Economy - Compilation Notes
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Daily Class Notes
Economy
List of Lectures
1. Introduction
2. Basics of Economy
3. GDP and GNP
4. Methods of GDP Calculation
5. Investment and savings
6. Growth and Development
7. Banking and Finance
8. Functions of RBI
9. RBI as a credit controller
10. Qualitative Tools
11. Commercial Banks
12. Commercial Banks-2
13. Money supply in India
14. Basel Norms
15. Current Banking Issues in India
16. Insolvency and Bankruptcy Code 2016
17. Government Budgeting
18. Government Budgeting
19. Fiscal Policy
20. India’s Tax Structure
21. Various taxes in India
22. GST
23. Finance Commission
24. Expenditure pattern of GOI
25. Inflation
26. Inflation (Part 02)
27. Capital Market
28. Capital Market (Part 02)
29. Capital Market (Part-3)
30. Debt Market
31. Foreign Trade
32. Foreign Investment
33. FDI
34. Foreign Exchange Rate
35. DTAA and GAAR
36. Unemployment
37. Poverty
38. Industry
39. LPG Reform
40. Industries and MSMEs
41. WTO
42. WTO (Part 02)
43. WTO (Part 3)
44. WTO and Doha Round
45. Subsidies in India
46. Food and Fertilizer Subsidies in India
47. Food Subsidies in India
48. Food Processing Industry
49. Land Reforms
50. Agriculture
ECONOMY
LECTURE 01: INTRODUCTION
Syllabus:
For Prelims
● Economic & Social Development – Sustainable Development, Poverty, Inclusion,
Demographics, Social Sector Initiatives, etc.
For Mains
● Indian Economy and issues relating to planning, mobilization, of resources, growth,
development and employment.
● Inclusive growth and issues arising from it.
● Government Budgeting.
● Majorcrops-croppingpatternsinvariouspartsofthecountry,-differenttypesofirrigation
and irrigation systems storage, transport andmarketingofagriculturalproduceandissues
and related constraints; e-technology in the aid of farmers.
● Issues related to direct and indirect farm subsidies and minimum support prices; Public
DistributionSystem-objectives,functioning,limitations,revamping;issuesofbufferstocks
and food security; Technology missions; economics of animal-rearing.
● Food processing and related industriesinIndia-scopeandsignificance,location,upstream
and downstream requirements, supply chain management.
● Land reforms in India.
● Effects of liberalization ontheeconomy,changesinindustrialpolicyandtheireffectson
industrial growth.
● Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
● Investment models.
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Topic to be covered in the class
● Basics of Economy
● National Income Accounting (GDP and other concepts)
● Banking and Finance
● Fiscal Policy
● Public Debt
● Inflation
● Capital Market
● Foreign Trade and Foreign Investment
● Foreign Exchange Rate
● DTAA and GAAR
● Poverty and Unemployment
● Industry
● Land Reforms
● International Organizations (WTO, WBG and IMF)
● Subsidies, Food Security and PDS
● Food Processing Industry
● Agriculture
● Infrastructure
● Miscellaneous
Important Instructions
● The content of NCERTs will be covered in class, so there is no need to read them
separately.
● The Budget and Economic Surveyofthepreviousyearwillalsobecoveredinclass,while
classes for the next year's Budget and Economic Survey will be conducted on YouTube.
● For reference books, students should refer to the IndianEconomybookbyPhysicsWallah
and Economy by Pratik Gupta.
● Additionally, handouts for some topics will be provided to students on the Telegram
channel.
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Economy
CH1: Introduction
Lecture 02: Basics of Economy
Factors of Production:
● Ineconomics, factorsofproduction refertotheresourcesusedtoproducegoodsandservices.
These includeLand,Labour,Capital,andEntrepreneurship.Theseresourcesareessentialfor
the efficient utilization of economic inputs.
○ Land:- Referstonaturalresourcesandgeographicalspaceusedforproduction.Theincome
generated from land is termed asrent.
○ Labor:- Represents the human effort, both physical and mental, used intheproduction
process. Workers receivewagesas compensation for their labor.
○ Capital:- Comprisestools,machinery,andfinancialassetsthataidproduction.Theincome
earned from capital investment is known asinterest.
○ Entrepreneurship:- Involves the vision, risk-taking, and management skills required to
bringtogetherotherproductionfactors.Entrepreneursearnprofitfortheirroleincreating
and managing the business.
● The total income generated by these factors is collectively referred to as factor income.
Definition of Economics:
● Economics is the study of how societies allocate limited resources to produce goods and
services and how these goods and services are distributed among individuals.
Importance of Economy in Daily Life:
● Economics plays an important role in our daily lives, influencingourchoicesandshapingthe
world around us. From the prices we pay for goods and services to the decisions made by
businesses, economics is present everywhere.
● Ithelpsusunderstandhowmarketsfunction,howgovernmentsmakepolicies,andhowwecan
make informed decisions about our money, capital, and finances.
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● Example: Despite its limited landmass, Japan has effectively managed its resources, utilizing
them with exceptional efficiency to drive economic growth.
Definition of Economy:
● Economy re fers to the system within a region orcountry,whereproduction,distributionand
consumption of goods and services occur.
Economics vs. Economy:
● In short, economics is the study of the theoretical field while economy is the system or
practical implementation of economics. Example: Indian Economy, US Economy, etc.
Mobilisation of Resources:
● Itreferstotheprocessofgatheringandallocatingfinancial,human,ormaterialresourcesto
producevariousgoodsorservices.Itinvolvesidentifyingavailableresources,bringingcapitalfor
money or finance and efficiently using them for productive use.
● In economics, it often refers to raising money to do certain business activities. Effective
resource mobilization, ensures sustainability, supports growth, and enables companies and
government to meet their objectives efficiently.
● Efficient transport infrastructure, such as roadways, waterways, and airways, plays a crucial
role,alongwithskilledandeducatedlaborthatcaneffectivelyutilizetheseresourcestoensure
optimal production and achieve desired outcomes.
Note:
Efficient:Achieving maximum productivity with minimum wasted effort or resources.
Economical: Providing good value or service in relation to the amount of money, time, or
resources spent.
Effective:Producing a desired result or outcome; successful in achieving its intended purpose.
Use of Resources:
○ Resources should be used efficiently, economically, and effectively.
○ In the economy, decision of utilization of resources in two levels:
○ Microeconomics
○ Macroeconomics
Types of Economics
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1. Microeconomics:
● Thisbranchofeconomicsstudiesindividualunitswithintheeconomy,suchashouseholds,
businesses, and markets.
● It examineshowtheseentitiesmakedecisions,allocateresources,andinteractwithinthe
marketplace. Key topics include demand and supply, pricing, and consumer behavior.
2. Macroeconomics:
● Macroeconomics deals with the economy as a whole. Itlooksataggregateindicatorslike
GDP, inflation, unemployment, and fiscal policies to understand and influence the overall
economic performance.
● This area of economics focuses on broad economic factors that impact the nationaland
global economy, such as monetary policy and international trade.
Behavioral economics:
● Behavioral economics is abranchofeconomicsthatcombinespsychologyandeconomic
theory to understand how people actually make decisions. Unlike traditional economics,
whichassumespeoplealwaysmakerationalchoices,behavioraleconomicsrecognizesthat
individuals often make decisions based on emotions, biases, and cognitive shortcuts.
● This field studies how factors likefearofloss,socialinfluence,andlimitedinformation
can lead to choices that deviatefrompurelogicoreconomicbenefit.Throughconcepts
like "nudges" small changesinhowchoicesarepresented,behavioraleconomicsaimsto
improve decision-making in areas like finance, health, and public policy.
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ECONOMY
CH 02: National Income and GDP
Lecture 01: GDP and GNP
National Income Accounting
● National Income Accounting measures a country’s economic activity, withGDP as its key
indicator.
● Developed by Simon Kuznets in the 1930s, GDP calculatesthe total monetary value of
goods and services produced.
● Adopted globally at the 1944 Bretton Woods Conference, GDP is used to assess economic
performance, guide policies, and compare nations’ economies.
Gross Domestic Product (GDP)is the total monetaryvalue of all goods and services produced
within a country’s geographical boundaries during a specific period of time.
GDP in India
● In India, GDP is calculated by theNational StatisticalOffice (NSO), which operates
under theMinistry of Statistics and Programme Implementation(MoSPI).
● The GDP data is released on aquarterly basisby theGovernment of India.
● GDP is aterritory-specific concept,focusing solelyon economic activity within the
country’s boundaries, regardless of the nationality of the producers.
This ensures GDP reflects the economic performance of the nation within its physical borders.
Gross National Product
● Gross National Product (GNP) represents thetotalmonetary value of all goods and
services produced by the nationals of a country,regardlessof where they are located
globally, during a given period.
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● GNPfocuses on the economic activities of a country’s citizens, whether they are within
or outside the country’s borders.
● GNP = GDP + NFIA,where NFIA (Net Factor Income fromAbroad) accounts for the
difference between income earned by nationals abroad and income earned by foreign
residents within the country.
● This measure highlights the economic contributions of a nation’s citizens worldwide.
Nominal GDP and Real GDP
● Nominal GDPmeasures the total value of goods andservices at current prices, including
inflation.
● Real GDPadjusts for inflation, measuring the valueat constant base-year prices.
For example,
● Nominal GDP (Current Market Prices) for 2023-24: ₹295.35 lakh crore.
This reflects the actual market value of goods and services produced, influenced by inflation,
making it higher than Real GDP.
● Real GDP (Constant Market Prices, Base Year 2011-12) for 2023-24: ₹173.81 lakh crore.
This provides a more accurate representation of economic growth by removing the effects of price
changes (inflation or deflation).
Base Year
● The base year is a benchmark year used for inflation-adjusted calculations like Real GDP.
Importance of Base Year Revision:
● Reflects structural changes in the economy.
● Ensures accurate and updated macroeconomic data.
● Aids effective policy making .
Criteria:The base year must be a normal year, freefrom disruptions like global crises.
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India’s Upcoming Base Year Revision
● Current Base Year: 2011-12
● Proposed New Base Year: 2022-23
● Chosen as a stable period after the pandemic recovery.
● Expected to reflect current economic realities, including the digital economy, green energy,
and updated production methods.
● Timeline:Likely to be implemented in February 2026,as per the recommendation of the
Advisory Committee on National Accounts and Statistics.
The Government of India (GOI) follows internationally recognized standards for national
accounts and economic data reporting:
● UN System of National Accounts (SNA):For consistentand comparable economic data
compilation.
● IMF Special Data Dissemination Standards (SDDS):Ensurestimely, accurate, and
transparent economic data for global comparison.
These frameworks enhance India’s economic reporting and global integration.
Base Price, Factor Cost and Market Price
● Factor Cost:The total cost of production, includingwages, rent, interest, and profit.
● Base Price:The price at which a good is sold to awholesaler or retailer, excluding taxes
and subsidies.
● Market Price:The final price paid by the consumer,including taxes and any applicable
subsidies.
For example:A farmer produces wheat at afactor costof ₹10,000 per ton. He sells it to a miller
at abase priceof ₹12,000 per ton. The miller processesit into flour and sells it to a retailer at a
higher price. The retailer then sells the flour to consumers at amarket priceof ₹13,200 per ton,
which includes a 10% tax.
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In India, GDP was previously calculated at factor cost, excluding taxes and subsidies. Now,
it is calculated at market prices, which includes taxes and excludes subsidies, providing a
more accurate reflection of economic activity.
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Economy
Chapter 02: National Income and GDP
Lecture 02: Methods of GDP Calculation
Problem of Double Counting:
● Gross Domestic Product (GDP)is defined as thecurrentvalue of all final goods and
services produced in a nation in a year.
● But what are final goods?
○ Statisticians who calculate GDP mustavoid the mistakeof double counting i.e.
counting output more than once as it travels through the stages of production.
○ For example, imagine what would happen if the governmentfirst counted the value
of tiers produced by a tier manufacturer and then counted the value of a new car
sold by an automaker that contains those tiers. The value of tiers would have been
counted twice because the price of the car includes the value of the tiers.
○ To avoid this problem, which would overestimate the size of the economy,the
government counts just the value of final goods and services in the chain of
production that are sold to the final customer.
Gross Value Added (GVA):
● Gross Value Added (GVA) is a metric that measures thevalue of goods and services
produced in a specific area, sector, or industry.
● It highlights the contribution of various sectors to the overall economy.
● GVA is used to calculate the Gross Domestic Product (GDP) by adding taxes on products
and subtracting any subsidies.
GVA = GDP + Product Subsidies - Product Taxes
OR
GDP = GVA + Product Taxes - Product Subsidies
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Depreciation:
● It refers to thereduction in the value of capitalassets(like machinery and plants)over
time due to wear and tear or aging.
● It represents the loss in the productive capacity of assets.
● Gross Valuerepresents the initial value of an assetbefore accounting for any depreciation.
Thus Gross in GDP means the depreciation of all those machines which were produced
earlier but consumed in the current year also.
● Net Valueis the value of an asset after accountingfor depreciation. It represents the
current value of the asset. If in GDP, depreciation is deducted then it is known asNet
Domestic Product.
Methods of GDP Calculation:
● Production/Output Method
● Expenditure Method
● Income Method
Production Method:
● The production method typically calculatestotal productionby adding together the
outputs of all goods and services produced within a given time frame, usually a year.
● This is also called the'Output method' or 'Valueadded method'.
GDP = Goods Produced During the Year
= Goods Sold During the Year - Opening Stock + Closing Stock
● Goods Produced During the Yearreflects the totalvalue of goods produced.
● Goods Sold During the Yearis the value of goods soldto consumers.
● Opening Stockis the value of goods in inventory atthe beginning of the year.
● Closing Stockis the value of goods in inventory atthe end of the year.
Expenditure Method:
● In a country, income earned is either spent on goods and services or saved and invested.
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● In this method,the total national expenditure incurred in a particular year is taken
into consideration to compute GDP.
GDP = C + I + G+ (X - M)
○ C:Gross Private Consumption Expenditure
○ I:Gross Private Investment
○ G:Government Purchases
○ X:Exports
○ M:Imports
○ (EX - IM):Net Exports (Exports minus Imports)
Income Method:
● GVA at Basic Price = CE (Compensation to employee) + OS (Operating Surplus)
+ MI (Mixed Income) + CFC (Consumption of Fixed Capital) + Production Taxes
- Production Subsidies
● GDP at Market Price = GVA at Basic Price + Product Tax - Product Subsidies.
● Components of GVA at Basic Prices (GVA at BP):
○ CE (Compensation of Employees):Total remunerationto employees, including
wages, salaries, and benefits.
○ OS (Operating Surplus):The surplus obtained fromproduction after subtracting
costs, including profits.
○ MI (Mixed Income):Income earned by self-employedindividuals and unincorporated
businesses that cannot be separately classified as compensation or operating
surplus.
○ CFC (Consumption of Fixed Capital):The depreciation of capital assets used in
production.
Real and Nominal GDP:
● Real GDP: Also known as"Constant GDP," it measures the value of goods and services
produced in an economy, adjusted for inflation.Itreflects the true growth of the
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economy byusing prices from a base year, making it easier to compare economic
performance over time.
○ Constant GDPgives a more accurate picture of economicgrowth by removing the
effects of inflation.
○ Real GDPis calculated by any government for the purposeof finding the actual
growth i.e., the growth only in terms of quantity.
○ It is done by the Government by taking a particular year as a Base Year, whose
prices are used to multiply with the current year quantity.
○ Currently, the base year used by the Government of India is2011-12.
● Nominal GDP: Also known as"Current GDP,"it measuresthevalue of goods and services
produced in an economy at current market prices, without adjusting for inflation.It
includes theeffects of price changes, making it lessreliablefor comparing economic
growth over time.
○ Nominal GDPmeanscurrent year quantity multipliedby current year prices.
This concept is used toknow the current worth ofa countryand for comparison
purposes. It is not used to know the growth of the country.
○ The current target of the Government of India to achieve a $5 trillion economy is
as per Nominal GDP.
○ India is thefifth-largest economyin the world bynominal GDP.
● The growth element might have two things:An increasein Price and Increase in
Quantity.
● The main purpose of calculating real GDP in the country is toprovide the information
about real growth ratewhile on the other hand, thesize of the country is providedwith
the help of the nominal GDP of the country.
GDP at Current Price → Nominal GDP
GDP at Constant Price (Base Year) → Real GDP
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Economy
CH 02: National Income and GDP
Lecture 03 : Investment and savings
Topics covered :
● GDP at Purchasing Power Parity
● Concept of Saving and Investment
● Incremental Capital Output ratio
● Potential GDP
● Green GDP
GDP at PPP (Purchasing Power Parity)
● Purchasing power parity GDP adjusts a country’s GDP to accountfordifferencesinprice
levelbetweenthecountries,providingamoreaccuratecomparisonofeconomicoutputand
living standards.
● PPP GDP measures what a currency can buy in its own country compared to other
countries. It reflects the real value of goods and services, making it a useful tool for
comparing economy, relative sizes and purchasing power globally.
● As per IMF, In
dia’s GDP in 2024 is 16 trillion dollar which makes India third-largest
economy.
Concept of Saving and Investment:
● Savings:Itcanbedefinedasanamountthatisleftaftermeetingalltheexpensesfrom
thedisposable income of a person.
● Investment:Itistheprocessofbuyinganassetthatisacquiredtogenerateincomeover
a long period.
ICOR (Incremental Capital Output Ratio):
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● ICOR measures the efficiency of capital investment in generating economic growth.
● It represents the amount of the additional capital required togenerateoneadditional
unit of output (GDP).
● A lower ICOR indicates higher efficiency in converting capital into output, meaning less
capital is needed for growth,while ahigher ICOR indicates inefficiencyin the economy.
● ICOR can be improved by enhancing investment efficiency through better allocation of
resources, investment in advanced technology and promoting innovation.
● Improving infrastructure, workforce skills and governance can also reduce wastage and
increase productivity, leading to higher output with the same capital or thereby lowering
ICOR.
● It is a useful equation for assessing investment effectiveness and economic performance.
● ICOR has evolved from Harrod Domar’s Growth Theory of 1939 which stresses the
importance of savings and investment as key determinants of growth.
Potential GDP
● PotentialGDPrepresentsthemarketvalue,butratherthancapturingthecurrentstate
of a nation’s economic activity.
● It attempts to estimate the highest level of output an economy can sustainovera
period of time.Generally it assumes that an economy has achieved full employment.
● It serves as a theoretical benchmark for the economy’s productive capacity under the
best conditions.
● Factorssuchastechnologicalprogress,up-to-dateeducation,betterskilldevelopment,
labor force growth, and many other factors influence potential GDP.
● Deviation from potential GDP indicates periods of economic expansion or contraction,
providing insight into the health and performance of an economy.
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Green GDP
● Green Gross Domestic Product (Green GDP) adjusts the traditional GDP measure to
account for environmental cost and benefitsassociated with economic activities.
● It deducts theenvironmentaldegradationcostcausedbypollution,resourcedepletion,and
otherenvironmentaldamagefromGDP,providingamorecomprehensivepictureofeconomic
well-being.
● Green GDP aims to promote sustainable development by incorporating environmental
considerations into economic decision-making and policy formations, fostering a balance
between economic growth and environmental conservation.
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Economy
Ch02 : National Income and GDP
Lec 04 : Growth and Development
Growth and Development:
Economic Growth Economic Development
Economic Growth is the positive change
Economic development is thequantitative
in the indicators of the economy. It is
and qualitative changein an economy.
quantitativein nature,
Economic development refers to thereduction
Economic Growth refers to the increment
and elimination of poverty, unemployment,
in the amount of goods and services
and inequality within the context of a
produced by an economy.
growing economy.
Economic development means an
Economic growth means an increase in improvement in the quality of life and living
real national income / national output. standards,e.g. measures of literacy, life
expectancy, and health care.
India’s Rank in Certain Indexes at the Global Level:
● World Happiness Report, 2024:
➢ TheWorld Happiness Report is an annual publicationof the United Nations
Sustainable Development Solutions Network.
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➢ It contains articles, and rankings of national happiness based on respondent ratings
of their own lives, which the report also correlates with various life factors.
➢ The ranking uses six key factors to measure happiness:social support, income,
health, freedom, generosity, and absence of corruption.
➢ Top Performers: Finlandhas been crowned as the happiestnation,Denmarkis at
number two, followed byIcelandat number three.
➢ Worst Performers: Afghanistanwas ranked as the unhappiestnation.
th
➢ Indiaranks at126 position out of 143countries,making it one of the least happy
countries in the world.
● Social Progress Index, 2022:
➢ The Social Progress Index (SPI) measures the extent to which countries provide for
the social and environmental needs of their citizens.
➢ Fifty-one indicators in the areas of basic human needs, foundations of well-being,
and opportunity to progress show the relative performance of nations.
➢ The index is published by thenonprofit Social ProgressImperativeand is based on
the writings of Amartya Sen, Douglass North, and Joseph Stiglitz.
➢ India's rank is 117(it was 102 in 2019)with lowsocial progress with a score of
56.8/100 in 2020.
➢ In 2022, India's rank is 110 and the score is 60.19.
● Legatum Prosperity Index, 2023:
➢ The Legatum Prosperity Index is an annual ranking developed by theLegatum
Institute, a division of the private investment firm Legatum.
➢ The ranking is based on a variety of factors including wealth, economic growth,
education, health, personal well-being, and quality of life.
st
➢ India ranked 101 out of 167 countries(Last YearIndia ranked 101, and in safety
th th th
and Security 138 place, Natural Environment- 160 ,Personal freedom 106 ,
st
Enterprise Condition- 51 Place).
● Global Hunger Index, 2022:
➢ Global Hunger Index developed by theInternationalFood Policy Research
Institute (IFPRI).
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➢ In the 2023 Global Hunger Index,India ranks 105th out of the 127 countrieswith
sufficient data to calculate 2023 GHI scores.With a score of 28.7 in the 2023
Global Hunger Index, India has a level of hunger that is serious.
➢ Values from 0 to 9.9 reflectlow hunger,values from 10.0 to 19.9 reflectmoderate
hunger, values from 20.0 to 34.9 reflectserious hunger,values from 35.0 to 49.9
reflectalarming hunger, and values of 50.0 or morereflectextremely alarming
hungerlevels.
● HUMAN DEVELOPMENT REPORT 2023-24
➢ The Human Development Index (HDI) is a composite indexthat is used to rank
countries in terms of Human Development.
➢ It is published by the Human Development Report Office for theUnited Nations
Development Programme (UNDP).
➢ A country scores a higher HDI when the lifespan is higher, the education level is
higher, and the gross national income GNI (PPP) per capita is higher.
➢ It was developed by Pakistani economist Mahbub ul Haq, with help from Gustav
Ranis of Yale University and Meghnad Desai of the London School of Economics.
➢ It is calculated using four indicators —life expectancyat birth, mean years of
schooling, expected years of schooling, and the Gross National Income (GNI)
per capita.
➢ The index rates countries on a scale of 0 to 1, with countries with a higher rating
being more developed (in terms of human development) than countries with a
lower rating. Therefore, the closer a score is to one, the greater the level of human
development.
➢ According to the 2023-24Human Development Report(HDR), titled ‘Breaking
the Gridlock: Reimagining Cooperation in a Polarised World,’ India ranks 134 on
the global Human Development Index (HDI).Switzerlandhas been ranked number
one.
● Corruption Perceptions Index, 2023:
➢ The Corruption Perceptions Index (CPI) is an index published annually by
Berlin-basedTransparency International since 1995which ranks countries "by
their perceived levels of public sector corruption, as determined by expert
assessments and opinion surveys.
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➢ If the score is 99-50, then the country is perceived as less corrupt, and 49-0, the
country is perceived as more corrupt.
rd
➢ Indiais at93 place with a score of 39.
➢ This year's top countries areDenmark, Finland, andNew Zealand.
● Global Peace Index, 2023:
➢ Produced by theInstitute for Economics and Peace (IEP), the Global Peace Index
(GPI) is the world’s leading measure of global peacefulness.
➢ This report presents the most comprehensive data-driven analysis to date on trends
in peace, its economic value, and how to develop peaceful societies.
➢ The Global Peace Index covers 99.7% of the world’s population, is calculated using
23 qualitative and quantitative indicators from highly respected sources, and
measures the state of peace across three domains:
● the level of Societal Safety and Security,
● the extent of Ongoing Domestic and International Conflict,
● and the degree of Militarisation.
➢ India's rank is 126th out of 163 nations in 2023.
● Global Terrorism Index, 2023:
➢ The Global Terrorism Index (GTI) is a comprehensive studyanalysing the impact
of terrorism for 163 countries covering 99.7 percent of the world’s population.
➢ The GTI report is produced by theInstitute for Economics & Peace (IEP)using
data from Terrorism Tracker and other sources.
➢ The GTI produces a composite score so as to provide an ordinal ranking of countries
on the impact of terrorism.
➢ The GTI scores each country on a scale from 0 to 10; where 0 represents no impact
from terrorism and 10 represents the highest measurable impact of terrorism.
➢ Given the significant resources committed to counter-terrorism by governments
across the world, it is important to analyse and aggregate the available data to
better understand its various properties.
➢ One of the key aims of the GTI is to examine these trends. It also aims to help
inform a positive, practical debate about the future of terrorism and the required
policy responses.
➢ India ranks 14 in this index with a score of 6.324.
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Problem with GDP as a concept :
● GDP does not measure the overall standard of living or well-being of a country:
GDP counts both positive and negative events. For example, when an earthquake strikes
and requires rebuilding, GDP increases.
● Similarly, when someone falls ill and money is spent on their healthcare, it contributes to
GDP. However, nobody will argue that we are better off from destructive earthquakes
and/or people getting sick.
● GDP does not account for pollution costs:Two economies with the same GDP per capita
but one has polluted air and water while the other does not, their well-being will be
different but GDP per capita won’t capture it. GDP is not telling what’s all happening with
the citizens of the country.
● GDP does not provide information about environmental degradation and resource depletion:
● GDP provides limited information about sustainability.
● The quality of life also depends on the distribution of GDP among the residents of the
country and not just the overall level.
● GDP does not provide insight into the well-being of citizens.
Per capita income:
● Per capita incomeis a measure of the average incomeearned per person in a given area
(city, region, country, etc.) in a specified year.
● NNP at Factor Cost = GNP (Gross National Product) - Depreciation
● This provides an estimate of the average income or economic well-being of the population
on average.
Per Capita Income = NNP at Factor Cost / Total Population
Inclusive growth:
● Inclusive growth refers to economic development that benefits all segments of society,
particularly marginalized and vulnerable groups.
● It emphasizes reducing disparities in income, wealth, and opportunities, ensuring that the
benefits of growth are shared equitably.
● Inclusive growth policies prioritize investment in education, healthcare, infrastructure, and
social protection programs to empower individuals and communities, promote social mobility,
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and foster a more inclusive and sustainable society where everyone has the opportunity to
participate and prosper.
Gini Coffecient:
● The Gini coefficient measures income inequality, ranging from 0 (perfect equality) to 1
(perfect inequality).
Prelims PYQs :
Que 1. Increase in absolute and per capita real GNP do not connote a higher level of economic
development, if (UPSC 2018)
(a) industrial output fails to keep pace with agricultural output.
(b) agricultural output fails to keep pace with industrial output.
(c) poverty and unemployment increase.
(d) imports grow faster than exports.
Answer :C
Que 2. Despite being a high saving economy, capital formation may not result in significant
increase in output due to (UPSC 2018)
(a) weak administrative machinery
(b) illiteracy
(c) high population density
(d) high capital-output ratio
Answer :D
Que 3. Consider the following statements:
1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the
same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statements given above is/are correct? (UPSC 2019)
(a) 1 only
(b) 2 only
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(c) Both 1 and 2
(d) Neither 1 nor 2
Answer :A
Que 4. With reference to the Indian economy, consider the following statements:
1. The rate of growth of Real Gross Domestic Product has steadily increased in the last decade.
2. The Gross Domestic Product at market prices (in rupees) has steadily increased in the last
decade.
Which of the statements given above is/are correct? (UPSC 2015)
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer :B
Que 5. Economic growth in country X will necessarily have to occur if (UPSC 2013)
(a) there is technical progress in the world economy.
(b) there is population growth in X.
(c) there is capital formation in X.
(d) the volume of trade grows in the world economy.
Answer :C
Que 6. The national income of a country for a given period is equal to the (UPSC 2013)
(a) total value of goods and services produced by the nationals.
(b) sum of total consumption and investment expenditure.
(c) sum of personal income of all individuals.
(d) money value of final goods and services produced.
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Answer :A
Mains PYQ
Que. Among several factors for India’s potential growth, the saving rate is the most effective
one. Do you agree? What are the other factors available for growth potential? (UPSC 2017, 10
Marks, 150 Words)
Que. Despite consistent experience of high growth, India still goes with the lowest indicators of
Human Development. Examine the issues that make balanced and inclusive development difficult
(UPSC 2019, 10 Marks, 150 Words)
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Economy
Ch 03 : Reserve Bank of India
Lecture 01 : Banking and Finance
Banking and finance :
1. Why do we need a bank?
2. Why do we need a central bank?
3. RBI and its functions (RR, CRR, SLR, REPO etc.)
4. Commercial bank
5. Interest rate determination (Base rate, MCLR, EBLR)
6. Basel norms
7. Monetary Aggregates
8. Current issues related to banking.
Why Do We Need a Bank?
● Banks help people save their money in safe custody.
● To save their money, people deposit it with banks. Banks give interest on the money
deposited by people, thus adding to the income of families.
● Banks, as financial institutions, also issue credits. Through capital markets, lending
activities can be carried out directly or indirectly.
● A bank can translate savings into investments.
● Commercial banks exhibit the money multiplier effect by accepting deposits, holding a
certainamountasareserve,andthendispersingthefundsasloanstoaddliquiditytothe
economy.
● Banks help channelize funds from those who are financially well-off to support thosein
need of aspiring entrepreneurs.
Difference between Savings Account and Current Account:
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● A savingsaccountisadepositaccountthatallowslimitedtransactions,whileaCurrent
Account is meant for a large number of daily transactions and usually has less/no
restriction on transaction limit.
● Savings accounts earn interest, while there is no such earning from a Current Account.
Demand and Time deposits:
● Demand deposits: These are deposits that banks have to pay on demand.For example:
Savings Bank Account deposits
● Time deposits: These are deposits that bankshavetopayafteraspecifictimeperiod.
For Example:Fixed Deposits
Assets and Liabilities of Bank:
● Theassetsare items that thebank owns.This includesloans, securities etc.
● Liabilities are items that thebankowestosomeoneelse,includingdepositsandbank
borrowing from other institutions.
● In case of any bank, deposits of the bank are the liabilities of the bank.
● In case of any bank there are two types of deposits, demand deposits and time deposits.
● Demand deposits are nothing but savings and current deposits of the bank and time
deposits are fixed deposits of the bank.
● Demand deposits and time deposits are together known as“Total deposits"of the bank.
And the deposits and liabilities of banks are technically known as“Total Demand and
Time Liabilities” (TDTL).
● Loans are bank assets.
Islamic Banking
● Islamic banking is based on the principle that interest, or riba, is forbidden.
Instead, Islamic banking focuses on sharing risk and profit equally between the
bank and the customer.
Reserve Bank of India
● The Reserve Bank of India was set up in1935,andworks in accordance with the provisions
of theReserve Bank of India Act of 1934.
● In 1949 after independence, the Government of India took over the control of RBI and
nationalised it.
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● The Central Office of the Reserve Bank was initially established in Kolkata but permanently
moved to Mumbai in 1937.
● In addition to the headquarters, the RBI has many regional offices and a few sub-regional
offices.
● It is headed by the Governor with the first governor of the RBI in 1934 wasSir Osborne
Smith, while the first governor of the RBI in independentIndia wasC.D. Deshmukh.
● The current Governor isSanjay Malhotra. The Governorof RBI is assisted by not more
than four deputy governors.
● The current deputy governors areShri SwaminathanJ, Shri M. Rajeshwar Rao, Shri T.
Rabi Sankar and ShriDr. M.D. Patra.
Is the RBI Constitutional Body?
● RBI is astatutory bodybecause it is establishedby the law of the parliamentRBI act,
1934.
● Also RBI isnot a constitutional bodyas it is notmentioned anywhere in the constitution.
● RBI is not an autonomous body. Accordingtosection7andsection58oftheRBIAct,
1934 the Government of India can interfere in the working of RBI.
○ Section7:TheCentralGovernmentmayfromtimetotimegivesuchdirections
totheBankasitmay,afterconsultationwiththeGovernoroftheBank,consider
it necessary in the public interest.
○ Section 58: The Central Board may, with the previous sanction of the Central
Government, by notification in the Official Gazette, make regulations consistent
with this Act to provide for all matters for which provision is necessary or
convenient for the purpose of giving effect to the provisions of this Act.
Central Board of RBI
● TheReserveBankofIndia'saffairsaregovernedbyacentralboardofdirectorsappointed
by the Government of India under the Reserve Bank of India Act.
● Official Directors: The boardconsistsofofficialdirectors,includingtheGovernorandup
to four Deputy Governors, serving full-time.
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● Non-Official Directors: Additionally, there are non-official directors, including ten
nominated by the government from various fields, two government officials, and four
directors representing local boards.
● Function: The members are appointed/nominated for four years. The board's primary
function is the general superintendence and direction of the Bank's affairs.Directorsare
appointed for a four-year term.
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Economy
Ch 03 : Reserve Bank of India
Lecture 02 : Functions of RBI
Monetary Policy
● MPCwasconstitutedbythegovernmentofIndiain2016byintroducinganamendmentto
RBI act, 1934.
● It comprises six members i.e. three ,members from RBI and three members from the
government of India.
● The Governor of RBI is the chairman ex-officio of the committee.
● Decisions are taken by majority with the governor having a casting vote in case of a tie.
● The MPC is supposed to meet at least once in a quarter and need to decide on the
following matters :
○ To fix the rate of interest.
○ To control the inflation as per monetary policy framework agreement.
○ To publish a monetary policy reportinwhichRBIneedstospecifythesourcesof
inflation and the measure it took to control it.
Functions of RBI :
● Banker to the Government: RBI acts as a banking agent and financialadvisortothe
Central as well as the State Governments.
● Itmanagesgovernmentaccountsandtreasuries.Itperformsthefunctionofcreditingloans
to the governments without any interest for the short term.
● RBI buys and sells Government Securities (G-Secs) on thegovernment'sbehalf.Itgives
monetary and financial advice to the governments.
● BankerstotheBank:RBIistheguardianofthebankingsystemandthemoneymarket.
All the other banks in the country keep their part of cash balances with RBI as a
deposit to meet theliabilities in times of crisis.
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● RBI handles theborrowing program of the central and state government.
● RBIisthesoleauthoritytoissuecurrencyinthecountry.Tworupeeandabovenotesare
printed by RBIand one rupee notes and coins are minted by government of India but
distributed by RBI on behalf of RBI.
● AsperSection24oftheRBIAct,1934,RBIcanprintanoteuptoRs.10000.Thedesign
and material of notes to be used is given under section 25 of the RBI Act, 1934.
○ The government of India mints coins as per Indian Coinage Act, 2011. As per
Section4ofthislaw,theGovernmentofIndiacanmintcoinsuptoRs.1000.As
per Section 6 of this law, the maximum payment that can be done with the
help of coins is Rs. 1000.
● IssuerofBankNotes:RBIissuescurrencyonthebasisofminimumreservesystem,under
which it keeps a minimum backing of 200 crore rupees to maintain gold and foreign
currencyreservesoutofwhichaminimumof115croreshouldbeingoldand85crores
as foreign government securities.
● Custodian of Foreign Exchange Reserves: RBI enjoys the sole authority ascustodianof
the nation's foreign exchangereserveandalsomanagestheForeignExchangeReservesof
the country.
● To stabilize the rupee's external value, the RBI maintains the reserves of foreign
currencieswhich also helps to stabilise the exchange rate and promote international trade.
● LenderofLastResort:RBIisnotonlyabankertothebanksbutalsoalenderoflast
resort.
● That means,intimesofcrisis,theScheduledCommercialBanksapproachtheRBItoget
financial assistance.
● AsRBIisthelenderoflastresort,itgivesopportunity,enablingitselftoexercisecontrol
over the banking system of the country.
● RBIisthecontrollerofcredit/loansgivenbythecommercialbanks.Itcontrolsthecredits
on the basis of two methods :
○ Quantitative methods : CRR/ Reserve ratio, SLR(Statutory reserve ratio), Repo
Rate,ReverserepoRate,StandingdepositFacility,MarginalStandingFacility,Bank
Rate.
