Commodity and Money Market

Money market and commodity market are two important segments of the financial market. The money
market is a platform for short-term borrowing and lending of funds, while the commodity market is a
platform for buying and selling commodities such as gold, silver, crude oil, and agricultural products.
Both markets play a crucial role in the economy by providing liquidity and hedging opportunities to
investors. In this article, we will explore the basics of the money market and commodity market, their
functions, and their significance in the financial system. Readers can also head to our Static GK page for
more such topics to help with their exam preparations

Money Market

The money market refers to the platform for short-term borrowing and lending of funds, typically for a
period of up to one year. It is a part of the financial market where financial instruments such as Treasury
bills, commercial papers, certificates of deposit, and repurchase agreements are traded. The money
market provides liquidity to investors and helps in the efficient allocation of funds among the various
sectors of the economy. It is an important segment of the financial system as it provides short-term
funding for banks, corporations, and governments.

Features of Money Market

The money market is an important part of the financial system that helps people borrow and give
money for short periods of time. Here are a few important features about the money market:

Short-term instruments: Most of the financial instruments on the money market have an end date of
less than one year. This makes it easy for buyers to get short-term loans without being locked into long-
term contracts.

High liquidity: High liquidity is one of the most important things about the money market. On the
money market, it's easy to turn financial assets into cash, so investors can get their money quickly when
they need it.

Low risk: The money market is thought to be a relatively low-risk way to spend because most of the
financial instruments that are traded there come from creditworthy sources like governments, banks,
and corporations.

A regulated market: Central banks, financial regulators, and other government groups keep an eye on
the money market. These agencies make sure that the market works in a fair and clear way and take
steps to stop scams from happening.
Interest rates that are competitive: The interest rates on the money market are set by how much
money is on the market and how much people want to borrow. This lets people who need money get it
at a reasonable interest rate and gives investors a good return on their money.

A variety of financial instruments: The money market has a lot of different financial instruments, such
as Treasury bills, commercial papers, certificates of deposit, and buyback agreements. This gives
investors the freedom to choose the investment instrument that best fits their wants and willingness to
take on risk.

Hedging possibilities: The money market also gives investors hedging opportunities, which help them
reduce the risk that comes with changes in interest rates. This lets investors keep their capital safe and
keep their losses to a minimum.

Commodity Market

The commodity market is a financial market where people buy and sell commodities like agro products,
metals, energy, and other raw materials. Producers and consumers of commodities use commodity
markets to control price risk and figure out prices. To put it more simply, it is a place where people can
buy and sell goods.

The physical market and the derivatives market are the two kinds of commodity markets. In the physical
market, real goods are traded. In the derivatives market, contracts are traded that show a deal to buy or
sell a specific good at a certain time in the future.

Features of Commodity Markets

Commodity markets have several features that distinguish them from other financial markets. Here are
some of the key features of commodity markets:

Standardization: Commodities traded in the market are standardized. This means that the quality,
quantity, and delivery date of the commodity are predetermined and specified in the contract.
Standardization enables buyers and sellers to trade in a transparent and efficient manner.

Price discovery: Commodity markets facilitate price discovery, which is the process of determining the
market value of a commodity. The price of a commodity is determined by the forces of supply and
demand in the market. Price discovery helps producers and consumers of commodities to determine the
fair value of the commodity.

Low transaction costs: Commodity markets have low transaction costs compared to other financial
markets. This is because commodities are physical assets that do not require complex financial
instruments for trading. As a result, transaction costs such as brokerage fees and commissions are
relatively low.
Leverage: Commodity markets provide leverage to traders. This means that traders can buy or sell a
larger quantity of commodities with a smaller amount of capital. Leverage allows traders to amplify their
gains or losses.

Volatility: Commodity markets are volatile. The prices of commodities are influenced by a variety of
factors such as weather conditions, geopolitical events, and supply and demand dynamics. As a result,
commodity prices can fluctuate rapidly and unpredictably.

Hedging: Commodity markets provide a mechanism for hedging against price risk. Producers and
consumers of commodities can use futures contracts to lock in a price for the commodity and protect
themselves against price fluctuations in the physical market.

