FUNDAMENTALS OF ECONOMICS

WHAT TO PRODUCE
FUNDAMENTALS OF ECONOMICS
● The problem of what to produce and in what
● Economics is the study of how people,
quantities to be produced can be solved by a
businesses, and societies make decisions about
government that decides the allocation of
using limited resources to satisfy their needs and
resources in different areas of production.
wants.
● Alternatively, it can be solved based on the
● The decisions are taken with regard to the basic preferences of people in an economy and on
economic activities such as production and the price of goods and services in the market.
consumption of goods and services and saving ● Various methods of production require different
and investment. combinations of factors of production. A
technique of production could be either labour
intensive or capital intensive.
● "The science of choices under conditions of o Labour Intensive: In a production
scarcity" - Lionel Robbins process when more units of labour are
● "The study of mankind in the ordinary business used in proportion to capital.
of life" - Alfred Marshall o Capital Intensive: When the proportion
of capital used is more than labour, the
production process.
MICRO VS MACROECONOMICS
● Microeconomics: Individual economic agent’s
HOW TO PRODUCE?
behaviour - result of such interactions in
determining the price of goods and services ● The solution of the problem of how to produce is
(also called Price Theory.) based on the extent of output that is produced
○ Studies individual markets, firms, and for a given level of resources.
consumers ● Any producer would like to maximize the level
○ Focuses on supply and demand, price of output from the available resources. At the
determination, and resource allocation same time cost of using a technique is equally
○ Examines how individual businesses and very important.
households make decisions ● A producer will use that particular technology
which is available at least cost.
● Macroeconomics : Deals with the economic
aggregates of a country as a whole (also called FOR WHOM TO PRODUCE
the Theory of Income and Employment).
● The problem of ‘for whom to produce’ relates to
○ Concerned with the economy as a whole
how the value of the produced output of an
and seeks to study the causes and solutions for
economy gets distributed amongst different
economic issues such as unemployment, inflation,
people.
balance of payment deficits.
● People do not receive the output they produce
CENTRAL PROBLEM OF ECONOMICS as their compensation.
● The output is sold and the money is earned in
Economic problem arises in every economy due to:
the production process.
a) Unlimited wants ● This money is paid as income to people for the
b) Limited resources work they have done in the production process.
c) Alternative uses of resources

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 Fundamentals of Economics

● This income is then used by people to satisfy methods, the opportunity

their wants. cost is the value of the
resources that could
CONCEPT OF OPPORTUNITY COST have been used in an
alternative method.
● Opportunity cost is an essential concept in
■ For example, if a factory
economics that refers to the value of the next
decides to automate its
best alternative that is given up when a choice
production line, the
is made.
opportunity cost could be
● In other words, it is the cost of forgoing the the jobs lost by human
benefits of one option in favor of another. workers, while the benefit
● The concept of opportunity cost is important might be increased
when addressing the central problems of an productivity and lower
economy, which can be summarized as what to production costs.
produce, how to produce, and for whom to 3. For whom to produce: The concept of
produce. opportunity cost helps to determine how to
distribute goods and services among the
1. What to produce: Economies have limited
population.
resources to produce goods and services.
■ If an economy chooses to
Opportunity cost helps to determine the best
allocate more resources
allocation of these resources.
towards providing public
■ When an economy
services, such as
chooses to produce one
healthcare and
good or service, it must
education, the
give up the opportunity
opportunity cost might be
to produce another.
reduced private sector
■ For example, if a country
growth or lower defense
decides to invest in
spending.
building more hospitals, it
■ Conversely, if an
may have to give up
economy prioritizes
building new schools or
private sector growth or
roads.
defense, the opportunity
■ The opportunity cost in
cost could be reduced
this case would be the
by public services.
forgone benefits of
having more schools or By considering opportunity costs, economies can
roads. make informed decisions about how to allocate
2. How to produce: Opportunity cost also plays their scarce resources most effectively, addressing
a role in deciding how to produce goods the central problems of what, how, and for whom
and services most efficiently. to produce.
■ When choosing between
different production
TYPES OF ECONOMIC SYSTEMS
● Economies around the world are broadly classified into three main types based on their characteristics and
the systems they use to allocate resources and manage production and consumption.
● These are mixed economies, command economies, and market economies.

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 Fundamentals of Economics

● Each type represents a different approach to solving economic problems and managing economic
activities.

FACTORS OF PRODUCTION AND FACTOR LAND:

INCOME ● Definition: In economics, 'land' encompasses
Factors of production are the resources used to not just land in the literal sense, but all natural
create goods and services in an economy. They resources that are used to produce goods and
are the building blocks of economic activity, services. This includes geographical land,
essential for production and typically classified into forests, water resources, mineral deposits, and
four main categories: even the natural environment.

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 Fundamentals of Economics

● Role in Production: Land provides the basic raw They are often seen as the driving force behind
materials for production, such as minerals, economic activity.
timber, and crops. ● Income Earned: Profit.
● Income Earned: Rent. ● Example: A person starting a new tech
● Example: A farmer using his land to grow crops; company; a small business owner opening a
an oil company extracting oil from an oilfield. café.
Each of these factors is essential in the production
LABOR: process and contributes uniquely to the creation of
● Definition: Labor refers to the human effort, both goods and services.
physical and mental, used in the production of
goods and services. Physical Capital
● Role in Production: Labor is the human input into Physical capital consists of tangible, man-made
the production process, which includes skills, objects that assist in the production process. It
knowledge, and physical work. does not include natural resources (which are
● Income Earned: Wages or salaries. considered under 'land'), but rather those assets
● Example: Workers on an assembly line in a that are created by human input to aid
factory; a software developer coding for a new production.
application.
Characteristics:
CAPITAL: ● Tangible: Physical capital comprises physical
● Definition: In economics, capital refers to the objects like machinery, equipment, and
man-made physical goods used in production. buildings.
It traditionally encompasses physical capital, ● Depreciable: These assets lose value over
such as machinery, buildings, and tools, and time due to wear and tear.
increasingly recognizes human capital, which ● Enhances productivity: Proper investment in
includes the skills, knowledge, and experience physical capital increases the productivity of
possessed by an individual or population labor and other inputs.
● Role in Production: Capital is used to increase
the efficiency and productivity of labor. It is
Role in Production:
often a result of previous production, and it's
used in the production of other goods. ● Enables large-scale production and
● Income Earned: Interest efficiencies.
● Example: The machinery used in a ● Reduces the effort and time in production
manufacturing plant; the tools used by a processes.
carpenter. ● Often requires significant investment and thus
affects the economic decisions of businesses.
ENTREPRENEURSHIP:
● Definition: Entrepreneurship is the act of
combining the other three factors of production Human Capital
- land, labor, and capital - to produce a good Human capital refers to the economic value of
or service. It involves taking risks and innovating a worker's experience and skills. This includes
to start and manage businesses. education, training, intelligence, skills, health,
● Role in Production: Entrepreneurs organize the and other things employers value such as
other factors of production and take on the risks loyalty and punctuality.
associated with starting and running a business.

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 Fundamentals of Economics

machinery, tools, buildings) used in the

Characteristics: production of other goods and services.
Financial capital (money) is used to
● Intangible: Unlike physical capital, human
purchase physical capital, but it is not itself
capital is not tangible and cannot be
a factor of production.
touched or measured precisely.
3. Liquidity and Investment: While money is not
● Develops over time: Through education,
a factor of production, it is essential for
training, and experience, individuals enhance
liquidity and investment. Businesses need
their skills and productivity.
money to acquire capital goods and to
● Dynamic: Human capital can increase or
manage day-to-day operations. Investment,
decrease over time, depending on
funded by money, is crucial for economic
investments in education, health, and other
growth and development.
personal or societal factors.
4. Money's Role in Economic Activity: Money is
Role in Production: vital in facilitating economic activity. It
serves as a medium of exchange, a unit of
● Enhances productivity and efficiency of the
account, and a store of value, which are
workforce.
essential functions for the smooth operation
● Leads to innovation and technological
of modern economies.
advancement.
● Plays a crucial role in determining the Technology is not traditionally classified as a
competitiveness of a nation in the global separate factor of production, but it plays a crucial
market. role in enhancing the productivity and efficiency of
the existing factors: land, labor, capital, and
entrepreneurship. It's important to understand how
ARE MONEY AND TECHNOLOGY FACTORS OF
technology intersects with these traditional factors:
PRODUCTION

● Money is not capital as economists define 1. Enhancing Capital: Technology often directly
capital because it is not a productive resource. integrates with the capital factor of production.
● While money can be used to buy capital, it is Advanced machinery, equipment, and tools—
the capital good (things such as machinery and all aspects of capital—are often products of
tools) that is used to produce goods and new technology. For example, in
services. manufacturing, technology in the form of
● Money merely facilitates trade, but it is not in automated machinery significantly boosts
itself a productive resource. However, it's production efficiency.
important to understand the role of money in 2. Improving Labor Productivity: Technology can
relation to these factors: greatly enhance labor productivity. The use of
computers, software, and other technological
1. Money as a Facilitator: Money acts as a tools allows workers to produce more output in
facilitator in the production process. It is less time and with greater precision. It also
used to buy the factors of production (land, opens up opportunities for more skilled labor,
labor, capital) and to pay for operating shifting the focus from manual to intellectual
expenses. Money helps in the exchange of work.
goods and services and in the allocation of 3. Utilizing Land More Efficiently: Technology
resources, but it does not directly contribute enables better utilization of land. Agricultural
to the production of goods and services. technologies like hydroponics, precision
2. Capital vs. Money: In economic terms, farming, and genetically modified crops can
"capital" refers to physical capital (like

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 Fundamentals of Economics

significantly increase yield per acre, making ● These incomes are called transfer incomes
land use more efficient. because such income merely represent transfer
4. Empowering Entrepreneurs: Technology of money without any good or service being
provides entrepreneurs with new opportunities, provided in return for the receipts.
tools, and platforms for innovation and business ● Types of Non-Factor Income:
creation. The rise of digital platforms, e- ○ Gifts and inheritances: Receiving money
commerce, and various software tools are or assets without any exchange of
examples of how technology has created new goods or services. For
avenues for entrepreneurial ventures. example, inheriting property from a
In modern economic analysis, while technology is family member.
○ Government transfers: Social security
not considered a separate factor of production, it is
acknowledged as a critical enabler and multiplier benefits, unemployment benefits, or
pension payments received from the
of the existing factors. It's often seen as a key driver
of economic growth, productivity improvements, government.
○ Windfalls: Gains received through luck or
and competitive advantage in the global
chance, like winning a lottery or
economy.
receiving unexpected financial support.
NON-FACTOR INCOME CLASSIFICATION OF DIFFERENT SECTORS OF
● Income received without contributing directly to ECONOMY
production. It often involves transfers or ● Based on Nature of Economic Activity
redistribution of existing wealth rather than ● Based on regulation and conditions of work
generating new value. ● Based on ownership
● Based on the actors in economy and their role

CLASSIFICATION BASED ON NATURE OF ECONOMIC ACTIVITY – WAY THE GOODS ARE PRODUCED

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 Fundamentals of Economics

STRUCTURAL TRANSFORMATION OF AN from rural to urban areas in search of better job

ECONOMY opportunities, often in industrial and service
sectors.
It refers to the fundamental shift in its makeup and ● Changes in Employment Patterns: With the shift
functioning over time. This involves changes in the from agriculture to industry and services,
relative contribution of different sectors to the employment patterns change significantly.
economy, alterations in employment patterns, and There's a reduction in the proportion of the
advancements in technology and productivity. population engaged in agriculture and an
increase in industrial and service sectors.
KEY ASPECTS OF STRUCTURAL ● Technological Advancement: This is both a
TRANSFORMATION: driver and a consequence of structural
● Sectoral Shifts: A declining share of agriculture transformation. Technological progress leads to
in GDP and employment, and a rising share of more efficient production methods, influencing
manufacturing and services. the shift towards more advanced sectors.
● Productivity Enhancements: With economic ● Income Levels and Consumption Patterns: As
evolvement, productivity improves in agriculture economies transform, there's typically an
and manufacturing driven by technological increase in income levels, which in turn affects
advancements and better production consumption patterns – from basic necessities
techniques. to more diversified and sophisticated products
● Urbanization: Structural transformation is usually and services.
accompanied by urbanization, as people move

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 Fundamentals of Economics

● The financial sector of the economy, on the

CLASSIFICATION BASED ON NATURE OF
other hand, involves activities related to the
ECONOMIC ACTIVITY – REAL AND FINANCIAL
management of money and financial
SECTOR
transactions.
The basis for the classification of activities into the ● This sector includes financial institutions such as
real sector and financial sector of the economy is banks, insurance companies, and investment
the nature of the economic activities involved. firms, as well as financial markets such as stock
exchanges and bond markets.
● The real sector of the economy involves the
● The financial sector facilitates the transfer of
production and distribution of tangible goods
funds from savers to borrowers, provides liquidity
and services that are consumed directly or used
to financial markets, and helps manage risk
in the production of other goods and services.
through financial instruments such as
● This sector is sometimes referred to as the
derivatives.
"productive" or "real" economy because it is
concerned with creating value through the In summary, the real sector of the economy is
production of goods and services. concerned with the production and distribution of
● Examples of activities in the real sector include tangible goods and services, while the financial
agriculture, manufacturing, construction, and sector of the economy is concerned with the
services such as healthcare, education, and management of money and financial transactions.
hospitality. The basis for classification is the nature of the
economic activities involved.

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 Fundamentals of Economics

CLASSIFICATION BASED ON REGULATION AND CONDITIONS OF WORK

● The term unorganized worker has been defined under the Unorganized Workers' Social Security Act,
2008, as
○ A home based worker, self-employed worker or a wage worker in the unorganized sector and

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 Fundamentals of Economics

○ Includes a worker in the organized sector who is not covered by any of the Acts mentioned in
Schedule-II of Act i.e.
■ The Employee's Compensation Act, 1923 (3 of 1923)
■ The Industrial Disputes Act, 1947 (14 of 1947)
■ The Employees' State Insurance Act, 1948 (34 of 1948)
■ The Employees Provident Funds and Miscellaneous Provision Act, 1952 (19 of 1952)
■ The Maternity Benefit Act, 1961 (53 of 1961)
■ The Payment of Gratuity Act, 1972

CLASSIFICATION BASED ON MAJOR ECONOMIC ACTORS AND THEIR ROLE

Private Sector(Firms)
Household Sector Government Sector External Sector
–
Use factors of Supply factors of Collect taxes from Import goods and
production supplied production (land, households and services produced by
by households to labor, capital) to firms foreign firms
produce goods and firms Spend money on Export goods and
services Receive income goods and services services produced by
Pay income to from firms for their produced by firms domestic firms
households for their contribution to and for public goods Receive payments
contribution to production Provide transfer from exports and
production Spend their payments (e.g. social make payments for
Sell goods and income on goods security) to imports
services produced to and services households
households and produced by firms
other firms

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 BASIC MICROECONOMIC CONCEPTS

CONCEPT OF DEMAND ● Conversely, the demand for inferior goods, like

generic brands, may decrease.
● Demand - Quantity of commodity which an
individual is willing and able to buy at a 4. TASTE AND PREFERENCE OF CONSUMERS:
particular price during a given period of time. ● Changes in consumer tastes, influenced by
o Demand for a commodity means the trends or health awareness, can affect
desire for the commodity backed by demand.
purchasing power and the willingness to ● For instance, a surge in fitness consciousness
spend. may increase the demand for gym
● Demand reflects the relationship between the memberships.
price of the good or service and the quantity 5. EXPECTATIONS ABOUT FUTURE PRICES:
that consumers are willing to buy at that price. ● If consumers expect the price of a good to rise
in the future, they may buy more now,
INDIVIDUAL DEMAND AND MARKET DEMAND
increasing current demand.
● Individual demand for a commodity refers to
● This can happen with electronics when a new
the quantity of the commodity that an
model is anticipated, prompting consumers to
individual buyer is willing to buy at a given price
purchase existing models before the price
during a given period of time.
increase.
● Market demand for a good means the total
6. OTHER FACTORS:
quantity of a commodity that all the buyers of
the good are willing to buy at a given price over ● Demographics: Changes in population size, age
structure, etc., can influence demand.
a given time period.
● Government Policies: Taxes, subsidies, and
DETERMINANTS OF DEMAND – FACTORS WHICH
regulations can alter demand.
INFLUENCE THE DEMAND FOR A COMMODITY
● Availability of Credit: Easier credit terms can
1. PRICE OF THE COMMODITY: increase demand for expensive items.
● According to the Law of Demand, there is an
inverse relationship between the price of a LAW OF DEMAND
commodity and the quantity demanded.
● Law of Demand: Explains the relationship
● Example: If the price of coffee decreases,
between price and quantity demanded of a
consumers will typically buy more coffee.
good or service.
2. PRICE OF RELATED GOODS: ● According to the law of demand, all other
● Substitute Goods: If the price of tea (a substitute factors being equal, the quantity of a good or
for coffee) increases, the demand for coffee service demanded by consumers will decrease
may increase as consumers switch to coffee. as the price of the good or service increases,
● Complementary Goods: If the price of sugar (a and vice versa.
complement to coffee) increases, the demand ● An inverse (negative) relationship between the
for coffee may decrease because the overall price of a good/service and the quantity that
cost of having a cup of coffee has risen. consumers are willing to buy.

3. INCOME OF CONSUMER:
● If a consumer’s income increases, they may
demand more normal goods, such as organic
food.

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 Basic Microeconomic Concepts

● Example: If a city imposes water restrictions

during a drought, the demand for water for
gardening might decrease.

EXCEPTIONS TO LAW OF DEMAND

VEBLEN GOODS:
● Luxury items such as high-end watches (e.g.,
Rolex), designer handbags (e.g., Hermes Birkin),
and supercars (e.g., Ferrari).
● As the price of these goods increases, they may
be perceived as more desirable for their status
symbol, thus increasing demand.
GIFFEN GOODS:
● The staple foods like bread or rice in a low-
REASONS BEHIND LAW OF DEMAND income market.
LAW OF DIMINISHING MARGINAL UTILITY: ● If the price of bread rises, a consumer with very
● The more of a good or service a person limited money might buy more bread instead of
consumes, the less satisfaction they derive from meat, which is now relatively more expensive,
an additional unit. increasing the demand for bread even as its
● Example: The first slice of pizza brings more price goes up.
pleasure than the fourth or fifth slice. NECESSITIES:
INCOME EFFECT: ● Essential goods such as generic medicines,
● When the price of a good decreases, the basic food items like milk and eggs, or utilities
consumer’s purchasing power increases, like electricity.
allowing them to buy more of the good with the ● Even if the prices for these goods rise,
same income. consumers will still need to purchase them due
● Example: If the price of rice falls, people can to their essential nature.
afford to buy more rice without spending more GOODS EXPECTED TO BE SCARCE:
money. ● Examples include tickets for a limited-run
SUBSTITUTION EFFECT: theatre show or concert, or limited edition items
● If the price of a good increases, consumers will like a collectible sneaker or art piece.
switch to a cheaper alternative. ● When consumers expect these items to
● Example: If the price of butter goes up, people become scarce, they may be willing to pay
might start buying more margarine instead. higher prices to acquire them before they run
out.
CHANGE IN NUMBER OF BUYERS:
● The demand for a good will increase if the Self Notes
number of buyers in the market increases.
● Example: the demand for housing increases as
the population grows.
RESTRICTING USES OF A COMMODITY:
● If the use of a commodity is restricted, demand
may decrease.

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 Basic Microeconomic Concepts

ELASTICITY OF DEMAND NATURE OF THE COMMODITY:

● Luxury goods tend to have elastic demand, like
It is a measure of the responsiveness of the a sports car, because they are not a necessity
quantity demanded of a good or service to a
change in its price, income or other related and consumers can refrain from buying them
factors when prices rise.
● In contrast, necessities like salt have inelastic
demand.
SHARE IN TOTAL EXPENDITURE:
● Goods that take up a large portion of the
Different types of elasticity of consumer's budget, such as housing, typically
demand have elastic demand.
● Conversely, goods that make up a small share
of expenditure, like toothpicks, have inelastic
Price Cross Price Income demand.
elasticity of Elasticity of elasticity of
demand demand demand LEVEL OF PRICE:
● High-priced goods, such as diamonds, usually
have elastic demand because a small change
PRICE ELASTICITY OF DEMAND in price can represent a significant financial
decision for the consumer.
LEVEL OF INCOME:
Price Elasticity of Demand (PED):PED measures ● Low Income Groups: The demand for normal
the responsiveness of quantity demanded to a
change in price. goods can be elastic because as prices
change, the proportion of their income
available to spend on these goods changes
significantly.
INCOME ELASTICITY OF DEMAND

PED = % Change in Quantity Demanded / % Income Elasticity of Demand (YED) measures the
Change in Price responsiveness of quantity demanded to
changes in income.

If the PED value If the PED value If the PED value

is greater than 1, is less than 1, is exactly equal
then demand is demand is to 1, demand is
considered considered considered unit
elastic inelastic elastic
YED = % Change in Quantity Demanded / %
FACTORS DETERMINING PRICE ELASTICITY OF Change in Income
DEMAND
AVAILABILITY OF CLOSE SUBSTITUTES: If the YED value If the YED value If the YED value
● The more substitutes available, the more elastic is positive, then is negative, then is greater than 1,
the good is the good is then the good is
the demand. considered a considered an considered a
● For example, demand for a specific brand of normal good inferior good luxury good
bottled water is elastic because many other
brands are available.

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 Basic Microeconomic Concepts

CROSS-PRICE ELASTICITY OF DEMAND

Cross-Price Elasticity of Demand (XED) measures

the responsiveness of quantity demanded of one
good to changes in the price of another good

XED = % Change in Quantity Demanded of Good

A / % Change in Price of Good B

DETERMINANTS OF SUPPLY
If the XED value If the XED value If the XED value
is positive, then is negative, then is zero, then the 1. PRICE OF THE COMMODITY:
the two goods the two goods two goods are ● If the market price of a commodity rises, it
are considered are considered considered
substitutes complements unrelated generally encourages producers to supply
more.
INDIVIDUAL SUPPLY AND MARKET SUPPLY ● For example, if the price of wheat increases,
● Supply - the quantity of a commodity that a firm farmers might cultivate more wheat to
or seller offers for sale at a given price during a capitalize on higher profits.
given time period 2. PRICE OF OTHER RELATED GOODS:
● Individual supply refers to the quantity of a ● A rise in the price of a related good may reduce
commodity which an individual firm is willing to the supply of the good in question.
sell at a given price during a given period of ● Example: The price of barley (used for beer
time. production) rises, a farmer might switch from
● Market supply can be desired by summing up growing wheat to barley.
the supply of all the individual firms in the 3. PRICE OF INPUTS/FACTORS:
market ● If the cost of inputs like raw materials or labor
LAW OF SUPPLY goes up, the supply might decrease due to
higher production costs.
● Law of Supply - Explains the relationship
● Example: The cost of steel increases, car
between price and quantity supplied of a good
manufacturers may reduce their output.
or service.
● Quantity supplied of a commodity increases 4. TECHNOLOGY:
with increase in price and vice versa. ● Technological advancements can increase
● A direct (positive) relationship between the supply by making production more efficient.
price of a good/service and the quantity that ● Example: The use of drones in agriculture can
producers are willing to supply. increase crop yields and hence the supply of
agricultural products.
Self Notes 5. EXPECTATIONS:
● If producers expect future prices to be higher,
they might reduce current supply to sell more
later.
● Conversely, if they expect prices to drop, they
might supply more now.

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 Basic Microeconomic Concepts

● Example: Release of a new smartphone model; SITUATION OF EXCESS DEMAND

if manufacturers expect higher demand in the
future, they might initially limit supply to keep In case of excess demand, price starts rising, as the
prices high. buyers try to compete out each other.

6. TAXATION POLICY OF GOVERNMENT:

● Taxes can decrease supply because they
represent an additional cost to the producer. As a result of rise in price, demand starts contracting
● Example: An increase in tobacco tax can lead and supply starts expanding.
to a decrease in the supply of cigarettes.
PRICE ELASTICITY OF SUPPLY
All these movements of price, demand and supply
result in getting equilibrium restored, though at a higher
Price elasticity of supply measures the degree of price, than before
responsiveness of quantity supplied of a
commodity to change in its price SITUATION OF EXCESS SUPPLY

In case of excess supply, price starts falling, as the

suppliers try to compete out each other.

It is influenced by As a result of fall in price, demand starts

expanding and supply starts contracting.
Cost of production
Nature of the
of additional units Time Period
commodity
of a good

All these movements of price, demand and

supply result in getting equilibrium restored,
MARKET EQUILIBRIUM BY PRICE MECHANISM though at a lower price, than before
OR INVISIBLE HAND
● Market equilibrium is a situation in which DISADVANTAGES/ LIMITATIONS OF MARKET
quantity demanded of a commodity is equal to MECHANISM
its quantity supplied ● Markets cannot ensure social justice i.e.
● Market Mechanism - It is an automatic process reduction in poverty, unemployment and
through which equilibrium is determined and inequalities.
maintained in a market on the basis of demand o Markets can fill the gap between
and supply. demand and supply but not the gap
between need and supply.
Self Notes ● Markets cannot resolve macro economic
problems of the economy like long term growth,
conservation of environment (sustainable
development), price stability, poverty alleviation
etc.
o Markets cater only to short term needs of
well-off sections in relatively developed
areas.

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 Basic Microeconomic Concepts

o Markets fail to allocate resources ● Market Structure: This is the overarching term
optimally in the presence of externalities. used to describe the competitive environment
● Markets operate optimally only under in which businesses operate. It is categorized
competitive conditions, which seldom exist into two main types: Perfect Market and
without government intervention. Imperfect Market.
● Markets can lead to unsustainable patterns of
resource consumption and negative PERFECT MARKET:
externalities like pollution, wastage etc. ● In a perfect market, also known as perfect
competition, there are many buyers and sellers,
APPLICATION OF DEMAND AND SUPPLY
none of whom have the market power to
ANALYSIS
influence prices. Products are homogenous,
and there is free entry and exit from the market.
● Example: Agricultural markets, where many
farmers sell identical products to many buyers.

IMPERFECT MARKET:
● Markets that do not fulfill the conditions of
perfect competition are considered imperfect.
They are further subdivided into Monopoly,
TYPES OF MARKET
Monopolistic Competition, and Oligopoly.
Different Types of Market on basis of:
● Number of Firms - degree of control of a firm on MONOPOLY:
the price of a commodity ● A market structure where a single seller
● Ease of Entry and Exit of the Firms – less control dominates the market with a unique product
of existing firms over prices and high barriers to entry, preventing others
● Degree of Product Differentiation- from entering the market.
○ greater the degree of uniqueness (or ● Example: Utility companies such as electricity or
higher degree of product water suppliers in certain regions.
differentiation), the greater is the control
exercised by that firm over its pricing MONOPOLISTIC COMPETITION:
decisions. ● A market structure characterized by many
○ In case, the goods offered by different sellers offering differentiated products. There is
firms are homogeneous, the individual some control over price, and firms compete on
firms lose their control over the market in factors other than price, such as advertising and
price determination. product differentiation.
● Example: Restaurants and cafes offering diverse
dining experiences.

OLIGOPOLY:
● A market structure where a few large firms
dominate the market. These firms sell either
identical or differentiated products, and the
entry of new firms is difficult.
● Example: The automotive industry, with key
players like Toyota, Ford, and Volkswagen.

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 Basic Microeconomic Concepts

DEGREE OF COMPETITION

PREVIOUS YEAR QUESTIONS (PYQ)

Q.1) Consider the following statements: (2021)

Other things remaining unchanged market
demand for a good might increase if
1. Price of its substitute increases
2. Price of its complement increases
3. The good is and inferior good and income
the consumers increases
4. Its price falls
Which of the above statements are correct?

a) 1 and 4 only
b) 2, 3 and 4 only
c) 1, 3 and 4 only
d) 1, 2 and 3 only

Answer: (a)

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 NATIONAL INCOME
residents from abroad, minus income earned by
NATIONAL INCOME foreigners in the domestic market.
CONCEPT OF STOCK AND FLOW
STOCK: ECONOMIC ACTIVITY:
● A stock variable refers to a quantity that is ● Economic activity is any activity that involves
measured at a particular point in time. It producing, distributing, or consuming goods
accumulates over time and represents a certain and services, including all actions that
amount that has been built up until that contribute to the creation of economic value.
moment. ● Example: A carpenter building furniture to sell at
● Example: The amount of money in a savings a profit is engaging in economic activity.
account on the last day of the year is a stock. ● Its Features:
FLOW: o Monetary Value: Economic activities
● A flow variable refers to a quantity that is involve transactions that are measured
measured over a period of time. It represents in monetary terms and contribute to the
something that occurs over a duration, such as economy's gross domestic product
a week, a month, or a year. (GDP). They are performed with the
● Example: The total income earned by an intention of earning income, profit, or
individual during the year is a flow because it is wealth.
the accumulation of income over that year. o Exchange of Goods and Services: These
activities typically result in the
CONCEPT OF NATIONAL INCOME
production or exchange of goods and
● National income is often used interchangeably
services.
with the national dividend, national output, and
o Market Transactions: Economic activities
national expenditure.
often take place in markets, whether
● National Income represents the total value of all
local, national, or international.
goods and services produced in a country
o Formal Recognition: They are usually
during a specific time period (usually one year).
recognized by the government for
● It includes payments made to all resources
taxation and regulatory purposes.
either in the form of wages, interest, rent, and
o Sustainability: They can be sustained
profits.
over time as they are a source of
● It has been defined on the basis of the systems
livelihood for individuals engaged in
of estimating national income as net national
them.
product (NNP).
NON-ECONOMIC ACTIVITY:
● The progress of a country can be determined
● Non-economic activities are actions or tasks
by the growth of the national income of the
that are performed without any financial or
country.
commercial motive.
● National income can be measured in different
● Example: A person cooking a meal for their
parameters like GDP, GNP, NDP and NNP.
family or volunteering at a local charity is
engaging in non-economic activity.
National Income is the total monetary value of all ● Its Features:
final goods and services produced by the o Non-Monetary Value: Non-economic
residents of a country, plus income earned by activities are not measured in monetary

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 National Income

terms and do not have a direct financial markets and do not involve monetary
value. They are usually motivated by transactions.
altruism, tradition, culture, or personal o Informal Recognition: These activities are
satisfaction. often informal and may not be formally
o No Exchange Involved: These activities recognized by government entities.
do not involve the exchange of goods o Personal Fulfillment: The primary aim is
and services for money and are not often personal fulfillment, social service,
calculated in GDP. or cultural expression rather than
o Outside Market Transactions: Non- financial gain.
economic activities occur outside formal
DIFFERENT TYPES OF GOODS

All Goods and Services Produced in an Economy in CAPITAL GOODS:

a Year: This refers to the total economic output, ● These are used for the production of other
which includes all categories of goods and services. goods and are not intended for immediate
INTERMEDIATE GOODS: consumption.
● These are goods used in the production of final ● Example: Machinery in a factory.
goods and services. They are not counted in CONSUMPTION GOODS:
the final GDP to avoid double counting. ● Divided into durables and non-durables based
● Example: The steel used in manufacturing cars. on their longevity and usage.
FINAL GOODS: ● Durables: Goods that are used over a long
● These are goods consumed by the end user or period. Example: Refrigerators.
that do not undergo any further production ● Non-Durables: Goods consumed in a short
process and selling. period. Example: Food items.
● Example: A purchased smartphone.

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 National Income

CAPITAL GOODS FURTHER CLASSIFICATION: ○ Semiconductors inserted into electronic

● To Replace Depreciated Capital Good: This is devices.
investment spending on goods that replace ○ Flour used by a bakery to make bread.
worn-out or outdated capital. ○ Chemicals used in the production of
● Addition to Stock of Capital Goods: This pharmaceuticals.
represents the net increase in the stock of ● These goods are considered intermediate
capital goods, like purchasing additional new because they are midway through the
machinery for expansion. production process.
● Change in Inventory: The unsold finished goods, ● They are not counted separately in the GDP
work in progress, or raw materials held during calculations because their value is subsumed
the accounting period. within the final products.
● Counting them separately would lead to
CONCEPT OF INTERMEDIATE GOODS
double counting, as their value is already
● Intermediate goods are products that are used
reflected in the price of the final goods.
as inputs in the production of other goods or
services and are not finished products.
INTERMEDIATE GOODS FOR RESALE:
1. Steel used in the construction of
● These are goods that a business purchases with
vehicles.
● They can be categorized into two main types: the intention to resell them without further
processing.
1. Those used for reprocessing or
● They are often sold to other businesses that will
manufacturing other goods, and
2. Those purchased for resale within the either use them as inputs in their own production
processes or sell them to final consumers.
same accounting year.
● Examples include:
● Understanding intermediate goods is important
○ A wholesaler buying vegetables to sell to a
because they play a crucial role in the
restaurant.
calculation of Gross Domestic Product (GDP)
○ An auto dealership purchasing cars from a
and other national accounts.
manufacturer to sell to consumers.
○ A clothing retailer buying garments from a
Key Characteristics:
producer to sell in a store.
● Even though these goods are resold, they are
1. Not final products
2. Used in producing other goods still considered intermediate because they are
3. Undergo further processing not the end product consumed by the final user.
4. Value is included in the final product ● When these goods are resold without any
additional processing, their total value is
reflected in the final sale to the consumer, and
hence, they are not counted separately in GDP.
INTERMEDIATE GOODS FOR REPROCESSING:
● These are goods that are used as inputs in the AVOIDING DOUBLE COUNTING:
production process to manufacture other ● In national income accounting, it's crucial to
goods. avoid double counting when calculating GDP.
● They are usually transformed or incorporated ● Intermediate goods are not counted as part of
into the final product during the manufacturing GDP if their costs have been included in the
process. value of the final goods they help produce.
● Examples include: ● GDP is intended to measure the market value of
all final goods and services produced within a

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 National Income

country in a given period, so it only includes the • Capital goods include machinery, buildings,
market value of the final stage of production. infrastructure, and technology - essentially
CONCEPT OF FINAL GOOD anything used to produce other goods and
services.
● Passes out of active economic flow - Will not
• This investment is a part of the final output of an
undergo any further transformation in
economy and is essential for economic growth.
production process by producer
Example in Indian Context:
● Whether a good is final good or not depends on
• Infrastructure Development: India's
the economic nature of its use rather than the
investment in building new highways, metro
nature of good itself
systems, and airports. For instance, the
● used either for final consumption by the
construction of the Delhi-Mumbai Industrial
consumers or for investment by the producers
Corridor is a form of gross investment.
are known as final goods
• Manufacturing Sector: Investment in new
● Capital Goods – used in production process to
machinery and technology by Indian
produce other goods but do not get
manufacturing companies to increase
transformed i.e durable in character. They are
production capacity.
one of the factors of production
● Consumer Goods DEPRECIATION
• Over time, capital goods experience wear and
CAPITAL FORMATION / INVESTMENT
tear or become outdated.
• This depreciation is an inevitable part of their
INCREMENTAL CAPITAL OUTPUT RATIO use.
● The Incremental Capital Output Ratio (ICOR) is • A portion of gross investment is always
an important economic concept used to assess dedicated to replacing or repairing these
the efficiency of capital investment. depreciated assets to maintain current levels of
● It represents the ratio of investment to growth, economic production.
which is the additional capital required to Example in Indian Context:
produce an additional unit of output. ● Replacement of Machinery: A textile factory
● In simpler terms, ICOR indicates how much in India replacing old looms with new ones
capital investment is needed to generate one due to wear and tear.
additional unit of output or income. ● Upgrading Technology: IT companies in
India regularly updating their computer
systems and software to keep up with
technological advancements.
NET INVESTMENT
● Net investment is what remains of the gross
investment after accounting for depreciation.
● It represents the actual addition to the stock of
capital goods in an economy.
● This is the portion of investment that increases
GROSS INVESTMENT the productive capacity of the economy.
• Gross investment refers to the total amount of Example in Indian Context:
money spent on purchasing new capital goods ● Addition of New Facilities: A pharmaceutical
and maintaining or upgrading existing ones company in India expanding its facilities by
within a given period. building an additional factory.

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 National Income

● Enhancing Capacity: Indian Railways not represent the year's production but rather a
introducing new trains and expanding its previous period's production.
network beyond the replacement of old or
worn-out trains. TRANSFER PAYMENTS:
CONCEPT OF INVENTORY ● These are redistributions of income in the
economy, such as pensions, unemployment
benefits, and social security.
DEFINITION OF INVENTORY:
● They do not reflect the production of goods
● Inventory refers to the stock of unsold finished
and services and are merely transfers of funds.
goods, semi-finished goods, or raw materials.
● For instance, a car manufacturer might have a
number of cars that are completed and ready NON-MONETARY GOODS AND SERVICES:
for sale (finished goods), cars that are ● Bartered goods, homegrown food, and other
assembled but not painted (semi-finished), and services exchanged without the use of money
various car parts (raw materials). are often not included because they are
difficult to measure accurately in monetary
terms.
INVENTORY AS CAPITAL:
● These unsold goods or raw materials are
considered a form of capital because they can ILLEGAL MONEY:
be sold or used in the future to generate ● Earnings from illegal activities are not
revenue. reported and hence are not included in the
● For example, the unsold cars represent potential official calculation of national income.
sales for the car manufacturer.
WINDFALL GAINS:
CHANGES IN INVENTORY AS INVESTMENT: ● Unanticipated gains such as lottery
● When a business increases its inventory levels, winnings, or sudden profits due to natural
this is counted as investment because it events or market shifts. These are not
represents an outlay of funds with the considered as regular income or production
expectation of future returns. for national income accounting.
● Conversely, a reduction in inventory would CIRCULAR FLOW OF INCOME
imply that the goods have been sold, which ● The production units produce goods and
then translates into revenue. services. For this they employ four factors of
THINGS NOT INCLUDED IN NATIONAL INCOME productions viz, land, labour, Capital and
entrepreneurship.
● These four factors of production jointly produce
INTERMEDIATE GOODS: goods and services i.e. they add value to the
● Goods that are used in the production process existing goods.
to produce other goods and services and are ● This value added i.e. net domestic product is
not final products themselves. Including them distributed among the owners of four factors of
would lead to double-counting since their value production receive rent, compensation of
is already included in the final products. employees, interest and profit for their
contribution to the production of goods and
SECOND HAND GOODS: services.
● These are goods that have been previously ● The incomes received by the owners of the
used and are being resold. Their inclusion would factors of production are spent on the purchase

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 National Income

of goods and services from the production units 3. Analyzing economic policies: To analyze the
for the purpose of consumption and investment. impact of economic policies on different
● In short, production generates income. Income sectors of the economy.
is used for expenditure, and expenditure, in turn, 4. Measuring national income: Measures national
leads to further production. income and analyzing the distribution of
● There are three phases of circular flow of income and wealth in the economy.
national income. So there are three methods of 5. Evaluating economic performance: Evaluate
measuring national Income. the economic performance of a country and
● They are compare it with other countries.
○ (A) Output or Value-Added method
○ (B) Income method Not all the flows influence the generation of national
○ (C) Expenditure method. income. Some of these are non-factor or transfer
incomes flows and have no effect on national
income.
INJECTIONS AND LEAKAGES
INJECTIONS
Injections are the external factors that add to the
circular flow of income, and they can be classified
into three categories:
● Investment: Injection of funds by firms into the
economy to finance the purchase of capital
goods and increase their productive capacity
which increases the flow of income and output
in the economy.
● Government spending: Injection of funds by the
government into the economy to finance public
goods and services, such as education and
healthcare.
● Exports: Injection of funds into the economy
from abroad as a result of exports of goods and
services.
The circular flow of income model helps to explain ● Leakages: Leakages are the external factors
the interdependence of various sectors in the that remove funds from the circular flow of
economy and the flows of money and goods income, and they can also be classified into
between them. Some of the key utilities of this three categories:
model are: 1. Savings: Leakage of funds from
1. Understanding the interdependence of sectors: households to the financial sector,
It helps us understand how different sectors of where they are saved and not spent on
the economy are interdependent and how goods and services. Reduced flow of
they contribute to the overall economic income in economy.
activity. 2. Taxes: This refers to the leakage of funds
2. Identifying the factors that drive economic from households and firms to the
growth: It identifies the factors that drive government, where they are used to
economic growth by analyzing the flows of finance public goods and services.
money and goods between sectors.

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 National Income

3. Imports: This refers to the leakage of • Both residents and non-residents render factor
funds from the economy to abroad as a services to these units. Therefore, the income
result of imports of goods and services. generated in these units is shared by both the
MEASUREMENT OF NATIONAL INCOME residents and non-residents as their factor
income.
• There are three phases of circular flow of
• To get contribution of only normal residents (or
national income. So there are three methods of
their factor income earned within the domestic
measuring national Income. They are (A)
territory) we have to deduct the factor
Output or value added method (B) Income
payments made to the nonresidents. These
method (C) Expenditure Method
factor payments are known as factor payments
• Product Method - measuring the aggregate
made to the rest of the world.
value of final goods and services produced
• The residents, in addition to their factor services
(total of gross value added of all the firms in the
to the production units located in the economic
economy)
territory of a country, also provide factor
• Income Method - measuring the sum total of all
services to the production units outside the
factor payments will be called income method
economic territory i.e., to the rest of the world
• Expenditure Method - measuring the aggregate
(ROW). In return for these services, they receive
value of spending that the firms receive for the
factor incomes from the rest of the world
final goods and services which they produce.
This method will be called the expenditure CONCEPT OF GNP
method. • It is the money value of all final goods and
CONCEPT OF GDP services produced by the normal residents of a
country during a financial year.
• It is the money value of all final goods and
• Normal Resident
services produced in the domestic /economic
• A normal resident is a person who
territory of a country during a financial year.
ordinarily resides in a country and
• Domestic territory of a country includes the
whose centre of economic interest also
following
lies in that particular country
• Political frontiers of the country including
• Normal resident is different from the term
its territorial waters
nationals (citizens)
• Ships, and aircrafts operated by the
• Normal residents include both nationals
normal residents of the country between
(such as Indians living in India) and
two or more countries
foreigners (non-nationals living in India)
• Fishing vessels, oil and natural gas rigs
• For example, Nepalese living in India for more
and floating platforms operated by the
than one year and performing economic
residents of the country in the
activities of production, consumption and
international waters or engaged in
investment in India, will be treated as normal
extraction in areas where the country
residents of India.
has exclusive rights of operation.
• Indian citizens, living abroad (say in USA) for
• Embassies, consulates and military
more than one year and performing their basic
establishments of the country located in
economic activities there, will be treated as
other countries
normal resident of that country where they
• The sum total of value added by all production
normally reside. They will be considered as non-
units within domestic territory of a country is
residents of India (NRIs).
called domestic product. But the whole of it
• GDP Focuses on Location: GDP considers the
may not accrue to the citizens of the country.
geographical boundaries of Country X. It

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 National Income

includes the production of foreign entities within to estimate the GVA of the concerned
Country X but excludes the production of firm/sector.
Country X's entities located abroad. • National income as aggregate of factor
• GNP Focuses on Ownership and Citizenship: incomes Income Method
GNP includes all production by Country X's • National Income = Compensation of
citizens and businesses, irrespective of where employee + Rent + Interest + profit +
this production takes place. Mixed income + Net factor income from
RELATION BETWEEN GDP AND GNP ROW
• National Income = NDP at FC + Net
• GNP = GDP + Net factor income from
Factor income from ROW
abroad (Factor income received from ROW
• National income as aggregate of final
– Factor payments made to ROW)
expenditure Expenditure Method
• Factor income received from Rest of the
• GDP = C + G + Ι + X – M
World refers to the income earned by
• Final expenditure (expenditure on final
residents of a country from their investments
goods) is classified into (a) Private final
or work abroad.
consumption expenditure (b)
• Factor payments made to Rest of the World
Government final consumption
refer to the payments made by residents of
expenditure (c) Investment Expenditure
a country to foreign entities for their
(d) Net exports
investments or work in the country.
NET NATIONAL PRODUCT AT FC (NATIONAL
MARKET PRICE, BASIC PRICE AND FACTOR
INCOME)
COST
• Net National Product at FC (National Income) -
• Basic price = Factor cost + Production taxes -
sum total of factor incomes (compensation of
Production subsidies
employees + rent + interest + profit) earned by
• Factor cost includes only the payment to
normal residents of a country in an accounting
factors of production, it does not include
year
any tax
• NNP at FC = NDP at FC + Factor income
• Production taxes and subsidies are paid
earned by normal residents from ROW -
or received in relation to production and
factor payments made to ROW
are independent of the volume of
• It is Net National Product at factor cost (NNP at
production such as land revenues,
FC) which is called National Income of a
stamp and registration fee
country.
• Market price = Basic price + Product taxes -
• Net Factor Income from abroad is
Product subsidies
considered
• Product taxes and subsidies, on the
• Depreciation is removed
other hand, are paid or received per
• Net Indirect taxes (both product and
unit or product, e.g., excise tax, service
production taxes) effect is removed
tax, export and import duties etc
• NNP at FC is the best measure to gauge
• Taxes are out of the effort (production) of the
national income of a country
producer. Actually, it is brought out of his
• United Nations, national income has been
income.
defined on the basis of the systems of estimating
• On the other hand, subsidies are not his income,
national income as net national product (NNP).
it is accrued from outside. Subsidies are not out
the contribution of the concerned firm. So, taxes SUB-CATEGORIES OF NATIONAL INCOME
to be added and subsidies should be reduced • Personal Income –Part of National Income(NNP
at FC) received by households

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 National Income

• Personal Income (PI) NI – Undistributed sectors and prepares comparable estimates of

profits – Net interest payments made by State Domestic Product (SDP) at current prices.
households – Corporate tax + Transfer
payments to the households from the ESTIMATION OF NATIONAL INCOME IN INDIA
government and firms. • The first estimate of national income of India
• Personal Disposable Income – Part of personal was prepared by Dadabhai Naoroji for the year
income that can be used by households 1867 - 68. It was published in his book titled
• Personal Disposable Income (PDI ) PI – ‘Poverty and UnBritish Rule in India’.
Personal tax payments – Non-tax • The first scientific estimate of National Income
payments. was made by Professor V.K.R.V. Rao for year
• Private income - Private income consists of 1931-32.
factor incomes earned within the domestic • The first official estimate of National Income was
territory and abroad by private enterprises and prepared by the Ministry of Commerce,
workers (factor owners in the private sector) Government of India for the financial year 1948
and current transfer from government and the - 49.
rest of the world. • For further estimation of National Income,
• National disposable income - refers to the Government established Central Statistical
income which is available to the whole country Organisation/ Office (CSO).
for disposal • Since 1956, CSO has been publishing annually
• It includes both earned income and national income and related aggregates under
transfer income (unearned income) the title ‘National Accounts Statistics’ (NAS).
• Net national disposable income = NNP • Recently CSO and NSSO has been merged to
at mp + Net current transfers from rest of form NSO ( National Statistical Office)
the world = NNP at fc + NIT + Net current
transfer from rest of the world
CHANGES TO NATIONAL INCOME
NOMINAL AND REAL GDP ACCOUNTING
• Nominal GDP measures output using current • To ensure conformity to international standards –
prices UN SNA 2008
• Real GDP measures output using constant prices • Base Year has been changed from 2004-05 to
2011-12
• Headline Growth rate – GDP at constant market
price
• Replaced GDP at factor cost with the GVA at
basic prices
• Sector wise GVA now at Basic price rather than
at factor cost
• R&D treated as part of capital formationm
NATIONAL INCOME ACCOUNTING IN INDIA • shift from Establishment approach to Enterprise
approach
• National Statistical Office - Prepares national
• Incorporation of findings of NSSO Surveys:
accounts as well as publishes annual estimates
improvement in the representation of activities
of national product, government and private
in the unorganized manufacturing sector.
consumption expenditure, capital formation,
• new method assigns different weight for workers
savings, estimates of capital stock and
as per their productivity.
consumption of fixed capital, as also the state
• Better Coverage
level gross capital formation of supra-regional

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 National Income

• Comprehensive coverage of
manufacturing and services by
incorporation of data of MCA 21
• Comprehensive coverage of financial
sector
• Better coverage of local bodies and
autonomous institutions

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 ECONOMIC GROWTH AND DEVELOPMENT

ECONOMIC GROWTH ENTREPRENEURSHIP:

• The economic growth of a country is the • The drive and ability to start new businesses,
increase in the market value of the goods and create new products and services, and open
services produced by an economy over time up new markets contribute to economic
• We are now $3.3 trillion, it is not such a difficult expansion.
target to reach. Then if you simply assume 10% HUMAN RESOURCES DEVELOPMENT:
nominal GDP growth in dollar terms, then you • Education, skill development, and health
get to $10 trillion by 2033-34 and another improvements increase the productivity of the
doubling with the same rate.” workforce.
• Chief Economic Adviser (CEA) V. Anantha POPULATION GROWTH:
Nageswaran on June 14 said India would • Can contribute to economic growth by
become a $5 trillion economy by 2026-27 and expanding the labor force and market size,
$10 trillion by 2033-34. although it can also strain resources if not
accompanied by job creation and investment.
SOCIAL OVERHEADS:
• Public investments in social capital such as
schools, hospitals, and transportation networks
that support a productive economy.
NON-ECONOMIC FACTORS:
POLITICAL FACTORS:
Stable governance, sound economic policies, and
a favorable legal environment can foster economic
growth.
SOCIAL AND PSYCHOLOGICAL FACTORS:
• Cultural attitudes towards work and innovation,
as well as societal values and norms, can
ECONOMIC GROWTH FACTORS influence economic activity and productivity.

