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ENGINEERING ECONOMICS
UNIT 3

What is Economic Growth?

Economic growth can be referred to as the increase that is witnessed in the monetary value of all the goods
and services produced in the economy during a time period. It is a type of quantitative measure that reflects
the potential increase in the number of business transactions taking place in the economy.
It can be measured in terms of the increase in the aggregate market value of additional goods and services
produced by using economic concepts such as GDP and GNP.
Economic growth is a narrow concept when compared to economic development.

What is Economic Development?

Economic development refers to the process by which the overall health, well-being, and academic level of
the general population of a nation improves. It also refers to the improved production volume due to the
advancements of technology.
It is the qualitative improvement in the life of the citizens of a country and is most appropriately determined
by the Human Development Index (HDI). The overall development of a country is based on many
parameters such as the creation of job opportunities, technological advancements, standard of living, living
conditions, per capita income, quality of life, improvement in self-esteem needs, GDP, industrial and
infrastructural development, etc.
Economic Growth vs Economic Development

Basis of
Economic Growth Economic Development
Comparison
Economic development entails changes in
Economic growth is defined as an income, savings, and investment, as well as
Meaning increase in the country's real output gradual changes in the country's socio-
of goods and services. economic structure (institutional and
technological changes).
Growth is defined as a gradual
Development related to human capital growth,
increase in one of the components
a reduction in inequality numbers, and
Factors of GDP: consumption, government
structural changes that improve the population's
spending, investment, and net
quality of life.
exports.
To assess economic development, qualitative
Economic growth is measured
indicators such as the HDI (Human
Measurement/ quantitatively by factors such as
Development Index), gender-related indexes,
Example real GDP growth or per capita
Human Poverty Index (HPI), infant mortality,
income growth.
literacy rate, and so on are used.
Quantitative changes in the Economic development results in both
Effect economy are brought about by qualitative and quantitative changes in the
economic growth. economy.
Economic growth reflects national Economic development reflects progress in a
Relevance
or per capita income growth. country's quality of life.

Why Economic Growth and Economic Development are important?

 Economic growth is a widely used term in economics that is useful not only for national-level
economic analyses and policymaking but also for comparative economics.
 International financial and commercial institutions base policymaking and future financial planning
on the available growth rate data for the world's economies.
 The most important aspect of growth is its quantifiability, or the ability to quantify it in absolute
terms.
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 Just as we need to make conscious efforts to increase our income and growth, we also need to make
conscious efforts to increase our economic development and higher economic development.
 Development has not been possible anywhere in the world without a conscious public policy.
 Similarly, we can say that there can be no development without growth.
 If economic growth is used properly for development, it will re-accelerate growth and eventually
bring a larger population into the development arena.
 Similarly, high growth with low development leads to a decline in growth.

A business cycle, sometimes called a "trade cycle" or "economic cycle," refers to a series of stages in the
economy as it expands and contracts. Constantly repeating, it is primarily measured by the rise and fall
of gross domestic product (GDP) in a country.

Business cycles are universal to all nations that have capitalistic economies. All such economies will
experience these natural periods of growth and decline, though not all at the same time. However, given the
increased globalization, business cycles across countries tend to synchronize more often than they did before.

Understanding the different phases of a business cycle can help individuals make lifestyle decisions,
investors make financial decisions, and governments make appropriate policy decisions.

Stages of a business cycle

Think of business cycles like the tides: a natural, never-ending ebb and flow from high tide to low tide and
back again. And the same way the waves can suddenly seem to surge even when the tide's going out or seem
low when the tide's coming in, there can be interim, contrarian bumps — either up or down — in the midst of
a particular phase.

Expansion: Expansion, considered the "normal" — or at least, the most desirable — state of the economy, is
an up period. During an expansion, businesses and companies steadily grow their production and profits,
unemployment remains low, and the stock market performs well. Consumers are buying and investing, and
with this increasing ›demand for goods and services, prices begin to rise too.

Peak: The economy starts growing out of control once these numbers start to increase out of their healthy
ranges. Any number of factors can throw the economy off balance. Companies may be expanding recklessly.
Investors might become overconfident, buying up assets and significantly increasing their prices, which are
not supported by their underlying value, creating an asset bubble. Everything starts to cost too much.

The peak marks the climax of all this feverish activity when the expansion has reached its end and indicates
that production and prices have reached their limit. This is the turning point: With no room for growth left,
there's nowhere to go but down. A contraction is forthcoming.

Contraction: A contraction spans the length of time from the peak to the trough. It's the period when
economic activity is on the way down. During a contraction, unemployment numbers typically spike, stocks
enter a bear market, and GDP growth is below 2%, indicating that businesses have cut back their activities.

When the GDP has declined for two consecutive quarters, the economy is often considered to be in a
recession. Even after a recession is officially over, that doesn't mean that the economy has returned to its
original shape and size.

Trough: IF the peak is the cycle's high point, the trough is its low point. It occurs when the recession, or
contraction phase, bottoms out and starts to rebound into an expansion phase — and the business cycle starts
all over again. The rebound is not always quick, nor is it a straight line, along the way toward full economic
recovery. The most recent trough was in April 2020.

Business cycles vs. market cycles

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Though often used interchangeably, a business cycle is technically different from a market cycle. A market
cycle specifically refers to the different growth and decline stages of the stock market, while the business
cycle reflects the economy as a whole.

But the two are definitely related. The stock market is greatly influenced by the phases of a business cycle
and generally mirrors its stages. During the contractionary phase of a cycle, investors sell their holdings,
depressing stock prices — a bear market. In the expansionary phase, the opposite occurs: Investors go on a
buying spree, causing stock prices to rise — a bull market.

How long does a business cycle last?

Business cycles have no defined time frames. A business cycle can be short, lasting a few months, or long,
lasting several years. Generally, periods of expansion are more prolonged than periods of contraction, but the
actual lengths can vary. Since the end of World War II, the average period of expansion in the US lasted 65
months, and the average contraction lasted about 11 months, according to the Congressional Research
Service.

What factors shape a business cycle?

From technological innovations to wars, a variety of things can shift a business cycle's phases. But,
according to the Congressional Research Service, the key influence boils down to the aggregate supply and
demand within an economy — economist-speak for the total spending that individuals and companies do.
When that demands decreases, a contraction occurs. Likewise, when demand increases, an expansion
occurs.

