agreement
organization officially commenced on between the U.S. and Canada.
January 1, 1995 under the Marrakech · The North American Free Trade
Agreement, replacing the General Agreement (NAFTA) has two
Agreement on Tariffs and Trade (GATT), supplements, the North American
which commenced in 1948. Agreement on Environmental Cooperation
· Most of the issues that the WTO focuses (NAAEC) and the North American
on derive from previous trade Agreement on Labour Cooperation
negotiations, especially from the Uruguay (NAALC).
Round (1986–1994). 2) OBJECTIVES:
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The objectives of this Agreement are as Thus it is important that the treaty should be
follows: carried forward concerning about taking
a) Eliminate barriers to trade in, and steps for the problems originated due to
facilitate the cross border movement of, NAFTA otherwise it will create inequality in
goods and services between the many terms which can lead to bad conditions
territories of the Parties. in future for all the three countries.
b) Promote conditions of fair competition
in the free trade area.
c) Increase substantially investment
opportunities in their territories.
d) Provide adequate and effective
protection and enforcement of
intellectual property rights in each
Party's territory.
e) Create effective procedures for the
implementation and application of this
Agreement, and for its joint
administration and the resolution of
disputes.
f) Establish a framework for further
trilateral, regional and multilateral
cooperation to expand and enhance the
benefits of this Agreement.
3) BENEFITS OF NAFTA:
a) NAFTA eliminates trade barriers.
b) Benefits the importers by reduced or
duty free goods.
c) Increase market access within each
country.
d) Can make the exporter more competitive
than other non-participating countries.
4) LIMITATIONS:
a) It has negative impact on farmers in
Mexico who saw food prices fall based
on cheap imports from U.S agribusiness.
b) It has negative impact on U.S workers in
manufacturing and assembly industries
who lost their jobs.
5) NAFTA PROVISIONS:
a) Sanitary and phytosanitary.
b) Export subsidies.
c) Internal support.
d) Grade and quality standards.
e) Rules of origin.
6) CONCLUSION:
NAFTA is one of the most successful treaties
of the times in terms of growth in trade i.e.
exports and imports, G.D.P etc. but on the
other hand it is also responsible for
causalities like loss of jobs, migration , rising
level of inequality and many others.