○ Qualitative methods : Priority sector lending, Regulating loans for consumption
purpose, Variation in margin requirement, Moral suasion, Direct action.
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Quantitative methods:
● Cash Reserve Ratio (CRR):
○ The Cash Reserve Ratio (CRR) is a percentage of the total deposits of
customers,whichcommercialbankshavetoholdasreserveswiththecentralbank
(RBI).
○ It is a tool used by the central bank tocontrol liquidityin the economy.
○ ThecurrentCRRis4%.InIndia,abankisrequiredtomaintainthisreservewith
RBI asa percentage of net demand and time liabilities asofthelastFridayof
the second preceding fortnight as RBI may notify from time to time.
○ CRR is defined underSection42oftheRBIAct1934andcurrently,thereisno
upper and lower limit of CRR.
○ When theCRRishigher,bankshavelessmoneytolend,whichcanhelpcontrol
inflation.
○ Ontheotherhand,loweringtheCRRincreasestheamountofmoneythatbanks
can lend, stimulating economic growth during slowdown.
○ WhentheRBIincreasesCRR,itisknownasatightmonetarypolicy.Whenthe
RBI decreases CRR,it is known asa liberal monetarypolicy.
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Economy
Ch03: Reserve Bank of India
Lec 03 : RBI as a credit controller
Credit Controller: The Reserve Bank of India is the controller of the credit system in the
economy created by commercial banks. It controls the creditonthebasisoftwomethodsand
these methods are also known as credit controllers.
Quantitative Tools :
● Statutory Liquidity Ratio (SLR):
○ SLRisthepercentageoftotaldepositsthatmustbeheldinliquidassetssuchas
cash,goldorgovernmentapprovedsecuritiesasmandatedbyRBI.Itensuresbanks
maintain financial stability and have enough reserves to meet customer
withdrawal.
○ SLRalsohelpscreditflow,inflationandliquidityintheeconomy.Allthebanksin
India need to maintain this ratio, currently 18%ofNDTL(Totaldepositsofthe
bank). SLR is defined under
○ SLR is defined under Section 24 of the Banking Regulation Act, of 1949 and
currently,thereisanupperlimitofSLRas40%andthereisnolowerlimitto
it.
● Repo Rate:
○ It is the interest rate at which the RBI provides liquidity under the liquidity
adjustment facility to all banks against the collateral, pledge, mortgage of
government and other approved securities.
○ The currentRepo Rate is 6.50%.
● Fixed Reverse Repo Rate:
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○ It is the interest at which RBI absorbs the liquidity from banks against the
collateral of eligible government securities.
○ Following the introduction of the standing deposit facility, the fixed reverse repo
operationswillbeatthediscretionofRBIforthepurposesspecifiedfromtimeto
time.
○ This rate is currently 3.35%. Repo rate and Reverse repo rate are given under
section 17(12AB) of RBI Act, 1934.
● Standing Deposit Facility:
○ ItistherateatwhichtheRBIacceptsnon-collateralizeddepositsonanovernight
basis from all the banks.
○ The SDF is also a financial stability tool in addition to its role in liquidity
management.TheSDFrateisplacedat0.25%lessthanthepolicyreporate.With
theintroductionofSDFinApril2022,theSDFratereplacedthefixedreverserepo
rate.
○ The current SDF rate is6.25%.
● Open Market Operation (OMO):
○ The Open market operations are operations whichareconductedbyRBIinIndia
under which it purchases/sells government securities to increase or decrease
liquidity into the banking system.
○ Itgenerallysellsgovernmentsecuritiesinthetimeofinflation(toreduceliquidity)
and buys government securities in times of slowdown (to increase the liquidity).
● Marginal Standing Facility (MSF)
○ MSF is the penalty rate of interest at which banks can borrow on an overnight
basis, from RBI by dipping into their SLR portfolio up to a predefined limit
(current 2% of total deposit).This provides a safetyvalve against unanticipated
liquidity shocks to the banking system.
○ The MSF rate is placed at 0.25% above the policy repo rate. Currently, it is 6.75%.
● Note:
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○ SDF is 0.25% less than the Repo rate.
o MSF is 0.25% above the Repo rate.
o The Repo Rate is called the Policy Repo Rate (the most important rate in the
country right now)
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Indian Economy
Ch03: Reserve Bank of India
Lecture 04 : Qualitative Tools
Repo rate: It is the rate at which banks avail refinancing facility of loans from RBI by pledging
government of India approved securities.
Bank Rate:
● It is the rate at which theRBI is ready to buy or rediscount bills of exchange or other
commercial papers.
● The bank rate acts as thepenal rate charged on banks for shortfall,in meeting their
reserve requirements (CRR and SLR).
● The bank rate ispublished under Section 49 of the RBI Act 1934.This rate has been
aligned to the MSF rate and therefore changes automatically as and when the MSF rate
changes alongside policy rate changes.
● This rate atpresent is 6.75%.
● RBI increases the Bank rate at the time of inflationanddecreases the Bank rate
during the time of slowdown.
Long-Term Repo Operation (LTRO):
● Under LTRO, RBI provideslonger-termloans(1to3years)tobanksattheprevailing
reporate.Asbanksgetlong-termfundsatlowerrates,theircostoffundsfalls.Inturn
they reduce interest rates for borrowers.
● LTROhelpedRBItoensurethatbanksreducetheirrateofinterestwithoutreducingpolicy
rates.
Liquidity Adjustment Facility (LAF):
● A Liquidity Adjustment Facility (LAF) is a tool used in monetary policy, mainly by the
ReserveBankofIndia(RBI),whichenablesbankstoborrowmoneythroughrepurchase
agreements or banks to lend to the RBI using reverse repo contracts.
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● The LAF refers to the RBI’s operation through which it increases/ decreases liquidity
into/from the banking system.
● ItconsistsofovernightaswellasLong-termRepo/ReverseReporates(fixedaswellas
variable repo), SDF, and MSF.
● ApartfromtheLAF,instrumentsofliquiditymanagementincludeopenmarketoperations,
the Market Stabilization Scheme (MSS), and Forex Swaps.
Important Terminologies
● Rediscount: A rediscount is a process where the banks or financial institutions sellor
discountpreviouslydiscountedbillsofexchangeorpromissorynotewiththecentralbank
to access liquidity and maintain financial stability.
● Refinancing:Itistheprocessoftakingloansfromtheexistingsecuritiesissuedbythe
government of India for financing its requirements.
Variable Rate Term Repo:
● Under this, a bank can borrow/land from/to RBI at a variable repo/reverse repo rate.
● The RBIseparately announces guidelineson the amount they wish to inject or absorb
from the system. (Bids for borrowing that is for repo are more than repo rate and the bids
for lending to RBI is less the reverse repo or SDF)
● In case of a repo, variable rate bids at or below the repo rate will be rejected.
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Economy
CH03: Reserve Bank of India
Lecture O5 : Commercial Banks
The Qualitative Tools of the Reserve Bank of India (RBI) include:
1. Rationing of Credit [Priority Sector Lending (PSL)]
2. Regulating Loans for Consumption Purposes
3. Variation in Margin Requirements
4. Moral Suasion
5. Direct Action
Priority sector lending
● It is an initiative by the RBI to ensure that certain sectors of the economy,critical for
inclusive growth receive adequate credit. Banks are mandated to allocate a specified
percentage of total loans to these priority sectors.
● For Example : Currently 40% of the total credits of the banks in India are reserved for the
priority sectors. The priority sectors include
○ Agriculture
○ Micro, Small and Medium Enterprises (MSMEs)
○ Export credit
○ Education
○ Housing
○ Social Infrastructure(Schools, Healthcare, Drinking water facilities and sanitation
facilities)
○ Renewable Energy
○ Weaker section of the societies
● Out of the 40% priority sector lending:
➢ 18% is reserved for the agriculture sector (10% for marginal farmers)
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➢ 12% for weaker sections
➢ 7.5% for micro-enterprises.
Regulating loans for consumption purpose :
● RBI regulates loans given by banks for consumption purposes to ensure responsible credit
usage and to prevent excessive borrowing for non-productive activities.
Variation in Margin Requirements:
The RBI adjusts margin requirements to regulate credit/loans flow in the economy. By increasing
margin it reduces the borrowing capacity to control price rise and inflation while decreasing margin
encourages borrowing for economic growth, ensuring financial stability and balances credit
distribution.
Moral Suasion:
● It is acombination of persuasion and pressure,under which RBI using persuasion, advice
or informal request to influence banks and financial institutions to follow desired policies
and practices such as controlling credit, managing inflation or ensuring financial stability
without resorting to formal directives or legal measures.
Direct Action
● RBI may take punitive measures against banks that disregard its moral advice and operate
against its guidelines or the interest of its depositors.
● These actions include imposing a penalty interest rate, denying refinancing and
rediscounting facilities, imposing a moratorium on banking activities, or even extreme steps
of canceling bank operating licenses.
Commercial Banks in India
● Commercial Banks are banking organizations that deal with the deposits and loans of
businesses.
● They operate under the B
anking Companies Act, of 1956.
● These banks are runsolely for profitmotive and notfor the purpose of charity.
● They issue bank checks and drafts and accept term deposits.
● Thefirst commercial bank in India was Oudh/AwadhCommercial Bank which started in
1881.
● Punjab National Bankstarted in1894,was the first bank, commercial in nature, which
continues to function till date.
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● There are12 Scheduled Public Sector Banks, 21 Scheduled Private Sector Banks, 12
Scheduled Small Finance Banks, 4 Scheduled Payments Banks, 43 Scheduled Regional
Rural Banks and 40-45 Scheduled Foreign banks in India.
Note:
● First Bank in India was theBank of Hindustanestablishedin1770.
● Later the General Bank of India started in1786.Boththe Banks served only the
Britishers and did not provide banking services to the people at large.
● Thefirst foreign Bankin India was established in1858.Its name wasChartered Bank.
Scheduled Commercial Banks:
● Banks that we deal with on a day-to-day basis are technically called the Scheduled
Commercial Banks.
● A Scheduled Commercial Bank is a bank that islistedunder the second schedule of the
Reserve Bank of India Act, of 1934.
● To be part of the second schedule of the RBI, the bank needs to fulfill two requirements:
○ The Paid up capital of the bank should bemore thanRs 5 lakhs.
○ The banks should work in theinterests of the depositors.
● A scheduled commercial bank enjoys the patronage of the RBI which means that in
difficult times RBI will help the bank.
● Schedule banks are classified into:
➢ Scheduled Public Sector Banks
➢ Scheduled Private Sector Banks
➢ Scheduled Small Finance Banks
➢ Regional Rural Banks
➢ Foreign Banks
➢ Payment banks
Nationalization of Banks:
● In around1951, the government of India adoptedHarrodDomal Modal.
● On 1 July 1955, as the premier commercial bank in the country, theImperial Bankwas
nationalized to create theState Bank of India.
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● Later, the S
tate Bank of India (Subsidiary Banks) Act was passed in 1959which
enabled theState Bank of Indiato take over sevenformer State-associated banks as
its subsidiaries (later named Associates).
● In 1969,14 Private Banks,whosedeposits were morethan 50 crore rupees,were
nationalized.
● In 1980, 6 more private banks whose deposits were more than 200 crore rupees were
nationalized.
Merger of Banks :
● Oriental Bank of Commerce (OBC)and theUnited Bankof India (BOI)are merged into
Punjab National Bank.
● Canara Bank and Syndicate Bankare merged.
● Union Bank of Indiamerged withAndhra Bank and CorporationBank.
● TheIndian Bankwill be combined withAllahabad Bank.
● Vijaya Bank and Dena Bankwere merged withBank ofBaroda.
Advantages of Merger of Banks:
● Increase in the assets of the Banks:The merger wouldresult in an increase in the
assets of the banks which can then provide more funds for investment activities in the
country.
● Enables diversification of activities of the Banks:Merger of banks enables diversification
of activities of the banks which can expand the market access of the banks.
● Increase the efficiency of the Banks:It would increasethe efficiency of the banks and
lower the risks of bankruptcy.
Regional Rural Banks (RRBs):
● Regional Rural Banks (RRBs) were established under the provisions of an ordinance passed
in September 1975 under the RRB Act, 1976 to provide sufficient banking and credit
facilities for agriculture and other rural sectors.
● These banks were set up on the recommendation of theNarasimham Committee.
● The development process of RRBs started on Oct 2, 1975, with the formation of the first
RRB, thePrathama Bank.
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● RRBs are owned by the stakeholders in afixed proportion of 50:35:15, with the central
government owning 50%, the sponsor bank owning 35%, and the state government owning
15%
● Example : NABARD acts as sponsor bank for RRBs.
About NABARD :
● NABARD is India’s apex development bank, established to promote sustainable and
equitable agriculture and rural development.
● It is a fully owned Government of India entity established in 1982 under the National
Bank for Agriculture and Rural Development Act, 1981.
Cooperative Banks:
● These banks are registered under theCooperative Societies Act, of 1912.
● They are regulated by RBI under theBanking RegulationAct, 1949andBanking laws
(Application to Cooperative Societies Act, 1965).
● These banks are working at four Different Levels:
1. Primary Agricultural Cooperative Societies at thevillage level.
2. District Central Cooperative Banks at thedistrictlevel.
3. State Cooperative Banks at thestate level.
4. Primary Agricultural and Rural Development Banks forlong-term loans.
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Economy
CH03: Reserve Bank of India
Lecture O6 : Commercial Banks-2
Small Finance Bank:
● Small Finance Banks were established on the recommendations of the Nachiket Mor
committee.
● The small finance bank shall be registered as a public limited company under the
Companies Act, 2013.
● The smallfinancebankwillprimarilyengageinfundamentalbankingoperationssuchas
deposit acceptance, providing loans, and lending to unserved and underserved populations.
● It issues bothcredit cards and debit cards.
● 25% of their branches should be opened in rural areas.
● They are expected to offer 75% oftheirAdjustedNetBankCredit(ANBC)tosectors
qualifying for priority sector lending. Out of which50%ofloansaretobegiventothe
MSME sector.
Payment Bank:
● ThepaymentsbankwillberegisteredasapubliclimitedcompanyundertheCompanies
Act, 2013, and licensed underSection 22 of the Banking Regulation Act, 1949.
● Apaymentsbankislikeanyotherbank,butoperatingonasmallerscalewithoutinvolving
any credit risk.
● It can carry out most banking operations butcan’t advance loans or issue credit cards.
● It can accept demand deposits (up to Rs 1 lakh), offer remittance services, mobile
payments/transfers/purchases and other banking services like ATM/debit cards, net
banking, and third-party fund transfers.
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● Acceptance of demand deposits, i.e., current deposits, and savings bank deposits from
individuals, small businesses and other entities are permitted. It cannot accept fixed
deposits.
Lead Bank Scheme:
● The Lead Bank Scheme, introduced by the RBI in 1969, aims to promote financial
inclusion and regional development by assigning specific banks as lead banks for each
district.
● The Lead Bank is responsible for coordinating financial institutions to ensure effective
banking services, credit expansion, development of key sectors like agriculture, small
industries and rural areas.
● The scheme enhances collaboration between banks, government agencies, and local
authorities to address needs and reduce regional disparities.
Service Area Approach:
● The Service Area Approach (SAA) was introduced as a sub-scheme for the LeadBank
schemeinApril 1989.
● Under this scheme, each bank is to adopt or be given certain rural and semi-urban
areasto bring about intensive development.
Differential Rate of Interest Advances (DRI Advances):
● It was started in 1972, mandating every public sector bank to allocateupto1%ofits
total credit from the previous year to individuals living below the poverty line.
● Thiscreditisprovidedataninterestrateof4%,andtheincomecriteriaforeligibilityare
an annual income of₹24,000for urban families and₹18,000for rural families.
● Regardinglandownership,thelimitissetat1acreforirrigatedareasand2.5acresfor
unirrigated areas. However, these land eligibility criteria do not apply to SC and ST
families.
Interest Rate Determination:
● Base Rate:
➢ Thebaserateistheminimumrateofinterestofbanksbelowwhichbanksare
not allowed to lendto their customers except in the cases allowed by the RBI.
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➢ As per the guidance of RBI following people can be priced below the BaseRate,
such as differential rate of interest, loans to bank own employees, and loans to
bank depositors against their own deposits.
➢ Every bankneeds to calculate its Base rate on its own.
Marginal Cost of Funds-based Lending Rate (MCLR):
➢ Fromthefinancialyear2016–17(i.e.,from1stApril2016),banksinthecountry
to calculate their lending rate based on the new methodology called MCLR
(Marginal Cost of funds-based Lending Rate) or the repo rate, as articulated by
the RBI in December 2015.
➢ Accordingtotherule,everybankhastocalculateitsMCLRacrossdifferenttenors.
To this, the bank will add other components including operating costandtenor
premium.
➢ A tenor premium is compensation for theriskassociatedwithlendingforthe
long term.
➢ Taking all these component banks will publish MCLR for 1 day, 1 month, 3
months, 6 months, 1 year, and so on.
● Credit Information Companies are entities that collect, maintain, and provide credit
information reports on individuals and businesses.
● CIBIL is a credit information company which gathers data from various financial
institutionsincludingbanks,Non-BankingFinancialCompanies(NBFC),andcreditcard
companies.
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Economy
Chapter 04 :Commercial Banks in India
Lecture 03 : Money supply in India
Credit Information Companies:
● Credit Information Companies are entities that collect, maintain, and provide credit
information reports on individuals and businesses.
● Operating under regulatory frameworks, these companiesaccesscreditworthinessbasedon
financial history, payment patterns, and outstanding loans or outstanding debt.
● These companies play a crucial role in the financial sector by adding lenders in making
informed decisions on loan approvals or credit card approvals.
● In India, the major credit information companies includeCIBIL, Experian, etc.
● Their services facilitate responsible lending risk management and helpindividualsmonitor
and improve credit profiles, contributing to a healthier and more transparent credit
ecosystem.
SecuritizationandReconstructionofFinancialAssetsandEnforcementof
Securities Interest Act, 2002 (SARFAESI):
Their services facilitate responsible lending risk management and help individuals monitor and
improve credit profiles, contributing to a healthier and more transparent credit ecosystem.
● SARFAESI Act was enacted in India in 2002 to facilitate asset reconstruction and
improve the recovery of Non-Performing Assets (NPA) in the banking sector.
● Itempowersbanksandfinancialinstitutionstotacklenon-performingassets.Itempowers
banks and financial institutions to enforce security interest in defaulted loans allowing
them to take possession, sell, or lease collateral without court intervention,
● SARFAESI provides a faster and efficient mechanism for debt recovery, aiding in the
resolution of bad loans reducing the burden on the judicial system.
● Under this law, banks are empowered to take possession of collateral provided by the
borrower without the need for court intervention.
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● However, the law would not be applicable in three cases:
➢ If the amount of the loan isless than 1,00,000.
➢ If no collateral (unsecured loans) is provided for the purpose of the loan. For
Example: Personal loan.
➢ If the loan is below the 20% of the original principal amount.
● This act allowed the creation of Asset Reconstruction Companies (ARCs) andallowed
Banks to sell their NPAs to ARCs.(Theyarecalled‘Reconstruction’companiesasthey
are provided with theresponsibility of recovery of loans.)
➢ The ARCs are registered under theRBI underSection 3 of the SARFAESI Act.
➢ An ARC is a special type of financial institution that buys the bad loansand
assetsofthebanksatamutuallyagreedvalueandattemptstorecovertheloanor
bad loan or associated security(anything that has a monetary value)by itself.
● Call Money:
➢ It implies banks are borrowing/lending among eachotheronaday-to-daybasis,
i.e.,abankshortoffundsonaparticulardayisborrowingfromanotherbankthat
has a surplus amount.
➢ The rate of interest on this day-to-day lending is called the call money rate.
● In the same way,
➢ NoticeMoneymeansborrowingorlendinginunsecuredfundsfortenorsuptoand
inclusive of 14 days excluding overnight borrowing or lending.
➢ Term Money means borrowing orlendinginunsecuredfundsforperiodsexceeding
14 days and up to one year.
Monetary Aggregates and Money Supply:
● RBI takes stock of money supply in India from time to time on the basis of monetary
aggregate adopted by it i.e.,M1, M2 and M3.
● M1(currencywhichisused)isknownasnarrowmoneysupplyandM3isknownasbroad
money supply.
● The aggregate nowbeingusedaretherevisedaggregatebasedontherecommendationof
Y.V. Reddy committee in 1998.
● Among M1, M2 and M3,M3 is the largestin monetary aggregate.
● The equation expressing each of these is as follows:
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➢ M1 = Currency and coins with public + Demand deposit issued bythebanks(in
saving and current account) + 'Other' Deposits with the RBI.
(Other deposits with RBI are the deposits of thebankswithRBIintheformof
CRR).
➢ M2 = M1 + Certificates of Deposit (CD) issued by Banks + Term Deposits of
residents with a maturity of one year + Time Liabilities Portion of demand
Deposits with the Banking System.
➢ M3 = M2 + Term Deposits of residents with a contractual maturity of overone
year with the Banking System + Term borrowings between the Banking System.
➢ M0 = CurrencyinCirculation+Bankers'DepositswiththeRBI+'Other'Deposits
with the RBI.
➢ M0 is calledhigh powered moneyorreserved money.
Old Formulas used by the RBI:
● M1 =Currencyandcoinswithpublic+Demanddepositissuedbythebanks(insaving
and current account) + 'Other' Deposits with the RBI.
● M2= M1 + Post Office Saving Deposits
● M3= M1 + Term Deposits with the Banks
● M4 = M3 + Total deposits with Post Office savings organizations (excluding National
Savings Certificates)
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Economy
Ch04 : Commercial Banks in India
Lecture 04 : Basel Norms
Basel Norms:
● In 1974, due to the failureoftheHerstattBankofGermany,theG10countries,Spain
and Luxembourg formed a standing committee 1974 under the support of the Bank for
InternationalSettlements(BIS),calledtheBaselCommitteeforBankingSupervision.The
BIS is headquartered in Basel, Switzerland, hence the name.
● Till now,theBASELCommitteehasprovidedBASELnormsthrice,BASELI1998,BASEL
II 2004, and BASEL III 2010.
● The BASEL IV was decided to be implemented in January 2022, butinresponsetothe
COVID-19 pandemic, it was delayed till January 2023.
● RBI issued directives under which Indian banks need to follow Basel-III norms from 1st
April, 2013 and need to be fully implemented by 31st March 2019.
● As a BASEL norm we need to study four points,
○ Capital adequacy ratio
○ Liquidity Coverage Ratio
○ Leverage ratio
○ Net stable funding ratio
Capital Adequacy Ratio:
● Capital Adequacy Ratio (CAR) measures a bank’s financial strength by comparing its
capital to its risk weighted asset. It ensures that a bank has enough capital to absorb
potential losses and protect depositors money.
● AHigherCARensuresthebankismorestableandbetterabletohandlefinancialstress.
The regulator sets minimum CAR requirements to maintain trust in the banking system
and prevent bank failures.
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● AsperBaselIIInorms,thisrationeedstobemaintainedat8%butinIndia,asperRBI,
this ratio needs to be maintained at 9%.Outofthis9%,5.5%shouldbefromTierI
capital,1.5%shouldbefromAdditionalTierIcapitaland2%shouldbefromTierII
capital.
● InadditiontoCAR,2.5%oftier-Icapitalneedstobemaintainedinthenameofcapital
conservation buffer.
𝑇𝑜𝑡𝑎𝑙𝑢
𝑛𝑖𝑚𝑝𝑎𝑖𝑟𝑒𝑑𝑐 𝑎𝑝𝑖𝑡𝑎𝑙𝑓 𝑢𝑛𝑑𝑠
Capital Adequacy Ratio = 𝑇𝑜𝑡𝑎𝑙𝑟 𝑖𝑠𝑘𝑊
𝑒𝑖𝑔ℎ𝑡𝑒𝑑𝑎
𝑠𝑠𝑒𝑡𝑠
x 100
● Total Unimpaired capital = TierI(Permanentcapitalinthebusiness)+TierII(Non
Permanentcapitalinthebusiness)+AdditionalTierIcapitali.e.semi-permanentcapital
(debentures that are converted to equity)
● Total risk-weighted assets = Expected loss of the bank
Types of capital Funds:
1. Permanent Capital:
● Itrepresentstheportionofcapitalthatdoesnothaveafixedmaturitydateandis
not required to be repaid during the life of the entity.
● It provides stability to the company's financial structure.
● In banking terms, it is technically calledTier I capital.
2. Non-Permanent Capital:
● It consists of funds thathaveafixedmaturitydateandmustberepaidwithina
short period, typically less than a year.
● It is used to meet short-term financing needs such as inventory purchases or
seasonal fluctuations in cash flow.
● In banking terms, it is technically calledTier II capital.
3. Semi-Permanent Capital:
● This type of capital lies between permanent and non-permanent capital.
● Ithasalongermaturityperiodcomparedtonon-permanentcapitalbutmaynotbe
as permanent as equity capital.
● In banking terms, it is technically calledAdditional Tier I capital.
Leverage Ratio (LR):
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● The leverage ratio is calculated by dividing tier 1 capital by the bank's average total
consolidated assets.
● This ratio needs to be maintained by all the banks in India at 3.5% and for
domestically systemic important banks this ratio needs to be maintained at 4%.
● Domestic Systemic banks of India are theState Bankof India, ICICI, and HDFC.
Leverage Ratio = Tier 1 capital of bank / Bank's average total consolidated assets.
Liquidity Coverage Ratio (LCR):
● The LCR refers to highly liquid assets held by financial institutionsinordertomeet
short-term obligations.
● TheLCRisdesignedtoensurethatfinancialinstitutionshavethenecessaryassetsin
hand toride out short-term liquidity disruptions.
● Banksarerequiredtoholdanamountofhighlyliquidassetssuchascashorgovernment
bonds equal to or greater than their net cash outflow over a 30 days period (havingat
least 100% coverage).
Net Stable Funding Ratio (NSFR):
● It is the ratio we get after dividing the total available stable funding by the total
required stable funding.
NetStableFundingRatio=TotalAvailableStableFunding(ASF)/TotalRequiredStable
Funding (RSF)
Domestically Systemic Important Banks (DSIB):
● A few banks assume systematic importance due to their size, cross-jurisdictional
activities, complexity, lack of substitutability, and interconnectedness.
● The disorderly failure of thesebankshasthepropensitytocausesignificantdisruptionto
the essential services provided by the banking system. It also interferes withtheoverall
economic activities.
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● Thesebanksareconsideredsystemicallyimportantbanksastheircontinuedfunctioningis
critical for the uninterrupted availability of essential banking services to the real
economy.
● These banks are perceived as ones that areToo BigTo Fail (TBTF).
● Thisperceptionof TBTFcreatesanexpectationofgovernmentsupportforthesebanksat
times of distress
● Various factors areconsidered for giving DSIBstatusto a bank. There are:
Factors Weightage
1. Size 40% of weightage
2. Complexity 20% of weightage
3. Substitutability 20% of weightage
4. Interconnectedness 20% of weightage
● There are atotal three DSIBs in India:
1. State Bank of India(SBI)
2. Housing Development Finance Corporation Limited(HDFC)
3. Industrial Credit and Investment Corporation of India(ICICI)
● These DSIB banks have to hold some extra percent of the money with them. This
increases their strength from any collapse. These categories of percentages are called
bucket systems.
● TherearefivebucketsforDSIBbasedontier1capitalofthebank'sTotalRiskControlling
Assets (TRWA).These five buckets are,
1. 0.2%
2. 0.4%
3. 0.6%
4. 0.8%
5. 1%
● SBI falls in the 0.6%bucket of DSIB.
● HDFC and ICICI fall in the 0.2% bucket of the DSIB.
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● The bank which has the status of DSIB gets government support.
● These DSIB’s assets exceed 2% of the national GDP.
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Indian Economy
Ch04 : Commercial Banks
Lecture 05 : Current Banking Issues in India
Current Issues in the Banking Industry:
● Stressed assets:It is a broader term and comprises non-performing assets, restructured
loans, and write off.
○ Restructured Loans:A loan or asset which has beenrestructured by giving a
longer durationfor repayment, reducing the interestrate.
○ Non-Performing Asset (NPA):NPA is a loan whoseinterest/installment is due
for more than 90 days.
○ Write off:These are thoseloans or assets which arenot counted as dues. They
are compensated in some other way and banks have accepted it as a loss.
Normally, a bank writes off an NPAwhen all recoverymeasures are exhausted
and chances of recovery of loans are remote. However, banks are supposed to
continue recovery steps even after write-off.
● Provision of Bad Debt:Provision of bad debt is a kind of loss provided by the banks in
their accounts for future losses.
Note:
● Gross NPA (GNPA):
○ Gross NPA (GNPA) denotes the total of all the loan assets that haven't been
repaid by the borrowers within the ninety-day period.
○ It is the total sum of loans defaulted by the customer.
○ Thevalue of net NPAis the Gross NPA minus provisions.
Indradhanush Scheme:
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● The scheme waslaunched by the Government of India in 2015to revamp the working of
public sector banks.
● The scheme has Seven Point Reforms:
1. Appointments:The Government decided to separate the post of Chairman and
Managing Director byprescribing that in the subsequentvacancies to be filled
up,the CEO will get the designation of MD & CEO andthere would be another
person who would be appointed as non-Executive Chairman of PSBs.
2. Empowerment:TheGovernment has issued a circular that there will be no
interference from Governmentand Banks are encouragedto take their decision
independently keeping the commercial interest of the organisation in mind.
3. Capitalization: TheGovernment of India wants to adequately capitalize all the banks
to keep a safe bufferover and above the minimum normsof Basel III.
4. Framework of Accountability: Thepresent system for the measurement of a bank's
performance was a system called SoI - Statement of Intent. Based on certain criteria
decided by the Ministry of Finance, the banks used to come up with their annual target
figures which were discussed between the Ministry and banks and finalised.
5. Governance Reforms:Theprocess of governance reformsstarted with "Gyan Sangam",
a conclave of PSBs and FIs organised at the beginning of 2015 in Punewhich was
attended by all stake-holders including Prime Minister, Finance Minister, MoS (Finance),
Governor, RBI and CMDs of all PSBs and FIs.
6. De-stressing PSBs: Theinfrastructure sector and core sector have been the major
recipients of PSBs' funding during the past decades.But due to several factors, projects
are increasingly stalled/stressed thus leading to NPA burden on banks. In a recent review,
problems causing stress in the power, steel and road sectors were examined.
7. Bank Board Bureau (BBB):Theannouncement of the Bank Board Bureau (BBB) was
made by the Hon'ble Finance Ministerin his BudgetSpeech for the year 2015-16. It is
an autonomous body of Government of India.
Bank Board Bureau (BBB):
● ItwassetupbytheGovernmentofIndiaasanautonomousbodyanditsHQishoused
in RBI central office in Mumbai.
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st
● From 1 july, 2022 onwards GoI changed the name of BBB to Financial Services
Institutions Bureau (FSIB)
● It has been tasked to improve the governance of Public sector banks, recommend the
selection of chiefs of government-owned banks and financial institutions and to help
banks in developing strategies and capital raising plans.
● Currently, Bhanu Pratap Sharmais the chairman ofFSIB.
Note:
Government has implemented a comprehensive 4R's strategy, consisting of:
● Recognition of NPAs transparently,
● Resolution and recovery of value from stressed accounts,
● Recapitalisation of PSBs, and
● Reforms in PSBs and the wider financial ecosystem for a responsible and clean system.
Bank Recapitalisation:
● Bankrecapitalisationmeansinfusingmorecapitalinstate-runbankssothattheymeet
the capital adequacy norms. The government, using different instruments, infuses capital
into banks facing shortage of capital.
Recapitalisation Bond:
● Bank recapitalisation bondsareissuedbytheGovernmenttowhichbankscansubscribe
orbuyandthesebondsarespecificallyaimedatthosebankswhichhavealotofdeposits
in hand.
● The government is likely tousethemoneyraisedbysaleofthesebondstoincreasethe
number of shares it holds in the bank. This will give banks more capital to work with,
making it easier for them to write off the bad loans.
● LateronGOIstartedissuingbankrecapitalisationbondsandzero-couponbonds,meaninga
buyer of this bond will not get any interest
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Indian Economy
Ch 04 : Commercial banks
Lecture 06: Insolvency and Bankruptcy Code 2016
Insolvency and Bankruptcy Code (2016):
● About:
○ In 2016, at atimewhenIndia’sNon-PerformingAssetsanddebtdefaultswere
piling up, and older loan recovery mechanisms such as the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act
(SARFAESI),LokAdalats,andDebtRecoveryTribunalswereseentobeperforming
badly.
○ The Insolvency and Bankruptcy Code (IBC) code was introduced to overhaul
the corporate distress resolution regime in India and consolidate previously
available laws to create a time-bound mechanism with a creditor-in-control
model as opposed to the debtor-in-possession system.
○ When insolvency is triggered under the IBC, there can be two outcomes:
■ Resolution or
■ Liquidation
Note:Details on IBC 2016 are explained in the handoutgiven in class.
Bad Bank:
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● TheNationalAssetReconstructionCompanylimited(NARCL)isthenameprovidedto
the bad bankwhich was announced in the budget of2021-22.
● Anotherentity,Indiadebtresolutioncompanylimited(IDRCL)hasalsobeensetupfor
the purpose of selling the stressed asset in the market.
● The NARCL and the IDRCL are new bad banks. To make it work, the Government has
provided the govt receipt worth Rs. 30,600 crores.
● NARCLwillpay15%oftheagreedvalueofloanincashandtheremaining85%would
be given in the form of Government guaranteed security receipts. The Government
guarantee would be invoked if there is a loss against the threshold values.
● If the bad bank is unable tosellthebadloansorhastosellitataloss,thenthe
governmentguaranteewillbeinvokedandthedifferencewillbepaidbytheGovernment
of India.
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Economy
Chapter 05: Government Budgeting
Lecture 01: Government Budgeting
Budget and Budgeting:
● The budget is a document regarding the income and the expenditure pattern of the
Government.
● Budgeting is theprocedure adopted by the government to make a budget.
● The Constitution refers to the budget as the ‘Annual financial statement’. In other
words,theterm‘budget’hasnotbeenusedintheConstitution.Itisthepopularname
for the ‘Annual Financial Statement’ that has been dealt with in Article 112 of the
Constitution.
● The annualfinancialstatementispresentedintheParliamentbytheFinanceMinister
andthePresidentofIndiamakessurethatthegovernmentpresentstheAnnualFinancial
Statement.
● The Government provides an Income and Expenditure bill under budget.
○ An income bill is called a‘Financial Bill’.
○ The expenditure bill is called the‘Appropriation Bill’.
● The budget is a statement of the estimated receipts and expenditures of the
GovernmentofIndiainafinancialyear,whichbeginson1Aprilandendson31Marchof
the following year. Additionally,itincludesanassessmentofthefinancialpositionofthe
Government of India for the previous, ongoing, and upcoming financial year during which
the budget was presented.
Different Types of Budgeting:
Zero-based Budgeting:
● Zero-basedBudgetreferstostartingabudgetwithascratchorzero,everytimewhenyou
make a budget.
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● Insteadofusinglastyearexpensesasaguide,thegovernmentplanseverysinglerupeeof
theirincomefromscratch.Insimplewords,thegovernmentsendseveryrupeefordifferent
work with no leftover and guessing.
Performance-based Budgeting:
● Performance budgeting links resource allocation to measurable results, focussing on
efficiency and effectiveness. Instead of just funding various departments for different
programs, it links budgets to specific performance, goals and objectives.
Outcome Budgeting:
● Outcome budgeting means that a certain expenditure incurred such as on construction
wouldtrytoanalysewhetherthehospitalactuallycomesupbutalsothehealthcondition
ofthatareaactuallyimprovesornot.Thus,outcomebudgetingimpliesthateachministry
has to be accountable to achieve the final outcome by way of targets laid down.
Gender Budgeting:
● It implies that budgetary allocations are made in such a way that it comprehensively
considerstheimproperrepresentationofgenderindifferentwaysoflife.Itisdonebythe
government by reserving specific components of thebudgetforthatgender.Forexample,
one-third of jobs in MGNREGA is reserved for women.
Budget:
● UnderArt112,itisthedutyofthepresidentofIndiatoensurethattheannualfinancial
statement of the GovernmentofIndiaispresentedtotheparliament.Nowthebudgetis
presentedbythefinanceministrybythefirstweekofFebruary.TheBudgetisnothingbut
a statement of GOI on-
○ The estimated income and expenditure of the upcoming financial year.