How supply and demand drives the business cycle

 In the beginning: The expansion happens because consumers are confident in the economy. They believe
that employment is steady and income is guaranteed. As a result, they spend more, which leads to increased
demand, which leads to businesses hiring more employees, and increasing capital expenditures to meet that
demand. Investors allocate more capital to assets, increasing stock prices.
 Getting overheated: The expansionary phase hits a peak when the demand is greater than the supply, and
businesses take on additional risks to meet increased demand and remain competitive.
 Scaling back: When interest rates rise quickly, inflation increases too fast, or a financial crisis occurs, an
economy enters a contraction. The confidence that stimulated demand quickly evaporates, replaced with
dwindling consumer confidence. Individuals save money rather than spend, reducing demand, and businesses
cut production and lay off employees as their sales dry up. Investors sell stocks to avoid a drop in the value
of their portfolios, which further drops stock prices.
 Hitting bottom: During the trough phase, demand and production are at their lowest point. But eventually,
needs reassert themselves. Consumers slowly start to gain confidence as production and business activity
start to improve, often spurred on by government policies and action. They begin to buy and invest, and the
economy reenters the expansion phase.

How governments influence business cycles

The fact that business cycles move in natural phases doesn't mean they can't be influenced. Countries can and
do try to manage the various stages — slowing them down or speeding them up — using monetary policy
and fiscal policy. Fiscal policy is carried out by the government; monetary policy is carried out by a nation's
central bank.

For example, when an economy is in a contraction, particularly a recession, governments use expansionary
fiscal policy, which consists of increasing expenditures on government projects or cutting taxes. These
moves provide increased levels of disposable income that consumers can spend, which in turn stimulates
economic growth.
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Similarly, a central bank — like the Federal Reserve in the US — will use an expansionary monetary
policy to end a contractionary period by reducing interest rates, which makes borrowing money cheaper, thus
stimulating spending, and eventually the economy.

If an economy is growing too fast, governments will employ a contractionary monetary policy, which
involves cutting spending and increasing taxes. This reduces the amount of disposable income to spend,
slowing things down. To employ a contractionary monetary policy, a central bank will increase interest rates,
making borrowing more expensive and therefore spending money less attractive.

Business Cycle in Economics Explained

A business cycle is a macroeconomic oscillation that affects the nation’s growth and productivity. They are
also called trade cycles or economic cycles. NBER is a US-based non-profit organization. It is a private
non-partisan research organization. The National Bureau of Economic Research (NBER) identifies and
gauges the economic cycle. It has a Business Cycle Dating Committee responsible for keeping the
chronological record of the economic stages. To determine economic conditions NBER uses the following
parameters; GDP, production, employment, aggregate demand, real income, and consumer spending.

Every capitalist economy repeatedly goes through the different phases of the business cycle, i.e., expansion,
peak, contraction, and trough. Although these ups and downs in the economy may correct by themselves in
the long run, the government and the central bank use economic policies to reduce the impact of trade cycle
fluctuations. At the same time, the central bank can inject expansionary or contractionary monetary
policies like interest rate changes or supply of money. Further, to mitigate fluctuations, the government
uses fiscal policy tools like tax rates and government spending. These measures are taken to avoid risky
situations like stagflation or hyperinflation.

Business Cycle Phases with Graph

A country keeps track of the trade cycle to ensure that the economy is on the path of growth, unemployment
steeps down, and the inflation rate remains under control. To understand the economic fluctuations and
pattern, let us have a look at the following graph:
An economy is expected to have constant growth, represented by the growth trend line. In reality, though, the
economy is unstable. National output goes up and down periodically. It expands to touch the peak and
contracts down to the trough.

Thus, a trade cycle consists of the following four phases:

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1. Expansion: When a nation’s GDP shows an upward move or recovers with time, this period of growth is
remarked as economic expansion. During this phase, the various economic indicators like consumer
spending, income, demand, supply, employment, output, and business returns shoot up.
2. Peak: During the expansion phase, the GDP spikes to its highest level; this is considered the economy’s
peak. At this point, economic factors like income, consumer spending, and employment level remain
constant.
3. Contraction: Next comes the phase of economic slowdown; it occurs when the stagnant peak GDP starts
tumbling down towards the trough. With this, the nation’s production, employment level, demand, supply,
income level, and other economic parameters plummet.
4. Trough: This is the stage at which the GDP and other economic indicators are at their lowest. During this
phase, the economy gets stuck at a negative growth rate. Additionally, the demand for goods and services
reduces.

Limitations

Predicting the business cycle phase is crucial for policymakers and governments so that they can deal with
deflation and inflation accordingly. The cycle also warns investors, owners, consumers, and strategists.
However, the following are the disadvantages associated with the business cycle:

 Limited Information: Since the economic cycle analysis is based on research, it becomes difficult for
economists to access complete and accurate data. Moreover, the process of correlating and interpreting
acquired information is equally challenging.
 Two Contrasting Models: The Keynesian theories consider money supply to be the important factor behind
fluctuations. But the Real Business Cycle theory opposes this concept and proposes that market imperfection
is the important factor behind fluctuations.
 Human Glitch: Economic researchers are humans; they are the ones who study trade cycle trends and
present economic indicators that cause the trend. Thus, this analysis is prone to human errors.

INFLATION: MEANING

Inflation is defined as a rise in the cost of most everyday items and services, such as food, clothing, housing,
recreation, transportation, consumer staples, and so on. The average change in the price of a basket of goods
and services over time is referred to as inflation.
Deflation is the opposite of inflation, and it refers to a decrease in the price index of this group of
commodities. Inflation is defined as a decrease in a country's currency unit's purchasing power. As a
percentage, this is calculated.

INFLATION: EFFECTS
The purchasing power of a currency unit decreases when commodities and services grow more expensive.
This has an impact on the cost of living in a country. When inflation is high, the cost of living rises along
with it, causing economic growth to decrease. A certain level of inflation is required in the economy in order
to encourage spending while discouraging conserving.

Because money depreciates in value over time, it is vital for people to invest their funds. Investing is
essential for a country's economic development.

WHO MEASURE IT?

A central government organization in charge of enacting policies to keep the economy functioning smoothly
keeps track of inflation. In India, the Ministry of Statistics and Programme Implementation monitors
inflation.
1. Meaning of Inflation
To the neo-classical and their followers at the University of Chicago, inflation is fundamentally a monetary
phenomenon. In the words of Friedman, “Inflation is always and everywhere a monetary phenomenon…and
can be produced only by a more rapid increase in the quantity of money than output.’” But economists do not
agree that money supply alone is the cause of inflation.
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As pointed out by Hicks, “Our present troubles are not of a monetary character.” Economists, therefore,
define inflation in terms of a continuous rise in prices. Johnson defines “inflation as a sustained rise”4 in
prices. Brooman defines it as “a continuing increase in the general price level.” 5 Shapiro also defines
inflation in a similar vein “as a persistent and appreciable rise in the general level of prices.” Demberg and
McDougall are more explicit when they write that “the term usually refers to a continuing rise in prices as
measured by an index such as the consumer price index (CPI) or by the implicit price deflator for gross
national product.”
However, it is essential to understand that a sustained rise in prices may be of various magnitudes.
Accordingly, different names have been given to inflation depending upon the rate of rise in prices.

