TYPES OF ECONOMIC SYSTEMS

Capitalist Economy/Market- individual actors own and control property according to their interests and where supply and demand freely determine market prices.

FEATURES MERITS DEMERITS

Freedom of Enterprise- every individual is free to make his own economic choices Increase in production Leads to monopoly

Right to Private Property Flexible system Inequalities

Freedom of choice to the consumers Optimum use of resources Depression and unemployment
Competition among producers and sellers Progress and prosperity Insufficient production
More scope for innovation Quality products at low costs Class conflict

A socialist economy is one in which the government controls the factors of production, such as labour, raw materials, and capital goods.

FEATURES MERITS DEMERITS

Co-existence of private and public ownership Welfare state Non-cooperation between the two sectors

Existence of economic planning Better allocation of the resources Inefficient Public sector
Promotes the equitable distribution of wealth and social Economic fluctuation and Administered prices are not the
Conducive policies by govt. for private sector
justice most efficient
Ensures that all citizens have the means to achieve a
Planned and definite economic role of govt. Breeding ground for corruption, red-tapism, and favouritism.
minimum living standard
Socialism does not promote hard work or any creativity in its
Consumers do not have absolute freedom of choice. It provides comprehensive social security to all its members
citizens.

Mixed Economy means a market system for allocating resources, doing business, and conducting trade in which government intervention coexists with free markets.
PRE-INDEPENDENCE PLANNING IN INDIA

The economic perspective of India’s freedom movement was formulated during the Karachi session of INC (1931), Faizpur session of INC (1936).

Visvesvaraya  “Planned economy in India” in 1934

 His core idea was to lay out a plan to shift labour from agriculture to industries and double up National income in 10 years.
Father of Indian  his plan was drawn within the framework of a capitalist economy
Economic Planning
National Planning  first attempt to develop a national plan for India. This committee was set up by Congress president Subhash Chandra Bose and was chaired
Committee (1938) by Jawaharlal Nehru
 The NPC was set up in a conference of the Ministers of Industries of the Congress-ruled States (though other states were also invited to participate)
Haripura Session of  15-member NPC with 29 sub-committees and a total of 350 members produced 29 volumes of recommendations.
Congress
Bombay Plan 1944  Industrialists of Bombay including Mr. JRD Tata, GD Birla, Purshottamdas Thakurdas( editorship), Lala Shriram, Kasturbhai Lalbhai, AD Shroff, Ardeshir
Dalal, & John Mathai working together prepared “A Brief Memorandum Outlining a Plan of Economic Development for India”
 envisaged doubling the per capita income in 15 years and tripling the national income during this period.

Planning and The British Indian government set up a “Planning and Development Department” under the charge of Ardeshir Dalal. But this department was abolished in
Development 1946.
Department -1944
People’s Plan  Plan was based upon Marxist socialism and drafted by M N Roy.
 This plan was for a 10 years period and gave greatest priority to Agriculture.
 Nationalization of all agriculture and production was the main feature of this plan.

Gandhian Plan (1944)  Sri Shriman Narayan in 1944 who was principal of Wardha Commercial College.
  Plan emphasized economic decentralization with primacy to rural development by developing cottage industries.

Sarvodaya Plan (1950)  Plan was drafted by Jaiprakash Narayan inspired by Gandhian plan as well as Sarvodaya Idea of Vinoba Bhave. It emphasized on small and cotton
industries and agriculture as well. Plan also stressed upon land reforms and decentralized participatory planning.
 This plan maker in later times had protested against the centralising nature of Indian economic planning.

POST-INDEPENDENCE

 Economic Programme Committee (EPC) – formed by All India Congress Committee (AICC) with Nehru as its chairman. The aim of this committee was to make a plan which
could balance private and public partnership and urban and rural economies. The EPC recommended in 1948 to form a permanent Planning Commission in India.
 The Planning Commission was charged with the responsibility of making assessment of all resources of the country, augmenting deficient resources, formulating plans for the most
effective and balanced utilization of resources and determining priorities.
 Planning Commission reported directly to the Prime Minister of India. It was founded on March 15, 1950, under Prime Minister Jawaharlal Nehru's presidency.
 Montek singh Ahluwalia - last deputy chairman

NEHRU – MAHALANOBIS MODEL OF GROWTH - In order to promote economic growth, the plan prioritized investment goods(basic goods ) and the quick development of heavy
industries. The Mahalanobis model has been constructed in terms of Keynesian aggregates; national income, investment, savings, and consumption.

Harrod Domar Model suggests that the rate of economic growth depends on two things: Level of Savings and Capital-Output Ratio

Five year plans - taken from the Soviet Union under the socialist influence of first Prime Minister Pt. Jawahar Lal Nehru.
Goals - growth , modernization , self-reliance and equity

Plan Year Features Architect

1 1951 - 56  Agriculture K N raj
 IITs setup, Khadi village board established
Harrod Domar model  Launching of Community Development Programme (2 oct 1952)
 Imperial Bank of India -> State Bank Of India (Gorwala Committee recommendations)

2 1956- 61 Nehru -  Heavy industries - Durgapur-WB (UK), Bhilai-Chattisgarh(USSR), Rourkela-Odisha (Germany) steel plants Mahalanobis
Mahalanobis setup
 Atomic energy commission

3 1961-66  First time borrowing from IMF Gadgil Yojna - allocation of

 Rupee devalued for the first time in 1966 central assistance for state plans
Gadgil Yojna  Sino-India war of 1962 and Indo-Pakistani war of 1965
  Established Food Corporation Of India (FCI) in 1965

Plan holidays ( 1966 - 1969 ) Focus – Self reliance

Though the Fourth Plan was ready for implementation in 1966. The weak financial situation as well as the low morale after the defeat by China, the government decided to go for an
Annual Plan for 1966–67
4 1969 - 1974  Nationalization of 14 banks leadership of Indira Gandhi.
 Green revolution
 Family Planning Programmes
 Self-reliance
 Buffer stock

5 1974 - 1978  Poverty alleviation ( Garibi hatao ) and justice Terminated by Morariji govt
 Twenty point programme launched in 1975
 Minimum needs programme introduced in 1974 ( by D.P Dhar )
 Indian National Highway System was introduced
 Integrated Child Development Scheme (ICDS) launched in 1975-76

 Rolling plans ( 1978 - 1980 ) by Janata govt

 “Rolling Plan” concept was envisaged and coined by Prof. Gunnar Myrdal in “India’s Economic Planning in its Broader Setting”
 The Food for Work programme was launched.
 Antyodaya scheme

6 1980 - 1985  NABARD established in 1982 ( Shivaraman committee ) leadership of Indira Gandhi.
 Family planning
 Steel plants - Visakhapatnam , salem and Bhadravati
 Launched – National Rural Employment Programme (NREP) on 2 Oct 1980
 Integrated Rural Development Programme (IRDP)
 Nationalization of six banks in 1980

7 1985 - 1990  establishment of a self-sufficient economy, opportunities for productive employment, and up- leadership of Rajiv Gandhi.
gradation of technology.
 private sector got priority over the public [Link] planning started for Sci & Tech.

Annual plans ( 1990 - 1992 )

8 1992 - 1997  development of human resources i.e. employment, education, and public health. leadership of V. Narasimha Rao.
 Beginning of LPG reforms
Rao - Manmohan  New Economic Policy launched Rangarajan Committee of 1993 -
model  highest annual growth rate so far – 6.8 % recommendations in context with
 Disinvetment the disinvestment.
 Indicative planning
 Involvement of Panchayats and nagar palikas
  India - member of WTO 1 Jan 1995
 SEBI - satutory status

9 1997 - 2002  Growth with Social Justice and Equality leadership of Atal Bihari
 Swaran jayanti gram swarojgar yojana 1999 Vajpayee.
 Golden Quadilateral 2001
 Privatisation of public sector units
 Launching of – Mid Day Meal Scheme, MPLADS, National Social Asst. Programme

10 2002 - 2007  aimed to double the Per Capita Income of India leadership of Atal Bihari Vajpayee
 reduce the poverty ratio to 15% by 2012 and Manmohan Singh
 National rural health mission
 Agriculture sector was declared as the prime moving force (PMF) of the economy in 2002

11 2007 - 2012  rapid and more inclusive growth C. Rangarajan

 It achieved a growth rate of 8%

12 2012 - 2017  Faster, Sustainable and More Inclusive Growth leadership of Manmohan Singh.
 Demonetization 2016

Reasons for economic crisis faced by India 1990 :

 High fiscal deficit of about 6- 8% and CAD
 Very high inflation rates between 8-10%.
 Low import cover - Imports grew at a very high rate without matching growth of exports.
 Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks India was on the verge of defaulting on its International Debt
Obligations
 external reasons which influenced the economic situation in India like the Gulf War, Collapse of the Soviet Union, high international crude oil prices.

New Economic Policy 1991

Economic reforms are the process in which a government prescribes a declining role for the state and an expanding role for the private sector in an economy.
Money

Fiat money  legally recognized to settle all debts & payments within territorial jurisdiction
 Government of India under the coinage act 1909 issues all coins and Rs.1 note
 RBI Act 1934 empowers RBI to issue the remaining bank notes
NOT FIAT MONEY?  Money without government legal backing
 Shares, Bonds, Debentures, G-Sec, T-bill
 DD, Cheques, Credit Card, ATM card
 Bitcoin & other Digital currency

Money is the most liquid of all assets. Liquidity Order – Currency > DD in Banks > Savings deposits in Banks > Term (Time) deposits in Banks
 The currency deposit ratio (cdr) is the ratio of money held by the public in currency to that they hold in bank deposits (cdr = CU/DD)
 Reserve deposit ratio (rdr) is the proportion of the total deposits commercial banks keeps as reserves.
 Reserve money consists of two things – Vault cash in banks and Deposits of commercial banks with RBI.
 Difference between borrowing rate and lending rates of bank is called spread.

Function of Commercial Banks

Primary Accepting deposit and Providing loans

 Collection and payment of various items e.g. Cheques, Bills

Secondary  Purchase and sell of securities & remittance of money

 Purchase and sell of foreign exchange
 Acting as executors and trustees of wills & underwriting of shares
 Lockers facility & Travellers’ cheque and letter of credit

OPPORTUNITY COST OF MONEY

 Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action.
 Opportunity Cost = Return of Most Lucrative Option – Return of Chosen Option.
 opportunity cost is zero for free goods such as Air and common goods such as fish / grazing land.
 For public goods such as street light and defence, opportunity cost is involved (Government could have spent that much money on street lights rather than on military).
Opportunity cost is not zero in case of public goods.
 If a commodity is provided free to the public by the government, then: The opportunity cost is transferred from the consumers of the product to the taxpaying public.

Monetary Aggregates

The classification of money supply was introduced in April 1977 by Reserve Bank of India.
 Reserve Money (M0): It is also known as High-Powered Money, monetary base, base money etc.
 Reserve Money (M0) = Currency in circulation + Bankers’ Deposits with the RBI + ‘Other’ deposits with the RBI.
‘Other’ deposits with RBI comprise mainly:
 deposits of quasi-government; other financial institutions including primary dealers,
 balances in the accounts of foreign Central Banks and Governments,
 Accounts of international agencies such as the International Monetary Fund.
 highly liquid and banks cannot run their lending programmes with this money.
NARROW MONEY (M1) M1 = Currency with the Public + Demand Deposits with the Banking System + ‘Other’ deposits with the RBI.
M2 = M1 + savings deposits of post office savings banks
BROAD MONEY (M3)  With this money (which lies with banks for a known period) banks run their lending programmes.
M4  M3 = M1 + Time Deposits with the Banking System.
 M4 = M3 + All deposits with Post Office Savings Banks (excluding National Savings Certificates).

M1 is the most liquid, and M4 is the least liquid.

The currency issued by the central bank is called ‘high power money’ because it is generally backed by supporting ‘reserves’ and its value is guaranteed by the government and it is the
source of all other forms of money.
 In India, there are two sources of high power money supply: RBI and Government of India

MONEY MULTIPLIER

A money multiplier is a method of demonstrating the maximum amount of broad money that commercial banks could create for a given fixed amount of base money and reserve
ratio.

RESERVE BANK OF
INDIA

LIABILITIES ASSETS

 Foreign currency assets

 Notes in circulation  Bill purchases and discounts
 Notes held in  Collateral by commercial banks
banking dept  Loan and advances
 Deposits  Rupee securities
 Gold coin bullion
 Clearly, its value is greater than 1.

The Currency Deposit Ratio (cdr) and Reserve Deposit Ratio (rdr) plays an important role in determining money multiplier.

Reserve Bank of India

 established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
 RBI did not start as a Government owned bank but as a privately held [Link] nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

The Royal Commission (Hilton Young commission) on

Indian Currency and Finance recommended creation of a
1926
central bank for India. On the basis of mainly this
commission, the RBI Act, 1934 was passed

 Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India

Important Publications of RBI

 Financial Stability Report

 Monetary Policy Report
 Report on Financial Review

SUBSIDIARIES OF RBI
 Deposit Insurance and Credit Guarantee Corporation (DICGC)
 Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
 Reserve Bank Information Technology Private Ltd. (ReBIT)
 Indian Financial Technology And Allied Services (IFTAS)
ASSISTIVE BODIES IN RBI – Board of Financial Supervision (BFS) and Board for Payment and Settlement Systems (BPSS); Both of these
are chaired by RBI Governor.
 Recognition of the glide path for disinflation (on recommendation of Urjit Patel Committee report). Under it, the CPI (C) is used
by the RBI as the “Headline Inflation” for monetary management.
MINIMUM RESERVE
 The RBI is required to maintain a reserve equivalent of Rs. 200 crores in gold and foreign currency with itself, of which 115 crore
should be in gold.
 Against this reserve, the RBI is empowered to issue currency to any extent. This is being followed since 1957 and is known as
the Minimum Reserve System (MRS).