○ The review of current year’s income and expenditure i.e. current years revised
estimates compared to budget estimates.
○ The actuals of previous financial years.
For example, the budget document of 2025- 2026 will provide budget estimates of 2025-26,
budget estimates and revised estimates of 2024-2025 and factual numbers of 2023 and 2024.
Fiscal Policy:
Fiscal policy deals with income and expenditure decisions of the government. There are three
different types of fiscal policy-
PW Web/App:https://smart.link/7wwosivoicgd4
● Neutral Fiscal Policy: It is a policy where income equals expenditure and there is no
surplus to the government.This kind of fiscal policy is hardly seen in any country.
● ExpansionaryFiscalPolicy:Itisapolicywheregovernmentexpenditureismorethanthe
income and the government is in deficit. This kind of policy is commonly found in
developing nations.
● Contractionary Fiscal Policy: It is a policy where income is greater than expenditure
and the government is in surplus.It is found in developed countries.
Revenue and Capital Account:
The government divides their budget into two accounts- Revenue and Capital account.
● Revenue Account: It is divided into Revenue Receipts and Revenue Expenditures. This
accountincludesroutineandday-to-dayexpendituresandanaccountcomparativelybigger
share.
○ RevenueReceipts:Thesearereceiptsthatdonotcreateliabilitiesorreduceassets.
They include:
■ Tax Receipt:
● Income Tax
● Goods and Services Tax (GST)
● Corporate Tax
● Excise Duty
■ Non-Tax Receipt:
● Fees, Fines, Tolls etc
● Grants, dividend received.
● Interest received.
○ RevenueExpenditures:Theseareexpendituresthatdonotleadtothecreationof
assets. They are further divided into:
■ Development Expenditures:
● Maintenance of government assets
■ Non-Development Expenditures:
● Salaries and wages
● Pensions
● Law and order expenditures
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● Defense
● Subsidies
● Interest payments
● Grants to state governments
● Civil administration
● Capital Account: This account includes expenditures that are not routine and involve
long-term financial activities. It is divided into Capital Receipts and Capital Expenditures.
○ Capital Receipts: Thesearereceiptsthateithercreateliabilitiesorreduceassets.
They include:
■ Loans and borrowings
■ Sale of government companies
■ Disinvestment
■ Sale of government assets
■ Recovery of principle of loans.
○ Capital Expenditures: These are expenditures that result in the creation of
long-term assets. They include:
■ Creation of infrastructure e.g. roads, dams etc.
■ Repayment of loans.
■ Loans provided to state governments.
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Economy
Chapter 05: Government Budgeting
Lecture 01: Government Budgeting
Budget and Budgeting:
● The budget is a document regarding the income and the expenditure pattern of the
Government.
● Budgeting is theprocedure adopted by the government to make a budget.
● The Constitution refers to the budget as the ‘Annual financial statement’. In other
words,theterm‘budget’hasnotbeenusedintheConstitution.Itisthepopularname
for the ‘Annual Financial Statement’ that has been dealt with in Article 112 of the
Constitution.
● The annualfinancialstatementispresentedintheParliamentbytheFinanceMinister
andthePresidentofIndiamakessurethatthegovernmentpresentstheAnnualFinancial
Statement.
● The Government provides an Income and Expenditure bill under budget.
○ An income bill is called a‘Financial Bill’.
○ The expenditure bill is called the‘Appropriation Bill’.
● The budget is a statement of the estimated receipts and expenditures of the
GovernmentofIndiainafinancialyear,whichbeginson1Aprilandendson31Marchof
the following year. Additionally,itincludesanassessmentofthefinancialpositionofthe
Government of India for the previous, ongoing, and upcoming financial year during which
the budget was presented.
Different Types of Budgeting:
Zero-based Budgeting:
● Zero-basedBudgetreferstostartingabudgetwithascratchorzero,everytimewhenyou
make a budget.
PW Web/App:https://smart.link/7wwosivoicgd4
● Insteadofusinglastyearexpensesasaguide,thegovernmentplanseverysinglerupeeof
theirincomefromscratch.Insimplewords,thegovernmentsendseveryrupeefordifferent
work with no leftover and guessing.
Performance-based Budgeting:
● Performance budgeting links resource allocation to measurable results, focussing on
efficiency and effectiveness. Instead of just funding various departments for different
programs, it links budgets to specific performance, goals and objectives.
Outcome Budgeting:
● Outcome budgeting means that a certain expenditure incurred such as on construction
wouldtrytoanalysewhetherthehospitalactuallycomesupbutalsothehealthcondition
ofthatareaactuallyimprovesornot.Thus,outcomebudgetingimpliesthateachministry
has to be accountable to achieve the final outcome by way of targets laid down.
Gender Budgeting:
● It implies that budgetary allocations are made in such a way that it comprehensively
considerstheimproperrepresentationofgenderindifferentwaysoflife.Itisdonebythe
government by reserving specific components of thebudgetforthatgender.Forexample,
one-third of jobs in MGNREGA is reserved for women.
Budget:
● UnderArt112,itisthedutyofthepresidentofIndiatoensurethattheannualfinancial
statement of the GovernmentofIndiaispresentedtotheparliament.Nowthebudgetis
presentedbythefinanceministrybythefirstweekofFebruary.TheBudgetisnothingbut
a statement of GOI on-
○ The estimated income and expenditure of the upcoming financial year.
○ The review of current year’s income and expenditure i.e. current years revised
estimates compared to budget estimates.
○ The actuals of previous financial years.
For example, the budget document of 2025- 2026 will provide budget estimates of 2025-26,
budget estimates and revised estimates of 2024-2025 and factual numbers of 2023 and 2024.
Fiscal Policy:
Fiscal policy deals with income and expenditure decisions of the government. There are three
different types of fiscal policy-
PW Web/App:https://smart.link/7wwosivoicgd4
● Neutral Fiscal Policy: It is a policy where income equals expenditure and there is no
surplus to the government.This kind of fiscal policy is hardly seen in any country.
● ExpansionaryFiscalPolicy:Itisapolicywheregovernmentexpenditureismorethanthe
income and the government is in deficit. This kind of policy is commonly found in
developing nations.
● Contractionary Fiscal Policy: It is a policy where income is greater than expenditure
and the government is in surplus.It is found in developed countries.
Revenue and Capital Account:
The government divides their budget into two accounts- Revenue and Capital account.
● Revenue Account: It is divided into Revenue Receipts and Revenue Expenditures. This
accountincludesroutineandday-to-dayexpendituresandanaccountcomparativelybigger
share.
○ RevenueReceipts:Thesearereceiptsthatdonotcreateliabilitiesorreduceassets.
They include:
■ Tax Receipt:
● Income Tax
● Goods and Services Tax (GST)
● Corporate Tax
● Excise Duty
■ Non-Tax Receipt:
● Fees, Fines, Tolls etc
● Grants, dividend received.
● Interest received.
○ RevenueExpenditures:Theseareexpendituresthatdonotleadtothecreationof
assets. They are further divided into:
■ Development Expenditures:
● Maintenance of government assets
■ Non-Development Expenditures:
● Salaries and wages
● Pensions
● Law and order expenditures
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● Defense
● Subsidies
● Interest payments
● Grants to state governments
● Civil administration
● Capital Account: This account includes expenditures that are not routine and involve
long-term financial activities. It is divided into Capital Receipts and Capital Expenditures.
○ Capital Receipts: Thesearereceiptsthateithercreateliabilitiesorreduceassets.
They include:
■ Loans and borrowings
■ Sale of government companies
■ Disinvestment
■ Sale of government assets
■ Recovery of principle of loans.
○ Capital Expenditures: These are expenditures that result in the creation of
long-term assets. They include:
■ Creation of infrastructure e.g. roads, dams etc.
■ Repayment of loans.
■ Loans provided to state governments.
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Economy
Chaptor05: Government Budgeting
Lecture No: 02: Fiscal Policy
Revenue Deficit
● It is the shortfall of government revenue receipts compared to its revenue expenditure.
● Formula: Revenue Deficit=Revenue Expenditure−Revenue Receipts
EffectiveRevenueDeficit:Thismetricexcludesgrantsforthecreationofcapitalassetsfromthe
revenue deficit. It provides a more accurate picture of the fiscal imbalance.
● Effective Revenue Deficit= Revenue Deficit - Grants in aid for the creation of capital
assets.
CapitalReceipts:Theseincludeloansraisedbythegovernment(throughbonds,securities,etc.),
recovery of loans, and disinvestment proceeds.
● Capital receipts are receipts that create liabilitiesorreducefinancialassets.Theyalso
refer to incoming cash flows.
● Capital receipts can be both non-debt and debt receipts. Loans from thegeneralpublic,
foreign governments and the Reserve Bank of India (RBI) form a crucialpartofcapital
receipts.
Non-DebtCapitalReceipts(NDCR):Capitalreceiptsthatdonotcreatefutureliabilities,suchas
recovery of loans and disinvestment proceeds.
FiscalDeficit:Representsthetotalborrowingrequirementofthegovernment.Itariseswhentotal
expenditure exceeds the sum of revenue receipts and non-debt creating capital receipts.
● Formula:Fiscal Deficit=Total Expenditure−(RevenueReceipts+Non-Debt Capital Receipts)
Primary Deficit: Indicates the borrowing requirements of the government, excluding interest
payments.
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● Formula:Primary Deficit=Fiscal Deficit−Interest Payments
● Interpretation: A low or zero primary deficit indicates that government borrowings are
mainlybeingusedtomeetinterestcommitmentsonpastloans,leavingminimalscopefor
fresh spending.
Monetised Deficit: Refers to the portion of the fiscal deficit that is financed by printing new
money rather than borrowing from the market.
● Thisoccurswhenthecentralgovernmentdirectlyfundsitsexpenditurebysellingsecurities
to the Reserve Bank of India (RBI), leading to an increase in money supply.
● Also known as Deficit Financing, it is typically used in extraordinary circumstances to
stimulate the economy.
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Economy
Chapter05: Government Budgeting
Lecture 03: India’s Tax Structure
India’s Tax Structure:
● Article 246 of the Indian Constitution distributes legislative powers including taxation
between parliament of India and state legislature. TheSchedule Seven of the Indian
Constitution enumerates these subject matters with the help ofthree lists i.eUnion
list, State list and Concurrent list.
● In theUnion list there are 13-14 such areas under which the Union can levy taxes. For
Example: Income tax, Corporate tax, excise duty, customs etc. [Provided under Entry list 82
to 92 B and 96].
○ Note: After 101st Amendment Act,2016 Entry number 92 and 92C have been
omitted and wording of Entry number 84 have been changed.
● In the State list there are around 19-20 areas where the state government can levy
taxeslike Tax on animals and boats, capitation tax(provided under entry number 45 to 63
and entry 66)
○ Note: After 101st Amendment Act, Entry number 52 and 55 have been omitted and
wordings of Entry number 54 and 62 have been changed.
● In theConcurrent list, there are three such areas where taxes can be imposed by both
Central and State governments. [Entry 35, 44 and 47]
● Through101st Amendment Act, 2016Article 246A has been inserted and special provisions
regarding GST are provided.
● Article 269Aadded forIntegrated GST(GST on inter state transactions)
● Article 279Aprovides for a GST council.
●
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GST Council:
● The GST Council is aconstitutional bodyin India,established to oversee and
recommend on the goods and services tax (GST). It was created underArticle 279Aof
the Indian Constitution following the implementation of the GST regime on July 1, 2017.
The Council's primary role is to ensure uniformity in the taxation system across India by
framing policies and suggesting tax rates, exemptions, and thresholds under GST.
● Composition:
○ Chairperson: The Union Finance Minister.
○ Members:
■ The Union Minister of State is in charge of Revenue or Finance.
■ Ministers of Finance or Taxation or any other Minister nominated by each
state government.
● Decision-making:
○ Every decision of the GST Council is made by amajorityof not less than
three-fourthsof the weighted votes of the memberspresent.
○ The Union Government's vote has a weightage ofone-third,while all the state
governments combined have a weightage oftwo-thirds.
Classification of Taxes:
● Progressive and Regressive Taxes
● Direct and Indirect Taxes
● Ad-Valorem Tax and Specific Tax
Progressive Tax:
● Progressive Tax is the one under whichas the income of a person goes up, the rate of
the tax will also increase.Thus, there is a higher tax on higher income and lower tax on
lower income.
○ Example:Income tax in India.
● The objective ofProgressive Tax is to remove grossinequality in society.
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Income Tax Rates
Up to Rs. 2.5 lakhs 0%
Rs. 2.5 lakhs - 5 lakhs 5%
Rs. 5 lakhs - 10 lakhs 20%
For more than Rs. 10 lakhs 30%
Regressive Tax:
● Indirect taxes such as GST, sale tax,excise tax, custom tax etc. are levied on all products
without any differentiation i.e. without considering the consumer group’s income or fiscal
status which consumes the product or service. So, the rich or poor are equally impacted by
this and hence considered regressive.
○ Example: Taxes on diesel in India i.e.Diesel consumed by luxury car owners and a
poor farmer need to pay tax at the same rate but the burden is vary.
Direct Tax:
● It is a tax whoseburden is borne by the same person on whom it is levied.In other
words, the burden of these taxes cannot be shifted to any other person.
● Example:Income Tax, corporate tax etc.
Indirect Tax:
● These are taxes which are imposed on someone but borne by someone else. It meansthe
burden of these taxes can be shifted.
● Example:Goods and Services Tax, Service Tax, Sales Tax.
Ad-Valorem Tax:
● It is the tax applied on thetotal value of a commodity,i.e. Quantity multiplied by Price.
○ Example:A manufacturer manufactures a shirt worth 100000 rupees which means
tax will be applied on 100000 rupees.
Specific Tax:
● It is a tax applied on specificattributes or characteristics of the commodity.
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○ Example:The length (taxes are levied on Cigaretteson the bases of length in
India), breadth, size, quantum, volume etc.
India’s Tax System :
● A sound tax system is one which issimple, rational,has few slabs, broad-basedand
ensures compliance.
● In other words, tax ratesshould neither be too highnor too low and there should be
flexibilityand a wider choice for the governmentto enlarge the base of taxation to bring
more and more people/sectors/occupations under the tax net.
● Thus, India initiated tax reforms in 1991 by setting upRaja. J. Chelliah Committeeand
subsequently Kelkar Task Formsto suggest reformsin the taxation structure.
Laffer Curve:
● It was invented byArthur Laffer.
● This curve shows the relationshipbetween tax ratesand tax revenues collected by the
government.
● The curve provides thatas the tax rates increasefrom low to high level, thetax
revenues collected by the government also increases.But if the tax rates keep on
increasing, it would cause people not to work as hard or not to work at all, thereby
reducing the tax revenues of the government.
● Eventually, if the tax rate reaches 100% then all people would choose not to work because
all that is earned would go to the government.
Income Tax and Corporate Tax:
● Income Tax:
○ Income tax is atax which is applied on the incomeof an individual and currently
the individual is provided withtwo choices-old systemand new system.
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Economy
Ch 05: Government Budgeting
Lecture 04: Various taxes in India
● Corporate Tax:
○ Corporate tax is a tax which isapplied on the profits of a corporation.
○ In the current year, 2024-25, a domesticcompanyneedstopay25%taxand
foreign companies need to pay tax at the rate of 35%.
○ A company whose turnover is under 400 crore rupees isrequiredtopaycorporate
tax at the rate of 25% and not 35%.
○ A manufacturingcompanystartedafter1stOctober2019needstopaytaxatrate
of 15% and companies started before 1st october, 2019 in manufacturing sector
need to pay tax at a rate of need to pay tax at 22%.
Cess:
● A cess is a temporary levy to achieve a specific objective and once the objective is
realized it is withdrawn.
● Example- Health and education cess is applied on individuals and corporations by
government of india at the rate of 4% on the total tax and surcharge.
Surcharge:
● Surcharge is a tax on tax imposed with the objective of removing gross inequalities in
society. As certain people orcorporationshaveincomeaboveacertainlevel,theyneedto
pay a surcharge in India.
● For example, the surcharge ratefor individuals are:
○ 50 lac to 1 crore = 10%
○ 1 crore to 2 crore = 15%
○ More than 2 crore= 25%
● The surcharge ratefor Domestic corporate:
○ 1 crore to 10 crore = 7%
○ More than 10 crore = 12%
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● The surcharge ratefor foreign companies:
○ 1 crore to 10 crore = 2%
○ More than 10 crore =5%
Minimum Alternate Tax (MAT):
● TheconceptofMATwasintroducedinthedirecttaxsystemtomakesurethatcompanies
havinglargeprofitsbutarenotcontributingtothegovernmentbywayofcorporatetaxby
takingadvantageofthevariousincentivesandexemptionsprovidedintheIncomeTaxAct
1961 are required to pay a fixed percentage of book profits as Minimum Alternate Tax
(MAT).
● It is applied on the book profits of the company. Current Minimum Alternate Tax
(MAT) rate is 15%.
Securities Transaction Tax (STT):
● Securities Transactions Tax is appliedonthebuyingandsellingofsecuritiesinthestock
market.ThecurrentSecuritiesTransactionsTaxonthedeliverybasedequitytransactionsis
0.1%. Thistax was introduced in 2004-05
Capital Gain Tax:
● Capital Gains Taxisleviedonprofitsfromthesaleofcapitalassetslikeproperty,stocks,
bonds, gold, mutual funds, and other valuable assets.
● GovernedbytheIncomeTaxAct,1961,thetaxratedependsonthetypeofassetandits
holding period.
Types of Capital Gains:
● Short-Term Capital Gains (STCG):
○ Tax on profits from assets sold within a short holding period.
○ Holding Period:
■ Listed Equity Shares/Mutual Funds: ≤ 12 months.
■ Real Estate/Unlisted Shares: ≤ 24 months.
■ Other assets (e.g., debt funds, jewelry): ≤ 36 months.
○ Tax Rate:
■ Listed securities (subject to STT): 15%.
■ Other assets: Taxed as per the individual’s income tax slab.
● Long-Term Capital Gains (LTCG):
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○ Tax on profits from assets held beyond the short-term holding period.
○ Tax Rate:
■ Listed Equity Shares/Mutual Funds: 10% (on gains above ₹1 lakh, no
indexation benefit).
■ Other assets (e.g., real estate, unlisted shares): 20% (with indexation
benefit).
Indexation Benefit:
● Adjusts the purchase price of an asset to account for inflation, therebyreducingtaxable
gain.
● It applies only to LTCG on certain assets such as real estate, gold, and debt mutual funds.
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Economy
Ch 05: Government Budgeting
Lecture 05
: GST
Securities Transaction Tax (STT):
● Securities Transactions Tax is a tax which is paid in the transactions happening in the
stock market. The current Securities Transactions Tax on the delivery based equity
transactions is 0.1%. Thistax was introduced in 2004-05.
Goods and Services Tax:
● It is a single tax on theprovisionofGoodsandServicesthroughouttheentireproduct
cycle or life cycle, from manufacturing to consumers.
● It is an indirect tax imposed on the entire country in the spirit of “One Nation, One
Tax”in order to make India a united market.
● In 2000, the first time there was talk about GST, was when Atal Bihari Vajpayeewas
Prime Minister,and it took 16 years after that to implement it.
st
● GSTwasimplementedinIndiaonJuly1,2017,throughthe101 ConstitutionAmendment
Act, of 2016.
○ Before the 2016 amendment, taxation powers weredividedbetweenthecenter
and states. For example, while the centre exclusively taxed services, the states
exclusivelytaxedgoodsatthetimeofsale. The2016amendmentreplacesvarious
centralandstatetaxessuchasexciseduty,servicetax,salestax,entrytaxand
entertainment tax with GST.
● It is a destination-based tax or consumption tax levied where goods and services are
consumed.
● The GST rate slabs are decided by the GST Council.
● GSTisdesignedtoeliminatethecascadingeffectoftaxes,whichwouldotherwiselead
to an increased tax burden on the final consumer
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How Did Double Taxation End?
● Example: A company makes a shirt forRs.10000andthenhastopay10%taxonitto
the government (CENVAT). Now the cost oftheshirtisRs.11000.Now,whilesellingin
themarket,thestategovernmentwillaskforataxof20%on11000,i.e.,2200;nowthe
costofACis13200.Thereisatax-on-taxproblemherebecausethestategovernmenthas
applied tax on 11000 and already (CENVAT) is included in that.
○ NowinGST,thereisonlyonetaxontheprice,whichis20percent;nowthetaxis
2000. Now this is equally divided between the central and state governments.
○ ConsumershavesavedRs.1200here,butthestategovernmentislosing.Here,the
central government will pay the remaining amount under the GST Compensation
Act.
○ Also, if there is no growth of 14% in revenue due to GST, Central will pay the
remaining amount to the states. Via;GST Compensation Cess.
Value Added Tax :
● ValueAddedTaxisatypeoftaxthatischargedbytheCentralGovernmentonthesale
of services and goods to the consumers.
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● A value-added tax wasintroduced in 1986and it came intoeffect in 2005.
Revenue Neutral Rate:
● RevenueneutralratemeaningistherateoftaxthatallowstheGovernmenttoreceivethe
same amount of money despite changes in the tax laws.
● The goal of determining the RNR is to ensure that the government collects the same
amount of revenue as before while simplifying the tax structure and reducing
inefficiencies.
Input Tax Credit:
● Itisthetaxalreadypaidbyapersonandwhichisavailableasadeductionfromtaxto
bepayablebyhim/herunderGoodsandServicesTax.Theinputtaxcreditisavailableat
every stage of production.
● Input tax credit removes the cascading effect of tax and in awayhelpstolowerthe
price of final products.
● For instance, Goods and Services Tax (GST) is paid by a manufacturer/producer when
buyingrawmaterialsorservicesasinputsusedintheproductionprocess.Thistaxpaidby
themanufacturercanbeadjustedagainstthefinalpaymentof GoodsandServicesTax
(GST)byhimatthetimeofsaleofthefinalproduct.ThishelpstochargeGSTonlyon
the value added by that manufacturer.
● There is a fifteen digit GSTN number to pay the tax on a monthly basis.
Applicability of GST
The individual has to pay GST in following case
● For manufacturer of goods if revenue is above 40 lakhs
● For service provider if revenue is above 20 lakhs
(Details about GST is provided in the handout)
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Indian Economy
Ch05: Government Budgeting
Lecture 06 : Finance Commission
Tax Buoyancy-
● Tax buoyancy refers to the responsiveness of tax revenuetochangesintheeconomy,
particularly the growth of Gross Domestic Product (GDP).
● Itmeasureshowwellacountry'staxrevenuegrowsinrelationtoitseconomicgrowth.In
simpleterms,taxbuoyancyindicatestheabilityofataxsystemtogeneratemorerevenue
as the economy expands.
Finance Commission:
● The Finance Commission is constituted underArticle280 ofthe Indian Constitution.
● The Commission is constituted by thePresident,everyfifth year.
● There are four important functions assigned to thefinance commission under Article 280.
○ ThedistributionofthenetproceedsoftaxesrevenuebetweentheCentreandthe
States.
○ Providingthegrants-in-aidoftothestategovernmentunderArticle275ofthe
constitution of India.
○ Supplementing the state government revenues for workingofthepanchayats
and municipalities.
○ Any othermatter referredto the Commission.
15th Finance Commission:
● The finance commission is required to recommendthedistributionofnettaxproceedsof
taxes of the union between the union and the states (commonly refer to as vertical
devolution),andtheallocationbetweenthestatesoftherespectiveshareofitsproceeds(
commonly known as Horizontal devolution)
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● Withregardsto15thFinanceCommissiontheverticaldevolutionamountis41%andas
per 14th financecommission(2015-2020),theverticaldevolutionamountis42%and
as per 13th finance commission it was 32%.
● As per 15th finance commission, 41% vertical devolution is because financial resources
equivalent to 1% of the net proceeds of union taxes should be retained to the central
governmentforfinancingtherequirementofnewlyformedUnionterritoriesofJammuand
Kashmir and Ladakh.
● Criteriausedbythe15thFinanceCommission(FC)fordevisingtheformulafordevolution
of funds:
○ Population (15%)
○ Demographic performance (12.5%)
○ Area (15%)
○ Forest and Ecology (10%)
○ Tax effort ( 2.5%)
○ Income distance (45%)
Note:
● The central government launched manySocial WelfareSchemes.These schemes are of
two types;
1. Central Sector Schemes:These schemes are 100% fundedby the Union
government and implemented by the Union government machinery.
2. Centrally Sponsored Schemes:In these schemes, a certainpercentage of the
funding (90:10 or 75:25 ratio) is borne by the state governments and the
central government gives funds in the form of grants-in-aid, etc., and
implemented by the state governments.
Ways and Means Advances (WMA):
● They are temporary, financial accommodations provided by RBI to the central and state
governments to bridge short term mismatches in the cash flow.
● Theseadvanceshelpgovernmentstomeettheirexpenditurerequirementswhentherevenue
collection falls short.
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● WMA is a crucial tool formaintainingfinancialstabilityandensuringsmoothgovernment
operations particularly during times of fiscal stress and unforeseen contingencies.
● UnderWMAthereisanagreementmutuallybetweenthecentralgovernmentandRBIand
stategovernmentsandRBIastheamounttheywillborrowfromRBIduringthecourseof
the year to take care of temporary mismatch between inflow and outflow of cash. The
amount is mutually decided by the government and RBI.
● The interest rates in WMA are equal to the repo rate.
● ThedurationofWMAwillgenerallyberestricteduptoamaximumof3monthsfromthe
date of making advances. The states governments have two options to borrow under WMA:
○ Normal WMA
○ Special WMA: Under this state government can borrow by pledging the central
governments securities andrate of interest is RepoRate minus 1%
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Indian Economy
Ch05: Government Budgeting
Lecture 07 : Expenditure pattern of GOI
Expenditure Pattern of Government of India:
Till 2016-2017 government of India used to divide the expenditures into plan and Non- Planned Expenditures
Planned Expenditure:
● Planned expenditures refers to the spending that is predetermined and included in the
government's five year plan document to achieve specific developmental goals and
objectives.
● Thistypeofexpenditureisusuallyassociatedwithlongtermplanningandaimstopromote
economic growth, social welfare and infrastructure development.
○ Examples of planned expenditure include investment in education, healthcare,
infrastructure, agriculture and rural development.
Non-Planned Expenditure:
● Ontheotherhand,Non-PlannedExpendituresreferstoregularorrecurringspendingthat
is not directly linked to specific developmental goals or objectives.
● This type of expenditure includes routine expenses such as salaries and pensions of
governmentemployees,debtservicing,subsidiesandmaintenanceofexistinginfrastructure
and services.
○ Nonplannedexpenditureisessentialforsmoothfunctioningofgovernmentandthe
delivery of public services but does not contribute directly to long term goals.
○ From 2017-18 onwards, the government has stopped dividing expenditures into
planned and non planned expenditures and started dividing expenditures into the
Revenue and Capital expenditure.
Fiscal Responsibility and Budget Management Act:
● The FiscalResponsibilityandBudgetManagementAct2003wasintroducedtoimprove
India's financial discipline and ensure sustainable economic growth.
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● It sets rules for the government to reduce fiscal deficit, manage public debt and avoid
excessive borrowing. The Act requires the government to present transparent financial
statements and adopt responsible spending practices by limiting fiscal deficits.
● By limiting fiscal deficit, the aim is to prevent the country from falling into debt trap,
promote economic stability and encourage long term growth.
● It holds the government accountable for maintaining fiscal discipline while ensuring that
essential public spending is not compromised.
NK Singh Committee on FRBM- Important Recommendations:
● The Government had constituted a Committee in May, 2016 to review the Fiscal
ResponsibilityandBudgetManagement(FRBM)ActundertheChairmanshipofShriN.K.
Singh,former Revenue and Expenditure Secretary andformer Member of Parliament.
● The Committee consisted of Dr. Urjit R. Patel, Governor, Reserve Bank of India (RBI),
Shri Sumit Bose, former Finance Secretary, Dr. Arvind Subramanian, Chief Economic
Adviser and Dr. Rathin Roy, Director, National Institute of Public Finance & Policy
(NIPFP) as members.
List of Recommendations of NK Singh FRBM Committee:
New Statutory Framework for Debt and Fiscal Targets:
● Repeal of Existing Laws: The FRBM Act, 2003, and the FRBM Rules, 2004, will be
repealed.
● EnactmentofNewLaws:AnewDebtandFiscalResponsibilityActwillbeenacted,along
with the adoption of the Debt and Fiscal Responsibility Rules.
● Medium-Term Debt Ceiling: A debt ceiling of 60% of GDP will be set for general
government debt, to be achieved by FY2023. TheCentre'sdebtceilingwillbe40%,and
States' debt will be limited to 20%.
● Key Operational Target: Fiscal deficit will be the primary target to align with the
medium-term debt ceiling.
● Fiscal Deficit Targets: Fiscal deficit to GDP ratios will follow the path:
○ 3.0% for FY2018–FY2020
○ 2.8% for FY2021
○ 2.6% for FY2022
○ 2.5% for FY2023
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● Revenue Deficit Targets: Revenue deficit to GDP will decline by 0.25 percentage points
annually, as follows:
○ 2.3% in FY2017
○ 2.05% in FY2018
○ 1.8% in FY2019
○ 1.55% in FY2020
○ 1.3% in FY2021
○ 1.05% in FY2022
○ 0.8% in FY2023
● AdherencetoTargets:Thefiscaldeficittargetsmustbeadheredto,unlessEscapeClauses
are invoked.
● Escape Clauses: Deviations from thefiscaldeficittargetsareallowedunderthefollowing
conditions:
○ National emergencies, such as war or major calamities.
○ Far-reaching economic reforms with unforeseen fiscal effects.
○ A sharp GDP growth decline of at least 3 percentage points.
● DeviationLimit:Deviationsfromfiscaldeficittargetscannotexceed0.5percentagepoints,
with a suggestion to limit it to 0.3 percentage points.
● Buoyancy Clause: If GDP growth exceeds the average by 3 percentage points,thefiscal
deficit must fall by at least 0.5 percentage points below the target.
● Invocation of Clauses: Both Escape and Buoyancy Clauses can only be invoked after
consulting the Fiscal Council, with a commitment to return to original targets in the
following year.
● FiscalCouncil:AFiscalCouncilwillbeestablished,asoutlinedinthenewDebtandFiscal
Responsibility Act and Rules.
Public Debt:
● Public debt refers to the total amount of money owed byagovernmenttoitscreditors,
including individuals, institutions and other governments.
● It is incurred through borrowing to finance government expenditure when revenue falls
short.
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● Public debt can be in the form of bonds, treasury bills, loans and other financial
instruments.
● Governments use public debt to fund infrastructure projects, social welfare programsand
other expenses
● In the Indian context,publicdebtincludesthetotalliabilitiesoftheuniongovernment
that have to be paid from the consolidated fund ofIndia.
● The uniongovernmentclearlydistinguishesitsdebtliabilitiesfromthoseofthestates.It
calls overall liabilities from both state and union governments as general government
debt.
● Over the years, the union government has followed a considered strategy to reduce its
dependence on foreign loans in its overall loan mix. Internal debt constitutes more than
93% of the overall public debt. Also, external debts are not market loans and they are
mainly raised from foreign countries and other institutions at concessional rates.
● Target:The Fiscal Responsibility and Budget Management (FRBM) Act, introduced in
2003, set ambitious debt reduction goals, targeting a reduction of general government debt
to 60% of GDP by the fiscal year 2024-25.
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Indian Economy
Ch 06: Inflation
Lecture 01 :Inflation
Public Debt :
● PublicdebtinIndiareferstothetotalliabilitiesoftheUnionGovernmentthataretobe
repaid from the Consolidated Fund of India.
● TheUnionGovernmentdistinctlyseparatesitsdebtliabilitiesfromthoseofthestates.The
combined liabilities of both the Union and State Governments are referred to as the
"General Government Debt."
● Overtheyears,theUnionGovernmenthasstrategicallyreduceditsrelianceonforeignloans
in its overall borrowing structure.
● Internal debt now constitutes more than 93% of the total public debt. Additionally,
external loans are not market loans but are sourced from various institutions at
concessional rates.
● These external loans are typically fixed-rate loans, shielding them from interestrateand
currency volatility.
The internal loans, which form the bulk of public debt, are further categorized into two types:
1. Marketable Loans
2. Non-Marketable Debts
Is Public Debt Beneficial?
Public debt can be advantageous when used effectively to fund investments in infrastructure,
education, and healthcare, thereby stimulating economic growth and development.
● It enables the government to address immediate needs without imposing high taxes on
citizens.Moreover, during economic downturns, public debt serves as a tool for fiscal
stimulus, helping to mitigate the effects of recession and unemployment.
● However, excessive dependence on debt can lead toaheavydebt-servicingburden,crowd
outproductivespending,andriskfinancialinstability.Hence,maintainingasustainablelevel
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of public debt through prudentfiscalmanagementiscrucialforreapingitsbenefitswhile
avoiding potential drawbacks.
When is Public Debt Harmful?
● Public debt becomesdetrimentalwhenitreacheslevelsthatareunsustainableordifficult
to repay.
● Excessive public debt strains government finances due to higher interest payments and
borrowing costs, reducing economic flexibility.
● It can crowd out private investment, slow economic growth, and cause inflation. A high
levelofpublicdebtmayalsoerodeinvestorconfidence,leadingtorisinginterestratesand
economic instability.
● Additionally, repaying substantial debt diverts resourcesfromessentialpublicservicesand
long-term investments, thereby impairing the economy's future prospects. To avoid these
adverse effects, it is essential to maintain public debt at reasonable levels.
Inflation:
Inflationisaconditioncharacterizedbyapersistentriseinthegeneralpricelevel,oftencreating
expectationsoffurtherincreases.Itcanalsobedefinedasareductioninthepurchasingpowerof
a unit of currency, as each unit can now buy fewer goods and services. Inflation is typically
measured by the inflation rate.
Causes of Inflation:
There are two main causes behind inflation in a country.
● Demand Pull/ Demand Side Factors:
○ Itbasicallyoccursinasituationwhentheaggregatedemandinaneconomyhas
exceeded the aggregate supply.
○ It couldfurtherbedescribedasasituationwhentoomuchmoneychasesjusta
few goods.
○ Examples - Increase in population, an increase of money supply, an increase of
salary/wages, an increase of Government expenditure, increase in blackmoney,an
increase of foreign exchange reserve, etc.
● Supply Side Factors/Fall in Production :
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○ Supply-side inflation is a key factor for therising inflationin India.
○ Examples -Irregular monsoon and shortfall in production, wastage and loss in
transit, hoarding and black marketing, import cost push factors, any natural
calamity etc.
Importcostpushfactorsmeanswhenthegovernmentisbuyingthosegoodsfromforeigncountries
whose prices are rising due to international factors , in this situationweareimportinginflation
from other countries .
Terms Related to Inflation:
● Hyperinflation:
○ Hyperinflationisanextremelyhighandtypicallyacceleratingrateofinflation,often
exceeding 50% per month. It can lead toacollapseinthevalueofcurrencyand
economic instability.
● Stagflation:
○ It refers to an economic condition where inflation is high, economic growth
stagnates,andunemploymentremainshigh,creatingachallengingenvironmentfor
policy makers.
○ Typically, inflation and unemployment have an inverse relationship. But during
stagflation they occur simultaneously.
○ This unusual combination can result from supply shocks, like oil crises for poor
economic policies they fuel price increase without boosting productivity.
○ Stagflationisparticularlydifficulttoaddressbecauseconventionalpoliciestoreduce
inflation or unemployment may worsen the other issue.
○ Which may technically define an economy recording negative growth in two
successive quarters
● Core Inflation :
○ Itmeansinflationwhichdoesnotconsidertheimpactofsuchfactorswhichare
beyond the Government's control, causing inflation.
○ Forexample:IftheinflationrateinIndiaismeasuredwithouttakingintoaccount
the impact of rising international prices, it is referred to as core inflation.
● Headline Inflation:
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○ It is a measure of total inflation in an economy and is majorly impacted by
certain areas of the market which may experience sudden inflationary spikes.
○ For example : Increase in prices of agriculturalcommodities,increaseinpricesof
crude oil etc.
● Depression:
○ Depression is a prolonged and severe downturn in economic activity.
○ The most notable example is the Great Depression of the 1930s, triggered by a
stock market crash in the United States in 1929, leading to a worldwide GDP
contraction of about 15% and massive unemployment,withtheUSreaching25%
and Europe 33%. This crisis had a profound impact on the global economy.