1. Creeping Inflation:
When the rise in prices is very slow like that of a snail or creeper, it is called creeping inflation. In terms of
speed, a sustained rise in prices of annual increase of less than 3 per cent per annum is characterized as
creeping inflation. Such an increase in prices is regarded safe and essential for economic growth.

2. Walking or Trotting Inflation:

When prices rise moderately and the annual inflation rate is a single digit. In other words, the rate of rise in
prices is in the intermediate range of 3 to 6 per cent per annum or less than 10 per cent. Inflation at this rate
is a warning signal for the government to control it before it turns into running inflation.

3. Running Inflation:
When prices rise rapidly like the running of a horse at a rate or speed of 10 to 20 per cent per annum, it is
called running inflation. Such an inflation affects the poor and middle classes adversely. Its control requires
strong monetary and fiscal measures, otherwise it leads to hyperinflation.

4. Hyperinflation:
When prices rise very fast at double or triple digit rates from more than 20 to 100 per cent per annum or
more, it is usually called runaway ox galloping inflation. It is also characterised as hyperinflation by certain
economists. In reality, hyperinflation is a situation when the rate of inflation becomes immeasurable and
absolutely uncontrollable. Prices rise many times every day. Such a situation brings a total collapse of mon-
etary system because of the continuous fall in the purchasing power of money.

5. Semi-Inflation:
According to Keynes, so long as there are unemployed resources, the general price level will not rise as
output increases. But a large increase in aggregate expenditure will face shortages of supplies of some factors
which may not be substitutable. This may lead to increase in costs, and prices start rising. This is known as
semi-inflation or bottleneck inflation because of the bottlenecks in supplies of some factors.

6. True Inflation:
According to Keynes, when the economy reaches the level of full employment, any increase in aggregate
expenditure will raise the price level in the same proportion. This is because it is not possible to increase the
supply of factors of production and hence of output after the level of full employment. This is called true
inflation.

7. Open Inflation:
Inflation is open when “markets for goods or factors of production are allowed to function freely, setting
prices of goods and factors without normal interference by the authorities. Thus open inflation is the result of
the uninterrupted operation of the market mechanism. There are no checks or controls on the distribution of
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commodities by the government. Increase in demand and shortage of supplies persist which tend to lead to
open inflation. Unchecked open inflation ultimately leads to hyperinflation.

8. Stagflation:
Stagflation is a new term which has been added to economic literature in the 1970s. It is a paradoxical
phenomenon where the economy expedience’s stagnation as well as inflation. The word stagflation is the
combination of‘ stag’ plus ‘flation’ taking ‘stag’ from stagnation and ‘flation’ from inflation.

Stagflation is a situation when recession is accompanied by a high rate of inflation. It is, therefore, also
called inflationary recession. The principal cause of this phenomenon has been excessive demand in
commodity markets, thereby causing prices to rise, and at the same time the demand for labour is deficient,
thereby creating unemployment in the economy.

Three factors have been responsible for the existence of stagflation in the advanced countries since 1972.
First, rise in oil prices and other commodity prices along with adverse changes in the terms of trade, second,
the steady and substantial growth of the labour force; and third, rigidities in the wage structure due to strong
trade unions.

13. Reflation:
Is a situation when prices are raised deliberately in order to encourage economic activity. When there is
depression and prices fall abnormally low, the monetary authority adopts measures to put more money in
circulation so that prices rise. This is called reflation.

Demand-Pull Inflation

Demand-Pull or excess demand inflation is a situation often described as “too much money chasing too
few goods.” According to this theory, an excess of aggregate demand over aggregate supply will generate
inflationary rise in prices. Its earliest explanation is to be found in the simple quantity theory of money.

The theory states that prices rise in proportion to the increase in the money supply. Given the full
employment level of output, doubling the money supply will double the price level. So inflation proceeds at
the same rate at which the money supply expands.

In this analysis, the aggregate supply is assumed to be fixed and there is always full employment in the
economy. Naturally, when the money supply increases it creates more demand for goods but the supply
of goods cannot be increased due to the full employment of resources. This leads to rise in prices.

Modern quantity theorists led by Friedman hold that “inflation is always and everywhere a monetary
phenomenon. The higher the growth rate of the nominal money supply, the higher the rate of inflation.
When the money supply increases, people spend more in relation to the available supply of goods and
services. This bids prices up. Modem quantity theorists neither assume full employment as a normal situation
nor a stable velocity of money. Still they regard inflation as the result of excessive increase in the money
supply.

Cost-Push Inflation
Cost-push inflation is caused by wage increases enforced by unions and profit increases by employers. This
type of inflation has not been a new phenomenon and was found even during the medieval period. But it was
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revived in the 1950s and again in the 1970s as the principal cause of inflation. It also came to be known as
the “New Inflation.”

Cost-push inflation is caused by wage-push and profit-push to prices for the following reasons:
1. Rise in Wages:
The basis cause of cost-push inflation is the rise in money wages more rapidly than the productivity of
labour. In advanced countries, trade unions are very powerful. They press employers to grant wage increases
considerably in excess of increases in the productivity of labour, thereby raising the cost of production of
commodities. Employers, in turn, raise prices of their products.

Higher wages enable workers to buy as much as before, in spite of higher prices. On the other hand, the
increase in prices induces unions to demand still higher wages. In this way, the wage-cost spiral continues,
thereby leading to cost-push or wage-push inflation. Cost-push inflation may be further aggravated by
upward adjustment of wages to compensate for rise in the cost of living index.

2. Sectoral Rise in Prices:

Again, a few sectors of the economy may be affected by money wage increases and prices of their products
may be rising. In many cases, their production such as steel, raw materials, etc. are used as inputs for the
production of commodities in other sectors. As a result, the production cost of other sectors will rise and
thereby push up the prices of their products. Thus wage- push inflation in a few sectors of the economy may
soon lead to inflationary rise in prices in the entire economy.

3. Rise in Prices of Imported Raw Materials:

An increase in the prices of imported raw materials may lead to cost-push inflation. Since raw materials are
used as inputs by the manufacturers of the finished goods, they enter into the cost of production of the latter.
Thus a continuous rise in the prices of raw materials tends to sets off a cost-price-wage spiral.