CREDIT CREATION IN INDIA

 Primary Deposits - It is created when customers deposit their money in the bank by opening new accounts.
 Derivative Deposits/secondary deposits- It arises when customers are granted loans and advances by a bank.
 Credit multiplier indicates the number of times primary deposits multiplies and is the inverse of CRR.
Narasimham Committee- I --> 1991
Narasimham Committee – II --> 1998

Liquidity Adjustment  LAF is a monetary policy tool used in India by the RBI through which it injects or absorbs liquidity into or from the banking system
Facility  It was introduced as a part of the outcome of the Narasimham Committee on Banking Sector Reforms of 1998.
 LAF has two components - repo (repurchase agreement) and reverse repo
2023
Repo - 6.50% Repo rate( ‘policy rate’) is the rate at which the RBI lends money to commercial banks against the securities .

Reverse - 3.35%
Reverse Repo Rate: It is the rate at which the RBI borrows from commercial banks for short term.

 LAF is used to aid banks in resolving any short-term cash shortages

 All commercial banks except RRBs and primary dealers are eligible for LAF

Marginal Standing  Introduced in 2011

Facility  MSF is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when inter bank liquidity dries up completely.
 Under MSF, banks are also allowed to use the securities that come under SLR in the process of availing loans from RBI.
MSF - 6.75%

Cash Reserve Ratio CRR is the amount of liquid cash that banks have to maintain with the RBI, as a percentage of their total deposits without interest.

Statutory Liquidity Ratio

(SLR)  It is the percentage of total deposits that banks have to keep with themselves in the form of safe and liquid assets such as: G-sec,Gold and Cash
 Receive interest

Open Market Operations

Buying and selling of G-secs in the open market by RBI is known as Open Market Operation (OMO).
(OMO)
Bank rate
 The rate at which commercial banks can borrow from the RBI without providing any security.
 Lending under bank rate is done for a long period of time

Standing Deposit Facility

 The SDF is a liquidity window through which the RBI will give banks an option to park excess liquidity with it without collateral
(SDF)
 first proposed in the Urjit Patel committee report in 2014

Credit Rationing
RBI fixes a specific quota of credit that can be allocated for various sectors in the economy. Banks are told to adhere to these limits. For example, RBI can
direct banks to give only 100 Cr of loans to the industrial sector, 500 Cr loans to the agriculture sector
Margin requirements
difference between the market value of a security (collateral) and the total amount of loan given by the bank against that security.
DIFFERENCIAL RATE OF
INTEREST obligatory upon all the public sector banks in India to lend 1 % of the total lending of the preceding year to ‘the poorest among the poor’ at an interest rate
of 4 per cent p.a.
CONSUMER CREDIT RBI can issue rules to set the minimum/maximum level of down-payments and periods of payments for purchase of certain goods.
REGULATION

UNCONVENTIONAL MONETARY POLICY INSTRUMENTS BY RBI

1. ZERO INTEREST RATE POLICY ( Quantitative Easing )- This policy was adopted by USA from 2008 .Under this policy, the Fed Bank provides loans to the banks at low interest rates
(0.25%) to spur investment level in the economy.

2. NEGATIVE INTEREST RATE POLICY (NIRP) - banks would be required to pay interest to the central bank if they park their surplus reserves. This encourages the banks to provide
loans to the borrowers at cheaper rates instead of parking their surplus reserves with the Central Bank.

Liquidity trap- A liquidity trap is a situation in which prevailing market interest rates are so low that an increase in money supply has no effect on interest rates and people will hold this
money in the form of money balance instead of investing or spending it.

Points
-----------------------------------------------------------------------------------------------------------
 as per the amendment to the RBI Act, Consumer Price Index (CPI) will be taken as the overall indicator of inflation in the economy.
 MPC (Monetary Policy Committee) determines the policy interest rate (Repo Rate) required to achieve the inflation target.
 MPC is a statutory body created under Monetary Policy Framework Agreement 2015 between the RBI and Government
  The first such MPC was constituted in 2016

Structure of MPC: --- 6 members

 The meetings of the MPC are held at least 4 times a year and it publishes its decisions after each such meeting.
 Chairperson of MPC – RBI Governor
 Quorum for meeting – 4 members
 Decisions are taken by majority with the Governor having the casting vote in case of a tie.
 To ensure transparency – Govt can send message only in writing.
 Committee must publish its proceedings of the meeting on the 14th day, and “Monetary policy report” at every 6 months.
 Allocation between non special category states is determined by the Gadgil-Mukherjee formula which gives weight to population (60%), per capita income (25%), fiscal
performance (7.5%) and special problems (7.5%).

RBI SIDE GOVT. SIDE

3 members – RBI Governor, Dy. Governor, One nominated person -will be from RBI side.
3 members will be selected from government side.
RBI Governor , as the Ex-officio Chairman.

Their tenure tied with their ex-officio job tenure. Tenure: 4 years, no reappointment.

RBI Governor & Dy. Governor are selected by Financial Sector Regulatory Appointment Search Committee They’re selected by Search-cum-Selection Committee headed by Cabinet
(FSRASC), headed by Cabinet Secretary (IAS) Secretary (IAS)

 Inflation target is decided by Union Government after consulting with the RBI Governor.
 RBI reviews its monetary policy every two months (Six times in a year)
 The present mandate of the committee is to maintain 4% annual inflation (until March 31, 2021) with bandwidth of ceiling 6% and a floor of 2%.
 If Target fail: If inflation not kept in 4% +/-2% zone for 3 consecutive quarters then the Committee must send report to Govt. with reasons and remedies.
 RBI has sole right to issue currency notes of various denominations except one rupee notes.
 Signature on currency notes is of the incumbent RBI Governor.
 The One Rupee note is issued by Ministry of Finance and it bears the signatures of Finance Secretary.

FINANCIAL LIQUIDITY - It is availability of cash or cash equivalents to meet short-term operating needs.

VARIOUS TERMS FOR CURRENCIES

HARD CURRENCY It is the international currency in which the highest faith is shown and is needed by every economy.

SDR - U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi

SOFT CURRENCY currency that is easily available in any economy in its forex market.

HOT CURRENCY  temporary name for any hard currency.

 Due to certain reasons, if a hard currency is exiting an economy at a fast pace for the time, the hard currency is known to be hot

HEATED CURRENCY  domestic currency which is under enough pressure (heat) of depreciation due to a hard currency’s high tendency of exiting the economy (since it has
become hot).
 It is also known as ‘currency under heat’ or ‘under hammering’.

CHEAP CURRENCY A term first used by the economist M. Keynes (1930s). If a government starts re-purchasing its bonds before their maturities (at full-maturity prices) the money
which flows into the economy is known as the cheap currency/ cheap money.

DEAR MONEY when a government issues bonds, the money which flows from the public to the government or the money in the economy in general is called dear currency/
dear money.

HELICOPTER MONEY  It is a hypothetical concept put forward by the economist, Milton Friedman.
 This involves the central bank of the country printing currency notes and distributing it to the people free of cost.

PRINTING PRESS IN INDIA FOR BANK NOTES

 Note Press (CNP), Nasik (Maharashtra) established in 1928, was the first printing press for bank notes in India.

1. Dewas in Madhya Pradesh

2. Nasik in Maharashtra
Location
3. Mysore in Karnataka
4. Salboni in West Bengal

 The presses in Madhya Pradesh and Maharashtra are owned by the Security Printing and Minting Corporation of India (SPMCIL), a wholly owned
company of the Government of India.
Owned by Govt.
 SPMCIL is the only PSU under the Department of Economic Affairs (MoF)

 The presses in Karnataka and West Bengal are owned by the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned
Owned by RBI
subsidiary of the Reserve Bank.
  The Government of India is the issuing authority of coins and supplies coins to the Reserve Bank on demand

Coins
 The Reserve Bank puts the coins into circulation on behalf of the Central Government.

NATIONAL PAYMENT CORPORATION OF INDIA (NPCI) - 2008

 It is an umbrella organization for operating retail payments and settlement systems in India. It is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of
the Payment and Settlement Systems Act, 2007.
 It has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013).
 National Financial Switch (NFS) is the largest network of shared automated teller machines (ATMs) in India.
 HQ - Mumbai
 Currently, Dilip Asbe is the current managing director and chief executive officer of NPCI.
 RuPay is the first domestic Debit and Credit Card payment network of India.

NPCI can operate the following payment systems:

1. National Financial Switch (NFS)

2. Immediate Payment System (IMPS)
3. Affiliation of RuPay Cards (debit cards/ prepaid cards) issued by banks and co-branded credit cards issued by non-banking financial companies (NBFCs) or any other entity
approved by the RBI.
4. National Automatic Clearing House (ACH)
5. Aadhaar Enabled Payments System (AEPS)
6. Operation of Cheque Truncation System

DIGITAL MODES OF PAYMENT SETTLEMENT

FEATURE NEFT RTGS IMPS

Introduced by RBI RBI NPCI
Settlement type Half- hourly batches One on one settlement One on one settlement
Min transfer limit Rs.- Rs. 2 lakh Rs. 1
No limit (Rs. 50,000 per
Max transfer limit No limit Rs. 2 lakh
transaction)
Funds Transfer Speed 2 hours Immediate Immediate

Service timings 24/7 Available on certain days of week between stipulated time period (till 6PM) 24/7

Mode Online/ offline Online/ offline Online

DIGITAL PAYMENTS INDEX (DPI) - By RBI to capture the extent of digitization of payments effectively.

Committees related to Digital Payment in India - Ratan Watal (2016) and Nandan Nilekani (2019)

DIGITAL COMPETITIVE INDEX

 Released by- IMD World Competitiveness Center.

 It was started in 2017 and measures the capacity and readiness of 63 economies to adopt and explore digital technologies as a key driver for economic transformation in business,
government and wider society.
 WDCR examines 3 factors: Knowledge; technology and future readiness

LABLES OF ATM IN INDIA

set up, owned and operated by non-bank entities incorporated in India under the Companies Act 1956
Such non-bank entities should have a minimum net worth of Rs 100 crore
cash deposit or cash acceptance facility is not permitted at the WLA.
White Label ATMs
These machines are usually deployed by NBFC (Non-Banking Financial Institutions)
They do not bear ‘logo’ of the banks they serve. They are interconnected with the entire ATM network in the country. The Tata Communications
Payment Solutions became the first such firm to get permission of the RBI – Brand name was “Indicash”.

BANKING IN INDIA
 The Arthashastra of Kautilya mentions presence of bankers during Mauryan era, known as “Adesha”
 The first bank of India called Bank of Hindostan was established in 1770.
 Three Presidency banks were set up under charters from the British East India Company- Bank of Calcutta (1806), Bank of Bombay (1840) and Bank of Madras (1843). These banks
worked as quasi central banks in India for many years.
 In 1921, the three presidency banks were amalgamated to form Imperial Bank of India.
 In 1955, this Imperial Bank of India was nationalized and renamed as State Bank of India (SBI). Thus, SBI is the oldest Bank of India
 India’s Oldest Joint Stock Bank(multiple shareholders) is Allahabad Bank. It is also known as India’s oldest public sector bank. It was established in 1865.

FIRST BANKS OWNED / MANAGED BY INDIANS

 The first bank purely managed by Indians -Punjab National Bank, established in Lahore in 1895.
 first Indian commercial bank which was wholly owned and managed by Indians - Central Bank of India , established in 1911.
 Central Bank of India is called India’s First Swadeshi bank. Its founder was Sir Sorabji Pochkhanawala and its first chairman was Sir Pherozeshah Mehta.
 Bank of India was the first Indian bank to open a branch outside India, in London in 1946.

 Committees made for reforms in banking sector - Narasimham-I (1991), Narasimham-II (1998), Dr. Raghuram Rajan Committee (2007) and P J Nayak Committee (2014)
 banks are not intermediaries but ‘fundamental money creation’ institutions.

Priority Sector Lending

 All scheduled commercial banks and foreign banks (with a sizable presence in India) are mandated to set aside 40% of their Adjusted Net Bank Credit for lending to these sectors.
 Regional rural banks, co-operative banks and small finance banks have to allocate 75% of ANBC to PSL.

CATEGORIES IN PSL 8. Minority communities

9. Agriculture
1. Small and Marginal Farmers 10. Micro, Small and Medium Enterprises
2. Beneficiaries under Government Sponsored Schemes – Such as NRLM, NULM etc. 11. Housing
3. Weaker sections of society – Scheduled Castes and Scheduled Tribes, women 12. Renewable Energy
4. Beneficiaries of Differential Rate of Interest (DRI) scheme 13. Social Infrastructure
5. Self Help Groups 14. Education
6. Distressed farmers indebted to non-institutional lenders 15. Start ups
7. Persons with disabilities

MARKET STABILISATION SCHEME (MSS) - RBI initiated the MSS scheme in 2004

 MSS is a policy tool used by the RBI to suck out excess liquidity from the market through issue of securities like T-Bills, Dated Securities etc. on behalf of the government.

STANDING DEPOSIT FACILITY SCHEME

 Standing deposit facility is a collateral free liquidity absorption mechanism which aims to absorb liquidity from commercial banking system into RBI.
 Concept was first recommended by the Urjit Patel committee in 2014.
 The new scheme has been proposed by the Union Budget 2018-19.

CONTRACTIONARY MONETARY POLICY EXPANSIONARY (CHEAP) MONETARY POLICY

 Dear Money Policy.  This policy is adopted to increase money supply in the economy
 It is pursued to control Inflation.  It is also pursued to overcome recession.
  CRR, SLR, Repo Rate, Reverse Repo Rate, Bank Rate should be reduced.

