TISS GUIDE

presents

Economics

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Important concepts and glossary:

Absolute advantage: A country has an absolute advantage if its output per unit of input of all
goods and services produced is higher than that of another country.

Ad valorem tax (in Latin: to the value added) - a tax based on the value (or assessed value)
of property.

Aggregate demand is the sum of all demand in an economy. This can be computed by
adding the expenditure on consumer goods and services, investment, and not exports (total
exports minus total imports).

Aggregate supply is the total value of the goods and services produced in a country, plus the
value of imported goods less the value of exports.

Alternative minimum tax: An IRS mechanism created to ensure that high-income

individuals, corporations, trusts, and estates pay at least some minimum amount of tax,
regardless of deductions, credits or exemptions. It operates by adding certain tax-preference
items back into adjusted gross income. While it was once only important for a small number
of high-income individuals who made extensive use of tax shelters and deductions, more and
more people are being affected by it. The AMT is triggered when there are large numbers of
personal exemptions on state and local taxes paid, large numbers of miscellaneous itemized
deductions or medical expenses, or by Incentive Stock Option (ISO) plans.

Asset: Anything of monetary value that is owned by a person. Assets include real property,
personal property, and enforceable claims against others (including bank accounts, stocks,
mutual funds, and so on).

Average propensity to consume is the proportion of income the average family spends on
goods and services.

Average propensity to save is the proportion of income the average family saves (does not
spend on consumption).

Average total cost is the sum of all the production costs divided by the number of units
produced.

Balance of trade: The difference in value over a period of time between a country's imports
and exports.

Barter system: System where there is an exchange goods without involving money.

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 Base year: In the construction of an index, the year from which the weights assigned to the
different components of the index is drawn. It is conventional to set the value of an index in
its base year equal to 100.

Bear: An investor with a pessimistic market outlook; an investor who expects prices to fall
and so sells now in order to buy later at a lower price

Bid price: The highest price an investor is willing to pay for a stock.

Bill of exchange: A written, dated, and signed three-party instrument containing an

unconditional order by a drawer that directs a drawee to pay a definite sum of money to a
payee on demand or at a specified future date. Also known as a draft. It is the most commonly
used financial instrument in international trade.

Birth rate: The number of births in a year per 1,000 population.

Bond: A certificate of debt (usually interest-bearing or discounted) that is issued by a

government or corporation in order to raise money; the issuer is required to pay a fixed sum
annually until maturity and then a fixed sum to repay the principal.

Boom: A state of economic prosperity

Break-even: This is a term used to describe a point at which revenues equal costs (fixed and
variable).

Bretton Woods: An international monetary system operating from 1946-1973. The value of
the dollar was fixed in terms of gold, and every other country held its currency at a fixed
exchange rate against the dollar; when trade deficits occurred, the central bank of the deficit
country financed the deficit with its reserves of international currencies. The Bretton Woods
system collapsed in 1971 when the US abandoned the gold standard.

Budget: A summary of intended expenditures along with proposals for how to meet them. A
budget can provide guidelines for managing future investments and expenses.

Budget deficit is the amount by which government spending exceeds government revenues
during a specified period of time usually a year.

Bull: An investor with an optimistic market outlook; an investor who expects prices to rise
and so buys now for resale later

c.i.f., abbrev: Cost, Insurance and Freight: Export term in which the price quoted by the
exporter includes the costs of ocean transportation to the port of destination and insurance
coverage.

Call money: Price paid by an investor for a call option. There is no fixed rate for call money.
It depends on the type of stock, its performance prior to the purchase of the call option, and

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the period of the contract. It is an interest bearing band deposits that can be withdrawn on 24
hours notice.

Capital: Wealth in the form of money or property owned by a person or business and human
resources of economic value. Capital is the contribution to productive activity made by
investment is physical capital (machinery, factories, tools and equipments) and human capital
(eg general education, health). Capital is one of the three main factors of production other two
are labour and natural resources.

Capital account: Part of a nation's balance of payments that includes purchases and sales of
assets, such as stocks, bonds, and land. A nation has a capital account surplus when receipts
from asset sales exceed payments for the country's purchases of foreign assets. The sum of the
capital and current accounts is the overall balance of payments.

Capital budget: A plan of proposed capital outlays and the means of financing them for the
current fiscal period. It is usually a part of the current budget. If a Capital Program is in
operation, it will be the first year thereof. A Capital Program is sometimes referred to as a
Capital Budget.

Capital gain tax: Tax paid on the gain realized upon the sale of an asset. It is a tax on profits
from the sale of capital assets, such as shares. A capital loss can be used to offset a capital
gain, reducing any tax you would otherwise have to pay.

Cartel: An organization of producers seeking to limit or eliminate competition among its

members, most often by agreeing to restrict output to keep prices higher than would occur
under competitive conditions. Cartels are inherently unstable because of the potential for
producers to defect from the agreement and capture larger markets by selling at lower prices.

Census: Official gathering of information about the population in a particular area.

Government departments use the data collected in planning for the future in such areas as
health, education, transport, and housing..

Central bank: Major financial institution responsible for issuing currency, managing foreign
reserves, implementing monetary policy, and providing banking services to the government
and commercial banks.

Centrally planned economy: An economic system in which the production, pricing, and
distribution of goods and services are determined by the government rather than market
forces. Also referred to as a "non market economy." Former Soviet Union, China, and most
other communist nations are examples of centrally planed economy

Classical economics: The economics of Adam Smith, David Ricardo, Thomas Malthus, and
later followers such as John Stuart Mill. The theory concentrated on the functioning of a
market economy, spelling out a rudimentary explanation of consumer and producer behaviour
in particular markets and postulating that in the long term the economy would tend to operate
at full employment because increases in supply would create corresponding increases in
demand.

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 Closed economy: An economy in which there are no foreign trade transactions or any other
form of economic contacts with the rest of the world.

Collateral security: Additional security a borrower supplies to obtain a loan.

Commercial Policy: encompassing instruments of trade protection employed by countries to

foster industrial promotion, export diversification, employment creation, and other desired
development-oriented strategies. They include tariffs, quotas, and subsidies.

Comparative advantage: The ability to produce a good at a lower cost, relative to other
goods, compared to another country. With perfect competition and undistorted markets,
countries tend to export goods in which they have a Comparative Advantage and hence make
gains from trading

Compound interest: Interest paid on the original principal and on interest accrued from time
it became due.

Conditionality: The requirement imposed by the International Monetary Fund that a

borrowing country undertake fiscal, monetary, and international commercial reforms as a
condition to receiving a loan for balance of payments difficulties.

Copyright: A legal right (usually of the author or composer or publisher of a work) to

exclusive publication production, sale, distribution of some work. What is protected by the
copyright is the "expression," not the idea. Notice that taking another's idea is plagiarism, so
copyrights are not the equivalent of legal prohibition of plagiarism.

Correlation coefficient: Denoted as "r", a measure of the linear relationship between two
variables. The absolute value of "r" provides an indication of the strength of the relationship.
The value of "r" varies between positive 1 and negative 1, with -1 or 1 indicating a perfect
linear relationship, and r = 0 indicating no relationship. The sign of the correlation coefficient
indicates whether the slope of the line is positive or negative when the two variables are
plotted in a scatter plot.

Cost benefit analysis: A technique that assesses projects through a comparison between their
costs and benefits, including social costs and benefits for an entire region or country.
Depending on the project objectives and its the expected outputs, three types of CBA are
generally recognised: financial; economic; and social. Generally cost-benefit analyses are
comparative, i.e. they are used to compare alternative proposals. Cost-benefit analysis
compares the costs and benefits of the situation with and without the project; the costs and
benefits are considered over the life of the project.

Countervailing duties: duties (tariffs) that are imposed by a country to counteract subsidies
provided to a foreign producer Current account: Part of a nation's balance of payments which
includes the value of all goods and services imported and exported, as well as the payment
and receipt of dividends and interest. A nation has a current account surplus if exports exceed
imports plus net transfers to foreigners. The sum of the current and capital accounts is the
overall balance of payments.