Speculation: Commodity markets also attract speculators who seek to profit from price changes in the
market. Speculators are traders who do not have an underlying interest in the physical commodity but
trade futures contracts for profit.

Demand for money

The demand for money refers to how much assets individuals wish to hold in the form of money (as
opposed to illiquid physical assets.) It is sometimes referred to as liquidity preference. The demand for
money is related to income, interest rates and whether people prefer to hold cash(money) or illiquid
assets like money.

Types of demand for money

Transaction demand – money needed to buy goods – this is related to income.

Precautionary demand – money needed for financial emergencies.

Asset motive/speculative demand – when people wish to hold money rather than buy
assets/bonds/risky investment.

Transaction demand for money

Transaction demand for money – the money we need to purchase goods and services in day to day life.
In the classical quantity theory of money. The demand for money is a function of prices and income
(assuming the velocity of circulation is stable.) If income rises, demand for money will rise.
In an inventory model, the demand for holding money depends on the frequency of getting paid, and
the cost of depositing money in a bank. When employees are paid, they will hold some money to buy
goods. If they are paid once a month, they may deposit half to benefit from interest payments, and then
withdraw after two months. However, electronic transfers and debit cards have made this less relevant
Precautionary demand for money
Precautionary demand for money – the money we may need for unexpected purchases or emergencies.
Precautionary motive for holding money refers to the desire of the people to hold cash balances for
unforeseen contingencies People hold a certain amount of money to provide tor the risk of
unemploy-ment, sickness, accidents and other more uncertain perils. The amount of money held under
this motive will depend on the nature of the individual and on the conditions in which he lives.
Speculative Motive:
The speculative motive relates to the desire to hold one’s resources in liquid form in order to take
advantage of market movements regarding the future changes in the rate of interest (or bond-prices).
The notion of holding money for speculative motive is a new typically keynesian idea. Money held under
the speculative motive serves as a store of value as money held under the precautionary motive does.
But it is a store of money meant for a different purpose.
Supply of Money
Money supply mean the total volume of monetary media of exchange available to the community for
use in connections with the economic activity of the country
Money Supply M1 or Narrow Money:
This is the narrow measure of money supply and is composed of the following items:
Ml = C + DD + OD
Where, C = Currency with the public
DD = Demand deposits with the public in the commercial and cooperative banks.
OD = other deposits held by the public with Reserve Bank of India.
The money supply is the most liquid measure of money supply as the money included in it
can be easily used as a medium of exchange, that is, as a means of making payments for
transactions
M2 is a broader
concept of money supply in India than M1. In addition to the three items of M1, the concept of money
supply M2 includes savings deposits with the post office savings banks.
Thus,M2 = M1 + Savings deposits with the post office savings banks. The reason why money supply M2
has been distinguished from M1 is that saving deposits with post office savings banks are not as liquid as
demand deposits with commercial and cooperative banks as they are not chequable accounts. However,
saving deposits with post offices are more liquid than time deposits
Money Supply M3 or Broad Money:
M3 is a broad concept of money supply. In addition to the items of money supply included
in measure M1, in money supply M3 time deposits with the banks are also included. Thus
M3= M1+ Time Deposits with the banks.
Money Supply M4:
The measure M4 of money supply includes not only all the items of M3 described above
but also the total deposits with the post office savings organisation. However, this
excludes contributions made by the public to the national saving certificates. Thus,
M4 = M3 + Total Deposits with Post Office Savings Organisation.

Money market
Money market, a set of institutions, conventions, and practices, the aim of which is to facilitate the
lending and borrowing of money on a short-term basis. The money market is, therefore, different from
the capital market, which is concerned with medium- and long-term credit. The definition of money for
money market purposes is not confined to bank notes but includes a range of assets that can be turned
into cash at short notice, such as short-term government securities, bills of exchange, and bankers’
acceptances.
The Money Market and Equilibrium
The money market consists of money demand and money supply functions, and the equilibrium in the
money market occurs where the money demand curve intersects the money supply curve. In other
words, at that point, the quantity of money demand equals the quantity of money supply that
determines the equilibrium interest rate and the equilibrium quantity of money. This equilibrium
interest rate determined in the money market is the short-term interest rate.