FINANCIAL STABILITY AND DEVELOPMENT COUNCIL

FSDC is a non-statutory apex council setup in 2010 under the Ministry of Finance and chaired by the Finance Minister. Its constitution was proposed by the Raghuram Rajan committee
(2008) on financial sector reforms.

Members ???? Functions of FSDC ????

 Governor of RBI,  Monitor macro-prudential supervision of the economy.

 Chairperson of SEBI  Assess the functioning of the large financial conglomerates.
 Chairperson of IRDA  Enhancing inter-regulatory coordination
 Chairperson of PFRDA  Promoting holistic financial sector development.
 Finance Secretary and/or Secretary, Department of Economic Affairs (Union Finance Ministry)  To strengthen and institutionalize the mechanism for maintaining
 Secretary, Department of Financial Services financial stability
 Chief Economic Adviser.

BENCHMARK PRIME LENDING RATE (BPLR)

 Under BPLR, bank loans were priced on the actual cost of funds.
 The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under this system, banks could lend
below BPLR. BPLR was used as benchmark rate by banks for lending till June 2010.

BASE RATE

 Base Rate is the interest rate below which Scheduled Commercial Banks will lend no loans to its customers
 It replaced the idea of BPLR on 1 July, 2010.

MARGINAL COST OF FUNDS BASED LENDING RATE - replaced base rate

 The MCLR refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. It is an internal benchmark or reference rate for
the bank.
 In 2016, RBI introduced the concept of MCLR in order to ensure monetary policy transmission.

MCLR is based on the marginal or incremental cost of money. MCLR depends on the repo rates changed by RBI while Base Rate does not depend on the repo rates changed by RBI.

FINANCIAL INCLUSION INDEX- launched by the Minister of Finance

WAYS AND MEANS OF ADVANCES (WMA)- The RBI gives temporary loan facilities to the centre and state governments as a banker to the government.
WAYS TO AVAIL WMA

 This facility can be availed by the government if it needs immediate cash from the RBI.
 The WMA is to be vacated after 90 days.
 The interest rate for WMA is currently charged at the repo rate.
 The limits for WMA are mutually decided by the RBI and the Government of India.

TYPES OF WMA - Normal and Special

Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state.

After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.

Commercial Banks: It refers to both scheduled and non-scheduled commercial banks which are regulated under the Banking Regulation Act, 1949.
SCHEDULED COMMERCIAL BANKS (SCB)

 listed in the 2nd schedule of the RBI Act, 1934

 Governed by the Banking Regulation Act-1949.
 The paid up capital and collected fund of the bank should not be less than Rs. 5 lakh
 Scheduled commercial banks account for a major proportion of the business of the scheduled banks.

 At present, there are 12 Public Sector Banks in India including SBI.

 SBI associates and Bharatiya Mahila Bank was merged with SBI w.e.f. April 1, 2017.
 SBI is the largest public sector bank in India.

1969 – 14 banks nationalized

1980 – 6 more banks nationalized The nationalized banks controlled about 91% of banking assets

1990 – Narsimhan Committee Reforms New Economic Policies (NEP)

PJ Nayak Committee (2014) recommended for privatize or merge PSBs

The P J Nayak Committee - was set up by the RBI to review the governance of the board of banks in India.

RBI POLICY TOWARDS FOREIGN BANKS IN INDIA

1. Banks have to adhere to mandated Capital Adequacy Requirements as per Basel Standard.
2. They should meet the minimum capital requirement of INR 500 cr.
3. They should maintain minimum CRAR at 10% .
4. Priority sector targets for foreign banks in India is 40%.
DIFFERENTIATED BANKS IN INDIA

 Differentiated banks are banking institutions licensed by the RBI to provide specific banking services and products.
 aim - to promote financial inclusion and payments.
 Differentiated banks licensing was launched in 2015.

1. SMALL FINANCE BANKS

2. INDIA POST PAYMENT BANKS
3. LOCAL AREA BANKS
4. PAYMENT BANKS
5. WHOLESALE BANKING
6. REGIONAL RURAL BANK

Chronology of differential banks: RRB (1976) → Local Area Bank (1996) → Small Finance Bank & Payments bank (2015) → Wholesale banks (proposed)

REGIONAL RURAL BANKS (RRB)

Founded 2 October 1975 on the recommendations of the Narsimhan Committee on Rural Credit, during the tenure of Indira Gandhi's government

Type government owned scheduled commercial banks ( under the ownership of Ministry of Finance )

Owner Central govt(50%), sponsor bank(35%) and state govt (15%)

Regulation Regulated by RBI and supervised by NABARD

PSL 75%

first RRB Prathama Bank, with head office in Moradabad Uttar Pradesh

RRB  authorised capital to Rs 2,000 crore and states that it cannot be reduced below Rs 1 crore
Amendment Bill  RRB can issue shares in capital market to get more funds from private investors.
2014  But one condition that combined shareholding of Union+State+Sponser bank should not fall below 51%
 One person cannot become director in 2 RRBs.( tenure - 3 years, allowed for 2 terms only 3+3)

 small/marginal farmers, agricultural laborers, artisans, and other vulnerable groups in rural areas are the primary recipients of loan assistance from regional rural banks
 RRBs also have urban branches
 sources of funds of RRBs - owned fund, deposits, borrowings from NABARD, Sponsor Banks and other sources including SIDBI and NHB.
 compliance requirements - CRR and SLR
 RBI has allowed RRBs to accept foreign currency deposits from NRIs and persons of Indian origin
SMALL FINANCE BANKS Vs PAYMENT BANKS

Small banks Payment banks

Can accept all types of deposits like a commercial bank (CASA, FDRD etc.)  Take deposit only on current account, saving account. (CASA)

 Can issue debit card? Yes.

 FD - no

 Can issue Credit card? Nope.

 Can open NRI accounts? Nope

 They can give out depositor’s money as loans to other customers,  They can’t give loans. They can invest depositor’s money in G-sec only.
but small area of operation.
 Although they’re allowed to sell mutual funds, insurance and pension products, accept
 They’ll be opened under “Companies Act 2013”. utility bill payments etc. to keep branch operations profitable.

Target customers: MSME businessmen, unorganized workers, small and Target customers: poor, migrants, unorganized workers wanting to send remittances home.
marginal farmers.

Focus: Deposit and loans Focus: Payment/remittances only. Including cross-border remittances.

Who can apply? Who can apply?

 Min.100cr.  Min.100cr.

 MFI, NBFC can convert their organization into small banks  Indian Post

 Even individual with 10 years’ experience in bank/cooperative  Corporate houses

sector can apply for license.
  Large companies can’t apply.  Telecom companies

 Retail chains.

 Above people can even launch payment banks with Joint venture from commercial banks.

Conditions: Condition:

 25% branches in rural area  Maximum balance per customer: Rs.1 lakh

 50% of the loans be given to MSME sector.  Minimum Leverage ratio 3% i.e. liabilities should not exceed 33 times of its networth.

Usha Throat (Former RBI [Link]) Nachiket Mor (Ex-RBI Board Member)

INDIA POST PAYMENT BANKS (IPPB)  Started in 2017, IPPB has been incorporated as a public sector company under the department of posts, with 100% government
equity and is governed by the RBI.
 Range of products – savings and current accounts, money transfer, direct benefit transfer, bill and utility payments, enterprise and
merchant payments.
 It will offer three types of savings accounts – regular, digital and basic – will attract an interest rate of 4% p.a.
 It will also provide access to third-party financial services such as insurance, mutual funds, pension, credit products and forex.
 It will not offer any ATM debit card. Instead, it will provide its customers a QR Code-based biometric card.
 The government – owned payments bank will be able to accept deposits of up to Rs. 1 lakh from customers.
 But they do not have the rights to use these funds to advance risky loans at higher interest rates.
LOCAL AREA BANK  Introduced in India in the year 1996 based on Budget-1996 by the then Finance Minister, Dr. Manmohan Singh.
 set up by private entities, simply applying to RBI under Banking Regulation Act.
 Each Local Area bank is registered as a public limited company under the Companies Act, 1956. However, they are licensed under
the Banking Regulation Act, 1949.
 Earning profit is the main objective of Local Area Banks
 They are Non-Sch. Banks – CRR, SLR, PSL applicable.
 Only RBI regulates
 Present in Maximum 3 geographically contiguous districts. only 1 urban centre per district.
LEAD BANK SCHEME  The Lead Bank Scheme was introduced in 1969 which aims at providing adequate banking and credit in rural areas through an ‘service
area approach’, with assignment of lead roles to individual banks (both in public sector and private sector) – one bank assigned for one
area
 On the recommendation of the Gadgil Study Group and Banker’s Committee, the Scheme was introduced by RBI.

Anyonya Co-operative Bank Limited (ACBL) is the first co-operative bank in India located in the city of Vadodara in Gujarat.
 Banking activities of Urban Cooperative Banks are monitored by RBI.

 However, registration and management activities are managed by the Registrar of Cooperative Societies (RCS). These RCS operate in single- state and Central RCS (CRCS) operate in
multiple states.

TIERS OF CO-OPERATIVE BANKS

1. State Co-Operative Bank-SCBc

2. District Central Co-Operative Bank
3. Primary Credit Societies-PCSs

DCCBs & SCBs:

 One district can have no more than one DCCB with a number of DCCBs reporting to the SCB.
 They were under supervision of the RBI – later on this function was delegated to the NABARD.

MUDRA BANKS
 The GoI launched (April 2015) the Micro Units Development and Refinance Agency Bank (MUDRA Bank) with the aim of funding the unfunded non-corporate enterprises. This
was launched as the PMMY (Prime Minister Mudra Yojana).
 MUDRA bank is a subsidiary of SIDBI.
 Under this banking model, the micro units can avail up to Rs. 10 lakh loan through refinance route (through the Public and private sector banks, NBFCs, MFIs, RRBs, District
Banks, etc).

TYPES OF LOAN COVERAGE OF LOAN

1. Shishu loan up to Rs. 50,000
2. Kishor Rs. 50,000 to Rs 5 lakh
3. Tarun Rs. 5 lakh to Rs. 10 lakh
 Though the scheme covers the traders of fruits and vegetables, in general, it does not refinance the agriculture sector.
 There is no fixed interest rate in this scheme.

ALL INDIA FINANCIAL INSTITUTION (AIFI)

List of All India Financial Institutions. Regulated by RBI. It aims at providing safety and support to borrowers and lenders
Organization Exim Bank NABARD SIDBI NHB

Full Form Export-Import Bank of National Bank for Agriculture and Rural Small Industries Development Bank National Housing Bank
India Development of India

Founded 1 January 1982 12 July 1982, Sivaraman Committee. 2 April 1990 9 July 1988 under the NHB Act, 1987, C.
Rangarajan committee
 Headquarters Mumbai Mumbai Lucknow New Delhi

Managing Director Harsha Bangari Chairman- Shaji K V CMD: Mohammad Mustafa CEO & MD- Shri Sarada Kumar Hota

Owned By 100 % Government GOI- 100 % SIDBI is regulated and supervised by 100% to the Govt
authorized share capital is about 30,000 the RBI (M/o Finance)
crore
Share- GOI (15.4%) + SBI (16.73%) +
LIC (14.25%) + NABARD (10%) +
Others (43.62)

Function Promotion of cross-  NABARD operates Rural Infra. Promotion, Financing & Promotes housing finance institutions.
border trade and Development fund (RIDF) from Development of MSMEs Registers, regulates and supervises
investment. PSL shortfalls from SCBs Housing Finance Company.
 NABARD also has a portfolio of Initiatives by SIDBI – Udyog Aadhar
Natural Resource Management (MSME), Udyami Mitra portal,
Programme involving diverse Guarantee fund, Small Enterprises
fields like Watershed Development Fund (SEDF).
Development, Tribal Development
and Farm Innovation through SIDBI Assistance to Facilitate
dedicated funds set up for the Emergency response against COVID-
purpose. 19 pandemic (SAFE PLUS) will be
 NABARD is a member of offered collateral free and disbursed
the Alliance for Financial Inclusion within 48 hours
 NABARD is also known for its “SHG
Bank Linkage Programme” (1992)

Refinance facility by NABARD is available to ????

 State co-operative agriculture and rural development banks (SCARDBs),

 State co-operative banks (SCBs),
 Regional rural banks (RRBs),
 Commercial banks (CBs) and Other financial institutions approved by RBI.
 NHB (1988) SIDBI (1990)

 Originally owned by RBI (100%). From 2019 NHB is 100% owned by Govt.  Owned by – SBI, LIC, IDBI other public sector banks, insurance companies etc.

 Finance to banks and NBFCs for housing projects.

 Operates Credit Guarantee fund, Small Enterprises Development Fund (SEDF).
 Regulator of Housing Finance Companies (NBFCs) Operates [Link] for loans to small entrepreneurs & SME via schemes like
 RESIDEX index to monitor residential real estate prices. Mudra, Stand- up-India.

PRODUCER ORGANISATION (PO) – It is a legal entity formed by primary producers, viz. farmers, milk producers, fishermen, weavers, rural artisans, craftsmen. A PO can be a producer
company, a cooperative society or any other legal form which provides for sharing of profits/benefits among the members.

PRIMARY AGRICULTURAL CREDIT SOCIETY (PACS) – It is a basic unit and smallest co-operative credit institution in India. It works on the grassroots level (gram panchayat and village
level). It provides credit to farmers in the form of term loans and recovers the amount after harvesting of crop from the cultivator.