NATURAL RESOURCES: BUSINESS CYCLE

• The availability of abundant and accessible • A business cycle refers to the fluctuations in
natural resources like oil, minerals, forests, and economic activity that an economy
water can drive economic growth by providing experiences over a period of time.
raw materials for production and export. • It consists of periods of expansion and
contraction in economic activity, measured by
CAPITAL FORMATION: indicators like GDP, employment, and
• Investment in physical assets like machinery, investment.
buildings, and infrastructure which can enhance • There are four main phases of a business cycle:
productive capacity and efficiency. expansion, peak, contraction, and trough.
Here's a brief explanation of each phase, along
TECHNOLOGICAL PROGRESS:
with examples:
• Advancements in technology improve
1. Expansion: During an expansion, the economy
productivity by enabling more efficient
grows, and economic activity increases. It is
production processes and innovation.

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 Economic Growth and Development

characterized by rising GDP, increased It's important to note that the duration and severity
consumer spending, higher business of each phase can vary across different business
investments, and growing employment rates. cycles and depend on factors like economic
Inflation may also rise during this phase. policies, global events, and structural changes in
Example: The U.S. economy experienced a period the economy.
of expansion from 1991 to 2001, with robust GDP RECESSION
growth, low unemployment, and a booming stock
• It is a significant decline in economic activity
market, driven by factors such as technology
that lasts for a prolonged period.
advancements and globalization.
• A technical recession refers to a specific
2. Peak: The peak represents the highest point of
situation in economic terms where there has
economic activity in a business cycle. It is the
been a decline in Gross Domestic Product
point at which the expansion transitions into
(GDP) for two consecutive quarters.
contraction. At the peak, GDP growth slows
• It is a period where the economy significantly
down, and economic indicators like
contracts, leading to a decrease in spending
employment and investment may begin to
and investment by businesses and consumers.
decline. Inflation could be high, and interest
• Governments and central banks often take
rates may rise to curb inflationary pressures.
measures to mitigate the effects of a recession,
Example: The U.S. economy reached a peak in
such as reducing interest rates to encourage
December 2007, just before the onset of the Great
borrowing and spending, implementing fiscal
Recession, with high levels of GDP, employment,
stimulus packages, and providing social aid to
and stock market valuations.
the affected population.
3. Contraction: A contraction, or recession, is a
period of declining economic activity. GDP falls, POTENTIAL GDP
unemployment rises, consumer spending • Potential GDP, or potential output, refers to the
decreases, and businesses reduce investments. maximum level of real Gross Domestic Product
Central banks may cut interest rates to stimulate (GDP) that an economy can produce when all
economic activity and counter deflationary its resources, such as labor and capital, are fully
pressures. employed and operating at their most efficient
Example: The Great Recession of 2007-2009 was a levels. It represents the long-term trend of a
significant contraction in the U.S. economy, country's economic growth when it operates at
characterized by widespread job losses, falling full capacity without triggering inflation or other
GDP, reduced consumer spending, and a collapse economic imbalances.
in the housing market. The determinants of potential GDP are:
4. Trough: The trough marks the lowest point of the • Labor force: The size and quality of the labor
business cycle before the economy starts force have a direct impact on potential GDP. A
recovering and expanding again. Economic larger and more skilled labor force can
indicators such as GDP, employment, and contribute to higher levels of output.
investment hit their lowest levels, and inflation • Capital stock: The accumulation of physical
may be low or negative. capital, such as machinery, equipment, and
Example: The U.S. economy reached a trough in infrastructure, also contributes to potential GDP.
June 2009, after which it began to recover and A higher capital stock enables an economy to
enter a new expansionary phase, driven by factors produce more goods and services.
like fiscal and monetary stimulus measures, as well • Technology: Technological progress and
as a rebound in consumer spending and business innovation can boost potential GDP by
investment. increasing the efficiency and productivity of
labor and capital.

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 Economic Growth and Development

• Human capital: The skills, knowledge, and ECONOMIC DEVELOPMENT

experience of the workforce play a crucial role
Economic development is a broad measure that
in determining potential GDP. Investments in
includes progress in standards of living, reduction of
education, training, and healthcare can
poverty, improvement of health and education
improve human capital and raise the
services, and betterment of working conditions.
economy's productive capacity.
• Institutional factors: The quality of institutions, INDICATORS OF ECONOMIC DEVELOPMENT:
such as the legal system, property rights, and • Common indicators include GDP per capita,
regulatory environment, can also affect literacy rates, life expectancy, and the Human
potential GDP by influencing the efficiency of Development Index (HDI).
resource allocation and the overall business STRATEGIES FOR ECONOMIC DEVELOPMENT:
climate. • Policies may focus on industrialization,
India has been facing several factors inhibiting it macroeconomic stability, infrastructure
from realizing its potential GDP: development, technology advancement,
• Infrastructure bottlenecks: Inadequate education, and training.
infrastructure, such as transportation networks,
CHALLENGES TO ECONOMIC DEVELOPMENT:
power supply, and water systems, can hinder
economic growth and limit the country's • Challenges can include political instability,
productive capacity. corruption, unequal distribution of wealth, and
• Skill gap: India has a large, young population, environmental degradation.
but there is a significant gap between the skills SUSTAINABLE ECONOMIC DEVELOPMENT:
required by the labor market and those • This approach emphasizes not just growth but
possessed by the workforce. This mismatch also the need for environmental protection and
leads to underemployment and limits the social equity, ensuring that development meets
economy's potential output. the needs of the present without compromising
• Regulatory hurdles: A complex regulatory the ability of future generations to meet their
environment and bureaucratic red tape can own needs.
deter investment, stifle innovation, and impede
the efficient allocation of resources. Self Notes

• Low investment in R&D: Insufficient investment in

research and development can slow down
technological progress and hinder productivity
growth.
• Income inequality: High levels of income
inequality can lead to social unrest and
reduced consumer demand, ultimately
constraining economic growth.
• Fiscal and monetary constraints: Fiscal deficits
and high inflation can restrict the government's
ability to invest in infrastructure, education, and
other areas critical for potential GDP growth.
Addressing these challenges through policy reforms
and investments can help India realize its potential
GDP and achieve more robust and sustainable
economic growth.

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 Economic Growth and Development

ECONOMIC GROWTH VS ECONOMIC DEVELOPMENT

HUMAN DEVELOPMENT SUSTAINABLE DEVELOPMENT

• Human development is defined as the process • development that meets the needs of the
of enlarging people's freedoms and present without compromising the ability of
opportunities and improving their well-being. future generations to meet their own needs
• Human development is about the real freedom • It emphasizes the need to balance three
ordinary people have to decide who to be, dimensions(pillars): the environment, economy,
what to do, and how to live. and society.
• The human development concept was Economic: Attaining Balanced Growth
developed by economist Mahbub ul Haq. Economic sustainability focuses on achieving a
• Human Development Index- HDI was created to stable and enduring economic growth that
emphasize that people and their capabilities equitably benefits all sections of society. This aspect
should be the ultimate criteria for assessing the emphasizes:
development of a country, not economic • Steady Economic Growth: Ensuring that the
growth alone. economy grows continuously without major
downturns, providing stability and confidence
for businesses and investors.
• Inclusivity and Equity: Economic benefits should
be distributed fairly across all strata of society,
reducing inequalities in wealth and income.
• Resource Efficiency: Utilizing resources in a way
that maximizes productivity while minimizing
waste. This involves adopting sustainable
practices in production and consumption.

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 Economic Growth and Development

• Investment in Sustainable Industries: • Innovation and Sustainable Practices: Promoting

Encouraging industries that are environmentally research and development in sustainable
friendly and resource-efficient, ensuring long- technologies and practices that can drive
term economic viability without depleting economic growth without harming the
natural resources. environment.

GREEN GDP costs, environmental outcomes and income

inequality.
• Green GDP quantifies the costs of pollution,
• When information on economy's use of the
climate change, waste and other factors likely
natural environment is integrated into the
to cause costly damages in the future.
system of national accounts, it becomes green
• It takes into account the environmental
national accounts or environmental accounting
consequences of economic growth.
• The original GDP is adjusted for environmental ECONOMIC INEQUALITY
impact. • Economic inequality is the unequal distribution
• Calculating green GDP requires that net natural of income and wealth between different groups
capital consumption, including resource in society
depletion, environmental degradation, and • Gini coefficient (Gini index or Gini ratio) is a
protective and restorative environmental statistical measure of economic inequality in a
initiatives, be subtracted from traditional GDP population.
• GDP measure is dangerously inadequate • The Lorenz curve is a graphical representation of
measure of quality of life since it counts what the distribution of income or wealth in a society
we produce and consume, but ignores social

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 Economic Growth and Development

• The State of Inequality in India Report was 20% of the population would earn 20% of the
released today by Dr Bibek Debroy, Chairman, total income.
Economic Advisory Council to the Prime Minister
(EAC-PM). The report has been written by GINI INDEX (OR GINI COEFFICIENT):
the Institute for Competitiveness and presents a • The Gini Coefficient is a numerical measure of
holistic analysis of the depth and nature of income inequality ranging from 0 to 1, where 0
inequality in India. indicates perfect equality (where everyone has
• The report compiles information on inequities the same income) and 1 indicates perfect
across sectors of health, education, household inequality (where all the income is earned by a
characteristics and the labour market. As the single person).
report presents, inequities in these sectors make • It is derived from the Lorenz curve and can be
the population more vulnerable and triggers a calculated as the area between the Lorenz
descent into multidimensional poverty. curve and the perfect distribution line divided
LORENZ CURVE by the total area under the perfect distribution
line.

CUMULATIVE SHARE OF INCOME EARNED:

• This refers to the total amount of income earned
by a certain percentage of the population
when arranged from the poorest to the richest.

KUZNETS CURVE

1. Lorenz Curve is a graphical representation of the

distribution of income or wealth within a society.
The curve plots the percentage of total income • Kuznets is also known for the Kuznets curve,
earned by the cumulative percentage of the which hypothesizes that industrializing nations
population, starting with the poorest individual experience a rise and subsequent decline in
or household. income inequality.
• The rise in inequality occurs after rural labor
migrates to urban areas and becomes socially
PERFECT DISTRIBUTION LINE (SOMETIMES
mobile. After a certain income level is reached,
CALLED 45 DEGREE LINE):
inequality declines as a welfare state takes
• This line represents perfect equality where each
hold.
percentage of the population earns an equal
• A modification of the curve, known as
percentage of the total income. For example,
environmental Kuznets curve, has become

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 Economic Growth and Development

popular to chart the rise and decline of all environmental pressures follow this pattern. When
pollution in an industrializing nation's economy. discussing or presenting the EKC, it's crucial to
emphasize that the relationship between economic
ENVIRONMENTAL KUZNETS CURVE development and environmental impact is
complex and influenced by many factors, including
policy choices, technological change, and societal
values.

EXTERNALITIES
Externalities occur when the production or
consumption of a good or service imposes costs or
benefits on third parties not directly involved in the
transaction, and these costs or benefits are not
reflected in market prices.
• Negative Externalities: These arise when the
PRE-INDUSTRIAL ECONOMIES: actions of a firm or individual cause harm to
• In this stage, environmental degradation is others, and the 'cost' of this harm is not borne by
relatively low because the economy is not the source of the harm. For example, pollution
heavily industrialized and pollution levels are from a factory affects the health of nearby
generally manageable. residents, but the factory does not pay for these
health costs.
INDUSTRIAL ECONOMIES:
• Positive Externalities: These occur when the
• As an economy develops and industrializes, actions of a firm or individual provide benefits to
environmental degradation typically increases. others for which the provider is not fully
This is due to higher levels of production, energy compensated. An example is a homeowner
consumption, and emissions. planting a garden, which beautifies the
neighborhood and increases the property
TURNING POINT:
values, but the homeowner is not compensated
• The EKC suggests that at a certain level of
for this benefit.
income per capita, the trend of increasing
• Externalities and Market Failure: Since
environmental degradation reverses. This turning
externalities result in costs or benefits not being
point is where the income level is sufficient to
reflected in market prices, they can lead to
invest in cleaner technologies and stricter
inefficiencies and market failure. Markets may
environmental regulations.
overproduce goods with negative externalities
POST-INDUSTRIAL (SERVICE) ECONOMIES: and underproduce goods with positive
• In more advanced stages of economic externalities.
development, where the economy shifts from
manufacturing to services, the income is high CIRCULAR ECONOMY
enough to afford investments in environmental A circular economy is an economic system
protection, leading to a decrease in designed with the intention that maximum use is
environmental degradation. extracted from resources and minimum waste is
The EKC proposes that environmental degradation generated for disposal. It is one of the keys ways to
first increases and then decreases as an economy achieve sustainable development.
grows. However, it's important to note that the EKC
is a hypothesis with mixed empirical support and not

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 Economic Growth and Development

beginning of a new cycle, with efforts to

minimize waste and emissions.

RECYCLING, REMANUFACTURING,
REFURBISHING:
• After use, products are collected and the
materials are processed to be used again.
Remanufacturing and refurbishing restore used
products to a like-new condition.
The circular economy is an alternative to a
traditional linear economy (make, use, dispose) REUSE:
where resources are kept in use for as long as • Products or their components are used again for
possible, the maximum value is extracted from the same or a new function. Reuse extends the
them whilst in use, and products and materials are life cycle of the materials.
recovered and regenerated at the end of each
service life.
LONGER USE, INTENSIFYING USE,
DEMATERIALIZATION:
ENERGY AND MATERIAL INPUT: • Strategies are implemented to maximize the
• Resources are used to create products. In a utility of products and minimize the amount of
circular economy, the focus is on minimizing the material used. This can include sharing
input of new resources by using renewable or platforms, product-as-a-service models, and
recyclable materials. digitalization of products.

PRODUCTION:
• Products are designed and manufactured. In a
circular economy, this step emphasizes
sustainable manufacturing practices, including
designing for longevity and reparability.

DISTRIBUTION:
• Finished goods are transported to markets.
Efficient distribution methods that minimize
environmental impact are preferred.

USE:
• Consumers use the product. Products in a
circular economy are designed for durability
and could be offered as services to extend their
usable life.

DISPOSAL:
• In a linear economy, disposal often means
waste. In a circular economy, disposal is the

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 INFLATION

o C = consumption or spending by
GENERAL PRICE LEVEL
households
• General Price Level refers to the average price o I = investment, which is the spending by
of all goods and services produced and firms on capital goods
consumed in an economy during a specific o G = government spending and
period. o Exports (X) - Imports (M), which is the net
• It is a measure of the overall cost of living and amount spent on the economy's output
serves as an indicator of inflation or deflation by the rest of the world.
within an economy.
• The General Price Level can be measured in
several ways, with two of the most common
methods being the:
o Consumer Price Index (CPI) and
o Gross Domestic Product (GDP) deflator

WHAT IS INFLATION?

• Inflation is the sustained rate of increase in

general prices over a given period of time.
• Inflation is the decline of purchasing power of a
given currency over time.
• Inflation is reduction in value of money. So why does the aggregate demand curve slope
• Inflation is a situation when too much money downwards?
chases too few goods and services.
• It is imbalance between the money supply and There are three main reasons why the aggregate
the Gross Domestic Product (GDP) demand curve slopes downwards. They are:
• Inflation is an imbalance when aggregate
1. As consumption depends on real income and
demand exceeds the aggregate supply, then
real money balances, a fall in the price level will
the prices keep rising.
• The Reserve Bank of India has maintained its stimulate the consumption component of AD
inflation forecast at 4.5% for the fiscal year 2024. (the real balance or wealth effect).
• Inflation in 2024: 2. A fall in the price level will increase the real
o In August 2024, retail inflation was 3.65%. money supply, lower the rate of interest and
o However, in September 2024, retail stimulate the investment and consumption
inflation rose to 5.49%, a nine-month components of AD.
high.
3. A fall in the price level will, with a constant
o The RBI has said that inflation is expected
to align with the 4% target in 2025-26. exchange rate, increase international
competitiveness so that exports increase and
AGGREGATE DEMAND imports decrease.
• Aggregate demand is the total expenditure on
the national output at different values of the AGGREGATE DEMAND SHIFT:
price level over a given period of time. • The aggregate demand shift graph shows how
• It is therefore the sum of: AD = GDP at given an increase in aggregate demand (AD) from AD
general price level = C + I+ G + NX

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 Inflation

to AD2 can lead to an increase in both the price • A reduction in raw material and import costs
level and real national output (economic • More favourable weather conditions, e.g.
growth), moving from point Y1 to Y2. causing bumper harvests
• The initial equilibrium is at price level P1 and
output Y1. The new equilibrium is at a higher AGGREGATE SUPPLY SHIFT:
price level P2 and higher output Y2.
• The arrow might indicate the direction of
change due to increased aggregate demand.

• When there is a shift in aggregate supply from

AS1 to AS2, there is an increase in the
economy’s productive capacity.
• Initially, the equilibrium is at price level P1 and
output Y1. After the supply increase, the new
AGGREGATE SUPPLY equilibrium is at a lower price level P2 and a
• Aggregate supply is the total output of goods higher output Y2, indicating that the economy
and services, which all firms in the economy are can produce more goods at a lower price level.
willing and able to supply at different price • This could be due to improvements in
levels over a period of time. technology, increased efficiency, or other
• In the short run, firms respond to price increases factors that enhance production capabilities.
by supplying more goods but, as we shall see, in
MARKET EQUILIBRIUM
the long run supply may not always respond to
an increase in price levels.
AGGREGATE SUPPLY (AS):
• The AS curve represents the total quantity of
goods and services that producers in an
economy are willing and able to supply at a
given overall price level, in a given time period.

AGGREGATE DEMAND (AD):

• The AD curve represents the total quantity of all
goods and services demanded by the economy
at different price levels.
In long run, An increase in aggregate supply will
shift the supply curve to the right as shown below.
EQUILIBRIUM:
• A reduction in indirect tax
• The point where the AD and AS curves intersect
• A reduction in wage costs
is the equilibrium point, denoted by P* (the price

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 Inflation

level) and Y* (the real national output). This aggregate supply. Common causes include
represents the situation where the quantity of increased prices of raw materials or wages.
goods and services demanded equals the • Supply Shock Inflation: Sudden disruptions to
quantity supplied. supply, such as natural disasters or geopolitical
events, can lead to rapid increases in prices.
PRICE LEVEL:
STRUCTURAL INFLATION:
• The vertical axis indicates the overall price level
in the economy, not the price of a specific • Caused by fundamental economic and
good or service. structural problems, such as low productivity or
inefficiencies in the economy which lead to
REAL NATIONAL OUTPUT: continuously increasing costs.

• The horizontal axis measures the real output or

BUILT-IN INFLATION (WAGE-PRICE SPIRAL):
gross domestic product (GDP) of the economy,
adjusted for inflation. • This refers to the situation where rising wages
increase disposable income, boosting
consumption and demand, which then leads to
higher prices. As the cost of living rises, workers
demand higher wages, leading to a spiral of
wages and prices chasing each other upwards.

IMPACT OF INFLATION

DECLINE IN PURCHASING POWER OF

CONSUMERS:
• Inflation erodes the purchasing power of
money, meaning consumers can buy less with
the same amount of money over time.

CAUSES OF INFLATION INCREASE IN COST OF PRODUCTION DUE TO

INCREASE IN COST OF INPUTS:

DEMAND-PULL INFLATION: • As input costs rise, such as raw materials or

labor, production becomes more expensive,
• This occurs when demand for goods and
which can lead to higher prices for consumers.
services exceeds supply, often due to
increased consumer spending, higher
government spending (expansionary fiscal INCREASE IN COST OF BORROWING:
policy), or expansionary monetary policy that • Inflation often leads to higher interest rates,
increases money supply. which increases the cost of borrowing for both
individuals and businesses.
SUPPLY-SIDE INFLATION:
• Cost-Push Inflation: This is when the cost of DECLINE IN TRADE COMPETITIVENESS:
production goes up, leading to a decrease in

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 Inflation

• If a country's inflation rate is higher than that of • WPI basket does not cover services.
its trading partners, its exports can become less • Released by – Office of economic advisor, DIPP,
competitive due to higher prices. Ministry of commerce
• Base year – 2011-12
INCREASE IN INEQUALITY: • New definition of wholesale price index does
not include taxes in order to remove impact of
• Inflation can disproportionately affect the poor
fiscal policy.
since they spend a larger portion of their
• The new series also present separate ‘WPI Food
income on basic necessities, which may
Index.’
increase in price.
• prices tracked are ex- factory price for
manufactured products, Agri-market (mandi)
INCREASE THE SUBSIDY BURDEN OF price for agricultural commodities and ex-mines
GOVERNMENT: prices for minerals.
• Governments may need to spend more on • Weights given to each commodity covered in
subsidies to help cover the increased cost of the WPI basket is based on the value of
goods and services, straining public finances. production adjusted for net imports.

REDISTRIBUTION OF INCOME AND WEALTH:

• Fixed income earners, such as pensioners, may
see their real income decline.
• Debtors may benefit from inflation if the value of
their debts is eroded, whereas creditors lose out
for the same reason.
• Savers may see the real value of their savings
CONSUMER PRICE INDEX
diminish, while investors might seek protection
by investing in assets that hedge against • Consumer Price Index is a measure of change in
inflation. retail prices of goods and services consumed
by defined population group in a given area
BUSINESS COMMUNITY: with reference to a base year.
• Consumer price indices compiled in India are
• Businesses may face uncertainty which can
o CPI for Industrial workers CPI(IW),
affect investment decisions. Some businesses
o CPI for Agricultural Labourers CPI(AL)
might benefit from inflation if they can increase
and;
prices quickly, while others may suffer if costs rise
o Rural Labourers CPI(RL) and
faster than prices.
o CPI(Urban) and CPI(Rural)
o CPI combined.
MEASURING INFLATION –WHOLESALE PRICE
o Consumer Price Index for Urban Non-
INDEX
Manual Employees was earlier
• The Wholesale Price Index (WPI) measures the computed by Central Statistical
average change in the prices of commodities Organisation. However this index has
for bulk sale at the level of early stage of been discontinued since April 2008
transactions. • CPI(IW) and CPI(AL& RL) compiled are
• WPI covers commodities falling under the three occupation specific and centre specific and
Major Groups namely Primary Articles, Fuel and are compiled by Labour Bureau.
Power and Manufactured product.

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 Inflation

• CPI(Urban) and CPI(Rural) are new indices in the separately are also released w.e.f May,
group of Consumer price index and has a wider 2014.
coverage of population. This index compiled by • Reserve Bank of India (RBI) has started using
Central Statistical Organisation. CPI-combined as the sole inflation measure for
o Consumer Food Price Indices (CFPI) for the purpose of monetary policy.
all India for rural, urban and combined

WPI VS CPI

Parameter CPI WPI

Meaning It reflects the average change in prices paid It reflects changes in average wholesale
by consumers at the retail level. prices for goods sold in bulk.

Published by National Statistical Office (NSO), Ministry of Office of Economic Advisor (Ministry of
Statistics and Programme Implementation & Commerce & Industry)
Labour Bureau

Base Year 2012 2011-2012

Frequency of Monthly (14th of every month) Primary articles, fuel, and power on a
Publishing Weekly basis (Generally Thursdays)
Overall index on monthly basis.

Source The CPI's item weights are based on average The WPI's item weights are based on
household expenditures gathered from production values.
consumer expenditure surveys.

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 Inflation

Measured at Final stage of transaction First stage of transaction

Price paid by Consumers Wholesale dealers and manufacturers.

Number of 448 items in rural and 460 items in urban 697 (including Primary, fuel & power and
items manufactured products)

Status of Services are included in the CPI (like housing, Services are not included in the WPI.
services education, medical care etc)

Commodities Education, communication, transportation, Minerals, machinery, basic metals, and

included recreation, clothing, foods and beverages, other manufacturing inputs and
housing and medical care etc. intermediary items etc

Note: Earlier the CPI was published by the Central Statistics Office (CSO) which is merged and now called as
National Statistical Office (NSO), Ministry of Statistics and Programme Implementation

PRODUCER PRICE INDEX (PPI) current prices to that of prices that prevailed
during the base year
• The Producer Price Index (PPI) measures the • GDP price deflator = (nominal GDP ÷ real GDP) x
average change in the price of goods and 100
services either as they leave the place of • Advantages
production, called output PPI or as they enter o deflator covers the entire range of
the production process, called input PPI. goods and services produced in the
• PPI estimates the change in average prices that economy
a producer receives while CPI measures the o Changes in consumption patterns or
change in average prices that a consumer introduction of goods and services are
pays. automatically reflected in the GDP
• The prices received by the producers differ from deflator
the prices paid by the consumers on account of • GDP deflator is available only on a quarterly
various factors such as taxes, trade and basis along with GDP estimates, whereas CPI
transport margin, distribution cost etc and WPI data are released every month.
• WPI captures the price changes at the point of
bulk transactions and may include some taxes MEASURES TO CONTROL INFLATION
levied and distribution costs up to the stage of
wholesale transactions.
MONETARY MEASURES:
• PPI measures the average change in prices
received by the producer and excludes indirect • These involve actions by the central bank to
taxes. reduce the money supply through:
• WPI does not cover services whereas PPI
includes services. • Raising interest rates, which discourages
borrowing and slows down the economy
GDP DEFLATOR • Through open market operations where the
central bank sells government securities to
• It is ratio of the value of goods and services an
economy produces in a particular year at

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 Inflation

reduce the amount of money in the annum, it is referred to as walking or trotting

banking system. inflation.

FISCAL MEASURES: RUNNING INFLATION:

• Controlling Government Expenditures: By • A more rapid form of inflation where prices
reducing its spending, the government can increase by more than 10% but less than 20%
decrease the overall demand in the economy. per annum.

• Incentivising or Disincentivising: The

GALLOPING INFLATION:
government can use tax policies to either
encourage or discourage certain spending or • Prices rise at a very high rate, exceeding 20%
investment behaviors. For example, higher taxes but not reaching 1000% per annum.
on luxury goods can reduce demand for these • Can have severe economic repercussions if not
items. controlled.

ADMINISTRATIVE MEASURES: HYPERINFLATION:

• Supply Management: Adequate supply of • An extreme form of inflation where prices

goods can help to prevent prices from rising. skyrocket at an astronomical rate, often
exceeding 1000% per annum.
• Price Controls: Directly setting maximum prices
for essential goods to keep them affordable. • The value of the currency plummets, sometimes
nearing worthlessness.
• Export Restrictions: By limiting the export of
goods, the government can ensure that there is OTHER TERMS RELATED TO INFLATION
enough supply within the domestic market.
STAGFLATION
LONG-TERM POLICY MEASURES:
Stagflation is typically characterized by the
• These may include structural reforms aimed at following features:
increasing the economy's productive capacity,
such as investing in new technology, improving • High inflation: The high rates of inflation, often in
education and workforce skills, that can the double digits due to various factors,
enhance productivity and growth potential. including rising commodity prices, supply-side
shocks, and excess demand.
TYPES OF INFLATION • Stagnant growth: Low or negative rates of
economic growth caused by a various factor,
including high unemployment, low levels of
CREEPING INFLATION:
investment, and declining productivity.
• The price level rises slowly at a rate generally • High unemployment: The high levels of
considered manageable by the economy; unemployment, as businesses may be reluctant
usually not more than 3% per year. to hire new workers in the face of high inflation
and stagnant growth.
WALKING/TROTTING INFLATION:
• The price rise steadily at a moderate pace,
generally between 3% and less than 10% per

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 Inflation

Challenges: o Decreased consumer and business

confidence, leading to reduced spending
• Stagflation is a difficult economic condition to and investment
manage, as the tools used to combat inflation • To reduce a deflationary gap, policymakers
(such as monetary tightening) may exacerbate may implement expansionary fiscal or
the stagnation, and the tools used to promote monetary policies, such as increasing
growth (such as fiscal stimulus) may exacerbate government spending, cutting taxes, lowering
the inflation. interest rates, or increasing the money supply.
• Some economists argue that stagflation can • These actions aim to stimulate aggregate
only be addressed by implementing structural demand, bringing the economy's output closer
reforms that address the underlying causes of to its potential output, and reducing
the stagnation, such as improving labor market unemployment and deflationary pressures.
flexibility, promoting innovation.
• Stagflation is often associated with periods of Inflationary gap:
economic crisis or major economic transitions,
such as the oil shocks of the 1970s or the global • An inflationary gap occurs when an economy's
financial crisis of 2008. actual output is greater than its potential output.
In this situation, aggregate demand exceeds
the economy's capacity to produce goods and
INFLATIONARY GAP AND DEFLATIONARY GAP
services, leading to an increase in the general
• They are referred to the differences between price level (inflation). The inflationary gap is a
the actual level of output (GDP) in an economy result of excess demand in the economy, which
and its potential output, which is the level of puts upward pressure on prices as consumers
output that would be produced if all resources and businesses compete for limited resources.
were fully and efficiently employed. • An inflationary gap can be caused by various
• These gaps are used to analyze the current factors, such as:
state of an economy and help formulate o Expansionary fiscal policies, like increased
appropriate fiscal policies. government spending or tax cuts
o Expansionary monetary policies, like lower
Deflationary gap:
interest rates or increased money supply
• A deflationary gap occurs when an economy's o Increased consumer and business
actual output is lower than its potential output. In confidence, leading to higher spending and
this situation, there is insufficient aggregate investment
demand in the economy to fully utilize its • To reduce an inflationary gap, policymakers
productive capacity, resulting in unemployment may implement contractionary fiscal or
and, potentially, deflation (a decrease in the monetary policies, such as reducing
general price level). government spending, increasing taxes, raising
• A deflationary gap can be caused by various interest rates, or decreasing the money supply.
factors, such as: • These actions aim to decrease aggregate
o Contractionary fiscal policies, like demand, bringing the economy's output back
decreased government spending or tax in line with its potential output.
increases
Other Terms:
o Contractionary monetary policies, like
higher interest rates or reduced money • Core inflation: It is based on the prices of only
supply those commodities whose prices are nonvolatile

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 Inflation

i.e. it does not take into account prices of fuel

and food. It is used to show trend of inflation.
• Headline Inflation: It is calculated for all
commodities including fuel and food prices.
• Disinflation: Reduction in the rate of inflation
i.e. inflation is there and prices are rising but
at a decreasing rate. Price level declines
without any decline in production.
• Deflation: Sustained decrease in the general
price level i.e. negative inflation. It is a
situation in which, price level decreases
along with decline in production. It is not
desirable.

PREVIOUS YEAR QUESTIONS

India has experienced persistent and high food

inflation in the recent past. What could be the
reasons? (2011)

1. Due to a gradual switchover to the

cultivation of commercial crops, the area
under the cultivation of food grains has
steadily decreased in the last five years by
about 30%.

2. As a consequence of increasing incomes,

the consumption patterns of the% people
have undergone a significant change.

3. The food supply chain has structural

constraints.

Which of the statements given above are correct?

(a.) 1 and 2 only

(b.) 2 and 3 only

(c.) 1 and 3 only

(d.) 1, 2 and 3

Solution (b)

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 MONETARY POLICY - I

MONETARY POLICY

WHAT IS MONEY?
• It is a intermediate good which is used as medium of exchange to facilitate transactions
• Functions of Money are:
o Medium of exchange for purpose of transaction
o Unit of account
o Store of value
• Purchasing power of money – Value of money with respect to other commodities
EVOLUTION OF MONEY

FORMS OF MONEY and cannot be refused in settling

transactions in India.
• Commodity money: This is a form of money that
• Deposits with banks – Demand deposits which
has intrinsic value, such as gold or silver.
can be withdrawn on demand. Facility of
o Intrinsic Value refers to the inherent worth
cheque makes money in bank deposits easy to
of something independent of its
use as medium of exchange.
monetary, utilitarian, or commercial
value. DIGITAL CURRENCY
• Fiat money: This is money that has no intrinsic • Digital currency is available only in digital or
value and is declared legal tender by the electronic form and not in physical form such as
government. Its value is dependent on backing banknotes and coins.
by government or a central authority. Fiat • Digital currencies can be decentralized, as in
money includes paper currency and coins the case of cryptocurrencies like Bitcoin, or
o Legal Tender – Legalized by law as a centralized, as in the case of Central Bank
medium of exchange for transactions Digital Currencies (CBDCs).

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 Monetary Policy - I

o Cryptocurrencies operate on the • Medium of Exchange: CBDCs facilitate

technology called blockchain, which is transactions, serving as a secure method for the
a distributed ledger enforced by a exchange of goods and services.
disparate network of computers. • Safety and Security: As a central bank-issued
o Central Bank Digital Currencies (CBDCs) currency, they are designed to minimize
are an official form of digital money financial risks, including fraud.
issued and regulated by a country's • Store of Value: CBDCs maintain their value over
central bank. They represent the digital time, similar to traditional currency.
form of a nation’s fiat currency and are • Programmability: They can incorporate smart
equivalent to its physical currency, but in functionalities for specific transaction
digital form. conditions.
CBDC • Efficiency: CBDCs potentially enable faster and
• A CBDC is a digital asset issued by a central cheaper transactions, particularly across
bank that is equivalent to the country's fiat borders.
currency. A CBDC is centralized; it is issued and • Financial Inclusion: They can reach
regulated by the nation's monetary authority, underserved populations, improving access to
which in India is the Reserve Bank of India (RBI). currency and payment systems.
MOTIVATIONS AND BENEFITS:
COMPARISON WITH PRESENT CURRENCY: • Cost Reduction: CBDCs can reduce the
• Form: Unlike banknotes or coins, a CBDC is operational costs involved in managing physical
entirely digital. There is no physical cash.
representation of a CBDC; all transactions and • Financial Inclusion: CBDCs, particularly with an
holdings would be electronic. offline feature, can enhance financial inclusion
• Issuance and Regulation: While both CBDCs and resilience, especially in remote areas.
and present fiat currency are issued by the • Innovation and Efficiency: The introduction of
central bank, CBDCs would enable the central CBDCs is expected to foster innovation and
bank to directly record every issuance and efficiency in the payments system.
transaction, if needed, which is not possible with • Cross-Border Payments: CBDCs can potentially
physical cash. streamline cross-border payments, making them
• Accessibility: CBDCs could potentially be more more efficient.
accessible than physical cash since they could • Security and Trust: CBDCs aim to provide the
be distributed directly to a digital wallet, benefits of virtual currencies without the
bypassing the need for physical banking associated risks, ensuring consumer protection
infrastructure. and maintaining trust in the national currency.
• Storage and Handling: There's no need for CBDCS IN INDIA: THE DIGITAL RUPEE (E₹)
vaults, armored transportation, or ATMs with • The RBI defines the e₹ as a digital counterpart
CBDCs. Their storage and handling would be to the physical rupee, intended to coexist with
entirely through digital infrastructure, which and complement existing monetary forms. It
could be more efficient and less costly. aims to be a legal tender, just like physical cash,
CHARACTERISTICS OF CBDCS but is designed for ease of digital transactions.
• Legal Tender: CBDCs are recognized by law to • Launch and Current Status: The e₹ is designed to
be valid for meeting financial obligations. be a legal tender just like physical cash and is
• Digital Format: They exist in an electronic form, aimed to facilitate transactions that are easier,
stored and transacted through digital wallets faster, and cheaper.
and platforms.

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 Monetary Policy - I

• e₹ as a legal tender issued by a central bank in § Most commonly used – also

a digital form. The conversion rate is 1 e₹ = 1 known as aggregate monetary
Rupee. e₹ shall be accepted as a medium of resources
payment, legal tender and a safe store of o M4 – M3 + Total deposits with Post office
value. savings organisations (excluding
• Usage and Features: The e-Rupee operates National Savings Certificate )
through a digital wallet, provided by partner • Order of liquidity of these monetary aggregates
banks, and can be stored on mobile phones or o M1>M2>M3>M4
other devices. • Money Supply is also known as Money Stock.
• Transactions with e₹ can be made
anonymously, using just a phone number or QR MONEY STOCK: COMPONENTS
code, enhancing the ease of digital • Currency with public: Currency with public
transactions. comprises of notes in circulation, rupee and
• The RBI is promoting the interoperability of e₹ small coins (i.e. currency in circulation) less cash
with the Unified Payments Interface (UPI) with banks.
through QR codes, which has been supported • Demand deposits with banks: Demand deposits
by major banks like the State Bank of India with banks include all liabilities (excluding inter-
DEMAND FOR MONEY bank) that are payable on demand.
• Value(Price Level) and Quantum of • Time deposits with banks: Time deposits with
transactions(real GDP) banks are those liabilities (excluding inter-bank)
• Income: earn more money, they tend to which are payable otherwise than on demand.
demand more money for spending, saving, and • Other Deposits with the Reserve Bank: Other
investing purposes Deposits with the Reserve Bank for the purpose
• Interest Rate: demand for money is inversely of monetary compilation include deposits from
related to interest rates. foreign central banks, multilateral institutions,
o When interest rates are low, people are financial institutions and sundry deposits net of
more likely to hold onto their money, as IMF Account No.1.
they are not earning much by CONCEPT OF LIQUIDITY AND MONEY SUPPLY
depositing it in banks • Liquidity refers to the availability of cash or
SUPPLY OF MONEY (MONEY SUPPLY) assets that can be easily converted into cash
• The money supply is the total value of money without affecting their market price.
available in an economy at a point of time. • Assets that can be easily converted into cash
• Money in modern economy is Cash + Bank are referred to as "liquid assets“.
Deposits. • Cash: Physical currency and coins, as well as
• Depending on type of deposits we have balances held in demand deposit accounts, are
different measures of money known as considered the most liquid of all assets.
Monetary aggregates • Reserve Bank of India (RBI), uses its control over
o M1 – Currency with public + Demand the money supply to influence the overall level
Deposits (Narrow Money) of liquidity in the economy and achieve its
o M2 – M1 +Savings deposits with Post macroeconomic objectives.
Office savings bank CREATION OF MONEY SUPPLY
o M3 – M1 + Net time deposits of • By central bank
commercial banks (Broad Money) o Controlling high powered money
through monetary policy tools

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 Monetary Policy - I

o Issues currency which is held by public small coins. Rupee coins and small coins in the
or commercial banks balance sheet of the Reserve Bank of India
§ Currency issued by RBI is part of include ten-rupee coins issued since October
High Powered Money/ Reserve 1969, two rupee-coins issued since November
Money (M0)/Monetary Base 1982 and five rupee coins issued since
• By Commercial banking system – based on November 1985.
Fractional Reserve Banking • Bankers’ Deposits with the RBI: Bankers’ Deposits
o Create money by their lending activity with the RBI represent balances maintained by
o People deposit currency with them to banks in the current account with the Reserve
banks Bank mainly for maintaining Cash Reserve Ratio
o They retain a portion as reserve and lend (CRR) and as working funds for clearing
the rest adjustments.
HIGH POWERED MONEY/ RESERVE MONEY • Other Deposits with the Reserve Bank: Other
(M0)/MONETARY BASE Deposits with the Reserve Bank for the purpose
• Controlled by the Reserve Bank of India (RBI) to of monetary compilation includes deposits from
influence the money supply and inflation in the foreign central banks, multilateral institutions,
economy. financial institutions and sundry deposits net of
• acts as base for credit creation and further IMF Account No.1.
money supply by banks The RBI uses various monetary policy tools to control
• It includes the supply of high-powered money and achieve its
o currency in circulation (i.e., notes and macroeconomic objectives:
coins in the hands of the public) 1 Open market operations (OMO): The RBI buys or
o Bankers’ deposits with the RBI - deposits sells government securities in the open market
held by commercial banks as reserves to inject or withdraw high-powered money from
with the RBI the economy, thereby influencing the money
o ‘Other’ deposits with the RBI supply and interest rates.
o M0 = Currency in Circulation + Bankers' 2 Cash Reserve Ratio (CRR): By adjusting the CRR,
Deposits with the RBI + 'Other' Deposits the RBI can control the amount of reserves
with the RBI + RBI's other liabilities banks are required to hold, which in turn affects
• It broadly reflects the total monetary liabilities of the money supply. A higher CRR means banks
the Reserve Bank have less money to lend, resulting in a decrease
• Reserve money is an important indicator of the in the money supply, while a lower CRR allows
liquidity in the economy banks to lend more, increasing the money
supply.
3 Statutory Liquidity Ratio (SLR): Changes in the
SLR impact the availability of credit in the
economy. A higher SLR means banks have
fewer funds available for lending, which can
decrease the money supply, while a lower SLR
makes more funds available for lending,
increasing the money supply.
4 Repo and reverse repo rates: The repo rate is
the interest rate at which the RBI lends short-
COMPONENTS OF RESERVE MONEY
term funds to commercial banks, while the
• Currency in Circulation: Currency in Circulation
reverse repo rate is the rate at which the RBI
includes notes in circulation, rupee coins and
borrows from banks. By adjusting these rates,

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 Monetary Policy - I

the RBI can influence the cost of borrowing for • The buyers pay for these securities by
banks and the overall liquidity in the financial transferring funds from their reserve accounts to
system. the central bank.
• This action reduces the amount of high-
OPEN MARKET OPERATIONS (OMO) powered money in the banking system, as it
• Open market operations (OMO) are a decreases both the currency in circulation
monetary policy tool used by central banks to (when banks withdraw cash to purchase
control the money supply in the economy by securities) and bank reserves held at the
buying or selling government securities in the central bank.
open market. OMOs directly impact high- • The decrease in high-powered money leads to
powered money (monetary base), which then a decrease in the money supply through the
influences the broader money supply, interest money multiplier effect.
rates, and economic activity. • As banks have fewer reserves, they can lend out
Here's how OMOs influence high-powered money: less money, which reduces new deposits and
contracts the money supply. This process can
EXPANSIONARY OMO (PURCHASE OF
raise interest rates, reduce borrowing, and slow
GOVERNMENT SECURITIES):
down economic activity.
• When a central bank wants to increase the
MONEY MULTIPLIER – HOW MUCH MONEY CAN
money supply, it buys government securities
BANKS CREATE FROM AN INITIAL DEPOSITS?
from commercial banks or other financial
institutions. • It depends on reserve requirement.
• The central bank pays for these securities by o CRR
crediting the reserve accounts of the selling o Statutory Liquidity Ratio (SLR)
banks. • Money multiplier = 1/ Reserve ratio
• This action increases the amount of high- • Reserve ratio is portion of deposits they have to
powered money in the banking system, as it retain as reserves.
increases both the currency in circulation (when • The money multiplier is a concept in banking
banks convert their reserves into cash) and and economics that illustrates how an initial
bank reserves held at the central bank. deposit can result in a larger increase in the
• The increase in high-powered money leads to overall money supply in the economy. This
an increase in the money supply through the occurs through the process of fractional reserve
money multiplier effect in a fractional reserve banking, where banks are required to hold only
banking system. As banks have more reserves, a portion of their deposits as reserves and are
they can lend out more money, which creates allowed to lend out the rest.
new deposits and further expands the money • The money multiplier formula can be used to
supply. This process can lower interest rates, calculate the maximum increase in the money
stimulate borrowing, and boost economic supply that can result from an initial deposit:
activity. • Money Multiplier = 1 / Reserve Requirement
Ratio
CONTRACTIONARY OMO (SALE OF • It's important to note that the actual money
GOVERNMENT SECURITIES): multiplier may be lower due to factors like
• When a central bank wants to decrease the banks not lending out all their available funds or
money supply, it sells government securities to individuals holding cash instead of depositing it
commercial banks or other financial institutions. into a bank.