Shows the relationship between Quantity of Money, Money Supply, and Interest Rate, as described in

Monetary Policy
Monetary policy is a set of tools used by a nation's central bank to control the overall money supply and
promote economic growth and employ strategies such as revising interest rates and changing bank
reserve requirements.
Monetary policy is an economic policy that manages the size and growth rate of the money supply in
an economy. It is a powerful tool to regulate macroeconomic variables such as inflation and
unemployment.
These policies are implemented through different tools, including the adjustment of the interest rates,
purchase or sale of government securities, and changing the amount of cash circulating in the economy.
The central bank or a similar regulatory organization is responsible for formulating these policies.
A central bank may revise the interest rates it charges to loan money to the nation's banks. As rates rise
or fall, financial institutions adjust rates for their customers such as businesses or home buyers.
Additionally, it may buy or sell government bonds, target foreign exchange rates, and revise the amount
of cash that the banks are required to maintain as reserves.
Objectives of Monetary Policy
The primary objectives of monetary policies are the management of inflation or unemployment and
maintenance of currency exchange rates.
1. Inflation
Monetary policies can target inflation levels. A low level of inflation is considered to be healthy for the
economy. If inflation is high, a contractionary policy can address this issue.

2. Unemployment
Monetary policies can influence the level of unemployment in the economy. For example, an
expansionary monetary policy generally decreases unemployment because the higher money supply
stimulates business activities that lead to the expansion of the job market.

3. Currency exchange rates

Using its fiscal authority, a central bank can regulate the exchange rates between domestic and foreign
currencies. For example, the central bank may increase the money supply by issuing more currency. In
such a case, the domestic currency becomes cheaper relative to its foreign counterparts.

Tools of Monetary Policy

Central banks use various tools to implement monetary policies. The widely utilized policy tools include:

1. Interest rate adjustment

A central bank can influence interest rates by changing the discount rate. The discount rate (base rate) is
an interest rate charged by a central bank to banks for short-term loans. For example, if a central bank
increases the discount rate, the cost of borrowing for the banks increases. Subsequently, the banks will
increase the interest rate they charge their customers. Thus, the cost of borrowing in the economy will
increase, and the money supply will decrease.

2. Change reserve requirements

Central banks usually set up the minimum amount of reserves that must be held by a commercial bank.
By changing the required amount, the central bank can influence the money supply in the economy. If
monetary authorities increase the required reserve amount, commercial banks find less money available
to lend to their clients, and thus, money supply decreases.

Commercial banks can’t use the reserves to make loans or fund investments into new businesses. Since
it constitutes a lost opportunity for the commercial banks, central banks pay them interest on the
reserves. The interest is known as IOR or IORR (interest on reserves or interest on required reserves).

3. Open market operations

The central bank can either purchase or sell securities issued by the government to affect the money
supply. For example, central banks can purchase government bonds. As a result, banks will obtain more
money to increase the lending and money supply in the economy.
Inflation
Inflation is a quantitative measure of how quickly the prices of goods in an economy are increasing.
Inflation occurs when goods and services are in high demand, thus creating a drop in availability (supply)
and a consequential raising of prices. It's sometimes referred to as too many dollars chasing too few
goods.

Supply can decrease for many reasons. For example, a natural disaster can wipe out a food crop, a
housing boom can exhaust building supplies, or aggregate demand may overwhelm inventories.
Whatever the reason, consumers are willing to pay more for the items they want, causing
manufacturers and service providers to charge more.
Types of Inflation

1] Creeping Inflation
Creeping inflation also known as mild inflation is as the name suggests a very slow rise in prices of goods
and services. If the prices increase by 3% or less annually, then such inflation is creeping inflation. Such
inflation is not harmful to the economy. In fact, as per the Federal Reserve, a 2% inflation rate is
desirable. It is necessary for the economic growth of a country.

2] Walking Inflation
In this case, the inflation rate falls between 3% to 10%. Such inflation can be harmful to the economy.
The economic growth of the country is too accelerated to sustain. Consumers start stocking goods
fearing the prices will rise further. This causes excess demand and the prices increase further.