RURAL INFRASTRUCTURE DEVELOPMENT FUND

 Fund is maintained by the NABARD. Banks which are not able to meet their targets of PSL are required to keep the shortfall in RIDF.
 The RIDF was set up by the government during 1995-1996 for financing ongoing rural infrastructure projects.
 Domestic commercial banks contribute to the fund to the extent of their shortfall in stipulated PSL to agriculture (mandated – 18%).
 The scope of RIDF has been widened to include activities such as rural drinking water schemes, soil conservation, rural market yards, rural health centers and primary schools,
mini hydel plants, shishu shiksha kendras, anganwadis and system improvement in the power sector. The eligible activities are classified under three broad categories i.e.
Agriculture and related sector, Social sector, Rural connectivity.

Eligible Institutions:

 State Governments / Union Territories

 State Owned Corporations / State Govt. Undertakings
 State Govt. Sponsored / Supported Organizations
 Panchayat Raj Institutions/SHGs/ NGOs (provided the projects are submitted through the nodal department of State Government, i.e Finance Department)
 NABARD releases the sanctioned amount on reimbursement basis except for the initial mobilisation advance @30% to North Eastern & Hilly States and 20% for other states.

Long Term Irrigation Fund (LTIF)

Government has announced creation of a dedicated LTIF in NABARD with an initial corpus of Rs. 20,000 crore for funding and fast tracking the implementation of incomplete major and
medium irrigation projects.. The Long Term Irrigation Fund (LTIF) aims to bridge the resource gap and facilitate completion of these projects during 2016-2020.

PRIMARY DEALERS- A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market
maker of government securities.

NON-BANKING FINANCIAL COMPANIES (NBFCs)

A NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable securities of a like nature.

 Systemically Important NBFCs ???? NBFC whose asset size is of ₹ 500 cr or more
 NBFC Classified into

1. Asset Finance Companies

2. Investment Companies
3. Loan Companies
  Investment and Credit Company
 Core Investment Company (CIC)
 Infrastructure Finance Company (IFC)
 Infrastructure Debt Fund (IDF)
NBFCs REGULATED BY RBI  Asset Reconstruction Companies (ARC)
 Factoring Companies
 Gold Loan Companies
 Micro Finance Institutions
 Fintech Companies-P2P Lenders

 Mutual Funds (MF)

 Stock Broker
NBFCs REGULATED BY SEBI  Real estate investment trusts (REITs) and Infrastructure investment trusts (InvITs)
 Investment Banks: (US term) & Merchant Banking Companies: (UK term)
 Venture Capital Fund

IRDAI 1) Life Insurance companies e.g. LIC, HDFC Standard Life Insurance

2) General (Non-Life) insurance companies e.g. IFFCO-Tokio General Insurance.

PFRDA Pension Fund Regulatory and Development Authority (PFRDA) regulates all Pension Funds, except EPF & other statutory funds.

National Housing Bank (NHB) Housing Finance Companies such as DHFL, Muthoot Housing finance etc. (endowed SARFAESI Powers). They were regulated by NHB but
 after Budget-2019, this category was handed over to RBI for regulation.

Ministry of Corporate Affairs [Link] Companies: Mutual benefit club, only members can borrow.

2. Microfinance Companies

REGULATIONS RELATING TO DEPOSIT TAKING NBFCs

 Allowed to accept and/or renew public deposits for a minimum period of 12 months and maximum period of 60 months.
 Cannot accept demand deposits (i.e., the saving and current accounts).
 Cannot offer interest rates higher than the ceiling rate prescribed by the RBI.
 Cannot offer gifts, incentives or any other additional benefit to the depositors.
 Should have minimum investment grade credit
 Their deposits are not insured.
 The repayment of deposits by NBFCs is not guaranteed by RBI.
 Need to maintain Capital Adequacy Ratio (CAR) norm as prescribed by the RBI.

MICRO FINANCE INSTITUTIONS

 Microfinance (called micro credit) is a type of banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial
services
 In 2010, on recommendations of H. Malegam Committee (by RBI), RBI created a new NBFC category called Micro Finance Institution (MFI).
 MFI gives small loans to the poor without collateral, flexible EMI.
 MFIs are regulated by RBI and Ministry of Corporate Affairs
 Households whose annual income is not more than ₹ 25 lakh (rural) or ₹ 2 lakhs (urban) are eligible to borrow from MFIs.
 However, maximum borrowing should not be more than ₹ 1.25 lakh.
 eg. of MFI – Bandhan (West Bengal), Disha (Gujarat), Cashpor (UP), Ujjivan (Karnataka).

 The Narasimham Committee for financial sector Reforms has suggested reduction in SLR, CRR and Priority Sector Financing
 CRAR also known as Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk.( Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of
their own funds to offset any loss that banks incur if the account holders fail to repay dues)
 CRAR is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
 In India, scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12% as per RBI norms.

Basel Norms

 The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
 These norms are for individual banks and Systemically Important Financial Institutions (SIFI).
 In India, these norms are implemented by the RBI
BANK FOR INTERNATIONAL SETTLEMENTS

 BIS is an international organization of central banks which fosters international monetary and financial cooperation and serves as a “bank for central banks.”
 It also provides banking services, but only to central banks, or to international organizations.
 Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930.

SYSTEMICALLY IMPORTANT BANKS

In addition to meeting the Basel III requirements, global Systemically Important Financial Institutions (SIFIs) must have higher loss absorbency capacity to reflect the greater risks that
they pose to the financial system.

Type of SIB Who will identify them?

Global Systemically important Bank (G-SIB) BASEL Committee on banking supervision

Domestic Systemically Important Banks (D-SIB) Each country’s central bank e.g. RBI for India

Each central bank is free to decide the parameters for identifying their desi SIBs.

 2015: SBI and ICICI declared as D-SIBs. List will be updated each year in August. HDFC added in – 2017
 DSIBs are also referred to as “Too Big To Fail” (TBTF)
 2009: Financial stability board (FSB) was set up. It is an international body affiliated with G20.

NPA AND STRESSED ASSETS

A Non-Performing Assets is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. NPAs are the bad loans of the banks.

NPA + Restructured loan + Written off assets = STRESSED ASSETS

RESTRUCTURED LOANS: Those assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some
combination of these measures.

WRITTEN OFF ASSETS: When the lender does not count that money, borrower owes to him, then the asset is called written off assets. However, it does not mean that the borrower is
pardoned or exempted.

LEGISLATIONS RELATING TO NPA AND BANKCRUPTCY

 Insolvency and Bankruptcy Code, 2016

 SARFAESI Act, 2002
 Recovery of Debts Due to Banks and Financial Institutions (DRT) Act
 Lok Adalats
 Under Banking Regulation Act 1949
 Fugitive Economic Offenders Act, 2018
RBI’S GUIDELINES TO RESOLVE NPA

 Strategic Debt Restructuring.

 Allows banks to change management of defaulter
 Joint Lenders Forum
 Lenders evolve resolution plan
 Lenders can vote on its implementation
 Project Sashakt

5/25 REFINANCING

 This scheme offered a larger window for revival of stressed assets in the infrastructure sectors and 8 core industries.
 Under this scheme lenders were allowed to extend the tenure of loans to 25 years with interest rates adjusted every 5 years, so tenure of the loans matches the long gestation
period in the sectors.

ASSETS RECONSTRUCTION COMPANIES (ARCs)

 ARCs were introduced to India under the SARFAESI Act (2002), as specialists to resolve the burden of NPAs.
 ARCs were recommended by Narasimham committee II.
 ARCIL – the first asset reconstruction company was set up recently.

STRATEGIC DEBT RESTRUCTURING (SDR)

In June 2015, RBI came up with the SDR scheme provide an opportunity to banks to convert debt of companies (whose stressed assets were restructured but which could not finally fulfil
the conditions attached to such restructuring) to 51 per cent equity and sell them to the highest bidders – meaning ownership change takes place in it.

S4A SCHEME

 Scheme for Sustainable Structuring of Stressed Assets

 Introduced in June 2016, in it, an independent agency is hired by the banks which decides as how much of the stressed debt of a company is ‘sustainable’.
 The rest (‘unsustainable’) is converted into equity and preference shares.

Bimal Jalan Panel On Economic Capital Framework 2013- to suggest how the central bank should handle its reserves and whether it can transfer its surplus to the government.

RBI’S BANKING OMBUDSMAN SCHEME - Quasi-judicial authority created to resolve customer complaints against banks, introduced under the Banking Regulation Act in 1995.

UTKARSH FRAMEWORK 2022 by RBI- It is a three-year road map for medium term objective which is in line with the global central banks’ plan to strengthen the regulatory and
supervisory mechanism.

BANK BOARD BUREAU (BBB)

 It was set up in February 2016 as an autonomous body – based on the recommendations of the RBI appointed PJ Nayak Committee (2014) to improve governance of Public Sector
Banks (PSBs).
 The Chairmen of public sector banks are selected by the Banks Board Bureau

INDRADHANUSH PLAN - Indradhanush Plan for revamping PSBs, announced by the Govt. on 14 Aug 2015, envisaged capital infusion by the Government of 70,000 crore.

FISCAL PERFORMANCE INDEX (FPI)

 Developed by- Confederation of Indian Industry (CII)

 It assesses the quality of Budgets presented by the Centre and state governments.
 The index has been constructed using UNDP’s Human Development Index (HDI)
 Components– Quality of revenue expenditure; Quality of capital expenditure; Quality of revenue; Degree of fiscal prudence; Debt Index

FINANCIAL SECRECY INDEX (FSI) - Released by- Tax Justice Network (TJN)

SARFAESI ACT 2002 - Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

 law that allows Indian banks and financial institutions to sell or auction the assets/properties of credit defaulters without any intervention from the courts
 Banks/FIs having 75% of the dues owed by the borrower can collectively proceed on the following in the event of the account becoming NPA????
 Issue notice of default to borrowers asking to clear dues within 60 days.
 On the borrower’s failure to repay:

 Take possession of security and/ or

 take over the management of the borrowing concern and/or
 appoint a person to manage the concern.

RBI is planning to setup a Public Credit Registry, based on recommendations of Y.M. Deosthalee committee.

 PCR is a database of credit information which is accessible by all the stakeholders.

 It will capture all relevant information in one large database on both individual & corporate borrowers.
 It will be managed by a public authority as RBI and the lenders will have to mandatory report the loan details.

UNITED NATIONS CONVENTION AGAINST CORRUPTION

 The United Nations Convention against Corruption is the only legally binding universal anti-corruption instrument.
 It was adopted by the General Assembly in 2003 and entered into force on December 14, 2005.

SWIFT SYSTEM

The Society for Worldwide inter – bank Telecommunication (SWIFT) is a messaging network which connects banks and financial institutions across the world. International transactions of
the banks and institutions are ultimately based on this network.

BUSINESS CORRESPONDENT

The RBI has allowed banks to appoint entities and individuals as agents for providing basic banking services in remote areas where they can’t practically start a
branch. Business Correspondents are instrumental in facilitating financial inclusion in the remotest areas of country.
MEANING
 Identification of borrowers, collection of small value deposit, disbursal of small value credit, recovery of principal, collection of interest, sale of micro insurance,
FUNCTIONS mutual fund products, pension products, other third party products and receipt and delivery of small value remittances, other payment instruments, creating
awareness about savings and other products, education and advice on managing money and debt counselling, etc.

TYPES OF PRODUCTS Small Savings Accounts, FD,RD with low minimum deposits, Remittance to any BC customer, Micro Credit and General Insurance.

Individuals like retired bank employees, retired teachers, retired government employees and ex-servicemen, individual owners of kirana / medical /Fair Price
WHO CAN ACT AS BCs shops, individual Public Call Office (PCO) operators, agents of Small Savings schemes of Government of India/Insurance Companies, individuals who own Petrol
Pumps, authorized functionaries of well-run SHGs which are linked to banks.

EVERGREEENING OF THE LOAN- Ever greening in banking is a practice of providing a fresh loan to repay an old loan.

RECAPITALIZATION- Bank recapitalization, means infusing more capital in state-run banks so that they meet the capital adequacy norms.

LAND DEVELOPMENT BANKS- This term is used for the banks which provide long term loans to promote use of land, agriculture etc.

‘NEAR’ MONEY- Near money functions similar to the money but is not actually money as it is not universally acceptable such as credit cards ‘also known as plastic money), drafts and
debit cards.

LINE OF CREDIT (LOC)- Line of Credit is the agreement between the financial institution (bank) and the individual (company or government) with respect to the maximum loan amount
that an individual can borrow from a bank any time he wants, provided the loan amount does not exceed the set limit in the agreement.

Financial Market
Money Markets Market for overnight to short-term funds and instruments having a maturity period of 1 or less than 1 year.

Capital Market Market for long-term funds–both equity and debt–that have maturity period greater than 1 year

Equity Market Market where equities (stocks) are traded or issued

Debt Market/Fixed Income Markets Market where debt instruments (bonds, debentures, etc) are issued or traded

A ‘Security’ means a certificate/document indicating that its holder is eligible to receive a certain amount of money at a particular time. This could be
Securities
a debt (bond/debenture) or equity (Share certificates)

Money Market Capital Market

  Short Term, less than 365 days
 Long Term in Nature
 Short term fixed income instruments are traded. ex. T-Bills, bill of exchange,
 Long term debt instruments or equity is traded ex. Bonds, debentures, equity shares etc
promissory notes, call money etc
 Players involve banks, listed companies, brokers, insurance companies, underwriter, stock
 Players involve financial companies, banks, central bank, Government, chit funds etc
exchanges, investors etc
(limited players)
 More formalized, generally exchange traded
 Informal in nature and over the counter
 Less Liquid
 More liquid
 High Risk
 Low Risk
 Creates investments and maintains stability in market
 Maintains liquidity in businesses (mainly financial system)
 Regulated by SEBI
 Regulated by RBI

Debt Instruments

 A debt instrument is a fixed-income asset that allows the lender (or giver) to earn a

fixed interest on it besides getting the principal back while the issuer (or taker) can

use it to raise funds at a cost.