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Economy
Chapter 06: Inflation
Lecture 02: Inflation (Part 02)
Depression:
● Depression originated in the United States of America after a fall in stock prices that
beganaroundSeptember4, 1929andbecameworldwidenewswiththestockmarketcrash
of October 29, 1929.
● Between 1929-1932, worldwide gdp fell by an estimated 15%.
● Personal income, tax revenue, profitsandpricesdropped,whileinternationaltradedropped
bymorethan50%.UnemploymentintheUSAincreasedto25%andinsomecountries
itroseashighas33%.ThissituationimpactedtheentirewesternEuropeandUSAduring
1929-1933, known as the Great Depression of the 1930s.
Structural Inflation:
● This type of inflation isnotcausedmerelybytheexcessofdemandoversupplybutis
built into an economy due to the Government’s monetary policy and fiscal policy.
Disinflation:
● Disinflation is described as a decrease in the rate of inflation, which is the general
increaseinthepricelevelofgoodsandservicesovertime. (F
orEx:InMaytheinflation
was 8% and in June the inflation was 6%, this 2% drop in the inflation is disinflation)
● Unlike deflation, which involves a sustained decrease in prices, disinflation refers to a
slowdown in the rate at which prices are rising.
Deflation
● It is theoppositeofinflation.
● Itreferstoageneraldeclineinthepricelevelofgoodsandservices,meanstheinflation
rate has fallen negatively
● Here, thepurchasing powerof the currencyincreases.
Reflation:
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● Itreferstoafiscalormonetarypolicy,designedtoexpandacountry’soutputandcurbthe
effects of deflation.
● Reflationary policies can include reducing tax rates, changing the money supply, and
reducing the interest rate etc.
Agflation:
● Agflation refers to the inflationary pressures caused by rising agricultural commodity
prices.The term is a combination of "agriculture" and "inflation."
● Agflationtypicallyoccurswhenthepricesoffooditemsincreaseduetofactorslikeadverse
weather conditions, rising input costs, supply chain disruptions, increased demand,
government policies, etc.
Shrinkflation:
● It is the process wherein the size or quantity of the commodity decreases insteadof
any rise in the price of the commodity.
● Itistheprocessofitemsshrinkinginsizeorquantityorevensometimesreformulatingor
reducing quality while their prices remain the same or increase a little bit.
● This is due to arise in the prices of inputsin themarket.
Measurement of Inflation in India:
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Inflation is measured through theConsumer Price Index(CPI) and Wholesale Price Index (WPI).
Aspect Consumer Price Index (CPI) Wholesale Price Index (WPI)
Base year 2012 2011-12
Indices: CPI Urban, CPI Rural, CPI WPI, Wholesale Food Price Index
Combined, Consumer Food Price
Index
Calculated by National Statistical Office, Office of Economic Advisor, Ministry of
Ministry of Statistics and Commerce and Industry (MoC&I)
Programme Implementation
(MoSPI)
Market Focus Retail market Wholesale market
Goods and Services Takes both goods and services Takes only goods into consideration
into consideration (200 goods (697 goods)
and services)
Calculation Calculated on amonthly basis Calculated on amonthly basis
Frequency
Perspective Calculated from a consumer Calculated from the businessman's
point of view point of view
Averaging Method Geometric Mean Geometric Mean
Weightage Weightage given below Weightage:
Out of 697 commodities, 117 are
primary goods (22.62%),16itemsfor
fuels and power (13.15%), 564 items
formanufacturing products (64.23%)
Weightage in WPI:
Out of 697 commodities, 117 are primary
goods (22.62%), 16 items for fuels and
power (13.15%), 564 items for
manufacturing products (64.23%)
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Weightage of CPI:
Particulars CPI Rural CPI CPI
Urban Combined
Food and 54.18% 36.29% 45.86%
beverages
Fuel and light 7.94% 5.58% 6.84%
Pan tobacco 3.26% 1.36% 2.38%
and intoxicant
Clothing and 7.36% 5.57% 6.53%
footwear
Housing 0 21.67% 10.07%
Services 27.26% 29.53% 28.32%
Point-to-point Inflation:
● Itreferstothechangeinthepricelevelofabasketofgoodsandservicesoveraspecific
time period, typically calculated as the percentage change from one point in time to
another (e.g., from one month to the same month the previous year). It helps in
understanding how much prices have increased or decreased over that period.
● For example, if the Consumer Price Index (CPI) for September 2023-24 iscomparedto
September 2024-25, the percentage increase (or decrease) is termed point-to-point
inflation.
● CPI and WPIare both point-to-point inflation.
How is inflation calculated?
● When we calculate inflation through any index, we need a base year.
● And to calculate base year, we need to give a value to the base year
● For Ex:
○ Product Base Year
○ Rs 20/unit 2012
○ Rs 55/unit Jan 2024
○ Recalculating Index value: increased by 75%
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Producer Price Index:
● In the current series of WPI, prices used for compilationdonotincludeindirecttaxesin
order to remove the impact of fiscal policy.
● ThisisinlinewithinternationalpracticesandhasmadethenewWPIconceptuallycloser
to the Producer Price index.
Note:To calculate inflation, thegeometric meanistaken into account.
Measures to Control Inflation:
Inflation can be controlled with the help of three different measures:
● Monetary Policy Measures: Here
interest rates can be increased like
repo rate, reverse repo rate bank
interest rate, CRR SLR can be
increased
● Fiscal Policy Measures: Under fiscal
policymeasures,governmentcanreduce
the expenditures specifically revenue,
direct taxes can be increased and
indirecttaxescanbedecreasedtogive
some relief to the consumers
○ For example: If the price of
sugar is rs 50 and government
is imposing a tax of 10% on
sugar then the sugar will cost
55 rs, but during inflation the
sugar price will cost rs 60and
ifgovernmentputs10%taxthenitwillcostRs66,sogovernmentcanreducethe
indirect tax for some time to give relief to consumers
● AdministrativeMeasures:ThesearethemostimportantindevelopingcountrieslikeIndia
and most effective also. These include:
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○ Strengthening the public distribution system and broadening its scope. For ex:
Delhi government selling onions through Mother dairy outlet when traders hoard
essential commodities
○ Importing some essential commodities like wheat, sugar, etc. to tide over the
domestic shortage from other states of India or other countries
○ EnforcingtheEssentialServicesMaintenanceAct(ESMA):Topreventstrikesin
essential transportation systems like railways, trucks, etc as thesestrikesleadto
shortages of essential commodities. It can be issued by both state and Central
governments. For example:In2002inTamilNadu2lakh GroupCandGroupD
employeesofthegovernmentwentonstrike,andthosewereessentialservices
and the government suspended all those 2 lakh employeesatonego. Whenthe
case reached the Supreme court 1,94,000 people were reinstated in the job but
6,000 employees were suspended ( T.R Rangarajan vs The state of Tamil Nadu
2004 case)
○ Enforcing Measures like ban on Export of Essential commodities
○ Issuing strict warnings to hoarders and speculators, andthosewhoindulgein
Cartelization.
○ Imposing aban on future trading of essential commodities.
Consequences of Inflation:
● Increase of Interest Rate: Central banks often raise interest rates in response to high
inflation to cool down demand and stabilize prices. Higher interest rates can increase
borrowing costs, affecting consumers and businesses seeking loans for various purposes.
● Less Savings: Inflation can distort saving and investment decisions. When the price of
goods and services increases leads to paying more money, so savings or investments
decrease.
● SocialUnrest:Economichardshipresultingfrominflationcanleadtoanincreaseincrime
rates. People may resort to theft, fraud, or other illegal activities to make ends meet,
which can contribute to social disruption and instability.
● Damage to Export Competitiveness: Inflation can make a country's exports costly in
international markets. It decreased demand for a nation's goods and services abroad.
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● Greater Uncertainty: When inflationishighandvolatile,itcancreateuncertaintyinthe
economy. Businesses may hesitate to make investments or long-term plans, as they are
uncertain about future costs and revenues.
● Redistributiveeffect:Peoplewhoseincomesareconstant,suffermoresuchasretireesor
those with fixed-wage jobs, can experienceadeclineintheirrealincome.Iftheirincome
does not keep pace with rising prices, they may find it harder to cover their living expenses.
GDP Deflator:
● GDP Deflator= Nominal GDP/ Real GDP × 100 percent.
● Nominal GDP: Current price X current quantity
● Real GDP:Current Quantity X Base year price
● The GDP deflator is a measure of inflation that shows how much prices of goods and
services in an economy have changed between years.
● It reflects the difference between Nominal GDP and Real GDP
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Economy
Chapter 07: Capital Market
Lecture 01: Capital Market
Capital Markets/Share Market:
● A financial market for raising long-term funds through instruments like equity shares,
bonds, and debentures.
● It serves as a link between businesses that need capital and investors looking for
returns.
● The capital market helps businesses secure funds for expansion, operations, and
development.
● It offers investors opportunities toearn dividends,interest, and capital appreciation.
Components of the Capital Market
● Equity Shares
○ Equitysharesrepresentownershipinacompany.Shareholdersarepart-ownersand
have voting rights in company decisions.
○ Investors gets benefitted from the equity shares from two types:
■ Dividend: A dividend is a share of the company's profits paid to
shareholders.
■ Capitalgain:Capitalgainistheprofitmadefromsellingsharesatahigher
price than their original purchase price.
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○ Equityshareshavehigherriskcomparedtodebtinstrumentsbutofferthepotential
for higher returns.
■ For example: Acompanyraises₹1000crorebyissuing100croresharesat
₹10/share. An investor buying 10,000 shares ownsaproportionatestakein
the company.
● Debentures
○ Debentures are fixed-income securities issued by companiestoborrowfundsfora
specified term.
○ Features of Debentures:
■ Fixed interest payments, regardless of company performance.
■ Debenture holders have no ownership or voting rights.
■ Debentures carry lower risk compared to equity shares.
■ Example: ₹1000 debenture at 7% annual interest provides ₹70 inreturns
every year.
● Preferred Shares
○ Preferred shares are the shares that offer fixed dividends and have priority over
equity shares in profit distribution and during liquidation.
○ Features ofPreferred shares:
■ Fixed dividend percentage.
■ They have limited or no voting rights.
○ They are less risky compared to equity shares but offer limited growthpotential.
For Example: ₹100 preferred share at 7% yields ₹7 annually.
Money Market vs. Capital Market
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Initial Public Offering (IPO) and Follow-on Public Offer (FPO)
IPO (Initial Public Offering)
● Initial Public Offering (IPO) is the first-time issuance of shares by a company to the
public in order to raise funds.
● The primary purpose of an IPO is to allow companies to raise funds for expansion or
operational needswhile offering investors the opportunityto buy a stake in the company.
● The process of launching an IPO involves several steps, including obtaining regulatory
approvalfromtheSecuritiesandExchangeBoardofIndia(SEBI),submittingadetailed
prospectus, and conducting a market valuation of the company.
○ For example, XYZ Ltd. might issue 100 crore shares at₹10each,aimingtoraise
₹1000 crore through its IPO.
FPO (Follow-on Public Offer)
● Follow-on PublicOffer(FPO)istheissuanceofadditionalsharesbyacompanyafterit
has already completed its Initial Public Offering (IPO).
● The purpose ofanFPOistohelpcompaniesraiseadditionalfundsforfurthergrowth,
expansion, or to manage existing debt.
○ For example, XYZ Ltd. may issue additional shares worth ₹300 crore at₹10per
share in 2024 through an FPO.
Bull investor:
● Abullisaninvestorwhothinksthemarket,aspecificsecurity,oranindustryispoised
to rise.
● Investorswhoadoptabullapproachpurchasesecuritiesundertheassumptionthatthey
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can sell them later at a higher price.
Bear investor:
● A bear is an investor who believes that a particular security, orthebroadermarketis
headed downward and may attempt to profit from a decline in stock prices.
● Bears are typically pessimistic about the state of a given market or underlying economy.
DEMAT Account
● It meanspaperless trading without a physical sharecertificate format.
● It is an electronic account used to store and manage shares and securities in digital form.
● It eliminates the need for physical certificates, making stocks trading and investing
more secure and efficient.
● When you buy or sell shares, they arecredited ordebited to your demat account.
● It simplifies transactions, reduces paper work and allows easy access to the portfolio,
making it essential for trading in the stock market.
● InIndiadepositoriesareinstitutionsthatholdandmanagesecuritieslikestocksandbonds
in electronic form.
● In India the two main depositories are: NSDL (National securities depository limited),
CDSL (Central depository Services limited).
● Theyenableseamlesstransfer,settlements,andsafekeepingofsecurities,eliminatingthe
need for physical certificates.
● Investors open demat accounts with these depository through depository participants like
banks or brokerage firms, to trade securities electronically.
● These systems ensureefficiency, transparency andsecurity in the financial market.
● NSDL is owned by National stock exchange, SBI,HDFC, IDBI etc and it was started in 1996
● CDSLwasopenedin1999andisprotectedorownedbyBombaystockexchange,SBI,SCB,
LIC etc.
Rolling settlement
● Rollingsettlementistheprocessinthestockmarketwheretradesaresettledcontinuously,
typically on a T+2 basis, meaning two businesses after the trade day.
● Instead of settling all trade at once , each transactionisprocessedindividually,ensuring
faster settlement, reducing risk and improving market efficiency.
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Economy
Chapter 07: Capital Market
Lecture 02: Capital Market (Part 02)
Various Terms Related to the Capital Market:
Mutual Funds:
● A mutual fund is a fund that is set up tohelp smallinvestorsto take or enjoy the
benefits of the stock marketwithout exposing themselvesto market complications.
● Thus, mutual funds pool small savings of lakhs of investors and, based on their professional
expertise, invest in the stock market to provide gains of the stock market growth to small
investors.
● However, it offersfree
choices:
○ To invest in the
debt fund.
○ To invest in the
equity fund.
○ To invest in a
balanced fund.
Derivative, or Commodity Trading:
● Derivative trading involvesbuying, and selling thefinancial contracts whose value
dependson underlying assets likestock, commodity,currency, and index.
● Instead of owing the assets, traders agree tobuyor sell at a future date for a specific
price.
● There are two types of contracts under derivative trading:Future ContractandOptions
Contract.
○ Future Contract:a future contract is a legally binding agreement tobuy, or sell
any underlying security at a future date at a predetermined price.
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■ The contract is standardized in terms of quantity, quality, delivery time, and
pace for settlement at a future date.
■ Both parties entering into such agreements are obligated tocomplete the
contract, and the end of the contract period with the delivery of cash,
or stock.
○ Options Contract:It is a contract which gives theright, but not an obligation,to
buy (call option), for sell (put option)the underlyingat a stated date, and a
stated price.
■ While a buy often pace the premium and buys the right to exercise his
option, the writer of an option is the one who receives the option premium,
and therefore, obliged tosell/buy the asset keepthe buyer exercises it
on him.
■ Option as word says thebuyer, or seller has a rightto decide whether he
will conclude the deal at a future date or not.
➢ In India these contracts are traded onMCX, and MCXwas
established in 2003, and it is based in Mumbai.
Inflation Index Bonds (IIBs):
● These are issued during ahigh rate of inflationinthe economy.
● It is issued by thegovernmentto guarantee a steadyyield to the investorsirrespective of
the level of inflation in the economy.
● Thereal coupon interest ratein the case of IIBsisfixed, however, thenominal principal
valueisadjusted for inflation, i.e.,the principalamount is indexed to inflation.
● They are, thus,designed to cut down the inflationrisk of an investmentand also
provide a extra interest rate after maturity.
Hedge Funds:
● Hedge means toprotect against risk.
● A hedge fund uses the funds collected from recognized investors likebanks, high
net-worth individuals, families, etc.
● These funds often function as overseas investment corporations or private investment
partnerships.
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● These involve alimited partnership of private investorswhose funds are managed by
professional fund managers with the involvement of wide strategies.
● In India, they arenotrequired to beregisteredwith theSecurities and Exchange Board
of India (SEBI),nor do they need to disclose their net asset value periodically like other
mutual funds.
● A hedge fund portfolio consists of assets such asderivatives, equities, bonds, currencies,
etc.
● As a collection of assets that strives to hedge risks to investors'money against market
ups and downs.
Participatory Notes (P-Notes):
● SEBI allowed Participatory Notes in2000.
● Participatory Notes (P-Notes) arefinancial instrumentsthat are issued by aregistered
Foreign Institutional Investor (FII)to an overseasinvestor who wishes to invest in the
Indian stock market without having to register themselves with the market regulator, the
Securities and Exchange Board of India (SEBI).
● P Notes aremostly used by hedge funds,overseas individualinvestors, and foreign
institutions to invest in the Indian stock market.
● This provides aneasy routefor overseas investorsto invest in India.
● A large amount of money was invested in India through the P-Notes route.
● It was subsequently found that P-Notes became amediumto invest black moneyin the
economy.
○ Thus, the Securities and Exchange Board of India (SEBI)has introducedKnow Your
Customer (KYC) normsfor P-Notes.
○ This has made the investment through P-Notes difficult and hence a decline in
investment through this route.
American Depositary Receipts (ADR):
● ADR is a method of generating long term funds by the Indian companies by listing in the
foreign stock exchange aftertaking permission fromSEBI as well as the concerned
foreign stock market regulatory commission.
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● An ADR, orAmerican depositary receipt, is a type ofnegotiable certificate issued by a
U.S. depositary bankthat represents a specified numberof shares, usually a single share,
of a foreign company's stock.
● Under this the Indian company Deposits a certain amount of its Indian share with a
designated depository.
● The depository in turns issued shares that are equivalent in value to the Indian company
shares then these Indian companies trade in ADR with the American public bylisting on
the US stock exchange and other international markets by way of GDR. Companies who
issues ADR and GDR areHDFC Bank, ICICI Bank, WIPRO,etc.
● The ADR is traded on thesame stock exchanges in theUnited States as any other
domestic share.
Global Depository Receipts (GDR):
● A global depository receipts, also known as a GDR, is very similar to an American
Depository Receipts.
● This is a type of bank certificate that represents aforeign company's share. This is a
foreign bank that holds the shares on a global scale.
● The shares are traded as domestic shares among them, but they are also available for
purchase at various bank branches around the world.
Masala Bonds (Offshore Rupee Bonds):
● They are termed so sinceIndia is famousin the internationalmarket for theexport of its
spices.
● They areoffshore rupee-denominated
bonds.
● These aredebt instruments offered by
Indian firmsin capital markets outside
India and are denominated in Indian rupees.
● They areoffered and settled in dollars to
raise Indian rupees from International
investors.
● The issuerconverts bond proceeds from
dollars into rupeesin the domestic market
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and uses them to finance its requirements in India. As such thecurrency risk in these
bonds resides with the investors.
● The investor base in these bonds are quite wide, that'swhy a lot of companies and
governments also use this bond to raise money.
● Theriskin these bonds isborne by the investor.Thus, any fall in the exchange rate of
the rupee would have a negligible effect on the issuer of these bonds.
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Economy
Chapter 07: Capital Market
Lecture 03: Capital Market (Part-3)
Comparison of Venture Capital (VC) and Private Equity (PE):
Aspect Venture Capital (VC) Private Equity (PE)
Definition Venture capital refers to funds Private equity refers to capital
invested by individuals or firms in investments made by firms or
startups or small companies aspiring individuals in private companies
to develop a fresh concept or that are not listed on stock
innovative product. exchanges.
Target Companies Focuses on startups and small Targets established private firms or
businesses that are in their initial acquires public companies to take
stages and lack access to public them private and delist them from
funding sources. stock exchanges.
Investment Provides financial support to startups Aims to acquire, develop, and
Purpose for developing innovative ideas, expand established companies
scaling operations, and preparing for through strategic restructuring and
public listing. management improvements.
Risk Level Involves high risk due to the Relatively lower risk as investments
unproven nature of startups and are made in mature companies with
their business models. proven revenue streams.
Investment Focuses primarily on funding Employs multiple strategies such as
Strategies early-stage businesses. venture capital, mezzanine capital,
leveraged buyouts, and growth
buyouts.
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Ownership Typically involves acquiring minority Often acquires majority or complete
Structure stakes in companies, allowing ownership, giving investors
founders to retain significant control. significant control over company
operations.
Role of Investors Venture capitalists (VCs) often Private equity firms actively
mentor and guide entrepreneurs, manage acquired companies, often
helping them grow their businesses. restructuring them to enhance
value before exiting.
Capital Provided Known as equity capital, which is Known as private equity capital,
used to develop and scale the which is used for acquisitions,
startup. restructuring, and growth
initiatives.
Exit Strategy VCs exit through IPOs, mergers, or PE firms exit by selling their stake
acquisitions after the company grows to other investors, a strategic
and achieves profitability. buyer, or through a public offering
(IPO).
Popularity A popular funding option for startups An attractive option for
to raise money for bank loans, high-net-worth individuals or firms
capital markets, or other debt seeking substantial returns on
instruments. investment through strategic deals.
Investor Profile Venture capitalists are individuals or Private equity investors include
firms investing in equity capital for high-net-worth individuals or firms
startups and early-stage businesses. investing in private companies or
public companies taken private.
Angel Investors:
● High-net-worth individualswho provide funding tostartups.
● Typicallyinvest in the early stages of a business,often when the founder is working to
establish the business.
● In exchange for their investment, they usually receiveownership equity or convertible
debt.
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● They often invest small amounts compared to venture capitalists, making it a riskier
proposition.
Angel Tax:
● A tax imposed on the funds raised by startups from external investors.
● Initiallyintroduced in 2012with the aim of discouragingmoney laundering.
● The angel tax wasabolished in the 2024 Union Budget,offering relief to startups.
Credit Rating:
● A credit rating evaluates the creditworthiness of a borrower, reflecting their ability to repay
a particular debt or financial obligation.
● It can be assigned to any entity seeking to borrow money, such as individuals, corporations,
state or provincial authorities, or even sovereign governments.
● A higher credit rating indicates a lower risk of default, while a lower rating signals a higher
risk for lenders or investors.
Credit Rating Agencies (CRAs):
● Credit Rating Agencies are companies thatassign creditratings to debtors, assessing
their ability to repay debt through timely payments of principal and interest.
● The primary purpose of CRAs is to provide an independent, research-based opinion on the
likelihood of default, helping investors and lenders make informed decisions.
● CRAs evaluate the creditworthiness of instruments through a combination ofqualitative
(management quality, industry outlook) andquantitative(financial ratios, cash flow
analysis) assessments, making the process more complex than simple mathematical
calculations.
Credit Rating Agencies in India
● In India, there are six
credit rating agencies
registered underSEBI:
1. CRISIL
2. ICRA
3. CARE
4. SMERA
5. Fitch India
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6. Brickwork Ratings
Global Credit Rating Agencies:
● At the global level, the leading credit rating agencies include:
1. Standard & Poor’s (S&P)
2. Moody’s
3. Fitch and Moody’s
Difference Between Sensex and Nifty:
Aspect Sensex Nifty
Full Form Sensex stands for Sensitive Index Nifty stands for National Stock
and is also known as S&P BSE Exchange Fifty.
Sensex.
Stock Exchange Associated with the Bombay Stock Associated with the National Stock
Exchange (BSE). Exchange (NSE).
Launch Year Introduced in 1986 by the BSE. Introduced in 1996 by the NSE.
Number of Consists of 30 stocks representing Consists of 50 stocks representing
Companies the top-performing companies the top-performing companies listed
listed on the BSE. on the NSE.
Coverage Represents companies across Represents companies from 24
various sectors but has a smaller sectors, covering nearly 65% of
sample size compared to Nifty. NSE's total market capitalization.
Base Year The base year for Sensex is The base year for Nifty is 1995,
1978-79, with a base value of 100. with a base value of 1000.
Calculation Initially based on the weighted Calculated using the free-float
Method market capitalization method, but market capitalization method.
transitioned to the free-float
market capitalization method in
2003.
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Relevance The Sensex is one of the oldest The Nifty is broader in scope,
and most established stock market representing a larger number of
indices in India. companies and sectors.
Investor Use Preferred by investors who follow Preferred by investors who focus on
the BSE and its listed companies. the NSE and its broader
representation of sectors.
Alternative Investment Funds (AIFs):
● AIFs are investment vehicles that pool funds from investors to invest in a wide range of
asset classes, excluding traditional investments like stocks, bonds, or mutual funds.
● They are designed to offer high-risk or low-risk ventures, depending on the type of fund,
and are an important avenue for those looking to diversify their portfolio.
SEBI (Securities and Exchange Board of India) and AIFs
● Regulation:
○ AIFs in India areregulated by SEBI under the AIFRegulations of 2012, which
wereamended in 2024to enhance transparency, investorprotection, and proper
governance of these funds. SEBI ensures that these funds follow clear rules for
managing investor funds and maintaining accountability.
● Trust Structure:
○ AIFs are often structured as trusts, governed by a trust deed. This structure gives
the trust the power to manage funds and invest in sectors like mutual funds,
infrastructure, and more. The trust can issue units to raise capital for various
investments.
● High-Risk Nature:
○ AIFs are high-risk investments and do not guarantee fixed returns. Investors may
experience fluctuations in returns depending on the performance of the underlying
assets, which may include equities, real estate, or infrastructure projects.
● Infrastructure Debt Funds (IDF):
○ Introduction:IDFs were introduced in the 2011-12Budget to boost infrastructure
financing by attracting institutional investors.
○ Types of IDFs:
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■ Trust-Based IDF:These are typically mutual funds regulated by SEBI,
and they raise resources by issuing units of the mutual fund.
■ Company-Based IDF:These are usually Non-Banking Financial Companies
(NBFCs), regulated by the Reserve Bank of India (RBI), that raise
resources by issuing bonds, typically rupee-denominated bonds with a
minimum 5-year maturity.
Reserve Bank of India (RBI) and Infrastructure Investment:
Non-Banking Financial Companies (NBFCs):
● Investment in Infrastructure:
○ NBFCs play a crucial role in funding infrastructure projects by raising capital
through bonds.
● Low-Risk Investment:
○ Compared to AIFs, NBFCs offer relatively lower-risk investment options, often with
fixed returns through bonds, which appeal to investors looking for predictable
income streams.
● Bonds:
○ NBFCs issue bonds that are structured to offer fixed returns, making them a more
stable and less volatile option for infrastructure investment.
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Economy
Chapter 07: Capital Market
Lecture 04: Debt Market
Debenture:
Debt Market:
● The debt market, alsoreferred to as the bond market,is where fixed-income securities,
such as bonds and government securities, are bought and sold.
● In this market,investors seek stable returns throughvarious debt instruments,
including government bonds and corporate debt.
Definition of Debenture:
● A debenture is atype of financial instrument usedby lenders, such as banks, to
provide capital to businesses and individuals.Unliketraditional loans, debentures are not
backed by specific collateral but are instead secured against the borrower’s assets.
● Thisallows the lender to claim the borrower's assetsif the loan is not repaid, offering a
form of protection.
Primary and Secondary Markets:
● In the debt market, there are both primary and secondary markets. Theprimary marketis
wherenew debenturesare issued andsold for the firsttime,
○ while thesecondary marketinvolves thebuying andsellingofpreviously issued
debentures among investors.
Fixed Returns:
● Debenturesoffer fixed returns, meaning the investorreceives a predetermined interest rate
over the life of the debenture.
● Thisfixed return appeals to investors seeking stableincomestreams from their
investments.
Interest Rate and Bond Price Relationship:
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● There is aninverse relationship between interest rates and bond prices. Wheninterest
rates rise, the prices of existing bonds or debentures fall.This occurs because new
bonds issued in the market will offer higher yields (interest rates) to attract investors,
making existing bonds with lower yields less attractive.
○ Consequently, the price of older bonds decreases to align with the new higher
returns offered by newer bonds.
● On the other hand,when interest rates fall, bondprices increase.This is because the
yields on newly issued bonds will be lower, making existing bonds with higher yields more
desirable.
○ Investors are willing to pay more for these bonds, driving up their prices.
Effective Rate of Interest (ERI):
● The Effective Rate of Interest (ERI), also known as the Effective Annual Rate (EAR), is
the interest rate on a loan or investment that is adjusted for compounding over a given
period.
● It reflects thetrue cost or return of an investment,taking into account thefrequency
of interest compounding(e.g., monthly, quarterly,annually).
Quantitative Easing (Q.E.)
Definition and Purpose:
● Quantitative Easing (Q.E.) is anon-traditional monetarypolicy toolused bycentral
banksto stimulate the economy when conventional measures,such as lowering interest
rates, become ineffective.
● Under Q.E., thecentral bank purchases governmentbonds and other securitiesfrom the
financial market to inject liquidity into the economy.
● The primary objective of Q.E. is toincrease the moneysupply,reduce long-term interest
rates, and encourage borrowing, spending, and investment.
● This ultimately boosts economic activity and supports asset prices.
Mechanism of Quantitative Easing (Q.E.):
● The central bank directly injects money into the financial system by purchasing securities,
thereby increasing the reserves of commercial banks.
● This liquidity infusion reduces long-term interest rates and makes credit more accessible,
encouraging businesses and consumers to spend and invest.
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Risks and Challenges:
● While Q.E. can revive a struggling economy, it comes with potential risks:
○ Inflationary Pressure:A significant increase in moneysupply may lead to
inflation if the economy overheats.
○ Asset Price Bubbles:Excess liquidity can inflateasset prices (e.g., real estate,
stocks) beyond their fundamental value, creating financial instability if bubbles
burst.
● Q.E. must be implemented cautiously to balance economic recovery with financial stability.
First Implementation- Bank of Japan (2001):
● The Bank of Japan (BoJ) was thefirst advanced economycentral bank to adopt
Quantitative Easing in 2001as a response to deflationand prolonged economic stagnation.
Traditional monetary tools, such as lowering interest rates, were no longer effective as
Japan's interest rates had already reached near-zero levels.
● Through Q.E., the BoJ aimed to stimulate spending and investment to lift the economy out
of its "lost decade."
Quantitative Easing (Q.E.) vs. Printing Money:
Aspect Quantitative Easing (Q.E.) Printing Money
Purpose Stimulates economic activity by Finances government debt or
injecting liquidity into the deficits directly.
financial system.
Mechanism Central bank purchases Central bank creates money to fund
government bonds and other government expenses.
securities from the market.
Objective Encourages borrowing, spending, Covers shortfalls in government
and investment to boost the budgets or spending needs.
economy.
Inflation Risk Moderate risk if managed properly, High risk of uncontrolled inflation
as funds are injected through due to excessive money supply.
financial markets.
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Target Supports long-term economic Primarily addresses immediate fiscal
stability and asset prices. needs of the government.
Perception Often regarded as a monetary Viewed as fiscal intervention
policy tool. through monetary expansion.
Control Managed and reversible, as central Difficult to reverse and can
banks can sell assets to reduce destabilize the economy.
liquidity.
Impact of Japan's Q.E.:
● Japan’s Q.E. program was pioneering but faced mixed outcomes. While it provided some
liquidity and stability, it struggled to fully revive Japan’s economy due to structural issues
and deflationary pressures.
● Despite its limitations, Japan's experiment with Q.E. paved the way for similar policies in
other advanced economies, especially during the 2008 global financial crisis.
Taper Tantrum:
Definition:
● The term "Taper Tantrum"refers to the financial market'sreaction in 2013 when the
U.S. Federal Reserve announced plans to reduce its pace of quantitative easing (QE).
● This announcement led to a sharp surge in U.S. Treasury yields as investors anticipated
tighter monetary conditions.
What Triggered the Taper Tantrum?
● In May 2013, the Federal Reserve signaled that it would begin tapering its bond purchases
under the QE program. QE was designed to inject liquidity into the economy by purchasing
Treasury bonds and mortgage-backed securities.
● The tapering announcement implied a gradual reduction in liquidity injection, causing panic
among investors.
Investor Reaction:
● Investors feared that tapering would tighten financial conditions, reduce demand for bonds,
and lead to higher interest rates.
● This panic triggered a sell-off in bonds, leading to a spike in U.S. Treasury yields and
volatility in global financial markets.
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Concerns Driving the Panic:
● The main concern during the taper tantrum was that the market's reliance on QE-driven
liquidity would result in a collapse once the program was reduced or ceased. Investors
worried that borrowing costs would increase, negatively impacting economic recovery.
Outcome:
● Despite the initial fears, the panic turned out to be largely unwarranted. As the Federal
Reserve gradually tapered its QE program, the markets adjusted, and the economy
continued to recover without any major disruptions.
Significance:
● Thetaper tantrum highlighted the sensitivity of financialmarketsto central bank
policies and announcements.
● It also underscored theimportance of clear communicationfrom central banksto
manage market expectations during major policy shifts.
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Economy
Chapter 08: External Trade
Lecture 01: Foreign Trade
Foreign Trade and Balance of Payments:
Definition of Balance of Payments (BoP):
● The Balance of Payments (BoP) is asystematic recordof all economic transactions
between the residents of a country and the rest of the worldover aspecific time
period, typically one year.
● It serves as an essential tool for analyzing a country’s international economic position,
showing whether a country is a
net borrower or lender to the
global economy.
○ BoP Surplus:Occurs
when acountry’s
receipts from
international
transactions exceed
its payments.
○ BoP Deficit:Occurs
when payments
exceed receipts,
reflecting anoutflow of
foreign reservesor theneed for external borrowing.
Components of Balance of Payments (BoP):
A. Current Account:
The current account tracks theflow of goods, services,income, and current transfers between a
country and the rest of the world.
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It is divided into two major components:
● Balance of Trade (BoT):
○ Represents the difference between exports and imports of physical goods.
○ India’s BoT:Since independence, India has faced apersistent trade deficit,
primarily due to higher imports than exports. This reflects India's heavy reliance on
imports for essential commodities like crude oil, machinery, and electronics.
Year BOT BOI Balance on Balance on Balance of
current capital payment
account account
2019-20 -$157.5 Bn +$132.8 Bn -$24.7 Bn +$83.2 Bn +$59.t Bn
2020-21 +$126.1 Bn +$23.9 Bn +$63.7 Bn +$87.3 Bn
-$102.2 Bn
2021-2022 +$150.7 Bn -$38.8 Bn +$85.8 Bn +$47.5 Bn
-$189.5 Bn
2022-2023 -$265. 3 Bn +$198.2 Bn -$67.1 Bn +$58.9 Bn -$9.1 Bn
2023-2024 -$242.1 Bn +$218.8 Bn -$23.3 Bn +$86.3 Bn +$63.7 Bn
Key Takeaway:Despite India’s growing export potential, its import dependency on crude oil and
electronic goods continues to drive a negative trade balance.
● Balance of Invisibles (BoI):
○ Tracks the balance of services, income, and transfers. It plays a critical role in
offsetting India's trade deficit due to the following:
■ Services Exports:Includes sectors like IT, tourism,transport, and
insurance, which contribute positively to India’s earnings.
■ Primary Income:Earnings from foreign investmentsand compensation to
employees abroad.
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■ Secondary Income:Remittances and personal transfers sent by
non-resident Indians (NRIs).
● The Balance of Payment numbers of the last four years:
Year India’s Balance of Payment
2019-20 + 59.5 Billion
2020-2021 + 87.3 Billion
2021-2022 + 47.5 Billion
2022-2023 -9.1 Billion
2023-2024 +63.7 Billion
Key Takeaway:The steady growth in service exports and remittances has helped India maintain
a positive balance in the invisibles account, partially offsetting its trade deficit.
● Balance on Current Account (BoT + BoI):
○ Reflects the overall surplus or deficit in the current account.
○ Twin Deficit Problem:
■ The current account deficit (CAD) combined with the fiscal deficit (FD)
constitutes the twin deficit.
■ CAD is more sensitive as it requires foreign currency to finance the deficit,
often leading to external borrowing. In contrast, FD can be financed through
domestic mechanisms like printing money, though this may lead to
inflationary pressures.
B. Capital Account
Thecapital account records the flow of investmentsand borrowingsthat are used to finance
the current account deficit and drive economic growth.
It includes the following components:
External Commercial Borrowing (ECB):
● Borrowing by the Indian government or private sector from international money markets at
market interest rates.
● Often used to finance infrastructure projects or expand business operations.
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External Assistance:
● Loans taken by India from foreign countries or international organizations at concessional
interest rates, primarily for development projects.
Foreign Direct Investment (FDI) & Foreign Portfolio Investment (FPI):
● FDI:Long-term investment in a country’s productive assets, contributing to economic
growth and employment.
● FPI:Short-term investment in financial instrumentslike stocks and bonds, providing
liquidity to markets.
Banking Capital:
● Involves the net flow of funds between domestic and foreign banks, including deposits and
loans.
● Examples:
○ Deposits by non-residents in Indian banks.
○ Loans taken by Indian banks from abroad.
○ Foreign bank investments in domestic banks.