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 Cross elasticity of demand: The change in the quantity demanded of one product or service
impacting the change in demand for another product or service. E.g. percentage change in the
quantity demanded of a good divided by the percentage change in the price of another good (a
substitute or complement)

Cross elasticity of demand: The change in the quantity demanded of one product or service
impacting the change in demand for another product or service. E.g. percentage change in the
quantity demanded of a good divided by the percentage change in the price of another good (a
substitute or complement)

Crowding out: The possible tendency for government spending on goods and services to put
upward pressure on interest rates, thereby discouraging private investment spending.

Currency appreciation: An increase in the value of one currency relative to another

currency. Appreciation occurs when, because of a change in exchange rates; a unit of one
currency buys more units of another currency. Opposite is the case with currency
depreciation.

Currency board: Form of central bank that issues domestic currency for foreign exchange at
fixed rates.

Currency substitution: The use of foreign currency (e.g., U.S. dollars) as a medium of
exchange in place of or along with the local currency (e.g., Rupees).

Customs duty: Duty levied on the imports of certain goods. Includes excise equivalents
Unlike tariffs customs duties are used mainly as a means to raise revenue for the government
rather than protecting domestic producers from foreign competition.

Death rate: numbers of people dying per thousand population.

Deflation: a reduction in the level of national income and output, usually accompanied by a
fall in the general price level.

Developed country is an economically advanced country whose economy is characterized

by a large industrial and service sector and high levels of income per head.

Developing country, less developed country, underdeveloped country or third world

country: a country characterized by low levels of GDP and per capita income; typically
dominated by agriculture and mineral products and majority of the population lives near
subsistence levels.

Dumping occurs when goods are exported at a price less than their normal value, generally
meaning they are exported for less than they are sold in the domestic market or third country
markets, or at less than production cost.

Direct investment: Foreign capital inflow in the form of investment by foreign-based

companies into domestic based companies. Portfolio investment is foreign capital inflow by
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foreign investors into shares and financial securities. It is the ownership and management of
production and/or marketing facilities in a foreign country.

Direct tax: A tax that you pay directly, as opposed to indirect taxes, such as tariffs and
business taxes. The income tax is a direct tax, as are property taxes. See also Indirect Tax.

Double taxation: Corporate earnings taxed at both the corporate level and again as a
stockholder dividend Economic growth: Quantitative measure of the change in size/volume of
economic activity, usually calculated in terms of gross national product (GNP) or gross
domestic product(GDP).

Duopoly: A market structure in which two producers of a commodity compete with each
other.

Econometrics: The application of statistical and mathematical methods in the field of

economics to test and quantify economic theories and the solutions to economic problems.

Economic development: The process of improving the quality of human life through
increasing per capita income, reducing poverty, and enhancing individual economic
opportunities. It is also sometimes defined to include better education, improved health and
nutrition, conservation of natural resources, a cleaner environment, and a richer cultural life.

Economic growth: An increase in the nation's capacity to produce goods and services.

Economic infrastructure: The underlying amount of physical and financial capital

embodied in roads, railways, waterways, airways, and other forms of transportation and
communication plus water supplies, financial institutions, electricity, and public services such
as health and education. The level of infrastructural development in a country is a crucial
factor determining the pace and diversity of economic development.

Economic integration: The merging to various degrees of the economies and economic
policies of two or more countries in a given region. See also common market, customs union,
free-trade area, trade creation, and trade diversion.

Economic policy: A statement of objectives and the methods of achieving these objectives
(policy instruments) by government, political party, business concern, etc. Some examples of
government economic objectives are maintaining full employment, achieving a high rate of
economic growth, reducing income inequalities and regional development inequalities, and
maintaining price stability. Policy instruments include fiscal policy, monetary and financial
policy, and legislative controls (e.g., price and wage control, rent control).

Elasticity of demand: The degree to which consumer demand for a product or service
responds to a change in price, wage or other independent variable. When there is no
perceptible response, demand is said to be inelastic.

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 Excess capacity: Volume or capacity over and above that which is needed to meet peak
planned or expected demand.

Excess demand: the situation in which the quantity demanded at a given price exceeds the
quantity supplied. Opposite: excess supply

Exchange control: A governmental policy designed to restrict the outflow of domestic

currency and prevent a worsened balance of payments position by controlling the amount of
foreign exchange that can be obtained or held by domestic citizens. Often results from
overvalued exchange rates

Exchange rate: The price of one currency stated in terms of another currency.

Export incentives: Public subsidies, tax rebates, and other kinds of financial and
nonfinancial measures designed to promote a greater level of economic activity in export
industries.

Exports: The value of all goods and nonfactor services sold to the rest of the world; they
include merchandise, freight, insurance, travel, and other nonfactor services. The value of
factor services (such as investment receipts and workers' remittances from abroad) is excluded
from this measure. See also merchandise exports and imports.

Exchange control: A governmental policy designed to restrict the outflow of domestic

currency and prevent a worsened balance of payments position by controlling the amount of
foreign exchange that can be obtained or held by domestic citizens. Often results from
overvalued exchange rates.

Externalities: A cost or benefit not accounted for in the price of goods or services. Often
"externality" refers to the cost of pollution and other environmental impacts.

Fiscal deficit is the gap between the government's total spending and the sum of its revenue
receipts and non-debt capital receipts. It represents the total amount of borrowed funds
required by the government to completely meet its expenditure

Fiscal policy is the use of government expenditure and taxation to try to influence the level
of economic activity. An expansionary (or reflationary) fiscal policy could mean: cutting
levels of direct or indirect tax increasing government expenditure The effect of these policies
would be to encourage more spending and boost the economy. A contractionary (or
deflationary) fiscal policy could be: increasing taxation - either direct or indirect cutting
government expenditure These policies would reduce the level of demand in the economy and
help to reduce inflation

Fixed costs: A cost incurred in the general operations of the business that is not directly
attributable to the costs of producing goods and services. These "Fixed" or "Indirect" costs of
doing business will be incurred whether or not any sales are made during the period, thus the
designation "Fixed", as opposed to "Variable".

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 Fixed exchange rate: The exchange value of a national currency fixed in relation to another
(usually the U.S. dollar), not free to fluctuate on the international money market.

Foreign aid: The international transfer of public funds in the form of loans or grants either
directly from one government to another (bilateral assistance) or indirectly through the
vehicle of a multilateral assistance agency like the World Bank. See also tied aid, private
foreign investment, and nongovernmental organizations.

Foreign direct investment (FDI): Overseas investments by private multinational

corporations.

Foreign exchange reserves: The stock of liquid assets denominated in foreign currencies
held by a government's monetary authorities (typically, the finance ministry or central bank).
Reserves enable the monetary authorities to intervene in foreign exchange markets to affect
the exchange value of their domestic currency in the market. Reserves are invested in low-risk
and liquid assets, often in foreign government securities.

Free trade: Trade in which goods can be imported and exported without any barriers in the
forms of tariffs, quotas, or other restrictions. Free trade has often been described as an engine
of growth because it encourages countries to specialize in activities in which they have
comparative advantages, thereby increasing their respective production efficiencies and hence
their total output of goods and services.

Free-trade area : A form of economic integration in which there exists free internal trade
among member countries but each member is free to levy different external tariffs against
non-member nations.

Free-market exchange rate : Rate determined solely by international supply and demand for
domestic currency expressed in terms of, say, U.S. dollars.

Fringe benefit: A benefit in addition to salary offered to employees such as use of company's
car, house, lunch coupons, health care subscriptions etc.

Gains from trade: The addition to output and consumption resulting from specialization in
production and free trade with other economic units including persons, regions, or countries.

General Agreement on Tariffs and Trade (GATT): An international body set up in 1947
to probe into the ways and means of reducing tariffs on internationally traded goods and
services. Between 1947 and 1962, GATT held seven conferences but met with only moderate
success. Its major success was achieved in 1967 during the so-called Kennedy Round of talks
when tariffs on primary commodities were drastically slashed and then in 1994 with the
signing of the Uruguay Round agreement. Replaced in 1995 by World Trade Organization
(WTO).