 A debt instrument can be in paper or electronic form. Bonds, debentures, leases,

certificates, bills of exchange and promissory notes are examples of debt

instruments.

Types of Debt Instruments

Unlike stocks, the principal value of a bond is returned to the investor in full at maturity.

The twin factors that affect a bond's price are inflation and changing interest rates. A rise
in either interest rates or the inflation rate will tend to cause bond prices to drop.

Parameter Bonds Debentures

Collateral Bonds are secured by the issuing company's collateral or tangible assets. Debentures are not backed by the issuing company's collateral or physical assets.

Tenure long-term investments with a larger average tenure than debentures. short- to medium-term investments with a shorter tenure than bonds.
 large enterprises, financial institutions, and government agencies to meet their
Issuer private enterprises to meet their urgent capital needs.
long-term capital needs.

Rate of Interest set or floating interest rate that is generally lower than debentures. fixed or floating interest rate that is normally higher than bonds.

Liquidation When a corporation is about to go bankrupt, bondholders get priority over When a corporation is about to go bankrupt, debenture holders do not get priority over
priority debenture holders when it comes to repayment of capital and interest. bondholders when it comes to repayment of capital and interest.

Payment The interest on bonds is paid on an accrual basis. - monthly, half-yearly, or annual
Interest on bonds is paid on a regular basis and is determined by the company's success.
structure basis, and it is not contingent on the company's success.

Risk less risky - backed by the issuing company's tangible assets. riskier - lack the security of the issuing company's tangible assets.

 Treasury bills and bonds, also known as dated securities, are both issued by the
G-Secs central government.
 State governments issue only bonds or dated securities, which are known
 A Government Security (G-Sec) is a tradable instrument issued by the federal or as State development loans.
state governments.  They are known as Risk-free gilt-edged instruments because they are issued by
 Government Securities are of two types the government and hence there is no danger of default.
 FPIs (Foreign Portfolio Investment) are authorized to trade in G-Secs as long as
1. Short term: With original maturities of less than one year. They are currently they stay within the quantitative limits that are set from time to time.
issued in three tenures: 91 days, 182 days, and 364 days. Example- Treasury Bills.
2. Long-term: With original maturity of one year or more. Example- Government
The Reserve Bank of India has allowed retail investors to invest in G-Secs from
bonds (dated securities).
November 2021.
 T-Bills
 issued by RBI on behalf of the central government ( not state govt )
 91, 182 and 364 days
 treasury bill is referred to as zero-coupon security ( no interest)
 Sold at discounted price by the government and Later bought at Par value

Commercial Papers  Same as T Bills but sold by Corporate

 maturity of 30 days, 60 days, or 90 days.

Certificate of deposits  Same as T Bills but sold by Banks & Financial Institutes
 When it matures, the principal amount along with the interest earned is available for withdrawal

 Cash Management Bills (CMBs)- ultra-short-term investment options with maturity periods of less than 91 days.
 Dated G-Secs: Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on half-yearly basis.
Generally, the tenor of dated securities ranges from 5 to 40 years.
 State Development Loans (SDLs): State Governments also raise loans from the market which are called SDLs. SDLs are dated securities issued through
normal auction similar to the auctions conducted for dated securities issued by the Central Government.

 Call money is any type of short-term, interest-bearing loan that the borrower must repay immediately if the lender demands it.
 No collateral required
 Mainly raised to fulfill CRR
Call money/ Term money  If raised for 1 day → Known as call money
market/ Notice money  Over 1-day upto 14 days → Known as notice money
 Over 14 days → Term money

 CP is a short-term debt instrument issued by companies to raise funds generally for a time period up to one year.
 It is an unsecured money market instrument issued in the form of a promissory note and was introduced in India in 1990.
Commercial papers  The minimum maturity period of commercial paper is for 7 days and a maximum of 1 year.
 CP is issued at a discount to face value.
(CPs)  Promissory Notes – A promissory note is a legal, financial tool declared by a party, promising another party to pay the debt on a particular day.

 The repo rate/ the repurchase rate is the rate at which RBI lends money to banks, when banks face shortage of funds.
 These are short-term, usually overnight borrowings.
Repo / Reverse Repo Market  The opposite of repo rate is reverse repo rate-it is the rate at which RBI borrows funds from other banks for the short term

Methods by Colonial era Govt. to borrow money :

Coupon Bonds Contain detachable coupons. Coupons are presented to the issuer to claim the interest. Therefore, bond interest rate is also called ‘coupon rate’.
 Zero Coupon Bonds These bonds are sold on discount and repurchased at face value, do not have any coupons.

Not linked to a PAN card, Aadhar card or passport, voter card or social security number. Anyone who presents it to the issuer, will get interest and principal. Usually
Bearer Bonds
issued during the war time.

Sovereign bonds – It is a specific debt instrument issued by the government. They can be denominated in both foreign and domestic currency.

World’s top three credit rating agencies – Fitch, Moody’s and Standard & Poor

Bonds by Govt. to Reduce Gold Consumption (so import)

Real Interest Rate is (Nominal Interest -Inflation). When Real Interest is negative,
purchasing power decrease despite increase in money quantity in bank account. Then
people prefer to park money in gold/real estate- which is not very beneficial to economy.

Sovereign Gold Bond (2015) - They are denominated in gold grams. Annual interest 2.5-
2.75% (depending on which year you bought), and after 8 years you get the amount
equivalent to prevailing gold prices at that time.

Inflation Indexed Bonds- similar to the conventional bonds, but the return on these
bonds are adjusted based on the inflation rate, thereby providing protection to the
investor from inflation.

Long term debt instruments by Companies:

A junk bond is debt that has been given a low credit rating by a ratings agency, below investment grade. As a result, these bonds are riskier since chances
that the issuer will default or experience a credit event are higher.
Junk Bonds
The Credit Rating Company will mark it as Junk Bonds (“BB to D” Grade) e.g. IL&FS. Such company will have to offer a very high interest rate when issuing
bonds next time.

Redeemable Bonds Will repay regular interest and will return principal on maturity.

Will pay only interest but no principal returned. Sometimes issued by PSB to meet BASEL-capital requirements. Although in reality they offer
Irredeemable Bonds
‘redemption’ after 5-10 years when holder has ‘option’ to redeem principal & exit.

Non-convertible Bond/Debenture Cannot be converted into shares.

Hybrid instruments Issued as “Bond” but can be converted into Share. E.g. Optionally Fully Convertible Debentures (OFCD).

Other issuers of Long Term Debt Instruments

Issuers Objective

Urban Local Bodies Urban Local Bodies Issue Municipal bonds to borrow money from public.

2014- BRICS Nations had setup the New Development Bank (NDB, HQ: Shanghai, China). Later it launched BRICS Bonds to mobilize money for its infrastructure
BRICS Bond
loans. (Denomination in US Dollars)

2018: launched world’s first Block chain Offered New Debt Instrument called Bond-i.

World Bank Sold in Australia using ETHEREUM block chain technology.

Local Manager: Commonwealth Bank of Australia (CBA)

Tenure of 2 years at ~ 2% interest. Denomination in Australian Dollars, hence also called “Kangaroo Bond”.

Masala Bonds  Masala Bonds are rupee-denominated bonds, i.e, the funds would be raised from overseas market in Indian rupees.
 World Bank’s sister agency International Financial Corporation (IFC) launched ‘Masala Bonds’
 Any corporate and Indian bank is eligible to issue rupee denominated bonds overseas.
 The money raised through such bonds cannot be used for real estate activities other than for development of integrated township or affordable housing projects.
 It also cannot be used for investing in capital markets, purchase of land and on-lending to other entities for such activities as stated above.
 The minimum maturity period for masala bonds raised up to rupee equivalent of $ 50 million = 3 years and for bonds raised above $ 50 million equivalent in INR per
financial year should be 5 years.
 Kerala became the first state to issue Masala Bonds.

 Better rating than Govt of India bonds but lower interest rate.
 It is Rupee denominated bond.
Maharaja  Tenure is 5 / 10 years.
Bond  Issued within India’s domestic financial market.
  An Elephant Bond is a Rupee denominated bond with 25 years maturity
 A High Level Advisory Group on Trade Policy (HLAG) headed by Surjit S Bhalla (Committee ‘to improve India’s share in global trade’) has recently suggested the
Elephant govt. to issue ‘Elephant Bonds’.
Bonds  used exclusively to fund infrastructure projects
 People declaring undisclosed income could pay 15% tax and compulsorily park 40% of it in Elephant Bonds, it suggested.
 This will help India to recover up to $500 billion of black money that is stashed overseas.

 A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental, renewable energy, pollution control
projects.
Green bonds  Green bonds are issued by multilateral agencies such as World Bank, corporations, govt. agencies and municipalities.
 Green bonds are open for investment by insurance companies, mutual fund companies, pension funds among others.

Indore Municipal Corporation (IMC) : 1 st Urban Body → Introduced 'Green Bond’

Green Bond : Will Be Used To Set Up 'Solar Power Plant’
2007 - World’s first Green Bond launched by World Bank
2015 - India’s first Green Bond launched by Yes Bank
2016 - BRICS Bank (New Development Bank) issued Yuan- denominated green Bonds
2018 - Indian Renewable Energy Development Agency (IREDA) launched India’s first Masala Green Bond at London Stock Exchange
Blue Bond  It is a debt instrument issued by governments, development banks etc to raise capital from investors to finance marine and ocean-based projects.
 The blue bond is a sub-type of green bond.
 Seychelles issued world’s first ‘Blue Bond,’ in 2018

Catastrophe  Catastrophe bonds, also known as Cat bonds, allows the transfer of risks to bond investors.
Bond  For the issuer – typically governments, insurers, and reinsurers – cat bonds signify financial protection in case of a major natural catastrophe, such as a hurricane or
an earthquake.
 For the investor, buying the bonds means they may get high returns for their investment, which is not subject to financial market fluctuations.
 In case a qualifying catastrophe or event occur the investors will lose the principal they invested.
 If disaster doesn’t happen then principal will be returned.

Social Impact  A Social Impact Bond, also known as Pay for Success Financing, a Pay for Success Bond or a Social Benefit Bond is a contract with the public sector in which a
Bonds commitment is made to pay for improved social outcomes that result in public sector savings
 Social Impact Bond bonds will be offered to High Net worth Individuals (HNI), Impact Investors (rich people interested in ‘indirect’ social service) etc. Investors
will earn 3% annual interest rate for tenure of 5 years.
 In 2019 SIDBI issued ₹ 300 cr. worth Women’s Livelihood Bonds with the help of World Bank, UN Women org etc.
  Announce in Budget 2017 (Dept. of Economic Affairs, Finance)
 These bonds are on the lines of bearer bonds or promissory notes wherein the issuer (bank) is be the custodian and pays the one who holds the bonds (political
Electoral party).
bonds  These bonds are issued by notified banks (SBI at present) in multiples of 1,000, Rs.10,000, Rs.1,00,000, Rs.10,00,000 and Rs.1,00,00,000
 Only an Indian citizen or Company registered in India can purchase bond by depositing money in their bank account and use that money to buy Electoral Bond. So,
Electoral Bond can’t be bought anonymously or directly with cash.
 The political party has to encash it into the account which is registered (Under RPA 1951) with the Election Commission of India and which has secured 1 percent or
above votes polled in last Lok Sabha or Vidhan Sabha elections.
 Validity of the bond will be only of 15 days from date of purchase. Within that time, buyer must donate, and political party must deposit in its SBI (current) bank
account. However, No interest payable on the bond.

Sovereign Sovereign Gold Bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold and because of this there are no storage
Gold Bonds issues for Sovereign Gold Bonds. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by the Reserve
Bank on behalf of the Government of India.

Relationship between Bond Price, Yield and Interest Rate

 Price of bond is inversely related to Interest Rates

 Price of Bond is inversely related to yields
 Yields are directly related to Interest Rates

EQUITY INSTRUMENTS

Equity holders are called as owners of the company.

If company makes profit, they will get dividend. However, during liquidation of an company, their claim will be at last.

It is the maximum amount of the capital for which shares can be issued by the Company to shareholders. The Authorized capital can be increased at
Authorized Capital
any time in future.

Paid- up capital is the amount paid by the shareholders for the shares held by them in the company. It is the actual fund that the company receives
Paid Up Capital
from the issue of shares

Have voting power in the meetings of shareholders. Equity shareholders are given dividend only after paying it to the preference shareholders. Last
Ordinary shares (Equity shares)
claim during liquidation.

These are shares of an enterprise’s stock with dividends that are paid out to the members before equity shares dividends are circulated. During
Preferential Shares
liquidation, these investors will be given money before the ordinary (equity) shareholders.

Sweat Equity Share Sweat Equity Share given at discount to directors & employees for their value addition to company.
 Penny stocks are those that trade at a very low price, have very low market capitalisation, are mostly illiquid, and are usually listed on a smaller
Penny stocks
exchange.

A blue-chip stock is a huge company with an excellent reputation. Shares of a nationally recognized, well-established and financially sound company
Blue Chip stocks
with a history of generating good dividend.

Venture capital is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage (seed), emerging firms that are
Venture capital funds (VCF)
deemed to have high growth potential, or which have demonstrated high growth.

Group of individuals or an individual itself who invest their own money in the early (concept) Stages of the company and in return take a share in the
Angel Investors
company. They invest typically less money than the Venture Capitalists

Corporate Strategic Investor Invests in start-up company with goal of acquiring the company or its technology at later date.