Balance of Payments (BoP):
The BoP is thesum of the current and capital accountbalances and must always balance to
zero. Any deficit in the current account is financedthrough surplus in the capital account or vice
versa.
● Recent Trends in Overall BoP (in billion dollars):
○ 2018-19: -3.3
○ 2019-20: +59.5
○ 2020-21: +87.3
○ 2021-22: +47.5
○ 2022-23: -9.1
○ 2023-24: +63.7
● Key Observations:
○ Even with a current account deficit, overall BoP can show a surplus if capital
inflows are significant.
○ India’s recent BoP trends reflect vulnerability to external shocks, as seen in the
deficit of 2022-23.
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Key Points:
Current Account Trends:
● India's persistent current account deficit highlights its dependence on imports, particularly
crude oil.
● However, the growing strength of service exports and remittances has provided resilience
to the current account.
Capital Account Trends:
● FDI inflows indicate long-term confidence in India’s economic prospects.
● Short-term FPI inflows, though volatile, help bridge temporary deficits in the current
account.
Twin Deficit Challenge:
● While fiscal deficits can be managed domestically, CAD requires external financing,
making the economy vulnerable to currency fluctuations and global market conditions.
Economic Health Indicators:
● The current account balance is a more accurate measure of economic health compared to
the overall BoP, as capital inflows may mask underlying vulnerabilities.
India's Foreign Trade Policy (FTP) 2023:
● India's Foreign Trade Policy
(FTP) 2023, effective from
April 1, 2023, outlines a
strategic framework to
enhance the country's
international trade
landscape.
● Building upon the previous
FTP 2015-2020, this policy
introduces several key
initiatives aimed at
boosting exports and
facilitating ease of doing
business.
Key Points of FTP 2023:
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Process Re-engineering and Automation:
● The policyemphasizes the simplification and digitization of trade processesto reduce
transaction costs and enhance efficiency.
● This includes implementing paperless procedures and leveraging technology to streamline
export and import activities.
Focus on Emerging Areas:
● FTP 2023 addresses new sectors such as dual-use high-end technology items under
Special Chemicals, Organisms, Materials, Equipment, and Technologies (SCOMET).
● It alsopromotes e-commerce exports and collaborateswith states and districtsto
bolster export promotion efforts.
Amnesty Scheme for Exporters:
● A one-time Amnesty Scheme has been introduced to allow exporters to close old pending
authorizations and start afresh, thereby encouraging compliance and reducing litigation.
Towns of Export Excellence (TEE):
○ The policy recognizes new towns as TEEs to promote the development of potential
export hubs across various regions, thereby diversifying export bases.
Advance Authorization and Export Promotion Capital Goods (EPCG) Schemes:
● FTP 2023 streamlines these popular schemes tofacilitateeasier access for exporters,
particularly Micro, Small, and Medium Enterprises (MSMEs),enabling them to import
necessary inputs for export production without facing financial constraints.
Merchanting Trade from India:
● The policyenables merchanting trade, allowing Indianintermediaries to source goods
from one foreign country and supply them to another without touching Indian shores,
thereby expanding trade opportunities.
Export Targets:
● FTP 2023 sets anambitious goal to increase India'stotal exports to $2 trillion by the
end of 2030,necessitating significant annual growthin both goods and services sectors.
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Economy
Chapter 08: External Trade
Lecture 02: Foreign Investment
Foreign Investment:
Foreign investment can
be categorized intotwo
primary types:
Foreign Portfolio
Investments (FPI):
● There are two
categories of FPI
and FPI regulations 2019.
○ CategorylFPI:UndercategoryI,foreigncentralbanks,pensionfunds,university
funds, banks, insurance companies, etc
○ Category II FPI: Under category II, charitable organizations, corporate bodies,
family offices, individuals, etc.
●OneFPIshallinvestbelow10%inacompany.Incaseifittouchesorcrossesthe10%
mark, then that investor will be provided with five working days to sell the stakes or
shareholdings and if not it will be treated as FDI.
● NRIs can currently invest in India through the portfolio investment scheme route,
whichisregulatedbyRBI.Underthis,oneNRIcaninvestupto5%inthecapitalofa
company and all the NRIs can hold up to 24% in the capital of a company.
Foreign Direct Investment (FDI):
● According to the RBI, Foreign Direct Investment (FDI) in India includes following three
types of investments:
○ Equity Inflows: (incorporating a company under companies act 2013 as ajoint
venture or wholly owned subsidiary).
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○ Other types of Capital: compulsorily convertible preference sharesanddebenture
within a specified period of time.
○ Reinvested Earnings:(profits earned in india are reinvested back)
Foreign Portfolio Investment (FPI) Regulations 2019:
Under the FPI Regulations
2019, FPIs are classified into
two categories:
Category-1 FPI:
● This category
includes entities
with significant
financial strength
and stability.
● Examples include foreign central banks, pension fund companies, university fund companies,
banks, and insurance companies.
● These entities are typically considered to have a lower risk profile and are permitted to
invest in Indian financial markets under more favorable conditions.
Category-2 FPI:
● This category is for investors with a relatively higher risk appetite and includes charitable
organizations, corporate offices, family offices, individuals, and trusts.
● These investors are subject to more restrictions and may face additional compliance
requirements compared to Category-1 FPIs.
Investment Limits and Regulations:
Individual Investment Limit:
● An individual FPI can invest in a company but must ensure that theirstake does not
exceed 10% of the company’s capital.
● If the investor's stake crosses the10% threshold,theFPI is required to sell the excess
share within 5 working days.
● If the investor fails to reduce the stake within this period, the investment will be treated
as a Foreign Direct Investment (FDI), subjecting it to different regulations.
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NRI Investment Regulations:
● Non-Resident Indians (NRIs)currently invest in Indiathrough thePortfolio Investment
Scheme (PIS) route,which isregulatedby theReserveBank of India (RBI).
● Under this scheme, NRIscan invest up to 5% of thecapital of a company.
● Additionally, NRIs, when acting collectively,canhold up to 24% of the company’s total
capital, subject to the regulations set by the RBI.
Foreign Direct Investment (FDI) in India:
According to the Reserve Bank of India (RBI), FDI in India includes the following three types of
investments:
1. Equity Inflows:
● This type of investment refers to the foreign company establishing a presence in India by
setting up a company under the Companies Act of 2013.
● Foreign investors may either establish ajoint venture (a partnership with an Indian
entity)or awholly owned subsidiary (an entirelyforeign-owned company)in India.
● Equity inflows are the most common form of FDI, as they provide long-term capital to
businesses operating in India and often help in the development of sectors such as
manufacturing, technology, and services.
2. Reinvested Earnings:
● Reinvested earnings are profits earned by foreign companies operating in India that are not
distributed as dividends but are reinvested back into the business.
● This type of FDI is crucial for the expansion and growth of foreign businesses in India, as
it allows companies to reinvest their profits to enhance operations, expand market share, or
develop new products or services.
● Reinvested earnings contribute significantly to the capital base of foreign firms, ensuring
continued investment in the Indian economy.
3. Other Types of Capital:
● This category includes financial instruments such asfully convertible preference shares
and debentures,which are convertible into equityafter a specified period.
● These instruments allow foreign investors to invest in companies with the option of
converting their investment into equity at a later stage, thus providing a flexible form of
financing.
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● The conversion of these instruments into equity brings additional capital into the company
and further strengthens the foreign ownership position in the Indian market.
Difference between Foreign Direct Investment (FDI) and Foreign Portfolio
Investment (FPI):
Category Foreign Direct Investment Foreign Portfolio Investment (FPI)
(FDI)
Definition Investment by an individual or Investment by individuals, hedge funds,
company from one country into or institutions in financial assets
business interests/assets in (stocks, bonds, etc.) in foreign
another country. countries.
Nature of Investment Long-term investment, often Short-term, liquid investments in
involving ownership stakes, joint financial assets like stocks, bonds, and
ventures, or long-term capital other securities.
for business operations.
Key Role Stimulates economic growth, Increases market efficiency, liquidity,
creates jobs, facilitates diversified investment portfolios, and
technology transfer, and allows hedging against domestic risks.
strengthens trade relations.
Investment Flexibility Less flexible, as FDI is a More flexible, as FPI can be quickly
long-term commitment. adjusted based on market conditions.
Risk Profile Typically lower risk due to Higher risk due to market volatility and
long-term nature and strategic investor sentiment.
corporate involvement.
Examples Establishing joint ventures, Investments in stocks, bonds, and
wholly owned subsidiaries, or other securities in foreign markets.
acquiring ownership stakes in
businesses.
Technology Transfer Facilitates technology and No direct technology transfer; focuses
management practice transfer on financial market participation.
to the host country.
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Economic Integration Strengthens cross-border Contributes to capital flow and global
corporate growth, technological market access but doesn't impact
advancements, and trade. corporate operations directly.
Investment Types in - Equity Inflows (joint ventures, - Investment in stocks, bonds, and
India subsidiaries) securities under FPI regulations.
- Reinvested Earnings (profits
reinvested into business)
- Other Capital (convertible
instruments like debentures)
FDI Routes in India:
● In India, FDI is permitted through two following routes:
○ AutomaticRoute:AsectorwhereFDIispermittedthroughautomaticroute,thena
foreign investor is not required to take any prior approval of thegovernmentand
can straight away invest in India. But once they come they need to follow the
given regulatory
compliances.
■ The Ministry of
Commerce and
industry gives a
comprehensive list
of those sectors
who can invest in india where a foreign investor can come through
automatic/direct route
■ Not only this , for each sector and industrieslimitsarealsoprovided.
Like: 26%,51%, 49%, 74% and 100
○ The Government Route: Under this, apriorpermissionisrequiredtoinvestanda
proposal of investment needs to be submitted at the National Single Window
Systemandthentheproposalwillbefurthersubmittedtotheconcernedministry
or department. Once permission is given, then the investment can be made in
India.
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Economy
Chapter 08: External Trade
Lecture 03: FDI
Sectors Prohibited for Foreign Direct Investment (FDI) in India:
● Foreign Direct Investment (FDI)isacriticalcomponentofIndia'seconomicstrategy,but
certainsectorsarestrictlyprohibitedfromreceivingFDItosafeguardnationalinterestsand
align with government policies.
These sectors are as follows:
● Lottery Business: FDI is not
permitted in anyformoflottery,
including:
○ Government lotteries
○ Private lotteries
○ Online lotteries
● Gambling and Betting: Sectors
related to gambling and betting,
including casinos, are completely
restricted from receiving foreign
investments.
● Chit Funds: FDI is prohibited in
chitfunds,whicharesavingsand
borrowing schemes popular in
India.
● NidhiCompanies:Thesecompanies,whicharemutualbenefitsocietiesdesignedtopromote
thrift and savings among members, cannot receive foreign investments.
● Trading in Transferable Development Rights (TDRs): The trade of rights for land
development is restricted from foreign capital participation.
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● Real Estate Business and Farmhouse Construction: Investment in real estate business
(excluding development of townships, constructionofresidential/commercialpremises,and
infrastructure projects) and the construction of farmhouses is prohibited.
● Manufacturing of Tobacco Products: The production of cigarettes, cigars, and other
tobacco products, including those using tobacco substitutes, is closed to foreign
investments.
● Activities Prohibited for Private Sector Investment: Certain activities that are
exclusivelyreservedforthegovernmentorareofstrategicnationalimportancearenotopen
to FDI.Examples include:
○ Atomic energy
○ Railway operations (excluding permitted activities like maintenance, suburban
corridors, or freight terminals).
Benefits of FDI:
● Attracts Investment and Capital: FDI injects substantial capital, fostering economic
growth and supporting the development of various sectors.
● Facilitates Capital Formation: The inflow of fresh or new capital contributes to capital
formation, driving the expansion of industries and infrastructure.
● Provides Latest Technology: FDI brings advanced technologies, enabling domestic
industries to improve productivity and efficiency. It also fosters the growth of human
capital by introducing global skill sets and training programs.
● Increases Government Revenues: With the expansion of industries and businesses, the
government benefits from higher tax revenues.
● Stimulates Infrastructure Development: FDI supports infrastructure projects such as
roads, power, and communication networks, enhancing overall productivity.
● Generates Employment Opportunities: FDI creates a significant number of direct and
indirect job opportunities in various sectors, reducing unemployment.
● EnhancesBalanceofPayments(BoP):ItpositivelyimpactsBoPbyincreasingtheinflow
of foreign exchange and reducing dependency on external borrowing.
● Encourages Constructive Competition: FDI promotes healthy competition within the
economy, pushing domestic firms to improve quality and efficiency.
Demerits/Disadvantages of FDI:
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● Threatens Political Sovereignty: Excessive dependence on foreign investments can
compromise a nation's political and economic sovereignty.
● Intensifies Competition: The entry of foreign companies can create tough competition,
potentially marginalizing small and medium-sized domestic enterprises.
● OutdatedTechnology:Someforeigninvestorsmaybringoutdatedorobsoletetechnologies
that fail to benefit the host economy.
● AffectsExchangeRateStability:LargeFDIinflowsandoutflowscanleadtofluctuations
in the exchange rate, impacting trade and economic stability.
● Outflow of Foreign Exchange: High dividends, royalties, and profits transferred toparent
companies abroad result in the outflow of foreign exchange.
● IncreasesLandandPropertyPrices:FDIinflowscanleadtohigherdemandforlandand
property, driving up real estate prices and creating affordability issues.
● Government ControlIssues:Wholly-ownedsubsidiariesofforeigncompaniesoftenoperate
with minimal government control, which can result in policy challenges.
● Cowboy Approach: Foreign companies may adopt aggressive practiceswithoutconsidering
the long-term interests of the host country.
● Transfer Pricing Issues: Some foreign companies engage in unfair practices, such as
inflating the cost of technology imports from parent companies. This results in:
○ Higher production costs.
○ Reduced profits.
○ Lower taxes paid in the host country.
○ Significant outflow of foreign exchange.
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Factors That Attract FDI in India:
● CheapandCompetitivelySkilledLabour:India'slargeworkforceisbothcost-effectiveand
skilled, making it an attractive destination for foreign investors.
● Huge Market: India offers a vast consumer market with a growing middle class and
increasing purchasing power, providing immense opportunities for investors.
● RelativelyStreamlinedLegalProcedures:Overtheyears,Indiahassimplifieditslegaland
regulatory frameworks, making it easier for foreign investors to set up and operate
businesses.
Factors That Detract FDI from India:
● Rigid LabourMarket:Complexandinflexiblelabourlawscandiscourageinvestors,asthey
make hiring and firing processes cumbersome.
● Poor Infrastructure: Inadequate infrastructure, including transportation, power, and
communication networks, hinders the smooth functioning of businesses and reduces
investment appeal.
● Bureaucratic Hurdles: Red tape, excessive paperwork, and lack of transparency in
government processes create delays and increase costs for foreign investors.
● Delays in Project Approvals:Slowapprovalprocessesforprojectsdeterinvestors,asthey
lead to time and cost overruns.
What India Attracts as a Country from Foreign Investors:
● Capital:FDIprovidesasignificantsourceoffinancialcapitalthathelpsfunddevelopmental
projects and industries.
● Technology: Foreign investors introduce advanced technologies that enhance productivity
and efficiency across various sectors.
● Exports:Byinvestinginexport-orientedindustries,foreigncompaniesboostIndia'sexports
and improve its trade balance.
● Employment Generation: FDI creates substantial employment opportunities, bothdirectly
in industries and indirectly in related sectors.
● Reduction in Poverty: With increased employment andeconomicactivity,FDIcontributes
to poverty alleviation by improving income levels.
● Limiting Regional Imbalances: Investments in underdeveloped regions promote balanced
regional growth and reduce disparities between urban and rural areas.
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● Sector-Specific Investments: FDI targets sectors that provide necessary and strategic
linkages, such as infrastructure, technology, and manufacturing, which strengthen the
overall economy.
Comparison Between Foreign Exchange Regulation Act (FERA), 1973 and
Foreign Exchange Management Act (FEMA), 1999
Aspect FERA (Foreign Exchange FEMA (Foreign Exchange
Regulation Act, 1973) Management Act, 1999)
Enactment Passed in 1973, came into force Passed in 1999, replacing FERA.
on 1st January 1974.
Objective Conservation and strict control Liberalization and efficient
of foreign exchange. management of foreign
exchange.
Global Alignment Not aligned with global Aligned with WTO and
frameworks like WTO. globalization requirements.
Nature of Violations Criminal offenses, punishable Civil offenses, punishable with
with imprisonment or fines. monetary penalties.
Approach Restrictive and rigid. Liberal and
management-oriented.
Number of Sections 81 sections. 49 sections.
Regulatory Focus Control of foreign exchange Managementofforeignexchange
transactions and activities. to facilitate trade and
investment.
Current Account Strictly controlled. Permitted unless explicitly
Transactions prohibited.
Capital Account Restricted and controlled. Restricted unless explicitly
Transactions permitted.
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Rule-Making Powers Not explicitly mentioned for - Section 46: Central
capital and current accounts. government regulates current
account transactions.
- Section 47: RBI regulates
capital account transactions.
Penalty for Violation Stringent penalties including Penalties involve monetary fines
imprisonment. only.
Context of Introduction Designed for a closed and Reflects liberalization and
regulated economy. globalization post-1991 reforms.
FDI Restrictiveness Index:
● Published by OECD:TheFDIRestrictivenessIndexisdevelopedbytheOrganisationfor
Economic Co-operation and Development (OECD) to measure the degree of
restrictiveness in policies affecting foreign direct investment.
● Purpose: The index evaluates how open or restrictive a country is to FDI by assessing
barriers foreign investors may face.
● Parameters (4 Key Criteria):
○ ForeignEquityLimitations:Measuresrestrictionsonthepercentageofownershipa
foreign investor can have in a domestic company.
○ Operational Restrictions: Includes limitations on activities such as local content
requirements, mandatory joint ventures, and restrictions on the repatriation of
profits.
○ Screening/Approval Requirements: Assesses whether government approval or
screening is mandatory for foreign investments in specific sectors.
○ Employment of Foreigners in Key Positions: Evaluates restrictions on hiring
foreigners for senior management or key technical roles in the company.
○ India’sPosition:Indiahasmoderaterestrictivenessduetolimitsonforeignequity
in strategic sectors like defense and media, approval requirements in sectors like
mining, and operational restrictions in certain industries.
Multilateral Investment Guarantee Agency (MIGA):
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● PartoftheWorldBankGroup:MIGAisaninternationalfinancialinstitutionthatoperates
under the umbrella of the World Bank to promote foreign investment.
● Establishment: Founded in 1988 with the objective of encouraging cross-border
investmentsin developing countries by mitigating risks.
● Objective:MIGA’sprimarygoalistoprovideguaranteestoforeigninvestorsoperatingina
country against non-commercial risks and potential losses.
● India’s Membership: India became a member of MIGA in 1994, aiming to enhance
foreign investors' confidence by ensuring security against non-commercial risks.
● Insurance Coverage by MIGA: MIGA provides insurance against the following five
non-commercial risks:
○ CurrencyInconvertibilityandTransferRestrictions:Protectsagainstlosseswhen
investors cannot convert or transfer local currency into foreign currency.
○ Government Expropriation: Covers risks of the host government seizing or
nationalizing foreign investments.
○ War,Terrorism,andCivilDisturbances:Insuresagainstlossescausedbyconflicts,
terrorism, or political instability.
○ Breach of Contracts: Protects investors from losses due to host governments
breaching investment agreements.
○ Non-Honoring of Financial Obligations: Covers situations where a government or
state-owned enterprise fails to honor financial commitments.
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Indian Economy
Chapter 08: External Trade
Lecture 04: Foreign Exchange Rate
Foreign Exchange Rate:
Importance of Exchange Rate Determination:
● The exchange rate plays a crucial role in the economy as it directly impactsacountry's
trade capacity, including imports and exports.
● A favorable exchange rate can enhance export competitiveness, while an unfavorable one
can make imports costlier, affecting the balance of trade.
Fixed Exchange Rate System (Post-Independence - 1990):
● After India’s independence, theReserveBankofIndia(RBI)initiallypeggedtherupeeto
the British pound and later to the US dollar.
● Until 1990, India followed a fixed exchange rate system, where the value of therupee
was maintained against a basket of foreign currencies.
Devaluation of the Rupee:
● Devaluationreferstoadeliberatedecisionbyacountry'scentralbanktoreducethevalue
of its currency against foreign currencies.
● This strategy makes exports cheaper and more competitive in global markets while
discouraging imports by making them more expensive.
● The RBI undertook two major devaluations:
○ 1966:Aimed at addressing trade imbalances and improving export earnings.
○ 1991: Implemented as part of structural reforms to stabilize the economy amid a
balance of payments crisis.
Transition to a Market-Driven Exchange Rate System (1991 Reforms):
● Aspartoftheeconomicliberalizationreformsof1991,Indiashiftedfromafixedexchange
rate system to a more flexible regime.
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● In March 1992, the Liberalized Exchange Rate Management System (LERMS) was
introduced, making the rupee partially convertible.
Partial Convertibility Under LERMS:
● Under this system, 60% of foreign exchange receipts on the current account could be
freely converted at market-determined exchange rates.
● Theremaining40%hadtobesurrenderedtotheRBIatanexchangeratefixedbythe
central bank.
● The portion surrendered to the RBI was primarily used to meet government foreign
exchange requirements and to finance essential imports.
Dual Exchange Rate System
● Theintroductionofpartialconvertibilitycreatedadualexchangeratesystem,wheretwo
different exchange rates coexisted, one market-determined and the other set by the RBI.
● ThissystemwasatransitionalphasebeforeIndiamovedtowardsfullconvertibilityonthe
current account in 1994.
Exchange Rate Determination:
Market Forces and Exchange Rate Determination:
● Inamarket-drivenexchangeratesystem,thevalueofacurrencyisdeterminedbythe
demand and supply
of foreign currency
in the domestic
economy.
● The exchange rate
fluctuates based on
the interaction
betweenbuyers(who
demand foreign
currency) and sellers
(who supply foreign currency).
Demand for Foreign Currency:
● The demand for foreign currency, such as the US dollar, arises due to:
○ Imports:Payments for foreign goods and services.
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○ Tourism:Outflow of domestic currency for travel and expenses abroad.
○ Debt Servicing:Repayment of external loans and interest.
● The relationship between the exchange rate and demand follows a downward-sloping
demand curve,meaning:
○ If the exchange rate rises (more rupees per dollar), fewer dollars will be demanded.
○ If the exchange rate falls (fewer rupees per dollar), more dollars will be demanded.
Supply of Foreign Currency:
● The supply of foreign currency in the domestic economy comes from:
○ Remittancesfrom NRIs(money sent by Indian workers abroad).
○ Foreign Direct Investment(FDI)and Foreign Portfolio Investment(FPI).
○ Export earningsfrom goods and services.
● The supply curve isupward-sloping,meaning:
○ If the exchange rateincreases(morerupeesperdollar),suppliersarewillingto
sell more dollars.
○ If the exchange rate decreases (fewer rupees per dollar), fewer dollars will be
supplied.
Equilibrium Exchange Rate:
● The equilibrium exchange rate isdeterminedatthepointwherethedemandandsupply
curves intersect.
● At this point, the quantity of foreign currency demanded equals the quantity supplied.
Fluctuations in Exchange Rate:
● Sincedemandandsupplyfactorsoperateindependently,itisdifficulttopredicttheexact
exchange rate.
● Any changes in demand (e.g.,increasedimports)orsupply(e.g.,higherremittances)will
cause the exchange rate to fluctuate.
● Depreciation:Ifdemandforforeigncurrencyrisesorsupplyfalls,therupeeweakens(more
rupees per dollar).
● Appreciation:Ifdemandfallsorsupplyincreases,therupeestrengthens(fewerrupeesper
dollar).
Impact of Increased US Dollar Supply & RBI's Role in Exchange Rate
Management:
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Effect of Increased Supply of US Dollars:
● AnincreaseinthesupplyofUSdollarsinthedomesticeconomycanoccurduetovarious
sources such as:
○ Remittances from NRIs
○ Foreign Direct Investment (FDI)
○ Foreign Portfolio Investment (FPI)
○ External Borrowings
● WhenthesupplyofUSdollarsriseswhiledemandremainsconstant,excesssupplyleadsto
the appreciation oftherupee(i.e.,fewerrupeesareneededperdollar),andtheUSdollar
depreciates.
Consequences of Rupee Appreciation:
● Exports become expensive: Indian goods and services become costlier in globalmarkets,
reducing export competitiveness.
● Imports become cheaper: Foreigngoodsbecomemoreaffordable,leadingtoanincreasein
imports.
● This shift can negatively impact domestic industries that rely on exports, leading to a
widening trade deficit.
RBI's Intervention to Prevent Rupee Appreciation;
● To counteract rupee appreciation, the RBI intervenes by purchasing US dollars from the
market.
● ThiscreatesartificialdemandforUSdollars,preventingexcessiveappreciationoftherupee
and maintaining the exchange rate at a stable level.
● However, this act of purchasing dollars releases rupees into the domestic economy,
increasing liquidity and creating inflationary pressure.
Managing Inflation Through Sterilization;
● To counter excess liquidity due to dollar purchases, RBI undertakes a process called
Sterilization, which involves absorbing surplus money from the economy.
● RBI mainly uses two tools for sterilization:
○ Reverse Repo Operations:RBIborrowsbackexcessliquidityfrombankstoreduce
inflationary pressure.
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○ Market Stabilization Scheme(MSS):Governmentbondsandsecuritiesareissued
to absorb excess liquidity from the market.
Liquidity Adjustment Facility (LAF):
● Liquiditycreatedfromdomesticfactors(suchasgovernmentspendingorchangesinbank
reserves) is managed through the Liquidity Adjustment Facility (LAF).
● This helps in maintaining stability in short-term interest rates and overall monetary
conditions.
The Prisoner’s Dilemma in Exchange Rate Management:
● RBI faces a trade-off between:
○ Export Competitiveness:Preventing rupee appreciation to support exporters.
○ Inflation Control:Managing excess liquidity to curb inflationary pressure.
● Since perfect sterilization is not always possible, RBI often has to choose between
stabilizing inflation or maintaining a competitive exchange rate.
● This dilemma implies that achieving both objectives simultaneously is difficult, and RBI
must make strategic trade-offs based on prevailing economic conditions.
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Economy
Chapter 08 : External Sector
Lecture 05: DTAA and GAAR
NEER and REER :
● Dirty Float and Managed Float:
○ Globally,anyinterventionbyacentralbankinamarket-determinedexchangerate
is referred to asa “Dirty Float.”
○ In India, such intervention by the RBI is referred to as a "Managed Float"ina
market-determined exchange rate, and it may be more accurately described as a
"Managed Market Determined Exchange Rate."
● Role of Effective Exchange Rates:
○ Theexportcompetitivenessofacountryshouldbeevaluatedintermsofitstrading
partners, which is better captured through effective exchange rates.
○ Effectiveexchangeratesserveasatooltoassessthefairvalueofacurrency,the
external competitiveness of an economy, and also guide monetary and financial
conditions.
○ Aneffectiveexchangerateprovidesasummaryindicatorofthemovementsofthe
home currency relative to a basket of currencies from trading partners.
● NEER (Nominal Effective Exchange Rate):
○ NEER shows thevalueofacountry’scurrencyrelativetoabasketofothermajor
currencies, without factoring in inflation.
○ Itprovidesabroadindicationofwhetheracurrencyisbecomingstrongerorweaker
compared to others.
● REER (Real Effective Exchange Rate):
○ REERadjustsNEERfortheinflationdifferencebetweencountries,providingamore
accurate measure of a currency's purchasing power by considering inflation
differences.
○ AhigherREERsuggestsacurrencymaybeovervalued,whichcannegativelyaffect
export competitiveness.
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● In simple terms, NEER reflects the raw strength of a currency, while REER reflectsthe
real value by accounting for inflation.
● TheReserveBankofIndia(RBI)monitorsmovementsinREERandNEERasindicatorsof
export competitiveness, rather than justtheexchangeratemovementsbetweentherupee
and the US dollar.
● Long-term export competitiveness is more influenced by factors such as product
diversification, quality, product sophistication, and exploring new markets rather than
exchange rate movements alone.
● Devaluation vs. Depreciation:
○ Devaluation is typically seen as a strategy to encourage exports and discourage
imports.
○ Depreciation,ontheotherhand,reflectsalossofconfidenceinthehomecurrency
and can lead to a currency crisis if not managed effectively.
Transactions restricted in Current Account:
● Remittance of money earned through activities such as racing, riding, lotteries, betting,
etc., is not permitted.
● ThewithdrawalofforeignexchangeisprohibitedfortraveltoNepalorBhutan,orfortravel
with a person resident in either of these countries.
● Under the FEMA rules, individuals are allowed to availforeignexchangefacilitiesuptoa
limit of 2.5 lakh US dollars for the following purposes:
○ Private visits to any country (except Nepal or Bhutan).
○ Sending gifts or donations abroad.
○ Going abroad for employment.
○ Immigration purposes.
○ Maintenance of close relatives living abroad.
○ Travel for business, attending conferences, or going for training programs.
○ Medical expenses abroad, including medical check-ups or treatments.
○ Studying abroad.
Transactions permitted in capital account:
● External Commercial Borrowing (ECB):
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○ Aneligibleborrowercanraiseupto750millionUSdollarsperfinancialyearunder
the automatic route.
○ Corporates can raise a total of up to 10 billion US dollars for working capital
purposes,with a minimum averagematurity period of3 years.
○ A startup can borrow up to3 million US dollars perfinancial year.
○ A manufacturing company can borrow up to 50 million US dollars per financial
year, with a minimum maturity period of 1 year.
● Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI):
○ The limits for FDI and FPI investments are determined by the Ministry of
Commerce and Industry.
● Investment Restrictions in Nepal and Bhutan:
○ There are no restrictions on investments in Nepal and Bhutan.
○ For other countries, the investment limit is 2.5 lakh US dollars per financial year.
● Restrictions Based on Financial Action Task Force (FATF) Designation:
○ If a country is identified by the Financial Action Task Force (FATF) as a
non-cooperative country, such as IranorNorthKorea,noinvestmentisallowedin
that country.
● Liberalised Remittance Scheme (LRS):
○ Under the Liberalised Remittance Scheme,anIndianresidentcanremitupto2.5
lakh US dollars per financial year outside India.
Double Taxation Avoidance Agreement (DTAA)
● A Double Taxation Avoidance Agreement (DTAA), also known as a Double Tax Treaty
(DTT), isanagreementbetweentwoormorecountriestopreventthedoubletaxationof
income.
● Doubletaxationoccurswhenanindividualorbusinessisrequiredtopaytaxesonthesame
income in multiple countries.
● DTAAs allocate taxing rights between countries to ensure that income is not taxed twice.
● Key Objectives of DTAA:
○ Avoidance of Double Taxation: The primary goal is topreventdoubletaxationof
income in two different countries.
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○ PreventionofTaxEvasion:DTAAshelppreventtaxevasionbydefiningcleartaxing
rights and promoting transparency.
○ Promotion of Economic Cooperation: These agreements facilitate international
trade and investment by offering clear guidelines on tax obligations.
○ Encouragement of Cross-Border Investments: By reducing the risk of double
taxation, DTAAs encourage individuals and businesses to invest across borders.
● Types of DTAA:
○ Comprehensive DTAAs: Agreements with countries like South Africa, Australia,
Bangladesh, Bhutan, USA, Japan, Germany, Singapore, and Mauritius, among others.
○ Intergovernmental Agreements (IGA): Examples include the agreement between
India and the US under the Foreign Account Tax Compliance Act (FATCA).
○ Limited Agreements: Such agreements are with countries like Afghanistan,
Ethiopia, Iran, and Pakistan, among around 8 others.
○ Specified Association Agreement: An agreement between India and Taipei under
Section 90-A of the Income Tax Act of 1961, focused solely on double taxation.
○ Tax Information Exchange Agreements (TIEA): Agreements with countries like
Argentina,Bahamas,andCaymanIslands,mainlywithtaxhavens.Indiahasaround
19 such agreements.
● Allocation of Taxing Rights:
○ Income from Employment: Generally taxedinthecountrywheretheemployment
is exercised.
○ Dividends:Taxedinthesourcecountry,withthecountryofresidencepossiblyalso
taxing them, but allowing a tax credit for the tax paid in the source country.
○ Interest: Taxed in both the source country and thecountry of residence.
○ Royalties: Similar to interest, royalties may be taxed in both countries, but
typically at reduced tax rates to avoid double taxation.
● Key Provisions in DTAAs:
○ Non-Discrimination Clause: DTAAs usually prevent discrimination against foreign
nationals, ensuring that a countrycannotimposehighertaxesonresidentsofthe
other contracting state than it would on its own residents.
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○ Mutual Agreement Procedure (MAP): This allows countries to resolve disputes
regarding the interpretation or application of the DTAA. Taxpayers can seek
assistance through MAP if they feel unfairly taxed or double-taxed.
○ ExchangeofInformation:DTAAsfacilitatetheexchangeoftax-relatedinformation
between tax authorities, helping prevent tax evasion by ensuring transparency in
cross-border transactions.
○ Limitation on Benefits (LOB): Some treaties include a provision that restricts
DTAA benefits to genuine residents ofthecontractingcountries,preventingabuse
by individuals or entities set up solely for tax avoidance.
● Importance of DTAAs:
○ Tax Relief: DTAAs reduce the effective tax rate on international income through
credits or exemptions, offering tax relief to taxpayers.
○ Economic Growth: By removing the risk of double taxation, DTAAs encourage
foreign investment and promote economic growth by providing more favorabletax
conditions.
○ Certainty and Transparency: DTAAs offer greater clarity about tax obligations,
reducing the likelihood of disputes between taxpayers and tax authorities.
○ ProtectionAgainstDiscrimination:DTAAsprotectforeignnationalsandbusinesses
by preventing discriminatory tax practices.
● Example of DTAA Application:
○ SupposeanindividualisaresidentofCountryAandearnsincomefromCountryB.
Without a DTAA, the individual could face double taxation: once in Country B
(where the income issourced)andonceinCountryA(theindividual'scountryof
residence).
○ Under the DTAA:
■ Country B may tax the income at a reduced rate or provide an exemption.
■ Country A may allow the individualtoclaimataxcreditfortaxespaidin
Country B, reducing the overall tax burden.
GARR (General Anti-Avoidance Rule)
● GARR (General Anti-Avoidance Rule) is a set of provisions in tax laws designed to
counteract tax avoidance schemes that, while legal, undermine the intent of the tax
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system. It was introduced to prevent the artificial shifting of profits or manipulation of
transactions to minimize tax liabilities.
● Key Aspects of GARR
○ Objective:TheprimarygoalofGARRistoprovidetaxauthoritieswiththepowerto
scrutinize and invalidate transactions or arrangements thatareprimarilyaimedat
obtainingataxbenefit,eveniftheytechnicallycomplywiththeletterofthelaw.
It is aimed at preventing aggressive tax planning and abuse of tax laws.
● Tax Avoidance vs. Tax Evasion:
○ TaxAvoidanceinvolvesstructuringtransactionsinawaythatlegallyminimizestax
liabilities, while still adhering to the rules.
○ Tax Evasion is illegal, where tax liabilities are deliberately concealed or falsified.
● GARR targets tax avoidance, not evasion, by enabling tax authorities to disallow any
transaction that is solely aimed at reducing taxes.
● Application: GARR can be invoked when:
○ Atransactionorarrangementhasnosignificantcommercialpurposeotherthanthe
avoidance of taxes.
○ The transaction is structured in a way that gives rise to a tax benefit.
○ The tax benefit is obtained through abnormal or artificial means.
● Key Features of GARR:
○ Substance over Form: GARR allows tax authorities tolookatthesubstanceofa
transaction rather than just its legalform.Thismeansthatevenifatransaction
appears legal on paper, it can be scrutinized and challenged if itlacksagenuine
business purpose.
○ Test of Main Purpose: A key element is whether the main purpose of the
arrangementistoobtainataxbenefit.Ifthisisthecase,thearrangementmaybe
disregarded by tax authorities.
○ Exceptions: Not all tax benefits are challengedunderGARR.Thereareexceptions
where tax benefits are legitimate and in line with the overall tax policy.
● Criteria for Application: The application of GARR typically requires satisfying a few
criteria:
○ The transaction must lack a genuine commercial rationale.
○ The transaction must result in a tax benefit.
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○ Thearrangementshouldbeartificialorcontrived,withthemainpurposeofavoiding
tax.