Let's illustrate the money multiplier with an example:

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 Monetary Policy - I

• Assume the reserve requirement ratio is 10%, SLR

which means banks are required to hold 10% of
• Statutory Liquidity Ratio or SLR is a minimum
their deposits in reserve and can lend out the
percentage of deposits that a commercial bank
remaining 90%.
has to maintain in the form of liquid cash, gold
• An individual, John, deposits $1,000 in Bank A.
or other securities.
• Bank A is now required to hold 10% of this
• It is basically the reserve requirement that banks
deposit ($100) as reserves and can lend out the
are expected to keep before offering credit to
remaining 90% ($900).
customers.
• Bank A lends the $900 to another individual,
o These are not reserved with the Reserve
Jane, who deposits it in Bank B.
Bank of India (RBI), but with banks
• Bank B must hold 10% of Jane's deposit ($90) as
themselves.
reserves and can lend out the remaining 90%
o The SLR was prescribed by Section 24
($810).
(2A) of Banking Regulation Act, 1949.
• This process continues, with each new deposit
• It is used to to regulate inflation and liquidity.
leading to more loans and deposits in other
• It also helps in government borrowing - SLR has
banks.
helped the government to sell its securities or
• In our example, the reserve requirement ratio is
debt instruments to banks.
10% or 0.1, so the money multiplier is:
• Most of the banks will be keeping their SLR in the
• Money Multiplier = 1 / 0.1 = 10
form of government securities as it will earn
• This means that an initial deposit of $1,000 can
them an interest income.
create up to $10,000 in new money in the
economy (10 times the initial deposit).
• It's important to note that the actual money
multiplier may be lower due to factors like
banks not lending out all their available funds or
individuals holding cash instead of depositing it
into a bank.
CRR
• Cash Reserve Ratio is percentage of cash
required to be kept in reserves as against the
bank's total deposits, is called the Cash Reserve
Ratio.
• Cash Reserve Ratio is the percentage of the
deposit (NDTL) that a bank has to keep with the
RBI. CRR is kept in the form of cash
o Banks don’t earn any interest on that
money
o it ensures the security of the amount in
case of any emergencies
o It is used to control inflation
• The cash reserve is either stored in the bank’s
vault or is sent to the RBI.
• Banks can’t lend the CRR money to corporates
or individual borrowers, banks can’t use that
money for investment purposes.

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 MONETARY POLICY II

MONETARY POLICY • Failure to Maintain Inflation Target

o Average inflation is more than the upper
• Monetary Policy is the policy of a country’s
tolerance level of the inflation target for
central bank to regulate the supply of money
any three consecutive quarters.
and credit in the economy with the objective of
o Average inflation is less than the lower
achieving the goals of growth, price stability,
tolerance level for any three
and financial stability.
consecutive quarters.
• RBI is entrusted with the responsibility of
conducting monetary policy in India Under the
Reserve Bank of India, Act,1934 (RBI Act,1934) WHAT WILL HAPPEN IF BANKS FAILS TO
(as amended in 2016), MAINTAIN INFLATION TARGET?
• RBI has the the primary objective of maintaining • It will have to give a report to Central
price stability while keeping in mind the Government
objective of growth. o Reasons for failure to achieve the
inflation target
MONETARY POLICY FRAMEWORK AGREEMENT o Remedial actions proposed to be taken
(MPFA) by the Bank
• In May 2016, the RBI Act, 1934 was amended to o Estimate of the time-period within which
provide a statutory basis for the implementation the inflation target shall be achieved
of the flexible inflation targeting framework.
MONETARY POLICY COMMITTEE (MPC)
• Inflation Target: Under Section 45ZA, the Central
Government, in consultation with the RBI, • Composition – Six Members (Section 45ZB of the
determines the inflation target in terms of the amended RBI Act, 1934)
Consumer Price Index (CPI), once in five years • 3 internal members:
and notifies it in the Official Gazette. o RBI Governor as the Chairperson, ex
• Accordingly, on August 5, 2016, the Central officio
Government notified in the Official Gazette o RBI Deputy Governor (in charge of
4 per cent Consumer Price Index (CPI) inflation monetary policy) as Member, ex officio;
as the target for the period from August 5, 2016 o One officer of the Bank to be nominated
to March 31, 2021. by the Central Board as Member ex-
o The upper tolerance limit is of 6 per cent officio.
and the lower tolerance limit of 2 per • 3 external experts appointed by the Central
cent. Government (hold office for a period of four
o On March 31, 2021, the Central years or until further orders, whichever is earlier)
Government retained the inflation target
and the tolerance band for the next 5- FUNCTIONING
year period – April 1, 2021 to March 31, • Determines the policy repo rate required to
2026. achieve the inflation target.
• Section 45ZB of the RBI Act provides for the • MPC is required to meet at least four times in a
constitution of a six-member Monetary Policy year.
Committee (MPC) to determine the policy rate • Quorum for the meeting of the MPC is four
required to achieve the inflation target. members.
• Once in every six months, the Reserve Bank
publishes the Monetary Policy Report.

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 Monetary Policy II

• Each member of the MPC has one vote, and in • The LAF helps in fine-tuning the liquidity in the
the event of an equality of votes, the Governor banking system on a day-to-day basis,
has a second or casting vote. providing a measure for banks to manage their
short-term liquidity needs.
INSTRUMENTS (TOOLS) OF MONETARY • The participants of the Liquidity Adjustment
POLICY Facility (LAF) are scheduled commercial banks,
primary dealers, and select all-India financial
institutions that have been approved by the RBI.
o Scheduled commercial banks are banks
that are included in the Second
Schedule of the Reserve Bank of India
Act, 1934.
o Primary dealers are specialized financial
institutions that deal in government
securities
o Select all-India financial institutions are
financial institutions that are authorized
by the RBI to participate in the LAF.
These institutions include the National
Bank for Agriculture and Rural
Development (NABARD), the Small
Industries Development Bank of India
(SIDBI), and the Export-Import Bank of
India (EXIM Bank).

KEY DIFFERENCES BETWEEN OMO AND LAF:

• Purpose: OMOs are mainly used to adjust the
base money supply and manage long-term
liquidity, whereas LAF is used for short-term
liquidity management.
LIQUIDITY ADJUSTMENT FACILITY (LAF):
• Frequency: OMOs can be conducted as per
• LAF is a tool used by central banks (in the case
the central bank's assessment of the
of India, the RBI) to aid banks in adjusting their
macroeconomic situation, while LAF is usually a
daily liquidity mismatches. LAF consists of two
daily operation for managing overnight liquidity.
components:
• Securities: OMOs exclusively deal with
• Repo (or Repurchase Agreement) operations:
government securities, while LAF can include a
Here, banks can borrow money from the central
broader range of approved securities.
bank by selling securities and agreeing to
• Impact: OMOs can have a broader impact on
repurchase them at a later date at a pre-
the economy influencing long-term interest
determined price. It is a short-term borrowing
rates, while LAF primarily affects short-term
facility for banks.
interest rates.
• Reverse Repo operations: This is the opposite of
Repo. Here, banks can park their excess funds
Apart from LAF, instruments of liquidity
with the central bank and earn interest on it. It is
management include outright open market
a short-term investment facility for banks.

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 Monetary Policy II

operations (OMOs), forex swaps and market • Can be invoked by banks any time whereas
stabilisation scheme (MSS). reverse repo operations are at the behest of RBI
where banks have to bid for the auctions.
REPO RATE • Provides freedom to banks to place their funds
• The interest rate at which the Reserve Bank to earn interest without waiting for auctions.
provides liquidity under the liquidity adjustment • Access to SDF and MSF will be at the discretion
facility (LAF) to all LAF participants against the of banks, unlike repo/reverse repo, OMO ,
collateral of government and other approved which are available at the discretion of the
securities. Reserve Bank.
• "repurchase agreement" or "repo," which is a • It is designed to absorb surplus liquidity – both
form of short-term borrowing mainly in transient and durable liquidity.
government securities. • Operated on an overnight basis with flexibility to
• The seller of the securities agrees to buy them absorb liquidity for longer tenure with
back from the purchaser at a predetermined appropriate pricing.
date and price.
MARGINAL STANDING FACILITY (MSF) RATE
• In the context of a repo transaction, the • The penal rate at which banks can borrow, on
"forward clean price" is the agreed-upon an overnight basis, from the Reserve Bank by
price at which the seller will repurchase the dipping into their Statutory Liquidity Ratio (SLR)
securities. portfolio up to a predefined limit (2 per cent).
• It differs from the "spot clean price," which is
• This provides a safety valve against
the current market value of the securities
without accrued interest. unanticipated liquidity shocks to the banking
• The forward price is adjusted for the system. The MSF rate is placed at 25 basis points
difference between the repo interest (which is above the policy repo rate
the cost of the borrowing for the seller) and
the coupon interest that the securities will
earn during the repo agreement. VARIANTS OF REPO – OUTSIDE THE LAF
• The LTRO is a tool under which the central bank
provides.
REVERSE REPO RATE
• It allows banks to borrow funds from the RBI for
• Reverse Repo Rate: The interest rate at which
one-year to three-year money at the prevailing
the Reserve Bank absorbs liquidity from banks
repo rate, accepting government securities as
against the collateral of eligible government
the collateral.
securities under the LAF.
• Consequently, the banks can invest these funds
in designated sectors only through various debt
STANDING DEPOSIT FACILITY (SDF) instruments like corporate bonds, non-
• Reserve Bank accepts uncollateralised deposits, convertible debentures, commercial papers,
on an overnight basis (flexibility to absorb etc.
liquidity for longer tenure with appropriate • The ultimate objective is to increase the flow of
pricing), from all LAF participants. . credit in the economy.
• SDF introduced in April 2022.
• SDF rate replaced the fixed reverse repo rate as
BANK RATE
the floor of the LAF corridor.
• The rate at which the Reserve Bank is ready to
• The SDF is also a financial stability tool in
buy or rediscount bills of exchange or other
addition to its role in liquidity management.
commercial papers.

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 Monetary Policy II

• It is the central banker’s tool for controlling • The money obtained under MSS should be kept
liquidity and inflation. with the RBI. It should not be transferred to the
• The Bank Rate is published under Section 49 of government. This is because, if it is transferred,
the RBI Act, 1934. government will spend the money in the
• A rise in bank rate raises the deposit as well as economy thereby adding to liquidity.
lending rates in the economy while a lowering
QUALITATIVE TOOLS
of the bank rate reduces these rates.
• Background: • Moral suasion - Moral suasion is a tool of
o Bank Rate once used to be the policy monetary policy where the central bank uses its
rate (the key interest rate based on reputation and influence to encourage or
which all other short term interest rates discourage certain types of borrowing or
move) in India. lending.
o On the introduction LAF, o The RBI can use moral suasion by
discounting/rediscounting of bills of communicating with banks and other
exchange by the RBI has been financial institutions and encouraging or
discontinued. As a result, the Bank Rate discouraging them from making certain
became dormant as an instrument of types of loans or investments
monetary management. • Margin Requirement - Margin requirement is a
• Bank Rate is now aligned to Marginal Standing tool of monetary policy where the central bank
Facility (MSF) rate. requires borrowers to put up a portion of the
o MSF is the penal rate at which banks loan amount as collateral.
can borrow money from the central • Direct Action - Direct action is a tool of
bank over and above what is available monetary policy where the central bank takes
to them through the LAF window. direct action to influence the behavior of banks
o In other words, MSF assumed the role of and other financial institutions. The RBI can use
bank rate, once the latter became direct action by imposing fines, penalties, or
operational in 2011. restrictions on banks that violate its regulations
• Bank Rate is now used only for calculating or engage in risky practices
penalty on default in the maintenance of cash • Credit Rationing - Credit rationing is a tool of
reserve ratio (CRR) and the statutory liquidity monetary policy where the central bank
ratio (SLR). restricts the amount of credit available in the
• Since Bank rate has been aligned to the MSF market. The RBI can use credit rationing by
rate, it changes automatically as and when the setting limits on the amount of credit that banks
MSF rate changes, alongside policy repo rate can extend to specific sectors or types of
change. borrowers

TYPES OF MONETARY POLICY

MARKET STABILISATION SCHEME
• Market Stabilization scheme (MSS) is a monetary EXPANSIONARY MONETARY POLICY:
policy intervention by the RBI to withdraw • This type of policy is used to stimulate the
excess liquidity (or money supply) by selling economy during a recession or period of slow
government securities in the economy. economic growth.
• The issued securities are government bonds and • It involves lowering interest rates, which
they are called as Market Stabilisation Bonds decreases the cost of borrowing and
(MSBs). encourages both consumer spending and
business investment.

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 Monetary Policy II

• Central banks may also increase the money • Preamble of the Reserve Bank of India describes
supply by buying government securities the basic functions of the Reserve Bank as
(quantitative easing), aiming to make more o to regulate the issue of Bank notes and
money available for banks to lend. keeping of reserves with a view to
securing monetary stability in India and
CONTRACTIONARY MONETARY POLICY:
generally to operate the currency and
• This approach is used to slow down economic credit system of the country to its
growth when there is concern about inflation. advantage; to have a modern monetary
• It involves increasing interest rates to make policy framework to meet the challenge
borrowing more expensive, which should of an increasingly complex economy, to
reduce spending and investment, thereby maintain price stability while keeping in
cooling down the economy and reducing mind the objective of growth
inflationary pressures. • Reserve Bank's affairs are governed by a central
• Central banks might also sell government board of directors
securities to decrease the money supply and • Board is appointed by the Government of India
limit the amount of money banks can lend. in keeping with the Reserve Bank of India Act. -
Appointed/nominated for a period of four years
MONETARY POLICY TRANSMISSION
• Monetary policy transmission is the process CONSTITUTION:
through which policy action of the central bank • Official Directors
is transmitted to meet the ultimate objectives of o Full-time : Governor and not more than
inflation and growth. four Deputy Governors
• Marginal Cost of Lending Rate - based on the • Non-Official Directors
marginal cost of funds o Nominated by Government: ten
• External Benchmark Lending Rate - linked to an Directors from various fields and two
external benchmark. government Official
1. RBI's repo rate. o Others: four Directors - one each from
2. Government of India 3-Months Treasury four local boards
Bill yield published by the Financial • RBI governor is appointed by the Prime Minister’s
Benchmarks India Private Ltd (FBIL). Office (PMO) on the recommendation of the
3. Government of India 6-Months Treasury union finance minister as per Section 8(1)(a) of
Bill yield published by the FBIL. the Reserve Bank of India Act, 1934.
4. Any other benchmark market interest • Financial Sector Regulatory Appointment
rate published by the FBIL. Search Committee (FSRASC) usually holds the list
of names who get interviewed for the RBI
RESERVE BANK OF INDIA
governor post. Members of FSRASC include the
• Reserve Bank of India was established on April cabinet secretary, RBI governor, financial
1, 1935 in accordance with the provisions of the services secretary and two independent
Reserve Bank of India Act, 1934. members.
• The Reserve Bank of India was set up on the • The chosen name from the interviews usually
basis of the recommendations of the Hilton gets sent to the Appointments Committee of
Young Commission the Cabinet headed by the prime minister for
• Originally privately owned, since nationalisation final approval. After the final nod by the
in 1949, the Reserve Bank is fully owned by the Appointments Committee of the Cabinet, the
Government of India. appointment is confirmed.

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 Monetary Policy II

BOARD FOR FINANCIAL SUPERVISION • RBI may print an unlimited amount of currency
• set up to strengthen supervision and notes to meet the needs of the economy.
surveillance over the financial system and • Although the RBI must obtain prior
providing sharper focus to supervisory policy approval from the government.
and skills.
BANKER OF BANKS
• exercises integrated supervision over
commercial banks, financial institutions and
• Like individual consumers, businesses and
non-banking financial intermediaries
organization of all kinds, banks need their own
• primary objective of BFS is to undertake
mechanism to transfer funds and settle inter-
consolidated supervision of the financial sector
bank transaction.
comprising Scheduled Commercial and Co-
• As the banker to banks, RBI fulfills this role and
operative Banks, All India Financial Institutions,
maintains banking accounts of all scheduled
Local Area Banks, Small Finance Banks,
banks. Thus, Reserve Bank acts as a common
Payments Banks, Credit Information Companies,
banker, known as ‘Banker to banks’ function
Non-Banking Finance Companies and Primary
• The current accounts of individual banks are
Dealers.
being opened in e-Kuber (CBS of RBI) by
Banking Departments of the Regional Offices.
FUNCTIONS OF RBI • RBI provides short-term loans and advances to
select banks, when necessary, to facilitate
ISSUER OF CURRENCY lending to specific sectors and for specific
• Issues, exchanges and destroys currency notes purposes.
as well as puts into circulation coins minted by • It also acts as the ‘lender of the last resort’ to
Government of India. prevent bank runs and collapse of banks
o RBI is responsible for the design, • It can come to the rescue of a bank that is
production and overall management of solvent but faces temporary liquidity problems
the nation's currency, with the goal of by supplying it with much needed liquidity when
ensuring an adequate supply of clean no one else is willing to extend credit to that
and genuine notes. bank.
• Government of India is the issuing authority of • The Reserve Bank extends this facility to protect
coins. RBI puts the coins into circulation on the interest of the depositors of the bank and to
behalf of the Central Government. prevent possible failure of the bank.
• GoI also issues one rupee note rest notes are
issued by RBI
FOREIGN EXCHANGE MANAGEMENT
MINIMUM RESERVE SYSTEM • RBI manages the Foreign Exchange
• The RBI's current currency-issuing system is Management Act, 1999.
known as the Minimum Reserve System. • This Act empowered the Reserve Bank, and in
• RBI is required to retain investments of at least certain cases the Central Government, to
200 crore rupees at all times under this control and regulate dealings in foreign
arrangement. exchange payments outside India, export and
• The first 115 crore rupees should be in the form import of currency notes and bullion, transfer of
of gold or gold bullion, and the remaining 85 securities between residents and non-residents,
crore rupees should have been in the form of acquisition of foreign securities, and acquisition
foreign currencies. of immovable property in and outside India,
among other transactions.

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 Monetary Policy II

• The Reserve Bank of India, is the custodian of • The Reserve Bank has a legislative mandate to
the country’s foreign exchange reserves and is regulate the interest rate and foreign exchange
vested with the responsibility of managing their markets.
investment. • Reserve Bank is tasked with the regulation,
development and oversight of
BANKER AND DEBT MANAGER TO
o interest rate markets (including
GOVERNMENT
government securities market)
• RBI Act, 1934 requires the Central Government o money markets including the market for
to entrust the Reserve Bank with all its money, repo in Government securities and
remittance, exchange and banking corporate bonds
transactions in India and the management of its o foreign exchange markets; derivatives
public debt. on interest rates/prices, foreign
• Manage the government’s banking exchange rates and credit.
transactions. • Reserve Bank is also responsible for the
• Government also deposits its cash balances regulation of financial market infrastructure,
with the Reserve Bank. including financial market benchmarks, for
• Receives and pays money on behalf of the these markets
various Government departments
• To float loans and manage them on behalf of REGULATION OF COMMERCIAL BANKING
the Government • Regulation aimed at protecting depositors’
• Provides Ways and Means Advances – a short- interests, orderly development and conduct of
term interest bearing advance – to the banking operations and fostering of the overall
Governments, to meet temporary mismatches health of the banking system and financial
in their receipts and payments stability.
• Like a portfolio manager, it also arranges for • It regulates Commercial banks, Small Finance
investment of surplus cash balances of the Banks, Payments Bank, All India Financial
Government Institutions, Credit Information Companies,
• Acts as an adviser to the Government on Regional Rural Banks and Local Area Banks.
monetary and banking related matters
REGULATION AND DEVELOPMENT OF PAYMENT
• Manages public debt on behalf of the Central
AND SETTLEMENT SYSTEMS
and the State Governments.
o It involves issue of new rupee loans, • RBI has taken several initiatives for Safe, Secure,
payment of interest and repayment of Sound, Efficient, Accessible and Authorised
these loans and other operational payment systems in the country.
matters such as debt certificates and • Payment and settlement systems are regulated
their registration. by the Payment and Settlement Systems Act,
2007 (PSS Act)
REGULATOR AND SUPERVISOR OF THE • In terms of Section 4 of the PSS Act, no
FINANCIAL SYSTEM person other than RBI can commence or
• Prescribes broad parameters of banking operate a payment system in India
operations within which the country's banking unless authorised by RBI.
and financial system functions. • Board for Regulation and Supervision of
• Objective: maintain public confidence in the Payment and Settlement Systems (BPSS), a sub-
system, protect depositors' interest and provide committee of the Central Board of RBI is the
cost-effective banking services to the public. highest policy making body on payment
systems in RBI.

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 Monetary Policy II

FINANCIAL INCLUSION AND DEVELOPMENT

• It formulates macro policy to strengthen credit
flow to the priority sectors.
o Priority Sector refers to sectors of the
economy that receive priority in
credit/lending by banks as per RBI
guidelines Priority Sector Lending -
categories under priority sector are as
follows:
§ Agriculture
§ Micro, Small and Medium
Enterprises
§ Export Credit
§ Education
§ Housing
§ Social Infrastructure
§ Renewable Energy
§ Others
• It works for financial Inclusion and Financial
Literacy through financial awareness initiatives.
o The National Strategy for Financial
Inclusion (NSFI) 2019-24 and the National
Strategy for Financial Education (NSFE):
2020-25 sets forth the vision and key
objectives of the Financial Inclusion and
Financial Literacy policies in India.
• Formulate policies to enable optimal flow of
credit to the MSME sector and address stress in
the accounts of MSMEs
• Credit Delivery to SHGs, SC/ST community and
Minority Communities through select
Government Sponsored Schemes.
• Credit flow to agriculture and allied activities:
Providing broad guidelines to enable (i) ease of
access to finance by farmers and (ii) financial
assistance to farmers affected by natural
calamities.
• Strengthening institutional arrangements, such
as, State Level Bankers Committees (SLBCs),
Lead bank scheme, etc., to facilitate
achievement of above objectives
o Weaker Sections

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 BANKING IN INDIA - I

WHAT ARE BANKS AND HOW DO THEY COOPERATIVE BANKS:

FUNCTION? • Scheduled Cooperative Banks: These banks are
• Banks are financial institutions which acts as also listed in the RBI's second schedule and
intermediaries between depositors (who lend include State Cooperative Banks and Urban
money to the bank) and borrowers (to whom Cooperative Banks. They are subject to RBI
the bank lends money) regulations and typically focus on the needs of
• Section 5(b) of the Banking Regulation (BR) Act their members.
defines banking as, ‘accepting, for the purpose • Non-Scheduled Cooperative Banks: Not listed in
of lending or investment, of deposits of money the RBI's second schedule, they are usually
from the public, repayable on demand or smaller and may not be required to meet the
otherwise, and withdrawable, by cheque, draft, same regulatory standards as scheduled banks.
order or otherwise.’
DIFFERENTIATED BANKS:
ASSETS AND LIABILITIES OF BANKS
• These banks offer specific banking services and
are differentiated from traditional commercial
Assets of banks Liabilities Capital
banks by their business model.
•Cash and •Deposits •Paid-up • Payments Bank: These are specialized banks
balances with •Borrowing by Capital that can accept deposits and provide payment
RBI banks from •Reserves and
•Loans other sources Surplus and remittance services, but cannot issue loans
•Investments •Other •Tier 2 Capital or credit cards.
•Balances with Liabilities and • Small Finance Bank: They are financial
Banks and Provisions
Money at Call institutions aimed at providing financial services
and Short to underserved sections of society, including
Notice small businesses, small and marginal farmers,
•Fixed & Other
Assets micro and small industries, and unorganized
sector entities.

SCHEDULED COMMERCIAL BANKS

DIFFERENT TYPES OF BANKS
• Scheduled Commercial Banks in India are
categorised into five different groups according
COMMERCIAL BANKS: to their ownership and / or nature of operation.
• These banks offer a range of services such as
These bank groups are (i) State Bank of India
accepting deposits, providing loans, and other
and its Associates, (ii) Nationalised Banks, (iii)
financial services to individuals and businesses. Private Sector Banks, (iv) Foreign Banks, and (v)
• Scheduled Commercial Banks: They are listed in
Regional Rural Banks.
the second schedule of the RBI Act, 1934, have • Almost all commercial banks Indian and
a paid-up capital and reserves of at least Rs. 5 Foreign, regional rural banks and state co-
lakhs, and are required to maintain reserve
operative banks are scheduled banks.
ratios. • Scheduled commercial banks enjoy the
• Non-Scheduled Commercial Bank: These are following facilities:
not included in the second schedule of the RBI
o They can borrow from RBI.
Act and do not adhere to certain RBI o They can avail the facility of central
stipulations such as maintaining reserve ratios. clearing house i.e. mutual transactions

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 Banking in India - I

amongst the banks are settled through o The primary object or principal business
central clearing house. of which is the transaction of banking
business;
COOPERATIVE BANKS
o The paid-up share capital and reserves
• They are Co-operative Credit Societies, which of which are not less than one lakh of
are licensed to carry out banking activities and rupees; and
are eligible to accept deposits from the public o The bye-laws of which do not permit
• Co-operative banks came under the dual admission of any other co-operative
control of respective State Governments / society as a member.
Central Government and the RBI. • RBI derives its powers to regulate UCBs mainly
o UCBs are regulated and supervised by from the Banking Regulation Act, 1949 (AACS)
RBI, and Reserve Bank of India Act, 1934.
o Rural Co-operative Banks and the • Large cooperative banks with paid-up share
District Central Co-operative Banks capital and reserves of Rs.1 lakh were brought
(DCCBs) are regulated by RBI but under the purview of the Banking Regulation Act
supervised by NABARD. 1949 with effect from 1st March, 1966 and within
• Long Term Rural Co-operatives, viz., State Co- the ambit of the RBI’s supervision.
operative Agriculture and Rural Development • RBI’s regulations include the following:
Bank (SCARDB) and Primary Co-operative o Issue of branch licenses
Agriculture and Rural Development Bank o Authorization for extending their area of
(PCARDB) do not fall under the regulatory or operation
supervisory purview of RBI. o Prescribing CRR and SLR requirements
and prudential norms for capital
adequacy
o Income recognition
o Asset classification and provisioning
norms, exposure norms
o Targets for priority sector lending
o Inclusion of UCBs into second Schedule
of RBI Act, 1934, etc.

BANKING REGULATION AMENDMENT

• Co-operative banks are exempted from several
provisions of the Banking Regulation Act,
1949. The Amendment applies some of these
provisions to them, making their regulation
URBAN COOPERATIVE BANKS
under the Act similar to that of commercial
• Urban Co-operative Banks (UCBs) refers to
banks.
primary cooperative banks located in urban
o RBI may prescribe conditions on and
and semi-urban areas.
• Sec. 5(ccv) of Banking Regulation Act, 1949 qualifications for employment of
Chairman of co-operative banks
(AACS) defines UCBs as a co-operative society,
o RBI may supersede the Board of
other than a primary agricultural credit society
Directors of a co-operative bank after
and satisfying the following conditions:
consultation with the state government.

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 Banking in India - I

o Allows RBI to undertake reconstruction or funds, even though the share of deposits has
amalgamation of a bank without increased over the years.
imposing a moratorium. • StCBs mobilize deposits and provide liquidity
o Urban Co-operative banks may raise and technical assistance to DCCBs and PACS.
equity or unsecured debt capital from They also mobilize refinance support from higher
the public subject to prior RBI approval. refinancing institutions like the NABARD for
o Granting more autonomy to these banks supporting the crop loan needs of affiliated
to raise capital. DCCBs and PACS.
§ UCBs are allowed to issue • DCCBs mobilize deposits from the public and
debentures or bonds with provide credit to them as well as to PACS. Their
maturity of not less than ten borrowings comprise of loans and advances
years, equity shares, preference from StCBs and direct refinancing from the
shares, or special shares on face NABARD.
value or at a premium. • PACS form the grass-root level tier of the short-
term rural co-operative structure that directly
RURAL COOPERATIVES interfaces with individual borrowers to provide
• Rural co-operatives, which were established them short-term and medium-term credit. They
to address the ‘last mile’ problem also arrange for the supply of agricultural inputs,
associated with delivery of affordable credit distribution of consumer articles, and marketing
to farmers, can be broadly classified into of produce for their members.
short-term and long-term institutions, each DIFFERENTIATED BANKS - PAYMENTS BANKS
with distinct mandates.
o Short-term co-operatives primarily
provide short-term crop loans and WHAT THEY CAN DO?
working capital loans to farmers and • Offer remittance services, mobile
rural artisans payments/transfers/purchases and other
o long-term co-operatives typically banking services like ATM/debit cards, net
provide longer duration loans for making banking and third party fund transfers
investments in agriculture, including land • accept demand deposits - current account and
development, farm mechanisation and savings accounts
minor irrigations, rural industries, and
housing. WHAT CANNOT THEY DO?
o Short-term co-operatives are arranged • can’t advance loans or issue credit cards
in a three-tier or two-tier structure, with • cannot accept fixed or recurring deposits
StCBs at the apex level, DCCBs at the
intermediate level and PACS at the REGULATORY REQUIREMENT
grassroots level. • 25% of its branches must be in the unbanked
o Deposits are the major sources of funds rural area
for StCBs and DCCBs, while PACS rely • minimum capital requirement is ₹100 crore
more heavily on borrowings from StCBs • invest a minimum 75% of its demand deposit
and DCCBs and owned funds. balances in securities issued by the
• Deposits are the major sources of funds for StCBs Government or Treasury Bills having maturity up
and DCCBs, while PACS rely more heavily on to 1 year
borrowings from StCBs and DCCBs and owned

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 Banking in India - I

DIFFERENTIATED BANKS - SMALL FINANCE • Local Area Banks (LABs) are small private banks,
BANKS conceived as low cost structures which would
provide efficient and competitive financial
intermediation services in a limited area of
WHAT IT CAN DO? operation, i.e., primarily in rural and semi-urban
• Basic banking activities of acceptance of areas, comprising three contiguous districts.
deposits and lending to unserved and • The Scheme envisaged a Local Area Bank with
underserved sections a minimum capital of INR 5 Crore and an area
• Can take deposits as well as lend of operation comprising three contiguous
• Banks will not be restricted to any region. districts
• The area of operation of LAB is limited to a
REGULATIONS: maximum of three geographically contiguous
• At least 50 per cent of its loan portfolio should districts and are allowed to open branches only
constitute loans and advances of up to Rs.25 in its area of operation.
lakh
• Extend 75 per cent of its Adjusted Net Bank REGULATION OF BANKS
Credit (ANBC) to the sectors eligible for • Banking Regulation Act, 1949
classification as priority sector lending (PSL) by • Bank licensing
RBI. • Branch Expansion
• Maximum loan size and investment limit • BASEL Norms - Basel Committee on Banking
exposure to a single and group obligor would Supervision (BCBS) issues Basel Norms for
be restricted to 10 per cent and 15 per cent of international banking regulations
its capital funds • Prudential Norms Set By RBI
• Small finance bank will be subject to all • Capital Adequacy Ratio (CAR)
prudential norms and regulations of RBI as • Asset Classification and Provisioning
applicable to existing commercial banks • Reserve Ratios – SLR and CRR
including requirement of maintenance of CRR • Basel norms are international banking
and SLR regulations issued by the Basel Committee on
• Maintain a minimum capital adequacy ratio of Banking Supervision (BCBS), which set standards
15 per cent of its risk weighted assets (RWA) on for the regulation of banks to ensure financial
a continuous basis stability and reduce the risk of banking crises.
• These norms are named after Basel, Switzerland,
REGIONAL RURAL BANKS
where the committee is based. Key points
• Objective - developing the rural economy by include:
providing credit and other facilities, particularly 1. Basel I (1988): Introduced a credit risk
to the small and marginal farmers, agricultural assessment framework and set a minimum
labourers, artisans and small entrepreneurs. capital requirement of 8% of risk-weighted
• Equity of the RRBs was contributed by the assets.
Central Government, State Government 2. Basel II (2004): Focused on three pillars -
concerned and the sponsor bank in the minimum capital requirements, supervisory
proportion of 50:15:35. review process, and market discipline. It
• The function of financial regulation over RRBs is introduced more sophisticated risk
exercised by Reserve Bank and the supervisory assessment techniques for credit, market,
powers have been vested with NABARD. and operational risks.
3. Basel III (2010): Developed in response to
LOCAL AREA BANKS
the 2008 financial crisis, this norm

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 Banking in India - I

emphasizes higher capital requirements, 4. Countercyclical Measures: Banks are

introduces leverage and liquidity required to build up a capital conservation
requirements, and enhances risk buffer during economic upturns that can be
management and transparency. drawn down in downturns. This helps to
moderate the cyclical effects of the
banking system on the economy.
BASEL – III NORMS
5. Risk Management and Supervision:
• Basel III sets norms for capital adequacy, stress Enhanced standards for assessing the
testing, and liquidity requirements. riskiness of assets and greater transparency
• It is intended to strengthen bank capital in banks’ reporting are mandated to
requirements by increasing minimum capital improve risk management practices.
requirements, holdings of high-quality liquid
assets, and decreasing bank leverage. CRAR/CAR
• It is regulatory requirement that measures a
bank's capital in relation to its risk-weighted
assets.
• Purpose of the CAR is to ensure that banks
maintain sufficient capital to absorb potential
losses and continue to operate in a safe and
sound manner.
• CAR = (Tier I Capital + Tier II Capital) / Risk-
• Background: It was introduced in 2010 by the weighted Assets
Basel Committee on Banking Supervision in o Tier I Capital = Core capital, which
includes equity capital and disclosed
response to the 2008 financial crisis.
reserves
• Aim: To strengthen regulation, supervision, and
risk management within the banking sector. o Tier II Capital = Supplementary capital,
• Key features include: which includes subordinated debt,
1. Higher Capital Requirements: Basel III revaluation reserves, and hybrid
instruments
increased the minimum core capital
requirement and introduced a new capital o Risk-weighted Assets = Total assets
buffer. Banks are required to hold more weighted by their credit risk
• Basel III norms have prescribed a CAR of 8%.
high-quality capital to withstand periods of
stress. • Indian public sector banks must maintain a CAR
2. Leverage Ratio: A non-risk-based leverage of 12%, while Indian scheduled commercial
ratio was introduced to curb excessive banks must maintain a CAR of 9%.
leverage in the banking system. This acts as
a supplementary measure to the risk-based TIER 1 CAPITAL
capital requirements. • It can absorb losses without requiring a bank to
3. Liquidity Requirements: It introduced two stop trading.
key liquidity ratios - the Liquidity Coverage • It is also referred to as core capital.
Ratio (LCR) and the Net Stable Funding Ratio • This is permanently available capital that can
(NSFR) to ensure that banks maintain a be used to absorb losses incurred by a bank
sound funding structure and sufficient high- without forcing it to cease operations.
quality liquid assets.
TIER 2 CAPITAL

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 Banking in India - I

• This can absorb losses if the bank goes • Provisioning is the process of setting aside funds
bankrupt, providing depositors with a lesser level to cover potential losses on a bank's loans and
of protection. other assets.
• This capital absorbs losses after a bank loses all
SPECIAL MENTION ACCOUNTS
of its tier 1 capital and is used to cushion losses if
the bank is winding up.

LEVERAGE RATIO
• Leverage ratio measures a bank's core capital
to its total assets. The ratio uses tier 1 capital to
judge how leveraged a bank is in relation to its
consolidated assets.
• Formula for the Leverage Ratio is = (Tier 1
Capital/ Total Consolidated Assets) ×100
• The banks were expected to maintain a
leverage ratio in excess of 3% under Basel III
• As per RBI minimum Leverage Ratio shall be 4%
for Domestic Systemically Important Banks
(DSIBs) and 3.5% for other banks.

PROMPT CORRECTIVE ACTION

• If banks breach any of the risk threshold under
PCA then RBI can intervene in their functioning
and management and take appropriate and
necessary action
• Risk Thresholds under PCA
o CRAR or CET 1
o Leverage Ratio
o NPA

ASSET CLASSIFICATION AND PROVISIONING

• Non-performing asset is a loan or an advance
where Interest and / or installment of principal
remain overdue for a period of more than 90
days in respect of a Term Loan.
• For agricultural loans
a) A loan granted for short duration crops
will be treated as NPA, if the installment
of principal or interest thereon remains
overdue for two crop seasons.
b) A loan granted for long duration crops
will be treated as NPA, if the installment
of principal or interest thereon remains
overdue for one crop season.

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 Banking in India - I

NBFCS
• Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act,
1956:
o Engaged in the business of loans and
advances, acquisition of
shares/stocks/bonds/debentures/securities
issued by Government or local authority or
other marketable securities of a like nature,
leasing, hire-purchase, insurance business,
chit business
o But does not include any institution whose
principal business is that of agriculture
activity, industrial activity, purchase or sale
of any goods (other than securities) or
providing any services and
sale/purchase/construction of immovable
property.

CREDIT REPORTING SYSTEM IN INDIA NBFC vs Banks

•NBFC cannot accept demand deposits

• Credit Reporting System in India currently
•NBFCs do not form part of the payment and settlement
consists of: system
•Deposit insurance facility is not available
o Four credit Information companies (CICs) •CRR does not apply on any NBFCs
(mentioned below)- These are the entities •NBFCs get license under Companies Act, 1956 and Banks
under Banking regulation Act.
authorized by the RBI to collect, process,
Different types of NBFCs
and share credit information viz.,:
§ TransUnion CIBIL limited •Depending on activity -Housing Finance Company,
Investment Company, Micro Finance Company/Institutions
§ Experian Credit Information (MFIs) etc.
•Depending upon whether they take deposits or not
Company of India Private Ltd, •non deposit taking NBFCs by their size into systemically
important and other non-deposit holding companies (NBFC-
§ Equifax Credit Information NDSI and NBFC-ND) and c
Services Private Limited and
§ CRIF High Mark Credit
Information Services Pvt. Ltd. and
o Credit institutions – Banks, All India Financial
Institutions, NBFCs, Housing Finance
companies, State Financial Corporations,
Credit Card Companies etc., are governed
by the provisions of Credit Information
Companies (Regulation) Act, 2005, Credit
Information Companies Rules 2006 and
Credit Information Companies Regulation,
2006.
• Reserve Bank of India (RBI): It regulates the
credit information companies under the Credit
Information Companies (Regulation) Act, 2005
(CICRA).

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 Banking in India - I

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 BANKING II

RECAPITALISATION OF BANKS bonds, and the banks, in turn, paying

interest on the money they have
received as loans if they leverage the
Recapitalisation of Banks is injecting bonds to raise cash.
additional capital into state-owned banks to
bring them up to capital adequacy SOME RELATED TERMS
standards

RESTRUCTURING OF LOAN:
• This refers to modifying the terms of an existing
loan, which is typically done to help a borrower
who is facing financial difficulties in making
In India recapitalisation is achieved through payments under the original terms.
3 major ways:
• Restructuring can involve extending the loan
Issue of term, reducing the interest rate, or even
Budgetary Market
recapitalisation forgiving a portion of the loan.
Allocation borrowings
bonds

• Recapitalisation helps banks to have enough WRITE-OFF:

capital to absorb losses and supports their • When a loan is written off, it means that the
lending and operation activities. In India, the bank has determined the loan will likely not be
recapitalisation of banks is achieved through collected and has removed it from its books as
three major ways: an asset.
1. Budgetary Allocation: This involves the • This action does not forgive the debt or release
government allocating funds specifically the borrower from the obligation to pay, but it is
for bank recapitalization in the country’s an accounting action that banks take to clean
annual budget. up their balance sheets and reflect more
2. Market Borrowings: Banks may raise accurately their expected future cash flows.
capital by borrowing from the markets • A write-off helps banks manage their non-
through financial instruments such as performing assets (NPAs) by reducing the
bonds or long-term loans. amount of declared NPAs on their balance
3. Issue of Recapitalisation Bonds: The sheets.
government issues recapitalization
bonds, which banks purchase. The
DICGC:
money paid to buy these bonds is then
• It is a specialized division of the Reserve Bank of
infused back into the banks as capital.
India (RBI) under the jurisdiction of the Ministry of
This method is a bit more complex as it
Finance, Government of India. Its main purpose
involves multiple steps. The banks
is to provide insurance for bank deposits.
receive bonds in exchange for the
capital, which they can then use as
securities to get liquid cash from the DEPOSIT INSURANCE:
Reserve Bank of India (RBI) or through • Each depositor in a bank is insured up to a
market sale. The interest for the bonds is maximum of ₹5,00,000 (Rupees Five Lakhs) for
also a factor, with the government both the principal and interest amount.
paying interest to the banks on these

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 Economy

• This insurance safeguards depositors’ money in SIDBI (SMALL INDUSTRIES DEVELOPMENT BANK
the event of a bank failure. OF INDIA)
• Principal Financial Institution engaged in
COVERAGE: promotion, financing & development of the
• The insurance by DICGC covers commercial Micro, Small and Medium Enterprises (MSMEs)
banks and cooperative banks. However, it is sector and coordination of the functions of the
noted that primary cooperative societies are various institutions engaged in similar activities
not covered by this insurance. • Primary functions of SIDBI include:
• Providing financial assistance to MSMEs in
ALL INDIA FINANCIAL INSTITUTIONS
the form of loans, equity, and guarantees.
• Providing refinancing facilities to banks and
other financial institutions to support MSMEs.
• Promoting MSME development through
various initiatives, including capacity
building, entrepreneurship development,
and technology up-gradation.
NATIONAL BANK FOR AGRICULTURE AND • Providing advisory and consultancy services
RURAL DEVELOPMENT (NABARD) to MSMEs on various aspects of business
• It is an apex development financial institution in development.
India, established on July 12, 1982, by an act of • Promoting sustainable development
Parliament. practices in MSMEs and encouraging them
• It was formed with the aim of promoting rural to adopt environmentally friendly
development and agriculture in India by technologies.
providing credit, development and other NATIONAL BANK FOR FINANCING
support services to farmers, rural cooperatives, INFRASTRUCTURE AND DEVELOPMENT (NABFID)
and other rural sectors.
• principal development financial institution (DFIs)
• The primary functions of NABARD include:
for infrastructure financing
• Providing financial assistance to rural
• NaBFID will be set up as a corporate body with
and agriculture-based projects and
authorised share capital of one lakh crore
enterprises.
rupees
• Providing refinance facilities to banks
• Financial Objectives -to directly or indirectly
and other financial institutions to support
lend, invest, or attract investments for
rural and agriculture-related activities.
infrastructure projects located entirely or partly
• Promoting sustainable agriculture
in India
practices and providing technical
• Developmental Objectives - include facilitating
support to farmers.
the development of the market for bonds,
• Promoting rural development through
loans, and derivatives for infrastructure
various initiatives, including the
financing.
formation of self-help groups, rural
• They source funds from the market, government,
infrastructure development, and
as well as multi-lateral institutions, and are often
promoting entrepreneurship.
supported through government guarantees.
• Conducting research and development
activities related to agriculture and rural
development.

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 Banking II

REFORMS IN BANKING SECTOR REASONS FOR PRIVATIZATION:

• High NPAs: PSBs struggle with stressed assets
NATIONALISATION OF BANKS (NPAs), limiting their lending capacity and
• In 1969 – 14 commercial banks were profitability.
nationalised with deposits of Rs.50 cr or above • Consolidation Aim: Fewer, stronger banks with
• In 1980 – 6 more commercial banks nationalised increased global competitiveness are
for deposits of 200 cr above envisioned.
• Reasons • Resource Allocation: Privatization could free up
• To go from class banking to mass government resources used for bank
banking recapitalization.
• Build confidence of public in banks • Market Performance: Private banks have
• Achieve various socio-economic historically exhibited better post-reform
objectives through banks performance.
• Under the Banking Companies (Acquisition and • Changing Economic Scenario: Adapting to a
Transfer of Undertakings) Act, 1970 & 1980, the dynamic economic landscape requires agility
Union government is required to hold at least a and efficiency.
51% stake in PSBs.
CONCERNS AND ISSUES:
PROS OF NATIONALISATION OF BANKS • Bank Stability: Yes Bank crisis raises concerns
• Financial Inclusion: PSBs bring banking to about potential instability and governance
underserved populations, like rural areas, with issues in private banks.
initiatives like PMJDY. • Socio-Economic Goals: Prioritization of profit
• Priority Sector Lending: PSBs dedicate resources over social objectives like financial inclusion and
to crucial sectors like agriculture and SMEs, rural credit is a potential concern.
fostering economic growth. • Valuation Complexity: Determining fair market
• Agricultural Development: PSBs' credit support value for PSBs with extensive branch networks
fuels agricultural progress, as seen in the Green and large asset bases is challenging.
Revolution. • Employee Impact: Job security and interests of
• Industrial Growth: PSBs provide crucial long-term PSB employees are major concerns, often met
financing for industries, enabling their with resistance from unions.
expansion.
• Socio-Economic Schemes: PSBs distribute funds RECOMMENDATIONS FOR PRIVATIZATION:
for social welfare programs, improving lives of • Selective Approach: Starting with smaller or less
vulnerable groups. critical banks could be a cautious and
• Reforms and Efficiency: PSBs are undergoing measured approach.
consolidation and technological upgrades to • Strengthened Governance: Robust governance
enhance performance. frameworks and stricter regulations are crucial
• Support During Crises: PSBs act as stabilizers to prevent future crises.
during economic downturns, exemplified by
their role in COVID-19 relief. MERGER OF BANKS
• In April 2017, 5 associate banks were merged
PRIVATISATION OF BANKS
with SBI – State Bank of Bikaner and Jaipur, State
Announced the privatisation of two public sector Bank of Hyderabad, State Bank of Travancore,
banks in the Budget for 2021-22 State Bank of Mysore and State Bank of Patiala.