3] Galloping Inflation
When creeping and walking inflation are left unchecked, the rate of inflation will rise above 10%. This is
galloping inflation. The currency of the country will lose value in the global economy. The salaries and
income of common people will not be able to keep up with the ever-increasing prices of commodities.
This will lead to the general instability of the economy and the country as a whole.

4] Hyperinflation
Next in the classification of inflation is hyperinflation. This when the inflation is completely out of
control. No measures taken by the monetary authorities can control the prices. The rate of inflation can
be 50% on a monthly basis. This is the last stage of inflation. A real-world example is that of Venezuela,
where the IMF has predicted prices rose 13,000% in 2018..
Causes of inflation
The main causes of inflation can be grouped into three broad categories:
DEMAND-PULL,
COST-PUSH, AND
INFLATION EXPECTATIONS.
As their names suggest, ‘demand-pull inflation’ is caused by developments on the demand side of the
economy, while ‘cost-push inflation’ is caused by the effect of higher input costs on the supply side of
the economy. Inflation can also result from ‘inflation expectations’ – that is, what households and
businesses think will happen to prices in the future can influence actual prices in the future. These
different causes of inflation are considered by the Reserve Bank when it analyses and forecasts inflation.
Deflation
Deflation occurs when too many goods are available or when there is not enough money circulating to
purchase those goods. As a result, the price of goods and services drops.

For instance, if a particular type of car becomes highly popular, other manufacturers start to make a
similar vehicle to compete. Soon, car companies have more of that vehicle style than they can sell, so
they must drop the price to attract buyers.
Stagflation
Stagflation is an economic cycle characterized by slow growth and a high unemployment rate
accompanied by inflation. Economic policymakers find this combination particularly difficult to handle,
as attempting to correct one of the factors can exacerbate another

Fiscal policy
Fiscal policy is the use of government spending and taxation to influence the economy. Governments
typically use fiscal policy to promote strong and sustainable growth and reduce poverty.
Roles and Objectives of Fiscal Policy
The roles and objectives of fiscal policy vary in different states. However, the primary aim is to manage
the economy by influencing the aggregate output (real GDP). It is imperative to note that the objectives
of fiscal policy change with the level of economic development. Some of these objectives are discussed
below.

Price Levels
The fiscal policy ensures an attractive price level in a country. Consequently, this implies that the costs
and prices reach a level where employment and production are maximized.
Controlling Inflation
When expenditures of non-productive projects are lowered, or taxes are raised, the demand for goods
and services decreases. As a result, fiscal policy acts as a significant inflation rate control alternative.

Encouraging Investments

Providing a conducive environment for businesses and consumers, for instance, by reducing taxes,
encourages investments. This moves capital from less productive to more productive sectors,
consequently enabling a country’s resources to be fully utilized.
Reducing the Regional Disparities
In most emerging economies, some provinces or states experience more development than others. It is,
therefore, the responsibility of the government to initiate the infrastructural development of the
underdeveloped areas. Also, the government might provide less developed areas with tax breaks to
boost the per capita income.

Increasing Industrial and/or Agriculture Output

Fiscal policy can influence certain sectors of the economy in direct or indirect ways. For example, some
policies have a direct impact on the value of land in the agricultural sector. Also, the agricultural sector is
very capital-intensive. A good fiscal policy can affect the relative demand and competitiveness of
exports for agricultural products. Therefore, fiscal policy can be used to increase the output of some
sectors of the economy.

Controlling Consumption
A country cannot improve its economic position without increasing investments. If the consumption rate
rises too rapidly, then savings and investments automatically drop. Therefore, the fiscal policy comes in
and plays a supervisory role over the consumption rate.

Ensuring Equal Distribution of Resources

The purchasing power increases with a fair distribution of resources among different classes of society.
This leads to high levels of production, which lowers the unemployment level.