Share Pledging When promoter of a company pledges his shares as collateral to borrow loans from a bank / NBFC.

Sum of the market value of all the stocks derived by multiplying the price of the share by the number of equity shares out- standing

Full Market Capitalization Method – In this case the market capitalization is found out by total number of Shares * Price of Each Share
Market capitalization
Free-Float Market Capitalization – Shares which are not free float such as shares held by government or promoters or locked under Employees Stock
Option are excluded while calculating market capitalization

Angel investor viz-a-viz Venture capital

ANGEL INVESTOR
VENTURE CAPITAL ( long-term investments )
They usually invest more than one million dollar
They usually invest less than one million dollar .
They usually involve with company
They usually don’t involve with company.
They unlikely to invest in start ups
They invest in early stage of business or we can say start ups
They use fund providers money
They use their own money they don’t demand board seat which leads to quick
decision making.
They demand board seat which leads to delay in decision making.

METHODS OF ISSUING SHARES

  Share have printed price on the certificate called Face Value or Par Value. If they are sold at higher price than face value, it’s called “Premium Value”.
 Share Price – Market Price of Trade based on demand supply
 Face Value – Book Value
 Discount – When share issued above face value

Types of Market

Primary Market Secondary Market

When Company directly issues shares to people or certain private individuals Market where one person buy/sell shares from another person

Enables company to tap sources of funding for capital requirement. Leads to discovery of valuation of the company

Leads to price Discovery

Public Issue – This issue is for retail investors to buy the shares of the company. Public Issue (methods) : Initial Public Offer (IPO) and Further Public Offer (FPO)

FDI FII/FPI

When a company situated in one country makes an investment in a company FII is when foreign companies make investments in the stock market of a country.
situated abroad, it is known as FDI.
Short-term relation with the company e.g., Morgan Stanley, Goldman Sach
Long-term relation with company & its board e.g., Walmart
Also known as Hot money → Can leave country on one phone call

Increase in country's Gross Domestic Product (GDP). Increase in capital of the country.

FDI can target primary market FII flows only into the secondary market

Investment of 10% or more is termed as FDI Any Public ltd. Company (listed) → Investment below 10% is termed as FII / FPI

 FDI applies to Equity finance only  NRI investment not counted

 Debentures / Bonds → No FDI cap applied  Both debt and equity included but can’t buy T-Bill
 Fully convertible debenture → FDI applies  G-Sec cap → 30 billion
 G-Sec / T-Bill → No FDI cap applied (Debt instruments)  Corporate bonds max. → 51 billion

World’s Oldest: Amsterdam Stock exchange, Netherlands (1602)

Asia’s Oldest: Bombay Stock Exchange (1875). SENSEX (Sensitivity Index) is the benchmark index of BSE.
 NSE (National Stock Exchange) – Setup in 1992 (HQ-Mumbai).

NIFTY (National Fifty) is the benchmark index of NSE.

MUTUAL FUND HEDGE FUNDS

Investors pool money to invest in basket of securities. High network investors come together to buy the securities
Any one having legal age can invest here. Due to high risk, only accredited investors can invest.

PARTICIPATORY NOTES (P-NOTES) - Participatory Notes are financial instruments that are issued by a registered institutional investor to an overseas investor who intends to invest in the
Indian stock market without having to register himself with the financial regulator in India, i.e, SEBI

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SEBI is a quasi-legislative, quasi-judicial and quasi-executive body est on 1988 under

the Finance Ministry.

 4th April 1992 --> statutory status

 SEBI can draft regulations, conduct inquiries, pass rulings and impose
penalties.
 Amendments in 2014 enabled SEBI to initiate order search and seizure,
attachment of properties, arrest and detention.
 SEBI Board Composition: Chairman + 1 officer from RBI + 2 officers from Union
Government + 5 members appointed by Union Government.
 Chairman: upto 5 years / 65 age, whichever earlier. Reappointment is
eligible.
 Securities Appellate Tribunal – SAT has been constituted to protect the
interest of entities that feel aggrieved by any of SEBI’s decision – Endowed
with powers of civil court. Appeal against SAT lies in Supreme Court.
 Same SAT also hears appeals against the orders passed by Insurance
Regulatory Development Authority of India (IRDAI) and PFRDA
NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA) – 2018

NFRA is an Indian body provided in Companies Act 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors.

Financial Stability & Development Council is Chaired by – Union Finance Minister.

Other members –

1. RBI Governor

2. SEBI head

3. IRDAI head

FSDC (2010) 4. PFRDA head

5. IBBI head & govt officials

Functions –

Supervision of the economy & large financial conglomerates,

coordination among the financial regulators, financial literacy and financial inclusion.

Secretariat assistance offered by: Dept. Of Economic Affairs (Min. of Finance)

HQ – BASEL (Switzerland)

Function – Financial monitoring at global level, Coordination between national financial regulators bodies.

Financial Stability Board (2009) India have 3 seats in FSB –

brainchild of G20. 1) Secretary of Department of Economic Affairs (IAS)

2) Dy. Governor of RBI

3) SEBI chairperson

HQ – Paris.
Financial Action Task Force (1989)
India became member in 2010.
brainchild of G7
Function – Combating Money laundering and terror finance.
 IOSCO
international body of world’s securities regulators.
International Organization of Securities
SEBI is a member of IOSCO.
Commissions

Committees on corporate governance

The Confederation of Indian Industries (CII) had set up a task force under Rahul Bajaj. The CII came up with a voluntary code
Rahul Bajaj committee(1995)
called “Desirable Corporate Governance” in 1998.

Committee was set up by SEBI Committee covers the issues such as protection of investor interest, promotion of transparency,
Kumar Mangalam Birla committee report (2000) building international standards in terms of disclosure of information. The SEBI implemented the recommendations of the Birla
committee through the enactment of Clause 49.

Naresh Chandra Committee Report It extensively cover Auditor-company relationship.

The committee was set up by SEBI to review the performance of corporate governance in India and make appropriate
R. Narayana Murthy Committee (2003)
recommendations.

In light of Tata and Infosys corporate governance episodes, SEBI appointed Uday Kotak panel to enhance corporate governance in
Uday kotak Panel (2017)
India.

Fiscal Policy

Fiscal policy is based on the theories of British economist John Maynard Keynes (Keynesian economics). This theory basically states that governments can influence macroeconomic
productivity levels by increasing or decreasing tax levels and public spending.

Budget

Fund (Art.) Description

Incoming taxes, loans raised, loans recovered. Withdrawal need Parliament Permission (except for Charged Expenditure like Judges’
Art. 266(1) – Consolidated Fund Of India
salaries).

Unforeseen events INR 500 cr by Finance Secretary on behalf of President. Parliament approval is “subsequently” obtained, after
Art. 267 – Contingency Fund of India
expenditure. Money refilled from CFI.

 Incoming provident fund, small savings, postal deposit etc.

Art. 266(2) – Public Accounts Of India  Govt. acts like banker transferring fund from here to there so parliament permission not necessary.
 If separate fund is to be created for the first time, for a specific expenditure, then needs parliament permission to create it
 Financial Year (FY)
1867 British Indian Govt. started financial year 1st April to 31st March to align with their home country’s financial year.
Constitutional
Constitution has not specified any months for FY but we continued the British legacy.
provisions
2016-17 Finance ministry had setup Shankar Acharya Committee to assess whether we should change FY

2017 All states not in favor because accounting practices need to be changed. Its challenges outweighed the benefits. So, Govt not implementing.

Three Documents related to Budget

 AFS containing receipt and expenditure of last year (and projections for the next year).
Annual Financial Statement (AFS) Article 1. The revenue expenditure must be shown separately from other expenditures.
112 2. No compulsion to show railway budget separately from general budget.
3. No compulsion to show plan expenditure separately from non-plan.
Finance Bill  To obtain Parliament’s permission to collect taxes.
1. Parliament can reduce or abolish a tax proposed by the Govt. but Parliament cannot increase tax beyond what Government has proposed
Art. 264 in the Finance bill.
1. To obtain Parliament’s permission to spend money from Consolidated Fund of India (Art-266). Such expenditure can be of two types:
Appropriation Bill
2. The expenditures ‘charged’ upon the Consolidated Fund of India e.g. Judges salaries. They can be discussed but they are non-votable &
automatically approved.
Art. 114
3. The expenditure ‘made’ from CFI. They are discussed and voted upon.

The finance bill and appropriation bill are considered money bills. Rajya Sabha approval is necessary, at maximum they can discuss it for 14 days and give suggestions to Lok Sabha for
amendments, but it’s not binding on the Lok Sabha to accept Rajya Sabha’s suggestions. Whether a given bill is money bill or not, Lok Sabha’s decision is final and it cannot be enquired
by any Court (Art.122).

Chief Economic Advisor - V. Anantha Nageswaran

 Falls under Department of Economic affairs, Ministry of Finance.

 Usual tenure 3 years, reappointment possible, but not a constitutional or statutory body.
 CEA has control over Indian Economic Service (IES)

Notable CEAs in Past:

 Manmohan Singh,
 Raghuram Rajan,
 Arvind Subramanian (2014-18).
 2018-Dec: Krishnamurthy

 DEA is responsible for the fiscal policy, Preparation and presentation of Union budget including the Railway component of budget.
 Also Budget for Union Territories without legislature, budget for States under president rule.
 DEA announces the Interest rates of small saving schemes.
 DEA assigns infrastructure status to a particular sector.

Organizations related to dept of economic affairs

Constitutional Body Finance Commission (Art. 280)

Statutory Body Insolvency and Bankruptcy Board of India (IBBI) under Corporate Affairs Ministry.

Chief Economic Advisor CEA that we have covered in above section.

Financial Stability and Development FSDC is neither Constitutional nor statutory body. FM is chairman. Members include the chiefs of all financial regulatory bodies- such as RBI, SEBI,
Council (FSDC) IRDAI etc. and the chief of IBBI- Insolvency and Bankruptcy Board of India.

Security Printing and Minting Corporation of India Ltd. (SPMCIL). Registered under the Companies Act responsible for printing currency notes, coins,
PSU
commemorative coins, cheques, postage stamps, non-judicial stamps, passports/visa and other travel documents etc.

Dept of expenditure

 Here the Controller General of Account (CGA) prepares the estimate of how much money will have to be spent from the consolidated fund of India.
 It also deals with Pay Commission reports, Pension Accounting office.

Revenue budget Capital Budget

Capital budget is associated with the income and expenditure that are of long term
It is associated with the income and expenditure that are of temporary in nature (1 year or
nature and/or results into creation of permanent / capital /financial assets, such as land,
less), and/or do not result into creation of permanent / capital / physical / financial assets.
buildings, machinery, equipment, shares, bonds, G- sec.

Borrowings, disinvestment, and expenditure on assets creation.

Taxation, revenue from selling goods and services, interest payment on previous loans,
salaries, pension, subsidies and other non- developmental expenditure.

The Bibek Debroy Committee recommended the formation and reorganization of the Railway Board.
 · In this type, simply calculating the income and expenditure without measuring the underlying benefit or performance
Traditional / Line-item
Budgeting
· For instance, Allot INR 100000 to buy a new computers in government department
· Calculating the income and expenditure tied with underlying benefit or performance

· Allot INR 50,000 to buy a new computer with target that it should result in 30% the faster clearance of RTI-applications compared to pen and paper
Performance Budgeting
based office system.

· Such budgeting helps measuring cost : benefit and efficiency.

· In a traditional budgeting, the approach is “automatic and incremental” e.g. “Last year we allotted INR 100000 crore to educational schemes, so this
year we should allot 55,000 crores, lest the opposition parties create controversy.”
Zero based budgeting
· Whereas in Zero Based Budgeting the budget is viewed as a fresh exercise from zero base. So, each department has to justify its budget demands to
finance ministry. E.g. if last year ₹ 50,000 crores given to education schemes but still 60% of class 5 kids cannot read class 2 books, then we will delete /
modify that scheme.
· This system was started from Budget-2005.

· It is not a separate budget but rather within the general budget, Finance Ministry will put a separate expenditure document showing women specific
schemes, targets, and commitments– in two parts:
Gender based budgeting
1. Part A – Women Specific Schemes, i.e. which have 100% allocation meant for women. E.g. Nai Roshni scheme (Minority Affairs Ministry) for
leadership development in Minority Women.

· Part B – Pro Women Schemes, i.e. atleast 30% allocation meant for women. E.g. Samagra Shiksha (Min of HRD) for pre-nursey to Class12 both boys &
girls covered.
· In a traditional budgeting, once a scheme is launched it runs perpetually, even after regime change e.g. MNREGA, Mid-day Meal.

· In a zero based budgeting, schemes are reviewed every year and then they may get discontinued or continued (with or without modifications).
Sunset Budgeting

· In Sunset Budgeting, scheme are announced with deadline. e.g. MEITY to give MDR subsidy for a period of two years starting from 1/1/2018. Thus, this
scheme will self-destruct after deadline just like the sun will set after the sunset time.

Art 248 mentions that the residual powers of Legislation are vested in the Parliament. Such power shall include the power of making any law imposing a tax not mentioned in either of
those lists.

Types of taxes acc. to fairness

Proportional taxation A tax that takes the same percentage of income from all income groups

Progressive taxation A tax that takes a larger percentage of income from high-income groups than from low-income groups.