Gross domestic product: (GDP) Gross Domestic Product: The total of goods and services
produced by a nation over a given period, usually 1 year. Gross Domestic Product measures

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the total output from all the resources located in a country, wherever the owners of the
resources live.

Gross national product (GNP) is the value of all final goods and services produced within a
nation in a given year, plus income earned by its citizens abroad, minus income earned by
foreigners from domestic production. The Fact book, following current practice, uses GDP
rather than GNP to measure national production. However, the user must realize that in
certain countries net remittances from citizens working abroad may be important to national
well being. GNP equals GDP plus net property income from abroad. Globalisation: The
process whereby trade is now being conducted on ever widening geographical boundaries.
Countries now trade across continents and companies also trade all over the world.

Human capital : Productive investments embodied in human persons. These include skills,
abilities, ideals, and health resulting from expenditures on education, on-the-job training
programs, and medical care.

Imperfect competition: A market situation or structure in which producers have some

degree of control over the price of their product. Examples include monopoly and oligopoly.
See also perfect competition.

Imperfect market: A market where the theoretical assumptions of perfect competition are
violated by the existence of, for example, a small number of buyers and sellers, barriers to
entry, nonhomogeneity of products, and incomplete information. The three imperfect markets
commonly analyzed in economic theory are monopoly, oligopoly, and monopolistic
competition.

Import substitution : A deliberate effort to replace major consumer imports by promoting

the emergence and expansion of domestic industries such as textiles, shoes, and household
appliances. Import substitution requires the imposition of protective tariffs and quotas to get
the new industry started.

Income inequality: The existence of disproportionate distribution of total national income

among households whereby the share going to rich persons in a country is far greater than that
going to poorer persons (a situation common to most LDCs). This is largely due to differences
in the amount of income derived from ownership of property and to a lesser extent the result
of differences in earned income. Inequality of personal incomes can be reduced by
progressive income taxes and wealth taxes.

Index of industrial production: A quantity index that is designed to measure changes in the
physical volume or production levels of industrial goods over time.

Inflation is the percentage increase in the prices of goods and services.

Indirect tax: A tax you do not pay directly, but which is passed on to you by an increase in
your expenses. For instance, a company might have to pay a fuel tax. The company pays the

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tax but can increase the cost of its products so consumers are actually paying the tax indirectly
by paying more for the merchandise.

Interdependence: Interrelationship between economic and noneconomic variables. Also, in

international affairs, the situation in which one nation's welfare depends to varying degrees on
the decisions and policies of another nation, and vice versa. See also dependence.

International commodity agreement: Formal agreement by sellers of a common

internationally traded commodity (coffee, sugar) to coordinate supply to maintain price
stability.

International Labor Organization (ILO): One of the functional organizations of the United
Nations, based in Geneva, Switzerland, whose central task is to look into problems of world
labor supply, its training, utilization, domestic and international distribution, etc. Its aim in
this endeavor is to increase world output through maximum utilization of available human
resources and thus improve levels of living.

International Monetary Fund (IMF): An autonomous international financial institution that

originated in the Bretton Woods Conference of 1944. Its main purpose is to regulate the
international monetary exchange system, which also stems from that conference but has since
been modified. In particular, one of the central tasks of the IMF is to control fluctuations in
exchange rates of world currencies in a bid to alleviate severe balance of payments problems.

International poverty line: An arbitrary international real income measure, usually

expressed in constant dollars (e.g., $270), used as a basis for estimating the proportion of the
world's population that exists at bare levels of subsistence.

Land reform: A deliberate attempt to reorganize and transform existing agrarian systems
with the intention of improving the distribution of agricultural incomes and thus fostering
rural development. Among its many forms, land reform may entail provision of secured
tenure rights to the individual farmer, transfer of land ownership away from small classes of
powerful landowners to tenants who actually till the land, appropriation of land estates for
establishing small new settlement farms, or instituting land improvements and irrigation
schemes.

Macroeconomic stabilization: Policies designed to eliminate macroeconomic instability.

Macroeconomics: The branch of economics that considers the relationships among broad
economic aggregates such as national income, total volumes of saving, investment,
consumption expenditure, employment, and money supply. It is also concerned with
determinants of the magnitudes of these aggregates and their rates of change over time.

Market economy: A free private-enterprise economy governed by consumer sovereignty, a

price system, and the forces of supply and demand.

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 Market failure: A phenomenon that results from the existence of market imperfections (e.g.,
monopoly power, lack of factor mobility, significant externalities, lack of knowledge) that
weaken the functioning of a free-market economy--it fails to realize its theoretical beneficial
results. Market failure often provides the justification for government interference with the
working of the free market.

Market-friendly approach: World Bank notion that successful development policy requires
governments to create an environment in which markets can operate efficiently and to
intervene selectively in the economy in areas where the market is inefficient (e.g., social and
economic infrastructure, investment coordination, economic "safety net").

Market mechanism: The system whereby prices of commodities or services freely rise or
fall when the buyer's demand for them rises or falls or the seller's supply of them decreases or
increases.

Market prices: Prices established by demand and supply in a free-market economy.

Merchandise exports and imports: All international changes in ownership of merchandise

passing across the customs borders of the trading countries. Exports are valued f.o.b. (free on
board). Imports are valued c.i.f. (cost, insurance, and freight).

Merchandise trade balance: Balance on commodity exports and imports.

Microeconomics: The branch of economics concerned with individual decision units--firms

and households--and the way in which their decisions interact to determine relative prices of
goods and factors of production and how much of these will be bought and sold. The market
is the central concept in microeconomics.

Middle-income countries (MICs): LDCs with per capita income above $785 and below
$9,655 in 1997 according to World Bank measures.

Mixed economic systems: Economic systems that are a mixture of both capitalist and
socialist economies. Most developing countries have mixed systems. Their essential feature is
the coexistence of substantial private and public activity within a single economy.

Monetary policy: The regulation of the money supply and interest rates by a central bank in
order to control inflation and stabilize currency. If the economy is heating up, the central bank
(such as RBI in India) can withdraw money from the banking system, raise the reserve
requirement or raise the discount rate to make it cool down. If growth is slowing, it can
reverse the process - increase the money supply, lower the reserve requirement and decrease
the discount rate. The monetary policy influences interest rates and money supply.

Money supply: the total stock of money in the economy; currency held by the public plus
money in accounts in banks. It consists primarily currency in circulation and deposits in
savings and checking accounts. Too much money in relation to the output of goods tends to
push interest rates down and push inflation up; too little money tends to push rates up and
prices down, causing unemployment and idle plant capacity. The central bank manages the

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money supply by raising and lowering the reserves banks are required to hold and the
discount rate at which they can borrow money from the central bank. The central bank also
trades government securities (called repurchase agreements) to take money out of the system
or put it in. There are various measures of money supply, including M1, M2, M3 and L; these
are referred to as monetary aggregates.

Monopoly: A market situation in which a product that does not have close substitutes is
being produced and sold by a single seller.

Multi-Fiber Arrangement (MFA): A set of nontariff bilateral quotas established by

developed countries on imports of cotton, wool, and synthetic textiles and clothing from
individual LDCs

Multinational corporation (MNC): An international or transnational corporation with

headquarters in one country but branch offices in a wide range of both developed and
developing countries. Examples include General Motors, Coca-Cola, Firestone, Philips,
Volkswagen, British Petroleum, Exxon, and ITT. Firms become multinational corporations
when they perceive advantages to establishing production and other activities in foreign
locations. Firms globalize their activities both to supply their home-country market more
cheaply and to serve foreign markets more directly. Keeping foreign activities within the
corporate structure lets firms avoid the costs inherent in arm's-length dealings with separate
entities while utilizing their own firm-specific knowledge such as advanced production
techniques.

National debt: Treasury bills, notes, bonds, and other debt obligations that constitute the
debt owed by the federal government. It represents the accumulation of each year's budget
deficit Public debt: Borrowing by the Government of India internally as well as externally.
The total of the nation's debts: debts of local and state and national governments is an
indicator of how much public spending is financed by borrowing instead of taxation

Newly industrializing countries (NICs): A small group of countries at a relatively advanced

level of economic development with a substantial and dynamic industrial sector and with
close links to the international trade, finance, and investment system (Argentina, Brazil,
Greece, Mexico, Portugal, Singapore, South Korea, Spain, and Taiwan).