4. Profit-Push Inflation:
Oligopolist and monopolist firms raise the prices of their products to offset the rise in labour and production
costs so as to earn higher profits. There being imperfect competition in the case of such firms, they are able
to “administer prices” of their products. “In an economy in which so called administered prices abound there
is at least the possibility that these prices may be administered upward faster than cost in an attempt to earn
greater profits.

4. The Inflationary Gap

In his pamphlet How to pay for the War published in 1940, Keynes explained the concept of the inflationary
gap. It differs from his views on inflation given in his General Theory. In the General Theory, he started with
underemployment equilibrium. But in How to Pay for the War, he began with a situation of full employment
in the economy.

He defined an inflationary gap as an excess of planned expenditure over the available output at pre-inflation
or base prices. According to Lipsey, “The inflationary gap is the amount by which aggregate expenditure
would exceed aggregate output at the full employment level of income.” The classical economists explained
inflation as mainly due to increase in the quantity of money, given the level of full employment.
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Keynes, on the other hand, ascribed it to the excess of expenditure over income at the full employment level.
The larger the aggregate expenditure, the larger the gap and the more rapid the inflation. Given a constant
average propensity to save, rising money incomes at full employment level would lead to an excess of
demand over supply and to a consequent inflationary gap. Thus Keynes used the concept of the inflationary
gap to show the main determinants that cause an inflationary rise of prices.

How can the inflationary gap be wiped out?

The inflationary gap can be wiped out by increase in savings so that the aggregate demand is reduced. But
this may lead to deflationary tendencies.

Another solution is to raise the value of available output to match the disposable income. As aggregate
demand increases, businessmen hire more labour to expand output. But there being full employment at the
current money age, they offer higher money wages to induce more workers to work for them.

As there is already full employment, the increase in money wages leads to proportionate rise in prices.
Moreover, output cannot be increased during the short run because factors are already fully employed. So the
inflationary gap can be closed by increasing taxes and reducing expenditure. Monetary policy can also be
used to decrease the money stock. But Keynes was not in favour of monetary measures to control
inflationary pressures within the economy.

6. Causes of Inflation

Inflation is caused when the aggregate demand exceeds the aggregate supply of goods and services. We
analyse the factors which lead to increase in demand and the shortage of supply.

Factors Affecting Demand:

Both Keynesians and monetarists believe that inflation is caused by increase in the aggregate demand.

They point towards the following factors which raise it.

1. Increase in Money Supply:

Inflation is caused by an increase in the supply of money which leads to increase in aggregate demand. The
higher the growth rate of the nominal money supply, the higher is the rate of inflation. Modem quantity
theorists do not believe that true inflation starts after the full employment level. This view is realistic because
all advanced countries are faced with high levels of unemployment and high rates of inflation.

2. Increase in Disposable Income:

When the disposable income of the people increases, it raises their demand for goods and services.
Disposable income may increase with the rise in national income or reduction in taxes or reduction in the
saving of the people.

3. Increase in Public Expenditure:

Government activities have been expanding much with the result that government expenditure has also been
increasing at a phenomenal rate, thereby raising aggregate demand for goods and services. Governments of
both developed and developing countries are providing more facilities under public utilities and social
services, and also nationalising industries and starting public enterprises with the result that they help in
increasing aggregate demand.
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4. Increase in Consumer Spending:

The demand for goods and services increases when consumer expenditure increases. Consumers may spend
more due to conspicuous consumption or demonstration effect. They may also spend more whey they are
given credit facilities to buy goods on hire-purchase and instalment basis.

5. Cheap Monetary Policy:

Cheap monetary policy or the policy of credit expansion also leads to increase in the money supply which
raises the demand for goods and services in the economy. When credit expands, it raises the money income
of the borrowers which, in turn, raises aggregate demand relative to supply, thereby leading to inflation. This
is also known as credit-induced inflation.

6. Deficit Financing:
In order to meet its mounting expenses, the government resorts to deficit financing by borrowing from the
public and even by printing more notes. This raises aggregate demand in relation to aggregate supply,
thereby leading to inflationary rise in prices. This is also known as deficit-induced inflation.

7. Expansion of the Private Sector:

The expansion of the private sector also tends to raise the aggregate demand. For huge investments increase
employment and income, thereby creating more demand for goods and services. But it takes time for the
output to enter the market.

8. Black Money:
The existence of black money in all countries due to corruption, tax evasion etc. increases the aggregate
demand. People spend such unearned money extravagantly, thereby creating unnecessary demand for
commodities. This tends to raise the price level further.

9. Repayment of Public Debt:

Whenever the government repays its past internal debt to the public, it leads to increase in the money supply
with the public. This tends to raise the aggregate demand for goods and services.

10. Increase in Exports:

When the demand for domestically produced goods increases in foreign countries, this raises the earnings of
industries producing export commodities. These, in turn, create more demand for goods and services within
the economy.

Factors Affecting Supply:

There are also certain factors which operate on the opposite side and tend to reduce the aggregate supply.

Some of the factors are as follows:

1. Shortage of Factors of Production:
One of the important causes affecting the supplies of goods is the shortage of such factors as labour, raw
materials, power supply, capital, etc. They lead to excess capacity and reduction in industrial production.

2. Industrial Disputes:
In countries where trade unions are powerful, they also help in curtailing production. Trade unions resort to
strikes and if they happen to be unreasonable from the employers’ viewpoint’ and are prolonged, they force
the employers to declare lock-outs. In both cases, industrial production falls, thereby reducing supplies of
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goods. If the unions succeed in raising money wages of their members to a very high level than the
productivity of labour, this also tends to reduce production and supplies of goods.

3. Natural Calamities:
Drought or floods is a factor which adversely affects the supplies of agricultural products. The latter, in turn,
create shortages of food products and raw materials, thereby helping inflationary pressures.

4. Artificial Scarcities:
Artificial scarcities are created by hoarders and speculators who indulge in black marketing. Thus they are
instrumental in reducing supplies of goods and raising their prices.

5. Increase in Exports:
When the country produces more goods for export than for domestic consumption, this creates shortages of
goods in the domestic market. This leads to inflation in the economy.

6. Lop-sided Production:
If the stress is on the production of comforts, luxuries, or basic products to the neglect of essential consumer
goods in the country, this creates shortages of consumer goods. This again causes inflation.

7. Law of Diminishing Returns:

If industries in the country are using old machines and outmoded methods of production, the law of
diminishing returns operates. This raises cost per unit of production, thereby raising the prices of products.

8. International Factors:
In modern times, inflation is a worldwide phenomenon. When prices rise in major industrial countries, their
effects spread to almost all countries with which they have trade relations. Often the rise in the price of a
basic raw material like petrol in the international market leads to rise in the price of all related commodities
in a country.