● Consequences of GARR: If a transaction is found to be in violation of GARR, the tax
benefitobtainedmaybedenied,andthetaxauthoritiesmayimposeadditionalpenaltiesor
adjustments to the tax filings.
● International Context: GARR is modeled after international anti-avoidance measures,
particularly the OECD's recommendations on Base Erosion and Profit Shifting (BEPS),
which aim to prevent multinational companies from exploiting gaps in tax rules to
artificially shift profits.
GARR in India
● InIndia,GARRwasintroducedintheIncomeTaxAct,1961,throughtheFinanceAct,2012.
However,itsapplicationhascertainconditionsandsafeguardstoensureitdoesnotresult
in arbitrary assessments. It applies to specific tax avoidance arrangements that involve
abuse of the tax system.
● Key Provisions in Indian Law:
○ Section 96 of the Income Tax Act outlines the scope and application of GARR.
○ Itisaimedatarrangementswheretheprimarypurposeistoreduce,avoid,ordefer
tax obligations.
○ GARR is not automatically invoked; it requires approval from the tax authorities,
who must demonstrate that the tax benefit gained is the main objective of the
arrangement.
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Economy
Chapter 09: Unemployment and Poverty
Lecture 01: Unemployment
Unemployment:
● Unemployment refers toaconditionwhereindividualswhoarewillingandabletowork,
and are actively seeking employment, are unable to find employmentopportunities.
● It is typically measured as a percentage of the labour force i.e actively seeking
employment butunable to secure jobs.
Historical Background:
● 1951 - First Five-Year Plan
○ The major issue during this period was unemployment.
○ The Planning Commission decided not to implement a specific plan to tackle
unemployment.
○ The focus was on increasing savings to boost investment in the economy,
following theHarrod-Domar model.
● 1956 - Second Five-Year Plan
○ The government initiated anindustrialization strategy.
○ The Mahalanobis model was adopted, emphasizing the development of heavy
industries.
● 1961-1977 - Period of Instability
○ The government did not implement any specific employment policies.
○ India faced multiple challenges, including wars andtheemergencyperiod,which
affected economic planning.
● 1978 - Employment-Focused Policies
○ The government launched employment schemes such as the Integrated Rural
Development Program (IRDP)to address rural unemployment.
● 1999-2004 - IT Revolution and Job Creation
○ Around 60 million jobs were created during this period.
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○ The IT revolution was at its peak, contributing significantly to employment
generation.
○ Various schemes, including the Pradhan Mantri Rojgar Protsahan Yojana, were
introduced to promote job creation.
Major Types of Unemployment in India:
● Disguised/ Hidden Unemployment:
○ It is a phenomenon whereinpeople are employed than actually needed.
○ It is primarily traced in theagriculture and the unorganised sectorof India.
● Seasonal Unemployment:
○ It is an unemployment that occursduring certain seasonsof the year.
○ Agricultural laborersin India rarely have work throughout the year.
● Structural Unemployment:
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○ Structuralunemploymentisacategoryofunemploymentrisingfromthemismatch
between the jobs available inthemarketandtheskillsandeducationofthe
available workersin the market.
○ ManypeopleinIndiadonotgetjobsduetolackofrequisiteskillandduetopoor
education level, it becomes difficult to train them.
● Technological Unemployment:
○ It is the loss of jobsdue to changes in technology.
○ It occurs when machines, computers, robots, or other technological advancements
perform tasks that were previously carried out by human workers.
● Chronic Unemployment:
○ Chronic unemployment means prolonged unemployment in the economy. It is
caused due to the long-term unemployment persisting in the economy.
○ When somebody is unemployed for a very long period like 2-4 years then it is
known as chronic unemployment
● Cyclical Unemployment:
○ Cyclical unemployment is a result of abusinesscyclewhereunemploymentrises
during recession or slowdown and declines with economic growth.
● Frictional Unemployment:
○ It is also called as search unemployment which refers to the time lagbetween
the jobs when an individual is searching for a new job or he is switching
between the jobs.
● Vulnerable Employment:
○ This means people working informally without a proper job contract and thus
without any legal protection.
○ These people are deemed unemployed since records of their work are never
maintained.
○ It isone of the main type of unemployment in India.
Causes of Unemployment in India:
● Large Population and Job Competition: India’s large population results in high job
demand, leading to intense competition for limited job opportunities.
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● Challenges for Small and Cottage Industries: Lack of state support, legal complexities,
andpoorinfrastructuralandfinanciallinkagesmakesuchenterprisesunviable,causingcost
overruns and compliance issues.
● InformalSectorWorkforce:Ahugeworkforceintheinformalsectorexistsduetolackof
education/skills, which is not captured in official employment data.
● Educational Mismatch with
Industry Needs: Mismatch
between educational syllabus and
current industry requirements
leads to structural unemployment.
● Inadequate Infrastructure and
Manufacturing Investment:
Inadequate infrastructure growth
and low investment in the
manufacturing sector restrict
employment potential in the
secondary sector.
● Agricultural Sector Challenges: Low productivity in agriculture combined with lack of
alternative opportunities for agricultural workers makes transitioning to secondary and
tertiary sectors difficult.
● Gender Inequality in Employment: Regressive social norms deter women from taking or
continuing employment.
Solutions to the Problem of Unemployment:
● Labour-Intensive Manufacturing Sectors: Special packages should be designed for
industrieslikefoodprocessing,leatherandfootwear,woodmanufacturing,textiles,apparel,
and garments to create jobs.
● PublicInvestmentinKeySectors:Publicinvestmentinsectorssuchashealth,education,
police, and judiciary can generate numerous government jobs.
● Decentralization of Industrial Activities: Decentralizing industrial activities will ensure
employment opportunities across different regions of the country.
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● Rural Development andMigrationReduction:Developingruralareaswillreducemigration
to urban areas, thereby
decreasing the pressure
on urban job markets.
● Encouraging
Entrepreneurship:
Promoting
entrepreneurship among
the youth will create
more job opportunities
and drive economic
growth.
● RemovingSocialBarriers
for Women: Concrete
measures should be
implementedtoeliminatesocialbarriersandensurewomen'scontinuousparticipationinthe
job market.
● Improving the Education System: The government should monitor the educationsystem
closely and adopt measures to produce a skilled labor force.
Consequences of Unemployment:
● Rise in Poverty: Unemployment leads to an increase in poverty levels as individuals are
unable to earn a livelihood.
● Engagement in Illegal Activities: Long-term unemployment may drive young people to
engage in illegal or harmful activities to earn money, resulting in increased crime rates.
● Loss of Faith in Democracy: Unemployed individuals are vulnerable to manipulation by
anti-social elements, causing a loss of trust in the democratic values of the country.
● Addiction and Mental Health Issues: Unemployment often leads to mental health
struggles,withmanyindividualsturningtodrugoralcoholaddiction,orevensuicide,which
diminishes the human resource potential of the country.
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● Economic Strain: Unemployment negatively impacts the economy as the potential
workforceisnotcontributingproductively,placingagreaterfinancialburdenontheworking
population and increasing the socio-economic cost for the state.
Approaches to Measure Unemployment in India:
Periodic Labour Force Survey (PLFS):
● ThePeriodicLabourForceSurvey(PLFS)waslaunchedbytheNationalStatisticalOffice
(NSO) in 2017 under the Ministry of Statistics and Programme Implementation
(MoSPI), considering the importance of availabilityoflabourforcedataatmorefrequent
time intervals.
● ThePLFSofferskeyemploymentandunemploymentindicators,includingtheLabourForce
Participation Rate (LFPR), Worker Population Ratio (WPR), and Unemployment Rate
(UR).
● The two main objectives of the PLFS are:
○ Estimation of Short-term Urban Indicators:
■ PLFS provides quarterly estimates of employment and unemployment
indicators for urban areas, based on theCurrent WeeklyStatus (CWS).
■ This data is released at more frequent intervals (three months) to capture
the dynamic nature of the urban labour market.
○ Annual Estimates for Rural and Urban Areas:
■ PLFS provides annual estimates for both rural and urban areas. These
indicators are measured using both theUsual Status(US)and theCurrent
Weekly Status (CWS)approaches to ensure comprehensivecoverage.
● The first annual report July, 2017-May, 2018 was released in May, 2019 and afterwards
every year.
● Activity Status: The activity status of a person is determined on the basis of the
activities pursued by the person during the specified reference period.
● UsualStatus:Whentheactivitystatusisdeterminedonthebasisofthereferenceperiod
ofthelast365daysprecedingthedateofthesurvey,itisknownastheusualactivity
status of the person.
○ Principal Activity Status:The usual principal activitystatus of a person is
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determined by the activity on which they spent the majority of their timeduring
the 365 days preceding the survey date.
○ Subsidiary Economic Activity Status:A person whoseprimary status is determined
using the major time criterion may also have engaged in an economic activity for a
shorter period, as long as it totalsat least 30 daysthroughout the reference year.
This shorter-term economic activity is recorded as the person's subsidiary economic
activity status.
● CurrentWeeklyStatus(CWS):Theactivitystatusdeterminedonthebasisofareference
period of the last 7 days preceding the date of the survey is known as the current
weekly status (CWS) of the person. In this case, a person is said to be unemployed if
he/shehasnotworkedevenforonehourduringtheweekbutwasseekingoravailableto
work.
● LabourForceParticipationRate(LFPR):LFPRisdefinedasthepercentageofpersons
in the labour force (i.e. working or seeking or available for work) in the population.
● WorkerPopulationRatio(WPR):WPRisdefinedasthepercentageofemployedpersons
in the population.
● Unemployment Rate (UR): UR is defined as the percentage of persons unemployed
among the persons in the labour force.
Schemes Related to Employemnt Generation in India:
● Pradhan Mantri Rojgar Protsahan Yojana (PMRPY): The scheme incentivizes employers
registered with the Employees' Provident Fund Organisation (EPFO) by paying the full
contribution of employers to the Employee Pension Scheme (EPS) and Employees'
Provident Fund (EPF)for new employees with a newUniversal Account Number (UAN).
● Prime Minister's Employment Generation Programme (PMEGP): Launched in August
2008, PMEGP is a credit-linked subsidy scheme designed to create employment
opportunities by establishing micro-enterprises in the non-farm sector. It operates in
both rural and urban areas and has been extended for the period from 2021-22 to
2025-26.
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● PradhanMantriMUDRAYojana(PMMY):ThisinitiativeoffersmicroloansofuptoRs.10
lakh to non-corporate, non-farm sector income-generating activities such as
manufacturing, trading, and services, including agricultural allied activities like poultry
and dairy.
● Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA): MGNREGA
guarantees 100 days of wage employment annually to one adult member of each rural
household willing to perform unskilled manual labor. The scheme also aims to create
durable assets like roads, canals, and ponds and provides employment within a 5 km
radiusof applicants' residences.
● Make inIndia:TheMakeinIndiainitiativeaimstoboostmanufacturinginthecountry,
encouragingcompaniestoinvestindiversesectors,withatargettocreate100millionjobs
by 2022 and increase the manufacturing sector'sGDP contribution to 25%by 2025.
● Skill India: The initiative targets the skill development of 300 million peopleby2022,
focusing on enhancing vocational training through schemes like Pradhan MantriKaushal
Vikas Yojana (PMKVY),to promote entrepreneurship and skill development across India.
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Economy
Chapter 09: Unemployment and Poverty
Lecture 02: Poverty
Poverty:
● Poverty is the situation where someone is not able to afford the basic things in life.
● In a country, Poverty is of two types:
○ Absolute Poverty: It means that a person is not able to afford the basic
necessities of life, like Food, clothes and shelter etc.
○ Relative Poverty: It means that a person is relatively poor to affordtheaverage
standardoflivingofthesociety,I.ehis/herincomeislessthantheaverageincome
ofthesociety.Itshowsthegiveninequalityinsociety.ConceptofRelativepoverty
is generally used in in developed countries.
● In India, we have both relative and absolute poverty in access.
Definition of Poverty in India:
● In1867-68,DadabhaiNaorojisaidthatanypersonwhospends18to35rupeesforayear,
then he is able to get two times per day food for the year.
● In 1938, the National Planning Committee said that any person who spends IS to 20
rupees per month, then he is able to maintain a basic living standard.
● In1944,undertheBombayplan,itsaidthatanypersonwhospends75rupeesforayear,
then he is able to get two times per day food for the year.
● DandekarandNilkanthRathsaidthatanypersonwhoconsumes2250caloriesinaday,
then he is above the poverty line.
● in1979,Y.K.AlaghCommitteeconstitutedbythePlanningCommissionforthepurposeof
poverty estimation, chaired by YK Alagh, constructed a poverty line for rural (2400
calories) and urban areas (consume 2100 calories per day)on the basis of nutritional
requirements.
● In 1993-34, the Lakdawala Committee was formed to look at the methodological and
computationalaspectsofestimatingtheproportionandnumberofpoorpeopleinIndia.The
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group's chairman was Prof.Lakdawala. The committee proposed calorie intake based on
consumption expenditure as a criterion.
● The Tendulkar Committee on poverty was set up by the Government of India in 2005
underthechairmanshipofSureshTendulkar,toreviewandsuggestanewmethodologyfor
estimatingpovertyinIndia.Thecommittee'sreportsubmittedin2009becamealandmark
in defining the country's poverty line and led to significant changes in how poverty was
measured.
● Prior to the Tendulkar committee, poverty in India was primarilyestimatedbasedonthe
caloriesintakemethod,whichfocusedondeterminingtheminimumcalorie (2400calories
for ruralareasand2100caloriesforurbanareas)consumptionrequiredforanindividualto
meet their daily needs.
● However, this approach had several limitations as it did not take into account the
expenditure on essential non food items like health, education, clothing and shelter.
● The government of India, recognising these limitations constituted the Tendulakar
committee to revise the methodology.
● As per the committee, the poverty line is defined on the basis of monthly per capita
consumption expenditure based on Mixed Reference Period (MRP). In
the MRP,
consumer expenditure data is gathered from the household using the recall period of:
○ 30 days data to be used for food items,
○ 365 days for clothing, footwear, education, institutional medical care and durable
goods
● AspertheestimatesofTendulksrcommittee,thenumberofpoorinurbanIndiain2011-12
was 13.7% and in rural India 25.7%.
● As per estimates of NationalSampleSurveyoffice(NSSO)2011-12,povertylineinurban
India was set at ₹33 per day and in rural India it was set at around ₹27 per day.
Additional notes:
Multidimensional Poverty Index (MPI)
● The Multidimensional Poverty Index (MPI), developed by the UNDP and Oxford poverty
&Humandevelopmentinitiative(OPHI), usesabroaderrangeofindicatorstoassesspoverty
beyond income alone. It considers three key dimensions, with various sub-indicators:
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● Health
○ Nutrition: Whether any
adult or child in the
household is
malnourished.
○ Child Mortality:
Whether any child in
the household has died
before the age of five.
● Education
○ Years of Schooling:
Whether any household
member has completed
at least six years of
schooling.
○ School Attendance: Whether any school-age child (up to age 18) is not attending
school up to the appropriate grade level.
● Standard of Living
○ Access to Electricity:Whether the household has access to electricity.
○ Sanitation: Whether the household has access to improved sanitation facilities.
○ Drinking Water: Whether the household has access to clean drinking water.
○ Flooring:Whetherthehouseholdhasdirt,sand,ordungfloors,whichareconsidereda
marker of poverty.
○ Cooking Fuel: Whether the household uses solid cooking fuel (like wood or coal) or
cleaner alternatives like gas.
○ Asset Ownership: Whether the household owns more than one asset, such as a
television, bicycle, or motorbike, or has a mobile phone.
UPSC Mains Question:
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● QI. Hunger and Poverty are the biggest challenges for good governance in India still
today. Evaluate how far successive governments have progressed in dealing with these
massive problems. Suggest measures for improvement. (2017)
● Q2.Though there have been several different estimates of poverty in India,allindicate
reductioninpovertylevelsovertime.Doyouagree?Criticallyexaminewithreferenceto
urban and rural poverty indicators. (2015)
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Economy
Chapter 10: Industry
Lecture 01: Industry
Industry:
Topics to be Covered:
● What is the meaning of Industry?
● India and its Industrial pattern
● Different types of Industry
● Process of Industrialisation in a country.
● Types of Public Sector undertaking
● Industrial policies before 1991
● New Industrial Policy of 1991
● Disinvestment and Privatisation
● Corporate governance
● Corporate Social Responsibility
● MSME Act, 2006
● Index of Industrial Production
● Purchasing Manager Index
● Miscellaneous
What is Industry?
● The economic activity including the preparation of raw materials, the production of
commodities in factories, and the provision ofservicesisreferredtoasIndustry.Without
the growth of industry, a nation cannot experience a goodamountofeconomicprogress.
As,hugenumberofindividualsareemployedbyindustry,whichgreatlyincreasesorcreates
the wealth and income of the country.
● The output of an economy can be segregated as
○ Primary (Use of Natural Resources)
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○ Secondary (Manufacturing)
○ Tertiary (Services)
○ Quaternary (Research and Development)
○ Quinary (Rearrangement)
● IndustriescouldalsobeclassifiedasAgricultureandalliedactivities,Industry,andServices
sectors.
● In the context of theIndianeconomy,theagriculturesectoraccountsforaround18%of
output, the industrial sector around 28% and Tertiary sector accounts for 54%. A
distributionwhichisverysimilartohighincomeeconomies.Theimportantfeaturehowever
is the economic dependence with as much as 44%, 25% and around 30% depends on
agriculture, industries and service sector.
● InIndiathesectorthatcontributestheleasthasthemaximumdependence.Inmostother
countries,astheshareoftheagriculturalsectorgoesdown,theeconomicdependencealso
goes down, this isnotthereincaseofIndia.Suchapatternofeconomicdependenceon
India may not allow for inclusive growth.
Process of Industrialization in a Country
● As an economy develops there is a need for the industrial sector to accelerate overall
growth of the economy. It is throughthismostoftheeconomytodayhaveacquiredthe
status of industrialised nations like the US, UK, Japan etc.
● The industrial sector can be seen as a basic industry (like steel, cement, aluminium,
etc.), capitalgoodssector(heavymachines),intermediategoods(tools,sphereparts
etc) and consumer goods (TV, fridge, AC etc)which are also known as White goods.
● In the initialstageandtoinitiatetheprocessofindustrialization,thegovernmenthasto
focusonbasicandcapitalgoodswhichcreatesthedemandforintermediategoodsaswell
as consumer goods. Their growth, in turn, creates demand for capital and basic goods
industries, which eventually creates a cycle in the process of industrialization.
● Thebasicandcapitalgoodssectorsarehighlycapitalintensive,technology-intensive,have
longgestationperiods(timegapbetweeninvestmentandproduction)andhighbreak-even
point (profit occurs after a long period of time).
● The process of industrialization in India was initiated during the Second Five Year Plan
(1955-56 to 1960-61), also called the Mahalanobis model, which was a top-down
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approach.Itfocusedonrapidindustrialisationbyprioritisinginvestmentinheavyindustries
like steel, cement, aluminium, etc. (basic industries), heavy machines (capital goods
industries) because theseindustrieswereconsideredakeytolong-termeconomicgrowth.
Thismodelwasadvocatedonsimilarlinesasthoserunbydevelopedcountriesduringtheir
process of industrialization.
● The large need of economic resources an technology required and a need for define
industrialization, the government of India took over the responsibility of industrialisation
through the public sector, this was not a matter of choice but a matter of compulsion,
giventheneedandabsenceofprivatesectortohandlesuchaenormousresponsibilityand
that’s how the public sector was born in India.
Types of Central Public Sector Enterprises (CPSE) in India:
● Departmental Undertakings:
○ Departmental undertakings are formed and managed by the government.
○ Itisattachedtoagovernmentministry,Itsmotiveistodeliveressentialgoodsand
services at a fair price.
○ Examples of Departmental Undertakings in India are:
■ Indian Space Research Organisation (ISRO)
■ Defence Research and Development Organisation (DRDO)
■ Indian Railways
■ All india Radio (AIR)
■ Indian Post, etc
● Statutory Corporations:
○ Astatutorycompanydefinitionisdefinedasacompanythatiscreatedbyaspecial
Act of the Parliament.
○ Their precise nature varies by jurisdiction, thus, they are statutes owned by a
governmentorcontrolledbythenationalorsub-nationalgovernmenttotheextent
provided for in the creating legislation.
○ Examples of statutory corporations in India are:
■ Reserve Bank of India (RB1)
■ Securities and Exchange Board of India (SEBI)
■ National Highways Authority of India (NHAI)
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■ Food Corporation of India (FCI)
■ Insurance Regulatory and Development Authority of India(IRDAI)
■ Airports Authority of India (AAl)
● Government Companies
○ Governmentcompanymeansanycompanyinwhichnotlessthanfifty-onepercent
ofthe(paid-upsharecapital)isheldbytheCentralGovernment,orbyanyState
GovernmentorGovernments,orpartlybytheCentralGovernmentandpartlybyone
or more State Governments.
○ Examples of government companies in India are:
■ Coal India Limited (CIL)
■ Engineers India Limited (ElL)
■ Hindustan Petroleum Corporation Limited (HPCL)
■ Bharat Petroleum Corporation Limited (BPCL)
● Autonomous Bodies:
○ Thesearesetupaspertheexigenciesoftimeanddischargefunctionsoutsidethe
governmental set-up with some amount of independence and flexibility.
○ ThesearesetupbytheMinistries/Departmentsconcernedandarefundedthrough
grants-in-aid, either fully or partially, depending on the extent to which such
institutes generate internal resources of their own.
○ Examples of autonomous bodies in india are
■ All India Institute of Medical Science (AIMS)
■ Indian Institute of Technology (IIT)
■ Indian Institute of Management (IIM)
■ Jamia Millia Islamia
■ Indian Council of Agriculture Research (ICAR)
■ Council of Scientific and Industrial Research (CSIR), etc.
Public Sector and Private Sector Enterprises:
● Apublicsectorenterpriseisownedandcontrolledbythegovernment.Itoperatesunderits
own set of rules and regulations.
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● Aprivatesectorenterpriseisownedandcontrolledbyindividualsorentitiesotherthanthe
government. ItfunctionsaccordingtotherulesandregulationssetbytheGovernmentof
India and the respective state governments.
● A limitedliabilitycompanycanbeestablishedinIndiaforcommercialpurposesunderthe
Companies Act, 2013.
● A limited liability partnership (LLP) firm can be started under the Limited Liability
Partnership Act, 2008.
● Limited liability means that the liabilities of a company or firm are restricted to the
company or firm itself. The personal assets of the owners cannot be used to repay
liabilities in case of the company's dissolution or closure.
● Under the Companies Act, 2013, a limited company can be formed as either a public
limited company or a private limited company.
● To start a private limited company, a minimum of two members is required, whereas a
public limited company requires at least seven members.
● The maximum number of members in a private limited company is 200, while a public
limited company has no upper limit on the number of members.
● Alimitedcompanyoranycompanyexistsinthebookoflaw,thedaywhenthecompany/
firm started, it is their birth date and the closure day of the company is their end or
death day.
● Acompanycansuesomebodyandacompanycanbesuedbysomebodyelsebecauseitis
a legal entity that exists in the book of law.
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Economy
Chapter 10: Industry
Lecture 02: LPG Reform
Industrial Policies in India:
● Industrialpolicyreferstostrategiceffortsbyagovernmenttoencouragethedevelopment
and growth of specific sectors or industries within the economy.
● It includes measures such as subsidies, tax incentives, regulatory adjustments,anddirect
investments aimed at enhancing industrial productivity, innovation, and competitiveness.
● The goal is to promote economicdevelopment,createjobs,andensuresustainablegrowth
by fostering key industries that can drive national economic advancement and resilience.
Industrial Policy 1956:
● TheIndustrialPolicyRevolutionof1956wastakenintoactionbytheIndianParliamenton
30th April 1956.
● The Industrial Policy was shaped by the Mahalanobis Model of growth, which suggested
that emphasis on heavy industries would lead the economy towards a long-term higher
growthpath.Itprovidedacomprehensiveframeworkfortheindustrialdevelopmentofthe
country.
● Itaimedatimprovingthecoordinationbetweenthepublicandtheprivatesectortoachieve
the goal of rapid industrial development by working together.
● This revolution provided more powers to the governmental machinery and laid down the
foundation for India's second five-year plan.
● TheIndustrialPolicyalsohelpedinlayingdownthethreecategoriesoftheindustrialsector
that helped in defining industries more sharply.
○ Schedule A: This group consisted of 17 different industries that were solely
designated for the public sector. Reflecting the government's goal to control and
develop important sectors, it included key industries such as atomic energy,
railways, armaments and ammunition, and heavy machinery.
○ Schedule B: This group consisted of 12 different industries open to participation
from both the public and private sectors. However, the state would play a
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predominant role, with the objective of gradually expanding operations carried out
by the public sector. Industries such as aluminum, machine tools, fertilizers, and
road transport were included in this program.
○ Schedule C: This group included all other industries, the majority of which were
handled by the private sector. Despite this, the government maintained the
authority to intervene if necessary to ensure balanced development.
Industrial Policies Before 1991:
● All the policies before 1991 were highly biased in the favor of the public sector with as
many as 17 areas like defence equipment, atomicenergyetcwerereservedexclusivelyfor
the public sector.
● Even in the remainingareas,thegovernmentintheinterestofthecountrycansetupa
public sector enterprise
● The remaining areas were, however, left open to the private sector but subject to strict
licensing policy and registration process before the commencement of business.
● The industrial sector thus, was highly regulated by the government.
● It was also an era of nationalization like coal fields, banking sector, insurance sector,
textiles, etc, which had the dominance of the public sector.
● Thepricesofindustrialproductslikesteel,cement,aluminium,etcwerealsocontrolledby
the government.
● While all the policies mentioned India as a mixed economy, it was moreofaphilosophy
and intention rather than a reality because of the given control of the private sector.
● TheMonopolyandRestrictiveTradePractices(MRTP)Actof1969broughttheconcept
of MRTP companies, which were those companies having assets of morethan100crores
rupees.Theactbelievedthatasthecountrymaygrowinsize,itcanresorttounfairtrade
practices and result in consumer exploitation. Thus, all the activities of such companies
came under the scanner of the government.
● The government's role was that of a regulator and a producer in the industrial sector.
● Allthepoliciesfavoredreservationforthesmallscalesectorindustriesandalsoarolefor
village and cottage industries.
● Overall, the policies prior to 1991, there was a dominance of the public sector, a strict
licensing system for the private sector and an administered price mechanism.
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Changes Made Under Industrial Policy, 1991:
Licencing Policy:
● This policy abolished industrial licensing for all industries except for a short list of 18
industries.
● Thislistof18industrieswasfurtherreducedin1999wherebythenumberwasreducedto
6 industries viz:
○ Drugs and Pharmaceuticals
○ Any kind of explosives
○ Any kind of wine, spirits and cigarettes
○ Any kind of hazardous chemicals (Example: Hydrocyanic acid).
● However, in this policy, industries reserved for the small scale sector continuedtobeso
reserved.
● This policy abolished Industrial licensing for public sector industries like Defense, Atomic
energy, Railways, Minerals, and Mineral oils.
Impact of the Industrial Policy, 1991 on Indian Economy:
● In 1991, India was a member of the G77 group of developing countries.
● In 2024, India is a proud member of the G20, the most powerful countries of the world.
● In1991,Indiawasinfamousastheworld'sbiggestbeggarbecausealmost40%oftheworld
bank's funds were soaked by India. But today India is a net donor to theWorldBank’s
International Development Association (IDA).
● In 1991 India's GDP was 266 billion dollars and which is now touched to the level of4
trillion dollars, which is 15 times more than what we had at that point of time.
● In 1991 India's foreign reserve was just 1.1 billion dollars which isnowaround650billion
dollars.
● ThebudgetsizeoftheGovernmentOfIndiain1991wasjust1.13lakhcrorewhichisnow
increased to 50 lakh crore rupees.
● In1991,thepercapitaincomeofIndiawasaround300USdollarswhichhasnowincreased
toalevelof2800USdollars(ForChina,percapitaincomein1991was333USdollarsand
now it is 13000 US dollars).
● In 1991, India's population was 84 crore but now it stands at 145 crore.
Guideline for Awarding Ratna Status:
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Category Eligibility Benefits for
investment
Maharatna Three years with an average annual ₹1,000 crore - ₹5,000
net profit of over ₹2,500 crores, OR crores, orfreetodecide
The average annual Net worth of on investments up to
₹10,000 crores for three years, OR 15% of their net worth
Average annual Turnover of ₹20,000 in a project
crore for three years (against Rs
25,000 crore prescribed earlier)
Navaratna Ascoreof60(outof100),basedon up to ₹1,000 crore or
six parameters which include net 15% of
profit, net worth, total manpower project or 30% oftheir
cost, the total cost of their net net worth in the whole
worthonasingleproduction,costof year (not exceeding
services, PBDIT (Profit Before ₹1,000 crores).
Depreciation, Interest, and Taxes),
capital employed, etc.
APSUmustfirstbeaMiniratnaand
have 4 independent directors on its
board before it can be made a
Navratna.
Miniratna Category-l Have made profits continuously for up to ₹500 crore or
the last threeyearsorearnedanet equal to their net
profit of ₹30 crores or more inone worth, whichever is
of the three years lower.
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Miniratna Category-11 Have made profits continuously for upto₹300croresorup
thelastthreeyearsandshouldhave to 50% of their net
a positive net worth. worth, whichever is
lower.
Disinvestment and Privatisation:
● Both disinvestment and privatisation involve the government reducing its ownership in
public sector companies but they are different in how much control the government
retains.
● Disinvestmentmeansthegovernmentsellsapartofitsshareinapublicsectorcompany
to private investor or the general public but still retains control
● Inthecaseofprivatisation,thegovernmentsells morethan51%ofstakeinthecompany,
transferring control and management to private players.
Strategic Disinvestment:
● Here,thegovernmentlooksforastrategicbuyertowhomthecontrolmanagementofthe
company and majority shareholding need to be transferred.
● For example, recently Air India was sold to the Tata group.
Corporate Governance:
● Corporate Governance is a set of principles or guidelines on which a company is governed.
● It ensures that corporate works in thewayitissupposedtoworktoachievethedesired
goals.
● In general, corporate governance means rules and regulations and practices by which a
Board of Directors ensures accountability, fairness, and transparency in a company's
relationship with its all stakeholders (financiers, customers, management, employees,
government, and the community).
● In India, the term Corporate Governance came to light after following the policy of
liberalisation in 1991.
● ItwasintroducedbyConfederationofIndianIndustry(CII)asavoluntarymeasure,but
it is now compulsory under Indian Companies Act 2013 and with the introduction of
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Regulation 17(8) in the SEBI Listing Obligations and Disclosure Requirements Regulation
2015.
Index of Industrial Production (IIP):
● The All-India Index of Industrial Production (IIP) is acompositeindicatorthatmeasures
the short-term changes in the volume of production of a basket of industrial products
during a given period of time with respect to a chosen base period.
● ItiscompiledandpublishedonamonthlybasisbytheNationalStatisticalOffice(NSO)
with a time lag of six weeks from the reference month.
● IIP is a composite indicator that measures the growth rate of industry groups classified
under,
○ Broad sectors, namely, Mining, Manufacturing, andElectricity
○ Use-based sectors,namely Basic Goods, Capital Goods,and Intermediate Goods.
● Currently, IIP figures are calculated considering2011-12 as the base year.
● TheIIPgrowthrateforthemonthofMarch2024overthecorrespondingperiodofprevious
year is 4.9 percent. The growth rates of the three sectors, Mining, Manufacturing and
ElectricityforthemonthofMarch2024overMarch2023are1.2percent,5.2percentand
8.6 percent respectively.
● Withinthemanufacturingsector,thegrowthrateofthetopthreepositivecontributorsto
the growth of IIP for the month of March 2024 are - "Manufacture of basicmetals"
(7.7%), "Manufacture of pharmaceuticals, medicinal chemical and botanical products"
(16.7%), and "Manufacture of other transport equipment" (25.4%).
Eight Core Industries:
● In addition to the IIP, there is an index of eight core industries which measures the
performance of eight core industries:
Industry Weightage(%), out of 100
Electricity 19.85
Refinery Product 28.04
Crude Oil 8.98
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Coal 10.3
Cement 5.37
Natural Gas 6.88
Fertiliser 2.63
Steel 17.92
● TheeightcoreindustriesofIndiarepresentabout40.27%oftheweightofitemsthatare
included in the IIP.
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Economy
Chapter 10: Industry
Lecture 03: Industries and MSMEs
Important point of Companies Act, 2013:
● TheBoardofDirectorsofeverylistedcompanyandsomeothertypeofcompany(paidup
capital of ₹10 crore or turnover of ₹100 crore or loans of ₹50crore)shouldappointan
audit committee that should be composed of at least three members, with independent
directors in the majority and independent director as a chairperson (Section 177 of the
Company Act 2013)
● One-third of the directors should be independent directors, not directly or indirectly
connected with the business or owner of the company.
● UnderSection139(3),Individualauditorsneedtoberotatedafterfiveyearsandanaudit
firm needs to be replaced after every tenth year.
● The operations of the company have to be transparent making full disclosure.
● TheCEOandCFOofalistedcompanymustcertifythatthefinancialstatementsarefair
and accept the responsibility for internal controls.
● Annual reports of listed companies must carry a status report about compliance with
corporate governance norms.
Regulations given under SEBI Regulations
● Under Regulation 20, it provides for a stakeholder relationship committee, the listed
entity shall constitute a stakeholder relationship committee to specifically look into the
mechanismofredressalofgrievancesofshareholders,debentureholders,andothersecurity
holders.
● UnderRegulation26(1),itstipulatesthatadirectorshallnotbeamemberinmorethan
ten committees or act as chairperson of more than five committees across all listed
entities.
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● Under Regulation 24(1), it prescribes having at least one independent director of the
listed entity as a director on the Board of Directors of an unlisted material subsidiary
incorporated in India or not.
● UnderRegulation24(4),itrequiresthatthemanagementoftheunlistedsubsidiaryshall
periodicallybringtothenoticeoftheBoardofDirectorsofthelistedentity,astatement
of all significant transactions and arrangements entered into by the unlisted subsidiary.
● Under Regulation 23(4) pertaining to Corporate Governance, listed entities have to get
shareholders' nod for "related party transactions".
Corporate Social Responsibility (CSR):
● Corporate Social responsibility (CSR) in India refers to the practice of companies
voluntarilyintegratingsocialandenvironmentalconcernsintotheirbusinessoperationsand
interactions with shareholders.
● CSR in India gained prominence withtheintroductionoftheCompaniesAct2013,which
made it mandatory forcertaincompaniestospendaspecificpercentageoftheprofitson
CSR activities.
● A list of CSR activities are provided by Government of India in the 7th schedule of
Companies Act 2013 and the companies who need to do CSR on compulsory basis are as :
○ CompanieswithAnnualProfitofRs5CroreorAnnualTurnoverofRs1000Croreor
Net Worth of Rs 500 Crore
● A company needs to spend at least 2% of their average profit over the last three years.
Purchasing Managers Index:
● The PMI is calculated based on responses to a survey sent to senior executivesatmore
than 400 companies in 19primaryindustries,whichareweightedbytheircontributionto
U.S. gross domestic product (GDP).
● The PMI is based on five major survey areas-each of which is weighted equally;
○ New orders
○ Inventory levels
○ Production
○ Supplier deliveries
○ Employment generation
Micro, Small, and Medium Enterprises Development Act, 2006:
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● Micro, Small, and Medium Enterprises (MSME) is an Indian law that was enacted to
promoteandfacilitatethedevelopmentandcompetitivenessof Micro,Small,andMedium
Enterprises (MSME) in India.
● Micro, Small, and Medium Enterprises (MSME)playacrucialroleinacountry'seconomy
by providing employment opportunities and fostering economic growth .
● Some important facts regarding MSMEs are follows:
○ AsofMarch2024,over39millionmicroenterpriseswereregisteredontheIndian
government’s Udhayam registration portal, accounting for over 90% of total
registered MSMEs.
○ IntheyearendingSeptember2024,India'ssmallbusinessesadded11millionjobs,
bringing total employment in the sector to 120.6 million.
○ In the fiscal year 2021-2022, MSME contributed 29.15% to India's GDP.
○ MSMErelatedproductsaccountedfor45%of
India's total export in 2021-22.
● Categorization of Industries: The act categorises
the MSMEs into two classes, namely the
manufacturing and service sectors. The criteria for
classification are based on the investment in plant,
machinery, and other equipment or turnover.
○ Micro enterprisesarethosewithinvestments
up to Rs. I Crore and turnover up to Rs. 5
Crore.