Non-governmental organizations (NGOs): Privately owned and operated organizations

involved in providing financial and technical assistance to LDCs. See foreign aid.

Non-tariff trade barrier: A barrier to free trade that takes a form other than a tariff, such as
quotas or sanitary requirements for imported meats and dairy products.

Official development assistance (ODA): Net disbursements of loans or grants made on

concessional terms by official agencies of member countries of the Organization for
Economic Cooperation and Development (OECD).

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 Official exchange rate: Rate at which the central bank will buy and sell the domestic
currency in terms of a foreign currency such as the U.S. dollar.

Open economy: An economy that encourages foreign trade and has extensive financial and
nonfinancial contacts with the rest of the world in areas such as education, culture, and
technology. See also closed economy.

Organization for Economic Cooperation and Development (OECD): An organization of

20 countries from the Western world including all of those in Europe and North America. Its
major objective is to assist the economic growth of its member nations by promoting
cooperation and technical analysis of national and international economic trends.

Overvalued exchange rate: An official exchange rate set at a level higher than its real or
shadow value--for example, 7 Kenyan shillings per dollar instead of, say, 10 shillings per
dollar. Overvalued rates cheapen the real cost of imports while raising the real cost of exports.
They often lead to a need for exchange control.

Perfect competition: A market situation characterized by the existence of very many buyers
and sellers of homogeneous goods or services with perfect knowledge and free entry so that
no single buyer or seller can influence the price of the good or service.

Performance budget is a budget format that relates the input of resources and the output of
services for each organizational unit individually. Sometimes used synonymously with
program budget. It is a budget wherein expenditures are based primarily upon measurable
performance of activities.

Political economy: The attempt to merge economic analysis with practical politics--to view
economic activity in its political context. Much of classical economics was political economy,
and today political economy is increasingly being recognized as necessary for any realistic
examination of development problems.

Portfolio investment: Financial investments by private individuals, corporations, pension

funds, and mutual funds in stocks, bonds, certificates of deposit, and notes issued by private
companies and the public agencies of LDCs. See also private foreign investment.

Poverty gap: The sum of the difference between the poverty line and actual income levels of
all people living below that line.

Poverty line: A level of income below, which people are deemed poor. A global poverty line
of $1 per person per day was suggested in 1990 (World Bank 1990). This line facilitates
comparison of how many poor people there are in different countries. But, it is only a crude
estimate because the line does not recognize differences in the buying power of money in
different countries, and, more significantly, because it does not recognize other aspects of
poverty than the material, or income poverty.

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 Price: The monetary or real value of a resource, commodity, or service. The role of prices in
a market economy is to ration or allocate resources in accordance with supply and demand;
relative prices should reflect the relative scarcity of different resources, goods, or services.

Price elasticity of demand: The responsiveness of the quantity of a commodity demanded to

a change in its price, expressed as the percentage change in quantity demanded divided by the
percentage change in price.

Price elasticity of supply: The responsiveness of the quantity of a commodity supplied to a

change in its price, expressed as the percentage change in quantity supplied divided by the
percentage change in price.

Quota: A physical limitation on the quantity of any item that can be imported into a country,
such as so many automobiles per year. Also a method for allocating limited school places by
noncompetitive means--for example, by income or ethnicity.

Repo rate: This is one of the credit management tools used by the Reserve Bank to regulate
liquidity in South Africa (customer spending). The bank borrows money from the Reserve
Bank to cover its shortfall. The Reserve Bank only makes a certain amount of money
available and this determines the repo rate. If the bank requires more money than what is
available, this will increase the repo rate - and vice versa.

Revenue expenditure: This is expenditure on recurring items, including the running of

services and financing capital spending that is paid for by borrowing. This is meant for
normal running of governments' maintenance expenditures, interest payments, subsidies and
transfers etc. It is current expenditure which does not result in the creation of assets. Grants
given to State governments or other parties are also treated as revenue expenditure even if
some of the grants may be meant for creating assets.

Subsidy : Financial assistance (often from the government) to a specific group of producers
or consumers.

Revenue receipts: Additions to assets that do not incur an obligation that must be met at
some future date and do not represent exchanges of property for money. Assets must be
available for expenditures. These include proceeds of taxes and duties levied by the
government, interest and dividend on investments made by the government, fees and other
receipts for services rendered by the government.

Stabilization policies: A coordinated set of mostly restrictive fiscal and monetary policies
aimed at reducing inflation, cutting budget deficits, and improving the balance of payments.
See conditionality and International Monetary Fund (IMF).

Subsidy: A payment by the government to producers or distributors in an industry to prevent

the decline of that industry (e.g., as a result of continuous unprofitable operations) or an
increase in the prices of its products or simply to encourage it to hire more labor (as in the

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case of a wage subsidy). Examples are export subsidies to encourage the sale of exports;
subsidies on some foodstuffs to keep down the cost of living, especially in urban areas; and
farm subsidies to encourage expansion of farm production and achieve self-reliance in food
production.

Tax avoidance: A legal action designed to reduce or eliminate the taxes that one owes.

Tax base: the total property and resources subject to taxation.

Tax evasion: An illegal strategy to decrease tax burden by underreporting income,

overstating deductions, or using illegal tax shelters.

Terms of trade: The ratio of a country's average export price to its average import price;
also known as the commodity terms of trade. A country's terms of trade are said to improve
when this ratio increases and to worsen when it decreases, that is, when import prices rise at a
relatively faster rate than export prices (the experience of most LDCs in recent decades).

Treasury bill: A short-term debt issued by a national government with a maximum maturity
of one year. Treasury bills are sold at discount, such that the difference between purchase
price and the value at maturity is the amount of interest.

VAT: A form of indirect sales tax paid on products and services at each stage of production
or distribution, based on the value added at that stage and included in the cost to the ultimate
customer.

World Bank: An international financial institution owned by its 181 member countries and
based in Washington, D.C. Its main objective is to provide development funds to the Third
World nations in the form of interest-bearing loans and technical assistance. The World Bank
operates with borrowed funds.

WTO: The World Trade Organization is a global international organization dealing with the
rules of trade between nations. It was set up in 1995 at the conclusion of GATT negotiations
for administering multilateral trade negotiations.

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Inflation

What is Inflation?

Inflation is a rise in the general level of prices of goods and services in an economy over a
period of time.

When the general price level rises, each unit of currency buys fewer goods and services.
Therefore, inflation also reflects an erosion of purchasing power of money.

According to Crowther, “Inflation is State in which the Value of Money is Falling and the
Prices are rising.”

In Economics, the word „inflation‟ refers to General rise in Prices Measured against a
Standard Level of Purchasing Power.

Here are several variations on inflation used popularly to indicate specific meanings.

 Deflation is when the general level of prices is falling. It is the opposite of inflation.
Also referred to as Disinflation.The lack of inflation may be an indication that the
economy is weakening.

 Hyperinflation is unusually rapid inflation in very short span of time. In extreme

cases, this can lead to the breakdown of a nation‟s monetary system with complete
loss of confidence in the domestic currency. One of the earlier examples of
hyperinflation occurred in Germany in early 1920s after the First World War, when
prices rose 2,500% in one month.

 Stagflation is the combination of high

unemployment with high inflation. This
happened in industrialized countries
during the 1970s, when a bad economy
was combined with OPEC raising oil
prices led to low growth.

Inflation is all about prices going up, but for healthy economy wages should be rising as well.
The question shouldn‟t be whether inflation is rising, but whether it‟s rising at a quicker pace
than your wages, if the answer is a Yes only then inflation is problematic.

Finally, inflation is a sign that an economy is growing. The RBI considers the range of 4-5 %
as comfort zone of inflation in India.

Impact or Effect of Inflation :

 Inflation affects the pattern of production, a shift in production pattern takes place
from consumer goods to luxury goods.

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  On Investment: Inflation discourages entrepreneurs in investing as the risk involved in
the future production would be very high with less hope for returns.Uncertainty about
the future purchasing power of money discourages investment and savings.