Fiscal Policy in India

Fiscal Policy in India is the cornerstone of its economic strategy, which steers the country through
various phases of growth, development, and challenges. It plays crucial role in shaping the nation’s
development trajectory, influencing its macroeconomic stability, and addressing socio-economic
challenges.
Objectives of Fiscal Policy in India
Some of the main objectives of fiscal policy in India can be seen as follows:

 To mobilise additional resources into socially necessary lines of development

  To achieve and maintain economic stability
 To stabilize the price level.
 To maintain the growth rate of the economy.
 To maintain equilibrium in the balance of payments.
 To raise standard of living of the citizens of the country.
 To reduce extreme inequality in income and wealth
 To provide the necessary incentives to the private sector for its healthy growth. Etc

Fiscal Policy Monetary Policy

It is a macro-economic policy
It is a macro-economic policy
used by the government to adjust
used by the Central Bank to
Definition its spending levels and tax rates
influence money supply and
to monitor and a nation’s
interest rates.
economy

Institutional Control Controlled by the Government Controlled by the Central Bank

To influence the economic To influence the money supply

Prime Objective
condition and interest rates.

Public Expenditure, Taxation, Bank Rate, Cash Reserve Ratio,

Major Tools
Public Borrowing etc Statutory Liquidity Ratio etc.

FOREIGN CAPITAL
Economic development necessitates: availability of natural resources like land,
water, etc., adequate levels of savings and its transformation into investment;
skilled labour force and entrepreneurship; technical knowledge, etc., A
developing economy may have a relatively low level of savings, an unskilled
labour force, limited entrepreneurship and lack of technical knowledge to exploit
its natural resources for economic development. In such circumstances, it might
seek the assistance of countries which are economically better developed in
terms of technology, labour skills, entrepreneurship, savings and investment.
Assistance from other countries might flow in the form of investment or
technical collaboration. It may be from foreign governments, foreign private
companies or international financial institu
MERITS OF FOREIGN CAPITAL
An industrialising economy like India can greatly benefit in different ways by
welcoming foreign capital into the country:
1. India can have better technology to exploit the unutilised and under utilised
national resources.
2. Foreign investment and technology will enable technology upgradation and
modernisation of industry to improve quality and productivity.
3. Foreign investment will supplement domestic savings and capital formation
towards accelerating the rate of investment for economic development.
4. Foreign investment and technology will help to build up the much needed
infrastructure for the development of agriculture and industry
5. Foreign investment will bring marketing expertise which would enable
Indian goods to penetrate the international market on a larger scale.
6. Foregin investment will promote employment generation by absorbing the
relatively economical, particularly skilled labour force.

FOREIGN COLLABORATION POLICY

Technological advancements accelerate the economic development of the country.
Therefore, Government encourage the acquisition of foreign technology. Let us
discuss the policy related to foreign collaboration.
Foreign Technology Agreements : In order to promote technological capability in
Indian industry, acquisition of foreign technology is encouraged through foreign
technology collaboration agreements. Induction of know-how are permitted either
through automatic route or with prior approval from the Government.
Scope of Technology Collaboration : The terms of payment under foreign
technology collaboration, which are eligible for approval through the automatic route
and by the Government approval route are : technical know how fees, payment for
design and drawing, payment for engineering service and royalty. Payments for hiring
of foreign technicians, deputation of Indian technicians abroad and testing of
indigenous raw material, products, indigenously developed technology in foreign
countries are governed by separate RBI procedures. Payments for imports of plant and
machinery and raw material are also not covered by this agreement.
Automatic Route : RBI has been authorised to allow payment for foreign technology
collaboration by Indian companies under automatic route. The lumpsum payments
should not exceed US $2 million. The royalty payable should be limited to 5% for
domestic sales and 8% for export sales. There is no restriction on the duration of the
royalty payments.
Use of Trademarks and Brand Name : Payment of royalty upto 2% for exports and
196 for domestic sales is allowed under automatic route for use of trademarks and
brand name of the foreign collaborator without technology transfer. In case of
technology transfer, payment of royalty includes the payment of royalty for use of
trademark and brand name of the foreign collaborator.
, Procedure for Automatic Route : Authorised dealers may allow remittances for
royalty and payment of lumpsum fee. The payment should not exceed 5% on
domestic sales and 8% on exports andlor lumpsum payment does not exceed US$2
million. Authorised dealers may freely allow remittances for use of
TrademarkEranchise in India. They are required to seek prior approval for remittance
towards purchase of Trademarmranchise.
Government Approval - Project Approval Board (PAB) : Government approval is
required for royalty payment in the following category :
proposals attracting compulsory licensing;
items of manufacture resewed for SSI;
4 proposals involving any existing joint venture or technology transferltrademark
agreement in the same field in India; and
proposals not meeting any or all of the parameters for automatic approval.
In case of technical collaboration, approval is rdquired from PAB and for both financial
and technical collaboration fiom FIPB.
Procedure for Government Approval : Proposals for foreign technology
collaboration not covered under the automatic route are considered by the Project
Approval Board in the Department of Industrial Policy and Promotion.