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 Economy

• merging Dena Bank and Vijaya Bank with Bank government of India merged 10 Public Sector
of Baroda (PSU) Banks into 4 banks
• In a move to restructure and redefine the • After this mergers, the country is having a total
country's banking space, in 2021, the of 12 public sector banks

• Larger banks benefit from enhanced

ADVANTAGES OF BANK MERGERS IN INDIA capabilities and combined expertise, potentially
leading to improved risk management and
RESOURCE OPTIMIZATION: better handling of non-performing assets
(NPAs).
• Merging banks consolidates
resources, minimizes redundancy, and improves
DIVERSE OFFERINGS:
efficiency in capital and personnel
• Mergers pave the way for a broader range of
usage. Overlapping branches can be
products and services, leveraging economies of
merged, saving operational costs.
scale and cross-selling opportunities to better
serve customers.
EXPANDED REACH:
• Combined networks enlarge the bank's
GLOBAL COMPETITIVENESS:
footprint, providing access to a wider customer
• Increased size boosts financial muscle, enabling
base and potentially entering new regions
merged banks to compete effectively on a
where one partner lacked significant presence.
global scale, meet international banking
standards, and challenge foreign banks.
NPA AND RISK MANAGEMENT:

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 Banking II

REDUCED RECAPITALIZATION NEEDS: REDUCED COMPETITION AND POTENTIAL FOR

• Financial strength of merged entities may lessen HIGHER FEES:
the need for frequent government capital • Fewer competitors in the market post-merger
infusions, easing the fiscal burden on the state. can lead to reduced competition, potentially
harming consumers through higher fees, interest
INFRASTRUCTURE INVESTMENT: rates, and limited product choices.
• A larger capital base allows merged banks to
undertake bigger financing projects, including LOSS OF SPECIALIZED SERVICES FOR NICHE
infrastructure initiatives crucial for economic MARKETS:
growth, aligning with the government's • Smaller PSBs sometimes cater to niche markets
development agenda. or offer specialized services tailored to specific
sectors or populations. Merging them can lead
DISADVANTAGES OF BANK MERGERS IN INDIA: to these services being neglected or
discontinued, leaving these groups with fewer
"TOO BIG TO FAIL" RISK: options.
• Large, interconnected banks pose systemic risks
SARFAESI ACT 2002
to the economy. If such a bank collapses, the
• The SARFAESI Act has two main objectives:
entire financial system could be
• Recovering the financial institutions and
destabilized, requiring costly public bailouts.
banks’ non-performing assets (NPAs) in
LOSS OF REGIONAL FOCUS AND a timely and effective manner.
SPECIALIZATION: • Allows financial organisations and banks
• Smaller regional banks often have deep to sell residential and commercial assets
knowledge of their local markets and cater to at auction if a borrower defaults on his
specific needs. or her debt.
• Merging them can dilute this focus and lead to
a one-size-fits-all approach that may neglect KEY PROVISIONS:
certain regions and communities. • Formation of Special Purpose Vehicles,
namely a Securitisation Company and a
DILUTION OF ACCOUNTABILITY AND Reconstruction Company
TRANSPARENCY: • Financial asset securitisation
• Large, complex organizations like merged banks • Securitisation funding
can face challenges in accountability. • Reconstruction of assets;
• Responsibility for decisions and performance • Enforcing security interests, i.e. seizing the
becomes diffused, making it difficult to track assets pledged as collateral for the loan;
individual or departmental effectiveness. • The establishment of a Central Registry for
the regulation and registration of
INCREASED REGULATORY SCRUTINY AND Securitisation transactions
COMPLIANCE HURDLES:
• Mergers, especially cross-border ones, involve
FORMATION OF SPECIAL PURPOSE VEHICLES
navigating intricate regulatory approvals and
(SPVS):
compliance requirements from multiple
This refers to the creation of specific companies
agencies. This can be a lengthy and resource-
designed for a particular financial operation. In this
intensive process, hindering swift
context, the Act allows the formation of two types
implementation.
of SPVs:

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 Economy

• Securitisation Company (SC): This company BAD BANK

takes over or acquires financial assets from
banks or financial institutions. Essentially,
they buy the problematic loans (NPAs) from WHAT IS A BAD BANK OR ASSET
banks. RECONSTRUCTION COMPANY?
• Reconstruction Company (RC): This • Specialized financial institutions that help banks
company focuses on the management and and other financial institutions to clean up their
reconstruction of the acquired assets. They non-performing assets (NPAs) and bad loans by
try to change the terms of the loans or take taking them over and attempting to recover the
other steps to recover the money owed. amount owed.
• Regulated by RBI under the SARFAESI Act 2002
• Financial Asset Securitisation: This is the process
where an SC buys the NPAs from a bank and FROM WHERE DO THEY GET MONEY TO BUY
then issues securities to investors against these NPAS?
assets. Investors receive income when the SC • By mainly issuing security receipts (SRs) to
successfully recovers money from these NPAs. Qualified Buyers through a trust holding the
• Securitisation Funding: To purchase these NPAs, NPA.
SCs need funds. They raise this money through • They also hold a part of SRs.
various means like issuing bonds or taking loans • They are charge a fee or commission for
themselves, with the aim of buying NPAs from recovery they make from investors of SRs.
the original lenders.
• Reconstruction of Assets: RCs work on Security Receipts (SR) are issued by ARCs, when
restructuring the loans that are not performing Non-Performing Assets (NPAs) of commercial banks
well. This may involve altering the repayment (CB) or financial institutions (FI) are acquired by the
schedule, reducing the interest, or converting ARCs for the purpose of recovery.
debt into equity. The goal is to make the asset • As per extant instructions, investment in SRs is
financially viable again. restricted to the Qualified Institutional Buyers
• Enforcing Security Interests: This provision allows (QIBs), as defined by SARFAESI Act 2002
banks and financial institutions to enforce their
rights to a collateral without court intervention if
a borrower defaults. For example, if a borrower
fails to repay a loan, the bank can take
possession of the collateral (like property or
equipment) and sell it to recover the dues.
• Central Registry: The Act established a central
database where all securitisation and
reconstruction transactions are recorded. This
registry helps in maintaining transparency and
avoids disputes over the title of assets used in
these transactions.
The SARFAESI Act provides a framework for banks PROCESS OF ASSET RECONSTRUCTION BY ABC
and financial institutions to recover bad loans • The main intention of acquiring debts / NPAs is
efficiently, without being entangled in lengthy legal to ultimately realise the debts owed by them.
processes, thus improving the health and stability of However, the process is not a simple one. The
the financial system in India. ARCs have the following options in this regard:

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 Banking II

• Change or takeover of the management of INDIA DEBT RESOLUTION COMPANY LTD.

the business of the borrower. (IDRCL)
• Sale or lease of such business. • a service company/operational entity which will
• Rescheduling the payment of debts – manage the asset and engage market
offering alternative schemes, arrangements professionals and turnaround experts
for the payment of the same. • Public Sector Banks (PSBs) and Public FIs will hold
• Enforcing the security interest offered in a maximum of 49% stake and the rest will be
accordance with the law. with private sector lenders
• Taking possession of the assets offered as
security. NARCL will acquire assets by making an offer to the
• Converting a portion of the debt into shares. lead bank. Once NARCL’s offer is accepted, then,
• Value of the SRs is determined by the recovery IDRCL will be engaged for management and value
or sale price of the NPAs. addition.
• Govt of India Guarantee of up to Rs 30,600 crore
REPAYMENT OF INVESTORS: will back Security Receipts (SRs) issued by
• When the ARCs recover the outstanding NARCL
amount from the NPAs, the proceeds are used • acquire these through 15% Cash and 85% in
to repay the investors in the trust who hold SRs. Security Receipts (SRs)
The investors receive a share of the proceeds • NARCL is intended to resolve stressed loan
based on the number of SRs they hold. assets above ₹500 crore each amounting to
about ₹ 2 lakh crore
FEES AND COMMISSIONS:
• In phase I, fully provisioned assets of about Rs.
• ARCs charge a fee or a percentage of the
90,000 crores are expected to be transferred to
amount recovered as compensation for their
NARCL
services. This fee is deducted from the proceeds
before they are distributed to the investors. The
fee charged by ARCs is typically higher for WHY IS NARCL-IDRCL TYPE STRUCTURE NEEDED
WHEN THERE ARE 28 EXISTING ARCS?
distressed assets with lower recovery rates.
• ARC shall by transferring funds, invest a • Existing ARCs have been helpful in resolution of
stressed assets especially for smaller value
minimum of 15% of the SRs of each class issued
by them under each scheme on an ongoing loans.
• Various available resolution mechanisms,
basis till the redemption of all the SRs issued
under such scheme. including IBC have proved to be useful.
• However, considering the large stock of legacy
NATIONAL ASSET RECONSTRUCTION COMPANY NPAs, additional options/alternatives are
LIMITED needed and the NARCL-IRDCL structure
• NARCL has been incorporated under the announced in the Union Budget is this initiative.
Companies Act and has applied to Reserve
INSOLVENCY & BANKRUPTCY CODE
Bank of India for license as an Asset
Reconstruction Company (ARC)
• PSBs will maintain 51% ownership in NARCL. KEY FEATURES
• Coverage - individuals, companies, Limited
Liability Partnerships (LLPs) and partnership firms.
• Adjudicating authority – NCLT & DRT
• Who will carry out IBC - Insolvency Professionals

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 Economy

• Regulator – IBBI ( Insolvency and Bankruptcy stress on companies amid the pandemic, the
Board of India) government increased the minimum amount to
₹1 crore.
PROCESS
• insolvency resolution process can be initiated by
any of the stakeholders of the firm: financial
creditors, operational creditors and corporate
debtors.
• If the adjudicating authority accepts, an
Insolvency resolution professional or IP is
appointed.
• power of the management and the board of the
firm is transferred to the committee of creditors
(CoC) which comprises of all financial creditors
of the corporate debtor.
• party with the best resolution plan, that is
acceptable to the majority of the creditors (66%
for critical decision and 51 % for routine
decisions), to take over the management of the
firm.

TIMELIMIT
If a decision is not reached within the time frame,
the firm will be liquidated.

• Maximum 330 Days

• As per the Insolvency and Bankruptcy Code,
2016 (the Code), the procedure involved in the
Corporate Insolvency Resolution Procedure
(CIRP) should be completed within 180 days or
within the extended period of 90 days and
mandatorily be completed within 330 days
including any extension and the time taken in
PRE-PACKAGED INSOLVENCY RESOLUTION
legal proceedings
PROCESS FOR MSMES
• When a corporate debtor (CD), or a company
which has taken loans to run its business, • Insolvency and Bankruptcy Code (Amendment)
defaults on its loan repayment, either the Act, 2021 –‘pre-packs’ as an insolvency
creditor (a bank or an entity that has lent resolution mechanism for Micro, Small and
money for operational purposes) or the debtor Medium Enterprises (MSMEs)
can apply for the initiation of a Corporate
Insolvency Resolution Process (CIRP) under KEY FEATURES
Section 6 of the IBC. • Pre-pack for MSMEs which blends elements and
• Earlier, the minimum amount of default after virtues of both formal and informal insolvency
which the creditor or debtor could apply for proceedings.
insolvency was ₹1 lakh, but considering the

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 Banking II

• Under the pre-pack process, a resolution plan is • a deputy governor of the Reserve Bank of India
negotiated between the debtor and creditors (RBI).
before formal proceedings start. • Apart from them, there will be three members
• This combines efficiency, speed, cost with knowledge of banks and other financial
effectiveness and flexibility with the binding institutions, and three more with knowledge of
effect of a formal process insurance, according to the order.
• Pre-packaged Insolvency Resolution Process
(PIRP) alternate to CIRP FUNCTIONS
• A pre-pack envisages the resolution of • It will recommending candidates for
the debt of a distressed company appointment as whole-time directors and non-
through a direct agreement between executive chairpersons of public-sector banks
secured creditors and the existing (PSBs), financial institutions and public-sector
owners or outside investors, instead of a insurers (PSI).
public bidding process. • It will advise the government on a suitable
• Under the pre-pack system, financial performance appraisal system for whole-time
creditors will agree to terms with the directors and non-executive chairmen of the
promoters or a potential investor, and state-run financial services institutions
seek approval of the resolution plan from • It will build a data bank relating to the
the National Company Law Tribunal performance of public-sector banks (PSBs), FIs
(NCLT). and insurance companies.
• Approval of at least 66 per cent of • It will advise the government on “formulation
financial creditors that are unrelated to and enforcement of a code of conduct and
the corporate debtor would be required ethics for whole-time directors” in these
before a resolution plan is submitted to institutions
the NCLT • Will help these state-run banks, FIs and insurers
• The NCLTs will be required to either in developing business strategies and capital
accept or reject an application for a raising plans, etc.
pre-pack insolvency proceeding before
considering a petition for a CIRP. EASE (ENHANCED ACCESS AND SERVICE
• 120 days for the entire process EXCELLENCE) NEXT
• Minimum threshold default of Rs 10 lakh • Reform agenda for public sector banks
for initiation of pre-pack insolvency • EASE Next has been conceptualised with two
resolution process. broad pillars:
• 1) EASE 5.0 - Common reforms agenda
FINANCIAL SERVICES INSTITUTIONS BUREAU
to be achieved by all PSBs
(FSIB)
• 2) Strategic 3-year roadmap specific to
each PSB to focus on new strategic
COMPOSITION initiatives beyond the common reforms’
• chairperson nominated by the central agenda.
government; • EASE 5.0 will continue to focus on driving an
• the secretaries of the departments of financial enhanced digital experience along with data-
services and public enterprises; driven, integrated, and inclusive banking across
• the chairman of the Insurance Regulatory and all banks.
Development Authority of India; • The 3-Year Strategic Roadmap will offer each
PSB the opportunity to set its own reforms path,

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 Economy

contextualised to its starting position and payment transactions using Unified Payments
strategic priorities. Interface (UPI). You can make instant bank-to-
bank payments and Pay and collect money
using just Mobile number or Virtual Payment
NPCI AND ITS RETAIL PAYMENT SYSTEMS
Address (UPI ID).
• National Payments Corporation of India (NPCI), • Bharat Bill Payment System - a Reserve Bank of
an umbrella organisation for operating retail India (RBI) conceptualised system driven by
payments and settlement systems in India, is an National Payments Corporation of India (NPCI).
initiative of Reserve Bank of India (RBI) and It is a one-stop ecosystem for payment of all bills
Indian Banks’ Association (IBA) under the • E-Rupi - National Payments Corporation of India
provisions of the Payment and Settlement (NPCI) in association with Department of
Systems Act, 2007, for creating a robust Financial Services (DFS), National Health
Payment & Settlement Infrastructure in India. Authority (NHA), Ministry of Health and Family
Welfare (MoHFW), and partner banks, has
PAYMENT SYSTEMS BY NPCI launched an innovative digital solution – ‘e-
• RuPay - RuPay is an Indigenously developed RUPI’.
Payment System which supports the issuance of • e-RUPI would be shared with the
debit, credit and prepaid cards by banks in beneficiaries for a specific purpose or
India. All RuPay Cards will now have the activity by organizations or Government
functionality of NCMC which can enable low via SMS or QR code.
value contactless payments (like transit, toll, • users of this seamless one-time payment
parking, retail) using Offline technology. mechanism will be able to redeem the
• IMPS -robust & real time fund transfer which voucher without a card, digital
offers an instant, 24X7, interbank electronic fund payments app or internet banking
transfer service access, at the merchants accepting e-
• NACH -for Banks, Financial Institutions, RUPI.
Corporates and Government a web based
NETC
solution to facilitate interbank, high volume,
electronic transactions which are repetitive and • National Payments Corporation of India (NPCI)
periodic in nature (bulk transactions like salary, has developed the National Electronic Toll
pension etc.) Collection (NETC) program to meet the
• AePS -AePS is a bank led model which allows electronic tolling requirements of the Indian
online interoperable financial inclusion market.
transaction at PoS (MicroATM) through the • It provides an electronic payment facility to
Business correspondent of any bank using the customer to make the payments at national,
Aadhaar authentication. state and city toll plazas by identifying the
• NFS(National Financial Switch) – National vehicle uniquely through a FASTag.
Financial Switch (NFS) is the largest network of • FASTag are Radio-Frequency Identification
shared Automated Teller Machines (ATMs) in (RFID) stickers which are affixed on the vehicle
India facilitating interoperable cash withdrawal, windshield and enable the driver to make toll
card to card funds transfer and interoperable payments electronically while the vehicle is in
cash deposit transactions among other value motion without stopping at the Toll plazas by
added services in the country saving Fuel and Time.
• BHIM - Bharat Interface for Money (BHIM) is an
app that lets you make simple, easy and quick

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 Banking II

UPI • Make payments of up to ₹500 INR without the

use of a UPI PIN.
• Unified Payments Interface (UPI) is a system that
• No KYC required.
powers multiple bank accounts into a single
• Maximum balance is ₹2,000 INR.
mobile application (of any participating bank),
• One can spend up to a total of ₹4,000 INR within
merging several banking features, seamless
24 hours.
fund routing & merchant payments into one
• No charges for money transfer and account
hood.
closing.
• It also caters to the “Peer to Peer” collect
request which can be scheduled and paid as
per requirement and convenience. UPI LITE X
• UPI Lite X which allows users to send and
receive money without internet connectivity, or
simply “offline”
• UPI Lite X enables users to make transactions
even in areas with no connectivity, such as
underground stations and remote locations.
• UPI Lite X requires both sender and receiver to
be close and it works offline using NFC.

FINANCIAL INCLUSION
• Financial inclusion may be defined as the
process of ensuring access to financial services
and timely and adequate credit where needed
by vulnerable groups such as weaker sections
and low-income groups at an affordable cost.

SCHEMES AND POLICIES FOR FINANCIAL

INCLUSION
UPI123PAY
• It is an instant payment system for feature
phone users who can use Unified Payments
Interface (UPI) payment service in a safe and
secure manner.
• Through UPI 123PAY, feature phone users will
now be able to undertake a host of transactions
based on four technology alternatives.
• They include calling an IVR (interactive • Lead Bank Scheme - Lead Bank Scheme,
voice response) number introduced in year 1969, envisages assignment
• app functionality in feature phones of lead roles to individual banks for the districts
• missed call-based approach allotted to them.
• proximity sound-based payments • The lead bank acts as a leader for coordinating
the efforts of all credit institutions in the allotted
districts to increase the flow of credit to
UPI LITE
agriculture, MSE and other economic activities
• UPI Lite is an on-device wallet with the following
with the district being the basic unit in terms of
key features:
geographical area.

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 Economy

• Service Area Approach (SAA) was a scheme • Self-Help Groups have emerged as the most
launched by the RBI in 1989 for an orderly effective mechanism for delivery of micro-
development of the rural areas of the country. finance services to the poor.
• Under the SAA, all rural and semi-urban
branches of banks were allocated specific SHG BANK LINKAGE PROGRAMME – LARGEST
villages, generally in geographical difficult MICROFINANCE PROGRAMME OF WORLD
areas, the overall development and the credit • Cost-effective mechanism for providing
needs of which were to be taken care of by the financial services to the unreached and
respective branches. underserved poor households.
• The concerned bank should meet the banking • NGO sector has played a prominent role of
needs of the service area by creating link working as a Self Help Group Promoting
between bank credit- production and Institution (SHPI) by organizing, nurturing and
productivity and income expansion enabling credit linkage of SHGs with banks
• Banking Correspondents (BCs) are • NABARD later coopted many others as SHPIs
individuals/entities engaged by a bank in India including the rural financial institutions (RRBs,
(commercial banks, Regional Rural Banks (RRBs) DCCBs, PACS), Farmers’ Clubs (FCs), SHG
and Local Area Banks (LABs)) for providing Federations, Individual Rural Volunteers (IRVs)
banking services in unbanked / under-banked etc.
geographical territories. • Stakeholders were encouraged to take up
• A banking correspondent works as an agent of promotion of SHGs by way of promotional grant
the bank and substitutes for the brick and assistance from NABARD
mortar branch of the bank. • Banks are also provided 100% refinance support
SELF HELP GROUPS by NABARD for financing of SHGs.
• To enable SHG Members to take up livelihood
• “SHGs are small economical homogenous
activities, NABARD has been supporting Micro
affinity groups of rural poor, voluntarily formed
Enterprise Development Programmes (MEDPs)
to save and mutually contribute a common fund
and Livelihood and Enterprise Development
to be lent to its members as per group decision”
Programmes (LEDPs) for SHGs.
(NABARD)
• An SHG by definition is a socially and DAY-NRLM
economically homogenous group of upto 20 • It is a flagship poverty alleviation program
persons, formed voluntarily for the collective implemented by the Ministry of Rural
purpose of savings and credit, with no insistence Development, Government of India
on collateral for loans and end usage of credit • It aims to reduce poverty by enabling the poor
• Self-Help Groups are informal associations of household to access gainful self-employment
people who choose to come together to find and skilled wage employment opportunities
ways to improve their living conditions. resulting in sustainable and diversified livelihood
• Important functions of a Self-Help Groups are options for the poor.
• a) to encourage and motivate its • DAY-NRLM seeks to promote a comprehensive
members to save livelihoods approach encompassing four inter-
• b) to persuade them to make a related tasks
collective plan for generation of • i. mobilizing all rural, poor households
additional income into effective self-help groups (SHGs)
• c) to act as a conduit for formal banking and SHG federations
services to reach them

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 Banking II

• ii. enhancing access to credit and other members and escort services over two credit
financial, technical, and marketing cycles
services
PROJECT ESHAKTI
• iii. building capacities and skills for
gainful and sustainable livelihoods • NABARD conceptualised EShakti with the aim of
• iv. improving the delivery of social and digitizing financial & non-financial data of all
economic support services to poor SHGs for enhancing the ease of doing business
through convergence with them by bridging the digital divide in the
• Through NRLM, a combination of financial SHG-BLP space.
resources and technical assistance is provided • The USP of the E-Shakti project is ‘one-click’
to the states to achieve these objectives. availability of both financial & non-financial
information of the SHGs maintaining savings
bank accounts with the banks.
MICRO ENTERPRISE DEVELOPMENT
• The project captures detailed information on the
PROGRAMME (MEDP)
existing SHGs (bankwise, branch-wise and
• programme enables SHG members to be
block-wise) in the selected districts and also
upskilled to take up income generating
captures all financial transactions taking place
livelihood activities
within the group and with banks.
• main objective of the programme is to enhance
• The database thus generates and provides
the capacities of participants through
multiple reports on SHGs and its members to
appropriate skill up-gradation in existing or new
Banks and other stakeholders, enabling them to
livelihood activities in farm or non-farm activities
take credit decisions
and enrich knowledge of participants on
enterprise management, business dynamics KCC
and rural markets • Kisan Credit Card (KCC) scheme was
introduced in 1998 for issue of Kisan Credit
LIVELIHOOD AND ENTERPRISE DEVELOPMENT Cards to farmers on the basis of their holdings
PROGRAMME (LEDP) for uniform adoption by the banks so that
• Livelihood and Enterprise Development farmers may use them to readily purchase
Programme (LEDP) was initiated on a pilot basis agriculture inputs such as seeds, fertilizers,
in 2015 with a view to create sustainable pesticides etc. and draw cash for their
livelihoods among matured SHG members and production needs.
to obtain optimum benefit from skill • The scheme was further extended for the
upgradation investment credit requirement of farmers viz.
• LEDP is a holistic intervention mechanism allied and non-farm activities in the year 2004.
conceived to take care of the entire ecosystem • On 18 December, 2020,Prime Minister Narendra
required for livelihood promotion in both farm Modi launched Revised Scheme to Kisan Credit
and off-farm activities under project mode in Card (KCC) which aims at providing adequate
clusters within contiguous villages, with a and timely credit support from the banking
provision for intensive training for skill building, system under a single window to the farmers for
refresher training, backward-forward linkages, their cultivation and other needs.
handholding and escort support for credit • Kisan Credit Card Scheme aims at providing
linkage adequate and timely credit support from the
• LEDP also encompasses the complete value banking system under a single window to the
chain and offers end-to-end solutions to SHG farmers for their cultivation & other needs as
indicated below:

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 Economy

• a. To meet the short term credit

requirements for cultivation of crops
• b. Post harvest expenses
• c. Produce Marketing loan
• d. Consumption requirements of farmer
household
• e. Working capital for maintenance of
farm assets and activities allied to
agriculture, like dairy animals, inland
fishery etc.
• f. Investment credit requirement for
agriculture and allied activities like
pump sets, prayers, dairy animals etc.

ELIGIBILITY
i. All Farmers – Individuals / Joint borrowers who are
owner cultivators
ii. Tenant Farmers, Oral Lessees & Share Croppers
iii. SHGs or Joint Liability Groups of Farmers including
tenant farmers, share croppers etc

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 FINANCIAL MARKETS I

FINANCIAL MARKETS DEPENDING ON TYPE OF SECURITY:

• Financial Markets include any place or system • Equity Market: Where shares of companies are
that provides buyers and sellers the means to traded, giving stockholders a claim to part of
trade financial instruments, including bonds, the company’s earnings and assets.
equities, the various international currencies, • Debt Market: For trading debt instruments,
and derivatives. where investors lend money to an entity
• Financial markets facilitate the interaction (company or government) that borrows the
between those who need capital with those funds for a defined period at an interest rate.
who have capital to invest.
• A ‘Security’ means a certificate/document DEPENDING UPON WHETHER SECURITY IS
indicating that its holder is eligible to receive a CREATED OR TRADED:
certain amount of money at a particular time • Primary Market: Where new securities are
• Financial market is a market for financial assets. created and offered to the public for the first
• A financial asset is a non-physical asset whose time, such as in an Initial Public Offering (IPO).
value is derived from a contractual claim, such • Secondary Market: Where existing securities are
as bank deposits, bonds, and participations in traded among investors after being issued on
companies' share capital the primary market.
• Financial markets provide a place where or a
system through which, the transfer of funds by SPECIFIC MARKETS:
investors/lenders to the business units is • Bond Market: Specifically for trading bonds, a
adequately facilitated. type of debt instrument.
• It is a transmission mechanism between investors • Share Market: Refers to the equity market where
(or lenders) and the borrowers (or users) through shares are bought and sold.
which transfer of funds is facilitated • Foreign Currency Market: Also known as the
• It consists of individual investors, financial Forex or FX market, where currencies are
institutions and other intermediaries who are traded.
linked by a formal trading rules and • Commodity Market: Where physical or virtual
communication network for trading the various commodities like metals, oil, or agricultural
financial assets and credit instruments products are traded.
• Financial markets create securities products that
provide a return for those who have excess
DEPENDING ON SETTLEMENT:
funds (Investors/lenders) and make these funds
• Future Market: Where contracts are made to
available to those who need additional money
buy or sell an asset at a future date at a price
(borrowers).
specified today.
TYPES • Spot Market: Also known as the cash market,
where financial instruments are traded for
immediate delivery.
DEPENDING ON DURATION:
• Money Market: This is for short-term borrowing EQUITY AND DEBT INSTRUMENTS
and lending, typically for instruments maturing in • Debt instruments represent borrowing, where an
less than one year. issuer (government or company) raises capital
• Capital Market: Deals with long-term securities, by promising to repay a fixed amount, known as
with maturities extending beyond one year.

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 Financial Markets I

the principal, to the investor (lender) along with investors become partial owners and gain rights
periodic interest payments, called coupons. to the company's profits (through dividends)
• Equity instruments represent ownership in a and its decision-making process (through voting
company. By purchasing shares (stocks), rights).

STRUCTURE OF INDIAN FINANCIAL MARKETS

MONEY MARKET AND CAPITAL MARKET MONEY MARKET

• Money market is an integral part of the financial
• Money market is a market for debt securities
system and includes instruments that provide
that pay off in the short term usually less than
short-term funds with maturity ranging from
one year, for example the market for 90-days
overnight to one year
treasury bills.
• Money market generally includes short-term
• This market encompasses the trading and
unsecured (uncollateralised) interbank loans,
issuance of short term non equity debt
secured (collateralised) loans (including
instruments including treasury bills, commercial
repurchase agreements), treasury bills (T-bills),
papers, bankers acceptance, certificates of
commercial papers (CPs) and certificates of
deposits, etc.
deposit (CDs).
• Capital market is a market for long-term debt
• Participants in these markets typically include -
and equity shares. In this market, the capital
commercial banks, co-operative banks,
funds comprising of both equity and debt are
primary dealers (PDs), insurance companies,
issued and traded.
mutual funds (MFs), non-banking financial
• This also includes private placement sources of
companies (NBFCs), corporates are permitted
debt and equity as well as organized markets
to participate in money markets.
like stock exchanges. Capital market can be
• Money market plays a key role in the
further divided into primary and secondary
transmission of monetary policy
markets.

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 Financial Markets I

• Money market rates serve as benchmarks for • Banks, Financial institutions and
the pricing of credit, it plays an important role in corporations normally play major role in
determining the credit conditions in the the Treasury bill market.
economy and in turn the level of lending rates • Cash Management Bill - short-term instrument,
faced by firms and households known as Cash Management Bills (CMBs), to
• Money Market is regulated by RBI meet the temporary mismatches in the cash
flow of the Government of India. The CMBs
MONEY MARKET INSTRUMENTS -INTER BANK have the generic character of T-bills but are
MONEY MARKET issued for maturities less than 91 days.
• Call Money - borrowing or lending in unsecured
funds on overnight basis GOVERNMENT SECURITIES MARKET IN INDIA
• Notice Money - borrowing or lending in • Government Security (G-Sec) is a tradeable
unsecured funds for tenors up to and inclusive instrument issued by the Central Government or
of 14 days excluding overnight borrowing or the State Governments. G-Secs carry practically
lending no risk of default and, hence, are called risk-
• Term Money - borrowing or lending in free gilt-edged instruments.
unsecured funds for periods exceeding 14 days • Short term – T Bill & CMB
and up to one year. • Long Term – Dated Securities and SDL
• The following entities shall be eligible to • G-Secs are issued through auctions conducted
participate in the Call, Notice and Term Money by RBI. Auctions are conducted on the
Markets, both as borrowers and lenders: electronic platform called the E-Kuber, the Core
• (a) Scheduled Commercial Banks Banking Solution (CBS) platform of RBI
(excluding Local Area Banks); • Major players in the G-Secs market include
• (b) Payment Banks; commercial banks and PDs besides institutional
• (c) Small Finance Banks; investors like insurance companies
• (d) Regional Rural Banks; • There is an active secondary market in G-Secs.
• (e) State Co-operative Banks, District The securities can be bought / sold in the
Central Co-operative Banks and Urban secondary market either through
Co-operative Banks (hereinafter Co- • (i) Negotiated Dealing System-Order
operative Banks); and Matching (NDS-OM) (anonymous online
• (f) Primary Dealers. trading) or through
• (ii) Over the Counter (OTC) and
MONEY MARKET INSTRUMENTS reported on NDS-OM
• Treasury Bill: are short term debt instruments • (iii) NDS-OM-Web
issued by the Government • (iv) Stock exchanges
• Treasury bills are highly liquid • Retail Direct scheme is a one-stop solution to
instruments, that means, at any time the facilitate investment in Government Securities
holder of treasury bills can transfer of or by Individual Investors. Under this scheme
get it discounted from RBI Individual Retail investors can open Gilt
• Treasury bills are zero coupon securities Securities Account – “Retail Direct Gilt (RDG)”
and pay no interest. Instead, they are Account with the RBI. Through this they can
issued at a discount and redeemed at trade in both primary and secondary market for
the face value at maturity. govt securities
• These bills are secured instruments and
are issued for a period of not exceeding CERTIFICATE OF DEPOSIT
364 days

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 Financial Markets I

• Certificate of Deposit (CDs): are short-term • Drawer/Maker: Drawer is the debtor who
instruments issued by Commercial Banks and promises to pay the amount to lender or
Special Financial Institutions (SFIs) against funds creditor.
deposited at a bank or other eligible financial • Payee: Payee is the creditor who is been
institution, which are freely transferable from promised by the borrower or debtor about
one party to another. the pending payment.
• The maturity period of CDs ranges from 91 days
to one year. These can be issued to individuals, COMMERCIAL BILL
co-operatives and companies • It is a trade bill accepted by a commercial
• Banks are not allowed to grant loans against bank
CDs, unless specifically permitted by the • Trade bill is a bill of exchange between a buyer
Reserve Bank and seller of any good or service
• CDs can be issued by (i) scheduled commercial • A bill of exchange is an instrument in writing
banks {excluding Regional Rural Banks and containing an unconditional order, signed by
Local Area Banks}; and (ii) select All-India the maker, directing a certain person to pay a
Financial Institutions (FIs) that have been certain sum of money only to or to the order of
permitted by RBI to raise short-term resources a certain person, or to the bearer of the
within the umbrella limit fixed by RBI instrument.
• A bill of exchange often includes three parties—
the drawee is the party that pays the sum, the
COMMERCIAL PAPER
payee receives that sum, and the drawer is the
• Commercial Paper (CP): is an unsecured money
one that obliges the drawee to pay the payee.
market instrument issued in the form of a
• A bill of exchange is used in international trade
promissory note. to help importers and exporters fulfill
• Highly rated corporate borrowers, primary transactions.
dealers (PDs) and satellite dealers (SDs) and all- • A bill of exchange is a written order binding one
India financial institutions (FIs) which have been party to pay a fixed sum of money to another
permitted to raise resources through money party on demand or at some point in the future.
market instruments under the umbrella limit fixed • Commercial bill is a bill of exchange used to
by Reserve Bank of India are eligible to issue CP finance the credit sales of firms. It is a short term,
• The original tenor of a CP shall be between negotiable and self liquidity instrument. In case
seven days to one year. of goods sold on credit, the buyer is liable to
make the payment on a specific date in future.
PROMISSORY NOTE • The seller could either wait till the maturity date
or can draw a bill of exchange. When this bill is
• A promissory note: is a negotiable instrument
accepted by the buyer it becomes a
containing written promise to pay a certain
marketable instrument and is called a trade bill.
amount of money to its holder by an individual
If the seller wants the funds before the maturity
or an entity either on demand by the holder or
date, he can get the bill discounted from the
at a pre-specified date.
bank. When a commercial bank accepts a
• The most important feature of Promissory Note is, trade bill it becomes a commercial bill.
once it is drawn by the debtor, it need not be
accepted by the creditor.
• Two parties are involved in the promissory note.
They are:

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 FINANCIAL MARKETS II

• This paves way for listing and trading of the

CAPITAL MARKET issuer’s shares or convertible securities on the
• A capital market is a financial market in which Stock Exchanges.
long term debt (over a year) or equity backed
securities are bought and sold FURTHER PUBLIC OFFER (FPO) OR FOLLOW ON
• It constitutes all long-term borrowings from OFFER:
banks and financial institutions, borrowings from • When an already listed company makes either
foreign markets and raising of capital by issue a fresh issue of shares or convertible securities
various securities such as shares debentures, to the public or an offer for sale to the public, it
bonds, etc is called a FPO.
• Three categories of participants in the capital
market – the issuer of securities, the investors in RIGHTS ISSUE (RI):
securities and the intermediaries • When an issue of shares or convertible securities
• Stock exchanges and over the counter markets is made by an issuer to its existing shareholders
are part of this market, where most of these as on a particular date fixed by the issuer (i.e.
instruments are traded. record date), it is called a rights issue.
• Capital market consists of broadly two • The rights are offered in a particular ratio
segments: to the number of shares or convertible
• Primary market - market for new issues of securities held as on the record date
these securities
• Secondary market -securities that are
COMPOSITE ISSUE:
issued are traded in what is called the
• When the issue of shares or convertible securities
secondary market.
by a listed issuer on public cum-rights basis,
PRIMARY MARKET wherein the allotment in both public issue and
rights issue is proposed to be made
simultaneously, it is called composite issue
PUBLIC ISSUE:
• When an issue / offer of shares or convertible
securities is made to new investors for becoming PRIVATE PLACEMENT:
part of shareholders’ family of the issuer (Entity • When an issuer makes an issue of shares or
making an issue is referred as “Issuer”) it is called convertible securities to a select group of
a public issue. persons not exceeding 49, and which is neither
• Public issue can be further classified into Initial a rights issue nor a public issue, it is called a
public offer (IPO) and Further public offer (FPO) private placement.
• Private placement of shares or convertible
INITIAL PUBLIC OFFER (IPO): securities by listed issuer can be of three types
• When an unlisted company makes either a • Preferential allotment
fresh issue of shares or convertible securities or • Qualified institutions placement (QIP)
offers its existing shares or convertible securities • Institutional Placement Programme (IPP)
for sale or both for the first time to the public, it is
called an IPO.

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 Financial Markets II

Term Description - Similar to QIP but specifically

designed to help promoters reduce
- A process of issuing shares to a their shareholding.
select group of investors at a
negotiated price. - Pricing follows similar regulations
as a QIP, with discounts offered
- Often used by companies to raise being subject to regulatory limits.
capital without going public.
Preferential SECONDARY MARKET
Allotment - Targets specific investors like
venture capitalists, corporations, or • A secondary market is a securities trading
individuals. avenue in which already existing/pre- issued
securities are traded amongst investors.
- Price can be at a premium or • The secondary market could be either auction
discount to the current market
or dealer market.
price, subject to regulatory norms.
• While stock exchange is the part of an auction
- A fundraising tool for listed market, Over-the-Counter (OTC) is a part of the
companies in India, allowing them dealer market.
to sell equity shares, fully/partially • The secondary market comprises of equity
convertible debentures, or any markets and the debt markets.
securities other than warrants that
• It impart liquidity to investments and enhance
are convertible to equity shares to
Qualified Institutional Buyers (QIBs). the marketability of securities.
• Majority of the trading is done in the secondary
- Avoids the lengthy process of a market
public offer and targets institutional • The Securities Contract (Regulation) Act, 1956,
Qualified
investors. defines stock exchange as “an association,
Institutions
Placement organization or body of individuals, whether
- Has a faster turnaround time and
(QIP) incorporated or not, established for the purpose
fewer regulatory compliances
compared to public offerings. of assisting; regulating and controlling of
business in buying, selling and dealing in
- Pricing is based on the pricing securities.”
formula provided by SEBI, which
• The stock exchange works as a facilitator of this
usually considers the average of
the weekly high and low of the transaction and enables the buying and selling
closing prices of the shares during of shares.
the two weeks preceding the • Key participants of stock market
relevant date. • SEBI
• Stock Exchange
- A method to meet minimum
• Stock brokers
public shareholding norms by
issuing new shares to institutional • Investors
Institutional investors. • Over the Counter” (OTC) and Stock Exchange
Placement are two distinct venues for trading financial
Programme - Aimed primarily at listed instruments, each with its unique characteristics
(IPP) companies needing to comply with
and mechanisms.
the minimum public shareholding
requirements as mandated by • Over-the-counter (OTC) securities are traded
market regulators. without being listed on an exchange. An over-
the-counter (OTC) market is a decentralized
market in which market participants trade

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 Financial Markets II

stocks, commodities, currencies, or other • Companies with OTC shares may raise capital
instruments directly between two parties and through the sale of stock.
without a central exchange or broker
STOCK EXCHANGE:
OVER-THE-COUNTER (OTC) MARKET: • Definition: India has two primary stock
• Definition: In India, the OTC market primarily exchanges – the Bombay Stock Exchange (BSE)
refers to bilateral trading directly between two and the National Stock Exchange (NSE). These
counterparties, without the involvement of a are centralized platforms where registered
formal exchange or centralized platform. This brokers facilitate the buying and selling of listed
usually happens through broker-dealer securities through an auction system.
networks. • Traded Instruments: Primarily focuses on equity
• Traded Instruments: Primarily deals with debt shares of listed companies, along with
instruments like corporate bonds, government Exchange Traded Derivatives (ETDs) like stock
securities, and derivatives like forward contracts options and index futures.
and swaps. Some equity trading also occurs in • Characteristics:
the OTC market, including smaller unlisted • Centralized Trading: Trades occur on a
companies or those not meeting listing physical or electronic platform provided
requirements on major exchanges. by the exchange.
• Characteristics: • Transparency: Trades are publicly
• Decentralized Trading: No central displayed, leading to transparent price
location; trading is done electronically or discovery and fair market value
via phone. determination.
• Flexibility: Offers greater flexibility in • High Liquidity: Typically offers high
tailoring transaction terms to specific liquidity for popular securities, allowing
needs, particularly for complex for easier and faster buying and selling.
derivatives. • Regulation and Standardization: Subject
• Less Transparency: Price discovery can to stricter regulations and standardized
be less transparent compared to trading practices, offering some
exchanges, as trades are not publicly protection against fraud and market
advertised. manipulation.
• Limited Liquidity: May face lower • Limited Flexibility: Less flexibility in
liquidity, especially for less popular negotiating transaction terms, as they
instruments, making it harder to buy or usually follow standardized exchange
sell quickly. rules.
• Higher Counterparty Risk: Requires
greater trust in the counterparty's BOMBAY STOCK EXCHANGE
creditworthiness due to the absence of • BSE, the first ever stock exchange in Asia
exchange guarantees. established in 1875.
• Securities that are traded over-the-counter may • Fastest Stock Exchange in world with the speed
be facilitated by a dealer or broker specializing of 6 microseconds
in OTC markets. • In 2017 BSE become the 1st listed stock
• OTC trading helps promote equity and financial exchange of India.
instruments that would otherwise be unavailable • Segments Permitted by SEBI
to investors. • a. Equity
b. Equity Derivatives

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 Financial Markets II

c. Currency Derivatives (including • These entities shall encompass non-profit

Interest Rate Derivatives) organizations & for-profit companies under their
d. Commodity Derivatives ambit of social enterprises (SE).
e. Debt • to qualify as a social enterprise, the
• BSE SME Platform offers an entrepreneur and entities whether NPO or FPE has to
investor friendly environment, which enables the demonstrate primacy of social impact
listing of SMEs from the unorganized sector • target the underserved and less
scattered throughout India, into a regulated privileged, in any of the 15 broad
and organized sector. categories of social welfare activities
• SENSEX -Sensex is the benchmark index of the specified by the SEBI
BSE in India. It was launched on January 1, 1986 • 67% of the SE’s activities ought to qualify
as a basket of 30 stocks representing the as eligible social welfare activities to be
country's largest, financially-sound companies able to list themselves on the SSE. -a)
listed on the BSE. Revenue b) Expenditure C) Customer
Base.
NATIONAL STOCK EXCHANGE • Listed SEs will then be able to raise capital
• NSE was incorporated in 1992. It was recognised through equity, zero-coupon bonds, mutual
as a stock exchange by SEBI in April 1993 and funds, social impact funds, and development
commenced operations in 1994 impact bonds.
• Segments Permitted by SEBI • listed SEs will enjoy tax benefits, they would be
• a. Equity subject to mandatory social audits
b. Equity Derivatives
c. Currency Derivatives (including
SOME IMPORTANT RELATED TERMS
Interest Rate Derivatives) • Market Capitalisation - Total value of a publicly
d. Commodity Derivatives traded company's outstanding common shares
e. Debt
owned by stockholders. Market capitalization is
• First dematerialized electronic exchange in the equal to the market price per common share
country. multiplied by the number of common shares
• NIFTY - a benchmark Indian stock market index
outstanding
that represents the weighted average of 50 of • Bulls -They are the stock market speculators
the largest Indian companies listed on the
who buy shares in bulk in the belief that share
National Stock Exchange prices would rise so that they can sell these later
• NSE EMERGE is the National Stock Exchange of at a profit.
India's new initiative for small and medium-sized
• Bears - The stock market speculators who sell
enterprises and startup companies from India. shares in the belief that stock prices would go
• These companies can get listed on NSE without down.
Initial public offering. This platform helps SMEs
• Insider Trading - Sale and purchase of stocks of
and Startups to connect with investors for a company on the basis of the information
funding
which is not publicly available
• Circular Trading: It refers to the practice of
SOCIAL STOCK EXCHANGE trading in a stock (share) among a group of
• SSE is a regulated funding platform, projected individuals in such a way as to send the signal
as an enabler of capital access for Social that the price of the stock is going up, to make
Enterprises. an impression that the stock is in great demand.