 Inflation also results in black marketing. Sellers may stock up the goods to be sold in
the future, anticipating further price rise.

 The effect of inflation is felt on distribution of income and wealth and on production.

 People with fixed income group are the worst sufferers of inflation.Those living off a
fixed-income, such as retirees, see a decline in their purchasing power and,
consequently, their standard of living.

 The entire economy must absorb repricing costs (“menu costs”) as price lists, labels,
menus and more have to be updated.

 If the inflation rate is greater than that of other countries, domestic products become
less competitive.

 They add inefficiencies in the market, and make it difficult for companies to budget or
plan long-term.

 On Exchange rate and trade: There can also be negative impacts to trade from an
increased instability in currency exchange prices caused by unpredictable inflation.

 On Taxes: Higher income tax rates on taxpayers. Government incurrs high fiscal
deficit due to decreased value of tax collections.

 On Export and balance of trade: Inflation rate in the economy is higher than rates in
other countries; this will increase imports and reduce exports, leading to a deficit in
the balance of trade.

Causes of Inflation:

There is no one cause that‟s universally agreed upon, but at least two theories are generally
accepted while the debate still goes on:

1. Demand-Pull Inflation – This theory can be summarized as “too much money

chasing too few goods”. It is a mismatch between demand and supply , if demand is
growing faster than supply, prices will increase. This usually occurs in growing
economies as more people gain purchasing power while the supply is not able to catch
up to growing demand.When the government of a country print money in excess,
prices increase to keep up with the increase in currency, leading to inflation.

2. Cost-Push Inflation – When production costs go up, there is an increase in prices to

maintain profit margins. Increased costs can include things such as wages, taxes, or
increased costs of imports.

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 3. Demand pull vs Cost Push Inflation: If demand pull inflation is present in the
economy, the government must bear the cost of excessive spending and monetary
authorities are to be blamed for “cheap money policy”• On the contrary, if cost push is
the real cause for inflation then the trade union are to blamed for excessive wage
claim, industries for acceding them and business firms for marking- up profits
aggressively.

Measurement of Inflation

Inflation is measured by calculating the percentage rate of change of a price index, which is
called the inflation rate.

Inflation is often measured either in terms of Wholesale Price Index or in terms of Consumer
Price Index.

 Wholesale Price Index(WPI) : The Wholesale Price Index is an indicator designed to

measure the changes in the price levels of commodities that flow into the wholesale
trade intermediaries.The index is a vital guide in economic analysis and policy
formulation. It is a basis for price adjustments in business contracts and projects. It is
also intended to serve as an additional source of information for comparisons on the
international front.

 Consumer Price Index (CPI) : Consumer price index is specific to particular group
in the population. It shows the cost of living of the group. It is based on the changes in
the retail prices of goods or
services. Based on their incomes,
consumer spends money on these
particular set of goods and
services. There are different
consumer price indices. Each index
tracks the changes in the retail
prices for different set of
consumers.

Measures to control inflation:

Effective policies to control inflation need to focus on the underlying causes of inflation in the
economy. There are two broad ways in which governments try to control inflation. These are-

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National Income Concepts

National income estimates are the most reliable macroeconomic indicators of an economy.
Therefore, it is essential for students to be aware of National Income Concepts. Changes in
national income measure the rate of growth of the economy.

Similarly, changes in the structure of national income of an economy reflect the changing
significance of different sectors. In India, national income, as also per capita income, have
been continuously increasing. In more recent years, the rate of growth of national income has
accelerated. It indicates that the economy has been growing at a faster rate in recent years than
in the past. Along with this, the structure of national income has also undergone a change, the
tertiary sector has emerged as the dominant sector of the economy.

The task of preparing national income estimates has been assigned to the Central Statistical
Organisation (CSO). The CSO has been producing annual official estimates of national
income of India since 1955 and publishing the same in its annual report National Accounts
Statistics.

Concept of National Income

National income accounting comprises of four concepts of calculations- GDP, NDP, GNP,
NNP.

Here, we discuss them and other related terms in a very objective way.

1. Factor cost is the input cost that producer has to incur in the process of production. It
includes cost of capital – loan interest, prices of raw materials, labour, power, rent, etc. Can
be termed as Production cost.

2. Market cost is calculated after adding indirect taxes to the factor cost of the product. It is
basically the cost at which the goods reach the market. Also termed as EX-FACTORY
PRICE. In India we calculate income at factor cost because of non-uniform taxes.

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  National Income: The sum total of factor of incomes accruing to the residents of the
country, both from their activities within and outside the economic territory is the
national income of the country.

 National income is calculated for a particular period, normally a financial year (In
India, financial year means April 1 to March 31 of next year). Net factor income from
abroad is added to the domestic product to get the value of National Income.

 National Income = C + I + G + (X – M)
Where,C = Total consumption expenditure
I = Total investment expenditure
G = Total government expenditure ; X – M = Export – Import

The National Income concepts include the following important terms:

Gross Domestic Product (GDP)

Gross domestic product is the value of all final goods and services produced within the
boundary of a nation during one year. In India one year means from 1st April to 31st March of
the next year.
GDP calculation includes income of foreigners in a Country but excludes income of those
people who are living outside of that country.

Net Domestic Product (NDP)

NDP is calculated by deducting the depreciation of plant and Machinery from GDP.

NDP = Gross Domestic Product – Depreciation

Gross National Product (GNP)

GNP is the value of all final goods and services produced by the residents of a country in a
financial year (i.e., 1st April to 31st March of the next year in India).

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While Calculating GNP, income of foreigners in a country is excluded but income of people
who are living outside of that country is included. It is the GDP of a country added with its
income from abroad.

GNP = GDP + X – M
Where, X = income of the people of a country who are living outside of the Country

and M = income of the foreigners in a country

 India‟s GNP is always lower than its GDP.

 This is the national income according to which the IMF ranks nations.

 It allows for knowledge of factors in production behaviour and pattern of an

economy‟s dependence on outside world, nature of human resources internationally,
position in world economics.

 It indicates both qualitative as well as quantitative aspects of an economy in a more

exhaustive fashion than GDP.

Intermediate products = one production unit purchasing from other for resale

Final product = all goods and services purchased for consumption and investment , and not
for resale

Value added = Value of output – Intermediate cost

Gross value added = net value added + depreciation

Indirect tax = all taxes levied on production, finally paid by consumer of buyer Ex – sales tax,
excise, customs

Subsidies = Financial help given by the government to the production units for selling the
product at lower prices

Net National Product (NNP)

Net National Product (NNP) in an economy is the GNP after deducting the loss due to
depreciation.

NNP = GNP – Depreciation

 NNP at Factor Cost:It is the value of NNP when the value of goods and services is
taken at the production cost.

 NNP at Market Price:It is the value of NNP at consumer cost.

NNP at market cost = NNP at factor cost + Indirect taxes – Subsidies

Closed Economy: An economy that does not maintain any economic relations with the rest of
the world.

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Economic Goods: Those goods which are scarce in supply and, hence, command a price.

Economic Growth: A sustained increase in real national income of a country.

Nominal National Income: The money value of all the final goods and services produced in an
economy during a year, estimated at current prices.

Real National Income: The money value of all the final goods and services produced in an
economy during a year, estimated at some fixed prices.

Subsidy: It is the grant given on current account by the Government to the private industries
and public corporations for selling certain goods at a price fixed by the Government.

National Income Measurement:

 Primary sector: all production units engaged in exploitation of natural resources

like Agriculture, Fishing, Mining and Quarrying , Forestry and Logging

 Secondary sector: all production units engaged in transforming one good to another
like Registered manufacture, unregistered, Construction, Electricity Gas Water supply

 Tertiary sector: all units engaged in producing services like Banking&Insurance,

Trade, hotel, restaurant, transport, storage , Real estate dwelling, Public administration
& defence, other services.

Business Cucle

A common definition of a business cycle in economics has the following four stages:

 expansion

 peak

 contraction

 trough.

Let's look at each term in turn.