Cashless Economy
This is a type of economy where the economic system is based on the transactions done
through debit cards, credit cards, digital wallets and modes. In a Cashless Economy, limited
amounts of money transactions can be done. In this economy, the electronic representation of
money is promoted over transactions by physical notes or coins.
Highlights of the Cashless Economy
• After demonetization, the Union made an initiative for card-based and online
transactions in India to emerge as a Cashless Economy.
• It led to e-payment startups in India.
• A unified Payments Interface(UPI) was introduced to simplify cashless transactions.
• The Covid-19 Pandemic ignited the massive shift towards digital transactions in India. As
per the NPCI Data, the UPI payment in June 2020 was recorded as an all-time high of
1.34 billion in terms of volume, with transactions worth INR 2.62 lakh crore.
Types of Payments in a Cashless Economy
There are different types of payment modes in a Cashless Economy, such as Mobile Wallets,
Net Banking, and Plastic Money.
• Mobile Wallet- This is one of the most common payment modes in India. Here a user
can store money on his/her mobile phone and pay it via apps. The user can transfer
money to the mobile wallet using his/her credit or debit card.
• Plastic Money- this includes prepaid, credit and debit cards. Cards can be used for
withdrawing money from ATMs, for online payment, and swiping for payment at shops,
fuel pumps, and restaurants.
• Net Banking- in a Cashless Economy, Net banking is one of the best ways for fund
transfer from one bank to another. Net banking can be done through a mobile phone or
computer.
Government Initiatives for Promoting Cashless Economy
There have been several steps taken by the government to promote Cashless Economy. Some
of them include UPI, government schemes, and programs. Let’s discuss them below.
• Demonetization- the primary goal of demonetization was to curb black money.
However, It also nudged India to become Cashless Economy. There was a big spike in
the use of payment apps after the declaration of demonetisation.
• Unified Payment Interface (UIP)- UPI has facilitated the payment system and
contributed massively to the Cashless Economy in India. Through UPI, users can use
multiple bank accounts in a single mobile App for transactions.
• Financial Literacy Centres- The Reserve Bank of India and the Finance Ministry have
established the Financial Literacy Centres, which would provide financial literacy and
spread awareness of banking products and services to the citizens of India.
• Direct Benefit Transfer (DBT)- This scheme was introduced by the Government of
India to transfer the subsidies and benefits of various social welfare schemes like Old
age pensions, MGREGA, LPG subsidy, etc. Schemes like this promoted Cashless
Economy in India.
• GST- the implementation of GST has also encouraged businesses to choose cashless
transactions.
• Ratan Watal panel on Digital Payments- This panel is headed by Ratan Watal, and it
suggests ways to promote Cashless Economy in India.
Prepaid Payment Instrument- Cashless Economy
As per the Reserve Bank of India, any mode of cashless fund transfer using mobile phones or
cards is defined as a ‘Prepaid Payment Instrument’. In a Cashless Economy, it can be issued as
net accounts, smart cards, mobile accounts, and Net wallets. These are classified into four
types namely- Open Wallets, Semi-open wallets, Closed Wallets, and Semi-Closed wallets.
• Open Wallets- these wallets allow you to withdraw money at ATMs and buy goods and
services. It also allows you to transfer funds.
• Semi-Open Wallets- Here, the customer has to spend what he has as the money can’t
be withdrawn. Examples of semi-open wallets include Airtel Money or Ola Money.
• Closed Wallets- it is the amount of money locked with the merchant in case of return or
cancellation of a product. This is popular with e-commerce companies.
• Semi-Closed Wallets- money withdrawals can’t be made with Semi-closed wallets.
However, the user can buy goods and services from listed vendors and at listed
locations.
Advantages of a Cashless Economy
One of the best things about the Cashless Economy is the record of transactions makes it
impossible to sustain black economics, which can be damaging to the national economy.