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 Financial Markets II

• Buy Back of shares: Under this, the company • There is an active secondary market in G-Secs.
can buy back a certain percentage of its shares The securities can be bought / sold in the
from the market directly secondary market either through
• Short selling: Short selling is defined as selling a • (i) Negotiated Dealing System-Order
stock which the seller does not own at the time Matching (NDS-OM) (anonymous online
of trade. An investor borrows a stock, sells the trading) or through
stock, and then buys the stock back to return it • (ii) Over the Counter (OTC) and reported
to the lender on NDS-OM
• Depository: A depository is like a bank wherein • (iii) NDS-OM-Web
the deposits are securities (viz. shares, • (iv) Stock exchanges
debentures, bonds, government securities, units • Retail Direct scheme is a one-stop solution to
etc.) in electronic form. There are two facilitate investment in Government Securities
depositories in India which provide by Individual Investors. Under this scheme
dematerialization of securities National Individual Retail investors can open Gilt
Securities Depository Limited (NSDL) and Central Securities Account – “Retail Direct Gilt (RDG)”
Securities Depository Limited (CSDL) A Account with the RBI. Through this they can
Depository is a facilitator for holding of securities trade in both primary and secondary market for
in the dematerialised form and an enabler for govt securities
securities transactions.
SEBI
• Algorithmic trading: (also called automated
trading, blackbox trading, or algotrading) is a • Securities and Exchange Board of India was
process for executing orders utilizing automated constituted as a non-statutory body on April 12,
and preprogrammed trading instructions to 1988 through a resolution of the Government of
account for variables such as price, timing and India.
volume. An algorithm is a set of directions for • Securities and Exchange Board of India was
solving a problem. Computer algorithms send established as a statutory body in the year 1992
small portions of the full order to the market over • Preamble of the Securities and Exchange Board
time of India describes the basic functions of the
Securities and Exchange Board of India as "...to
GOVERNMENT SECURITIES MARKET IN INDIA protect the interests of investors in securities and
• Government Security (G-Sec) is a tradeable to promote the development of, and to regulate
instrument issued by the Central Government or the securities market and for matters
the State Governments. G-Secs carry practically connected therewith or incidental thereto"
no risk of default and, hence, are called risk-free
SECURITIES – BONDS
gilt-edged instruments.
• Short term – T Bill & CMB • Bonds are a type of debt instrument that allows
• Long Term – Dated Securities and SDL investors to lend money to a corporation,
• G-Secs are issued through auctions conducted government, or other organization.
by RBI. Auctions are conducted on the • In return, the borrower pays the investor interest
electronic platform called the E-Kuber, the Core over a specified period and returns the principal
Banking Solution (CBS) platform of RBI amount upon maturity.
• Major players in the G-Secs market include
commercial banks and PDs besides institutional COMMON TERMS RELATED TO BONDS
investors like insurance companies 1. Face Value: The face value of a bond is the
amount that the issuer promises to pay to the

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 Financial Markets II

bondholder at maturity. It is also known as the • Debentures – unsecured bonds -often issued by
par value or principal amount. smaller corporations with weaker credit ratings
2. Coupon Rate: The coupon rate is the fixed rate and therefore carry a higher risk of default.
of interest that the issuer pays to the bondholder • Non-Convertible Debentures (NCDs) - issued by
periodically. companies and do not have the option of
3. Yield: Yield is the effective return on a bond, conversion into equity shares.
taking into account the coupon rate, face
value, and current market price. CONVERTIBLE BONDS
4. Maturity: The maturity of a bond is the date on • Convertible bonds are a type of financial
which the issuer repays the face value to the instrument that represents a hybrid investment,
bondholder. offering features of both bonds and stocks. They
5. Yield to Maturity (YTM): YTM is the total return are issued by corporations and can be
that an investor can expect to earn on a bond converted into a predetermined number of
if it is held until maturity. shares of the issuing company's stock at certain
6. Bond Market: The bond market is a marketplace times during the bond's life, usually at the
where bonds are bought and sold, including discretion of the bondholder.
government securities, corporate bonds, and Here are the key features and details regarding
municipal bonds. convertible bonds:
• Bond Component: As a bond, the instrument
DIFFERENT TYPES OF BONDS pays regular interest to investors. This interest is
usually at a fixed rate and is paid until the bond
• Government Bonds - They are considered to be
low-risk investments and offer a fixed rate of is either converted into equity or reaches its
maturity date.
return.
• Corporate Bonds - They offer higher returns than • Conversion Feature: The bond can be
government bonds but also carry a higher risk of converted into equity shares of the issuing
company. The terms of conversion—such as the
default.
• Municipal Bonds - are backed by the full faith conversion ratio, which determines how many
and credit of the issuing municipality, or shares one bond can be converted into—are
specified at the time of the bond's issue.
revenue bonds, which are paid from specific
revenue sources. • Conversion Price and Ratio: The conversion
price is the predetermined price at which the
• Zero Coupon Bonds - do not pay any interest
during the tenure of the bond. Instead, they are bond can be converted into shares. The
issued at a discount to the face value and conversion ratio is the number of shares an
investor receives upon conversion. For example,
redeemed at par on maturity, providing a
capital appreciation to the investor. if the conversion ratio is 10:1, the investor can
• Inflation-Indexed Bonds: These bonds are linked convert each bond into 10 shares of stock.
• Interest Rate: Convertible bonds typically have
to the inflation rate and provide a hedge
against inflation. The interest rate is adjusted to a lower interest rate than comparable non-
convertible bonds because they offer the
match the inflation rate, ensuring that the real
rate of return remains constant. additional value of the conversion option.
• Convertible Bonds -bonds can be converted • Investor Benefits: Investors are attracted to
convertible bonds because they offer the
into equity shares of the issuing company at a
pre-determined price and time period. potential for capital appreciation through
conversion into equity while also providing fixed-
income interest payments. If the company
performs well and the stock price increases, the

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 Financial Markets II

bondholder can benefit from the upside. If the • Credit Rating: Because they are unsecured, the
stock does not perform well, the investor still credit rating of the issuing company is a critical
receives bond interest payments and has the factor in the interest rate set on debentures.
bond's face value returned at maturity. • Convertible Options: Some debentures come
• Company Benefits: For the issuer, convertible with an option to convert into equity shares at a
bonds can be a way to raise capital at a lower future date, similar to convertible bonds.
cost. Since these bonds typically offer a lower • Seniority: In the event of liquidation, debenture
interest rate due to the conversion feature, they holders are paid before shareholders but after
can be less expensive than issuing regular secured debt holders.
bonds.
• Conversion at Investor's Discretion: Usually, the BONDS V/S DEBENTURES
option to convert lies with the bondholder. They Bonds and debentures are indeed both ways for
can decide whether to convert based on the institutions to raise capital by borrowing from
performance of the company's stock. If the investors. Here’s the distinction between them :
stock price is above the conversion price, • Security: The crucial aspect of collateralized
conversion can be advantageous. vs. unsecured debt.
• Maturity: If the bonds are not converted into • Interest Rate: Higher reward for higher risk in
equity, they mature like a typical bond, and the debentures.
principal is returned to the investor. • Priority of Repayment: Secured bondholders
• Forced Conversion: Sometimes, a convertible first, then unsecured debenture holders.
bond may have a feature that allows the issuer • Level of Risk: Debentures inherently carry higher
to force conversion. This is typically done when risk due to the lack of collateral.
the stock price is significantly higher than the
SECURITIES – SHARES (EQUITY)
conversion price.
• Anti-Dilution Provisions: In case of corporate • Shares, also known as equity, represent
actions like stock splits, dividends, or rights issues ownership in a company. When an individual
that can affect the stock price, anti-dilution buys shares of a company, they become a
provisions adjust the conversion terms to protect part-owner of that company, and are entitled
the interests of the bondholders. to a portion of the company's profits, as well as
a say in company decision-making.
DEBENTURES
• Debentures are a type of long-term debt DIFFERENT TYPES OF SHARES
instrument that is not secured by physical assets
or collateral. Issued by companies to raise EQUITY SHARES –
capital, debentures are backed only by the • represent ownership in a company and provide
general creditworthiness and reputation of the shareholders with voting rights in proportion to
issuer. Here are their key features: their shareholding.
• Unsecured: Unlike secured bonds, debentures • Equity shareholders are entitled to a share of the
do not have any assets backing them. If the company's profits in the form of dividends.
company goes bankrupt, debenture holders • benefit from capital appreciation if the value of
are considered general creditors. the shares increases over time.
• Fixed Interest Rate: Debentures typically pay a • Highly risky investment
fixed interest rate to investors and have a fixed
repayment date.

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 Financial Markets II

PREFERENCE SHARES/PREFERRED STOCK SECURITIES – DERIVATIVES

• offer investors a fixed dividend payment, usually • A derivative is a financial contract between two
at a higher rate than equity shares, and or more parties that derives its value from an
typically do not offer voting rights. underlying asset or group of assets.
• Preference Given over equity shareholders in • The underlying assets can include commodities,
two things stocks, bonds, currencies, or market indices.
• Dividend before equity shareholders and • Derivatives are used for a variety of purposes,
at fixed rate including risk management, speculation, and
• Paid on preference basis in case of hedging.
bankruptcy
• less risky than equity shares
MAJOR TYPES OF DERIVATIVES
• Futures: Futures contracts are standardized
CONVERTIBLE PREFERRED SHARES
contracts to buy or sell an asset at a
• Convertible Preferred Shares: These shares have predetermined future date and price. For
an option for the holder to convert them into a example, a wheat farmer may use futures to
set number of common shares. lock in a selling price for his next crop.
• Conversion Ratio: A predetermined rate • Options: Options give the holder the right, but
detailing how many common shares can be not the obligation, to buy (call option) or sell
received per preferred share, e.g., a 5:1 ratio (put option) an underlying asset at a specified
means 5 common shares for 1 preferred share. price within a specified time period. An investor
• Investor Benefit: Potential for capital gains if the may buy a call option on a stock if they believe
price of the common stock rises, allowing the stock price will rise but want to limit potential
conversion for a profit. losses.
• Company Benefit: May pay lower dividends on • Swaps: Swaps are contracts to exchange cash
these shares due to the added value of the flows or other financial instruments. A common
conversion feature, attracting investors seeking example is an interest rate swap, where parties
dividends plus the potential for equity exchange a fixed interest rate for a floating
appreciation. rate.
• Conversion Trigger: Holders convert based on • Forwards: Forwards are customized contracts
the common stock's market price, usually opting between two parties to buy or sell an asset at a
to do so when it is beneficial financially. specified price on a future date. For example, a
• Cash Payment Option: In some cases, upon company expecting to receive euros in six
conversion, holders may receive cash instead of months might enter into a forward contract to
common stock, though this is less usual. lock in the exchange rate with the dollar.
• Valuation Complexity: Valuing these shares • Credit Derivatives: These are financial contracts
involves accounting for both the steady income to transfer the credit risk of a fixed income
from dividends and the potential growth from product between parties. A Credit Default Swap
converting to common stock. (CDS) is one where a lender, like a bank, might
buy a CDS to hedge the risk that a borrower
CUMULATIVE PREFERENCE SHARES might default on a loan.
• These shares allow for the accumulation of • Oil Futures: An oil producer expects to produce
unpaid dividends and typically have a higher 1 million barrels of oil in six months. Concerned
dividend rate than non-cumulative preference about the potential fall in oil prices, the
shares. producer can enter into a futures contract to
sell 1 million barrels of oil at a predetermined

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 Financial Markets II

price on a set date in the future. Conversely, an • InvIT invests in infrastructure projects. The
airline, which is a heavy consumer of fuel, may projects can be in sectors such as transport
wish to lock in the price of oil to manage their (road, bridges, railways), energy (electricity
costs and avoid the risk of rising oil prices. generation, transmission, distribution),
communication, etc.
REITS
• REITs are companies that own, operate, or SOME IMPORTANT FINANCIAL INSTRUMENTS
finance income-producing commercial real • Global Depository receipt
estate. • American Depository Receipt
• real estate properties can be hospitals, • Indian Depository Receipt
warehouses, large office spaces,
shopping malls, hotels and commercial
properties of different kinds
• REIT raises funds by issuing units to investors and
invest those funds primarily in assets in real
estate sector
• The investors who hold units in a REIT are called
unit holders. The income generated from the
underlying assets of the REIT are regularly
distributed to the unit holders.
• It has to distribute 90% of its cash flows to
investors at least once in six months.
Investors also benefit from capital
appreciation in the underlying assets.
• Indian companies can raise foreign currency
• REITs can enlist themselves on a stock
funds through the issue of American Depository
exchange.
Receipts (ADRs) and Global Depository Receipts
• REITs can be traded on the stock market
(GDRs).
like every other equity share of the
• These ADRs and GDRs help companies to tap
company
foreign funds and increase their shareholding
• It is a natural hedge against inflation as returns
base which leads to better share valuation and
have been seen to consistently outpace
also creates value for shareholders.
Consumer Price Inflation.
• Indian companies who are willing to raise funds
INVITS from the U.S. can do so by issuing shares on the
• InvITs are collective investment vehicles similar American Stock exchange.
to a mutual fund, which enables direct • The companies give shares to an American
investment of money from individual and bank. These American banks in return for those
institutional investors in infrastructure projects to shares provide receipts to the Indian
earn a small portion of the income as return companies.
• highway projects, power plants, airports, • The companies raise funds by providing those
transmission lines and large scale ADR receipts in the American share market.
pipeline projects etc • American Depository Receipt (ADR) Process:
• InvITs enable developers of infrastructure assets The domestic company, already listed in its
to monetise their assets by pooling multiple local stock exchange, sells its shares in bulk to a
assets under a single entity (trust structure) U.S. bank to get itself listed on U.S. exchange.

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 Financial Markets II

• The U.S. bank accepts the shares of the issuing

company. The bank keeps the shares in its
security and issues certificates (ADRs) to the
interested investors through the exchange.
• Investors set the price of the ADRs through
bidding process in U.S. dollars. The buying and
selling in ADR shares by the investors is possible
only after the major U.S. stock exchange lists the
bank certificates for trading.
• The U.S. stock exchange is regulated by
Securities Exchange Commission, which keeps a
check on necessary compliances that need to
be complied by the foreign company.

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 FISCAL POLICY

WHAT IS FISCAL POLICY? • An annual financial statement presenting the

government's proposed revenues and spending
• Fiscal policy refers to the use of government
for a financial year.
spending and tax policies to influence
• The budget reflects the government's fiscal
economic conditions, especially
policy stance and priorities.
macroeconomic conditions,
including aggregate demand for goods and BUDGET – MAJOR OBJECTIVES
services, employment, inflation, and economic • Allocation Function of Government Budget
growth.
• Redistribution Function of Government Budget
• The major purpose of these measures is • Stabilisation Function of Government Budget
to stabilize the economy. The annual budget statement presents four kinds of
• Fiscal policy measures are frequently used
estimates:
in tandem with monetary policy to achieve • 1. Actual estimates of the preceding year
these macroeconomic goals.
• 2. Budget estimates of the current year
COMPONENTS/TOOLS OF FISCAL POLICY • 3. Revised estimates of the current year
• 4. Budget estimates for the proceeding year

PUBLIC SPENDING: COMPONENTS OF BUDGET

• Expenditures by the government on goods and
Tax
services. Revenue
• Can be used to stimulate economic activity Receipts
Revenue
Non Tax
during a slowdown. Budget
Revenue
expenditure
Debt creating
TAXATION:
• Adjusting tax rates and tax policies to influence Capital Receipts
Non Debt
the economy. Creating
• Can be used to control inflation or to stimulate Capital Budget
investment. Creation of
assets
Capital
expenditure
INVESTMENT AND DISINVESTMENT: Reduction of
liability
• Government investments in infrastructure or
other sectors to promote growth. Revenue Budget
• Disinvestment refers to the sale of assets such as • Do not impact assets and liabilities of
public sector enterprises to reduce the fiscal government
deficit or raise funds. • Relate to current financial year
• Recurring in nature
Capital Budget
PUBLIC DEBT:
• Impact on assets and liabilities of
• The total amount of money that a government
government
owes to creditors.
• Long term impact or implication
• Used as a tool for raising funds to finance
• Non recurring in nature
government spending.

BUDGET:

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 Fiscal Policy

RECEIPTS OF GOVERNMENT • Law and order maintenance charges

REVENUE RECEIPTS CAPITAL EXPENDITURE

• Non-redeemable - do not lead to a claim on • Creation of asset or reduction of liability
the government • Examples –
• accrue to the government on account of its • Repayment of loans
current activities • Expenditure on acquisitions of land,
• generally recurrent in nature building,machinery etc.
• Divided into – Tax and Non Tax Revenue • Investment in shares
• Examples – • Loans and advances to state/ UT
• Direct Tax – Corporate tax, Income Tax
MEASURES OF GOVERNMENT DEFICIT
• Indirect Tax – GST
• Interest on loans made by central govt
• Dividends and profits on investment REVENUE DEFICIT –
made • government spends more than it collects by
• Fees and other receipts for services way of revenue
• Cash grant in aid from foreign country • Revenue deficit = Revenue expenditure –
and international organizations Revenue receipts
• revenue deficit includes only such transactions
CAPITAL RECEIPTS that affect the current income and expenditure
• Create liability ( debt creating capital receipts) of the government
• Reduce Assets (non- debt creating capital • government is dissaving and borrowing for
receipts) consumption
• non-recurring • lead to a build up of stock of debt and interest
• Exmples – Loans, Recovery of loans, liabilities
Disinvestment - sale of shares in Public Sector • May lead to cut in capital or welfare
Undertakings (PSUs) expenditure
• May lead to higher taxes
EXPENDITURE OF GOVERNMENT
FISCAL DEFICIT
REVENUE EXPENDITURE • difference between the government’s total
• Recurrent in nature -incurred on day-to-day expenditure and its total receipts excluding
activities of the government borrowing
• Neither create assets nor reduce liability • Gross fiscal deficit = Total expenditure –
• incurred for purposes other than the (Revenue receipts + Non-debt creating capital
creation of physical or financial assets receipts)
• Broadly the expenditure which does not result in • it indicates the total borrowing requirements of
creation of assets for Government of India is the government from all sources
treated as revenue expenditure • Gross fiscal deficit = Net borrowing at home +
• Examples Borrowing from RBI + Borrowing from abroad
• Interest payment on Govt debt • Fiscal Deficit = Revenue Deficit + Capital
• Defence payments Expenditure - non-debt creating capital
• Subsidies • Key variable in judging the financial health of
• Pensions and salaries the public sector and the stability of the
• Grants to states economy.

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 Fiscal Policy

PRIMARY DEFICIT • FRBM Act as amended in 2017 contained an

• Primary Deficit - Gross primary deficit = Gross escape clause which permits monetisation of
fiscal deficit – Net interest liabilities the deficit under special circumstances.
• estimate of borrowing on account of
IMPLICATIONS OF FISCAL DEFICIT
current expenditures exceeding
• Depends on
revenues
• Nature of deficit – more revenue
• excludes interest obligations on
expenditure or capital expenditure
accumulated debt
• on source of financing
MONETIZATION OF DEFICIT • Level of deficit and how is borrowing
• Using money instead of debt to finance the used
fiscal deficit .
• Two ways POSITIVE IMPACTS
• Direct- RBI prints new currency and • Economic stimulus: During a recession, a fiscal
purchases government bonds directly deficit can help stimulate economic growth by
from the primary market increasing government spending on
• Indirect - government issues bonds in infrastructure, social services, and other
the primary market and the RBI investments. This can boost demand, create
purchases an equivalent amount of jobs, and increase consumer spending.
government bonds from the secondary • Counter-cyclical policy: Fiscal deficits can be
market in the form of Open Market used as a counter-cyclical policy tool to
Operations (OMOs). stabilize the economy during economic
• i) hold the purchased bonds in downturns, helping to mitigate the impacts of
perpetuity, ii) roll over all the recessions.
purchased bonds that reach • Investment in long-term growth: Deficit
maturity, and iii) return to spending can be used to invest in projects that
government the interests earned promote long-term growth, such as education,
on the purchased bonds. research and development, and infrastructure.
• Lower interest rates: In some cases, fiscal deficits
ISSUES WITH MONETIZATION can lead to lower interest rates, as the central
• Inflation bank may adopt an expansionary monetary
• Devaluation of Rupee policy to stimulate economic growth. Lower
• Fiscal Indiscipline interest rates can encourage borrowing and
• Adversely impact monetary policy investment.
objectives
• Direct monetization process used to be NEGATIVE IMPACT
automatic only until 1997 through the issuance • Increased debt burden: Persistent fiscal deficits
of ad-hoc treasury bills. can lead to a growing public debt, which may
• The Ways and Means Advances scheme was eventually become unsustainable. High debt
introduced in 1997 levels can constrain future government
• Fiscal Responsibility and Budget Management s'pending and may necessitate tax increases or
(FRBM) Act, 2003, RBI was completely barred spending cuts.
from subscribing to the primary issuances of the • Inflation: Fiscal deficits can contribute to
government. inflation if the increased spending leads to
higher demand for goods and services without

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 Fiscal Policy

a corresponding increase in supply. Inflation • government to lay before the parliament three
erodes purchasing power and can negatively policy statements in each financial year
impact the economy. • Medium Term Fiscal Policy Statement
• Crowding out effect: Government borrowing to • Fiscal Policy Strategy Statement
finance deficits can lead to higher interest rates, • Macroeconomic Framework Policy
which may crowd out private investment, Statement
reducing economic growth in the long term. • Medium Term Expenditure Framework
• Currency depreciation: Large fiscal deficits can Statement (MTEF)
cause a country's currency to depreciate,
making imports more expensive and potentially FRBM ACT - BACKGROUND
contributing to inflation. Additionally, currency • In the 1990s and 2000s, India stood at the top in
depreciation can undermine investor borrowing capital. Indian Economic Status was
confidence, leading to reduced foreign feeble as it had a high Fiscal Deficit, high
investment. Revenue Deficit, and the degree of high Debt-
• Reduced fiscal space: Persistent fiscal deficits to-GDP was also lofty.
can limit a government's ability to respond to • In the latter half of 2002-03, the continuous
future economic crises or invest in growth- borrowing by the government led to high debt,
enhancing projects. which critically affected the Indian Economic
The overall impact of fiscal deficits on a country's Status.
economy will depend on various factors, such as • More than half of the borrowed capital was
the size and duration of the deficit, the state of the used for the payments of interest on the
economy, and the effectiveness of the previous loans and had nothing much left for
government's fiscal policy. progressive purposes or productivity growth.
FISCAL CONSOLIDATION • Many economists then warned the government
and were made well aware of the strategic
• Fiscal consolidation is defined as concrete
conditions that could be the result of this
policies aimed at reducing government deficits
borrowing culture.
and debt accumulation
• Parliamentarians then pointed out the need for
• Way to reduce deficits and debt
a systematic regulation of the government of
• Increase taxes
India on resorting to a high level of borrowing.
• Reduce Expenditure
• Henceforth, the Fiscal Responsibility and Budget
• Disinvestment
Management (FRMB) Act was established in
• Legal Constraints
2003.

FRBM ACT – KEY FEATURES

PURPOSE –
• targets for reduction of fiscal indicators –fiscal
• ensure inter-generational equity in fiscal
deficit, eliminate revenue deficit, Limit general
management
government debt, Limit Central government
• long run macroeconomic stability
debt
• better coordination between fiscal and
• prohibits borrowing by the government from the
monetary policy
Reserve Bank of India
• transparency in fiscal operation of the
• bans the purchase of primary issues of
Government
the Central Government securities by
• medium term fiscal policy statement lays down
the RBI after 2006, preventing
the limits on the size of the budget deficits for
monetization of government deficit

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 Fiscal Policy

three years and target for tax and non-tax PUBLIC DEBT
receipts
• Central Government Debt includes all liabilities
• macroeconomic framework gives the
of Central Government contracted against the
government’s outlook on growth prospects of
Consolidated Fund of India (defined as Public
the economy
Debt), and liabilities in the Public Account,
• fiscal policy strategy explains how the current
called Other Liabilities.
policies follow sound fiscal management
• Public debt is further classified into
principles and give reasoning for any deviation
internal and external debt
from the deficit targets set by it under the Act.
• Other liabilities include liabilities on
• The Medium-term Expenditure Framework
account of State Provident Funds,
Statement is a statement presented to the
Reserve Funds and Deposits, Other
Parliament under Section 3 of the Fiscal
Accounts, etc
Responsibility and Budget Management (FRBM)
• Public debt in India is primarily contracted at
Act, 2003 and sets forth a three-year rolling
fixed interest rates. The debt portfolio is,
target for the expenditure indicators with
therefore, insulated from interest rate volatility,
specification of underlying assumptions and risks
which also provides stability to interest
involved.
payments
• Sovereign external debt is very less and majority
N K SINGH COMMITTEE ON FRBM ACT of debt is in domestic currency. Implying low
• Public debt to GDP ratio should be considered currency risk, the sovereign external debt is
as a medium-term anchor for fiscal policy in entirely from official sources, which insulates it
India from volatility in the international capital
• Fiscal deficit as the operating target markets.
• Independent Fiscal Council to ensure fiscal • It has been the endeavour of the Government
prudence to elongate the maturity profile of its debt
• Escape Clause portfolio with a view to reduce the roll-over risk.
• During Higher economic growth higher Most of the Government debt is long term.
reduction in fiscal deficit • The investor base as evident from the ownership
• Borrowing from RBI allowed in certain cases pattern of dated securities indicates a gradual
diversification and widening of market over time
FRBM ACT – ASSESSMENT
• The initial deadline to reach the 3% target was
2007-08 but it has been extended several times
over the years. In 2018, the deadline was again
extended to 2020-21.
• FY21 Budget, the target was relaxed to 3.5% as
permitted under the FRBM Act. The Centre
made use of escape clause to deviate from the
fiscal consolidation road map
• Government aims to reduce fiscal deficit to
below 4.5% of GDP by 2025-26

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 Fiscal Policy

TYPES OF FISCAL POLICY

EXPANSIONARY FISCAL POLICY:

• Used to stimulate economic growth.
• Involves increasing government spending
and/or cutting taxes.

CONTRACTIONARY FISCAL POLICY:

• Aims to slow down an overheating economy.
• Involves decreasing government spending
and/or increasing taxes.

NEUTRAL FISCAL POLICY:

• Designed to neither stimulate nor slow down
economic growth.
• Government spending is roughly equal to tax
revenue.
The major instruments covered under Debt are as
follows:
CYCLICAL FISCAL POLICY:
• Dated Securities: Primarily fixed coupon
• Changes in fiscal policy that are triggered by
securities of short, medium and long term
fluctuations in economic activity.
maturity which have a specified redemption
• Government spending and tax revenues
date.
naturally fluctuate with the economic cycle.
• Treasury-Bills: Zero coupon securities that are
issued at a discount and redeemed in face
value at maturity. These are issued to address COUNTER-CYCLICAL FISCAL POLICY:
short term receipt-expenditure mismatches • Deliberate action to counteract the economic
under the auction program of the Government. cycle.
These are primarily issued in three tenors, 91,182 • For example, increasing spending or cutting
and 364 day. taxes in a recession.
• 14 Day Treasury Bills. *Large fiscal deficit do not always signify
• Securities issued to International Financial expansionary fiscal policy.
Institutions: Securities issued to institutions viz.
IMF, IBRD, IDA, ADB, IFAD etc. for India’s
contributions to these institutions etc.
• Securities issued against ‘Small Savings’: All
deposits under small savings schemes are
credited to the National Small Savings Fund
(NSSF). The balance in the NSSF (net of
withdrawals) is invested in special Government
securities.

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 TAXATION

WHAT IS TAXATION? • Such taxes are imposed on production and

distribution of commodities (goods and
• Tax is a mandatory contribution to state
services).
revenue that the Indian government levies on
• Such taxes include excise tax, custom duties,
worker income and corporate gains, as well as
service tax, VAT, sales tax, entertainment tax
added to the cost of certain transactions,
etc.
commodities, and services.
• Payment of such taxes can be avoided by
• The government collects taxes on citizens to
refraining from entering into the particular
generate revenue for business ventures that
transaction that leads to the tax being levied.
would improve the country's economy and raise
• Indirect taxes are generally regarded as
citizens' living standards.
regressive because they fall on all persons
• In our country, the government's right to levy
indiscriminately irrespective of their ability to
taxes is derived from the Indian Constitution,
pay.
which grants the State and Central
• Inflationary in nature
governments equal jurisdiction to impose taxes.
• Every tax imposed within the country must be Aspect Direct Tax Indirect Tax
accompanied by an accompaniment law Taxes levied Taxes imposed on
passed by the State Legislature or the directly on the production
Parliament. income, wealth, and distribution of
Definition
and activities of commodities
CLASSIFICATION OF TAXES - ON BASIS OF individuals and (goods and
POSSIBILITY OF SHIFTING TAX BURDEN firms. services).
Excise tax, custom
Personal income
DIRECT TAX duties, service tax,
tax, corporate
• Direct taxes are those taxes in which the impact Examples VAT, sales tax,
tax, wealth tax,
(levy) and incidence (final burden) are on the entertainment
gift tax, etc.
same person i.e. the tax is borne by the person tax, etc.
on whom it is levied. The impact is on
• Such taxes are imposed on income, wealth and The impact is on
the producer or
activities of individuals and firms. the person or
Impact service provider
• Such taxes include personal income tax, entity that earns
(Levy) at the point of
corporate tax, wealth tax, gift tax etc. the income or
production or
• Payment of such taxes is compulsory and owns the wealth.
sale.
cannot be escaped. The incidence
• Direct taxes are generally progressive i.e. they The incidence is
may be on a
tend to reduce economic inequalities. on the same
different
• Not inflationary in nature person or entity
person/firm, as
Incidence on whom the tax
the tax burden
(Burden) is levied. The
INDIRECT TAX can be shifted to
person who pays
• Indirect Taxes are those taxes in which impact the consumer
the tax bears the
and incidence of the taxes may be on different through higher
burden.
people/firms i.e. tax burden can be shifted on prices.
to others.

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 Taxation

Payment can be tax as it tax rate increases with increase in

Payment is
avoided by not income.
compulsory and
Payment engaging in the • Proportional Tax: In the proportional tax system,
cannot be
transaction that the tax rate remains constant irrespective of the
escaped.
incurs the tax. level of taxable income.
Generally • Regressive Tax: In regressive taxation, the
Generally marginal tax rate decreases with increase in
regressive, falling
progressive, taxable income.
Economic on all persons
tending to o It is reverse of the progressive tax system.
Nature indiscriminately
reduce economic This is against the objective of a welfare
irrespective of
inequalities. state as it tends to accentuate income
their ability to pay.
inequalities.
Inflationary in
o Hence, it is only a theoretical concept
nature, as the
and has not as such been adopted by
Effect on Not inflationary in increased cost of
any country in the world.
Inflation nature. goods and
services can lead CLASSIFICATION OF TAXES - ON THE BASIS OF
to a rise in prices. IMPOSITION
Taxpayers are Consumers may • Ad-Valorem Tax: Under this tax system, tax is
aware of the tax be less aware of imposed on the basis of the value of the
payments and the tax commodity. These taxes are expressed in terms
Behavioral
their obligations, component of percentage of the selling price. An example
Aspect
promoting included in the for ad valorem tax is imposition of 28% GST on
transparency and price of goods luxury cars. Here, if the price of a car is Rs 10
accountability. and services. lakh, the GST amount will be Rs 2.8 lakh.
Requires a • Specific Tax: Such taxes are imposed on the
detailed basis of specific attributes or qualities of
Easier to collect
mechanism for commodities like unit, weight, length, size or
as it is added to
income volume. For ex: Excise duty on petrol and diesel
Collection the price of goods
assessment and is per litre. It is a flat rate of tax unlike ad
and and services, but
collection, valorem tax which is a percentage tax. Here a
Compliance may lead to a less
potentially specific amount is imposed upon a good.
transparent tax
leading to
system. DIRECT TAXES IN INDIA
administrative
complexity. • Income Tax - levied on the income of
individuals, Hindu undivided families,
unregistered firms and other association of
CLASSIFICATION OF TAXES - ON THE BASIS OF people.
TAX RATES • Surcharge on income tax - Income tax
• Progressive tax: Under such taxation system, the surcharge is an additional charge
marginal tax rate increases with increase in payable on income tax. It is an added
taxable income. It is based on the ‘ability to tax on the taxpayers having a higher
pay’ and ‘equity’ principles of taxation. It is an income inflow during a particular
effective tool of fiscal policy to reduce financial year.
inequalities of income and wealth in a society. • Corporate tax - levied on the income of
For example, Income tax in India is progressive corporate firms and corporations

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 Taxation

• For taxation purpose, a company is treated as a any tax due to various tax concessions and
separate entity and thus must pay a separate incentives provided under the Income-tax Law.
tax different from personal income tax of its • Alternative Minimum Tax - It is imposed on non-
owner corporates
• Recent Changes - The government • Securities Transactions Tax - It is levied on the
slashed basic corporate rate tax to 22% from value of securities transaction done through a
30% for domestic companies that don't avail recognized stock exchange in the country.
any exemption/incentive. The effective tax • The securities on which STT is applicable are
rate for these companies shall be 25.17% shares, bonds, debentures, derivatives, units
inclusive of surcharge and cess. Also, such issued by any collective investment scheme,
companies shall not be required to pay equity based government rights or interests in
Minimum Alternate Tax or MAT. securities and equity mutual funds.
• To boost manufacturing and the ‘Make-in- • The rate of taxation for STT is set by the
India’ initiative, the government has slashed government and depends upon the type of
corporate tax rate to 15%, from 25%, for security and type of transaction, whether
domestic companies incorporated on or after purchase or sale.
1st October 2019 making fresh investment in • Surcharge: It is an additional charge (tax) on
manufacturing. The option to pay income tax.
tax at the rate of 15% is available to o It is usually imposed to increase tax
companies which do not avail any revenue temporarily or to make the tax
exemption/incentive and commence their system more progressive.
production on or before 31st March, 2023. The o For example, the surcharge on income
effective tax rate for these companies shall tax is 10%, if income exceeds Rs.50 lakh
be 17.01% inclusive of surcharge & cess. Also, and 15% of income tax, if income
such companies shall not be required to pay exceeds Rs.1 crore.
Minimum Alternate Tax. • Cess: It is an additional charge (tax) on a tax,
which is levied for a specific purpose.
• Wealth tax: It is imposed on accumulated o Generally, cess is expected to be levied
wealth or property of every individual, Hindu till the time the government gets enough
undivided family and closely held companies. money for that purpose.
Wealth tax, in India, was levied under Wealth- o For ex. The Budget 2018-19 replaced the
tax Act, 1957. However, it was abolished in the existing 3 per cent education cess on
Budget 2015-16 personal income tax and corporation
• Gift Tax: First introduced in 1958. The gift tax was tax with a 4 per cent ‘Health and
levied on all donations except the one given by Education Cess’.
the charitable institution’s government Note: Cess and surcharge are not part of the
companies and private companies. The tax divisible pool of taxes as per Article 270 because
now stands abolished w.e.f 1998 they are levied for specific purposes.
• Minimum Alternate Tax - All companies having
book profits under the Companies Act shall
have to pay a minimum alternate tax. CAPITAL GAINS TAX
• objective of introduction of MAT is to bring into • Tax on Profits or gains arising from transfer of a
the tax net "zero tax companies" which in spite asset.
of having earned substantial book profits and • It is of two types
having paid handsome dividends, do not pay • Short term Capital Gains Tax –

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 Taxation

o In general, the asset is held for less than LAFFER CURVE

36 months
• The Laffer Curve is a relationship which suggests
o 24 months for immovable properties like
there is an optimum tax rate which maximises
land, building and house property
total tax revenue.
o Less than 12 months for assets like Equity
• Why might total tax revenues fall if the tax rate
or preference shares, securities listed on
increases?
stock exchange zero coupon bond etc.
• Increased rates of tax avoidance –
• Long term Capital Gains Tax
greater incentive to seek out tax relief,
Capital gains tax is not applicable to the inherited
make max use of tax allowances
property, as there is an only transfer of ownership
• Greater incentive to evade taxes (illegal)
and no sale. Any asset which is received as a gift
– i.e. non–declaration of income and
by way of will or inheritance is totally exempted
wealth
from the Online Income Tax Act 1961.
• Possible “brain drain” effects – loss of
However, CGT will be applicable if the individual
highly skilled, high income taxpayer
who inherits the asset decides to sell it.
The following do not come under the category of
capital asset:
a. Any stock, consumables or raw material,
held for the purpose of business or
profession
b. Personal goods such as clothes and furniture
held for personal use
c. Agricultural land in rural(*) India
d. 6½% gold bonds (1977) or 7% gold bonds
(1980) or National Defence gold bonds
(1980) issued by the central government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold
deposit scheme (1999) or deposit
certificates issued under the Gold SOME MAJOR DIRECT TAX REFORMS RECENTLY
Monetisation Scheme, 2015 • Vivaad se vishwas - a voluntary scheme for
resolving pending direct tax disputes amicably
with the taxpayers
• a taxpayer would be required to pay
CHANGES BROUGHT IN YEAR 2024
only the amount of the disputed taxes
• Finance Bill, 2024 amends Long Term Capital
Gain (LTCG) tax provision on immovable and will get complete waiver of interest
and penalty
properties.
• Taxpayer’s Charter - enshrines in law the rights
• Budget proposed a lower 12.5% rate of LTCG
and duties of the taxpayers. It will empower
tax on all assets (without indexation), down
citizens by ensuring time-bound services by the
from 20%.
Income-Tax Department.
• For classifying assets into long-term and
• Faceless Assessment Scheme - it will eliminate
short-term, there will only be two holding
human interface in assessments and is
periods: 12 months and 24 months.
• expected to reduce potential harassment of
taxpayers. The National e-Assessment Center
will be the sole governing authority for all

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 Taxation

communication with taxpayers under the FEATURES OF GST

scheme. • Destination based tax - GST is applicable on the
• A faceless appeal scheme has been supply of goods or services as against the earlier
launched on these lines. concepts of tax on the manufacture or sale of
goods or provision of services. On supply of
INDIRECT TAXES IN INDIA
Goods and services - means that tax would
• Customs Duty – imposed on import and
accrue to the State or the Union Territory where
export(very few) of goods.
the consumption takes place.
• government uses this duty to raise its
• Input tax credit - taxpayers are allowed to take
revenues, safeguard domestic industries,
credit of taxes paid on inputs (input tax credit)
and regulate movement of goods
and utilize the same for payment of output tax.
• Types of custom duty
• GST is largely technology-driven - The interface
• Basic Customs Duty (BCD)
of the taxpayer with the tax authorities is
• Countervailing Duty (CVD)
through the common portal (GSTN).
• Additional Customs Duty or
• Dual GST – levied by Centre and State both on
Special CVD
common base
• Protective Duty
• SGST/ UTGST - levied and administered
• Anti-dumping Duty
by respective state/UT
• Excise Tax - a form of tax imposed on goods for
• CGST - levied and administered by
their production, licensing and sale
Centre
• After GST excise duty applies only on
• IGST -levied and administered by Centre
petroleum and liquor.
on every inter-state supply of goods and
services
VALUE ADDED TAX (VAT) • CGST and SGST would be levied at rates to be
• Value-added tax (VAT) is a consumption tax on jointly decided by the Centre and States
goods and services that is levied at each stage • rates would be notified on the
of the supply chain where value is added, from recommendations of the GST Council.
initial production to the point of sale. • GST Council – to make recommendations on
GST related matters
GOODS AND SERVICES TAX • Import will be treated as inter-States supply and
• GST is a destination based tax on consumption IGST will be chargeable along with basic
of goods and services Customs duty
• GST is a single tax on the supply of goods and • Export will be treated as Zero rated supplies and
services, right from the manufacturer to the no IGST is payable.
consumer • Multiple Rates - 5%, 12%, 18% and 28%
• GST essentially a tax only on value addition at • GST Rate Slab Exempted (No Tax)
each stage due to facility of input tax credit • Threshold limit of turnover for exemption from
• The taxable event under GST shall be the supply GST -Threshold limits of Aggregate Annual
of goods or services or both made for Turnover for exemption from registration and
consideration in the course or furtherance of payment of GST for the suppliers of goods
business. • Composition scheme has been formulated for
• The taxable events under the existing indirect small businessmen being supplier of goods and
tax laws such as manufacture, sale, or provision supplier of restaurant services
of services shall stand subsumed in the taxable
event known as ‘supply’.

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 Taxation

• HSN (Harmonised System of Nomenclature) COMMODITIES KEPT OUT OF GST

code shall be used for classifying the goods • alcohol for human consumption is kept out of
under the GST regime GST by way of definition of GST in constitution
• An anti-profiteering measure has been • Five petroleum products viz. petroleum crude,
incorporated in the GST law to ensure that any motor spirit (petrol), high speed diesel, natural
benefits on account of reduction in tax rates or gas and aviation turbine fuel have temporarily
benefit of input tax credit results in been kept out
commensurate reduction in prices of such
goods/services. GST COUNCIL
• Under Article 279A of the Constitution
• Composition
• The Union finance minister who will be
the CHAIRMAN of the council;
TAXES SUBSUMED UNDER GST • The union minister of state in charge of
Taxes currently levied and collected by the Centre: revenue or finance who will be the
a. Central Excise duty MEMBER of council.
b. Duties of Excise (Medicinal and Toilet • ONE MEMBER from each state who is
Preparations) minister in charge of finance or taxation
c. Additional Duties of Excise (Goods of Special or any other minister and
Importance) • anyone of them will be VICE
d. Additional Duties of Excise (Textiles and CHAIRMAN of the GST council
Textile Products) who will be mutually elected by
e. Additional Duties of Customs (commonly them.
known as CVD)
f. Special Additional Duty of Customs (SAD) GST COUNCIL FUNCTIONS
g. Service Tax Make the recommendation to the Union and State
h. Central Surcharges and Cesses so far as on the following matters:-
they relate to supply of goods and services 1. the taxes, cesses and surcharges levied by the
Centre, the States and the local bodies which
State taxes that would be subsumed under the GST may be subsumed under GST;
are: 2. the goods and services that may be subjected
a. State VAT to or exempted from the GST;
b. Central Sales Tax 3. model GST laws, principles of levy,
c. Luxury Tax apportionment of IGST and the principles that
d. Entry Tax (all forms) e govern the place of supply;
e. . Entertainment and AmusementTa x(except 4. the threshold limit of turnover below which the
when levied by the local bodies) goods and services may be exempted from
f. Taxes on advertisements GST;
g. Purchase Tax 5. the rates including floor rates with bands of GST;
h. Taxes on lotteries, betting and gambling 6. any special rate or rates for a specified period
i. State Surcharges and Cesses so far as they to raise additional resources during any natural
relate to supply of goods and services calamity or disaster;
7. special provision with respect to the North- East
States, J&K, Himachal Pradesh and Uttarakhand;
and

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 Taxation

8. any other matter relating to the GST, as the E WAYBILL

Council may decide. • E-way bill is a mechanism to ensure that goods
being transported comply with the GST Law and
GST COUNCIL – DECISION MAKING is an effective tool to track movement of goods
Quorum of GST council - One half of the total and check tax evasion.
number of Members of the Goods and Services Tax • Electronic Way Bill (E-Way Bill) is basically a
Council shall constitute the quorum at its meetings. compliance mechanism wherein by way of a
• The Goods and Services Tax Council shall digital interface the person causing the
determine the procedure in the performance of movement of goods uploads the relevant
its functions. information prior to the commencement of
• Every decision of the Goods and Services Tax movement of goods and generates e-way bill
Council shall be taken at a meeting, by a on the GST portal.
majority of not less than three-fourths of the • A GST registered person cannot transport goods
weighted votes of the members present and in a vehicle whose value exceeds Rs. 50,000
voting, in accordance with the following (Single Invoice/bill/delivery challan) without an
principles, namely: — e-way bill
• the vote of the Central Government
shall have a weightage of one-third of GST COMPENSATION CESS
the total votes cast, and • It was provided in GST to compensate states
• the votes of all the State Governments due to loss of revenue on account of
taken together shall have a weightage implementing GST.
of two-thirds of the total votes cast, in • GST Compensation Cess is levied by the Goods
that meeting. and Services Tax (Compensation to States) Act
2017
GOODS AND SERVICE TAX NETWORK (GSTN) • The cess is levied on goods such as automobiles
• It is a not-for-profit, non-Government Company and air conditioners that attract the highest 28%
to provide shared IT infrastructure and services GST and on so-called sin goods such as aerated
to Central and State Governments, tax payers drinks, coal, pan masala and cigarettes.
and other stakeholders • It has been extended to 31st March 2026
• portal to track every financial
transaction and provide taxpayers with BENEFITS OF GST
all services – from registration to filing • Eliminates cascading of taxes effect
taxes and maintaining all tax details. • Better compliance
• Centre holds about 24.5% equity in GSTN, with • Create a common national market
an equal amount held by all states, union • Reduction in price for consumer
territories and the Empowered Committee of • Increase competitiveness of Goods and
State Finance Ministers. Services
• The balance 51% is held by non-government • Increase tax collection – due to wider base, less
financial institutions, including LIC Housing evasion, more trade volumes
Finance, which owns 11%, and HDFC Bank, ICICI • Easy to administer and transparent in nature
Bank, HDFC Ltd and NSE Strategic Investment • Ease of doing Business
Co, each owning about 10%. • Reduced logistics cost due to e way bill system
• It has been decided to Change in ownership
status of GSTN to 100% government-owned

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 Taxation

INTERNATIONAL TAXATION gaps and mismatches in tax rules, to

take advantage of lower tax rates and,
thus, not paying taxes to in the country
BEPS (BASE EROSION AND PROFIT SHIFTING) where the profit is made
• multinational enterprises exploiting gaps and • BEPS practices cost countries 100-240 billion USD
mismatches between different countries' tax in lost revenue annually, which is the equivalent
systems to 4-10% of the global corporate income tax
• Firms make profits in one jurisdiction, and revenue.
shift them across borders by exploiting

HOW IS BEPS DONE

DOUBLE IRISH STRATEGY TAX HAVEN

• Google has used the double Irish loophole to • A tax haven, or “offshore financial center,” is a
funnel billions in global profits through Ireland country (or state) in which foreign investors pay
and on to Bermuda, effectively putting them taxes at an abnormally low rate, possibly even
beyond the reach of US tax authorities. zero.
• Companies exploiting the double Irish put their • Additionally, tax havens share little or none of
intellectual property into an Irish-registered their investors' financial information with foreign
company that is controlled from a tax haven tax authorities.
such as Bermuda. • Three essential characteristics of a tax haven:
• Ireland considers the company to be tax- (a) no or only nominal taxes (b) lack of effective
resident in Bermuda, while the US considers it to exchange of information and (c) lack of
be tax-resident here. The result is that when transparency in their legislative, legal or
royalty payments are sent to the company, they administrative provisions.
go untaxed – unless or until the money is • By shifting their funds into or through tax havens,
eventually sent home to the US parent businesses and other investors can avoid paying
taxes in high-tax countries.

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 Taxation

TRANSFER PRICING PILLAR ONE – RE-ALLOCATION OF TAXING

• Transfer pricing is a technique used by RIGHTS
multinational corporations to shift profits out of • Pillar One will ensure a fairer distribution of profits
the countries where they operate and into tax and taxing rights among countries with respect
havens that involves a multinational selling itself to the largest MNEs, including digital
goods and services an artificially high price. By companies.
using its subsidiary in a tax haven to charge an • It would re-allocate some taxing rights over
inflated cost from its subsidiary in another MNEs from their home countries to the markets
country. where they have business activities and earn
profits, regardless of whether firms there have a
DOUBLE TAX AVOIDANCE AGREEMENT physical presence there.
• The Double Tax Avoidance Agreement (DTAA) is • Under Pillar One, taxing rights on more than USD
essentially a bilateral agreement entered into 125 billion of profit are expected to be
between two countries to prevent taxation of reallocated to market jurisdictions each year.
same income twice.
• The basic objective is to promote and foster PILLAR TWO – GLOBAL ANTI-BASE EROSION
economic trade and investment between two MECHANISM
Countries by avoiding double taxation • Pillar Two seeks to put a floor on competition
over corporate income tax, through the
INTERNATIONAL TAXATION MEASURES
introduction of a global minimum corporate tax
• OECD/G20 framework – international
rate that countries can use to protect their tax
collaboration to set international tax standards
bases.
to combat through BEPS package –set of 15 • The global minimum corporate income tax
Action points
under Pillar Two - with a minimum rate of 15% - is
• Advanced pricing agreement - an agreement
estimated to generate around USD 150 billion in
between a tax payer and tax authority
additional global tax revenues annually.
determining the transfer pricing methodology
• Additional benefits will also arise from the
for pricing the tax payer's international
stabilisation of the international tax system and
transactions for future years. the increased tax certainty for taxpayers and
• GAAR - is a concept which generally empowers
tax administrations.
the Revenue Authority in a country to deny tax
benefit of transactions or arrangements which TAXATION RELATED TERMS
do not have any commercial substance and • Countervailing Duty (CVD): Additional duty
the only purpose of such a transaction is imposed to neutralize the negative impact of
achieving the tax benefit imports that are subsidized by the exporting
country, making them cheaper than domestic
OECD/BEPS TWO PILLAR SOLUTION goods.
As of October 2021, over 135 countries and • Anti-Dumping Duty: A protectionist tariff that a
jurisdictions have joined the Two-Pillar Solution to domestic government imposes on foreign
reform international taxation rules and ensure that imports that it believes are priced below fair
multinational enterprises pay a fair share of tax market value.
wherever they operate. • Tax Avoidance: The use of legal methods to
modify an individual's financial situation to lower
the amount of income tax owed.
• Tax Evasion: The illegal evasion of taxes by
individuals, corporations, and trusts.

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 Taxation

• Tax Buoyancy: A measure of how revenue from

taxes increases without increasing tax rates,
typically due to economic growth.
• Tax Expenditure: Government spending through
the tax code; these are deviations from the
normal tax structure designed to favor a
particular industry, activity, or class of persons.
• Shell Firms: Entities without active business
operations or significant assets, often used for
financial maneuvers, sometimes for tax
avoidance or evasion.
• Inverted Duty Structure: A situation where the
import duty on raw materials is higher than the
import duty on finished goods, which
disincentivizes domestic production.
• Pigovian Tax: A tax imposed on any market
activity that generates negative externalities
(costs not included in the market price). The tax
is intended to correct an inefficient market
outcome by being set equal to the social cost
of the negative externalities.