7. Measures to Control Inflation

We have studied above that inflation is caused by the failure of aggregate supply to equal the increase in
aggregate demand. Inflation can, therefore, be controlled by increasing the supplies and reducing money
incomes in order to control aggregate demand.

The various methods are usually grouped under three heads:

Monetary measures, fiscal measures and other measures.

1. Monetary Measures:
Monetary measures aim at reducing money incomes.
(a) Credit Control:
One of the important monetary measures is monetary policy. The central bank of the country adopts a
number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates,
sells securities in the open market, raises the reserved ratio, and adopts a number of selective credit control
measures, such as raising margin requirements and regulating consumer credit.
Monetary policy may not be effective in controlling inflation, if inflation is due to cost-push factors.
Monetary policy can only be helpful in controlling inflation due to demand-pull factors.
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(b) Demonetization of Currency:

However, one of the monetary measures is to demonetize currency of higher denominations. Such a measure
is usually adopted when there is abundance of black money in the country.
(c) Issue of New Currency:
The most extreme monetary measure is the issue of new currency in place of the old currency. Under this
system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is
also fixed accordingly. Such a measure is adopted when there is an excessive issue of notes and there is
hyperinflation in the country. It is a very effective measure. But is inequitable for it hurts the small
depositors the most.
2. Fiscal Measures:
Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal
measures. Fiscal measures are highly effective for controlling government expenditure, personal
consumption expenditure, and private and public investment.
The principal fiscal measures are the following:
(a) Reduction in Unnecessary Expenditure:
The government should reduce unnecessary expenditure on non-development activities in order to curb
inflation. This will also put a check on private expenditure which is dependent upon government demand for
goods and services. But it is not easy to cut government expenditure. Though economy measures are always
welcome but it becomes difficult to distinguish between essential and non-essential expenditure. Therefore,
this measure should be supplemented by taxation.
(b) Increase in Taxes:
To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be
raised and even new taxes should be levied, but the rates of taxes should not be so high as to discourage
saving, investment and production. Rather, the tax system should provide larger incentives to those who
save, invest and produce more.
Further, to bring more revenue into the tax-net, the government should penalise the tax evaders by imposing
heavy fines. Such measures are bound to be effective in controlling inflation. To increase the supply of goods
within the country, the government should reduce import duties and increase export duties.
(c) Increase in Savings:
Another measure is to increase savings on the part of the people. This will tend to reduce disposable income
with the people, and hence personal consumption expenditure. But due to the rising cost of living, people are
not in a position to save much voluntarily. Keynes, therefore, advocated compulsory savings or what he
called ‘deferred payment’ where the saver gets his money back after some years.
For this purpose, the government should float public loans carrying high rates of interest, start saving
schemes with prize money, or lottery for long periods, etc. It should also introduce compulsory provident
fund, provident fund-cum-pension schemes, etc. compulsorily. All such measures to increase savings are
likely to be effective in controlling inflation.
(d) Surplus Budgets:
An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the government should
give up deficit financing and instead have surplus budgets. It means collecting more in revenues and
spending less.
(e) Public Debt:
At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary
pressures are controlled within the economy. Instead, the government should borrow more to reduce money
supply with the public.
 13

Like the monetary measures, fiscal measures alone cannot help in controlling inflation. They should be
supplemented by monetary, non-monetary and non-fiscal measures.

3. Other Measures:
The other types of measures are those which aim at increasing aggregate supply and reducing
aggregate demand directly:
(a) To Increase Production:
The following measures should be adopted to increase production:
(i) One of the foremost measures to control inflation is to increase the production of essential consumer
goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.

(ii) If there is need, raw materials for such products may be imported on preferential basis to increase the
production of essential commodities.

(iii) Efforts should also be made to increase productivity. For this purpose, industrial peace should be
maintained through agreements with trade unions, binding them not to resort to strikes for some time.

(iv) The policy of rationalisation of industries should be adopted as a long-term measure. Rationalisation
increases productivity and production of industries through the use of brain, brawn and bullion.
(v) All possible help in the form of latest technology, raw materials, financial help, subsidies, etc. should be
provided to different consumer goods sectors to increase production.

(b) Rational Wage Policy:

Another important measure is to adopt a rational wage and income policy. Under hyperinflation, there is a
wage-price spiral. To control this, the government should freeze wages, incomes, profits, dividends, bonus,
etc. But such a drastic measure can only be adopted for a short period and by antagonising both workers and
industrialists. Therefore, the best course is to link increase in wages to increase in productivity. This will
have a dual effect. It will control wages and at the same time increase productivity, and hence increase
production of goods in the economy.

(c) Price Control:

Price control and rationing is another measure of direct control to check inflation. Price control means fixing
an upper limit for the prices of essential consumer goods. They are the maximum prices fixed by law and
anybody charging more than these prices is punished by law. But it is difficult to administer price control.

(d) Rationing:
Rationing aims at distributing consumption of scarce goods so as to make them available to a large number
of consumers. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. It is
meant to stabilise the prices of necessaries and assure distributive justice. But it is very inconvenient for
consumers because it leads to queues, artificial shortages, corruption and black marketing. Keynes did not
favour rationing for it “involves a great deal of waste, both of resources and of employment.”

Conclusion:
 14

MONETARY AND FISCAL POLICY

From the various monetary, fiscal and other measures discussed above, it becomes clear that to control
inflation, the government should adopt all measures simultaneously. Inflation is like a hydra-headed monster
which should be fought by using all the weapons at the command of the government.

Comparison Chart
BASIS FOR
FISCAL POLICY MONETARY POLICY
COMPARISON
Meaning The tool used by the government in The tool used by the central bank
which it uses its tax revenue and to regulate the money supply in
expenditure policies to affect the the economy is known as
economy is known as Fiscal Policy. Monetary Policy.

Administered by Ministry of Finance Central Bank

Nature The fiscal policy changes every year. The change in monetary policy
depends on the economic status
of the nation.