• It would curb the black money entering the system. An economy that is majorly cashbased gives
advantages to criminal activities like terrorism, human trafficking, drug
trafficking, etc.
• In a Cashless Economy, the circulation of fake currency notes can be reduced.
• It would lead to an increase in the tax base, as it is difficult to avoid proper payment in a
cashless society.
• In a Cashless Economy, the transaction of funds gets easier across the country. The
transfer of money can be done with ease.
• There will be less chance of theft of cash.
• A cashless Economy leads to digital transactions, which bring better transparency and
accountability.
Disadvantages of a Cashless Economy
There are various challenges faced in a Cashless Economy. We have mentioned some of them
below.
• Cyber attacks have increased a lot due to the emergence of digital infrastructure in a
Cashless Economy. That’s why establishing secured interfaces is required in a cashless
economy.
• Not all people have access to banking facilities which has become a major challenge for
the Cashless Economy.
• Lack of knowledge and adequate infrastructure is a big roadblock in setting Cashless
Economy.
• The citizens are not aware of the financial and digital instruments available to them.
They don’t know how to use them, which again becomes a major concern for the
Cashless Economy.
• There is a lack of internet connectivity in rural areas when compared to Urban areas.
There is a big Urban-Rural divide that needs to be addressed for the betterment of the
Cashless Economy.
Cashless Economy in India
To encourage the Cashless Economy in India, the Finance Minister during Budget Union 2019-
20 stated that a 2% tax deducted at the source will be levied on cash withdrawals that exceed
Rs. 1 crore in a year from a bank account. The government also added that businesses with an
annual turnover of over Rs. 50 crore can offer low-cost digital modes of payments, and no
merchant discount rate or charges will be added to the customers. This was a great move by
the government to adopt the Cashless Economy in India.
90% of all transactions in India's economy are dependent on cash because of the big size of the
informal sector that employs 90% workforce in India. India will face many challenges to
becoming a Cashless society. However, the challenges can be tackled if the Government
support developing technologies and infrastructure.
Challenges for Cashless Economy in India
Cashless Economy may take a long time to become adaptable in India. The challenges are
discussed below.
• A huge part of India’s population does not have access to smartphones, debit cars, etc.
This is the reason why they are dependent on cash transactions.
• People are not educated about how to use cashless methods.
• Most people in India use debit cards to withdraw money rather than paying directly
through them.
• People are not aware of privacy and security under cashless transactions, which have
become a big challenge for the Cashless Economy in India.
• Only 26% have access to the internet, and they choose online payment methods for
their transactions.
Why India Should Transform into Cashless Economy
There are various reasons why India should shift to a Cashless Economy, such as
• Cash is Expensive: It takes a lot of time and money to print the currency. The Reserve
Bank of India has spent Rs. 32.1 billion on printing the currency.
• Cash Drives Shadow Economy- it is difficult to trace cash, which gives the advantage of
carrying out illegal activities like smuggling, trafficking, terrorism, etc.
• Increased Tax Revenue- the Cashless Economy makes it mandatory for all people to
have bank accounts. This guarantees transparency in the money transaction within the
economy and minimizes the possibility of tax evasion.
Cashless Economy: Way Forward
To shift to a Cashless Economy, India need to learn from other developed countries which have
reduced their cash dependency.
• A financial education drive should be carried out to boost the knowledge of etransactions.
• The banks must make sure that the transaction fee is affordable or free.
• Internet connectivity must be improved in the rural areas of India.
• Infrastructure must be developed to ensure the availability of ATMs to reduce the
dependency on Cash.