○ Smallenterprisesarethosewithinvestments
uptoRs.10CroreandturnoveruptoRs.S0
Crore.
○ MediumenterprisesarethosewithinvestmentsuptoRs.50Croreandturnoverup
to Rs. 250 Crore.
● TheMSMEsector incorporatesadiverserangeofindustries,includingmanufacturing,trade
and services. As of2023-24,thenumberofsmallmanufacturingbusinessesincreasedto
20.15 million from 17.83 million in the previous year.
Shell Companies:
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● In the USA, law defines a shell firm as one that has no or nominal operations and assets.
● The assets must consist mainly of cash and cash equivalents with very few other assets.
● In other words, a shell company should not have active business operations or assets.
● InIndia,undersection248oftheCompaniesAct2013,thegovernmentcanproceedwith
action againstdormant companiesthat have been passivefor two consecutive years.
● Normally they are given 30 days' notice before their name is struck off from the records.
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Economy
Chapter 11: International Organisations
Lecture 01: WTO
Preferential Trade Agreement (PTA):
● It is an agreement that governments use to manage their trade relationships and market
access conditions. Through trade agreements, governments agree on a range of conditions
such as preferential tariffs for goods, market access for services, intellectual property
rights, competition, and investment measures, among other things.
Free Trade Agreement:
● A free trade agreement is a pact between two or more nations to reduce barriers to
imports and exports among them. Under a free trade policy, goods and services can be
bought and sold across international borders with little or no government tariffs, quotas,
subsidies, or prohibitions to inhibit their exchange.
● For example, The commercial relations between Sri Lanka and India signed the India-Sri
Lanka Free Trade Agreement (ISFTA) in 1998, as the first bilateral free trade agreement
of Sri Lanka. The ISFTA entered into force with effect from 2000.
WTO (World Trade Organization):
● WTO was earlier called GATT(General Agreement on Tariffs and Trade), which came into
being in 1948. It was negotiated during the United Nations Conference on Trade and
Employment and was the outcome of the failure of the negotiating government to create
the International Trade Organisation(ITO).
● Due to non-approval by the US Congress regarding ITO, the GATT agreement was signed on
30 October 1947 by 23 countries in Geneva, Switzerland and it took effect from 1st
January 1948.
● GATT was merely an agreement whereas the WTO is a body and an Organisation.
● The original GATT agreement is still in effect under the WTO framework, subject to
modification of GATT 1994.
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● GATT was a big success in terms of reducing tariffs at the global level. For example, The
average tariff levels for the major GATT participants were about 22% in 1947 which was
reduced under 5% by 1994 after the Uruguay round of negotiations.
● The Marrakesh agreement, manifested by the Marrakesh declaration, was an agreement
signed in Marrakesh, Morocco by 123 Nations on 15 April 1994 marking the end of
8-year-long Uruguay round negotiations and establishing the WTO, which officially came
into force from the 1st January 1995.
● India was the founding member of the WTO.
● GATT has no dispute settlement mechanism while WTO has a well-established and
well-defined dispute settlement mechanism in it.
● Both GATT and WTO had one common objective i.e. promotion of free trade by reducing
barriers to trade like customs duties, import ban, quotas, etc.
● The first Director General of WTO was Peter Sutherland and he was also the last Director
General of GATT.
● The highest post in WTO is the post of director general and currently Director General of
WTO is Ngozi Okonjo-Iweala who leads a staff of over 650 people in Geneva,
Switzerland.
● WTO was set up with six major issues or agreements including among the member nations
which were the result of what is popularly called as Dunkel draft, a consensus draft
prepared by the then director general of GATT, Arthur Dunkel.
The six Important Agreements of the WTO:
● Modified GATT: It talks about trade in goods.
● GATS (General Agreement on Trade in Services.)
○ Mode 1
○ Mode 11
○ Mode 111
○ Mode 1V
● AoA (Agreement on Agriculture)
○ Market access
○ Domestic support (Green box subsidy, blue box subsidy, Amber box subsidy)
○ Export subsidies.
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● MFA (Multi Fibre Agreement)
● TRIMS (Trade Related Investment Measures)
○ FDI
○ FPI
● TRIPS (Trade Related Intellectual Property Rights)
○ Copyrights
○ Trademarks
○ Geographical indications
○ Patents
○ Industrial design.
In addition to the above trade agreements, WTO also deliberates from time to time on other
trade-related issues like Anti-dumping duties, Countervailing duties, Environmental measures related
to trade, Non-tariff barriers, etc.
Important Terms Related to WTO
● Anti-Dumping Duties
○ Dumping refers to the practice of a country exporting a product at a price
significantly lower than its domestic market price.
○ To counter this, an anti-dumping duty is imposed as a protectionist tariff by the
domestic government.
○ This duty is levied on foreign imports that are believed to be priced below fair
market value.
○ Many countries impose such duties to protect their domestic economy from the
negative effects of dumping.
○ The primary rationale behind this measure is to prevent unfair competition that
could harm local businesses and industries.
● Countervailing Duty (CVD)
○ Countervailing duty is a specific import tax imposed by the government to protect
domestic producers from the negative impact of import subsidies.
○ Foreign governments sometimes provide subsidies to their producers, making their
products cheaper and more competitive in international markets.
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○ To counter the effects of these subsidies and prevent market flooding, the
importing country imposes a countervailing duty.
○ This duty ensures a level playing field for domestic industries by neutralizing the
price advantage gained through foreign subsidies.
● The Directorate General of Trade Remedies (DGTR) dealt with anti-dumping and
Countervailing Duties cases. It works under the Ministry of Commerce and Industry.
Ministerial Conferences of WTO:
S. No. Date Host City
1 December, 1996 Singapore (Singapore issues)
2 May, 1998 Geneva, Switzerland
3 December, 1999 Seattle, United States
4 November, 2001 Doha, Qatar (Doha Development Agenda)
5 September, 2003 Cancún, Mexico
6 December, 2005 Hong Kong
7 December, 2009 Geneva, Switzerland
8 December, 2011 Geneva, Switzerland
9 December, 2013 Bali, Indonesia
10 December, 2015 Nairobi, Kenya
11 December 2017 Buenos Aires, Argentina
12 June, 2022 Geneva, Switzerland
13 February, 2024 Abu Dhabi
WTO General Council:
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● The WTO General Council is the highest-level decision-making body in Geneva, meeting
regularly to carry out the functions of the WTO. It has representatives from all member
governments and has the authority to act on behalf of ministerial conferences which only
meet about every 2 years.
● The General Council also meets, under different rules, as the disputes settlement body and
as the trade policy review body.
● WTO has 166 members (162 UN members, Taiwan, European Union, Hong Kong, Macow). It
also has 23 observer states like Bhutan, Iran, Iraq, Libya, Andorra, etc and 9 countries are
neither members nor observers like Somalia, North Korea, South Sudan, Turkmenistan, etc.
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Economy
Chapter 11: International Organisations
Lecture 02: WTO (Part 02)
Five Principles Governing Trade in WTO:
1. Most Favoured Nation (MFN) Principle under WTO:
○ It applies to all
World Trade
Organisation (WTO)
issues with different
scopes.
○ Most Favoured
Nation (MFN) is a
treatment accorded
to a trade partner to
ensure
non-discriminatory
trade between two
countries in
comparison to other
trade partners.
○ The importance of the Most Favoured Nation (MFN) is shown in the fact that it is
the first clause in the General Agreement on Tariffs and Trade (GATT).
○ Under World Trade Organisation (WTO) rules, a member country cannot
discriminate between its trade partners, i.e., if a special status is granted to a trade
partner, it must be extended to all the members of the WTO.
○ National treatment policy (NTP) means that imported goods should be treated no
less favourably than domestically produced goods and was introduced to tackle
non-tariffs like technical standards, security standards etc.
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2. Principle of Reciprocity:
○ Reciprocity in WTO means that countries agree to give each other mutual benefits
in trade. It's like a give-and-take principle.
○ If one country lowers its trade barrier, other countries are expected to do the same
in return.
3. Principle of Transparency:
○ WTO members are required to openly communicate and publish their trade
regulations, allowing other members to be aware of any changes or policies
affecting trade.
4. Principle of Binding and Enforceable Commitments:
○ WTO members are required to adhere to their trade commitments, and these
commitments are "bound" or legally enforceable.
○ This principle provides predictability and stability in trade relations, as any changes
to agreed tariffs or rules can be contested through the WTO's dispute resolution
mechanism.
5. Safety Valve for Specific Circumstances:
○ In specific circumstances, governments are able to restrict trade.
○ The WTO's agreement permits members to take measures to protect not only the
environment but also public health, animal health, and plant health.
Important Terms Related to the WTO
● NAMA (Non-Agricultural Market Access);
○ Non-Agricultural Market Access (NAMA) refers to products not covered by the
Agreement on Agriculture, including manufactured goods, fuels, mining products,
fish, fish products, and forestry products. These products make up about 90% of
global merchandise exports.
○ NAMA has been a subject of significant debate between developed and developing
countries due to differing priorities on tariff reductions.
○ Refers to the opening up of markets by member nations for non-agricultural
products i.e. manufacturing products, fuel and mining products etc. They are
sometimes referred to as industrial products or manufactured products.
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○ The Uruguay round reduced significant improvements in market access for NAMA
products in the developed country markets. As tariff averages were reduced from
6.3% to 3.8%.
○ In the case of developing countries, the most important contribution was made in
the form of new tariff binding. Binding coverage for NAMA products in developing
countries increased from 21% to 73%, which has considerably increased the
predictability of trade.
○ A tariff binding is a ceiling level above which a member country cannot apply a
tariff. In other words, it is a maximum tariff that may be applied by a member.
○ Despite the significant improvements in market access for NAMA products, tariffs
continue to be an important barrier to world trade.
○ Developed countries have advocated the use of the Swiss formula for reducing
tariffs on industrial products, according to which there would be a greater obligation
on developing countries to reduce tariffs on industrial products by a much higher
percentage than the developed countries, a formula initially resisted by developing
countries but later on accepted.
● S&D Treatment (Special and Differential Treatment):
○ The WTO agreements contain special provisions which give developing countries
special rights and allow other members to treat them more favourably. These are
"special and differential treatment provisions".
○ The special provisions include:
■ Longer time periods for implementing agreements and commitments,
■ Measures to increase trading opportunities for developing countries,
■ Provisions requiring all WTO members to safeguard the trade interests of
developing countries,
■ Support to help developing countries build the capacity to carry out WTO
work, handle disputes, and implement technical standards,
■ Provisions related to Least Developed Country (LDC) members.
○ Agreement implementation period for WTO member countries:
■ Developed countries: 1-2 years.
■ Developing countries: 5 years.
■ Least Developed Country (LDC): 10 years or more.
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● TBT (Technical Barriers to Trade Agreement):
○ The Technical Barriers to Trade (TBT) Agreement is a component of the World
Trade Organization (WTO) that aims to ensure that regulations, standards, and
testing procedures do not create unnecessary obstacles to international trade.
○ It encourages member countries to adopt international standards where possible,
thereby promoting transparency, harmonisation, and mutual recognition of
conformity assessment procedures.
○ The TBT Agreement obliges WTO members to notify proposed technical regulations
and provide opportunities for consultation, enhancing transparency and reducing
uncertainty for exporters.
○ It facilitates trade by promoting cooperation and information sharing among
countries while safeguarding legitimate regulatory objectives such as consumer
safety and environmental protection.
● Special Safeguard Measures (SSMs):
○ It means special safeguards measures, which were raised in the Doha round of
negotiations under the Agreement on Agriculture.
○ It is a tool that will allow developing countries to raise tariffs temporarily to deal
with import surges or price falls.
● Special Products:
○ This term was used in the Doha round of negotiations under the Agreement on
Agriculture.
○ Under this, there are certain products for which developing countries are to be
given extra flexibility in market access for food and livelihood security and rural
development.
○ These products may be subject to less stringent tariff reduction commitments or
be exempt from tariff reductions altogether under trade liberalization agreements.
● SCM Agreement (Agreement on Subsidies and Countervailing Measures);
○ The “SCM Agreement” addresses two separate but closely related topics:
multilateral disciplines regulating the provision of subsidies (export-based and
import substitution-based), and the use of countervailing measures to offset the
injury caused by subsidized imports.
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○ Regulates the use of subsidies by WTO members and provides mechanisms to
counter the adverse effects of subsidies on international trade, including dispute
resolution.
○ Developed countries should eliminate these subsidies within 3 years, and the
member also needs to notify within 90 days when they enter into the agreement.
○ Developing countries are divided into three parts:
■ Least Developed Countries (exempted from removing subsidies)
■ Members with a GNP per capita of less than $1000 per year (exempted
from removing subsidies)
■ Members with a GNP per capita of more than $1000 per year (8 years
period to phase out their export subsidies)
○ For Import Substitution:
■ Least Developed Countries (8 Years)
■ Members with a GNP per capita of less than $1000 per year (8 Years)
■ Members with a GNP per capita of more than $1000 per year(5 years period
to phase out).
● SPS (Sanitary and Phytosanitary Agreement):
○ Under the Sanitary and Phytosanitary Measures (SPS) agreement, the WTO sets
constraints on member-state policies relating to food safety (bacterial
contaminants, pesticides, inspection, and labeling) as well as animal and plant
health (phyto-sanitation) concerning imported pests and diseases.
○ Three standards organizations set standards that WTO members should base
their SPS methodologies on:
■ Codex Alimentarius Commission (Codex): For humans.
■ World Organization for Animal Health (OIE): For animals.
■ International Plant Protection Convention (IPPC): For plants.
○ The SPS agreement is closely linked to the Agreement on Technical Barriers to
Trade, which was signed in the same year and has similar goals. The TBT Emerged
from the Tokyo Round of WTO negotiations and was negotiated with the aim of
ensuring non-discrimination in the adoption and implementation of technical
regulations and standards
● GSP (Generalized System of Preference):
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○ A system under which developed countries grant preferential tariff treatment to
imports from developing and least-developed countries, aiming to support their
economic growth.
○ The objective of the Generalised System of Preferences (GSP) was to give
development support to poor countries by promoting exports from them into
developed countries, as well as promote sustainable development in beneficiary
countries by helping these countries to increase and diversify their trade with the
United States.
○ It provides opportunities for many of the world’s poorest countries to use trade to
grow their economies and climb out of poverty.
● ITA (Information Technology Agreement):
○ The Information Technology Agreement (ITA) is a plurilateral trade agreement
under the auspices of the World Trade Organization (WTO) aimed at eliminating
tariffs on a wide range of information technology products.
○ Initially negotiated in 1996, the ITA covers items such as computers,
semiconductors, telecommunications equipment, software, and electronic
components.
○ By eliminating tariffs on these products, the ITA promotes trade and facilitates the
global diffusion of information technology, fostering innovation, economic growth,
and digital connectivity.
○ The agreement encourages countries to modernize their economies and participate in
the digital revolution by removing barriers to the cross-border flow of IT goods and
services.
● TFA (Trade Facilitation Agreement):
○ The Trade Facilitation Agreement (TFA), was confirmed in Bali, Indonesia in
December 2013 at the 9th Ministerial Conference.
○ After almost 20 years of Negotiations, the agreement was officially an open
invitation for acceptance from the 160 members of the WTO on 27 December 2014.
○ However, the agreement was to be ratified once 2/3rd of the members had
informed the WTO of their agreement.
○ For the WTO, this agreement can be viewed as a historic achievement as it is the
first multilateral agreement since the WTO's inception in 1995.
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○ This agreement aimed at streamlining and facilitating international trade by
simplifying customs procedures and reducing red tape at borders.
○ The TFA includes provisions related to expediting the clearance of goods, improving
customs cooperation, enhancing transparency, and promoting the use of electronic
documentation and automated systems.
○ By implementing the TFA, countries aim to reduce trade costs, enhance efficiency,
and increase the predictability of trade flows.
○ The agreement particularly benefits developing and least developed countries by
providing technical assistance and capacity-building support to help them meet the
requirements of the agreement and integrate into the global trading system.
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7
Economy
Chapter 11: International Organisations
Lecture 03: WTO (Part 3)
Various Agreements of WTO
GATT
● TheGeneral Agreement on Tariffs and Trade (GATT)was established in 1948 as a
multilateral treaty aimed at promoting international trade byreducing tariffs and other
trade barriers.
Multi Fibre Agreement (MFA)
● Adopted in 1974 to govern the global trade in textiles and garments. Itimposed quotas on
the amount of textiles and clothing that developing countries could exportto developed
countries, aiming to protect domestic industries in developed nations from rapid increases in
imports Ended in 2004.
TRIMS
● TheAgreement on Trade-Related Investment Measures(TRIMs)is an agreement that
addresses the regulation of foreign investment by member countries.
● It aims to promote atransparent and non-discriminatoryenvironmentfor international
investment, thereby facilitating global trade and economic integration.
GATS
● TheGeneral Agreement on Trade in Services (GATS)was established to extend the
multilateral trading system to the services sector, similar to how the General Agreement on
Tariffs and Trade (GATT) applies to goods.
● The agreement coversfour modes of supplyfor thedelivery of services in cross border
trade:
○ Cross-border supply (Mode 1):Services supplied fromone country to another.
Example-Tata Consultancy Services (TCS) in Indiadevelops software and delivers
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it electronically to Microsoft abroad, making it a cross-border digital service with no
physical presence required.
○ Consumption abroad (Mode 2):Consumers from one country using services in
another country.Example-a student going abroad foreducation/ training, a patient
seeking medical treatment in another country and then returning back to India.
○ Commercial presence (Mode 3):A company from one countrysetting up
subsidiaries or branches in another country to provide services.Example-TCS (Tata
Consultancy Services) opening a branch in the U.S. and providing services there,
Infosysestablishing an office in Germany to provideIT consulting.
○ Presence of natural persons (Mode 4):Individualstraveling from their own
country to supply services in another.Example-AnIndian software engineer
traveling to the U.S. for a short-term consulting project, foreign doctor providing
temporary medical services in another country.
Trade-Related Aspects of Intellectual Property Rights (TRIPS)
● Intellectual property rights is the body of law
developed to protect the creative people who have
disclosed their inventions for the benefit of
mankind. This protects ther invention from being
copied or imitated without their consent.
● The TRIPS which came into effect on 1st January
1995istodatethemostcomprehensivemultilateral
agreement ofintellectualproperty.TRIPSsetsdown
minimum standards forvariousformsofintellectual
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property regulations that members countries must incorporate into their national legal
system.
● The areas of intellectual property that it covers are:
○ Copyrights and Related Rights→ In India, we have Copyrights Act 1957 for
protection of copyrights.
■ It sets out minimum standards for copyrights protection including the
protection of the rights of authors and literary, artistic, and musical works.
■ Copyrights terms must be atleast 50 years fromthedeathoftheauthor.
This act permits photocopying of books for education, research, private
study,criticismorreview,aslongasitisfairandnon-commercialandfor
academic purposes.
○ Trademarks→ Safeguards distinctive brand names, logos, and symbols associated
with goods and services. In India we haveTrademarks Act, 1999.
■ Statutory protection for trademark is administered by the Controller
GeneralofPatents,Designs,andTrademarks,agovernmentagencywhich
reportstotheDepartmentforPromotionofIndustryandInternalTrade,
under Ministry of Commerce and Industry.
■ Under the Trademarks Law 2002, trademarks can be registered in India
under 45 different classed of goods and services.
■ TRIPS establishes the protectionoftrademarksandservicemarksensuring
that trademark owners have
exclusiverightstousetheirmarks
for atleast 10 years with a
possibility of renewal.
➢ The Starbucks vs.
SardarBaksh case (2018)
was a trademark dispute in India between the global coffee giant
Starbucks and the local chain SardarBaksh, which had a similar
name and logo.
○ Industrial Designs and Trade Secrets→ For industrial designs in India wehave,
Designs Act, 2000. This agreement includes measure to protect confidential
information and trade secrets.
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■ Example→ Apple accused Samsung of copying the iPhone’s design,
includingitsroundedcorners,bezelshape,andgridofappicons.In2012a
U.S. court ruled in favour of Apple, awarding over $1 billion in damages.
○ Geographical Indications (GIs) → TRIPS require member countries to protect
geographical indications which are signs used on goods that have a specific
geographic originandpossessesqualities,reputationorcharacteristicsattributedto
that place of origin.
■ In India we have Geographical Indications of Goods (Registration and
Protection) Act, 1999, which came into force with effect from 15
September 2003 and Darjeeling Tea became the first GI tag product in
India.
○ Patents→Providesinventorswithexclusiverightstotheirinnovationsforadefined
duration.
■ Patents are of two types→ process-based patenting andproductbased
patenting.
➢ For patents, we haveIndian Patents Act, 1970.
➢ Under Section 2, it provides for both product and process-based
patents.
➢ Under Section 25 both pre-grant and post-grant opposition is
provided.
➢ UnderSection53oftheact,thedurationofthepatentis20years.
Revocation of patents inthe public interest and also on security
considerations.
➢ The Patent Amendment Act 2005 introduced product patentsfor
the first time, allowing inventions such as drugs, chemicals, food
items themselves to be patented- not just the processes but also
the products. The patent office is headquartered in Kolkata with
branches in Chennai, Delhi and Mumbai.
Compulsory Licensing:
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● ItisakeyaspectofTRIPS,allowingcountriestoissuelicensestoproduceapatented
product without the patent holder’s consent under specific conditions such as a
public health emergency.
● India’s compulsory licensing provision ensures that essential drugs can be produced
generically if the original patent holder does not make them available at reasonable
process for meeting local needs.
Evergreening:
● Section 3(d) of the Indian Patents Act, 1970, preventstheevergreeningofpatentsby
denyingpatentsforincrementalchangestoexistingdrugsunlessasignificantincreasein
efficacy can be shown.
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Economy
Chapter 11: International Organisation
Lecture 04: WTO and Doha Round
Agreement on Agriculture (AJA):
● The Agreement on Agriculture is a significant treaty within the WTOthataimstomake
international agricultural trade equitable and competitive byminimisingdistortionscaused
by subsidies and trade barriers.
● It was negotiated during theUruguay Round of Trade(1986-94), and took effect in 1995
● TheAoA works on three major issues:
○ Export Subsidies
○ Domestic Support
○ Market Access
Market Access:
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● The market access reduction commitment under AoA is aimed at improvingtheentryof
agricultural products into international markets by reducing tariffs and other trade barriers.
● Under this:
○ Non-tariffbarrierssuchasquotasandimportbanswererequiredtobeconverted
into equivalent tariffs (a process called Tariffication). The reduction commitment
differsfordevelopedanddevelopingcountries,specialprovisionsforLeastDeveloped
Countries (LCDs).
○ Thedevelopedcountriesneedtoreducedutiesbyanaverageof36%overaperiod
of 6 years and for each product minimum tariff reduction is to be 15%.
○ Thedevelopingcountriesneedtoreducedutiesbyanaverageof24%overaperiod
of 10 years and for each product minimum tariff reduction is to be 10%.
○ The LDCs were exempt from reduction commitment but they were expected to
improve market access.
Domestic Support:
● It is related to subsidy reductions provided by member nations to the agriculturesector.
The reduction of subsidies on agriculture also aimed at greater market access.
● As per the WTO framework, developed countries have to reduce domestic subsidies on
agriculture, so as to bring at a level of not more than 5% of the value of agricultural
produce and 10% for developing countries.
● This support provided by developed and developing countries is calledDe-minimis Support.
● These subsidies are of three types:
○ Green box subsidy
○ Blue box subsidies
○ Amber box subsidies
Green Box Blue Box Amber Box
● Greenboxsubsidiesare ● Thesearethesubsidies ● These are considered
considered non-trade given only by as trade distorting
distorting or minimally developed countries for and are subject to
trade distorting and production limitation production
programs that are commitment i.e not
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are exempt from aimed at limiting the more than 5% for
reduction commitment. quantumofproduction, developed and 10%
● Thesesubsidiesinclude likedeficiencypayment for developing
government spending given by the USA to countries.
on research, its farmers. ● It is oftwo types:
environmental ● These subsidies are ○ Non-product
programmes, disaster also consideredexempt specific or
relief, infrastructure, under WTO butuptoa input based
and other public goods. limit. subsidies given
● Green box measures for fertilisers,
are important for power,
developing countries as irrigation,seeds
they allow for support etc.
to agriculture without ○ Product
the need for reduction. specific
subsidies given
for different
agriculture
products like
wheat, rice,
maize, etc. by
way of support
prices, direct
payments, etc.
Export Subsidies:
● TheAgreementonAgriculturerequireddevelopedcountriestoreduceexportsubsidiesbyat
least 36% over a period of 6 years and fordevelopingcountrieswasrequiredtoreduce
export subsidies by at least24% over a period of10 years.
Doha Development Agenda:
● The Doha Development Agenda (DDA) was launched at the fourth WTO Ministerial
Conference held in Doha, datar, in November 2001.
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● The conference aimed to address the development needs of developing countries and
promote global trade liberalisation.
Why is the Doha Round Not Working?
● Its goal was to finish by January 2005, but the deadline was then pushed back to 2006.
● The talks were finally suspended in June 2006. This was becausetheUnitedStatesand
the European Union refused to reduce agricultural subsidies.
Why is Doha an Ambitious Round?
● First, all WTO members (almost every country in the world) participated.
● Second, decisions must be settledbyconsensus,asopposedtomajorityrule.Thatmeans
every country must sign off.
● Third, there are no piecemeal sub-agreements. That means there is either an entire
agreementornoneatall.Inotherwords,unlesseverycountryagreeswiththewholedeal,
it's off.
● In total, Doha consists of 21 main points that can be classified intoAgriculture,NAMA,
Services,Rules,IPR,TradeandInvestment,TradeFacilitation,5andDTreatment,Dispute
Settlement and e-Commerce.
Main Issues of the Doha Development Round:
● Agriculture: Reduce subsidies to 2.5% of thevalueofproductionfordevelopedcountries,
that would only be 6.7% for
developing countries. Reduce
tariffs on food imports. End
subsidies for exports.
● Non-agricultural market access
(NAMA): Reduce tariffs for
non-food imports.
● Services: Clarify rules and
regulations on foreign-provided
services.Developedcountrieswant
to export financial services,
telecoms, energy services, express
delivery and distribution services. Developing countrieswanttoexporttourism,healthcare,
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andprofessionalservice.Countriescandecidewhichservicestheywanttoallow.Theycan
also decide whether to allow foreign ownership.
● Rules: Tighten the rules on anti-dumping. Strengthen prohibitions against launching
subsidies to retaliate against another country's subsidies. Focus on commercial vessels,
regional aircraft, large civil aircraft, and cotton. Reduce fishery subsidies to cut downon
overfishing.
● Intellectual property: Create a register to control country-of-origin for wine and liquor.
Protectproductnames,suchasChampagne,TequilaorRoquefort,thatareonlyauthenticif
they come from that region. Inventors must reveal the country of originforanygenetic
material used.
● Trade and environment: Coordinate trade rules with other agreementstoprotectnatural
resources in developing countries.
● Trade facilitation: Clarify and improve custom fees, documentation, andregulationsthat
will cut bureaucracy and corruption in customs procedures. This became an important
feature of the Trans-Pacific Partnership
● Special and differential treatment: Give special treatment to help developingcountries.
That includes longer time periods for implementing agreements. It requires that all WTO
countries safeguard the trade interests of developing countries. It also provides financial
support to developing countries to build the infrastructure neededtohandledisputesand
implement technical standards.
● Dispute settlement:Install recommendations to bettersettle trade disputes.
● e-commerce: Countries won't impose customs duties or taxes on internet products or
services.
World Bank:
● The World Bank is an internationalfinancialinstitutionthatprovidesloansandgrantsto
governments in low and middle-income countries for capital projects.
● The World Bank was created at the 1944 Bretton Woods Conference, along with the
international Monetary Fund (IMF).
● ItwasestablishedinthewakeoftheSecondWorldWar.ThepresidentoftheWorldBank
is traditionally an American.
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● The World Bank and the IMF (together called Bretton Woods Twins) are both based in
Washington, D.C., and work closely with each other.
● The intention behind the founding of the World Bank wastoprovidetemporaryloansto
low-income countries that could not obtainloanscommercially.TheBankmayalsomake
loans and demand policy reforms from recipients.
● The World Bank's most recently stated goals are ending extreme poverty and boosting
shared prosperity.
● The World Bank Group is an extended family of five international organisations, and the
parentorganisationoftheWorldBank,thecollectivenamegiventothefirsttwolisted
organisations, the IBRD and the IDA:
○ International Bank for Reconstruction
andDevelopment(IBRD):Lendstolow-
and middle-income countries (189
member countries).
○ International Development Association
(IDA): Lends to low-income countries
(174 member countries).
○ International Finance Corporation
(IFC): Lends to the private sector (186
member countries).
○ Multilateral Investment Guarantee
Agency (MIGA); Encourages private
companies to invest in foreign countries (182 member countries).
○ International Centre for Settlement of Investment Disputes (ICSD): Helps
private investors and foreigncountriesworkoutdifferenceswhentheydon'tagree
(163 member countries).
● [Note: India is a member of the first four organisations. It is not a member of the
International Centre for Settlement of Investment Disputes (ICSID).
International Bank for Reconstruction and Development (IBRD):
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● The International Bank for Reconstruction and Development (BRD) is an international
financial institution, established in 1944 and headquartered in Washington, D.C., United
States, that is the lending arm of World Bank Group.
● The IBRD is the first of five member institutions that compose the World Bank Group.
● The IBRD and its concessional lending arm, the International Development Association
(IDA), are collectively known as the World Bank as they share thesameleadershipand
staff.
● The IBRD offers loans to middle-income developing countries. The initial mission of the
IBRD in1944,wastofinancethereconstructionofEuropeannationsdevastatedbyWorld
War Il.
● TheIBRDisownedandgovernedbyits189memberstates,witheachcountryrepresented
on the Board of Governors.
International Development Association (IDA):
● The International Development Association (IDA) is an international financial institution
which offers concessional loans and grants to the world's poorest developing countries.
● TheIDAisamemberoftheWorldBankGroupandisheadquarteredinWashington,D.C.in
the United States.
● It was established in 1960 to complement the existing International Bank for
Reconstruction and Developmentbylendingtodevelopingcountrieswhichsufferfromthe
lowestgrossnationalincome,fromtroubledcreditworthiness,orfromthelowestpercapita
income.
● The association shares the World Bank's mission of reducingpovertyandaimstoprovide
affordable development financingtocountrieswhosecreditriskissoprohibitivethatthey
cannot afford to borrow commercially or from the Bank's other programs.
International Finance Corporation (IFC):
● The International Finance Corporation (IFC) is an international financial institution that
offers investment, advisory, and asset-management services to encourage private-sector
development in less developed countries.
● TheIFCisamemberoftheWorldBankGroupandisheadquarteredinWashington,D.C.in
the United States.
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● Itwasestablishedin1956,astheprivate-sectorarmoftheWorldBankGroup,toadvance
economic development by investing in for-profit and commercial projects for poverty
reduction and promoting development.
● The IFC's stated aim is to create opportunities for people to escape poverty andachieve
better living standards by mobilising financial resources for private enterprise, promoting
accessibleandcompetitivemarkets,supportingbusinessesandotherprivate-sectorentities,
and creating jobs and delivering necessary services to those who are poverty stricken or
otherwise vulnerable.
Multilateral Investment Guarantee Agency (MIGA):
● The Multilateral Investment Guarantee Agency (MIGA) is an international financial
institution which offers political risk insuranceandcreditenhancementguarantees.These
guarantees help investors protect foreign direct investments against political and
non-commercial risks in developing countries.
● MIGA is amemberoftheWorldBankGroupandisheadquarteredinWashington,D.C.in
the United States.
● MIGA was established in 1988asaninvestmentinsurancefacilitytoencourageconfident
investment in developing countries.
● MIGA is owned and governed by itsmemberstates,buthasitsownexecutiveleadership
and staff which carry out its daily operations.
● Itsshareholdersaremembergovernmentsthatprovidepaid-incapitalandhavetherightto
vote on its matters.
● It insures long-term debt and equity investments as well as other assets and contracts
with long-term periods.
● The agency is assessed by the World Bank's Independent Evaluation Group each year.
International Centre for Settlement of Investment Disputes (ICSID):
● TheInternationalCentreforSettlementofInvestmentDisputes(ICSD)isaninternational
arbitration institution established in 1966 for legal dispute resolution and conciliation
between international investors and States.
● ICSIDispartofandfundedbytheWorldBankGroup,headquarteredinWashington,D.C.,
in the United States.
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● It is an autonomous, multilateral specialised institution toencourageinternationalflowof
investment and mitigate non-commercial risks by a treaty drafted by the International
Bank for Reconstruction and Development's executive directors and signed by member
countries.
● Currently, 163 contractingmemberstatesagreedtoenforceandupholdarbitralawardsin
accordance with the ICSID Convention.
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Economy
Chapter 11: International Organizations
Lecture 05: Subsidies in India
International Monetary Fund (IMF):
● The International Monetary Fund (IMF) is a major financial agency of the United
Nations, and an international financial institution, headquartered in Washington, D.C.,
consisting of190 member countries.
● Its stated mission is “working to foster global monetary cooperation, secure financial
stability,facilitateinternationaltrade,promotehighemploymentandsustainableeconomic
growth, and reduce poverty around the world.”
● Itwasformedin1944ataUNConferenceinBrettonWoods,NewYork,UnitedStates
of Americawith the goal of reconstructing theinternational monetarysystem.
● It nowplaysacentralroleinthemanagementofbalanceofpaymentsdifficultiesand
international financial crises.
● Membercountriescontributefundstoapoolthroughaquotasystemfromwhichcountries
experiencing balance of payments problems can borrow money.
● Rich countries contribute more funds to the IMF than poor countries. IMF’s Important
decisions have to get an 85% majority to come into force. The USA has a 17%
contribution to the IMF.
● The IMF is regarded as theglobal lender of last resort.
Objectives of IMF:
● To promote international monetary cooperation.
● To promote international trade.
● To boost employment.
● To maintain exchange-rate stability.
● To achieve sustainable economic growth.
● To make resources available to member countries in financial difficulty.
Special Drawing Rights (SDR):
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● The SDR is aninternational reserve asset.
● The SDR serves as theunit of account of the IMFandother international organizations.
● TheSDRisnotacurrency,butitsvalueisbasedonabasketoffivecurrencies—theUS
dollar, the Euro, the Chinese Renminbi, the Japanese Yen, and the British Pound
Sterling.
● The SDR is neitheracurrencynoraclaimontheIMF.Rather,itisapotentialclaimon
the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
● The SDR was initially defined as equivalent to 0.888671 grams of fine gold,which,at
that time, was also equivalent to one U.S. dollar.
○ After the collapse of the Bretton Woods system, the SDR was redefined as a
basket of currencies.
Note:
● If there are1000 SDRs, and India receives 30 SDRs,with 1 SDR valued at $1.5, India
effectively gets $45.
● If thebalance of payments(BoP) worsens, with moreoutflows than inflows, therupee
depreciates.
● To stabilize it, the RBI sells dollars fromforexreserves, depleting them further, and
worsening the situation. In such a case, India may mortgage its SDRs to the USA,
receiving $45 in exchange for 30 SDRs.
● When repaying throughIMF’s SDRs, 25% is paid in hardcurrencies (Reserve Tranche
Position), while the remaining is paid in rupees (Credit Tranche Position).
Subsidies:
● A Subsidy is afinancial benefit or support providedby the government to individuals,
businesses, or industries.
● It is essentially a way for the government to encourage certainactivities, and make
goods, and services more affordable.
● In general, subsidies can be defined as when the government provides any goodor service
at a concessional price, that is, a price that is less than the market price.
● This act is performed by the government for thewelfare of the people.
● It is said that subsidies are good when it fulfill the following three conditions:
○ It has to beWell-targeted.
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○ It has to beTransparent in nature.
○ It has to beSuitably designedfor practical implementation.
● In India,Subsidies are considered regressive in naturebecauserich people are getting
more benefits from subsidies in comparison to below-poverty-line people.
● Subsidies are apowerful toolfor governments to achievevarious policy goals but their
design, targeting, and management are crucial in ensuring that they contribute to
sustainable, economic, and social development.
Subsidies in India:
Description 2024-25(BE) In Lakh crore Rs. 2025-26(BE) In Lakh crore Rs.
Food (Rs. cr) 205250.01 203420.00
Fertilizer 163999.80 (118999.80 for Urea) 16788720.20
Petroleum 11925.01 12100.01
Others 17697.51 14968.62
Interest Subsidies 25550.34 27840.38
Subsidy on Petroleum:
● Currently, prices of petrol and diesel are controlled by the government of India, and oil
marketing companies can increase or decrease the price of petrol and diesel as per the
increase or decrease of the price of crude oil at the international level.