Related to Government Revenue & Expenditure Banks & Credit Control

Focuses on Economic Growth Economic Stability

Policy instruments Tax rates and government spending Interest rates and credit ratios

Political influence Yes No

Definition of Fiscal Policy

When the government of a country employs its tax revenue and expenditure policies to influence the overall
demand and supply for commodities and services in the nation’s economy is known as Fiscal Policy. It is a
strategy used by the government to maintain the equilibrium between government receipts through various
sources and spending over different projects. The fiscal policy of a country is announced by the finance
minister through budget every year.
If the revenue exceeds expenditure, then this situation is known as fiscal surplus, whereas if the expenditure
is greater than the revenue, it is known as the fiscal deficit. The main objective of the fiscal policy is to bring
stability, reduce unemployment and growth of the economy. The instruments used in the Fiscal Policy are
the level of taxation & its composition and expenditure on various projects. There are two types of fiscal
policy, they are:
 Expansionary Fiscal Policy: The policy in which the government minimises taxes and increase
public spending.
 Contractionary Fiscal Policy: The policy in which the government increases taxes and reduce
public expenditure.
Definition of Monetary Policy
Monetary Policy is a strategy used by the Central Bank to control and regulate the money supply in an
economy. It is also known as credit policy. In India, the Reserve Bank of India looks after the circulation of
money in the economy.
There are two types of monetary policies, i.e. expansionary and contractionary. The policy in which the
money supply is increased along with minimization of interest rates is known as Expansionary Monetary
Policy. On the other hand, if there is a decrease in money supply and rise in interest rates, that policy is
regarded as Contractionary Monetary Policy.
The primary purposes of the monetary policy include bringing price stability, controlling inflation,
strengthening the banking system, economic growth, etc. The monetary policy focuses on all the matters
which have an influence on the composition of money, circulation of credit, interest rate structure.
 15

The measures adopted by the apex bank to control credit in the economy are broadly classified into two
categories:
 General Measures (Quantitative Measures):
o Bank Rate
o Reserve Requirements i.e. CRR, SLR, etc.
o Repo Rate Reverse Repo Rate
o Open market operations
 Selective Measures (Qualitative Measures):
o Credit Regulation
o Moral persuasion
o Direct Action
o Issue of directives

Key Differences Between Fiscal Policy and Monetary Policy

The following are the major differences between fiscal policy and monetary policy.
1. The policy of the government in which it utilises its tax revenue and expenditure policy to influence
the aggregate demand and supply for products and services the economy is known as Fiscal Policy.
The policy through which the central bank controls and regulates the supply of money in the
economy is known as Monetary Policy.
2. Fiscal Policy is carried out by the Ministry of Finance whereas the Monetary Policy is administered
by the Central Bank of the country.
3. Fiscal Policy is made for a short duration, normally one year, while the Monetary Policy lasts longer.
4. Fiscal Policy gives direction to the economy. On the other hand, Monetary Policy brings price
stability.
5. Fiscal Policy is concerned with government revenue and expenditure, but Monetary Policy is
concerned with borrowing and financial arrangement.
6. The major instrument of fiscal policy is tax rates and government spending. Conversely, interest
rates and credit ratios are the tools of Monetary Policy.
7. Political influence is there in fiscal policy. However, this is not in the case of monetary policy.
Conclusion
The main reason of confusion and bewilderment between fiscal policy and monetary policy is that the aim of
both the policies is same. The policies are formulated and implemented to bring stability and growth in the
economy. The most significant difference between the two is that fiscal policy is made by the government of
the respective country whereas the central bank creates the monetary policy.

NATIONAL INCOME CONCEPT AND MEASUREMENT

 National income is net national product at factor cost (NNP at FC)

OR National income is the sum of money value of final goods and services produced by normal residents of
a country within and outside the country during an accounting year.
 GDP at MP= It is the market value of all the final goods and services produced by all production
units within the domestic territory of a country during a period of one year.
 NDP at MP = GDP at MP – Depreciation charges
Where Depreciation charges = Charges incurred on loss or fall in the value of fixed assets due to normal
wear and tear and expected obsolesce( fall in value of typewriters due to introduction of computer)
 GNP at MP: It is the market value of all the final goods and services produced in the domestic
territory of a country by normal residents during an accounting year including net factor income
from aboard.
 GNP at MP= GDP at MP + NFIA
Where NFIA = Factor incomes earned by normal residents of a country from rest of the world and factor
incomes earned by non-residents in the domestic territory of the country.
 NNP at MP = GNP at MP – Depreciation charges
 16

 GNP at FC = GNP at MP – Net Indirect Tax(NIT)

Where Net indirect tax = Indirect Tax- Subsidies
 NNP at FC= NNP at MP – NIT
OR NNP at FC = NDP at FC + NFIA
 GDP at FC = GDP at MP- NIT
 NDP at FC = NDP at MP – NIT
OR NDP at FC= NNP at FC - NFIA

National income at current prices or Nominal National income: if goods and services produced in a year
are valued at current prices ,i.e., prices prevailing in that particular year then it is called NI at current prices.
If goods and services produced in a year are valued at price of base year, we get national income at
constant prices. A base year is a normal year, free from price fluctuations, without inflation or deflation.
NI at Constant Price = [(NI at Current price)÷(Current Price Index)]x 100
Where Current Price Index = (P1/P0)x 100
Where P1= Price at current year
P0= Price at base year

National Income of a country can be measured by three different methods:

1. Value added/output/ product method
2. Income method/distribution method
3. Expenditure or disposition method
1. According to Value Added Approach, national income is calculated by adding net value added at
FC all the producing units during an accounting year within the domestic territory.
 GVA at MP / GDP at MP = GVO at MP – Intermediate consumption
 NVA at FC = GVA at MP- NIT – Depreciation Charge
 NNP at FC = NVA at FC + NFIA
 Income method: the income method measures national income generated among four factors of
production in the form of wages, rent, interest and profits in exchange for their factor services.
 NDP at FC = C.O.E + O.S + M.I
 Compensation of Employees= it is the total amount of remuneration in cash (wage, bonus etc), in
kind (non-monetary benefit like rent free accommodation, free conveyance, medical facilities, etc.
and in the form of social security contributions, an employee receives from his employer for his
factor services provided during an accounting period.
 Operating Surplus= Operating surplus is income from property( rent, royalty and interest) and
income from entrepreneurship ( profits= dividends + corporation tax + corporate saving)
 Mixed Income of Self- employed: income of own account workers ( like farmers, doctors, barbers,
etc) and unincorporated enterprises ( small shopkeepers, repair shops, etc) is known as mixed
income.
 NNP at FC = NDP at FC + NFIA

Expenditure method: Under expenditure method, national income is measured at the point of actual
expenditure on goods and services for final use by all four sectors functioning in the economy.
GDP at MP = Private final consumption expenditure (PFCE) + Government final consumption
Expenditure( GFCE)+ Gross domestic capital formation ( GDCF) + Net exports(X-M)

Central bank is regarded as an apex financial institution in the banking system. It is considered as an
integral part of the economic and financial system of a nation. The central bank functions as an independent
authority and is responsible for controlling, regulating and stabilising the monetary and banking structure of
the country.
In India, the Reserve Bank of India is regarded as the central bank. It was set up in 1935. Central banks are
responsible for maintaining the financial stability and economic sovereignty of the country.
 17

The functions of a central bank can be discussed as follows:

1. Currency regulator or bank of issue
2. Bank to the government
3. Custodian of Cash reserves
4. Custodian of International currency
5. Lender of last resort
6. Clearing house for transfer and settlement
7. Controller of credit
8. Protecting depositors interests

The above mentioned functions will be discussed in detail in the following lines.
1. Currency regulator or bank of issue: Central banks possess the exclusive right to manufacture
notes in an economy. All the central banks across the world are involved in issuing notes to the economy.
This is one of the most important functions of the central bank in an economy and due to this the central
bank is also known as the bank of issue.
Earlier all the banks were allowed to publish their own notes which resulted in a disorganised economy.
To avoid this situation the government around the world authorised the central banks to function as the issuer
of currency, which resulted in uniformity in circulation and balanced supply of money in the economy.
2. Bank to the government: One of the important functions of the central bank is to act as the bank to
the government. The central bank accepts deposits and issues funds to the government. It is also involved in
making and receiving payments for the government. Central banks also offer short term loans to the
government in order to recover from bad phases in the economy.
In addition to being the bank to the government, it acts as an advisor and agent of the government by
providing advice to the government in areas of economic policy, capital market, money market and loans
from the government.
In addition to that, the central bank is instrumental in formulation of monetary and fiscal policies that
help in regulation of money in the market and controlling inflation.
3. Custodian of Cash reserves: It is a practice of the commercial banks of a country to keep a part of
their cash balances in the form of deposits with the central bank. The commercial banks can draw that
balance when the requirement for cash is high and pay back the same when there is less requirement of cash.
It is for this reason that the central bank is regarded as the banker’s bank. Central bank also plays an
important role in the credit creation policy of commercial banks.
4. Custodian of International currency: An important function of the central bank is to maintain a
minimum balance of foreign currency. The purpose of maintaining such a balance is to manage sudden or
emergency requirements of foreign reserves and also to overcome any adverse deficits of balance of
payments.
5. Lender of last resort: The central bank acts as a lender of last resort by providing money to its
member banks in times of cash crunch. It performs this function by providing loans against securities,
treasury bills and also by rediscounting bills.
This is regarded as one of the most crucial functions of the central bank wherein it helps in protecting
the financial structure of the economy from collapsing.
6. Clearing house for transfer and settlement: Central bank acts as a clearing house of the
commercial banks and helps in settling of mutual indebtedness of the commercial banks. In a clearing house,
the representatives of different banks meet and settle the inter bank payments.
7. Controller of credit: Central banks also function as the controller of credit in the economy. It
happens that commercial banks create a lot of credit in the economy that increases the inflation.
The central bank controls the way credit creation by commercial banks is done by engaging in open
market operations or bringing about a change in the CRR to control the process of credit creation by
commercial banks.
8. Protecting depositors interests: Central bank also needs to keep an eye on the functioning of the
commercial banks in order to protect the interests of depositors.
 18

Examples of Central Banks

Some of the well known central banks across the world are:
1. Federal Reserve (USA)
2. Reserve Bank of India (India)
3. People’s Bank of China (China)
4. Bank of England (UK)
5. European Central Bank (EU or European Union)

What is Commercial Bank?

A commercial bank is a kind of financial institution that carries all the operations related to deposit and
withdrawal of money for the general public, providing loans for investment, and other such activities. These
banks are profit-making institutions and do business only to make a profit.
The two primary characteristics of a commercial bank are lending and borrowing. The bank receives the
deposits and gives money to various projects to earn interest (profit). The rate of interest that a bank offers to
the depositors is known as the borrowing rate, while the rate at which a bank lends money is known as the
lending rate.

Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

Accepts deposit: The bank takes deposits in the form of saving, current, and fixed deposits. The surplus
balances collected from the firm and individuals are lent to the temporary requirements of the commercial
transactions.
Provides loan and advances: Another critical function of this bank is to offer loans and advances to
the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of
making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the
remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such
banks.
Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a
bank account is opened for the customer and then the money is transferred to the account. This process
allows the bank to create money.

(b) Secondary functions

Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid
against the goods purchased at a given point of time in the future. The amount can also be cleared before the
quoted time through a discounting method of a commercial bank.
Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to
the given limit.
Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the
securities.
Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents
safely. The banks charge a minimum of an annual fee for this service.
Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of
exchange.
Types of Commercial Banks:
There are four different types of commercial banks.
1. Private bank –: It is a type of commercial banks where private individuals and businesses own a
majority of the share capital. All private banks are recorded as companies with limited liability.
Such as Housing Development Finance Corporation (HDFC) Bank, Industrial Credit and
Investment Corporation of India (ICICI) Bank, Yes Bank, and more such banks.
 19

2. Public bank –: It is a type of bank that is nationalised, and the government holds a significant
stake. For example, Bank of Baroda, State Bank of India (SBI), Dena Bank, Corporation Bank,
and Punjab National Bank.

3. Foreign bank –: These banks are established in foreign countries and have branches in other
countries. For instance, American Express Bank, Hong Kong and Shanghai Banking Corporation
(HSBC), Standard & Chartered Bank, Citibank, and more such banks.

4. Regional Rural Banks: Regional Rural Banks (RRB):-

These are unique types of commercial banks that lend to agriculture and the rural economy at a reduced rate.
RRBs were founded in 1975 and are governed by the 1976 Regional Rural Bank Act.

List of Govt. Banks in India

Below the List of govt. banks in India 2022
1. State Bank of India
It is the first largest central government bank in India. It also gets to be known as the Imperial Bank of India.
India. SBI is ranked 236th on the Fortune Global 500 list. With the merger with its 5 associates banks, SBI
has the largest branch network in India. Tagline- Pure Banking, Nothing Else
2. Punjab National Bank
Punjab National Bank is the second-largest government bank. The new name of merged Punjab National
Bank, Oriental Bank, and United Bank is Amalgamated 3. The tagline of PNB is –The name you can Bank
Upon.
3. Bank Of Baroda
Bank of Baroda is the third-largest bank of India. The merging of Dena Bank and Vijaya Bank created the
Bank of Baroda. Bank of Baroda is an Indian multinational bank. Tagline: India’s International Bank
4. Bank Of Maharashtra
The Bank of Maharashtra originated in 1969. It was founded and created by D.K Sathe as well as V.G. Kale.
Bank of Maharashtra is a major public sector bank. Tagline: One Family One Bank.
5. Bank Of India
 20