Regressive taxation A tax that takes a larger percentage of income from low-income groups than from high-income groups.
Direct taxes

Centre State
 Income Tax
 Corporate Tax -Agriculture Income tax
 Minimum Alternative Tax (MAT) -Professional Tax (Constitutional ceiling of max ₹2500 per year)
 Dividend Distribution Tax (DDT) -Land Revenue
 Capital Gains Tax (CGT) -Stamp or Registration duty
 Securities and Transaction tax/Commodities Transaction Tax -Property tax in urban areas
 Wealth Tax
 Estate Duty
 Fringe Benefit tax (FBT)

 Computed on taxable income, profit, transaction.

Union Tax  Union tax goes to Consolidated Fund of India.

 Later divided between Union and states as per the finance commission formula. (except if IGST: divided on GST Council’s formula.)

 Computed on Tax amount. So, it is a ‘tax on tax’. This amount will also go to CFI. It is not shared with States

Surcharge  Usually cess does not have any clear objective in ‘prefix’ so it may be used for any purpose.
 Exception is 10% Social Welfare Surcharge on the custom duty on imported goods. This will specifically use for social welfare schemes of the union.

 A cess is a tax on tax, levied by the govt. for a specific purpose. It is levied on the tax payable and not on the taxable income.

 In a sense, for the taxpayer, it is equivalent to a surcharge on tax.

 A cess can be levied on both direct and indirect taxes. Clear objective is mentioned. Proceeds of the cess cannot be spent on any other kind of govt.
expenditure.
 Computed on [(Tax) + (Surcharge, if any)]
 By default, cess goes to CFI→ from there, to a specific fund in Public Accounts
Cess  Cess is not shared with States using Finance Commission Formula. (Although some of the cess money will invisibly go to states as a part of scheme
implementation
 GST Compensation Cess is shared with States, as per GST formula.

 Equalization Levy (Direct Tax) was introduced in India in 2016, with the intention of taxing the digital transactions. the income accruing to foreign e-commerce companies from
India.
 If a foreign company makes profit in India, they have to pay 40% Corporation Tax.
 Officially called “Equalisation Levy”, not part of “Income Tax” or “Corporation Tax” under the Income Tax Act 1961, but a separate levy altogether imposed by the Finance Bill 2016.
 Tobin tax is a tax on all spot conversions of one currency into another. Tobin tax would be paid by market players as a method for controlling the stability of a country’s currency.
 Ad- Valorem tax (indirect taxes ) - Taxes based on the value of something.
  American economist Arthur Laffer - if (direct) tax rates are increased above a certain level, then tax revenue collection will fall because higher tax rates
Laffer Curve
discourage people from working and/or encourage them to engage in tax evasion and tax avoidance).

 If GDP grew by x%, then how much % Income tax collection will grow?
Tax buoyancy
 E.g. if income tax collection growth rate is 11% when GDP growth rate is 10%, then Income Tax’s tax buoyancy is 1.1

Tax elasticity  If first income tax slab increased from say 5% to 15%, then in absolute terms how much more IT-revenue will be generated?

Revenue expenditure - Revenue receipts

Since a major part of revenue expenditure is committed expenditure – like Interest repayment on previous loans, staff-salaries & pensions which Govt cannot avoid –
so it is quite difficult to reduce the revenue deficit.
Revenue Deficit
So, when revenue deficit increases, government will be forced to borrow more money or cut down the expenditure in the capital part – Such as less new schools,
bridges, hospitals and other critical infrastructure. This will result in lower human development and lower economic growth

Effective Revenue Revenue Deficit - Grants for creation of capital assets

Deficit introduced in Budget 2011 (By Chidambaram)

Budget Deficit Budget expenditure - Budget receipt

Fiscal Deficit Total Expenditure – Total revenue (Excluding the borrowings)
Primary Deficit Fiscal Deficit -interest to be paid on previous loans

Fiscal Consolidation refers to the policies undertaken by Governments (national and sub-national levels) to reduce their deficits and accumulation of debt stock. It is not aimed at
eliminating fiscal debt.

Fiscal stimulus refers to policy measures undertaken by a government that typically reduce taxes or regulations—or increase government spending—in order to boost economic activity

Fiscal Drag is an economic term that describes how income growth or inflation forces taxpayers into higher tax brackets. A larger proportion of taxpayers' income is now spent on taxes.
Without officially raising tax rates, this effectively raises government tax revenue. The increase in taxes reduces aggregate demand and consumer spending, which results in deflationary
policies or a drag on the economy.

For instance, if government has targeted to keep the fiscal deficit within 3.3% percent of GDP, but if it crosses that limit, it is called as fiscal slippage.

 Ministry of Heavy Industries & Public Enterprises decides the norm for Ratna Companies.
Balance of Payment

 It is a systematic record of all economic transactions made between the residents and non-residents of a country for a specific time period, usually a year.
 Central Banks of each country prepare BoP records as per the format given in IMF’s BPM-6 manual, all the figures are expressed in Dollar ($).
 Since any country’s debit (outgoing money) is a credit (incoming money) for another country - World’s NET Balance of Payment is zero.
 BoP is further sub-classified into two parts → Current Account and Capital Account
Foreign Portfolio Investors (FPI)- It is a foreign entity registered with SEBI, and who buys upto 10% in equity / shares of an Indian Company.
Foreign Direct Investment (FDI)- FDI is the (more than 10% equity / share) investment made by a foreign entity into an Indian company, with the objective to get involved in the
management / production of that Indian company.
Foreign Investment is prohibited in atomic energy, railway operations (except Metro & infra dev.); Tobacco Products, Real Estate Business, Farm Houses, Chit Funds, Nidhi Companies,
Betting Gambling Casino & Lottery.

Automatic Route Foreign entity doesn’t require Indian Govt’s approval.

Government Route get approval from the Govt of India’s respective Administrative Ministry/ Department (and Commerce Ministry).
DIPP becomes DPIIT (2019)
 Interim-Budget-2019: Govt renamed Commerce Ministry’s Department of Industrial Policy and Promotion (DIPP) as Department for Promotion of Industry and Internal Trade
(DPIIT).
 It’ll function under Ministry of Commerce and Industry
 Objectives of DPIIT – Promotion of internal trade, including retail trade; welfare of traders and their employees; matters relating to ease of doing business; and start-ups.

International Financial Services Centre (IFSC)

 In such centre, a nation will not apply its local taxation and investment norms.
 Gujarat International Finance Tech (GIFT) city international financial services centre (IFSC) near Ahmedabad. (2015)
 This ‘greenfield’ GIFT city was developed by 50:50 Joint venture of (the infamous) IL&FS + Gujarat Urban Development Company Limited (GUDCL)

S.S. Tarapore Committee (1997) on Convertibility of Rupee

Committee suggested India to allow full Capital Account Convertibility only when the fundamentals of our economy become strong enough, such as:
 RBI must have enough forex to sustain 6 months’ import
 Fiscal deficit must not be more than 3.5% of GDP
 Inflation must not be more than 3-5%
 Banks’ NPA must not be more than 5%

Twin Deficit – It’s the term used when both Current Account Deficit and Fiscal Deficit are high

NEER and REER

Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) are the indicators of external competitiveness.

NEER is the weighted average of bilateral nominal exchange rates of REER is the weighted average of nominal exchange rates adjusted for relative price differential between the
the home currency in terms of foreign currencies. domestic and foreign countries, relates to the purchasing power parity (PPP) hypothesis.

AGRICULTURE
 Agriculture is a State subject.
 The United Nations’ Decade of Family Farming (2019-2028) was launched by FAO and the International Fund for Agricultural Development (IFAD).

Targets
 Doubling of farmers’ income by the year 2022 (Ashok Dalwai Committee)
 Agriculture export policy: increase the agriculture export to over US $ 60 billion by 2022.

INDIA’S SEED BANK: India has established its own seed storage facility at Chang Lain Ladakh, Jammu and Kashmir.
NOTE: Svalbard Global Seed Vault is the world’s largest seed storage facility situated at Norway.

Seed Replacement Rate (SRR) or Seed Replacement Ratio

Measures how much of the total cropped area was sown with certified seeds in comparison to farm saved seeds.

Soil Health Card Scheme or SHC Scheme was launched by the Ministry of Agriculture, Government on 19th Feb 2015 at Suratgarh, Rajasthan.
 Printed report card; given to all farmers at an interval of 2 years
 The cost of sampling, testing and reporting is borne by Central Government.
 It provides two sets of fertilizers recommendations for six crops including recommendations of organic manures and recommendations for additional crops on demand.
 Food Corporation of India (FCI) is the nodal agency under Ministry of Consumer Affairs, Food and Public Distribution for the procurement, storage
and movement of food grains, public distribution and maintenance of buffer stocks.
FOOD CORPORATION OF INDIA It procures food grains:
At minimum support price (MSP).
On an open-ended basis.

MINIMUM SUPPORT PRICE- Recommended by Commission for Agricultural Costs and Prices (CACP) and approved by Cabinet Committee on Economic Affairs (Headed by PM)
Food Corporation of India (FCI) is the Nodal Agency.

 Cereals (7) – Paddy, Wheat, Barley, Jowar, Bajra, Maize and Ragi
 Pulses (5) – Gram, Arhar/ Tur, Moong, Urad and Lentil
 Oilseeds (8) – Groundnut, Rapeseed/Mustard, Toria, Soyabean, Sunflower seed, Sesamum, Safflower seed and Niger seed,Copra
MSP is declared on:
 De-husked coconut
 Raw cotton, Raw jute
 Sugarcane (Fair and remunerative price)
 Virginia flu cured (VFC) tobacco.

COMMISSION FOR AGRICULTURAL COSTS AND PRICES (CACP)

 The CACP is an attached office of the Ministry of Agriculture and Farmers Welfare, formed in 1965. It is a statutory body.
 It is mandated to recommend MSPs to incentivize the cultivators to adopt modern technology, and raise productivity and overall grain production.
 CACP submits separate reports recommending prices for Kharif and Rabi seasons.

Price of sugarcane is fixed by the centre/State, while the price of sugar is market determined.
FAIR AND REMUNERATIVE PRICE (FRP): The minimum price at which rate sugarcane is to be purchased by sugar mills from farmers; fixed by Union government based on
recommendations of CACP; Governed by the statutory provisions of the Sugarcane (Control) Order, 1966 issued under the Essential Commodities Act (ECA), 1955.

PRICE STABILISATION FUND (2014)

PSF is a Central Sector Scheme = 100% funded by Union.
Nodal → Govt gives Interest free loans given to FCI, NAFED & other central/state agencies to procure pulses and perishable vegetables from local and foreign farmers and sell it to
common man at reasonable prices.
2014– set up in the agriculture ministry but 2016- shifted to Consumer Affairs Ministry.

PRADHAN MANTRI KISAN SAMMAN NIDHI (PM-KISAN): 1 feb 2019

 PM KISAN ia a Central Sector Scheme.
 Income support of Rs 6000 per year in three equal installments.
 Available to all farmers irrespective of their farm size.

 Statutory body under the Ministry of Commerce and Industry.

APEDA  Promotes export of agricultural and processed food products from India.
 Entrusted with the responsibility to monitor import of sugar.
Contract farming is based on a pre-harvest agreement between the buyers and [Link] is under the Concurrent List under seventh schedule of Indian constitution.

ESSENTIAL COMMODITIES ACT (1955)

No specific definition of essential commodities in The EC Act.
To regulate the production, supply and distribution of commodities. It declares ‘essential’ in order to make them available to consumers at fair prices.
Central government can add or remove a commodity in the Schedule of the Act.
The government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.
ORGANIC FARMING
India ranks 1st in number of organic farmers and 9th in terms of area under organic farming.
Sikkim became the first State in the world to become fully organic in 2016.

Subsidies which are no or least market distorting.

Income Support which is not product specific and uniformly available to farmers and crop doesn’t matter.
subsidies must not distort trade, or at most cause minimal distortion
Green Box
They have to be government-funded.
They should not relate to (are “decoupled” from) current production levels or prices.
Amber Box / Aggregate Measure Of
Those subsidies which are trade distorting and need to be curbed.
Support (Ams)

This is the “amber box with conditions.”

Blue Box Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit production.

Under this provision, developed countries are allowed to maintain trade distorting subsidies or ‘Amber box’ subsidies to level of 5% of total
De-Minimis support
value of agricultural output. For developing countries this figure was 10%.

Special concessions to the developing economies for their agricultural development like subsidies for tractors, plough machines, pump sets,
Special and Differential Treatment Box
winnowing machines etc.

Measures for food safety and animal and plant health based on scientific terms. They should not be arbitrary and discriminatory in nature.
Sanitary and Phyto Sanitary Measures

ECONOMIC PLANNING

NITI: Initiatives

Darpan Portal · 2017 onwards: NGO register here, get unique ID – apply for grants under various govt schemes.
 · 2018 onwards: to rapidly transform 115 backward districts on 49 key performance indicators (KPIs) related to Health, Nutrition, Education, Agriculture, Water
Aspirational District Resources, Financial Inclusion, Skill Development, Infrastructure etc.
Programme
· Their progress is monitored using NITI online dashboard called ‘Champions of Change’.

Strategic disinvestment NITI Aayog suggested strategic disinvestment of more than 30 sick and loss making CPSEs such as Air India, Pawan Hans Helicopter, Scooters India etc.

· Ministry of Women and Child Development (MWCD) is implementing POSHAN Abhiyaan to make India malnutrition free by 2022 with focus on pregnant
women, mothers and children.
POSHAN Abhiyaan
· NITI Vice-Chairman is the head of POSHAN Abhiyaan’s National Council.

NITI helped revamping the MSP by suggesting price deficiency payments (under PM-AASHA), & revamping fertilizer subsidies through DBT mechanism to fertilizer
Agriculture
companies.

For Sustainable Development Goals:

SDG · NITI developed SDG India Index to monitor our progress in 17 SDG goals.