An expansion is a time when businesses are expanding, producing more

goods and hiring more workers. This is generally a happy time for people
because it usually means that more money is coming into the economy
and that people and businesses are able to afford more things than they
normally might be.

A peak is usually identified after it happens because this is the time when
a country's expansion is at its highest level. Economists don't really know when the expansion
is going to peak, so they wait until production and hiring start to fall, then identify the peak.

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A contraction is the reverse of an expansion. During a contraction, production goes down,
hiring goes down, and people are generally less happy than they are during an
expansion. A country's output commonly decreases during a contraction, as
does consumer confidence.

A particularly long contraction can be termed the dreaded recession. During a

recession, businesses are slumping, companies are laying off workers, and
consumers are generally grumbling.

If a recession lasts a particularly long time and gets progressively worse, economists might
call it a depression. Economically, things are really bad during a depression. A prime example
of this in American history was the Great Depression, which lasted more than a decade and
resulted in thousands of people losing their jobs and their life savings.

A trough is the opposite of a peak. A trough is the low point of an economy. As they do with
a peak, economists will identify a trough only after the fact, when productivity begins to head
upward again and the low point can be calculated.

The next phase of the business cycle after a trough is expansion. Thus, the cycle resets itself.

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INDIAN ECONOMY:

Introduction

India is a developing country and our economy is a mixed economy where the public sector
co-exists with the private sector. For an overview of Indian Economy, we should first go
through the strengths of Indian economy.

India is likely to be the third largest economy with a GDP size of $15 trillion by 2030.The
economy of India is currently the world‟s fourth largest in terms of real GDP (purchasing
power parity) after the USA, China and Japan and the second fastest growing major economy
in the world after China.

Dadabhai Naoroji is known as the Father of Indian Politics and Economics, also known as the
„Grand Old Man of India‟. Dadabhai Naoroji was the first to calculate the national income of
India. In his book “Poverty and Un-British Rule in India” he describes his theory, i.e. the
economic exploitation of India by the British. His theory is popularly called the Economic
Drain Theory.

Introduction to Indian Economy:-

 Low per capita income.

 Inequalities in income distribution.

 Predominance of agriculture. (More than 2/3rd of India‟s working population is

engaged in agriculture. But in USA only 2% of the working population is engaged in
agriculture.)

 Rapidly growing population with 1.2% annual change.

 Chronic unemployment (A person is considered employed if he / she works for 273

days of a year for eight hours every day.)Unemployment in India is mainly structural
in nature.

 Low rate of capital formation due to less saving rate.

 Dualistic Nature of Economy (features of a modern economy, as well as

traditional).Mixed Economy

 Follows Labour Intensive Techniques and activities.

Agriculture in Indian economy:-

While Indian economy introduction is started, the major focus is always on the agriculture
sector. This is because Indian economy is based on agriculture.52% of the total population of
India depends on agriculture.

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According to the 2011-2012 survey of Indian agriculture contributes 14.1% of the Gross
Domestic Product (GDP). It was 55.4% in 1950-1951.

India is the second largest sugar producer in the world (after Brazil).
In tea production, India ranks first. (27% of total production in the world).

Wheat production: Uttar Pradesh is the largest producer. Punjab and Haryana is then the
second and the third largest producer of wheat

Rice production:The principal food grain in India is rice. West Bengal is the largest producer.
Uttar Pradesh is the second largest producer of Punjab and is the third largest producer of rice.

CSO: Central Statistical Organization is under the Department of Statistics. Govt. of India is
responsible for estimating the national income.CSO was founded by Prof. Mahalanobis. CSO
is assisted by the National Sample Survey Organization (NSSO) in estimating National
Income.

Gross Domestic Product (GDP) is the money value of final goods and services produced
in the domestic territory of a country during the accounting year.
In India Gross Domestic Product (GDP) is larger than national income because net factor
income from abroad is negative, i.e. foreign payment is larger than the foreign receipt.

Net National Product (NNP) at market prices = Gross National Product at Market Prices –
Depreciation

Sectors of Indian Economy:-

1. Primary Sector: When the economic

activity depends mainly on exploitation
of natural resources then
that activity comes under the primary
sector. Agriculture and agriculture
related activities are the primary sectors
of economy.

2. Secondary Sector: When the main

activity involves manufacturing then it
is the secondary sector. All industrial
production where physical goods are
produced come under the
secondary sector.

3. Tertiary Sector: When the activity involves providing intangible goods like services
then this is part of
the tertiary sector. Financial services, management consultancy, telephony and IT are
examples of service sector.

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 Other Classifications of Economy:-

In Indian economy introduction, the sectors of economy based on other basis is also required
to get a clear picture of the strengths of Indian Economy.

1. Organized Sector: The sector which carries out all activity through a system and
follows the law of the
land is called organized sector. Moreover, labour rights are given due respect and
wages are as per the norms of the country and those of the industry. Labour working
organized sector get the
benefit of social security net as framed by the Government. Certain benefits like
provident fund, leave
entitlement, medical benefits and insurance are provided to workers in the organized
sector. These security
provisions are necessary to provide source of sustenance in case of disability or death
of the main
breadwinner of the family without which the dependents will face a bleak future.

2. Unorganized Sector: The sectors which evade most of the laws and don‟t follow the
system come under
unorganized sector. Small shopkeepers, some small scale manufacturing units keep
all their attention on profit making and ignore their workers basic rights. Workers
don‟t get adequate salary
and other benefits like leave, health benefits and insurance are beyond the imagination
of people working in
unorganized sectors.

3. Public Sector: Companies which are run and financed by the Government comprises
the public sector.
After independence India was a very poor country. India needed huge amount of
money to set up
manufacturing plants for basic items like iron and steel, aluminium, fertilizers and
cements. Additional
infrastructure like roads, railways, ports and airports also require huge investment. In
those days Indian
entrepreneur was not cash rich so government had to start creating big public sector
enterprises like SAIL
(Steel Authority of India Limited), ONGC(Oil & Natural Gas Commission).

4. Private Sector: Companies which are run and financed by private people comprise
the private sector.Companies like Hero Honda, Tata are from private sectors

Agriculture in Indian Economy

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These trivia about role of agriculture in Indian Economy is from Economic Survey 2013-14,
so the data given below is latest from government sources and hence, relevant. We have
compiled it for benefit of fellow aspirants. This will especially prove useful for civil services
mains paper IV.

The share of agriculture in GDP has been constantly declining over the years. This was
highlighted yet again in this year‟s Economic Survey 2013-14. In eight years from 2000 to
2008 it has declined 6.4 percent.

Since agricultural market provides the backward linkage to Agro-based industries, it has to
be viewed holistically as a seamless farm-to-fork value chain, comprising farming,
wholesaling, warehousing, logistics, processing, and retailing including exports.

State of Agriculture in Economy

 About 60 per cent of the total foodgrains and oilseeds production occurs in the kharif
season.

 Just about 35 per cent of arable area being irrigated, Indian agriculture is still largely
dependent on rainfall.

 The south-west monsoon (from June to September) accounts for nearly 75 per cent of
total annual rainfall in India.

 Horticulture production is estimated at 265 million tonnes in 2013 and for the first
time has exceeded the production of foodgrains and oilseeds.

 An increase of 40 lakh ha in overall area coverage under foodgrains in 2013 as

compared to previous year. And record foodgrains production of 264.4 million tonnes
is estimated in 2013-14. This increase is due to : A) expansion in area, B) increase in
MSPs of select foodcrops gave incentive to cultivation.

Concerns regarding Agriculture:

 Productivity levels in Indian agriculture are still much lower than the global standards.
Productivity levels of rice and wheat have not risen significantly after the 1980s.
Though cotton yields have taken tremendous leap over the last decade, due to Bt
cotton.

 Soil degradation because of declining efficiency of fertilizer use.

 Alarming reduction in the water table, especially in states of Punjab and Haryana due
to their inefficient cropping pattern.

 The nutrient based subsidy (NBS) policy, does not have “urea” under its purview
which is used more than the others, so subsidy benefit is not reaching right
beneficiary.

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  The predominance of marginal and fragmented farms in India‟s agriculture, with
limited capital availability, hampers progress of farm mechanization.