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 EXCHANGE RATE

WHAT IS EXCHANGE RATE? can actually purchase, adjusting for inflation

and other economic factors.
• Rate at which one currency will be exchanged
• It's calculated by multiplying the nominal
for another currency: This is the basic definition
exchange rate (e) by the ratio of prices
of the exchange rate, also known as the foreign
between the two countries. The formula is:
exchange rate or forex rate.
• Real Exchange Rate=e×(Price of Basket in Dom
• It tells us how much of one currency you can get
estic CurrencyPrice of Basket in Foreign Currenc
in exchange for another currency. For example,
y)Real Exchange Rate=e×(Price of Basket in For
if the exchange rate between the Indian Rupee
eign CurrencyPrice of Basket in Domestic Curren
and the US Dollar is 75, it means you need 75 INR
cy)
to buy 1 USD.
• Value of one country's currency in relation to EXCHANGE RATE REGIMES
another currency: Exchange rates express the Exchange rate regimes are the systems that
comparative economic strengths of countries'
countries use to determine the value of their
currencies.
currency in relation to other currencies:
• They fluctuate due to various factors, including
trade balances, interest rates, inflation, and
political stability.

DIFFERENT TYPES OF EXCHANGE RATES

NOMINAL EXCHANGE RATE:

• This is the actual rate at which two currencies FIXED OR PEGGED EXCHANGE RATE
can be exchanged in the forex market. • Under a fixed or pegged exchange rate regime,
• It does not adjust for differences in price levels a country's currency value is tied or pegged to
between countries and can be affected by another major currency, such as the U.S. Dollar
speculative movements in the forex market. or gold.
• The central bank maintains this fixed rate by
PPP EXCHANGE RATE: standing ready to buy or sell its own currency in
• Purchasing Power Parity (PPP) is a theory which exchange for the currency or commodity to
states that in the long run, exchange rates which it is pegged, thus maintaining a
should move towards rates that would equalize consistent exchange rate.
the prices of an identical basket of goods and • This regime provides stability in international
services in any two countries. prices for trade and investment but requires the
• The PPP exchange rate is the rate at which the country to hold large reserves of the foreign
currency of one country would need to be currency to which it is pegged.
converted into that of another to buy the same • Countries with less developed financial systems
basket of goods and services in each country. or those prone to speculative attacks may
adopt this regime to stabilize their currency.
REAL EXCHANGE RATE: • Example: The Hong Kong dollar is pegged to the
• The real exchange rate provides a measure of U.S. dollar at a rate of approximately 7.8 HKD to
the true value of a currency in terms of what it 1 USD.

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 Exchange Rate

FLOATING/FLEXIBLE EXCHANGE RATE forces in a phased manner but RBI can

• A floating or flexible exchange rate is intervene by buying and Selling foreign
determined by the free market through supply currencies
and demand relative to other currencies.
• This means the currency's value can change APPRECIATION OF CURRENCY
freely and is affected by a wide range of • Increase in the value of domestic currency with
factors, including economic performance, respect to value of foreign currency
interest rate differentials, and geopolitical
stability. DEPRECIATION OF CURRENCY
• Floating rates are often adopted by countries • Decrease in value of domestic currency with
with mature financial markets and stable respect to foreign currency
economic systems.
• Example: The U.S. dollar and the Euro are APPRECIATION AND DEPRECIATION – CAUSES
examples of currencies with floating exchange
• Demand and Supply Shifts: When a currency is
rates.
in high demand (due to strong exports, safe-
haven status, etc.), it appreciates, and when
MANAGED FLOATING EXCHANGE RATE there is less demand or higher supply, it
• A managed floating exchange rate is a hybrid depreciates.
where a country's currency is primarily traded • Speculation/Expectations: Traders' expectations
freely on the foreign exchange market, but the of future movements can lead to buying or
central bank can intervene by buying or selling selling pressures on a currency.
currencies to influence the value of the • Interest Rates & Monetary Policy: Higher interest
currency. rates offer better returns on assets denominated
• This is to prevent excessive fluctuations and in that currency, causing appreciation, and
maintain economic stability. vice versa.
• The level of intervention can vary widely from • Trade Balances: A higher demand for exports
occasional adjustments to frequent and active than imports can cause a currency to
management. appreciate, and a trade deficit can lead to
• Example: The Indian Rupee operates under a depreciation.
managed float regime, where the Reserve Bank • Macroeconomic Indicators: Strong economic
of India occasionally intervenes to stabilize the growth, lower inflation rates, a lower fiscal
currency or to reach certain economic targets. deficit, a current account surplus, and higher
EXCHANGE RATE REGIME IN INDIA forex reserves generally lead to currency
appreciation.
• Post Independence - Indian Rupee was pegged
• Fiscal Policy: Government spending and tax
to the Pound Sterling on account of historic links
policies can affect the currency's strength.
with Britain
• Non-Economic Factors: Political stability, social
• After Breakdown of Bretton Woods System -
unrest, and other geopolitical factors can
Indian Rupee was de-linked from the Pound
influence investor confidence and currency
Sterling in September 1975 and determined with
valuations.
reference to the daily exchange rate
movements of an undisclosed basket of
currencies of India’s major trading partners
• After 1991 – Economic reforms -Rupee’s external
value was allowed to be determined by market

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 Exchange Rate

APPRECIATION AND DEPRECIATION -IMPACT about future currency values and stabilize the
currency.
• Export: Appreciation makes exports more
• Swap Agreements: Currency swap agreements
expensive and less competitive abroad, while
between central banks can be used to stabilize
depreciation makes them cheaper and more
a currency by providing liquidity in the foreign
competitive.
exchange market.
• Import: Appreciation reduces the cost of
• Interest Rate Changes: Raising interest rates can
imports, making foreign goods cheaper for
attract foreign capital due to higher returns,
domestic consumers, whereas depreciation
leading to currency appreciation. Lowering
makes imports more expensive.
rates can have the opposite effect.
• Foreign Investments: Appreciation can reduce
• Liquidity Management: Adjusting the level of
foreign investment as it increases the entry cost,
liquidity in the banking system can influence the
while depreciation can boost foreign
exchange rate; for example, reducing liquidity
investment due to lower entry costs.
can lead to currency appreciation.
• External Debt: Appreciation can reduce the
• Liberalizing or Restricting Capital Account
domestic cost of servicing foreign-denominated
Transactions: These measures control the flow of
debt, while depreciation increases it.
foreign capital, which can affect the currency's
• Inflation: Appreciation may lower inflation by
value.
making imports cheaper, while depreciation
• Encouraging or Discouraging External
may increase inflation by raising the cost of
Commercial Borrowings (ECB): Policies that
imports.
regulate the borrowing of funds from foreign
• Monetary Policy: Central banks may intervene
sources can impact the demand and supply of
in currency markets or adjust interest rates to
foreign currency, thus affecting exchange rates.
control appreciation or depreciation.
• Economic Growth: Appreciation can slow down
HOW IS EXCHANGE RATE DETERMINED?
growth by making the export sector less
Exchange rates are determined by a variety of
competitive, while depreciation can stimulate
factors in the foreign exchange market. The foreign
growth by making exports more competitive.
exchange market is a global decentralized or over-
However, if not managed well, depreciation
the-counter (OTC) market for trading currencies.
can also lead to inflationary pressures that harm
Here are some key factors that influence the
the economy.
determination of exchange rates:
MEASURES TO CONTROL APPRECIATION AND • Supply and Demand: Influences currency value
DEPRECIATION OF RUPEE based on market forces.
• Interest Rates: Higher rates attract foreign
• Selling Foreign Currency: The central bank can investment, increasing currency value.
sell foreign currency from its reserves to increase • Inflation Rates: Lower inflation rates contribute
the supply of domestic currency, which can to currency appreciation.
lead to depreciation if the domestic currency is • Economic Indicators: Strong economic
too strong. performance enhances currency value.
• Buying Foreign Currency: Conversely, buying • Political Stability: Stable environments attract
foreign currency reduces the supply of the foreign investment, strengthening the currency.
domestic currency in the market, which can • Trade Balances: Surpluses can appreciate a
help appreciate its value if it is too weak. currency; deficits may lead to depreciation.
• Forward Contracts: Central banks can use • Government Debt: High debt levels can create
forward contracts to manage expectations concerns, leading to currency depreciation.

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 Exchange Rate

• Speculation: Traders' expectations can cause • For example, if India trades more with the US
short-term fluctuations in exchange rates. than with Australia, the US Dollar will have a
• Central Bank Interventions: Central banks may higher weight in the NEER calculation for the
act to stabilize or influence their currency's Indian Rupee.
value. • To construct the NEER, India's central bank, the
Reserve Bank of India (RBI), would select a
STERILIZATION OPERATIONS BY RBI
basket of currencies and assign weights to them
• Sterilization in the context of central bank according to their share in international trade.
actions refers to neutralizing the impact of • A rise in the NEER indicates that the Indian
foreign exchange interventions on the domestic Rupee has appreciated against this basket,
money supply. making Indian goods more expensive abroad,
• When the RBI intervenes in the foreign and a fall indicates a depreciation, making
exchange market to buy or sell currencies, it Indian goods cheaper for foreign buyers.
can affect liquidity (the amount of money
readily available) in the banking system.
REAL EFFECTIVE EXCHANGE RATE (REER)
• This, in turn, can impact money supply and
• The Real Effective Exchange Rate (REER) adjusts
inflation.
the NEER for price differences. It is the NEER
EFFECTIVE EXCHANGE RATE (EER) deflated by the relative price or cost indices,
• EER is a summary indicator of movements of the which include inflation differentials between
home currency against a basket of currencies India and its trading partners.
of trading partners. • This provides a more accurate measure of the
• Effective exchange rates (EERs) serve as a international competitiveness of Indian goods.
gauge for assessing the fair value of a currency, • increase in REER implies that exports become
the external competitiveness of an economy more expensive and imports become cheaper;
and even serve as guideposts for setting therefore, an increase indicates a loss in trade
monetary and financial conditions competitiveness
• An increase in the Effective Exchange Rate (EER) • REER is a better measure than NEER when it
does indeed indicate an appreciation of the comes to assessing the economic health and
home currency, which in the context of India, competitiveness of a country because it takes
would mean an appreciation of the Indian into account not just exchange rate
Rupee. movements but also price level changes. If the
• Appreciation of the Rupee in terms of the EER REER of India is high, Indian products are
means that, on average, the Rupee is gaining comparatively more expensive for other
value against the basket of currencies of India's countries, and vice versa.
major trading partners. • For instance, if inflation is higher in India than in
its trading partners, the REER would decrease
even if the NEER remains constant, indicating a
NOMINAL EFFECTIVE EXCHANGE RATE (NEER)
loss in competitiveness of Indian goods.
• The Nominal Effective Exchange Rate (NEER) is
an index of the weighted average of bilateral UPDATE ON NEER/REER SERIES
exchange rates between the home currency • The NEER/REER series was updated with a 2015-
and a basket of foreign currencies. 16 base year and a basket of 40 currencies
• The weights are typically assigned based on the instead of 36.
trade balance India has with each of these • This update reflects changes in global trade
countries. patterns and India's trade relations. By updating

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 Exchange Rate

the base year and expanding the basket of

currencies, the indices provide a more accurate
and up-to-date reflection of India's currency
strength relative to its current main trading
partners.

CALCULATION OF NEER

Where;
e: Exchange rate of Indian rupee against a
numeraire, i.e., the IMF’s Special Drawing Rights
(SDRs) in indexed form,
ei: Exchange rate of foreign currency ‘i’ against the
numeraire (SDRs) (i.e., SDRs per currency i) in
indexed form,
wi: Weights attached to foreign currency/country ‘i’
in the index
n: Number of countries/currencies in the index other
than India.

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 BALANCE OF PAYMENT

WHAT IS BALANCE OF PAYMENT(BOP)? TRADE IN SERVICES:

• It is a systematic record of all economic • This includes all services traded between
transactions of the residents of a country with residents and non-residents, such as:
the rest of the world, during an accounting year
NET FACTOR INCOME:
• It is maintained by Central bank of each
• Net Income from Compensation of Employees:
country as per IMF manual BMP6. All amounts
Wages and salaries earned by residents working
are expressed in Dollars.
abroad minus the earnings of foreign workers in
• Residents of a country include individuals,
the resident country.
private firms, organizations, government etc.
• Net Investment Income: Income from foreign
• Economic transactions include all transactions
investments minus payments made to foreign
which cause transfer of value like export of
investors.
goods, services, investments, gifts etc

COMPONENTS OF BOP NET NON-FACTOR INCOME:

• This typically includes earnings from services
such as shipping, banking, insurance, tourism,
software services, and more, subtracting the
payments made for such services to foreign
entities.

TRANSFER PAYMENTS:
• Consists of Gifts, Remittances, and Grants: One-
way transfers that do not require a quid pro
quo, such as money sent home by expatriates,
disaster relief, and development grants.

CURRENT ACCOUNT
• records exports and imports in goods, trade in
services, investment income and transfer
payments.
• This is a primary component of the Balance of
Payments, summarizing the flow of goods,
services, income, and current transfers between
residents and non-residents.

TRADE IN GOODS: CURRENT ACCOUNT DEFICIT

• Exports of Goods: These are goods sent out of a • Import of Goods and Services > Export of Goods
country to be sold abroad. and Services
• Imports of Goods: These are goods brought into • Implications of CAD – Key macro-economic
a country from abroad. indicator of health of external sector of a

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 Balance of Payment

country - Increased vulnerability to external • Policy Implications: A high CAD may prompt
shocks government and monetary authorities to
• Implies we are consuming more than we implement policies to curb imports, encourage
are producing exports, and control inflation and exchange
• Needs to be balanced from Capital rate volatility.
Account or Forex Reserves • Economic Growth Impact: While a moderate
• Rupee may depreciate or CAD can indicate healthy economic activity, a
decrease forex reserves large deficit may signal imbalances that could
• If funded using debt under lead to economic instability if not addressed.
capital account could lead to
BoP Crisis – due to high interest CAPITAL ACCOUNT
payments records all such transactions, which cause a
• The Current Account Deficit occurs when a change in the foreign assets or liabilities of the
country's total imports of goods, services, and residents of a country vis à vis rest of the world
transfers exceed its total exports. It is significant • Capital inflows can be classified by instrument
as it reflects the country's foreign trade and (debt or equity) and maturity (short or long
investment balance, influencing its exchange term)
rate, foreign reserves, and overall economic • main components of capital account include
health. foreign investment, loans and banking capital.
• Detailed Explanation:
• External Sector Health Indicator: CAD indicates
the health of a country's external sector. A
deficit suggests that a nation is spending more
on foreign trade than it is earning and is
borrowing capital from foreign sources to fund
the deficit.
• Exchange Rate Impact: Persistent CADs can put
downward pressure on a country's currency
value, as it may need to sell its currency to buy
foreign currency for imports. This can lead to
currency depreciation.
• Foreign Investment Dependency: A deficit often
requires financing through foreign investment. • Capital Account: A section of a nation's BoP
While this can bring in capital, it also increases that records all transactions that involve
reliance on external economic conditions and changes in the ownership of national assets.
investor sentiments. • Investments:
• Inflationary Pressures: A depreciating currency • Direct Investment: Refers to Foreign
due to CAD can make imports more expensive, Direct Investment (FDI), where investors
potentially leading to inflation, especially in from one country acquire a lasting
import-dependent countries. interest in a company in another
• Interest Rate Correlation: To attract foreign country. This includes equity capital,
investment to finance the deficit, a country reinvested earnings, and other direct
might need to offer higher interest rates, which capital flows.
can impact its domestic borrowing costs and • Portfolio Investment: Involves investments
economic growth. in foreign financial assets that do not

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 Balance of Payment

confer control over the asset. This

includes Foreign Institutional Investment and non-
(FII) and investments in offshore funds. residents
• External Borrowings:
• These are loans taken by the country
Direct
from foreign lenders, which can be long- Goods and
investment,
term or short-term debt. External services,
portfolio
commercial borrowings are loans investment
Transactions investment,
obtained from foreign sources such as income,
other
banks, financial institutions, or corporate current
capital
entities. transfers
transfers
• External Assistance:
• Government Aid: Financial aid provided
by foreign governments, often as part of Short-term Long-term
developmental assistance programs. Time
(less than a (one year
• Inter-governmental, Multilateral, and Horizon
year) or more)
Bilateral Loans: Loans taken from
international financial institutions (like the
IMF or World Bank) or directly from other
governments. Multilateral loans involve FOREIGN EXCHANGE RESERVES OF INDIA
multiple governments or financial • RBI is the custodian of the Foreign exchange
institutions, while bilateral loans are reserves in India
between two countries.

OFFICIAL RESERVE TRANSACTIONS

• Official reserve transactions refer to transactions
by the central bank that cause changes in its
official, reserves of foreign exchange.

ERRORS AND OMISSIONS

• to adjust for inaccuracies in recording
international transaction

Current Capital • Foreign exchange reserves in India refer to the

Feature
Account Account deposits of foreign currency and other assets
held by the Reserve Bank of India (RBI), the
Net country's central bank.
changes in • These reserves are used to back liabilities and
Current
ownership influence monetary policy. They are a crucial
income and
of assets indicator of the ability to repay external debt
Focus expenditure
and and for currency defense against market
with the rest
liabilities fluctuations.
of the world
between Here’s what India’s foreign exchange reserves
residents typically consist of:

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 Balance of Payment

• Foreign Currency Assets (FCA): These are the are greater (less) than autonomous
assets in major currencies like the US dollar, payments.
euro, pound sterling, Japanese yen, etc. The
FCA is the largest component of India's forex SDF AND RESERVE TRANCHE
reserves. It includes currency deposits, bonds, • SDR – international reserve asset to supplement
and treasury bills held in these currencies. its member countries’ official reserves
• Gold: The RBI holds a certain amount of gold as • value of the SDR is based on a basket of
part of its reserves. The value of this gold five currencies—the U.S. dollar, the euro,
fluctuates based on market prices. the Chinese renminbi, the Japanese yen,
• Special Drawing Rights (SDR): The SDR is an and the British pound sterling
international type of monetary reserve currency • SDR serves as the unit of account of the
created by the International Monetary Fund IMF
(IMF), which operates as a supplement to the • SDR is neither a currency nor a claim on
existing reserves of member countries. the IMF - it is a potential claim on the
• Reserve Tranche Position: This refers to the freely usable currencies of IMF members.
amount of funds that the RBI can draw from the SDRs can be exchanged for these
IMF on demand with no strings attached. It's currencies.
essentially India’s quota in the IMF, which can • SDR allocations are distributed in
be accessed without the need to provide proportion to countries’ participation in
additional collateral. the IMF capital, which in turn closely
• The level of foreign exchange reserves can relate to the size of their economies
reflect the health of India’s external sector and • A reserve tranche is a portion of the required
its ability to respond to external shocks. quota of currency each member country must
• For instance, strong reserves can provide provide to the International Monetary Fund
confidence to markets that a country can meet (IMF) that can be utilized for its own purposes—
its international obligations, stabilize its currency, without a service fee or economic reform
and maintain a favorable investment climate. conditions.
Conversely, dwindling reserves can signal • a portion of a member country’s quota
potential economic instability. can be withdrawn free of charge at its
• Autonomous and Accommodating Transactions own discretion.
–
• All the included transactions under
current account and capital account
are called as Autonomous transactions
because they are done with business or
profit motives without considering the
status of BoP (whether it is surplus or
deficit)
• Accommodating transactions are
determined by the net consequences of
autonomous transactions, that is, they
depend on the status of BoP
• The balance of payments is said to be in
surplus (deficit) if autonomous receipts

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 Balance of Payment

BALANCE OF PAYMENT – DEFICIT

IMPACT OF BOP DEFICIT:
• Rupee Depreciates: A deficit in the BoP often
CAUSES FOR BOP DEFICIT: leads to a depreciation of the national
• More Imports: When a country imports more currency, in this case, the Rupee. This occurs
goods and services than it exports, it spends because a deficit implies a greater demand for
more foreign currency than it receives. This foreign currencies to pay for imports, which
leads to a trade deficit, which is a significant lowers the value of the domestic currency.
component of the BoP deficit. • On Economic Growth: A persistent BoP deficit
• Less Exports: Conversely, when a country's can have several impacts on economic growth,
exports decrease due to lower competitiveness, including:
reduced global demand, or other factors, it • Inflationary Pressure: A depreciating
earns less foreign currency, contributing to a currency can make imports more
BoP deficit. expensive, leading to inflation.
• Flight of Capital: This refers to the rapid • Interest Rate Adjustments: To counter the
movement of large sums of money out of a outflow of capital, the central bank
country, which can happen due to loss of might raise interest rates, which can slow
confidence in the economy, political instability, down economic growth.
or better investment opportunities abroad. It • Reduction in Foreign Reserves: To
results in a reduction of foreign currency maintain currency stability, a country
reserves and can cause a BoP deficit. might use its foreign reserves, which can
• External Shock or Economic Disruption: These deplete these reserves and affect the
are events that negatively affect the economic country's creditworthiness.
activities of a country, such as natural disasters, • Investment and Spending: Uncertainty
global financial crises, or pandemics. They can about the currency and inflation can
disrupt trade and investment flows, leading to a lead to reduced investment and
BoP deficit. consumer spending, further slowing
• Non-Economic Factors: Political instability, poor economic growth.
governance, and policy uncertainty can deter • Public Debt: Governments may need to borrow
investment and influence the flow of trade and more to finance a BoP deficit, potentially
capital, potentially leading to a BoP deficit.

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 Balance of Payment

increasing the country's public debt. This can tariffs and quotas, to reduce imports and
lead to higher taxes in the future and reduced improve the trade balance. While this might
public spending on essential services. help reduce the BoP deficit, it can also lead to
• Credit Rating: A large or sustained BoP deficit trade wars and reduced economic efficiency.
can lead to a downgrade in a country's credit • Exchange Rate Mechanism: To correct a BoP
rating, making it more expensive to borrow deficit, a country may adjust its exchange rate
money on international markets. regime, moving from a fixed exchange rate to a
• Foreign Exchange Reserves: A country might more flexible one, or vice versa, depending on
have to use its foreign exchange reserves to the circumstances and policy goals.
pay for its imports, which can quickly deplete • Structural Reforms: A BoP deficit may prompt
these reserves. Low levels of reserves can make structural reforms aimed at improving the
an economy vulnerable to external shocks. competitiveness of the economy's exports,
• Confidence and Investment: Persistent deficits enhancing productivity, and reducing reliance
can undermine investor confidence, both on foreign goods and services.
domestic and international. This can lead to • Social Impact: An adjustment to a BoP deficit
reduced levels of foreign direct investment (FDI) often requires austerity measures, which can
and portfolio investment, further straining the lead to reduced consumption, higher
BoP. unemployment, and social unrest.
• Trade Measures: A government might
implement protectionist trade measures, like

account transactions viz. import and export of

CONVERTIBILITY OF RUPEE
goods and services and unilateral transfers.
• Convertibility of a currency implies that the • Capital Account Convertibility (CAC): It refers to
currency can be exchanged for any other freedom to convert domestic financial assets
currency, without any restriction, at the into foreign assets and vice versa for
prevailing exchange rate. investments and borrowings. i.e. no restrictions
• Current Account Convertibility: A currency is on exchange of currencies regarding the
said to be convertible on current account if it movement of capital across countries.
can be freely exchanged in respect of current

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 FOREIGN INVESTMENT AND TRADE

FOREIGN INVESTMENT AND TRADE

FOREIGN PORTFOLIO INVESTMENT portfolio flows can exacerbate economic

problems during periods of uncertainty.
• FPI stands for those investors who hold a short-
• In economics, hot money is the flow of funds
term view on the company.
(or capital) from one country to another in
• FPIs generally participate through the stock
order to earn a short-term profit on interest
markets and gets in and out of a particular
rate differences and/or
stock at much faster frequencies. Short term
anticipated exchange rate shifts. These
view is associated often with lower stake in
speculative capital flows are called "hot
companies
money" because they can move very quickly
• In India, the term “Foreign Portfolio Investor”
in and out of markets, potentially leading to
refers to FIIs or their sub-accounts, or qualified
market instability
foreign investors (QFIs) who are permitted to
hold upto 10% stake in a company. • FPI definition - Any investment made by a
• Non-Resident Indians (NRIs) and Foreign person resident outside India through capital
Venture Capital Investors (FVCI) are instruments where such investment is
excluded from the purview of this • less than ten percent of the post issue
definition. paid-up share capital on a fully diluted
basis of a listed Indian company or
• Hot money is capital that investors regularly
move between economies and financial • less than ten percent of the paid-up
markets to profit from highest short-term value of each series of capital
interest rates. instrument of a listed Indian company
• FPI is often referred to as “hot money” • Permitted instruments: shares of listed Indian
because of its tendency to flee at the first Company, Non-Convertible Debentures, units of
signs of trouble in an economy. These massive domestic MF, Government Securities, Security

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 Foreign Investment and Trade

Receipts, Pass Through Certificates, derivatives – • Increase in Investment Level: FDI contributes to
Exchange traded Futures and Options, FX higher capital inflow, which is invested in local
forwards and Interest rate swaps businesses and infrastructure.
• Transfer of Technology: FDI often brings
FOREIGN INSTITUTIONAL INVESTOR (FII)
advanced technology from developed
• Foreign Institutional Investor (FII) means an countries to host countries, enhancing their
institution established or incorporated outside technological capabilities.
India which proposes to make investment in • More Employment: Investment by foreign
securities in India. companies can create new jobs and reduce
• FII as a category does not exist now. It was unemployment.
decided to create a new investor class called • Stable Exchange Rate: FDI can contribute to the
"Foreign Portfolio Investor" (FPI) by merging the stability of a country's currency by increasing
existing three investor classes viz. FIIs, Sub the flow of foreign currency.
Accounts and Qualified Foreign Investors • Revenue for Government: FDI can increase
government revenue through taxes and duties.
QUALIFIED FOREIGN INVESTORS-QFI • Better Management Practices: Foreign
• Foreign investor who satisfies following criteria companies may introduce improved
• any foreign individuals, groups, or management practices and operational
associations, or residents from a country efficiencies.
that is a member of the Financial Action • Increased Competition and Innovation: The
Task Force (FATF). presence of multinational companies can lead
• resident in a country that is a signatory to greater competition, benefiting consumers
to IOSCO’s MMOU (Appendix A and spurring innovation.
Signatories) or a signatory of a bilateral • Promote Entrepreneurship: FDI can foster an
MOU with Securities and Exchange entrepreneurial culture by enabling the
Board of India (SEBI) exchange of expertise and knowledge.
• May Lead to Increase in Exports: Local
FOREIGN DIRECT INVESTMENT
companies may become part of the global
• Investment purpose is long term or to do supply chain, leading to an increase in exports.
business -Investor aims to manage enterprise • Create Demand from Ancillary Industries: FDI
and get profits. can stimulate the development and growth of
• foreign companies are directly involved local suppliers and ancillary industries.
with day-to-day operations in the other • Utilization of Natural Resources: FDI can provide
country. the means for better extraction and utilization of
• they aren’t just bringing money with natural resources, with the potential for
them, but also knowledge, skills and economic benefits.
technology.
• Foreign Direct Investment (FDI) is the investment
FDI ROUTES
through capital instruments by a person resident
• Automatic Route: entry route through which
outside India.
investment by a person resident outside India
• (a) in an unlisted Indian company;
does not require the prior approval of the
• (b) in 10 percent or more of the post
Reserve Bank of India or the Central
issue paid-up equity capital on a fully
Government
diluted basis of a listed Indian company.
• Government Route: entry route through which
investment by a person resident outside India
BENEFITS OF FDI

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 Foreign Investment and Trade

requires prior Government approval and foreign • FDI is not permitted in inventory-based model of
investment received under this route shall be in e-commerce.
accordance with the conditions stipulated by
the Government in its approval INVENTORY BASED MODEL OF E- COMMERCE –
• Foreign Investment Facilitation Portal (FIFP) is the • Inventory based model of e-commerce means
new online single point interface of the an e-commerce activity where inventory of
Government of India for investors to facilitate goods and services is owned by e-commerce
Foreign Direct Investment. entity and is sold to the consumers directly.
• This portal is being administered by the
Department for Promotion of Industry and
MARKETPLACE BASED MODEL OF E-
Internal Trade (DPIIT), Ministry of Commerce &
COMMERCE
Industry. This portal will continue to facilitate the
• Marketplace based model of e-commerce
single window clearance of applications which
means providing of an information technology
are through approval route.
platform by an e-commerce entity on a digital
& electronic network to act as a facilitator
SECTORS IN WHICH FDI IS PROHIBITED between buyer and seller.
• Lottery Business including Government/private • E-commerce marketplace may provide support
lottery, online lotteries, etc. services to sellers in respect of warehousing,
• Gambling and Betting including casinos etc. logistics, order fulfillment, call centre, payment
• Chit funds collection and other services.
• Nidhi company • E-commerce entity providing a marketplace will
• Trading in Transferable Development Rights not exercise ownership or control over the
(TDRs) inventory i.e. goods purported to be sold. Such
• Real Estate Business or Construction of Farm an ownership or control over the inventory will
Houses ‘Real estate business’ shall not include render the business into inventory-based model.
development of townships, construction of • An entity having equity participation by e-
residential /commercial premises, roads or commerce marketplace entity or its group
bridges and Real Estate Investment Trusts (REITs) companies, or having control on its inventory by
registered and regulated under the SEBI (REITs) e-commerce marketplace entity or its group
Regulations 2014. companies, will not be permitted to sell its
• Manufacturing of cigars, cheroots, cigarillos and products on the platform run by such
cigarettes, of tobacco or of tobacco substitutes marketplace entity
• Activities/sectors not open to private sector • Inventory of a vendor will be deemed to
investment e.g.(I) Atomic Energy and (II) be controlled by e-commerce
Railway operations. marketplace entity if more than 25% of
FDI IN E COMMERCE purchases of such vendor are from the
marketplace entity or its group
companies.

FDI IN SINGLE BRAND RETAIL TRADING

• E-commerce means buying and selling of

goods and services including digital products
over digital & electronic network.
• 100% FDI under automatic route is permitted in
marketplace model of e-commerce.

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 Foreign Investment and Trade

• In respect of proposals involving foreign SPECIAL ECONOMIC ZONES

investment beyond 51%, sourcing of 30% of the
• Government of India first introduced the
value of goods purchased, will be done from
concept of SEZ in the export import policy 2000
India, preferably from MSMEs, village and
with a view to provide an internationally
cottage industries, artisans and craftsmen, in all
competitive and hassle-free environment for
sectors.
exports
• An SBRT entity operating through brick and
• SEZ refers to a specially demarcated territory
mortar stores can also undertake retail trading
usually known as ‘deemed foreign territory’ with
through e-commerce.
• tax holidays,
FDI IN MULTI BRAND RETAIL • exemption from duties for export and
import,
• world level economic and social
infrastructure for production and
• augmentation of export activities within
the territory along with facilities like
• The minimum amount to be brought in, as FDI,
• abundant and relatively cheap labour,
by the foreign investor, would be US $ 100
strategic location and market access
million.
etc
• Fresh agricultural produce, including fruits,
vegetables, flowers, grains, pulses, fresh poultry, OBJECTIVE FOR CREATING SEZ
fishery and meat products, may be unbranded. • To promote exports
• Retail trading, in any form, by means of e- • Create employment
commerce, would not be permissible for • Attract Investment
companies with FDI, engaged in the activity of • Develop infrastructure
multi-brand retail trading. • Economic Growth and development
• At least 30% of the value of procurement of
manufactured/processed products purchased
SEZ RULES PROVIDE FOR:
shall be sourced from Indian micro, small and
• " Simplified procedures for development,
medium industries, which have a total
operation, and maintenance of the Special
investment in plant & machinery not exceeding
Economic Zones and for setting up units and
US $ 2.00 million
conducting business in SEZs;
FDI IN INSURANCE SECTOR • Single window clearance for setting up of an
• majority of its directors, key management SEZ;
persons, and at least one among the • Single window clearance for setting up a unit in
chairperson of its Board, its managing director a Special Economic Zone;
and its Chief Executive Officer -- will be a • Single Window clearance on matters relating to
Resident Indian Citizen. Central as well as State Governments;
• Simplified compliance procedures and
documentation with an emphasis on self
certification

FOREIGN TRADE POLICY 2023

• FTP 2023 aims at process re-engineering and
automation to facilitate ease of doing business
for exporters.

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 Foreign Investment and Trade

• It also focuses on emerging areas like dual use for pre-production, production and post-
high end technology items under SCOMET, production at zero customs duty.
facilitating e-commerce export, collaborating
FTP 2023 - RECOGNITION OF EXPORTERS
with States and Districts for export promotion.
• FTP 2023 encourages recognition of new towns • Status recognition norms have been re-
through “Towns of Export Excellence Scheme” calibrated to enable more exporting firms to
and exporters through “Status Holder Scheme”. achieve 4 and 5-star ratings, leading to better
• The FTP 2023 is facilitating exports by branding opportunities in export markets.
streamlining the popular Advance Authorization • Exporter firms recognized with 'status' based on
and EPCG schemes and enabling merchanting export performance will now be partners in
trade from India. capacity-building initiatives on a best-endeavor
basis.
FTP 2023 - PROCESS RE-ENGINEERING AND • Similar to the 'each one teach one' initiative, 2-
AUTOMATION star and above status holders would be
• automated IT systems with risk management encouraged to provide trade-related training
system for various approvals in the new FTP based on a model curriculum to interested
• policy emphasizes export promotion and individuals
development, moving away from an incentive
FTP 2023 - PROMOTING EXPORT FROM THE
regime to a regime which is facilitating, based
DISTRICTS
on technology interface and principles of
collaboration. • FTP aims at building partnerships with State
• FTP 2023 codifies implementation mechanisms governments and taking forward the Districts as
in a paperless, online environment, building on Export Hubs (DEH) initiative to promote exports
earlier 'ease of doing business' initiatives. at the district level and accelerate the
development of grassroots trade ecosystem
FTP 2023 - TOWNS OF EXPORT EXCELLENCE • District specific export action plans to be
• Four new towns, namely Faridabad, Mirzapur, prepared for each district outlining the district
Moradabad, and Varanasi, have been specific strategy to promote export of identified
designated as Towns of Export Excellence (TEE) products and services.
in addition to the existing 39 towns.
FTP 2023 - STREAMLINING SCOMET (SPECIAL
• The TEEs will have priority access to export
CHEMICALS, ORGANISMS, MATERIALS,
promotion funds under the MAI scheme and will
EQUIPMENT AND TECHNOLOGIES) POLICY
be able to avail Common Service Provider
(CSP) benefits for export fulfillment under the • India is placing more emphasis on the "export
EPCG Scheme. control" regime as its integration with export
• Market Access Initiative (MAI) Scheme is control regime countries strengthens
an Export Promotion Scheme envisaged • A robust export control system in India would
to act as a catalyst to promote India’s provide access of dual-use High end goods and
exports on a sustained basis. technologies to Indian exporters while
• Export Promotion Capital Goods (EPCG) facilitating exports of controlled
Scheme - to facilitate import of capital items/technologies under SCOMET from India
goods for producing quality goods and
FTP 2023 – OTHER ASPECTS
services and enhance India's
• Facilitating E-Commerce Exports - FTP 2023
manufacturing competitiveness. EPCG
outlines the intent and roadmap for establishing
Scheme allows import of capital goods
e-commerce hubs and related elements such

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 Foreign Investment and Trade

as payment reconciliation, book-keeping, • Merchanting trade - Merchanting trade involves

returns policy, and export entitlements shipment of goods from one foreign country to
• Facilitation under Export Promotion of Capital another foreign country without touching Indian
Goods (EPCG) Scheme ports, involving an Indian intermediary.
• Facilitation under Advance authorization • Merchanting trade of restricted and
Scheme prohibited items under export policy
would now be possible.

FDI IN DIFFERENT SECTORS

Sector Sub-sector Automatic Route Government Route
- Up to 100% under automatic - -
route
Aquaculture Up to 100% for deep-sea fishing Up to 100% for other
and inland aquaculture activities
Agriculture & Animal Animal Husbandry Up to 100% for breeding, feed -
Husbandry production, veterinary services,
livestock farms, etc.
Plantation & Agriculture Sector Up to 100% for specific -
activities like tea, coffee, rubber,
palm oil, floriculture, etc.
- Up to 100% under automatic - -
route
Food Processing
- Retail trading linked to Up to 51% automatic, beyond -
processing, manufacturing requires government approval
- Up to 74% under automatic Up to 100% under specific -
route conditions
- Scheduled Airlines Up to 49% for foreign airlines, Up to 100% under
Civil Aviation up to 74% for NRI airlines specific conditions
- Non-Scheduled Airlines Up to 100% -
Ground Handling Services Up to 74% Up to 100% under
specific conditions
- Up to 74% under automatic Up to 100% under specific -
route conditions
- Manufacturing of specified Up to 49% automatic, beyond Up to 100% under
Defense
defense items requires government approval specific conditions
- Maintenance and repair Up to 74% automatic, beyond Up to 100% under
requires government approval specific conditions
- Up to 100% under automatic - -
route
- Preschools, K-12, Vocational 100% automatic -
Education Training
- Higher Education 100% automatic for non-profit -
entities, for-profit entities require
specific conditions
- Up to 74% under automatic Up to 100% under specific -
Healthcare
route conditions

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 Foreign Investment and Trade

- Hospitals, diagnostic centers, Up to 74% automatic, beyond Up to 100% under

medical & surgical equipment requires government approval specific conditions
- Clinical research Up to 100% automatic -
- Brownfield investments in Up to 74% automatic, beyond -
existing hospitals requires government approval
- Up to 100% under automatic - -
route
- Construction-development Up to 100% -
Housing & Real Estate projects
- Operation and management of Up to 100% -
townships, malls, shopping
complexes, business centers
- Up to 74% under automatic Up to 100% under specific -
route conditions
- Life Insurance Up to 74% automatic, beyond Up to 100% under
Insurance
requires government approval specific conditions
- Non-Life Insurance Up to 74% automatic, beyond Up to 100% under
requires government approval specific conditions
- Up to 100% under automatic - -
route
Infrastructure (Roads, - Public-Private Partnership
Up to 100% -
Ports, etc.)
(PPP) projects
- Highways, airports, ports, etc. Up to 100% -
- Up to 100% under automatic Up to 100% under specific -
route conditions
- Exploration and mining of Up to 100% automatic for Up to 100% under
Mining & Minerals specific minerals specific minerals, others require specific conditions
government approval
- Downstream processing Up to 100% automatic -
- Trading of minerals Up to 100% automatic -
- Up to 26% under automatic Up to 49% under specific -
route conditions
- Printing Press Up to 26% -
- Publishing of newspapers and Up to 26% Up to 49% under
Printing & Media periodicals specific conditions
- Broadcasting (TV channels) Up to 20% for news and current -
affairs channels, up to 74% for
other channels under specific
conditions
- Up to 51% under automatic Up to 100% under specific -
route conditions
- Single-brand retail trading Up to 51% automatic, beyond Up to 100% under
Retail Trading
requires government approval specific conditions
- Multi-brand retail trading Up to 51% for online sales, no Up to 100% under
physical stores permitted specific conditions
- Up to 100% under automatic - -
Telecommunications
route

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 Foreign Investment and Trade

- Basic, cellular, and satellite Up to 100% -

services
- Cable TV and DTH services Up to 74% for foreign -
companies, 100% for NRIs
- Up to 100% under automatic - -
Textiles route
- All textile items Up to 100% -

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 INTERNATIONAL ECONOMIC ORGANISATIONS

policy advice, an activity known as

INTERNATIONAL MONETARY FUND (IMF) surveillance.
• International Monetary Fund (IMF) is a major • Identifies potential risks and recommends
financial institution within the United Nations appropriate policy adjustments to sustain
(UN). economic growth and promote financial
• It acts as a global lender of last resort and a key stability.
promoter of financial stability and international • Monitors regional and global economic trends
cooperation. and issues periodic reports:
• Establishment and Background: • World Economic Outlook
• Founded: 1944 (Bretton Woods • Global Financial Stability Report
Conference) • Fiscal Monitor, External Sector Report,
• Headquarters: Washington, D.C., USA Regional Economic reports etc.
• Started Operations: March 1, 1947
• Number of Member Countries: 190
PROVIDING FINANCIAL ASSISTANCE TO
KEY FUNCTIONS: MEMBER COUNTRIES IN TIMES OF ECONOMIC
OR FINANCIAL CRISIS
• Promoting exchange rate stability: The IMF works
to stabilize exchange rates and prevent
Various Lending Instruments of IMF are:
financial crises by providing loans and technical
• General Resources Account (GRA) – funds on
assistance to member countries facing
non-concessional terms to all members
economic challenges.
• Poverty Reduction and Growth Trust -
• Surveying the global economy: It continuously
Concessional Financial Support @ 0% interest
monitors the global economy and financial
rate for low-income countries
system, identifying potential risks and providing
• Stand-By Arrangements (SBAs) - emerging and
early warnings to member countries.
advanced market economies in crises to
• Offering policy advice: The IMF offers policy
address short term BoP problems
advice to member countries on issues like fiscal
• Extended Fund Facility (EFF)/ Extended Credit
and monetary policy, debt management, and
Facility (ECF)- for low-income countries are the
financial sector regulation.
Fund’s main tools for medium-term support to
• Providing financial assistance: The IMF lends
countries facing protracted BoP problems
financial resources to member countries facing
• Flexible Credit Line (FCL) or the Precautionary
temporary balance of payments problems or
and Liquidity Line (PLL) - prevent or mitigate
experiencing crisis situations.
crises and boost market confidence during
• Building capacity: The IMF offers technical
periods of heightened risks, members with
assistance and training to member countries to
already strong policies
help them strengthen their economic and
• Rapid Financing Instrument (RFI) / Rapid Credit
financial institutions
Facility (RCF) - low-income countries provide
HOW DOES IMF WORK? rapid assistance to countries with urgent
balance of payments need.

PROVIDING POLICY ADVISE TO MEMBERS

• Monitoring the economic and financial policies
of member countries and providing them with

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 Fundamentals of Economics

PROVIDING TECHNICAL ASSISTANCE TO HELP • Euro's weighting declined to 29.31% from

COUNTRIES BUILD EFFECTIVE ECONOMIC 30.93%,
INSTITUTIONS • Yen fell to 7.59% from 8.33%
• Technical Assistance and training programs • British pound fell to 7.44% from 8.09%.

IMF GOVERNANCE
KEY TOOLS: • Highest decision making body – Board of
• Quotas: Every member country contributes Governors
financially to the IMF based on its quota, which • Includes one governor and alternate
determines its voting power and access to IMF governor from each member country
resources. • Usually ministers of finance or central
• Special Drawing Rights (SDRs): The IMF's reserve bank governors
asset, SDRs are used by member countries to • Twenty-four of the governors serve on the
settle international transactions and supplement International Monetary and Financial
their foreign exchange reserves. Committee (IMPC)
• Loan programs: The IMF offers various loan • advises the IMF's Executive Board
programs with different lending terms and • advises and reports to the IMF Board of
conditionalities tailored to the specific needs of Governors
borrowing countries. • size and the composition of the IMFC
• Surveillance reports: The IMF regularly publishes mirrors that of the Executive Board
reports analyzing the economic and financial • IMFC has no formal decision-making
situation of member countries, providing powers
recommendations for policy improvements. • IMFC operates by consensus, including
IMF QUOTA on the selection of its chair
• A number of international institutions,
• Primary source of IMF funds
including the World Bank, participate as
• Based on country's relative position in world
observers in the IMFC’s meetings
economy
• Executive Board
• Current quota formula is a weighted average of
• 24 Executive Directors
GDP (weight of 50 percent), openness (30
• Conducts day-to-day business
percent), economic variability (15 percent),
• Represents member countries
and international reserves (5 percent)
• Quota determines – WORLD BANK
• resources to be contributed to IMF
• World Bank is an International financial
• voting power
institution
• Access to financing
• Establishment & Background:
• SDR allocations
• Founded: 1944 (Bretton Woods
SPECIAL DRAWING RIGHTS (SDR) Conference)
• It is an international reserve asset and • Headquarters: Washington, D.C.
supplements member countries' official reserves • Original Name: International Bank for
• Created by IMF in 1969 Reconstruction and Development (IBRD)
• It is not a currency and not a claim on IMF • Member Countries: 189
• It is based on a basket of currencies • It gives Funding and knowledge to reduce
• Dollar's weighting to 43.38% from 41.73% poverty and build shared prosperity in
• Renminbi/Yuan to 12.28% from 10.92%. developing countries

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 Fundamentals of Economics

• End extreme poverty: By reducing the • World Bank provides financing, policy advice,
share of the global population that lives and technical assistance to governments of
in extreme poverty ($1.90) to 3 percent. developing countries.
• Ensure Shared prosperity: By increasing
the incomes of the poorest 40 percent of
people in every country.

WORLD BANK GROUP

• Comprises 5 institutions
• Collectively, all 5 financial institutions are known as the “World Bank Group”.
• Together, IBRD and IDA are known as the ‘World Bank’.