Bank of India is a leading nationalized bank. It was founded by a distinguished group of Maharashtra as well
as Mumbai. Bank of India is the founder member of SWIFT (Society for Worldwide Inter Bank Financial
Telecommunications). Tagline: Relationship Beyond Banking.
6. Union Bank Of India
Union Bank of India is a very famous government bank. It consists of 3040 ATMs under them. It contains
complete automatic 2600 CBS branches. The tagline of this bank- Good People to Bank With.
7. Canara Bank
Canara Bank is the largest famous public sector government bank in India. Canara Bank will merge
with Syndicate Bank to become the fourth largest Public Sector Bank in the country. The tagline of Canara
Bank is- Together we can.
8. Central Bank Of India
It was founded by Ammembal Subba Rao Paiand. It originated in 1969 at Mangalore. Established in 1911,
the financial organization of India was the primary Indian bank that was the whole closely-held and managed
by Indians. Tagline- Central to you since 1911.
9. Indian Bank
Indian Bank is the oldest bank of India, which includes the 20924 rates of employees. It also contains 2900
bank branches and 2861 ATMs under them. Tagline of this bank is- Your Own Bank.
10. Indian Overseas Bank
The founder of the Indian Overseas Bank is Thiru.M.Ct.M. Chidambaram Chettiar. It has formalized foreign
exchange operations with high capability. It is the fastest and largest top performer among Government
banks. Tagline- Good People to Grow With
11. UCO Bank
It was established in 1943 in Kolkata, India. The founder of UCO bank is a group of eminent Indian
industrialists. It is a commercial bank that has provided an excellent economic facility to people. The tagline
of UCO bank is- Honours Your Trust.
12. Punjab and Sind Bank
The Punjab and Sind Bank has 623 branches in Punjab state, and throughout the country, it has 1559 bank
branches. This is a public sector bank of India. The tagline of this bank- Where Service Is A Way Of Life.

About Private Sector Bank

Private Banks are banks owned by either the individual or a general partners with limited partenrs. At present
there are 21 private banks in India.
1. Axis Bank: In India Axis bank is the 3rd largest bank in the private sector. The bank has worldwide
workplaces in 11 countries. Axis bank is a premier bank for the new generation. The year of the
Establishment of Axis Bank is 1993, and its headquarters is located in Mumbai, Maharashtra
2. Bandhan Bank: Bandhan Bank is a wholly-owned subsidiary of Bandhan Financial Holdings
Limited. It started its operations in the year 2015. It is headquartered located in Kolkata, West
Bengal.
 21

3. CSB Bank: The headquarters of CSB Bank is located in Thrissur, Kerela. It was formerly known as
the Catholic Syrian Bank and is one of India’s oldest private sector banks as it was established in
November 1920.
4. City Union Bank: City Union Bank was initially named Kumbakonam Bank Limited. The
headquarter of this bank is located in Kumbakonam, Tamil Nadu. Currently, it has a network of over
700 branches across the country.
5. DCB Bank: DCB Bank is a new generation private sector bank with 400 branches across India.
DCB Bank has deep roots in India since its inception in the 1930s. The headquarter of Development
Credit Bank (DCB) is located in Mumbai Maharashtra.
6. Dhanlaxmi Bank: This bank was set up in 1927 with its registered office in Thrissur, Kerala.
Dhanlaxmi Bank is one of the most trustworthy and dignified banks in India. It is expanded across
the country with 245 branches.
7. Federal Bank: The headquarter of Federal Bank is located in Aluva, Kerala, Federal Bank consists
of a banking network of over 1272 branches in the nation. It was named Travancore Federal Bank
when it was established, but later on, it changed.
8. HDFC Bank: HDFC Bank is India’s largest private sector bank. it was one of the first to get ‘in
principle’ clearance to open a bank in the private sector. The headquarters of HDFC bank is located
in Mumbai. It was among the first to receive in-principle approval from the RBI to set up a bank in
the private sector, as a part of RBI’s liberalization of the Indian Banking Industry in 1994.
9. ICICI Bank: ICICI Bank is India’s largest private sector bank. ICICI Bank was established in 1994
as a wholly-owned subsidiary of ICICI Limited. Its headquarters is located in Mumbai.
10. Karur Vysya Bank: Karur Vysya Bank is a scheduled commercial bank in India. It was set up in
1916. The headquarter of this bank is located in Karur, Tamilnadu. It has completed 100 years of
operation and is one of the leading banks in India
11. Kotak Mahindra Bank: Kotak Mahindra Bank is India’s first finance company converted into a
private bank. It has ended up as one of the foremost prevalent banks in India. It has begun in 1985 as
Kotak Mahindra fund ltd but afterward, it changed to the bank in 2003.
12. IDBI Bank: IDBI Bank has become one of the premier private banks in our country. Established
initially for the purpose of boosting the industrial sector of our country, it comes among the top
private banks of the country. The headquarters of IDBI bank is located in Mumbai Maharastra.
13. IDFC FIRST Bank: IDFC First Bank was set up in 1997 as a financing foundation, and its prime
center was on extending the back and mobilization of capital for the improvement of private sector
foundations in 2005, Its headquarters is located in Mumbai.
14. IndusInd Bank: The IndusInd bank is a Pune-based new generation Indian bank. This is one of the
oldest private sector banks of our country. The headquarter of IndusInd Bank is located in Mumbai.
15. J&K Bank: J&K bank is a pretty old bank that was established back in 1938. The headquartered of
J&K bank is located in Srinagar, Jammu, and Kashmir. It is a universal bank in Jammu & Kashmir
and Ladakh and is a specialized bank in the rest of the country.
 22

16. Karnataka Bank: Karnataka Bank Ltd is an Indian banking company. The company’s operating
segment includes Treasury operations, Corporate/Wholesale Banking, Retail Banking, and Other
Banking Operations. The headquarter of Karnataka bank is located in Mangluru Karnataka.
17. RBL Bank: RBL bank is established in the year 1943 with the aim of serving the Kolhapur-Sangli
belt of Maharashtra. This is one of the fastest-growing private banks of the nation. The headquarter
of RBL bank is located in Mumbai Maharashtra.
18. YES Bank: It was founded in 2004 by two bankers Ashok Kapur and Rana Kapoor. The registered
office of the bank is situated in Mumbai, Maharashtra. This bank in India is one of the most
customer-focused and service-driven banks.
19. Tamilnad Mercantile Bank: The headquarter of Tamilnad Mercantile Bank Limited (TMB) is
located in Thoothukudi, Tamil Nadu. TBM was set up in 1921 at the Nadar Bank but changed its
name to Tamilnadu Mercantile Bank in 1962.
20. South Indian Bank: The South Indian Bank is known to be the first Kerala bank to execute the core
banking system. They have a good market reputation because of their transparency in operations.
Headquartered is located in Kerala,
21. Nainital Bank: The Nainital Bank was established in 1922 in Nainital to meet the financial needs of
the region. It was started by Govind Ballabh Pant. However, in 1975, the bank’s 99% shares were
acquired by the Bank of Baroda.