 Domestic and international marketing of agricultural commodities needs immediate

attention but past interventions of government
for building marketing set up have in fact created more barriers to trade. So, there is a
need to reduce these market distortions.

Steps to be taken, as suggested by the Economic Survey document:

 Recommendation of the Task Force for Direct Transfer of Subsidy (headed by Nandan
Nilekani) to shift to direct transfer of fertilizer subsidy to farmers in a phased manner
needs to be considered.

 The Crop Diversification Scheme has been introduced in the Punjab and Haryana
region to encourage farmers to choose crop alternatives and is also expected to
promote technological innovations.

 There is need to facilitate a National Common Market for agricultural

commodities with uniform taxes in the domestic market, and to foster a long-term
stable trade policy for agricultural products.

 Need to expand the decentralized system of procurement for the PDS from present 11
states and UTs to all the states. This would help in- A) saving transport costs, B)
reduce transit losses and other leakages, C) increase food availability, D) reduce food
prices in the open market and E) ultimately rein in food subsidy.

Industries in Indian Economy

Broadly, there are three major industrial economic sectors in India.

 The primary sector, which mainly extracts raw material. Such as mining and farming
industries.

 The secondary sector, involves refining, construction, and manufacturing.

 The tertiary sector is concerned with services and distribution of manufactured

goods.

Indian Industrial sector, hence, consists of manufacturing, mining, electricity, and

construction. After the economic crisis in 2008, it showed considerable recovery and steady
growth for three years but then lost the track after that. This was due to constraints on
both supply-side and demand-side. Therefore, Industrial performance in 2013-14 has
maintained its lackluster growth for the second successive year.

Sectoral contribution as per bullseye

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Economic Planning in India

Economic Planning is a term used to describe the long term plans of government to co-
ordinate and develop the economy with efficient use of resources. Economic planning in India
was stared in 1950 after independence, it was deemed necessary for economic
development and growth of the nation.

The idea of Five year planning was taken from the erstwhile Soviet Union under socialist
influence of first Prime Minister Jawahar lal Nehru.

Long term objectives of our Five Year Plans are:

 A high rate of growth to improve the standard of living of residents.

 Economic self-reliance.

 Social justice and reduction of inequalities.

 Modernization of the economy.

 Economic stability for prosperity.

An overview of all plans implemented in India is given below. The first eight plans had their
emphasis on growing the public sector with massive investments in basic and heavy
industries, but since the launch of the Ninth Plan in 1997, attention has shifted towards
making government a facilitator in growth.

Plan Assessment Objective/Features

First Five year Targets and objectives more or Rehabilitation of refugees, rapid agricultural
Plan (1951- 56) less achieved. With active role of development to achieve food self-
state in all economic sectors. sufficiency in the shortest possible time and
Five Indian Institutes of control of inflation.
Technology (IITs) were started as
major technical institutions.

Second Five Could not be implemented fully Nehru-Mahalanobis model was adopted.
year due to shortage of foreign „Rapid industrialisation with particular
Plan (1956-61) exchange. Targets had to be emphasis on the development of basic and
pruned. heavy industries‟
Yet, Hydroelectric power projects Industrial Policy of 1956 accepted the
and five steel mills at Bhilai, establishment of a socialistic pattern of
Durgapur, and Rourkela were society as the goal of economic policy.
established.

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Plan Assessment Objective/Features

Third Five year Failure. Wars and droughts. „establishment of a self-reliant and self-
Plan (1961-66) Yet, Panchayat elections were generating economy‟
started.
State electricity boards and state
secondary education boards were
formed.

Annual Plan ( A new agricultural strategy was crisis in agriculture and serious food
1966-69) implemented. shortage required attention
It involved distribution of high-
yielding varieties of seeds,
extensive use of fertilizers,
exploitation of irrigation potential
and soil conservation measures.

Fourth Five Was ambitious. Big failure. „growth with stability‟ and progressive
year Achieved growth of 3.5 percent achievement of self-reliance‟
Plan (1969-74) but was marred by Inflation. Garibi HataoTarget: 5.5 pc
The Indira Gandhi government
nationalized 14 major Indian
banks and the Green Revolution
in India advanced agriculture.

Fifth Five year High inflation. Was terminated by „removal of poverty and attainment of self-
Plan (1974-79) the Janta govt. Yet, the Indian reliance‟
national highway system was
introduced for the first time.

Sixth Five year Most targets achieved. Growth: „direct attack on the problem of poverty by
Plan(1980-85) 5.5 pc. creating conditions of an expanding
Family planning was also economy‟
expanded in order to prevent
overpopulation.

Seventh Five With growth rate of 6 pc, this plan Emphasis on policies and programmes that
year Plan was proved successful in spite of would accelerate the growth in foodgrains
(1985-1990) severe drought conditions for first production, increase employment
three years consecutively. opportunities and raise productivity
This plan introduced programs
like Jawahar Rozgar Yojana.

Annual Plans It was the beginning of No plan due to political uncertainities

(1989-91) privatization and liberalization in

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Plan Assessment Objective/Features

India.

Eighth Five Partly success. Rapid economic growth, high growth of

year An average annual growth rate of agriculture and allied sector, and
Plan (1992-97) 6.78% against the target 5.6% was manufacturing sector, growth in exports and
achieved. imports, improvement in trade and current
account deficit. to undertake an annual
average growth of 5.6%

Ninth Five year It achieved a GDP growth rate of Quality of life, generation of productive
Plan (1997- 5.4%, lower than target. employment, regional balance and self-
2002) Yet, industrial growth was 4.5% reliance.
which was higher than targeted Growth with social justice and equality.
3%. growth target 6.5%
The service industry had a growth
rate of 7.8%. An average annual
growth rate of 6.7% was reached.

Tenth Five year It was successful in reducing To achieve 8% GDP growth rate
Plan (2002 – poverty ratio by 5%, increasing Reduction of poverty by 5 points and
2007) forest cover to 25%, increasing increase the literacy rate in the country.
literacy rates to 75 % and the
economic growth of the country
over 8%.

Eleventh Five India has recorded an average Rapid and inclusive growth.
year Plan(2007 annual economic growth rate of Empowerment through education and skill
– 2012) 8%, farm sector grew at an development.
average rate of 3.7% as against Reduction of gender inequality.
4% targeted. Industry grew with Environmental sustainability.
annual average growth of 7.2% To increase the growth rate in
against 10% targeted. agriculture,industry and services to 4%,10%
and 9% resp.
Provide clean drinking water for all by 2009.

Twelfth Five “faster, sustainable and more inclusive

year Plan(2012- growth”.
2017) proposes a growth target of 8 percent.
Raising agriculture output to 4 per cent.
Manufacturing sector growth to 10 %
Target of adding over 88,000 MW of power
generation capacity.

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Prime Minister Narendra Modi has announced abolition of Planning Commissionon the
Independence Day.It is to be replaced by a more relevant institution.The planning body lost
its relevance after LPG reforms of 1990s. With the an end of the licence raj, it functioned only
as an advisory body without any effective power. The future of economic planning in India
will be different and better from its past, we remain optimistic.

Snippets of Census 2011

covered 35 States/Union Territories, 640 districts, 5,924 sub-districts, 7,935 Towns and
6,40,867 Villages.

In Census 2001, the corresponding figures were 593 Districts, 5,463 sub-Districts, 5,161
Towns and 6,38,588 Villages.

There is an increase of 47Districts, 461 Sub Districts, 2774 Towns (242 Statutory and 2532
Census Towns) and 2279 Villages in Census 2011 as compared to Census 2001.

As per the Provisional Population Totals of Census 2011, the total population of India was
1210.2 million.

Of this, the rural population stands at 833.1 million and the urban population 377.1
million.

In absolute numbers, the rural population has increased by 90.47 million and the urban
population by 91.00 million in the last decade.

Uttar Pradesh has the largest rural population of 155.11 million (18.62% of the country‟s
rural population) whereas Maharashtra has the highest urban population of 50.83 million
(13.48% of country‟s urban population) in the country.

The growth rate of population for India in the last decade was 17.64%.