• IFC, MIGA, and ICSID focus on strengthening the private sector in developing countries
• financing, technical assistance, political risk insurance, and settlement of disputes to private
enterprises, including financial institutions .
• Executive Directors make up the Boards
WORLD BANK GOVERNANCE
of Directors of the World Bank
• Board of Governors - ultimate policymakers at • World Bank Group President chairs
the World Bank meetings of the Boards of Directors
• governors are member countries' • voting power of each Member country is based
ministers of finance or ministers of on the number of shares it holds
development • Shares are allocated differently in each
• Governors delegate specific duties to 25 organization, resulting in different voting
Executive Directors powers
• Five largest shareholders appoint an
executive director, while other member
countries are represented by elected
executive directors

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 Fundamentals of Economics

KEY REPORTS and increase demand for interventions

to build human capital.
Report Name Brief Details • Three components of HCP-
World Provides an in-depth analysis of • A cross-country human capital
Development economic development issues. measurement metric called the Human
Report Published by the World Bank. Capital Index (HCI)
• A programme of measurement and
Assesses global economic
research to inform policy action
Global trends and their impact on
Economic developing countries. By the • A programme of support for country
Prospect Report World Bank. strategies to accelerate investment in
human capital.
Poverty and Tracks progress on poverty
Shared reduction and shared HUMAN CAPITAL INDEX
Prosperity prosperity. By the World Bank. • to measure the amount of human capital that a
Covers the flow of money sent child born today can expect to attain by age 18
Remittance back home by migrants • to convey the productivity of the next
Report globally. By the World Bank. generation of workers, compared to a
Evaluates the quality of life, benchmark of complete standard education
economic ability, sustainability in and full health
Ease of Living cities. By the Ministry of Housing • HCI has three components
Index and Urban Affairs (India). • Survival, as measured by under-5
mortality rates
India Analyses the development and
• Expected years of Quality-Adjusted
Development prospects of the Indian
School -quantity and quality of
Update economy. By the World Bank.
education
Universal Health Measures progress towards • Health environment
Coverage Index universal health coverage. • adult survival rates
The Service Measures restrictions on trade in • rate of stunting for children
Trade Restriction services across countries. By the under age 5
Index World Bank.
WORLD TRADE ORGANIZATION (WTO)
World Bank's new flagship report
(launched in Oct 2024) OBJECTIVES
benchmarking the business • To ensure reduction of tariff and other barriers.
environment and investment • To eliminate discrimination in trade.
B-READY Report climate in the countries. • To facilitate a higher standard of living.
• To facilitate optimal use of the world's resources.
HUMAN CAPITAL PROJECT – WORLD BANK • To enable the LDCs to secure fair share in the
INITIATIVE growth of international trade.
• Human Capital Project is a global effort to • To ensure linkages between trade policies,
accelerate more and better investments in environmental policies and sustainable
people for greater equity and economic development
growth
WTO – EVOLUTION
• HCP programme is claimed to be a
• In 1945, a conference known as the Bretton
program of advocacy, measurement,
Woods Conference (by two Bretton wood
and analytical work to raise awareness

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 Fundamentals of Economics

institutions- IMF and World Bank) was held for 2. The Dispute Settlement Body
the creation of International Trade Organization 3. The Trade Policy Review Body
(ITO) which finally could not be ratified due to • Third level: councils for each broad area of
lack of approval by the US and many other trade and more
major countries. o Three more councils, each handling a
• As the US was an emerging world power after different broad area of trade, report to
World War-II, hence the creation of ITO without the General Council:
the US was meaningless. o The Council for Trade in Goods (Goods
• Meanwhile, through negotiations, a multilateral Council)
agreement was concluded in 1947 known as o The Council for Trade in Services
the General Agreement on Tariffs and Trade (Services Council)
(GATT). o The Council for Trade-Related Aspects of
• GATT Formation (1947): Intellectual Property Rights (TRIPS
o Created as multilateral trade agreement Council)
o Alternative to failed ITO proposal • Fourth level: down to the nitty-gritty -Each of the
o US support was crucial as emerging higher level councils has subsidiary bodies
power post-WW2
KEY PRINCIPLES OF WTO
• GATT Period (1948-1994):
o Governed world trade rules • Most Favoured Nation (MFN) status:
o High international commerce growth o This principle requires that a WTO
o Remained provisional for 47 years member country should not discriminate
• Uruguay Round: between its trading partners.
o Initiated in November 1982 at Geneva o It means that if a country grants a
o Initially stalled on agriculture issues special favor, such as reduced tariffs, to
o Led to WTO's creation through one of its trading partners, it must also
Marrakesh Agreement (1994) grant the same favor to all other WTO
o Included future commitments for member countries.
agriculture and services negotiations • FTAs, Security, Special and Differential
• WTO Establishment (January 1, 1995): Treatment:
o Biggest post-WW2 trade reform o This principle recognizes that developing
o Expanded beyond GATT's goods-only countries may need special treatment
focus to help them participate more
o Added services and intellectual effectively in the global trading system.
property (IP). o Special and differential treatment (SDT)
o Introduced new dispute settlement provisions allow developing countries to
procedures. implement trade policies that are suited
to their specific needs and
STRUCTURE AND FUNCTIONING OF WTO circumstances. WTO member countries
• Highest authority: the Ministerial Conference are also allowed to negotiate free trade
• All major decisions are made by the agreements (FTAs) among themselves.
membership as a whole • National Treatment (NT):
• Second level: General Council o This principle requires that imported and
• Day-to-day work in between the domestically produced goods are
ministerial conferences is handled by treated equally under a country's trade
three bodies: policies.
1. The General Council

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 Fundamentals of Economics

o It means that a WTO member country o This principle recognizes the importance
cannot discriminate against foreign of trade in promoting economic
products by imposing higher tariffs, taxes development and reducing poverty.
or other restrictions on them than it o It encourages WTO member countries to
imposes on its own products. implement economic reforms that
• Free trade: promote trade and development, and to
o Gradually, through negotiation: This provide technical assistance to
principle requires WTO member developing countries to help them
countries to work towards freer trade by participate more effectively in the
gradually reducing trade barriers such global trading system.
as tariffs, quotas, and subsidies.
o This is done through negotiations Below Fig: The basic structure of the WTO
between member countries, where they agreement: How the six main areas fit together –
agree to make binding commitments to the umbrella WTO agreement, goods, services,
reduce trade barriers. Intellectual Property, disputes and trade policy
• Predictability through Binding and enforceable reviews.
commitments:
o This principle requires that WTO member
countries make binding commitments on
trade policies, which are enforceable
through the WTO dispute settlement
mechanism.
o It ensures that countries can rely on the
commitments made by their trading
partners, providing greater predictability
in trade.
• Transparency:
o This principle requires that WTO member
countries make their trade policies
transparent by publishing their laws,
regulations, and other measures that
affect trade. GATT (GENERAL AGREEMENT ON TARIFFS AND
o This allows other member countries to TRADE):
understand and review the trade • Purpose: To promote international trade by
policies of their trading partners. reducing tariffs (taxes on imports), quotas (limits
• Promoting fair competition: on imports), and other trade barriers.
o This principle requires WTO member • Adoption: 1947, as a provisional agreement;
countries to promote fair competition by 1995, as part of the WTO framework.
preventing anti-competitive practices • Scope: Covers trade in goods, including
such as price-fixing and market sharing. agricultural and industrial products.
o It also includes protecting intellectual • Key principles:
property rights and preventing the use of
unfair trade practices such as dumping. o Non-discrimination: Members must treat
• Encouraging Development and Economic all other members equally (MFN) and
Reforms: treat foreign products no less favorably

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 Fundamentals of Economics

than domestic products (national 3. Export subsidies –to deal with use of export
treatment). subsidies and other government support
o Reciprocity: Members negotiate programmes that subsidize exports.
reductions in trade barriers on a mutually
beneficial basis. DOMESTIC SUBSIDIES UNDER AOA
o Transparency: Members must publish • Green Box -All those subsidies that do not distort
their trade rules and regulations. trade or cause minimal distortion, comes under
o Dispute settlement: GATT provides a the green box –No Limits.
mechanism for resolving trade disputes • Amber Box -All kinds of domestic subsidies or
between members. support that can distort production and trade –
• Tariff Reductions: GATT required member “De minimis”Limit.
countries to negotiate and reduce tariffs on • Blue Box - All those Amber Box subsidies which
goods in a non-discriminatory manner. The tend to limit the production comes under Blue
ultimate goal was to achieve free trade by Box –No Limits.
eliminating all tariffs on goods. o Any support that would normally be in
• Anti-Dumping Measures: GATT allowed the amber box, is placed in the blue box
countries to take action against the dumping of if the support also requires farmers to
goods (selling products below their cost of limit production.
production) by other countries. However, the • Development Box - allows developing countries
measures taken should not be protectionist in additional flexibilities in providing domestic
nature and should be based on sound support.
evidence. o Designed to encourage agricultural and
• Non-Tariff Measures: GATT sought to reduce rural development and that are an
non-tariff measures, such as quotas and integral part of the development
licensing requirements, that restrict trade. programmes of developing countries.
• Special and Differential Treatment: It allowed for
special and differential treatment for GENERAL AGREEMENT ON TRADE IN SERVICES
developing countries, including longer time (GATS)
periods for tariff reductions and flexibility in • GATS, in the context of the World Trade
meeting other GATT obligations. Organization (WTO), stands for the General
Agreement on Trade in Services. It's a crucial
AGREEMENT ON AGRICULTURE – agreement that establishes the first and only set
• Aims at reforming trade in agriculture with a fair of multilateral rules governing international
and market-driven system trade in services.
• Allows governments to support their rural • Adopted in 1995 after the Uruguay Round of
economies, but only allowed those policies that trade negotiations, it aims to:
cause less trade "distortions“. o Liberalize trade in services by reducing
1. Improving Market access – to deal with use barriers and promoting transparency in
of trade restrictions, such as tariffs on regulations.
imports. o Establish common ground for
2. Domestic Subsidies – to deal with use of negotiations between WTO members
subsidies and other support programmes regarding service trade.
that directly stimulate production and distort o Provide a dispute settlement
trade. mechanism for service-related trade
issues.

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 Fundamentals of Economics

• Key aspects of GATS: o Geographical indications (e.g., for

o Modes of supply: The agreement products with a specific geographical
recognizes four ways services can be origin)
traded: cross-border (e.g., online o Industrial designs (e.g., for the aesthetic
education), consumption abroad (e.g., features of products)
tourism), commercial presence (e.g., o Patents (e.g., for inventions)
foreign bank branch), and presence of • Layout-designs (topographies) of
natural persons (e.g., temporary integrated circuits
professional work).
o Most-favored-nation (MFN) KEY PRINCIPLES:
principle: Members generally grant the • National Treatment and Most-Favoured-Nation
same treatment to service suppliers from (MFN) Treatment to IP: WTO member countries
all other WTO members. must provide foreign nationals and companies
o National treatment principle: Members with the same level of protection for their IP as
treat foreign service suppliers no less they provide to their own nationals and
favorably than their own service companies.
suppliers. o It also prohibits discrimination against
o Exceptions: GATS allows certain foreign IPRs in favour of domestic IPRs.
exceptions to its core principles for • Balanced Protection to IP: The protection and
public policy reasons, such as protecting enforcement of IPRs must balance the rights of
health, safety, and the environment. IP owners with the public interest.
o The agreement recognizes that IPRs may
have anti-competitive effects and that
TRIPS (AGREEMENT ON TRADE-RELATED
ASPECTS OF INTELLECTUAL PROPERTY RIGHTS): exceptions and limitations to IPRs may
• Purpose: To protect intellectual property rights be necessary in certain cases, such as
for public health or the public interest.
(IPRs), such as
patents, copyrights, trademarks,and trade • Adequate Protection to IPRs: It sets minimum
secrets, in the context of international trade. standards for the protection and enforcement
of different types of IPRs, including patents,
• The TRIPS Agreement has an additional
important general objective: intellectual trademarks, copyrights, industrial designs, and
geographical indications.
property protection should contribute to
technical innovation and the transfer of • Enforcement of IPRs: TRIPS requires WTO member
technology. Both producers and users should countries to establish effective procedures and
remedies for the enforcement of IPRs. This
benefit, and economic and social welfare
should be enhanced includes civil and criminal procedures and
• Adoption: 1995, as part of the WTO framework. penalties, as well as border measures to prevent
the importation or exportation of infringing
• Scope: Covers a wide range of IPRs, including:
o Copyrights and related rights (e.g., for goods.
• Dispute Settlement: TRIPS provides for dispute
literary and artistic
works, performances, sound recordings) settlement procedures among its member
o Trademarks (e.g., for countries to ensure the effective
implementation and enforcement of the
words, logos, symbols that distinguish
goods and services) agreement. WTO member countries can bring
disputes to the WTO's Dispute Settlement Body
(DSB) for resolution, which can authorize trade

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 Fundamentals of Economics

sanctions against countries that fail to comply oLocal content requirements: Mandating
with their TRIPS obligations. a specific percentage of a product's
components to be sourced
SOME EXCEPTIONS domestically.
• Compulsory Licensing -government allows o Trade balancing requirements: Forcing
someone else to produce the patented companies to export a certain
product or process without the consent of the percentage of their production.
patent owner o Foreign exchange balancing
• Parallel importing - country to import the same requirements: Imposing conditions on
product sold more cheaply in another country how foreign currency earned through
by the holder of the patent, without exports can be used.
authorization of the latter. o Technology transfer
requirements: Mandating the transfer of
TRIMS: TRADE-RELATED INVESTMENT MEASURES technology to domestic companies as a
• Prohibits trade-related investment measures, condition for investment.
such as local content requirements, that are • Upholds core WTO principles:
inconsistent with basic provisions of GATT 1994 o National treatment: Foreign investors and
• The Agreement on Trade-Related Investment their investments must be treated no less
Measures (TRIMS) recognizes that certain favorably than domestic investors and
investment measures can restrict and distort investments.
trade. o Quantitative restrictions: Measures that
• It states that WTO members may not apply any directly limit the quantity of imports or
measure that discriminates against foreign exports are generally prohibited.
products or that leads to quantitative
OTHER AGREEMENTS
restrictions, both of which violate basic WTO
principles. • Technical Barriers to Trade(TBT) – to ensure that
• A list of prohibited TRIMS, such as local content regulations, standards, testing and certification
requirements, is part of the Agreement. procedures do not create unnecessary
obstacles but also recognizes countries’ rights to
PURPOSE: adopt the standards they consider appropriate
• Promote fair competition and non- • Sanitary and Phytosanitary Measures
discrimination in trade by limiting the use of Agreement or SPS- agreement on food safety
certain investment measures that can distort and animal and plant health standards. allows
trade. countries to set their own standards
• Ensure that investment policies do not unfairly
favor domestic producers or disadvantage
foreign investments.

SCOPE:
• Applies to any measure imposed by a WTO
member that affects trade in goods (It applies
only to measures that affect trade in
goods), regardless of whether the measure
targets domestic or foreign investors.
• Prohibits certain restrictive investment measures:

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 ECONOMIC PLANNING
o Focused on agriculture as well as small
PRE INDEPENDENCE-ECONOMIC PLANNING and cotton industries
o Advocated self-sufficiency by curtailing
• Visvesvaraya Plan (1934) - M. Visvesvaraya
the use of foreign technology and
published a book titled “Planned Economy for
implementing land reforms and
India” in 1934 wherein suggested to double the
decentralized participatory planning
national income in a decade.
o Shift the labour from the agrarian set PLANNING POST INDEPENDENCE -GOALS
up to the industries thereby OF FIVE-YEAR PLANS
advocating for democratic
• Growth - Increase in country's capacity to
capitalism.
Produce goods service.
• National Planning Committee (NPC) (1938)- First
• Modernization - Adoption of new technology to
attempt under Jawaharlal Nehru to develop a
increase production & changes in social
national plan for India emanated in 1938 with
outlook.
the set-up of NPC.
• Self-Reliance – Reduce dependence on
o Focused on: Industrial development,
Foreign Countries (Avoid imports of goods
Rural economy, Population control and
which could be produced domestically)
Education
• Equity – Benefits of economic prosperity should
• Bombay Plan (1944) - Eight leading industrialists
reach the poor.
and technocrats formulated a draft titled “A
Brief Memorandum Outlining a Plan of FIVE YEAR PLANS IN INDIA - SUMMARY
Economic Development for India” under the
editorship of Purushottamdas Thakurdas in 1944.
● Focus - Agriculture, price
o Basic objective- Doubling the output of
stability, and infrastructure.
the agricultural sector and a five-fold
● Context - Influx of refugees,
growth in the industrial sector in 15 years.
food shortage, inflation at
o It called for government intervention First Five- plan's outset.
and regulation. Year Plan - ● Harrod Domar model; growth
• Gandhian Plan - drafted by S. N. Aggarwal, the 1951 to 1956 tied to investment and
principal of Wardha Commercial College in
productivity.
1944. Target ● Active state role in all
o ‘Decentralized economic structure’ for Growth - economic sectors post-
India with ‘self-contained villages’ 2.1% independence.
o laid more emphasis on agriculture.
● Major irrigation projects like
• People’s Plan - Drafted by M. N. Roy, the Actual Bhakra, Hirakud, Mettur,
communist leader, on behalf of the Post - War Growth - Damodar Valley dams.
Reconstruction Committee of the Indian 3.6% ● Outcomes - Successful due to
Federation of Lahore in 1945.
good harvests; achieved
o Based on ‘Marxist Socialism’ and gave
rehabilitation of refugees, food
primacy to agriculture.
self-sufficiency, price control.
o It advocated for the nationalization of
agriculture and all production activities.
• Sarvodaya Plan
o Drafted by Jai Prakash Narayan in 1950.

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 Economic planning

years is regarded as plan

● Focus- Rapid industrialization,
holiday.
especially in the industrial
● Due to the prevailing food
sector.
crisis, annual plans were
● Context - Economic stability
primarily focused on
allowed for a lower emphasis
agriculture.
on agriculture.
Second ● During these plans, the
● Known as the Mahalanobis
Five-Year foundation of the green
Plan, indicating a shift from
Plan - 1956 revolution was laid down which
agriculture to industry.
to 1961 included widespread use of
● Heavy and basic industries
HYV (high yielding varieties)
were prioritized.
Target seeds, chemical fertilizers and
● Advocated for import
Growth - extensive exploitation of
substitution, export pessimism,
4.5% irrigation potentials.
and overvalued exchange
● Focus - Growth with stability
rates.
Actual and progressive achievement
● The 1956 Industrial Policy
Growth - of self-reliance.
aimed to establish a socialistic
4.3% ● Context - Challenges post-Indo
pattern of society.
Pak war; aimed for self-reliance
● Forex shortages,
without foreign aid.
developmental target
Fourth Five- ● Agricultural Goal - Focused on
adjustments, and significant
"Green Revolution" to boost
price rise. Year Plan -
1969 to 1974 agricultural productivity.
● Moderately successful overall.
● Major Initiatives -
● Focus - 'Self-reliant' and 'self- Target Implementation of Family
generating' economy. Planning Programmes.
Growth -
● Context - Aimed to make India 5.7% ● Issues Faced - Influx of
Third Five- self-reliant, considering it Bangladeshi refugees, price
Year Plan - reached the 'takeoff stage'. Actual rise crisis, and poor monsoon in
1961 to 1966 Agriculture was given top later years.
● Growth -
priority to support exports and 3.30% ● Economic Changes - First oil
Target industry. shock of 1973 led to
Growth - ● The plan failed to meet targets remittances becoming a major
5.6% due to unforeseen events such source of foreign exchange.
as the Chinese aggression in ● Overall: Considered a
Actual 1962, the Indo-Pak war in 1965, significant failure due to not
Growth - and severe drought. meeting targets.
2.84% ● Shift from development to
Fifth Five- ● Focus: Removal of poverty and
defense & development due
Year Plan - attainment of self-reliance.
to conflicts.
1974 to 1979 ● Context: Launched by D.P.
● 1966-67, 1967-68 and 1968-69 Dhar amidst inflation and
Plan
were annual plans. economic challenges.
Holiday
Discontinuation of five-year Target ● Economic Strategy: High
1966-69 Growth -
planning for three consecutive growth rate, income
4.4%

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 Economic planning

distribution, and increased ● Overall Assessment: Generally

Actual savings. successful, despite severe
Growth - ● Inflation Impact: Cost famine and agricultural
4.8% miscalculations due to challenges in the last year.
inflation; revised public sector
outlay. ● Focus: Accelerating food grain
● Political Shift: Focus shifted to production, employment
Prime Minister's 20 Point Seventh opportunities, productivity with
Programme post-emergency. Five-Year an emphasis on 'food, work &
● Plan Outcome: Terminated Plan of India productivity'.
with the change of (1985-1990) ● Private Sector: Gained priority
government in 1978. over the public sector for the
● Rolling Plans: Introduced for Target first time.
1978-1979 and 1979-1980. Growth - ● Outcome: The plan was very
5.0% successful, surpassing the
● Two versions of the Sixth Plan targeted growth, but faced
due to a change in Actual inflationary pressures.
government. Growth - ● Political Context: Two annual
● Emphasis on employment and 6.01% plans were made for 1990-1991
direct attack on poverty. and 1991-1992 due to political
● Janata Govt. initiated the plan volatility.
focusing on employment,
Congress Govt. later ● Focus: 'Plan with a human
Rolling Plan introduced a different plan. face': human resource
1978-80 ● Janata Govt. lasted for 2 years, development, liberalization.
after which Congress Govt. ● Prioritized infrastructure
returned to power in 1980. development and social sector
Eighth Five-
● Janata Govt. criticized the reforms.
Year Plan of
Nehru Model for power ● Economic Reforms:
India (1992-
concentration, widening Introduction of fiscal &
1997)
inequality, and increasing economic reforms
poverty. (Liberalization, Privatization,
Target
Globalization) under P.V.
Sixth Five- ● Focus: Increase in national Growth -
Narasimha Rao.
Year Plan of income, technology 5.6%
● Strategy: Gave primacy to
India (1980- modernization, poverty human capital and the private
1985) reduction, employment Actual
Growth - sector.
through schemes like TRYSEM Economic Outcomes: Rapid
6.8% ●
Target and IRDP, population control.
growth in economy,
Growth - ● Poverty Strategy: Direct attack agriculture, manufacturing,
5.2% on poverty, abandoning the
and foreign trade;
trickle-down approach. improvement in trade and
Actual ● Achieved higher growth fueled
current account deficit.
Growth - by technological
5.7%
advancements.

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 Economic planning

● Focus: 'Growth with Social ● Social Objectives: Reduce

Justice and Equity', human Actual unemployment, poverty (by
resource development. Growth - 8% 10%), and gender gap in
Ninth Five-
Year Plan of ● Role of State: Facilitator in literacy.
India (1997- sectors where private ● Poverty Reduction: Decline of
2002) participation was limited. 1.5 percentage points per year
● Priority: Agriculture & rural between 2004-05 and 2009-10.
Target development for employment ● Fiscal Measures: Expansionary
Growth - and poverty eradication. policies to counter global
6.5% ● Promoted information slowdown.
technology and knowledge- ● Challenges: Price stability issues
Actual based economy. and utilization of funds
Growth - ● Dimensions: Quality of life, affected performance.
5.4% productive employment,
regional balance, and self- ● Focus: 'Faster, Sustainable, and
reliance. More Inclusive Growth'.
● Context: Initiated during global
● Focus: Growth with social economic slowdown and
justice and equity, specifically Eurozone crisis.
Twelfth Five-
in human resource ● Inclusiveness: Poverty
Year Plan of
development. reduction, equality, and
India (2012-
● Social Goals: Reduction in regional balance.
2017)
Tenth Five- gender gaps, infant & ● Sustainability: Environmental
Year Plan of maternal mortality, sustainability, human capital
Target
India (2002- improvement in literacy, and development, improved
Growth - 8%
2007) cleaning of polluted rivers. infrastructure.
● Governance: Considered a ● Strategic Approach:
Target key development factor; Empowerment of people,
Growth - 8% agriculture as a prime growth in human resource,
economic mover. infrastructure development.
Actual ● State's Role: Enhanced in
Growth - planning, involving Panchayati
7.6% PLANNING POST 2014
Raj Institutions for balanced
● Planning Commission Abolished: The Planning
development.
Commission, which was established in 1950 to
● Long-term Aim: Doubling per
oversee the country's strategic planning, was
capita income in ten years;
abolished.
reducing poverty by 15% by
● NITI Aayog Established: In its place, the
2012.
Government of India established the National
Eleventh ● Focus: Faster and more Institution for Transforming India (NITI Aayog) in
Five-Year inclusive growth, emphasizing 2015. NITI Aayog serves as the premier policy
Plan of India social justice. 'Think Tank' of the Government of India,
(2007-2012) ● Sector Growth: Agriculture: providing both directional and policy inputs.
3.7%, Industry: 7.2%, Services: ● New Way of Planning: With the establishment of
Target 9.7% NITI Aayog, a new approach to planning was
Growth - 9% adopted. This includes:

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 Economic planning

o 15 Year Vision: A long-term vision set to SOME MAJOR INITIATIVES OF NITI AAYOG
guide the strategic development of the
• Atal Innovation Mission (AIM): A flagship
country.
initiative set up by the NITI Aayog to promote
o 7 Year Strategy: A strategy document to
innovation and entrepreneurship across the
convert the longer-term vision into
length and breadth of the country.
implementable policy and action as a
o An umbrella innovation organization
part of the "National Development
that would play an instrumental role
Agenda."
in alignment of innovation policies
o 3 Year Action Plan: This document is
between central, state and sectoral
aligned with the predictability of the
innovation schemes.
financial resources during the 14th
o It will be incentivizing the
Finance Commission Award period. It
establishment and promotion of an
reflects the nation's immediate and
ecosystem of innovation and
medium-term priorities.
entrepreneurship at various levels -
NITI AAYOG higher secondary schools, science,
engineering and higher academic
• Established: January 1, 2015
institutions, and SME/MSME industry,
• Replaced: Planning Commission
corporate and NGO levels.
• Full Form: National Institution for Transforming
• SDG India Index - The SDG India Index is
India
intended to provide a holistic view on the
• Nature: Think Tank and Policy Forum
social, economic and environmental status of
o Apex public policy think tank of the
the country and its States and UTs.
Government of India.
• Aspirational Districts Programme -The
o Nodal agency tasked with catalyzing
‘Transformation of Aspirational Districts’
economic development, and fostering
programme aims to quickly and effectively
cooperative federalism through the
transform these districts. The broad contours of
involvement of State Governments of
the programme are Convergence (of Central &
India in the economic policy-making
State Schemes), Collaboration (of Central, State
process using a bottom-up approach
level ‘Prabhari’ Officers & District Collectors),
• Chairman: Prime Minister
and Competition among districts driven by a
• It performs 4 key activities:
mass Movement.
o Policy and Programme Framework
• Development Support Services for States (DSSS)
o Cooperative Federalism
for Infrastructure Projects: It has the visions to
o Monitoring and Evaluation
achieve transformational, sustained delivery of
o Think Tank, and Knowledge and
infrastructure projects with state of art capacity
Innovation Hub
disseminated at all levels of governance.
• Organizational Structure:
o Objective- creating PPP success stories
o Chairperson: PM
and rebooting infrastructure project
o Vice Chairperson: Appointed by PM
delivery models so a sustainable
• Governing Council:
infrastructure creation cycle is
o All Chief Ministers
established. The DSSS Infrastructure
o Lt. Governors of UTs
initiative involves providing project level
o Special invitees
support from Concept plan till financial
closure to State Governments / UTs.

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 Economic planning

• Composite Water Management Index: To assess Q.2) Consider the following statements: (2013)
and further improve the performance in
efficient management of water resources. 1. National Development Council is an organ of the
• School Education Quality Index (SEQI): This state Planning Commission.
level index focuses on improving education
2. The Economic and Social Planning is kept in the
outcomes (learning, access, equity) in India.
Concurrent List in the Constitution of India.
• Health Index initiative: To measure the annual
performance of States and UTs, and rank States 3. The Constitution of India prescribes that
on the basis of incremental change, while also Panchayats should be assigned the task of
providing and overall status of States’ preparation of plans for economic development
performance and helping identify specific areas and social justice.
of improvement.
• Sustainable Action for Transforming Human Which of the statements given above is/are
Capital (SATH) Programme: Focusses on two correct?
main sectors — Education and Health and to
A) 1 only
build three ‘Role Model’ States.
B) 2 and 3 only
DOCUMENTS PUBLISHED BY NITI AAYOG C) 1 and 3 only
ARE AS FOLLOWS:
D) 1,2 and 3
• Fifteen-Year Vision
Q.3) Which of the following are associated with
• Seven Year Strategy and
‘Planning’ in India? (2014)
• Three-Year Action Agenda
1. The Finance Commission

PREVIOUS YEAR QUESTIONS (PYQS) 2. The National Development Council

Q.1) Which of the following bodies does not/do not 3. The Union Ministry of Rural Development
find mention in the Constitution? (2013)
4. The Union Ministry of Urban Development
1. National Development Council
5. The Parliament
2. Planning Commission
Select the correct answer using the code given
3. Zonal Councils below.

Select the correct answer using the codes given A) 1, 2 and 5 only
below.
B) 1, 3 and 4 only
a) 1 and 2 only
b) 2 only C) 2 and 5 only
c) 1 and 3 only
d) 1, 2 and 3 D) 1, 2, 3, 4 and 5

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 AGRICULTURE
GREEN REVOLUTION

AGRICULTURE • The Green Revolution in India, initiated in the Commented [1]: please convert entire doc for
mid-1960s, was a major breakthrough in APPSCCE - see if something can be minized so it is 7-
WHAT WAS LAND REFORMS? agricultural production, particularly in wheat 8 pages
@[email protected]
and rice. It was led by agricultural scientist Dr. _Assigned to [email protected]_
• Land reforms in India were introduced after
M.S. Swaminathan, with support from Norman
independence with the primary aim of
Borlaug, and transformed India from a food-
restructuring agrarian relations to achieve
deficient nation to a food-surplus one.
an egalitarian social structure.
• It was achieved as a result of adoption of the
• The major objectives included abolition of
new agricultural strategy, which was based on
intermediaries (like zamindars), providing
High Yielding Variety (HYV) seeds.
security to tenants, redistribution of land
• This programme was introduced in the form of a
through ceiling laws, and consolidation of
package programme, since it depended
fragmented holdings.
crucially on regular and adequate supply of
irrigation, fertilizers, high yielding seeds,
KEY FEATURES
pesticides and insecticides.
● Abolition of Intermediaries: Eliminating the layers • Issues created by Green Revolution
of middlemen or landlords who traditionally o Crop Imbalance
took a share of the produce without o Regional inequality
contributing to the production process to give o Income inequality
tenants and cultivators direct access to the o Ecological imbalance
land. o Social cost
● Tenancy Reforms: Implementing regulations to
protect the rights of tenants, often including
SECOND GREEN REVOLUTION –
security of tenure, fair rents, and protection from
• The first green revolution did not help the
eviction.
dryland farming and helped only large farmers
● Ceiling on Land Holding: Establishing legal
which called for second green revolution. This
maximum limits on the amount of land one
revolution has been called for in Eastern States
individual or family can own, thereby
via the Bringing Green Revolution in Eastern
redistributing excess land to the landless and
India (BGREI).
promoting equity.
● Consolidation of Land Holding: Restructuring
fragmented landholdings into consolidated EVERGREEN REVOLUTION
ones, aiming to improve agricultural efficiency • M S Swaminathan gave the call for ‘evergreen
and productivity by reducing the wastage of revolution for productivity improvement in
time and resources across fragmented plots. perpetuity without ecological and social harm.
● Co-operative Farming: Encouraging farmers to • The evergreen revolution involves the
pool their resources and work together as a integration of ecological principles in
cooperative unit, sharing inputs, machinery, technology development and dissemination.
and knowledge to increase efficiency and Integrating ecology and technology is the way
productivity. forward towards an evergreen revolution.

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 Agriculture

WHITE REVOLUTION fertility when compared to other popular

• Operation Flood was a rural development cereals
programme started by National Dairy o Grown with low chemical inputs such
Development Board (NDDB) in 1970s. as fertilizers and pesticides
• The objective of this programme was to • Known as Nutri-cereals as they provide most
create a nationwide milk grid. Gujarat- of the nutrients required for normal
based co-operation “Anand Milk Union functioning of human body.
Limited” (Amul) was the engine behind the • Millets have many nutraceutical and health
success of the programme. promoting properties especially the high
• It ensured that the producer gets a major fibre content.
share of the price consumers pay, by • Millets are Gluten free and good for people
eliminating intermediaries. It resulted in who are gluten-intolerant.
making India one of the largest producers of • Millets are dual purpose crops –food and
milk and milk products and hence is also fodder.
called the White revolution of India. • Major producers include Rajasthan, Andhra
• It also augmented rural income and proved Pradesh, Telangana, Karnataka, Tamil Nadu,
to be a significant anti-poverty measure as Maharashtra, Gujarat and Haryana.
60% of the beneficiaries were marginal or
AGRICULTURE PRICE POLICY
small and landless farmers.

NUTRI CEREALS – MILLETS

• Millets are collective group of small seeded
annual grasses that are grown as grain crops,
primarily on marginal land in dry areas of
• Food Subsidy = Economic Cost – Central Issue
temperate, sub tropical and tropical regions.
Price
• Highly tolerant to drought and other extreme
o The prices at which central government
weather conditions:
issue food (wheat and rice) to state
o They are rain - fed, hardy grains which
government for distribution under PDS to
have low requirements of water and
poor families is Central Issue Price (C.I.P)

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 Agriculture

which is much less than the economic • 7 cereals (paddy, wheat, maize,
cost incurred by central government by sorghum, pearl millet, barley and ragi),
way of procurement, storage, transport, • 5 pulses (gram, tur, moong, urad, lentil),
and distribution. • 7 oilseeds (groundnut, rapeseed-
o The difference between economic cost mustard, soyabean, seasmum,
and issue cost is reimbursed to the FCI sunflower, safflower, nigerseed)
by the central government as subsidy • 4 commercial crops (copra, sugarcane,
PDS is operated under the joint cotton and raw jute)
responsibility of the central and state
Crop Type Growing Conditions
governments.
Requires high
MAJOR INSTRUMENTS OF AGRICULTURE PRICE temperature, high
Paddy Kharif humidity, and a
POLICY IN INDIA:
prolonged sunlight
• Minimum Support Price (MSP) period.
• Public Distribution System (PDS)
• Buffer Stocks Grows well in cool,
• Market Intervention Scheme (MIS) moist weather and
Wheat Rabi requires a bright
• Price Stabilization Fund (PSF)
sunlight period at the
The broad objectives of agriculture price policy in time of ripening.
India are:
Requires moderate
• To set remunerative prices to encourage higher temperature, rainfall
Maize Kharif/Rabi
investment and production in the agriculture or irrigation, and lots of
sunshine.
and ensure farmer’s income.
• To set the prices at levels so that the consumers Grows well in sandy
are not adversely affected. Bajra Kharif soils and warm
• Agriculture prices should be such that the terms conditions.
of trade between agriculture and non-
Requires warm
agriculture sector is not adversely affected.
Jowar Kharif/Rabi weather and well-
• To set price in such a manner so that optimal drained soils.
crop mix can be achieved.
Grows in dry regions
MSP – MINIMUM SUPPORT PRICE Ragí (Finger
Kharif and can withstand
Millet)
• MSP is a guaranteed minimum price set by drought.
government at which farmers' produce is
Requires well-drained
procured.
Arhar (Tur) Kharif loamy to sandy loam
• It acts as a safety net for farmers, protecting soils.
them from price fluctuations and ensuring
minimum returns. Moong Grows well under
• Recommended by Commission for Agricultural (Green Kharif/Rabi dryland conditions
Gram) with light rains.
Costs and Prices (CACP) at start of sowing
season and finalized by Cabinet Committee on Requires a warm
Economic Affairs (CCEA). Urad (Black
Kharif/Rabi climate and well-
Gram)
• CACP recommends MSPs of following drained loamy soils.
commodities

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 Agriculture

the functioning of Fair Price Shops (FPSs)

Requires high
temperature, light etc.
Cotton Kharif
rainfall, and bright
sunshine for its growth.

Requires a warm
climate and well-
Groundnut Kharif
drained sandy loam
soils.

Requires cool climate

Rapeseed to grow with a clear
Rabi
& Mustard sky during flowering
and seed formation.

Requires hot and

humid climate with a
temperature range of
Sugarcane Plantation 21-27°C and an
annual rainfall
between 75cm and
100cm.

Requires a warm and

moist climate, well-
Soybean Kharif drained loamy soil
with a high organic
content.

Grows well in well-

drained soils under
Sunflower Kharif/Rabi conditions of high
insolation and long
days.

PUBLIC DISTRIBUTION SYSTEM (PDS)

• Public Distribution System (PDS) evolved as a
system of management of scarcity through
distribution of food grains at affordable prices.
• PDS is operated under the joint responsibility of EVOLUTION OF PDS
the Central and the State Governments • PDS emanated from the critical food shortages
• Central Government, through Food of the 1960s.
Corporation of India (FCI), procure, • In the aftermath of the Green Revolution (In
store, transport and bulk allocate food 1970s, 80s), the outreach of PDS was extended
grains to the State Governments. to tribal blocks and areas of high incidence of
• The State has the operational poverty.
responsibility including allocation within • Revamped Public Distribution System (RPDS)
State, identification of eligible families, launched in June, 1992 to improve its reach in
issue of Ration Cards and supervision of the far-flung, hilly, remote and inaccessible
areas.

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 Agriculture

• Targeted Public Distribution System (TPDS) • Food accessibility -It refers to the
launched in June, 1997 where states were were affordability and allocation of food, as
required to identify the poor for delivery of well as the preferences of individuals
foodgrains and for its distribution in a and households
transparent and accountable manner at the • Utilization – It relates to hidden hunger
FPS level. and improper absorption of food
• Antyodaya Anna Yojana (AAY) AAY- Making • Stability - ability to obtain food over time
TPDS aim at reducing hunger among the • India faces the triple burden of malnutrition—
poorest segments of the BPL population the coexistence of under nutrition, over nutrition
• AAY involved identification of one crore and micronutrient deficiency (hidden hunger)
poorest of the poor BPL families and
provide food grains at a highly NATIONAL FOOD SECURITY ACT 2013
subsidized rate. • Paradigm shift in the approach to food security
from welfare to rights based approach
ONE NATION ONE RATION CARD SCHEME • Its key provisions:
(ONORC) o Coverage and entitlement TPDS -75% of the
• The ONORC system enables intra-State and rural population and 50% of the urban
inter-State portability of ration cards. It helps the population will be covered with uniform
migrant beneficiaries access their food security entitlement of 5 kg per person per month.
entitlements from any fair price shop (FPS) of o Subsidised prices and their revision -
their choice by using the same ration card after Foodgrains under TPDS will be made
biometric/Aadhaar authentication on available at subsidised prices of Rs. 3/2/1
electronic Point of Sale (e-PoS) devices at the per kg for rice, wheat and coarse grains
FPS. o Identification of Households - eligible
• Presently, the national/inter-State portability is households to be identified by States/UTs
enabled in all 36 States/UT, covering 100 per o Nutritional Support to women and children -
cent of the total NFSA population. Pregnant women and lactating mothers
• Integrating the existing PDS systems/portals of and children in the age group of 6 months
States/UTs with the Central systems/portals to 14 years will be entitled to meals as per
under Central Repository of all NFSA ration prescribed nutritional norms under
cards/beneficiaries Integrated Child Development Services
• The creation of a Central Repository of all ration (ICDS) and Mid-Day Meal (MDM) schemes.
cards/beneficiary data of all States/UTs shall o Higher nutritional norms have been
ensure that no duplicate ration card/ prescribed for malnourished children
beneficiary exists in any State/UT under NFSA upto 6 years of age.
o Maternity Benefit: Pregnant women and
FOOD SECURITY
lactating mothers are entitled to receive
• FAO “Food security exists when all people, at all maternity benefit of not less than Rs. 6,000 as
times, have physical, social and economic per scheme to be formulated by the Central
access to sufficient, safe and nutritious food government
which meets their dietary needs and food • Women Empowerment: Eldest women of the
preferences for an active and healthy life.” household of age 18 years or above will be the
• Components of Food Security head of the household for the purpose of issuing
• Food availability -It relates to the supply ration cards.
of food through production, distribution,
and exchange

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 Agriculture

• Grievance Redressal Mechanism: Grievance includes identification of eligible households,

redressal mechanism at the District and State issuing ration cards to them, distribution of
levels. States will have the flexibility to use the foodgrain entitlements to eligible households
existing machinery or set up separate through fair price shops (FPS), issuance of
mechanisms licenses to Fair Price Shop dealers and their
• Cost of intra-State transportation & handling of monitoring, setting up effective grievance
foodgrains and FPS Dealers' margin: Central redressal mechanism and necessary
Government will provide assistance to States in strengthening of Targeted Public Distribution
meeting the expenditure incurred by them on System (TPDS).
transportation of foodgrains within the State, its
ORGANIC FARMING
handling and FPS dealers’ margin as per norms
to be devised for this purpose. • Organic farming system is a method of farming
• Transparency and Accountability: Provisions system which primarily aimed at sustainable
have been made for disclosure of records agricultural production in an eco-friendly
relating to PDS, social audits and setting up of pollution free environment and being followed
Vigilance Committees in order to ensure from ancient time in India.
transparency and accountability. • In Organic production, focus is on using
• Food Security Allowance: Provision for food naturally available resources as inputs, such as
security allowance to entitled beneficiaries in organic wastes (crop, animal and farm wastes,
case of non-supply of entitled foodgrains or aquatic wastes) and other biological materials
meals. along with beneficial microbes (biofertilizers/ bio
• State Food Commission: Further, it has been control agents) to release nutrients to crops and
provided that every State Government shall set protect them from insect pest and diseases for
up a State Food Commission for the purpose of increased agricultural production.
monitoring and review of implementation of the
Act in respect to the concerned State PRINCIPLES OF ORGANIC AGRICULTURE
• Penalty: Provision for penalty on public servant • Principle of health: Organic Agriculture should
or authority, to be imposed by the State Food sustain and enhance the health of soil, plant,
Commission, in case of failure to comply with animal, human and planet as one and
the relief recommended by the District indivisible. It should avoid the use of fertilizers,
Grievance Redressal Officer pesticides, animal drugs and food additives that
may have adverse health effects.
HOW DOES NFSA WORK? • Principle of ecology: Organic Agriculture should
• NFSA defines the joint responsibility of the be based on living ecological systems and
Centre and States/UTs. cycles, work with them, emulate them and help
o The Centre is responsible for allocation sustain them.
of required foodgrains to States/UTs, • Principle of fairness: Organic Agriculture should
transportation of foodgrains up to build on relationships that ensure fairness
designated depots in each State/UT and regarding the common environment and life
providing central assistance to opportunities. Fairness requires systems of
States/UTs for delivery of foodgrains from production, distribution and trade that are open
designated FCI godowns to the doorstep and equitable and account for real
of the FPSs. environmental and social costs.
• The States/UTs are responsible for effective • Principle of care: Organic Agriculture should be
implementation of the Act, which inter-alia managed in a precautionary and responsible
manner to protect the health and well-being of

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 Agriculture

current and future generations and the through transparent and participatory
environment. Decisions should reflect the values processes.
and needs of all who might be affected,

INTEGRATED FARMING SYSTEM (FPS)

• IFS is a mix of farm enterprises such as crop,
livestock, aquaculture, poultry, sericulture and
agro-forestry to achieve economic and
sustained agricultural production through
efficient utilization of resources.
• It is recognized as a solution to the continuous
increase of demand for food production,
providing stability to the income and nutritional
security particularly for the small and marginal
farmers with limited resources.
• The principle of IFS model is developed such as
wastes generated from one component
becomes an input for other system and hence
there is efficient recycling of farm and animal
wastes in the integrated system. There is
FARMER PRODUCER ORGANISATIONS
increase in yield per unit area through
intensification and diversification of crops. • Collectivization of small and marginal farmers to
• Apart from this IFS helps in controlling insect form their organization as Farmer Produce
pests and diseases and weeds through natural Organization has been another major initiative
cropping system management and there is less for giving farmers better bargaining power in
use of harmful agro-chemicals for farm Agri Marketing
production. • Scheme for Formation & promotion of 10,000
FPO’s
• FPOs will be registered either under
Companies Act or any State
Cooperative Societies Act as decided
by Members of FPO.

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 Agriculture

• Scheme will be focussed on the guidance, control systems, sensors, robotics,

concept of “One District One Product” drones, autonomous vehicles, variable rate
to promote formation of value chain, technology, and software tools for managing
processing and export. fields.
• Agriculture Value Chain Organization
MAJOR AGRICULTURAL INITIATIVES
forming FPOs and facilitating 60 % of
market linkages for members’ produce ,
then FPO management cost can be PM-KISAN
reimbursed. • PM-KISAN is the Centre’s flagship scheme to
provide income support worth ₹6000 a year to
SMALL FARMER LARGE FIELD
farming families.
• SFLF pilot project in Odisha, an eastern India • Exclusion categories –
State. • Institutional Landholders
• The model was piloted by International Rice • Farmer families – holder of constitutional
Research Institute (IRRI) in two villages (the first post, MP & MLAs, Mayors, Chairpersons
village having male farmers only and the of district panchayats, government
second village having all women farmers as SFLF employees –serving or retired, monthly
members) of Odisha. pension of more than 10000, who paid
• The basics of the model are that smallholders income tax & professionals like doctors,
join and decide to grow a crop of one or two CA etc.
varieties, synchronize all the agricultural
operations (seed to seed) as a group/
community and gain higher bargaining power
while dealing with service providers, dealers,
and paddy traders/millers.
• The overall findings from the project are-
reduced cost of production of paddy, increased
grain yield, comparatively higher price over
prevailed market price, enhanced farmers gross
income and net profit

PRECISION AGRICULTURE
• Precision agriculture (PA) is a farming
management concept based on observing,
measuring and responding to inter- and intra-
field variability in crops.
• PA is also sometimes referred to as precision
farming, satellite agriculture, as-needed farming
E NAM
and site-specific crop management (SSCM).
• A pan-India electronic trading portal, which
• The core principle of precision farming is to
seeks to connect existing APMCs and other
ensure profitability, sustainability, and protection
market yards to create a unified national
of the environment by precise application of
market for agricultural commodities.
inputs and management of farms.
• Its Features:
• It is a modern farming approach that
o A “virtual” market but a physical market
emphasizes the use of information technology
(mandi) at the back end
and a wide array of items such as GPS

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 Agriculture

o Creating a unified market through online o Prevented Sowing/Planting/Germination

trading platform both, at State and National Risk: Insured area is prevented from
level sowing/planting/germination due to
o “Logistic providers” information is also being deficit rainfall or adverse
provided in the portal to traders from seasonal/weather conditions.
outside the State, which will facilitate o Standing Crop (Sowing to Harvesting):
transportation of commodities after trading Comprehensive risk insurance is
o An Inter-State dashboard on e-NAM provided to cover yield losses due to
platform has been developed to promote non-preventable risks, viz. Drought, Dry
inter State trade among e-NAM States spell, Flood, Inundation, widespread
Pests and Disease attack, Landslides, Fire
PM FASAL BIMA YOJANA due to natural causes, Lightning, Storm,
• Comprehensive insurance coverage against Hailstorm and Cyclone.
crop loss on account of non-preventable o Post-Harvest Losses: Coverage is
natural risks. available only up to a maximum period
• Uniform premium of of two weeks from harvesting, for crops
o 2% for all Kharif crops against Hailstorm, Cyclone, Cyclonic
o 1.5% for all Rabi crops. rains and Unseasonal rains
o 5% for annual commercial and o Localized Calamities: Loss/damage to
horticultural crops notified insured crops resulting from
• Voluntary coverage : From 2020 Kharif occurrence of identified localized risks of
onwards the enrollment is made 100% Hailstorm, Landslide, Inundation, Cloud
voluntary. burst and Natural fire due to lightning.
• Scheme shall be implemented on an ‘Area o Add-on coverage for crop loss due to
Approach basis’ attack by wild animals: Add-on
• The scheme emphasizes on use of technology coverage for crop loss due to attack by
• Risks Covered: wild animals wherever the risk is
perceived to be substantial and is
identifiable.

PRADHAN MANTRI KRISHI SINCHAI YOJANA

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 Agriculture

PRADHAN MANTRI KRISHI SINCHAI YOJANA – COMPONENTS

Accelerated Irrigation Benefit Programme (AIBP)
Completion of ongoing Major and Medium Irrigation including National Projects.