Foreign Exchange Management Act – FEMA

The Central Government of India formulated an act to encourage external payments and across the
border trades in India known as the Foreign Exchange Management Act. FEMA (Foreign Exchange
Management Act) was introduced in the year 1999 to replace an earlier act FERA (Foreign Exchange
Regulation Act). FEMA was formulated to fill all the loopholes and drawback of FERA (Foreign Exchange
Regulation Act) and hence several economic reforms (major reforms) were introduced under the FEMA
act. FEMA was basically introduced to de-regularize and have a liberal economy in India.
Objectives of FEMA

The Foreign Exchange Management Act (FEMA) in India has several key objectives that guide its
implementation and regulatory framework. These objectives are aimed at facilitating foreign exchange
transactions, promoting international trade and investment, maintaining the stability of the Indian
rupee, and preventing illegal activities such as money laundering and unauthorized foreign exchange
dealings. Some of the main objectives of FEMA include:
 Facilitating External Trade and Payment
 Promoting Foreign Investment
 Maintaining Stability of the Indian Rupee
 Monitoring and Control of Capital Movements
 Preventing Money Laundering and Illegal Activities
 Promoting Financial Stability
 Harmonizing with International Standards
 Facilitating Cross-Border Transactions
 Promoting Economic Growth
 Adapting to Economic Changes

GST
GST, or Goods and Services Tax, is an indirect tax imposed on the supply of goods and services. It
is a multi-stage, destination-oriented tax imposed on every value addition, replacing multiple
indirect taxes, including VAT, excise duty, service taxes, etc
Primary objectives of GST :
1. The primary objective of GST is One Nation, One Tax, One Market.
2. To merge several Central and State taxes into a single tax.
3. To facilitate a common national market, it helps to improve
competitiveness of original goods and services in the market which directly
impact on GDP of the country.
4. To reduce the Cascading effect of taxes.
5. To ensure speedy and faster economic growth.
Salient features of GST :
1. Supply of goods and services : GST is applicable on ’supply’ of goods or
services as against the present concept on the manufacture of goods or on
sale of goods or on provision of services.
2. Principle of destination : GST is based on the principle of destination –
based consumption taxation as against the present principle of origin –
based taxation
3. A Dual GST Model : It is a dual GST with the Centre and the States
simultaneously levying tax on a common base
4. An Integrated GST ( IGST ) : Integrated GST (IGST) will be levied on inter –
state supply ( including stock transfers ) of goods or service.
5. Import of goods or services covered under IGST : Import of goods or
services will be treated as inter-state supply and would be subject to IGST
in addition to the applicable customs duties
6. Four rates GST Model : CGST, SGST, & IGST would be levied at rates to be
mutually agreed upon by the Centre and the States. In a recent meeting,
the GST Council has decided that GST would be levied at four rates viz. 5%,
12%, 18% and 28%
7. Merger of Existing taxes under GST : GST replaced the following taxes that
are prevailed in practice under the system of previous tax regime. VAT
levied and collected by the Union and State Governments that are
subsumed within the GST
8. Exception from GST : GST would apply on all goods and services except
Alcohol for human consumption. GST on five specified petroleum products (
Crude, Petrol, Diesel, ATF & Natural Gas ) would by applicable from a date
to be recommended by the GSTC. Tobacco and tobacco products would be
subject to GST. In addition , the Centre would have the power to levy
Central Excise duty on these products.
9. Composition scheme : For small taxpayers with an aggregate turnover in a
financial year upto 1.5 crores, a composition scheme is available. Under the
scheme a taxpayer shall pay tax as a percentage of his turnover in a State
during the year without benefit of Input Tax Credit. This scheme will be
optional
10. Input Tax credit (ITC) : Credit of CGST paid on inputs may be used only for
paying CGST on the output and the credit of SGST paid on inputs may be
used only for paying SGST. Input Tax Credit (ITC) of CGST cannot be used for
payment of SGST and vice versa. In other words, the two streams of Input
Tax Credit ( ITC) cannot be cross – utilized, except in specified
circumstances of inter - state supplies for payments of IGST.