· NITI suggested Govt. to focus on methanol / bio fuel based economy for reducing the fuel bill by around 30% by 2030.

NITI runs Atal Innovation Mission (AIM): grant of upto INR 10 crores to setup Atal Incubation Centres incubators.
Startups
AIM also started “Mentor India” program, wherein experts from industry provide mentorship to students in Atal incubator labs. SETU to help start ups.

Digital Age NITI developing National Program on Artificial Intelligence.

The term Capital Goods is used for Plants, machinery and other assets which are used for conversion of basic goods to finished goods. all basic goods, intermediate goods and capital
goods are Producer goods because they are used to produce other goods.

Net income from abroad components - Net compensation of employees; Net income from property and entrepreneurship (rent, interest, profit); Net retained earnings of resident
companies abroad.
 [In India, a combination of production method value added and income method is used
for estimating national income.]

Income approach Y=w+i+r+p w = wages, I = interest , R = rent , P=profit Expenditure approach Y = C + I + G + (X − M)

GDP Gross domestic Product Nominal GDP - GDP at the current price
total value of goods and services produced in a Real GDP - GDP at the base year price is called the Real GDP or Nominal GDP adjusted for the inflation
country in one year within the geographical territory
of a country (both citizens or foreigners) GDP is a ‘quantitative’ concept and its volume/size indicates the ‘internal’ strength of the economy. But it does not say
anything about the ‘qualitative’ aspects of the goods and services produced.

NDP Net Domestic Product NDP = GDP – Depreciation

In India NDP is announced by the Ministry of Commerce and Industry.
Calculations of Net domestic product are used only for the domestic purposes.
GNP Gross National Product (GNP) is the total value of GNP = GDP + X – M
the goods and services produced by a country’s where, X = Income earned and received by nationals within the boundaries of foreign countries.
citizens or companies in one year irrespective of M = Income received by foreign nationals within the country.
their geographic location. If X = M, then GNP = GDP.
GNP = GDP + Net Factor Income from abroad
income earned by the Non-Resident Indians (NRIs)  NFIA = Factor incomes received from abroad — Factor income paid to abroad
 will not be part of India's GNP  ‘Income from Abroad’ : Private Remittances, Interest on External Loans, External Grants.
 more exhaustive concept of national income than the GDP as it is indicated towards the ‘quantitative’ as well as the
‘qualitative’ aspects of the economy, i.e., the ‘internal’ as well as the ‘external’ strength of the economy

NNP Net National Product NNP = GNP – Depreciation Or,

NNP = GDP + Income from Abroad – Depreciation.
This is the ‘National Income’ (NI) of an economy.
NNP at factor cost is the purest form of the income of a nation.

NATIONAL INCOME

National income of a country means the sum total of incomes earned by the citizens of that country during a given period, over a year.

National Income= C+I+G+(X-M)

C - national private consumption
I - gross investment
G - Government expenditure
X - Export; removes expenditures on imports not produced in the nation, and adds expenditures of goods and services produced which are exported, but not sold within the country.
M - Imports

National Income is considered as NNP at Factor cost.

National Income can be measured by GNP, GDP,Gross National Income(GNI),Net National Product(NNP) and Per Capita Income(PCI)
Since January 2015, the CSO has switched over to calculating it at market price (i.e. market cost).
Per Capita Income- It is a measure of the amount of money that is being earned per person in a certain area. PCI = National Income /Population
Personal Income = National income – undistributed profits of corporation – payments for social security provisions – corporate tax + government transfer payments + Business transfer
payments + Net interest paid by government.

Disposable personal income DPI = [Personal income] – [Direct Taxes]

HUMAN DEVELOPMENT INDEX (HDI)

UNDP introduced HDI in its first Human Development Report(HDR) prepared under Mahbub-ul-Haq in 1990 (Amartya Sen is also associated).

GROSS NATIONAL HAPPINESS (GNH) - The term was coined by Bhutan’s king Jigme singye Wangchuck in 1972

Black Revolution petroleum

Blue Revolution fish
Brown Revolution leather
Golden Revolution horticulture, honey and fruits
Green Revolution agriculture
Grey Revolution fertilizers
Pink Revolution Meat and poultry
Silver Revolution egg
White Revolution dairy and milk
Yellow Revolution oil seed
Committees constituted for measurement of Poverty
Dr. Y.K. Alagh (1977) constructed a poverty line for rural and urban areas on the basis of nutritional requirements and related consumption expenditure.
people consuming less than 2100 calories in the urban areas or less than 2400 calories in the rural areas are poor.
D.T. Lakdawala (1989)
Suresh [Link] (2005) Committee moved away from just calorie criteria to a broader definition of poverty that also includes expenditure on Health, Education, Clothing, Food.
Committee has used the ‘Uniform Recall Period’ method to below poverty line data.

N.C. Saxena (2008)

S.R. Hashim (2010)
Dr. C. Rangarajan (2012) based on an independent large survey of households by Center for Monitoring Indian Economy (CMIE)
Persons spending below ₹47 a day in cities and ₹32 in villages be considered poor.

Different types of Unemployment in India

 Structural - arising from the mismatch between the jobs available in the market and the skills of the available workers in the market.
 Disguised - people are engaged in work than are really needed.
 Seasonal - It refers to an unemployment that occurs at certain seasons of the year.
 Open - It refers to that economic phenomenon in which persons are able and willing to work at the prevailing wage rate, but fail to get work.
 Industrial - It refers to the unemployment among the illiterates, who wish to work in industrial establishments.
 Frictional -It refers to temporary unemployment which exists during the period, wherein workers leave one job and join some other.
 Cyclical - unemployment rises during recessions and declines with economic growth.
 Technological - It is a loss of jobs due to changes in technology.
Full employment is when all available labor resources are being used in the most efficient way possible.

Index of industrial production (IIP) is a composite indicator measuring changes in the volume of production of a basket of industrial products over a period, with respect to a chosen base
period.
 It is compiled and published monthly by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation
 Base Year for IIP is 2011-2012.
 It takes into account manufacturing, mining, and electricity
 only measure of the physical volume of production.
 The eight core sector comprise 40.30% of the weight of items included in the IIP.
 The eight core sector industries in decreasing order of their weightage:

Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.

Basic features of Imperative Planning

 the planning authority decides about every aspect of the economy
 The planning process followed by the state economies is known as imperative planning. Such planning is also called directive or target planning.
 Numerical (i.e. quantitative) targets of growth and development are set by the plan. For example, five lakh tonnes of steel,
 state controls the ownership rights over the resources,
 Almost no role for the market, no price mechanism with all economic decisions to be taken in the centralised way by the state/government.
 No private participation in the economy, only the state plays the economic role.

Indicative planning is based on the principle of decentralization for the operation & execution of plans.
In this type of planning, the private sector is neither completely controlled nor directed to meet the targets of the plan. But it is expected to fulfil those targets. Towards that end, the
government facilitates the private sector but does not direct them in any way.

Economic planning is classified into more types—sectoral and spatial.

sectoral planning, the planners emphasizes the specific sector of the economy, i.e., agriculture, industry or the services.
Spatial planning systems refer to the methods and approaches used by the public and private sector to influence the distribution of people and activities in spaces of various scales.

Inflation in India

[Link]

 Increasing Inflation in the Economy benefits the debtors/borrowers in the economy.

 The real estate investments fare better than others in a highly inflationary economy. The real estate rents and values tend to increase during inflation
 Very low inflation usually signals demand for goods and services is lower than it should be, and this tends to slow economic growth and depress wages
 The Inflation rate of India has been fluctuating in the past five years
 Deficit Financing is inherently inflationary in nature.
 Base Effect Refers to the impact of an increase in the price level (i.e. previous year's inflation) over the corresponding rise in price levels in the current year (i.e., current
inflation).
 inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every five years.

GDP deflator/ implicit price deflator

  The deflator covers the entire range of goods and services produced in the economy GDP
 deflator measures produced goods, (including those for exports) in the country and hence, imports are excluded from it.

Laspeyres Price Index is a consumer price index used to measure the change in the prices of a basket of goods and services relative to a specified base period weighting. The Index is
used for calculation of WPI, CPI, IIP.

Laffer curve -The curve shows how tax revenues change when the tax rate is either increased or decreased. Typically, it has an inverted-U [Link] Laffer Curve states that if tax rates
are increased above a certain level, then tax revenues can actually fall because higher tax rates discourage people from [Link] depicts that lower tax rates boost economic growth.

Phillips curve is an economic concept developed by A. W. Phillips states that inflation and unemployment have a stable and inverse relationship. The theory claims that with economic
growth comes inflation, which in turn should lead to more jobs and less unemployment.
Lorenz curve is a way of showing the distribution of income (or wealth) within an economy.
Kuznets Curve is used to demonstrate the hypothesis that economic growth initially leads to greater inequality, followed later by the reduction of inequality.

WPI - WPI excludes the impact of indirect taxes. WPI includes three components viz,
o Manufactured products - 64.2%
o Primary articles - 22.6%
o Fuel and power - 13.1%
 Four types of CPI are as follows:

 CPI for Industrial Workers (IW).

 CPI for Agricultural Labourer (AL).
 CPI for Rural Labourer (RL).
 CPI (Rural/Urban/Combined).
Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour
and Employment. Fourth is compiled by the National Statistical Office (NSO) in the
Ministry of Statistics and Programme Implementation.

The Monetary Policy Committee (MPC) uses CPI data to control inflation. Thus, it is also
called headline inflation

The index basket of the WPI covers commodities falling under the three major groups
namely Primary Articles, Fuel and Power and Manufactured products.

The CPI (All India) provides maximum weightage to food and beverages followed by
services. The least weightage is assigned to the tobacco and intoxicants

Producer Price Index measures the changes in the prices from the perspective of the  depression may be defined as an extreme recession that lasts three or more
seller. It is generally adopted by OECD countries to measure inflation. It is inclusive of years or which leads to a decline in real gross domestic product (GDP) of at least
both the goods and services 10% in a given year.

Central Statistics Office (CSO), in January 2015, brought new and revised guidelines for The crowding out effect is an economic theory that argues that rising public sector
National Accounts: spending drives down or even eliminates private sector spending.

 The most popular, or most recommended, policy for any country to dig itself out
of recession is expansionary fiscal and monetary policy. Thus, during recessions,
the central bank typically slashes interest rates in an effort to stimulate the
economy.
 Headline growth rate will now be measured by GDP at constant market prices
 Sector-wise estimates of Gross Value Added (GVA) at basic prices
Recession

Economic recession is the phase when the overall output of goods and services, which is
typically measured by the Gross Domestic Product (GDP), decreases. If there is a back-to-
back decline in the GDP for two quarters, the economy is said to be in a state of a
technical recession. If the recessionary phase lasts for a longer period of time, then the
economy is said to be in a state of recession.
 The procurement of commodities at MSP is done up to a certain limit based on the
production in that particular year. This limit is set by the government and varies from year
to year. Moreover, the procurement is done only for the crops that are covered under the
MSP regime.
In the case of cereals and pulses, the MSP is fixed in any State/UT at a level to which the
market price will never rise.
The MSP is not fixed at a level to which the market price will never rise. The MSP is fixed
based on the cost of production, demand and supply, and other factors. The MSP is not a
fixed price, and it is revised every year based on the prevailing market conditions. The
market price of the crops can go higher than the MSP if the demand is high, and the
supply is low.
Union Finance Minister has announced in the Budget 2022-23 that the Centre will
promote 'Kisan Drones' to help farmers assess crops, digitize land records, spray
insecticides and nutrients.

During a recession, tax revenues will be low due to low income in the economy.
Government spending will be high to correct the situation, thus resulting in a budget
deficit.
The following are the relations between the demand and price of the products, with
changing economic conditions:
The demand for a good increase, if the price of one of its substitutes rises. The demand
for a good decrease, if the price of one of its substitutes falls.
The demand for a good increase, if the price of one of its complement’s falls.
The demand for an inferior good decrease if income increases. The demand for a normal
good increase if income increases.

If the Price of the good falls, then its demand increases.

FC - vertical devolution at 41%

All those receipts of the government which create liability or reduce financial assets are
termed as capital receipts
 Demand Pull Inflation Cost Push Inflation

Inflation that occurs due to increase in Inflation that results from decline in
aggregate demand is referred to as aggregate supply due to external factors
demand pull inflation is referred to as cost push inflation.
Fiscal Stimulus: It also increases the money in the market leads to increase demand for
the goods and fuels demand-pull inflation Increased aggregate demand results in In cost push inflation the aggregate
demand pull inflation demand remains the same.
Inflation-indexing wages and rising interest rates do not increase or cause demand-pull
inflation Due to - Rise in aggregate demand Due to - Rise in price of inputs like raw
materials, labour, etc

What it represents

The beginning of price inflation The idea that inflation is difficult to stop,
once it has started

Demand pull inflation occurs in most Cost push inflation is not that relevant in
economies of the world current times
 Rupees Goes To (Revenue Expenditure)

Predatory pricing occurs when a company intentionally sets its prices below cost
or at an unsustainable level in order to undercut competitors and drive them out of
the market
A windfall tax is a higher tax rate on sudden big profits levied on a particular
company or industry

Utkarsh 2022 is a medium-term strategy in line with the global central banks’ plan
to strengthen the regulatory and supervisory mechanism - RBI

Categorising Poverty: people who are always poor and those who are usually poor but
who may sometimes have a little more money (example: casual workers) are grouped
together as the chronic poor.
churning poor who regularly move in and out of poverty (example: small farmers and
seasonal workers) and the occasionally poor who are rich most of the time but may
sometimes have a patch of bad luck. They are called the transient poor. And then there
are those who are never poor and they are the non-poor.

Rupee Come From (Revenue Receipt)