PMKSY (Har Khet ko Pani)

New sources of irrigation, Repair, restoration and renovation of water bodies; strengthening carrying capacity of
traditional water sources, construction rain water harvesting structures (Jal Sanchay); Diversion of water from
source of different location where it is plenty to nearby water scarce areas

PMKSY (Per Drop More Crop)

Promoting efficient water conveyance and precision water application devices like drips, sprinklers, pivots, rain -
guns in the farm (Jal Sinchan), Construction of micro irrigation structures, Extension activities for promotion of
scientific moisture conservation and agronomic measures including cropping alignment to maximise use of
available water including rainfall and minimise irrigation requirement (Jal sarankchan)

PMKSY (Watershed Development)

Effective management of runoff water and improved soil & moisture conservation activities

the agriculture besides reducing human

AGRICULTURE INFRASTRUCTURE FUND (AIF) drudgery and cost of cultivation.
• Central Sector Scheme of a financing facility • Main objectives - To promote ‘Custom Hiring
under Rs. 1 Lakh Crore Agriculture Infrastructure Centres’ and ‘Hi-tech Hubs of High-Value
Fund. It is operational from 2020-21 to 2029-30. Machines’ to offset the adverse economies of
o Overall period has been extended to 13 scale arising due to small and fragmented
years (up to 2032-33). landholding and high cost of individual
• Provide medium - long term debt financing ownership;
facility through interest subvention and credit • Demonstration and capacity building among
guarantee. stakeholder for ensuring performance testing
• Beneficiaries - farmers, Primary Agricultural and certification of agricultural machines at
Credit Societies (PACS), Farmer Producers designated testing centres all over the country.
Organizations (FPOs), Agri-entrepreneurs,
Startups, Central/State agency or Local Body SVAMITVA SCHEME (SURVEY OF VILLAGES
sponsored PPP Projects, State agencies/APMCS ABADI AND MAPPING WITH IMPROVISED
etc TECHNOLOGY IN VILLAGE AREAS)
• Eligible projects - Post Harvest Management • Aims to provide an integrated property
Projects & community farming assets such as validation solution for rural India.
e-marketing platforms, Warehouses, Cold • Demarcation of rural abadi areas using Drone
chains, Logistics facilities, supply chain Surveying technology
infrastructure etc. • Provide the ‘record of rights’ to village
household owners possessing houses in
SUB MISSION ON AGRICULTURAL inhabited rural areas.
MECHANISATION (SMAM) • Intends to achieve the following objectives: -
• Increasing the reach of farm mechanization to o Bring financial stability to the citizens in
small and marginal farmers and to the regions & rural India by enabling them to use their
difficult area by boosting up mechanization in property for taking loans.

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 Agriculture

o Creation of accurate land records for

rural planning.
o Determination of property tax
o Creation of survey infrastructure and GIS
maps.
o To support in preparation of better-
quality Gram Panchayat Development
Plan (GPDP)
o Reducing property related disputes and
legal cases

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 SECTORS OF INDIAN ECONOMY
4. Other Industries (Private and
INDUSTRY AND SERVICES SECTOR Cooperative Sector): Other industries
that were not included in all the above
INDUSTRIAL POLICY IN INDIA mentioned three categories were left for
the private sector.

INDUSTRIAL POLICY RESOLUTION OF 1948 -

MIXED ECONOMIC MODEL INDUSTRIAL POLICY RESOLUTION, 1956
• It classified industries into four broad areas: • India's economic constitution" or the "Bible
1. Strategic Industries (Public Sector): It of State Capitalism.”
included mainly three i.e. the Arms and
ammunition, Atomic Energy and Rail KEY FEATURE
transport where Government has the ● The development of heavy and machine-
monopoly. building industries:
2. Basic/Key Industries (Public-cum-Private o The expansion of the public sector.
Sector): Six industries including coal, o The establishment of a large growing co-
aircraft manufacturing, iron & steel, operative sector
shipbuilding, telegraph & wireless o Encouragement to the diffusion of
apparatus, manufacture of telephone, ownership and management in the
and mineral oil were designated as "Key private sector.
Industries" or "Basic Industries". These o Emphasis on Small Scale Industries and
were set-up by the Central Government. Cottage Industries - Reservation of many
With existing private sector enterprises industries for SSI
being allowed to continue. o Balanced industrial development
3. Important Industries (Controlled Private
CLASSIFICATION OF INDUSTRIES
Sector): Important industries included 18
• Schedule A: It consists of 17 industries that were
industries including sugar, heavy
the exclusive responsibility of the State except 4
chemicals, cotton textile & woollen
industries, namely arms and ammunition,
industry, cement, paper, machine tools,
atomic energy, railways and air transport had
salt, fertiliser, rubber, air and sea
Central Government monopolies.
transport, motor, tractor, electricity etc.
• Schedule B: It consists of 12 industries was open
i. Such types of industries will
to both the private and public sectors; however,
remain under private
such industries were progressively State-owned.
sector; however, the
• Schedule C: All the other industries that are not
central government, in
included in these two Schedules constituted the
consultation with the state
third category that was left open to the private
government, can control
sector.
over these types of
However, the State has the right to undertake any
industries.
type of industrial production.

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 Industry and Services Sector

NEW ECONOMIC POLICY 1991

Liberalisation – Deregulation
removing various
restriction in Delicensing
economy – doing
away with LPQ raj Dereservation

Privatisation – De reservation
Reducing role of
government Privatisation of PSUs & Disinvestment
sector
Greater autonomy to PSUs through special status

Globalisation – Greater integration with global economy by removing restriction on foreign trade and investment
Opening up of
economy to Market determined foreign exchange
external sector
Removal of quantitative restrictions on imports and exports, Reduction of tariffs

DISINVESTMENT
ASSESSMENT OF NEW ECONOMIC POLICY 1991
– POSITIVE SIDE Disinvestment is the sale or the liquidation of assets
• Increased economic growth rate – from sub 5% by the government, usually the central and state
to 7-8% from 2005 onwards. public sector enterprises, projects, or other fixed
• Increased foreign investment – Significant FDI assets.
came in India along with better technology and
management. TYPES OF DISINVESTMENT
• Remarkable performance in services sector of • Minority – Government retains a majority stake
economy particularly IT- ITeS sector in the company, mostly greater than 51%, and
• Increase freedom and ease of doing business. ensures that the management control stays with
• Affordable and better quality of goods and the government.
services for Indian Consumers • Strategic - Sale of substantial portion of
• Increased inequality – increase in Gini- Government shareholding in identified CPSEs
coefficient post reforms. upto 50 per cent or more, along with transfer of
• Lagging on social indicators – not management control.
inclusive growth • Privatization - Sale of the government’s majority
• Skewed structural transformation stake, or the whole enterprise, to private
• Lagging manufacturing sector investors – Government exiting out of the sector.
• Agriculture sector has also not
benefitted NEW PUBLIC SECTOR ENTERPRISE POLICY
• Jobless growth • Public sector commercial enterprises are
• Quality of employment is also an issue- classified as Strategic and Non- Strategic
mostly in unorganised sector. sectors, with the policy of privatization in non-
• Imbalanced growth strategic sectors and bare minimum presence
• Low tax to GDP ratio even in strategic sectors.
• Low export competitiveness – losing out on • The identified strategic sectors are:
globalisation. i. Atomic Energy, Space & Defense;

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 Industry and Services Sector

ii. Transport & Telecommunication;

iii. Power, Petroleum, Coal & other
minerals; and
iv. Banking, Insurance & Financial
Services

IIP – INDEX OF INDUSTRIAL PRODUCTION

• It is a composite indicator that measures the
short-term changes in the volume of production
of a basket of industrial products during a given
period with respect to that in a chosen base
period.
KEY INITIATIVES FOR MANUFACTURING SECTOR
• NATIONAL STATISTICAL OFFICE (NSO), Ministry of
• Make in India - flagship program of the
Statistics and Program Implementation compiles
Government of India that aspires to facilitate
it every month.
investment, foster innovation, enhance skill
• Base Year -2011-12
development, and build best-in-class
manufacturing infrastructure.
• ‘Make in India 2.0’ is now focusing on 27 sectors,
which include 15 manufacturing sectors and 12
service sectors
• Production Linked Incentive Scheme –
• across 14 key sectors, to create national
manufacturing champions and to
create 60 lakh new jobs, and an
additional production of 30 lakh crore
during the next 5 years.
• The 14 sectors are mobile
manufacturing, manufacturing of
medical devices, automobiles and auto
components, pharmaceuticals, drugs,
specialty steel, telecom & networking
products, electronic products, white
goods (ACs and LEDs), food products,
textile products, solar PV modules,
CORE INDUSTRIES advanced chemistry cell (ACC) battery,
● The core industries comprise 40.27% weightage and drones and drone components.
in the Index of Industrial Production (IIP). • PLI schemes provide eligible
● Index of Eight Core Industries (ICI)- The Office of manufacturing companies incentives
the Economic Adviser (OEA), Department for ranging from four to six percent on
Promotion of Industry and Internal Trade (DPIIT), incremental sales over the base year for
Ministry of Commerce & Industry prepares the a four to six-year period
ICI.

MSME SECTOR

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 Industry and Services Sector

• CHAMPIONS, the single-window hand holding

SIGNIFICANCE OF MSMES and grievance redressal portal for MSMEs
• ‘Raising and Accelerating MSME Performance’
● Employment Generation: MSMEs provide
scheme (RAMP) - World Bank-supported
employment and self-employment to
scheme aims at strengthening institutions and
approximately 111 million people.
governance at the Centre and State, improving
● Contribution to GDP: They contribute about 28%
Centre-State linkages and partnerships and
to the GDP of India.
improving access of MSMEs to market and
● Exports: MSMEs account for 45% of the total
credit, technology upgradation and addressing
Indian export volume.
issues of delayed payments and greening of
● Manufacturing: They represent 40% of the
MSMEs
manufacturing sector.
• Mandatory public procurement/GeM portal to
● Rural Presence: 51% of the 634 lakh MSMEs are
ensure access to markets/MSME Sambandh-
based in rural areas.
public procurement portal for MSME
● Ownership by Socially Backward Groups:
o Comes unde Priority Sector Lending
Around 66% (or two-thirds) of MSMEs are owned
• Credit Guarantee Trust Fund for Micro & Small
by individuals from socially backward groups.
Enterprises (CGTMSE) - Established by M/o MSME
● Micro Sector Dominance: A vast majority, 99%,
and Small Industries Development Bank of India
of MSMEs come from the micro sector.
(SIDBI) to provide collateral free loans (up to INR
● Sectoral Distribution: 31% are involved in
1 cr) to individual Micro and Small Enterprises
manufacturing, 36% in trade, and 33% in other
(MSEs).
services.
• Financial Support to MSMEs in ZED Certification
● Gender Disparity: There is a significant male
Scheme - Supporting the ‘Make in India’
dominance in ownership with 80%.
initiative, the aim of the scheme is to inculcate
Zero Defect & Zero Effect (ZED) practices in
INITIATIVES FOR MSME SECTOR manufacturing done by Indian MSMEs. Under
• Udyam portal for MSME registration, a paperless, the scheme, the Government of India (GoI)
zero-cost registration that is based on self- provides up to 80% subsidy to MSMEs.
declaration and only requires Aadhaar. • National Manufacturing Competitiveness
• Samadhaan Portal - set up to monitor the Programme (NMCP) - An umbrella scheme
outstanding dues to the MSME sector, is helping which aids MSMEs through the following sub
MSMEs in resolving their cashflow difficulties. schemes:
• Trade Receivables Discounting System (TReDS) o Credit Linked Capital Subsidy for
For facilitating the discounting of trade Technology Upgradation (CLCSS)
receivables of MSMEs through multiple o Financial Assistance on GS1
financiers. Barcodes for Micro Enterprises

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 Industry and Services Sector

o Lean Manufacturing • Enabling Manufacturing Sector to be

Competitiveness for MSMEs Competitive through Quality
o Design Clinic for Design Expertise to Management Standards (QMS) and
MSMEs Quality Technology Tools (QTT)
o Technology and Quality • Building Awareness on Intellectual
Upgradation Support to MSMEs Property Rights (IPR)
• Entrepreneurial and Managerial
Development of SMEs through
Incubators

SERVICES SECTOR IN INDIA

• India’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport,
storage and communication, financing, insurance, real estate, business services, community, social and
personal services, and services associated with construction.
o Dominant sector in India’s GDP -The services sector of India remains the engine of growth for India’s
economy and contributed ~53% to India’s Gross Value Added
o Attracted significant foreign investment - The Indian services sector was the largest recipient of FDI
inflows worth US$ 96.76 billion between April 2000-June 2022.
o Contributed significantly to export and has provided large-scale employment

Contribution to
Sector Description GDP (%) (2023 Key Drivers Challenges
Est.)
Globally recognized
- Talent shortage,
Information Technology for software - Rising digital adoption,
8.1 infrastructure
(IT) & ITES development & skilled workforce
limitations
outsourcing
- Increasing non-
Banking, Financial - Fintech innovation,
Robust growth with performing assets
Services & Insurance 9.2 financial inclusion
global presence (NPAs), regulatory
(BFSI) initiatives
landscape
- Intense
Largest subscriber - Growing mobile data
competition,
Telecommunications base in the world, 1.8 consumption, rising
infrastructure
rapid 5G rollout disposable income
development
- Infrastructure
Cultural heritage & - Recovering from
development,
Tourism & Hospitality cost-effectiveness 8.0 pandemic, growing
marketing &
drive tourism domestic tourism
promotion
Cost-effective
- Medical tourism, - Infrastructure gaps,
medical treatments &
Healthcare 5.5 increasing healthcare skilled workforce
pharmaceutical
awareness shortage
production
Driven by - Rising online retail
- Logistics
Retail & Ecommerce consumerism & 11.0 penetration, evolving
challenges,
internet penetration consumer preferences

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 Industry and Services Sector

regulatory
compliance
- Increasing demand for - Skill development
Diverse public &
Education 4.5 skilled professionals, gap, quality
private institutions
internationalization concerns
Construction & - Urbanization, smart city - Regulatory hurdles,
Real Estate infrastructure 7.5 initiatives, affordable financing
development housing demand constraints
- Growing demand for - Competition from
Professional & Business Legal, accounting,
4.8 skilled professionals, global players,
Services consulting services
globalization talent retention
- Public infrastructure
Public Administration & Government services - Bureaucracy,
4.2 spending, digitalization
Defense & national security efficiency concerns
initiatives

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 POVERTY
poverty line. It indicates the depth and
severity of poverty.
POVERTY IN INDIA: o Monthly Per Capita Expenditure (MPCE)
used by Government as proxy for
WHAT IS POVERTY?
income of households to identify the
● Poverty is a state where individuals or poor
communities lack access to basic necessities
and resources needed for a minimum standard PRE-INDEPENDENCE POVERTY ESTIMATION:
of living, including food, shelter, clothing, ● Poverty under British Rule in India (1901):
healthcare, and education. Dadabhai Naoroji’ in his book ‘Poverty and Un-
British Rule in India,
TYPES OF POVERTY:
● National Planning Committee (1938): In 1938,
the National Planning Committee set up under
the chairmanship of Jawaharlal Nehru
suggested a poverty line based on a minimum
standard of living.
● The Bombay Plan (1944): Bombay Plan
proponents suggested a poverty line of ₹75 per
capita per year, which was much more modest
than that of the NPC.

POST- INDEPENDENCE POVERTY ESTIMATION:

CONCEPT OF POVERTY LINE: WORKING GROUP (1962)

● Poverty line is minimum expenditure (or income) ● In terms of a minimum requirement (food and
required to purchase a basket of goods and non-food) of individuals for healthy living.
services necessary to satisfy basic human needs ● Formulated the separate poverty lines for rural
● Monetary value for minimum basic needs is and urban areas.
calculated. ● Poverty line excluded expenditure on health
● Poverty can be measured in terms of the and education.
number of people living below this line.
● Methods to measure poverty are: STUDY BY VM DANDEKAR AND N RATH (1971) –
o Head Count Ratio or Poverty Ratio: It is ● First established the consumption levels required
calculated by dividing the number of to meet a minimum calorie norm of an average
people below the poverty line by the calorie norm of 2,250 calories per capita per
total population. It measures the day.
proportion of poor in the total
population. TASK FORCE ON “PROJECTIONS OF MINIMUM
o Poverty Gap Index (PGI): It is the NEEDS AND EFFECTIVE CONSUMPTION DEMAND”
difference between the poverty line and HEADED BY DR. Y. K. ALAGH (1979) –
the average income of all households ● Poverty line was defined as the per capita
living below the poverty line (BPL) consumption expenditure level to meet
expressed as a percentage of the average per capita daily calorie requirement of
2400 kcal per capita per day in rural areas and

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 Poverty

2100 kcal per capita per day in urban areas. 12. The number of poor in the country was
These lines were based on the assumption of pegged at 269.8 million or 21.9% of the
different PLBs for rural and urban consumption. population.

LAKDAWALA EXPERT GROUP (1993) – RANGARAJAN COMMITTEE (2014)

● Retained the separate rural and urban poverty ● Separate all-India rural and urban poverty line
lines recommended by the Alagh Committee baskets and deriving state-level rural and urban
at the national level based on minimum estimates from these
nutritional requirements. ● Separate consumption baskets for rural and
● It disaggregated them into state-specific urban areas which include food items that
poverty lines in order to reflect the inter-state ensure recommended calorie, protein & fat
price differentials intake and non-food items also like clothing.
● Incidence of poverty is estimated by the
TENDULKAR EXPERT GROUP (2009): Planning Commission on the basis of the
● Did not construct a poverty line and adopted household consumer expenditure survey.
the officially measured urban poverty line of o The NSSO regularly conducts surveys
2004-05 based on Expert Group (Lakdawala) on household consumer
methodology. expenditure, in which households
● Recommended incorporation of private are asked about their consumption
expenditure on health and education while of the last 30 days and is taken as
estimating poverty the representative of general
● Recommended using Mixed Reference Period consumption.
(MRP) based estimates, as opposed to Uniform ● BPL census was done for identification of poor
Reference Period (URP) households for proper targeting of beneficiaries
● Suggested a Uniform Poverty Line under pro poor programmes.
● In July 2013, based on this line, the Planning
Commission released poverty data for 2011-

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 Poverty

1. Automatically Excluded: Households

MULTI DIMENSIONAL APPROACH TO POVERTY:
meeting exclusion criteria - any of the 13
● Multi-dimensional character of poverty - Poverty assets and income-based parameters are
encompasses other factors such as poor health automatically excluded from welfare
or malnutrition, lack of clean water or benefits;
electricity, poor quality of work and limited 2. Automatically Included: Households
education access, geographical isolation, satisfying inclusion criteria – any one of the 5
powerlessness or dis-empowerment in civil acute social destitution parameters are
society, caste or gender based inherent automatically included for welfare benefits;
disadvantages etc. 3. Others: “Others” are ranked on the basis of 7
indicators of deprivation and would,
SOCIO-ECONOMIC CASTE CENSUS SURVEY
(SECC) 2011: resources permitting be eligible for welfare
benefit
● A door-to-door enumeration across both rural
● Government has used SECC 2011 data for
and urban India collecting household-level
identification of beneficiary households while
socio-economic data
implementing its social welfare programmes
● Its objective was not to replace the poverty line,
including Pradhan Mantri Aawas Yojana-
but to provide ‘information regarding the socio
Gramin, Deendayal Antyodaya Yojana-
economic condition, and education status of
National Rural Livelihood Mission, Pradhan
various castes and sections of the population’
Mantri Jan Arogya Yojana-Ayushman Bharat,
and ‘enable households to be ranked on their
Pradhan Mantri Sahaj Bijli Har Ghar Yojana, and
socio economic status’ to identify households
Pradhan Mantri Ujjwala Yojana.
that live below the poverty line.
● The selection of beneficiaries gets validated
● It captured data on households - individual
through Gram Sabhas, while identity is
particulars, housing, deprivation, employment,
established through Aadhaar wherever legally
income, assets/amenities, and land ownership.
allowed. This leads to selection of right
● The SECC 2011 ranked households in three
beneficiaries and minimizes duplication and
categories:
fraud.

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 Poverty

● A person is multi-dimensionally poor if she/he is

GLOBAL MULTIDIMENSIONAL POVERTY INDEX
deprived in one third or more (means 33% or
(MPI):
more) of the weighted ten indicators.
● Launched in 2010 by the United Nations ● Those who are deprived in one half or more of
Development Program (UNDP) and the Oxford the weighted indicators are considered living in
Poverty and Human Development Initiative extreme multidimensional poverty.
(OPHI) ● It is the product of the incidence of poverty
● The Global MPI is released at the High-Level (proportion of poor people) and the intensity of
Political Forum (HLPF) on Sustainable poverty (average deprivation score of poor
Development of the United Nations in July every people)
year. ● MPI assesses poverty at the individual level.
● It goes beyond income as the sole indicator for ● Global MPI is also part of Government of India’s
poverty and tracks deprivation across three decision to monitor the performance of the
dimensions and 10 indicators. country in 29 select Global Indices under the
“Global Indices to Drive Reforms and Growth
(GIRG)” exercise.

NATIONAL MPI:
● National Multidimensional Poverty Index is the
FINDINGS OF GLOBAL MPI:
baseline Report based on NFHS-4 (2015-16).
● incidence of poverty fell from 55.1% in 2005-06
● Developed by NITI Aayog in consultation with
to 16.4% in 2019-21
12 Line Ministries and in partnership with State
● India has by far the largest number of poor
governments and the index publishing agencies
people worldwide at 22.8 crore
–Oxford University’s Oxford Poverty and Human
● relative reduction from 2015- 2016 to 2019-21
Development Initiative (OPHI) and UNDP.
was faster

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 Poverty

● In this context, a national Multidimensional NATIONAL MPI: SALIENCE AND FEATURES:

Poverty Index for India enables estimation of ● To compare poverty across subnational regions
poverty not only at the level of the States but ● To track poverty over time
also for all the 700 plus districts (600 plus in 2015- ● To highlight “how” poor are the people in
16, 700 plus in 2019-20) across twelve indicators, poverty, using direct information from the set of
capture simultaneous deprivations and MPI indicators.
indicator-wise contribution to poverty, and most ● National MPIs are always reported along with
importantly, will facilitate formulation of sectoral several intuitive statistics that show the level and
policies and targeted interventions which composition of poverty by indicator. These are:
contribute towards ensuring that “no one is left o Incidence, ‘H’ which shows the
behind”. percentage of people who are
● Latest Estimates (2022-23): multidimensionally poor.
o NITI Aayog released updated MPI o Intensity, ‘A’ which shows the
o Based on NFHS-5 (2019-21) percentage of weighted deprivations
o Shows poverty reduced to 14.96% the average multidimensionally poor
o 135 million Indians moved out of poverty person suffers from.
(2015-2021) ● The national MPI is constructed directly from
each person’s profile of deprivations across
each indicator, built from a single household
survey that captures the data on all the
indicators. So, the national MPI is always
reported together with its composition by
indicator.

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 Poverty

● Social Exclusion: Certain groups may be

KEY FINDINGS OF THE NITI AAYOG’S systematically excluded from social, economic,
MULTIDIMENSIONAL POVERTY INDEX: and political systems, leading to a lack of
● As per the index, 51.91% of the population in access to jobs, education, and other
Bihar is poor, followed by Jharkhand , Uttar opportunities.
Pradesh and MP. ● Unemployment: The lack of job opportunities
● Kerala registered lowest population poverty leads to a lack of income, which is a direct
levels (0.71%), followed by Puducherry (1.72%), cause of poverty.
Lakshadweep (1.82%) and Goa (3.76%). ● Population Pressure: Overpopulation can strain
● Other States and UTs where less than 10% of the available resources and infrastructure, making it
population are poor include Tamil Nadu , difficult for economies to support all citizens
Andaman & Nicobar Islands , Delhi, Punjab, adequately.
Himachal Pradesh and Mizoram. ● Lack of Social/Welfare Nets: Inadequate social
protection systems fail to provide safety nets for
WORLD BANK POVERTY LINE: individuals and families during times of
Word Bank defines three poverty lines economic downturns or personal crises.
● International Poverty Line set at $2.15/day – ● Conflict: Wars and political conflicts can disrupt
which remains the headline poverty threshold economic activities and displace populations,
and continues to define the Bank’s goal of leading to increased poverty.
ending global extreme poverty by 2030. ● Hunger, Malnutrition, and Stunting: Poor nutrition
● Lower middle-income International Poverty Line, can lead to health problems and reduced
set at $3.20/day; physical and cognitive development, impacting
● Upper middle-income International Poverty Line, an individual's ability to work and earn a living.
set at $5.50/day ● Poor Healthcare Systems: Without access to
● Shared Prosperity Goal: Tracking progress of quality healthcare, individuals may suffer from
Bottom 30-40% illnesses that prevent them from working or lead
● In addition to the goal of poverty reduction, in to high medical expenses.
2013, the World Bank Group has adopted the ● Lack of Access to Clean Water, Sanitation, and
shared prosperity goal that defines it as growth Hygiene: Inadequate basic services can lead to
of real income of the bottom 40 %. diseases and time lost from work or school,
● World Poverty Clock (WPC) is a systematic contributing to poverty.
analytical framework to measure progress ● Climate Change: Extreme weather events and
towards SDGs by World Data Lab . changing climate patterns can disrupt
● The WPC provides real-time poverty estimates livelihoods, particularly in agriculture-dependent
until 2030 for (almost) every country in the world. communities.
The World Poverty Clock (WPC) is a global ● Colonial Legacy: Historical exploitation and
model that tracks poverty in real time structural imbalances created during colonial
periods can have long-lasting effects on the
CAUSES OF POVERTY:
economies and social structures of affected
● Social, Economic, and Political Inequality: countries.
Disparities in wealth, power, and access to
resources can marginalize certain groups and VICIOUS CYCLE OF POVERTY:
limit their opportunities for economic ● Poverty aggravates the factors that cause
advancement. poverty and which in turn leads to perpetuation
of poverty over generations

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 Poverty

GOVERNMENT APPROACH TO DEAL WITH in the organization of growth and benefiting

POVERTY: equally from it."
● Inclusive Growth refers both to the pace and
● A two pronged strategy is in place to eliminate
pattern of growth, which are interlinked and
poverty, which lies at the core of India's national
must be addressed together.- World Bank
development agenda.
o Maintaining an average annual GDP COMPONENTS OF INCLUSIVE GROWTH:
growth rate of 8 % in real terms is a
critical element of the strategy for the ● Economic Growth
creation of remunerative jobs for new ● Poverty Reduction
entrants to the labour market as well as ● Investment in Human Capital.
those facing redundancy in agriculture ● Social Development
or other sectors. ● Gender Equity
o Targeted programmes aim to directly ● Infrastructure Development
attack various facets of poverty and ● Technological Advancement
help the poor. ● Access to Essential Services such as healthcare,
▪ They facilitate income growth for education, and financial services.
the economically ● Environmental Sustainability
disadvantaged by developing ● Good Governance
agriculture infrastructure and
CHALLENGES:
support services, creating
productive assets, and ● Uneven distribution of income and
developing skills and opportunity in society.
entrepreneurship. ● Disparities in access to resources, rights, and
opportunities between men and women.
GOVERNMENT APPROACH TO DEAL WITH
● The strain on resources and services due to
POVERTY:
a large and growing population.
● Trickle down approach –rapid and high
● Variations in economic and social
economic growth
development across different geographic
● Generating Employment and enhancing
regions.
income
● Inadequate physical and organizational
● Wage Employment
structures needed for the operation of a
● Self Employment
society or enterprise.
● Providing Minimum Basic Amenities
● Difficulty in obtaining fundamental services
● Building Human Capability
such as healthcare, education, and
INCLUSIVE GROWTH sanitation.
● The abuse of entrusted power for private
MEANING OF INCLUSIVE GROWTH: gain (corruption) which can hinder
● According to the Eleventh Plan, inclusive growth development and distribution of resources.
refers to "equitable development" or "growth ● Fiscal Capacity of the government to
with social justice" and is defined as "a growth generate revenue and allocate resources
process which yields broad-based benefits and for public services and development.
ensures equality of opportunity for all.” ● Imbalanced change in the economic
● The United Nations Development Program framework of the various regions
(UNDP) defines inclusive growth as "the process
and result of all groups of people participating

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 Poverty

● The involuntary displacement of people

from their homes, lands, or places of
livelihood

STRATEGIES /MEASURES FOR INCLUSIVE

GROWTH:

● High Economic Growth

● Poverty Alleviation Measures
● Broad-Based and Job Creating Economic
Growth
● Investing in Human Capital.
● Effective Delivery of Public Services
● Social Justice and Empowerment
● Promoting Gender Equality
● Investing in Quality Infrastructure
● Data-Led Governance and Policy Making
● Income Redistribution
● Balanced Regional Development

INCLUSIVE DEVELOPMENT INDEX (IDI)

● The Inclusive Development Index (IDI) is an
annual assessment of 103 countries’ economic
performance that measures how countries
perform on eleven dimensions of economic
progress in addition to GDP.
● It is published by World Economic Forum It has 3
pillars;
o Growth and development;
o Inclusion and;
o Intergenerational equity – sustainable
stewardship of natural and financial
resources

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 UNEMPLOYMENT
UNORGANISED SECTOR/INFORMAL SECTOR:
UNEMPLOYMENT:
• The Indian economy is characterised by the
• Unemployment refers to a situation when a
existence of a vast majority of informal or
person is able and willing to work at the
unorganized labor employment.
prevailing wage rate but does not get an
• The term unorganized worker has been defined
opportunity to work.
under the Unorganized Workers' Social Security
• Labor force includes all people in the working
Act, 2008, as a home based worker, self-
age group (15–59 years) who are able and
employed worker or a wage worker in the
willing to work.
unorganized sector.
TYPES OF UNEMPLOYMENT: • Unorganized worker includes a worker in the
• Open Unemployment: It is one in which a person organized sector who is not covered by any of
is willing and able to work but there are no job the Acts mentioned in Schedule-II of Act i.e.
opportunities. It is involuntary unemployment. o The Employee's Compensation Act, 1923
• Functional/Frictional Unemployment - (3 of 1923)
Temporary form of unemployment due to o The Industrial Disputes Act, 1947 (14 of
switching between the jobs or is searching for a 1947)
new job. o The Employees' State Insurance Act,
• Structural Unemployment - arises from the 1948 (34 of 1948)
mismatch between the jobs available in the o The Employees Provident Funds and
market and the skills of the labour force in the Miscellaneous Provision Act, 1952 (19 of
market. 1952)
• Cyclical Unemployment - arises due to the o The Maternity Benefit Act, 1961 (53 of
consequences of the business cycle, in which 1961) and
unemployment declines with economic growth o The Payment of Gratuity Act, 1972 (39 of
and rises during recessions. 1972).
• Seasonal Unemployment - occurs during certain • As per the Economic Survey, 2021-22, total
specific seasons of the year. number of people working in the unorganised
• Disguised Unemployment - phenomenon in sector is around 43.99 crores during 2019-20.
which more people are employed in a job than • The largest number of workers in the
actually needed. The marginal productivity of unorganized sector are present in the
the extra laborer comes out to be zero. agricultural sector followed by construction
• Educated Unemployment: It is the situation in work and remaining in manufacturing and
which a person who is educated, trained and service.
skilled, fails to obtain a suitable job suited to his • The 90 per cent of total worker in the country
qualifications. are in the unorganized sector.
• Technical Unemployment: When adoption of • The Ministry of Labour, has categorized the
new labor-saving technology renders some unorganized labor force under four groups
workers unemployed, it is called technical depending on occupation, nature of
unemployment. employment, specially distressed categories
and service categories.
1. Under Terms of Occupation: Small and
marginal farmers, landless agricultural
laborers, sharecroppers, fishermen, those

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 Unemployment

engaged in animal husbandry, beedi

rolling, labeling and packing, building
and construction workers, leather
workers, weavers, artisans, salt workers,
workers in brick kilns and stone quarries,
workers in saw mills, oil mills, etc. come
under this category.
2. Under Terms of Nature of Employment:
Attached agricultural laborers, bonded
laborers, migrant workers, contract and
casual laborers come under this
category.
3. Under Terms of Specially Distressed
Category: Toddy tappers, scavengers,
carriers of head loads, drivers of animal
driven vehicles, loaders and unloaders
come under this category.
4. Under Terms of Service Category:
Midwives, domestic workers, fishermen
and women, barbers, vegetable and
fruit vendors, newspaper vendors, etc.,
belong to this category.

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 Unemployment

INFORMALIZATION OF WORKFORCE: o Distribution of workers by industry and

occupation
• Formal Sector – 6% of workforce
o All public sector establishments MEASUREMENT OF UNEMPLOYMENT:
o Pvt. Establishment with more than 10
hired workers
o Provision of social security and other
benefits
o Regulated by labor laws
• Informal Sector – 94% workforce
o Includes farmers, agricultural laborers,
owners of small enterprises,casual wage
laborers
o Irregular jobs, Low wages, No social
Security
o Not regulated by labor laws

PERIODIC LABOUR FORCE SURVEY:

• The Periodic Labour Force Survey (PLFS) is India's
primary employment data collection initiative
ACTIVITY STATUS
launched by the National Statistical Office • Usual Status: The activity status of a person is
(NSO) in 2017.
determined on the basis of the activities
• The objective of PLFS is primarily twofold:
pursued by the person during the specified
o To estimate the key employment and reference period. When the activity status is
unemployment indicators (viz. Worker
determined on the basis of the reference period
Population Ratio, Labour Force
of the last 365 days preceding the date of
Participation Rate, Unemployment Rate) survey, it is known as the usual activity status of
in the short time interval of three months
the person.
for the urban areas only in the ‘Current • Usual Principal Status and Subsidiary Status
Weekly Status’ (CWS).
(PS+SS): Usual Principal Status and Subsidiary
o To estimate employment and
Status approach is an extension to the principal
unemployment indicators in both ‘Usual
status approach. If a person has engaged in
Status’ (ps+ss) and CWS in both rural and
any economic activity for a period of 30 days or
urban areas annually. more during the preceding 365 days a person is
• Key Indicators Measured by PLFS:
considered as employed under this approach.
o Labor Force Participation Rate (LFPR): LFPR is
• Current Weekly Status (CWS): The activity status
defined as the percentage of persons in the determined on the basis of a reference period
labour force (i.e. working or seeking or
of last 7 days preceding the date of survey is
available for work) in the population. known as the current weekly status (CWS) of the
o Worker Population Ratio (WPR): WPR is person.
defined as the percentage of employed
• Current Daily Activity Status (CDS): CDS
persons in the population. approach measures the activity status of a
o Unemployment Rate (UR): UR is defined as person on each day of the week preceding the
the percentage of persons unemployed
date of survey.
among the persons in the labour force.

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 Unemployment

SIGNIFICANCE OF PLFS: • Promote MSMEs by creating a conducive

environment
• Helps track employment trends
• Export trained manpower to japan and
• Guides policy making
Canada and other such nations which do not
• Provides insights into formal vs informal
have young workforce
employment
• Promote entrepreneurship and self employment
• Measures impact of various government
• Unemployment allowance
initiatives
• Demand-based Urban guaranteed
• Helps understand gender participation in
employment scheme for the urban
workforce
unemployed on lines of MGNREGA
• Inclusive Growth by investing in Infrastructure
CAUSES OF UNEMPLOYMENT: and Human Capital

• Inadequate Economic Growth: Slow economic

growth doesn't create enough jobs for the
population.
• Skewed Structural Transformation: Economic
reforms may lead to jobless growth, particularly
when growth is not inclusive or broad-based.
• Underemployment and Seasonal
Unemployment in Agriculture: This is common in
agricultural sectors where workers are not fully
employed throughout the year.
• Loss of Small-Scale/Cottage Industries: Small
industries face challenges due to globalization
and competition from larger companies,
leading to job losses.
• Inadequate Investment in Economy: Especially
when investments are made in capital-intensive
sectors that do not create substantial
employment opportunities.
• Structural Unemployment: Arises from a
mismatch between the jobs available and the
skill levels of the workforce.
• Restrictive Labor Laws: Overly stringent labor
laws can discourage employers from hiring new
workers due to the high cost and difficulty of
terminating employment.

WHAT COULD BE DONE?

• Improving employability by skilling, reskilling and
upskilling
• Increase creation of jobs in formal sector
• Investment in labor intensive sector-
textile/leather/footwear

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 IMPORTANT SOCIO-ECONOMIC SCHEMES

• The households included are based on the

HEALTH SECTOR deprivation and occupational criteria of Socio-
Economic Caste Census 2011 (SECC 2011) for
AYUSHMAN BHARAT SCHEME
rural and urban areas respectively.
• Scheme aims to undertake path breaking
interventions to holistically address the
ITS FEATURES:
healthcare system (covering prevention,
• A cover of Rs. 5 lakhs per family per year for
promotion and ambulatory care) at the
secondary and tertiary care hospitalization
primary, secondary and tertiary level.
across public and private empanelled hospitals
• It adopts a continuum of care approach,
in India.
comprising of two interrelated components,
• PM-JAY provides cashless access to health care
which are -
services for the beneficiary at the point of
o Health and Wellness Centres (HWCs)
service, that is, the hospital.
o Pradhan Mantri Jan Arogya Yojana (PM-
• It covers up to 3 days of pre-hospitalization and
JAY)
15 days post-hospitalization expenses such as
diagnostics and medicines.
HEALTH AND WELLNESS CENTERS (HWCS) • There is no restriction on the family size, age or
• The Government of India announced the gender.
creation of 1,50,000 Health and Wellness • All pre–existing conditions are covered from
Centres (HWCs) by transforming the existing Sub day one.
Centres and Primary Health Centres. • Benefits of the scheme are portable across the
• Comprehensive Primary Health Care (CPHC) country i.e. a beneficiary can visit any
bringing healthcare closer to the homes of empanelled public or private hospital in India to
people. They cover both, maternal and child avail cashless treatment.
health services and non-communicable
diseases, including free essential drugs and AYUSHMAN BHARAT DIGITAL MISSION (ABDM):
diagnostic services. • Ayushman Bharat Digital Mission will connect the
• The emphasis of health promotion and digital health solutions of hospitals across the
prevention is designed to bring focus on country with each other.
keeping people healthy by engaging and • The Mission will not only make the processes of
empowering individuals and communities to hospitals simplified but also will increase ease of
choose healthy behaviours and make changes living.
that reduce the risk of developing chronic • The Digital Ecosystem will also enable a host of
diseases and morbidities. other facilities like Digital Consultation, Consent
of patients in letting medical practitioners
PRADHAN MANTRI JAN AROGYA YOJANA
access their records, etc.
(PM-JAY):
• With the implementation of this scheme, old
• It is the largest health assurance scheme in the medical records cannot get lost as every record
world which aims at providing a health cover of will be stored digitally.
Rs. 5 lakhs per family per year for secondary
and tertiary care hospitalization to over 12
crores poor and vulnerable families
(approximately 55 crore beneficiaries) that form
the bottom 40% of the Indian population.

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 Socio-Economic Schemes

SKILLING • PMKVY 4.0 (2023-ongoing): Under the umbrella

scheme of the ‘Skill India Programme' is being
PRADHAN MANTRI KAUSHAL VIKAS YOJANA: implemented between FY 2022-2026. It features
• encourage and promote skill development in are:
the country by providing free short duration skill o Skill training in a market-oriented and
training and incentivizing this by providing demand- driven manner
monetary rewards to youth for skill certification o Setting up a network of skill
development infrastructure in remote
parts.
KEY COMPONENTS OF THE SCHEME:
o Focus on New Age Skills like Industry 4.0,
• Short Term Training (STT) given to to candidates
Web 3.0, AI/ML, AR/VR, Climate
who are either school/college dropouts or
Change, Circular Economy, Green
unemployed imparted at PMKVY Training
Economy, and Energy Transition.
Centres (TCs).
o Focus on online/digital/blended skilling.
• The Training is provided according to the
o Training in transferable skills and
National Skills Qualification Framework (NSQF)
incentives for employment generation.
with Soft Skills, Entrepreneurship, Financial and
o Improve inclusivity by ensuring that SC,
Digital Literacy curriculum, a part of the
ST, women, and other marginalized
curriculum.
communities can undertake skill training.
• Duration of courses: 200-600 hrs (2 – 6 months).
• Placement assistance by Training Partners (TPs). PM SVANIDHI - SPECIAL MICRO-CREDIT
• Recognition of Prior Learning (RPL) - Individuals FACILITY FOR STREET VENDORS:
with prior learning experience or skills are • The scheme will help formalize the street
assessed and certified under the Recognition of vendors with above objectives and will open up
Prior Learning (RPL) component of the Scheme. new opportunities to this sector to move up the
o RPL aims to align the competencies of economic ladder.
the unregulated workforce of the • To facilitate working capital loan up to
country to the NSQF. 10,000;
• Special Projects – Trainings in special areas and • To incentivize regular repayment; and
premises of Government bodies, corporates / • To reward digital transactions
industry bodies and trainings in special job roles
not defined under the available Qualification
Packs (QPs)/National Occupational Standards PM VISHWAKARMA:
(NOSs). • scheme aims to assist traditional artisans and
• PMKVY 1.0 (2015-2016): Focused on traditional craftspeople by providing recognition, skill
sectors like IT, construction, and apparel. enhancement, and economic support
• PMKVY 2.0 (2016-2020): Expanded to new • aims at improving the quality as well as the
sectors like logistics, retail, and healthcare. reach of products and services of artisans and
• PMKVY 3.0: Shifted from supply-based craftspeople and to ensure that the
approach to demand-based approach (during Vishwakarmas are integrated into the domestic
COVID-19 phase). and global value chains.
o Major focus on upskilling/reskilling with a
focus on future skills (industry 4.0) courses KEY FEATURES:
and provide online/digital mode of • Recognition: Identifies artisans and craftspeople
training. as Vishwakarmas

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 Socio-Economic Schemes

• Skill Upgradation: Provides relevant training • PMAY (U) has made a mandatory provision for
opportunities the female head of the family to be the owner
• Product Enhancement: Improves capability, or co-owner of the house under this Mission.
productivity, and quality.
PM BHARTIYA JAN AUSHADHI PARIYOJANA:
• Credit Access: Ensures easy access to
collateral-free credit and interest subvention. • Objective of making quality generic medicines
• Digital Incentives: Offers incentives for digital available at affordable prices to all
transactions. • Under the scheme, dedicated outlets known as
• Market Linkages: Creates a platform for brand Jan aushadhi Kendras are opened to provide
promotion and wider market reach. generic medicines at affordable prices.

PM UJJWALA YOJANA: UJALA YOJANA:

• flagship scheme launched by the Ministry of • UJALA (Unnat Jyoti by Affordable LEDs for All) is
Petroleum and Natural Gas, Government of part of the Government of India’s efforts to
India aimed at providing free LPG (liquefied spread the message of energy efficiency in the
petroleum gas) connections to adult women country.
from poor households. • Aims to promote efficient use of energy at the
• aims to empower women, reduce indoor air residential level, enhance the awareness of
pollution, and promote clean cooking fue consumers about the efficacy of using energy
• After distribution of around 9.6 Cr LPG efficient appliances and aggregate demand to
connections the scheme has been extended to reduce the high initial costs thus facilitating
benefit an additional 75 lakh households, higher uptake of LED lights by residential users.
accompanied by a ₹300 subsidy on LPG refills PRADHAN MANTRI SAHAJ BIJLI HAR GHAR
for PMUY beneficiaries, reinforcing the
YOJANA – SAUBHAGYA:
commitment to expanding access to clean
• achieving electrification of all un-electrified
energy across India.
households in the country.
PM AWAS YOJANA (URBAN): • focuses on last mile connectivity and electricity
• To provide all weather pucca houses to all connections to all the unelectrified households
eligible beneficiaries in the urban areas of the in the country.
country through States/UTs/Central Nodal HAR GHAR JAL - JAL JEEVAN MISSION:
Agency
• Aims to provide functional household tap
• Scheme covers the entire urban area of the
connections (FHTCs) to every rural families of
country, i.e., all statutory towns as per Census
India
2011 and towns notified subsequently, including
• Every rural household has drinking water supply
Notified Planning/ Development Areas
in adequate quantity (minimum 55 lpcd) of
• Scheme is being implemented through four
prescribed quality (BIS:10500) on regular and
verticals: Beneficiary Led Construction/
long-term basis at affordable service delivery
Enhancement (BLC), Affordable Housing in
charges leading to improvement in living
Partnership (AHP), In-situ Slum Redevelopment
standards of rural communities
(ISSR) and Credit Linked Subsidy Scheme (CLSS)

PM-JANMAN:
• Aimed to improve the socio-economic status of PVTGs by bridging gaps in health, education, livelihoods.
• To improve socio-economic conditions of the Particularly Vulnerable Tribal Groups (PVTGs), by saturating
PVTG families and habitations with basic facilities and services.

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 Socio-Economic Schemes

FINANCIAL INCLUSION RELATED: MAHATMA GANDHI NATIONAL RURAL

• Pradhan Mantri MUDRA Yojana (PMMY) - EMPLOYMENT GUARANTEE PROGRAMME:
Scheme for providing collateral free loans up to • The Act gives a legal guarantee of a hundred
10 lakhs to the non-corporate, non-farm days of wage employment in a financial year to
small/micro enterprises. adult members of a rural household who
• Standup India - The Stand-Up India scheme demand employment and are willing to do
facilitates bank loans between 10 lakh and 1 unskilled manual work.
crore to atleast one Scheduled Caste and • The village community has the right to choose
Scheduled tribe borrower per bank branch for works under 8 permissible categories of works
setting up a greenfield enterprise. • 1/3 beneficiaries should be women
• Social Audit is a must for all the works
NATIONAL SOCIAL ASSISTANCE PROGRAMME: implemented under NREGA
• Social security and welfare programme to • Work site facilities such as creche, drinking
provide support to aged persons, widows, water and shade have to be provide
disabled persons and bereaved families on • Employment will be given within 15 days of
death of primary breadwinner, belonging to application for work, if it is not then daily
below poverty line households. unemployment allowance as per the Act, has
to be paid
NSAP COMPRISES OF FIVE SCHEMES, NAMELY: • Work should ordinarily be provided within a 5 km
• Indira Gandhi National Old Age Pension radius of the village. In case work is provided
Scheme (IGNOAPS), beyond 5 km, extra wages of 10% are payable
• Indira Gandhi National Widow Pension Scheme to meet additional transportation and living
(IGNWPS), expenses
• Indira Gandhi National Disability Pension
Scheme (IGNDPS),
• National Family Benefit Scheme NFBS
• Annapurna.

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