● Currently, subsidies offered by the Government of India are only on LPG under the
Pradhan Mantri Ujjwala Yojana.
● In 2010 on the recommendations of an expert group on a viable and sustainable system of
pricing petroleum products, the government deregulated the prices of petrol with
effect from June 2010.
● The prices of diesel were allowed to increase from40 to 50 paise every month from
January 2013, and once the under recovery will befinished, it would be allowed to fixas
per market forces and that was ended in the middle of 2014.
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● To finish the kerosene subsidy, the Government of India started two schemes that is
Pradhan Mantri Ujjwala Yojana and Saubhagya scheme to provide electricity all over
the country, and there accordingly subsidies on Kerosene faced out by GOI in 2021-22.
Note:
● Petroleum subsidies should end due torising fiscal burdens.If companies like HPCL,
BPCL, and IOCL sell fuel at subsidized rates (e.g., ₹10 off petrol, ₹15 off diesel), losses
occur.For instance,if HPCL incurs a ₹10,000 crore loss annually, the government
compensates through bonds, increasing interest burdens.
● Additionally, selling at market rates aligns with demand-supply dynamics. Since India
imports 80-85% of crude, fuel prices depend oninternational crude rates, refining
costs, import duties, transportation, excise, sales tax, and profit margins.
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Economy
Chapter 11: International Organizations
Lecture 06: Food and Fertilizer Subsidies in India
Fertilizer Subsidies:
● The Department of Fertilizeris implementing aNutrient-basedSubsidy PolicyforP and
K fertilizerswith effect from1stApril 2010.
● Under this policy, afixed rate of subsidy (in Rs.per kg) is announced on nutrients
namely Nitrogen (N), Phosphate (P), Potash (K), and Sulphur (S)by the government
onan annual basis.
● The per kg subsidy rate on the nutrients NPKS is converted intoper tonne subsidyon the
variousP and K fertilizerscovered under the policy.
● Any variant of the fertilizers covered under the subsidy scheme withmicro-nutrients
namely Zinc and Boronis eligible for a separate pertonne subsidy to encourage their
application along with primary nutrients.
● At present25 grades of P and K fertilizersnamelyDiammonium phosphate (DAP), MAP
(Monoammonium Phosphate) etc.,and18 grades of NPKScomplex fertilizersare
covered under the policy.
● Under this policy,MRP of P and K fertilizers hasbeen left openand fertilizer
manufacturers/ marketers are allowed to fix the MRP at reasonable rates.
● Though the market price of subsidized fertilizers,except urea,is determined based on
demand and supply dynamics, thefertilizer companiesare required to print the retail
price along with applicable subsidies on the fertilizer bagsclearly.
● Anysale above the printed MRP is punishableunderthe Essential Commodities Act,
1955.
Neem-Coated Urea:
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● From January 2015, the Government made itmandatoryfor urea manufacturers to
produce neem-coated ureaup to a minimum of 75% oftheir total productionof
subsidized urea, (from 35% earlier and allowed them to go up to 100%).
● When farmers use conventional urea,about half ofthe applied nitrogen is not
assimilated by the plant and leaches into the soil,causing extensive groundwater
contamination.
● Spraying urea with neem oilslows the release of nitrogenby about10-15%,
alongside reducing the consumption of the fertilizer.
● The neem coating alsostopped an age-old malpracticeof this cheap fertilizer being
diverted for use in the chemical industry and most harmful in states like Punjab,
Haryana as a chemical to whiten milk.
Fertilizer Consumption April-Oct 2021 (In Million Apr-Oct 2022 (In Million metric
metric tonne) tonne)
Urea 18.6 19.3
DAP 5.56 6.50
MOP 1.68 0.879
NPKS 7.18 5.57
SSP 3.48 3.16
DBT (Direct Benefit Transfer):
● From October 2016, the GoI started DBT in fertilizer companies. Earlier subsidies were paid
if fertilizer companies on the basis receipt of fertilizers atrail rack pointsfor identified
godowns in the districts.
● Under the DBT system, themanufacturers will get thedifference between the actual
value and subsidized price of fertilizerin the company’sbank account after giving the
actual details of the sale through the Point of Sale machine device.
● The government has asked all the fertilizer marketing companies to installpoint-of-sale
machinesas early as possible.
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● The companies have also been asked totrain the retailers so that the scheme can also
roll it out quickly.
Food Subsidy, or Security:
● TheWorld Health Organisationdefines food securityas a situation when all people at all
times have physical and economic access to sufficient and nutritious food that meets their
dietary needs and food preferences for a healthy and active life. The lack of a balanced
diet minus essential nutrients results inchronicmalnutrition.
● Food Security as per 1974, World Food Conferenceisthe availability at all times of
adequate world food supplies of basic food stuffs to sustain a steady expansion a food
consumption into obsessed fluctuation in production, and spices.
● It is build on 4 factors, or pillars:
○ Availability:Adequate and consistent food suppliesare available on anational and
household level.This includesfood production, imports,and stocks.
○ Accessibility:Individuals and households have theeconomic means toacquire or
purchase the food they need.This is influenced byfactors such asincome,
employment, and social safety nets.
○ Utilization:People have the ability to use food effectivelyfor nutrition. This is to
make sure that food is safe to eat and individuals have theknowledge and
practices to derive the necessar̥ y nutrients from their diet.
○ Stability:Food security is not a temporary condition.It has to be stable over a
period of time and individuals and the communities should beresilient to shocks
or disruptions that could affect food supply.
Global Food Security Index:
It Depends on:
● Availability (Rank: 42)
● Affordability (Rank: 80)
● Quality and safety (Rank: 67)
● Sustainability and adaptation (Rank: 71)
NOTE:India's Current rank: 68th out of 113.
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Economy
Chapter 11: International organisations
Lecture 07: Food Subsidies in India
Comparison of Food self Sufficiency:
Crop India average World Average Highest productivity in
(Kg/hc) (Kg/hc) Kg/ha (Country)
Paddy 3576 4546 6832 (China)
Wheat 3144 3314 8634 (Germany)
Maize 2560 5622 10744 (USA)
Pulses 659 999 2031 (Canada)
Groundnut 1400 1657 4397 (USA)
Schemes for Agriculture Development in India:
● Paramparagat Krishi Vikas Yojana
● Pradhan Mantri Krishi Sinchai Yojana
● Zero Budget Natural Farming
● National Mission for Sustainable Agriculture
● Pradhan Mantri Fasal Bhima Yojana
● PM AASHA(Pradhan Mantri Anna Data Ayya Sanrakhan Abhiyan)
● Pradhan Mantri Kisan Samman Nidhi (PM Kisan)
Food and Agriculture Organization(FAO)
The Food and Agriculture Organization (FAO) is a global agency that focuses on ensuring food
security worldwide. It is a specialized agency of the United Nations, established in 1945, and
currently has 194 member countries.
● Objectives of FAO:
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○ To ensure global food security and eradicate hunger.
○ To modernize agriculture and improve farming practices.
● Role played by FAO:
○ 1974: FAO organized the World Food Conference to address global food security
issues.TheInternationalFundForAgricultureDevelopment(IAFD)wasestablished
to modernise agriculture.
○ 1996:TheWorldFoodSummitledtothesigningoftheRomeDeclaration,aimingto
achieve food security by 2015. However, the target was not adopted as countries
failed to come to an agreement.
○ 2002:AnotherglobalfoodconferencewasheldtoadopttheRomeDeclarationand
work towards global food security by 2015.
○ 2009: A third World Summit on Food Security was convened, with the goal of
postponingthe2015targetandacceleratingeffortstoachievefoodsecurityassoon
as possible.
Global Hunger Index
● GHI Indicators
○ Undernourishment:Share of the population with insufficientcaloric intake.
○ ChildWasting:Shareofchildrenunderfivewithlowweightfortheirheight(acute
undernutrition).
○ ChildStunting:Shareofchildrenunderfivewithlowheightfortheirage(chronic
undernutrition).
○ Child Mortality: Share of children who die before reaching theageoffive,often
due to malnutrition and poor health environments.
● The 2024 GHIIndexranksIndia105thoutof127countrieswitha“serious”hungerlevel
(score 27.3), though the situation could be considered “extremely alarming” based on
additional factors.
● According to the 2024 report, 13.7% of the population isundernourished,with35.5%of
children stunted and 18.7% wasted.
● Additionally,2.9%ofchildrendiebeforetheirfifthbirthday,makingIndiathecountrywith
the highest child wasting rate globally.
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National Food Security Act 2013:
● The government of India enacted the National Food Security Actin2013.Theimportant
features of this act are:
○ Aspersection3(2) NationalFoodSecurityActwillcover75%oftheruraland
50% of the Urban population (2/3rd of India's population).
○ Aspersection3(1)5kgperpersontopriorityhouseholdsand35kgoffoodgrains
to Antyodaya Anna Yojana.
■ In a Priority household a family gets amaximum of25 kg of food grains.
○ As per schedule 1 of this law the prices of Rice, wheat, and millets will be
providedat3rupees,2rupees,and1rupeesperkgfor3yearsfromthedateof
commencement of thislaw.Andthereafteratsuchpriceasmaybefixedbythe
central governmentfrom time to time but not exceedingthe MSP.
○ State governments of India decide who will get foodgrainsunderthisparticular
law.
○ As per section 4, Free meals that are free of charge to pregnant and lactating
mothers and maternity benefit of at least 6000 rupees for 6 months asmaybe
prescribed by central government and 600 calories of food containing 18 to 20
grams of protein.
○ Undersection5oftheAct,freemealsforchildrenfrom6monthsto14yearsor
up to 8th standard,Take home ration or hot cooked meals of 450 to 800 calories.
○ Under section 8 of the Act, In case of non-supply of entitled quantity offood
grains or meals to entitledpersonsunderchapter2,suchpersonshallbeentitled
toreceivesuchfoodsecurityallowancefromtheconcernedstategovernmentstobe
paid to each person, within such time and manner as may be prescribed by the
central government.
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○ Under section 10 of the Act, The state governments are responsible for
determining eligibility to get food grains.
○ Undersection13(1)oftheAct,theeldestwomanofthehouseholdis18yearsor
abovetobetheheadofthehouseholdforthepurposeofissuingrationcardsunder
theAct,ifthereisnowomaninthefamilythentherationcardwillbeissuedin
the name of male.
○ Under section 15 of the Act, state governments appoint district grievance
redressal officers and under section 16 a state food commission should be
constitutedforthepurposeofmonitoringandreviewingtheimplementationofthis
law.
○ The act is implemented with the help of thePublicDistribution System (PDS)
Public Distribution System (PDS):
● The Public Distribution Systemis also known as theFair Price Shop or Ration Shop.
● PDS is theresponsibilityof both theCenter and theState.
● The central government through the Food Corporation of India has assumed the
responsibility ofprocurement,storage,transportation,andbulkallocationoffoodgrainsto
the state governments.
● The operational responsibilityincludingallocationwithinastate,identificationofeligible
families, issue of ration cards, and supervisionofthefunctioningoffairpriceshops,etc.
rests with the state governments.
● Under the PDS, certain goods like rice, wheat, and millets are offered by the central
governmentandifthestategovernmentwantstoprovideothercommoditiesthatcanalso
be provided.
● Some States/UTs also distribute additional items of mass consumption through the PDS
outlet such as pulses, edible oil, iodized salt, spices, etc.
● PDS till 1992 was a general entitlement scheme for all consumers without any specific
target. In the same year the PDS systemwasrenamedtoincludethehillyareas,desert
areas and other areas of the country.
● ThenfromJune1997,PDSwaslaunchedasTargetedPDS(TPDS)wasintroduced,aiming
to assist with subsidized food grains to Below Poverty Line (BPL) families as per
planning commission definition.
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● In 2013, the government of India passed the National Food Security Act, under which
2/3rd of the population will be covered.
● But after the Covid-19 pandemic, under this law 80 crore population will now get food
grains for free.
Problems With the PDS System:
● FoodgrainsmeantforthePublicDistributionSystem(PDS)weresoldintheopenmarket
instead.
● Subsidised foodgrainsarestolenbymiddlemenandsellers.PDSemployees,suppliers,and
local leaders work together to exploit loopholes.
● FoodgrainsdistributedthroughPDSroutesareoftenofpoorqualityorhavebeentampered
with. There is a lack of transparency and accountability in the way the PDS operates,
leading to systematic corruption.
● PDS shop owners generally overcharge and underweight the quantity.
● Fraudinvolvingfakerationcardsandextracardsisstillcommon.Officialsandmiddlemen
use bribery and blackmail to manipulate distribution
Way Forward:
● DigitizationandAadhaarlinkagestoensureaccuratebeneficiaryidentificationandeliminate
duplicate and fake ration cards.
● Strengtheningofgrievanceredressalmechanismstoallowbeneficiariestoreportcorruption
and irregularities.
● Implementation of biometric authentication systems toverifybeneficiaries'identitiesat
PDS outlets.
● RegularsocialauditsandpublicmonitoringofPDSoperationstoincreasetransparencyand
accountability.
● Use of GPS technology to track the movement of food grains from procurement to
distribution points.
● Introductionofdirectcashtransfersorfoodcouponstoreducephysicalgrainhandlingand
minimize leakages.
● Strict enforcement of anti-corruption laws and prosecution of individuals involved in
corrupt practices within the PDS.
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● Trainingandcapacity-buildingprogramsforPDSofficialstoenhancetheirawarenessof
ethical conduct and integrity.
● Promotion of community participation and vigilance committees to oversee PDS
operations at the grassroots level.
● Simplification of PDS procedures and reduction of bureaucratic hurdles to streamline
operations and minimise opportunities for corruption.
● Shanta Kumar Committee: The objective of the Committee was to restructure FCI to
improve its operational efficiency and financial management.
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Economy
Chapter 12: Food Processing Industry
Lecture 01: Food Processing Industry
Food Processing:
● Food Processing is a procedure in whichfood is preparedfor consumption.
● There are several purposes to food processing but the most basic goal is to prepare
food that is palatable (good in taste with nutrition).
● It includes processing ingredients that arenotsafetoeatraw,flavoringfoodstomake
them more interesting and moreover, it also includes the process offoodfortification,
thatis,addingvitaminsandproteinstofoodandgrains.Forexample:Addingiodineto
salt.
● It includes adding somepreservativestothefoodproductstoincreasetheshelflifeof
food products.
Types of Food Processing Industries:
The processing sector comprises of three segments based on the level of processing:
● PrimaryProcessingofFood:Itincludessortingandgradingandpackagingoffruitsand
vegetables, milk, spices.
● SecondaryProcessingofFood:Itcomprisesreshapingoffoodforeaseofconsumption.It
includes flour, tea leaves etc. .
○ NOTE: The primary and secondary processing constitutearound62%ofprocessed
food in value terms.
● Tertiary Processing of Food: Itincludesprocessedfruitsandvegetables.Example:Juices,
Jam, jelly, Ketchup etc. and it holds around 38% share in the total processed food
market.
○ NOTE:78.2 million tonnes of food is wasted and 22% food is wasted every year.
Important Features of Food Processing Industry:
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● Indian households waste 55kgoffoodperpersonannually,totallingaround78.2million
tonnes each year. This wastage accounts for about 22% of the country’s food grain
output.
● Over 30-40% of foods and vegetables in India go to waste due to improper storage
conditions.
● Around 15-20% of food loss occurs due to poor roads, delays and lack of proper transport.
● The economic implications are substantial, with the value of wasted food costing at
920000 crore per annum, around 1% of GDP.
● Only about 10% of food produced in India gets processed compared to 30-80% in
developed countries.
● The food processing industry in India is among the largest globally, with the amount
expected to reach 535 billion dollars by 2025-2026, which was $ 263 billion in 2021-22
● India is the third largest grocery market in the world.
● The industry contributes approximately 14% to the GDP of India’smanufacturingsector
and accounts for 13% of the country's exports.
● The sector has attracted 6.79 billion US dollar equity inflows over the last decade,
highlighting its appeal to international investors.
● Directly employing about 20 million people across over 40,000 registeredfoodprocessing
factories, the sector significantly contributes to job creation.
● With an outlay of 10900 Crore rupees the production linked incentive scheme aims to
boost domestic manufacturing, promote exports and generate employment in the food
processing sector.
Supply Chain Management:
● Supplychainsarethesuppliers,manufacturers,distributors,andtransportationmodes
thatmoveproductsandservicesfromthesourceofcomponentsandrawmaterialstothe
consumer/customers.
● Supply Chain Management is a set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and stores, so that goods are produced and
distributed in the right quantity, to the right location, at the right time, in order to
minimize systems-wide cost while satisfying service level requirements.
PW Web/App:https://smart.link/7wwosivoicgd4
● ThebasicobjectivesofSupplyChainManagementaretoensurethattherightproducts
are delivered to the right place at the right time in a cost-effective manner.
● Supply Chain Management consists of upstream and downstream activities.
● The product flowing from the source towards the customer is flowingdownstream.
● Activities that are performed previous to a specific point on the supply chains are
upstream activities.
● Backward integrationmeans a company that expandsits activities to upstream areas.
● Forward integrationmeans that the company expandsits activities to downstream areas.
● Vertical integration means when a company’s backward and forward integration is so
good that it practically runs everything from making raw materials to selling the final
producttothecustomer.Itisachievedwhenasinglefirmabsorbsmultiplefirmsinvolved
in all aspects of a product's manufacture, from raw materials to distribution.
Mega Food Parks:
● ThepurposeofMFPistocreatemoderninfrastructurefacilitiesforfoodprocessingalong
the value chain.
● It aims to provide a mechanism to link agricultural production to market by bringing
togetherallthestakeholders,i.e.farmers,processors,andretailerstoensuremaximisationof
value addition, creating employment opportunities, minimising wastages, and increasing
farmers' income.
● MFP is based on acluster approach.
● Until now, the Government has established 42 Mega Food Parks.
Food Safety And Standard Act 2006:
● ThisActaimstoconsolidatethelawsrelatedtofoodandestablishtheFoodSafetyand
Standards Authority of India (FSSAI).
● Its purpose is to set science-based standards for food products and regulate their
manufacture, storage, distribution, sale, and import, ensuring the availability of safe and
wholesome food for human consumption and addressing related or incidental matters.
● These safety standards are in compliance with the Codex Alimentarius Commission.
● FSSAI issues three types of food licences.
PW Web/App:https://smart.link/7wwosivoicgd4
○ The first is basic registration, intendedforsmallFoodBusinessOperators(FBOs)
with an annual turnover oflessthan₹12lakh,suchassmallcafes,restaurants,
food hawkers, and food stalls.
○ The second type is the FSSAI state licence, applicable to FBOs with an annual
turnover between₹12 lakh and ₹20 crores.
○ ThethirdtypeistheFSSAIcentrallicence,requiredforlargerfoodentitieswithan
annual turnover exceeding ₹20 crores. FBOs must choose the appropriate
registration or licence based on the nature and size of their business.
● The Food Safety and Standards Authority of India (FSSAI) has recommended stringent
punishment to curb food adulteration following the Supreme Court order.
● ThoseadulteratingfoodproductscouldfacelifeimprisonmentandapenaltyofuptoRs
10 lakh as per the amendmentsproposedbytheregulatorFSSAIinits2006foodsafety
and standards law.
PW Web/App:https://smart.link/7wwosivoicgd4
Economy
Chapter 13: Land Reforms
Lecture 01: Land Reforms
Land Reforms:
● Land reforms usually refer to theredistribution oflandfrom therich to the poor.More
broadly, it includes regulation ofownership, operation,leasing, sales, and inheritance of
land.
● In an agrarian economy like India with agreatscarcityof land and an unequal
distribution of landcoupled with a large mass ruralpopulation livingbelow the poverty
line, there arecompelling economic and politicalarguments for land reforms.
● Not surprisingly it received top priority on thepolicyagendaat the time of independence.
● In the decades following independence, India passed a significant body ofland reform
legislation.
● The1949 Constitutionleft theadoptionandimplementationof land and tenancy
reformsto the state governments.
Note:
TheFirst Constitutional Amendment Act, 1951introducedkey changes to the Indian
Constitution:
● Reason: Addressed challenges to land reforms and fundamentalrights.
● Added Ninth Schedule: Protected laws from judicialreview.
● Restricted Fundamental Rights: Curbed freedoms underArticle 19(speech, property).
Broadly in Land Reforms, there are Five Main Components:
● Abolition of Intermediaries: Removed zamindars, transferred land ownership to tenants
and cultivators.
● Tenancy Reforms: Provided security, fair rent, andownership rights to tenant farmers.
● Ceiling on Landholdings: Limited maximum land ownership to distribute excess land among
the landless. Land ceiling laws vary by state. Like in West Bengal, the limit is5 hectares
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for irrigated landand7 hectares for non-irrigated land. In Haryana, the ceiling is7
hectares for irrigated landand21 hectares for non-irrigatedland.
● Consolidation of Landholdings:
○ It refers to theprocess of combining fragmented landparcels into two larger
plotsfor agriculture. In india this consolidationis typically carried out throughlegal
and administrative measuresaimed at increasingefficienciesof agricultural land
use and prompting agricultural productivity.
○ There are multiple advantages of consolidation increased efficiencies, improved
access to infrastructure, better crop management, and encouraged investment.
○ However, there are multiple challenges faced by the state governments. Some are
legal and administrative hurdles, resistance from small landholders and
environmental impacts, and social displacement.
● Compilation and updation of Land Records:
○ Initially, the government of India started two programs: Updation of land
records (ULR)andComputerisation of land records(CLR), and the taskswere
supposed to be completed by 2007.However when itwas not completed by 2007,
the government of India startedthe National LandRecord Modernisation Program
(NLRMP), and this time the target was supposed tobe completed by 2017.
○ But still, when it was not completed, the government of India launched Digital
India Land Record Modernisation Program ( DLRMP),andthis time the
government provided the tasks to be completedas soonas possible.
th
As per the 10 Agriculture Census (2015-16), farmersare divided into five
categories:
Category of Farmers Population of Farmers Landholdings
2015-16 2010- 11 2015-16 2010-11
● 0.5 - 1 hectare: 86.21% 84.97% 47.34% 44.31%
Marginal Farmers
● 1 - 2 hectares:Small
Farmers
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● 2 - 4 hectares:Semi 13.22% 14.29% 43.61% 44.82%
Medium Farmer
● 4 - 10 hectares:
Medium Farmer
● > 10 hectares:Large 0.57% 0.71% 9.06% 10.59%
Farmer
Note:Average landholding in2015-16 was 157.14 millionhectares which has decreased from
159.59 million hectares in 2010-11.
Co-operative Farming:
● Cooperative farming is a collaborative agricultural arrangement where farmers pool their
resources, land, and labour to collectively cultivate crops, manage livestock, and share
in the risks of benefits of agricultural production.It involves joint decision-making,
resource sharing, and collective marketing of produce among members.
Relationship Between Farm Size and Farm Output:
● Normally it is said that, as thesize of a farm increasesthe per-acre yield of the farm
decreases.This means thatsmall farms are more efficientthan large farms. In this
respect, the following arguments are given:
○ When the cultivation on large farms is made, the production is carried to the level
that marginal outputbecomes equal to wages.Whileon small farms the output is
produced under family farming practice whereoutputis carried to the situation
where the marginal output of the last labour is zero.Thus, on the basis of per
acre-productivity, small farms are more efficient.
○ Large farms are less fertilebecause small farmerssell their inferior lands to big
farmers during days of distress.
○ The large farms are scattered at different places, rather than beingconcentrated
in one place.If the distress hypothesis is consideredcorrect, thepoor farmers sell
their farms during poverty and famine, then scattered farms are furnished
with inefficiency.Again it has been found that smallfarmers utilize small farms
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effectively because such farms are theironly sourceof income, so they use their
farm inputs in the best possible manner.
○ On the other hand,big farmers use their big farmsineffectively because it is
not mandatory for themto use their inputs effectively.And that is whyyield
goes down.
○ The big farms are so often cultivated by tenants, while the small farms are
cultivated by the owners themselves. The tenants and the agriculture labourers have
theleast interest in the lands of the others. Thesmall owners work more
diligently with their land and as a result, the per-acre yield is higher.
○ The owners of big farms are eitherabsentee landlordsor those engaged in
politics.Therefore, they neither makeproper supervisionnor do innovation in
their products and that's why the per-acre yield remains lower.
○ The large farmholders follow the principle of maximization of profit or they produce
to such an amount where the difference betweentotalrevenue and the total cost
is maximum whereas small farmers like to maximize their revenues or outputs,
rather than profit.
Previous Year Questions:
● In view of the declining average size of land holdings in India which has made agriculture
non-viable for a majority of farmers, should contract farming and land leasing be
promoted in agriculture? Critically evaluate the pros and cons.
● Discuss the role of land reforms in agricultural development. Identify the factors that
were responsible for the success of land reforms in India.
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Economy
CH13: Land Reforms
Lecture 02: Agriculture
Minimum Support Price (MSP):
● Minimum Support Price (MSP) is aformof marketinterventionbytheGovernmentof
India to ensure agricultural producers against any sharp fall in farm prices.
● The minimum support prices areannouncedbytheGovernmentofIndiaatthebeginning
ofthesowingseasonforcertaincropsbasedontherecommendationsoftheCommission
for Agricultural Costs and Prices (CACP).
● MSP is a price fixed by theGovernmentofIndiatoprotecttheproducersandfarmers
against excessive falls in priceduring bumper productionyears.
● The government guarantees minimum support prices for their produce. Thus, this will be
the minimum price at which their product will fetch.
● IfthemarketpriceisabovetheMSP,thefarmerscansellitatthemarketprice.Incase
themarketpriceforthecommodityfallsbelowtheannouncedminimumprice,government
agencies purchase the entire quantity offeredbythefarmersattheannouncedminimum
price.
● The government of India established companies such as Food Corporation of India,
NAFED, CCT, JCT, etc.to procure agricultural goods directly from the farmer.
● Themajorobjectivesaretosupportthefarmersfromdistresssalesandtoprocurefood
grains for public distribution.
● Procurement price (PP) is the priceatwhichthegovernmentprocuresfoodgrainsfor
buffer stocking and PDS purposesthrough the FoodCorporation of India.
● ThemajordifferencebetweentheMSPandPPisthatwhiletheprocurementpriceisonly
for food grains, the MSP is for both food grains and non-food grains.
Determinants Of MSP:
● While recommending price policies of various commodities under its mandate, the
CommissionkeepsinmindthevariousTermsofReference(TOR)giventoCACPin2009.
Accordingly, it analyzes
○ Demand and supply
○ cost of production
○ price trends in the market, both domestic and international
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○ inter-crop price parity
○ terms of trade between agriculture and non-agriculture;
○ a minimum of 50 percent as the margin over the cost of production; and
○ likely implications of MSP on consumers of that product.
Different Methods of MSP Calculation:
● The Commission for Agricultural Costs and Prices (CACP) gives three definitions of
production costs:
○ A2:
■ A2 costs basically cover all paid-out expenses, both in cash and in kind,
incurred by farmers on seeds, fertilizers, chemicals, hired labor, fuel,
irrigation, etc.
○ A2 + FL:
■ A2+FLcoversactualpaid-outcostsplusanimputedvalueofunpaidfamily
labor (alternative cost of family labor).
○ C2:
■ C2 costs are more comprehensive, accounting for the rentals andinterest
for owned land and Fixed Capital Assets respectively, on top of A2+FL.
■ The C2 cost is usually the foundation for determining the Minimum
Support Price (MSP).ItisgenerallyrecommendedthatMSPshouldbeat
least 50% higher than the C2 cost to ensure a reasonableprofitmargin
for farmers.
● The central government decides the MSP of a product, but market places such as
Agricultural Produce Market Committees (APMC), are developed and managed by the
state government.
What did "Swaminathan Sir" say in 2006?
● M S Swaminathan committee's widely disseminated recommendation is to fixMinimum
Support Prices (MSP)for crops at levels "at least 50 percent more than theweighted
average cost of production (WACP)".
● The National Commission on Farmers did not elaborate on what really constituted
"weighted average cost of production"in its report submitted in October 2006.
Practical implementation of MSP:
● M. S. Swaminathan committee's 2006 widely disseminated recommendation, to fix
Minimum Support Prices (MSP) for crops atlevels"atleast50percentmorethanthe
weighted average cost of production (WACP)"but Still not implemented.
PW Web/App:https://smart.link/7wwosivoicgd4
● TheShantaKumarCommitteewhichlookedintothefoodprocurementsystemreportedin
2015 that on average, just about 14 percent ofpaddyandwheatfarmerswereableto
sell their produce to government procurement agencies.
○ The same report also says that even those who sold to the government got the
declared MSP foronly 27-35 percent of their produce.
○ Shanta Kumar's report suggests that only rich farmers are able to access
government mandis and get paid the MSP.
○ HesaysthatofthetotalagriculturalhouseholdsinIndia,lessthan6percentare
sold to procurement agencies.
○ Nearly 75 percent of paddy growers and over 65 percent ofwheatgrowersdidn't
even know that the government procured any food grain.
○ What isevenmoresurprisingisthat68percentofpaddygrowersand60percent
of wheat growers hadn't even heard ofminimum support prices (MSP).
○ Even if one assumes that rich farmers account for 50 percent of thepaddyand
wheatthathitsthemarket,ShantaKumar'sreportwouldsuggestthatjustabouta
sixth of India's total rice and wheat output is bought by the government atthe
floor price it announces.
Recent agricultural bill repelled by the government of India:
● 1ST Agricultural Reform Bill/Act:
○ Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act,
2020.
○ Main provisions:
■ The new legislation will create an ecosystem where the farmers and
traders will enjoy the freedom of choice of sale and purchase of
agri-produce.
■ It will also promote barrier-free inter-state and intra-state trade and
commerce outside the physical premises of markets notified under State
Agricultural Produce Marketing legislation.
■ The farmers will not be charged any cess or levy for the sale of their
produce and will not have to bear transport costs.
■ The Bill also proposes an electronic trading-in-transaction platform for
ensuring seamless trade electronically.
■ In addition to mandis, freedom to do trading at farmgate, cold storage,
warehouse, processing units, etc.
■ Farmers will be able to engage in direct marketing thereby eliminating
intermediaries resulting in full realization of price.
PW Web/App:https://smart.link/7wwosivoicgd4
● 2nd Agricultural Reform Bill/Act:
○ The Farmers (Empowerment and Protection) Agreement on Price Assurance
and Farm Services Act, 2020.
○ Main provisions:
■ The new legislation will empower farmers to engage with processors,
wholesalers, aggregators, wholesalers, large retailers, exporters, etc., on a
level playing field. Price assurance to farmers even before sowing of crops.
In case of a higher market price, farmers will be entitled to this price
over and above the minimum price.
■ It will transfer the risk of market unpredictability from the farmer to the
sponsor. Due to prior price determination, farmers will be shielded from
the rise and fall of market prices.
■ It will also enable the farmer to access modern technology, better seeds,
and other inputs.
■ It will reduce the cost of marketing and improve the income of farmers.
■ An effective dispute resolution mechanism has been provided with clear
timelines for redressal.
■ The impetus to research and new technology in the agriculture sector.
● 3rd Agricultural Reform Bill/Act:
○ The Essential Commodities (Amendment) Act 2020.
○ Main Provisions:
■ The Essential Commodities (Amendment) Act, 2020withprovisions to
remove commodities like cereals, pulses, oilseeds, edible oils, onion, and
potatoes from the list of essential commodities.
■ The EC (Amendment) Act 2020 aims to remove fears of private investors
of excessive regulatory interference in their business operations.
■ The freedom to produce, hold, move, distribute, and supply will lead to the
harnessing of economies of scale and attract private sector/foreign direct
investment into the agriculture sector.
■ It will help drive up investment in cold storage and modernization of the
old supply chain.
Agricultural Produce and Livestock Marketing (Promotion and Facilitating) Act
(APLM), 2017:
● Itwouldbeamajoragri-reformasitprovideswideroptionsforfarmerstosellproduceand
get better prices.
PW Web/App:https://smart.link/7wwosivoicgd4
● At present, farmers can sell their produce at regulated APMC (Agriculture Produce
Marketing Committee) mandis only. They are subjected to different kinds of fees.
● Its implementation will help in doubling farmers' income by 2022.
● Thepurposeofthisactistocreateasingleagri-marketwherewithasinglelicenceone
can trade agri-produce as well as livestock.
● Thegovernmentaimstosetupawholesalemarketatevery80km.Thenewlawwillend
themonopolyofAPMCandallowmoreplayerstosetupmarketsandcreatecompetitionso
that farmers can discover prices and sell their produce accordingly.
● It caps market fees (including developmental and other charges) at not more than 1
percentforfruitandvegetables,and2percentforfoodgrain.Itcapscommissionagents'
fees at not more than 2 percent for non-perishables and 4 percent for perishables.
Model APMC Act by Central Government:
● The Ministry of Agriculture formulated a model law on agricultural marketing - State
Agricultural Produce Marketing(DevelopmentandRegulation)Act,2003andrequested
the state governments to suitably amend their respective APMC Actsforderegulationof
the marketing system in India, to promote investment in marketing infrastructure,
thereby motivating the corporate sector to undertake directmarketingandtofacilitatea
national market.
● Important Provision of Model APMC Act:
○ Legal persons, farmers, and local authorities are permitted to apply for the
establishment of new markets for agricultural produce in any area. Under the
existing law, markets areset up at the initiativeof State Governments alone.
○ Consequently, in a market area, more than one market can be established by
private persons, farmers, and consumers.
○ There will be no compulsion on the farmerstoselltheirproducethroughexisting
markets administered by the Agricultural Produce Market Committee (APMC).
However, an agriculturist who doesnotbringhisproduceareaforsalewillnotbe
eligible for election to the APMC.
○ A new Chapter on 'Contract Farming' was added to provide for compulsory
registration of all contract farming sponsors, recording of contract farming
agreements, resolution of disputes, if any, arising out of such agreements,
exemption from levy of market fee on produce covered by contract farming
agreementsandtoprovideforindemnitytoproducers'titlepossessionoverhisland
from any claim arising out of the agreement.
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○ It has a provision for the direct sale of farm produce to contract farming
sponsors from farmers' fields without the necessity of routing it throughnotified
markets.
○ Provisionmadefortheimpositionofsinglepointlevyofmarketfeeonthesaleof
notifiedagriculturalcommoditiesinanymarketareaanddiscretionprovidedtothe
State Government to fix graded levy of market fee on different types of sales.
○ State Governments conferred power to exempt any agricultural produce brought
for sale in market areas,from payment of market fee.
Mains question:
● What do you mean by MSP? How will MSP rescue the farmers from the
low-income trap? (UPSC 2018)
Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA):
● The PM-ASHA (Pradhan Mantri Annadata Aay Sanrakshan Abhiyan) is an Indian
governmentinitiativeaimedatensuringafairpriceforfarmers’producebyprovidingthem
with a mechanism forprice assurance.
● PM AASHA has three components, and states can choose whichever onetheywishto
implement. The three components are
○ Price Support Scheme (PSS):
■ If the market price falls below theMSP during theprocurement period,
the government intervenes and directly purchases the crops from farmers at
the MSP level.
■ In PSS, thephysical procurement of pulses, oilseeds,and coprawill be
done by central nodal agencies with the proactive role of state governments.
■ In addition to the National Agricultural CooperativeMarketing Federation
of India (NAFED), the Food Cooperation of India (FCI)willtake up PSS
operations in state districts.
■ The procurement expenditure and losses due to procurement will be borne
by the Central Government as per norms.
○ Price Deficiency Payment Scheme (PDPS):
■ Under PDPS, it is proposed to cover all oilseeds for which MSP is notified.
■ Direct payment is thedifference between the MSP andthe selling modal
pricewill be made to pre-registered farmers sellingtheir produce in the
notified market yard through a transparent auction process.
PW Web/App:https://smart.link/7wwosivoicgd4
■ All payments will be made directly into the registered bank account of the
farmer.
■ This scheme does not involve any physical procurement of crops, as farmers
are paid the difference between the MSP price and the Sale modal price on
disposal in the notified market.
■ The support of the central government for PDPS will be given as per norms.
○ The pilot of Private Procurement and Stockist Schemes (PPPS):
■ In addition to PDPS, for oilseeds, states have the option to roll out PPPS on
a pilot basis in selected districts where theAgriculturalProduce Market
Committee (APMCs)of districts involve the participationof private
stockists.
■ This scheme will allow private players to participate in the procurement of
crops.
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