The growth rate of population in rural and urban areas was 12.18% and 31.80%
respectively.

Bihar (23.90%) exhibited the highest decadal growth rate in rural population.

In percentage terms, the rural population formed 68.84% of the total population with the
urban population constituting 31.16% (increase of 3.35%).

Himachal Pradesh (89.96%) has the largest proportion of rural population, while Delhi
(97.50%) has the highest proportion of urban population.

The EAG States have a lower percentage of urban population (21.13%) in comparison to
non EAG States (39.66%).

The Sex Ratio in the country which was 933 in 2001 has risen by 7 points to 940 in 2011.

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 The increase in rural areas has been 1 point from 946 to 947. The same in urban areas has
been 26 points from 900 to 926.

Kerala has the highest sex ratio in total (1084), rural (1077) and urban (1091). In rural,
Chandigarh (691) and in urban, Daman & Diu (550) show the lowest sex ratio in the country
respectively.

Eight states namely Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Bihar, Jharkhand,
Chhattisgarh, Maharashtra, Karnataka and 1 UT Lakshadweep show fall in the sex ratio in
rural area and 2 UTs Daman & Diu and Dadra & Nagar Haveli in urban areas.

Out of the child population of 158.8 million in the age group of 0-6 in the country the rural
child population stands at 117.6 million and urban at 41.2 million in 2011.

The Child population has declined by 5.0 million in the country – decline of 8.9 million in
rural areas and increase of 3.9 million in urban areas.

The Country has observed a decline in the percentage of child population in the age group
0-6 years by about 3 percentage points over the decade - rural areas show a decline of about 3
% and urban a decline of 2%. The growth rate of Child population has been -3.08% in the last
decade (Rural- (-)7.04%; Urban- (+)10.32%).

Census 2011 marks a considerable fall in child sex ratio in the age group of 0-6 years and
has reached an all-time low of 914 since 1961.

The fall has been 13 points (927-914) for the country during 2001-2011.

In rural areas, the fall is significant - 15 points (934-919) and in urban areas it has been 4
points (906-902) over the decade 2001-2011.

Delhi (809) has recorded the lowest and Andaman & Nicobar Islands (975) the highest
child sex ratio in rural areas.

Haryana (829) has recorded the lowest and Nagaland (979) the highest child sex ratio in
urban areas.

As per the Provisional Population Totals of Census 2011, the number of literates in India
was 778.5 million.

Of this, 493.0 million literates were in rural areas and 285.4 million literates in urban
areas.

Out of an increase of 217.8 million literates over the decade 2001-2011, rural areas
accounted for 131.1 million and urban areas 86.6 million.

The highest number of rural literates has been recorded in Uttar Pradesh (88.4 million).
Maharashtra (40.8 million) has recorded the highest number of literates in urban areas.

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 The Literacy Rate of India as per the Provisional Population Totals of Census 2011 is
74.04.

In rural areas the Literacy Rate is 68.91 and in urban areas it is 84.98.

The decadal change works out to 9.21 points - 10.17 points in rural areas and 5.06 points in
urban areas respectively.

The male Literacy Rate which is 82.14 (Rural- 78.57; Urban-89.67) is higher than the
female Literacy Rate of 65.46 (Rural- 58.75; Urban-79.92).

The increase in female literacy rate is significantly higher in all areas i.e. total (11.79
points), rural (12.62 points) and urban (7.06 points) in comparison to corresponding male
literacy rates - total (6.88 points), rural (7.87) and urban (3.40 points) over the decade.

It is significant to note that the gap in literacy rate among males and females has reduced
to 16.68 in the country.

The gap is 19.82 points in rural areas and 9.75 points in urban areas. Kerala (92.92) ranks
first in rural areas whereas Mizoram (98.1) ranks first in urban areas.

As far as Male literacy rate is concerned, Kerala (95.29) ranks first in rural areas whereas
Mizoram (98.67) ranks first in urban areas.

Rajasthan (46.25) has recorded lowest female literacy rate in rural areas, whereas, Jammu
& Kashmir (70.19) has the lowest female literacy rate in urban areas.

Lowest male literacy rate in rural areas has been recorded in Arunachal Pradesh (68.79)
and in urban areas in Uttar Pradesh (81.75).

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BANKING IN INDIA

Overview

– 27 public sector banks, 31 private banks and 38

foreign banks

private banks (18.2%) and foreign banks (6.5%)

ponsibility of the Department of Financial Services, Ministry of

Finance

banks, 19 nationalised banks, 8 banks in the SBI group and the IDBI

-scheduled commercial banks in the country

History of banking in India

founded in 1786. However both banks are now defunct

e Bank of India. The origins of the SBI go back

to the Bank of Calcutta (founded 1806, renamed Bank of Bengal in 1809)

ged to form the Imperial

Bank of India in 1921. The Imperial Bank of India was renamed the State Bank of India in
1955. Although a normal commercial bank, the Imperial Bank of India also functioned as a
central governmental until 1935

f India was established in 1935

However, it failed in 1958. The next oldest is the Punjab National Bank (Lahore, 1895)

the Cradle of Indian Banking

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Nationalisation of banks

s achieved by an ordinance to the effect in July 1969. This was formalized by the
Banking Companies (Acquisition and Transfer of Undertaking) Bill 1969

India, Bank of Maharastra, Canara Bank, Central Bank of India, Dena Bank, Indian Bank,
Indian Overseas Bank, Punjab National Bank, Syndicate Bank, UCO Bank, Union Bank of
India and United Bank of India

tionalized in 1980 were:

Andhra Bank, Corporation Bank, Oriental Bank of Commerce, Punjab and Sind Bank, New
Bank of India and Vijaya Bank

nationalized banks in operation today

RESERVE BANK OF INDIA

Overview

initially Calcutta,
but moved to Bombay in 1937. It is currently headquartered in Mumbai.

Dr. Raghuram Rajan.

e Bank of India Act 1934

Organisation and Management:

The Reserve Bank”s affairs are governed by a central board of directors. The board is
appointed by the Government of India for a period of four years.

 Full-time officials : Governor and not more than four Deputy Governors. The
Governor of RBI is Raghuram Rajan. There are 4 Deputy Governors, H R Khan, Dr
Urjit Patel, R Gandhi and SS Mundra.

 Nominated by Government: ten Directors from various fields and two government
Officials

 Others: four Directors – one each from four local boards

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Main Role and Functions of RBI

 Monetary Authority: Formulates, implements and monitors the monetary policy for
A) maintaining price stability, keeping inflation in check ; B) ensuring adequate flow
of credit to productive sectors.

 Regulator and supervisor of the financial system: lays out parameters of banking
operations within which the country”s banking and financial system functions for-
A) maintaining public confidence in the system, B) protecting depositors‟ interest ; C)
providing cost-effective banking services to the general public.

 Regulator and supervisor of the payment systems: A) Authorises setting up of

payment systems; B) Lays down standards for working of the payment system; C)lays
down policies for encouraging the movement from paper-based payment systems to
electronic modes of payments. D) Setting up of the regulatory framework of newer
payment methods. E) Enhancement of customer convenience in payment systems. F)
Improving security and efficiency in modes of payment.

 Manager of Foreign Exchange: RBI manages forex under the FEMA- Foreign
Exchange Management Act, 1999. in order to A) facilitate external trade and payment
B) promote development of foreign exchange market in India.

 Issuer of currency: RBI issues and exchanges currency as well as destroys currency
& coins not fit for circulation to ensure that the public has adequate quantity of
supplies of currency notes and in good quality.

 Developmental role : RBI performs a wide range of promotional functions to support

national objectives. Under this it setup institutions like NABARD, IDBI, SIDBI,
NHB, etc.

 Banker to the Government: performs merchant banking function for the central and
the state governments; also acts as their banker.

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  Banker to banks: An important role and function of RBI is to maintain the banking
accounts of all scheduled banks and acts as banker of last resort.

 Agent of Government of India in the IMF.

Monetary Policy of RBI :

As discussed earlier, RBI executes Monetary Policy for Indian Economy. The RBI formulates
monetary policy twice a year. It reviews the policy every quarter as well. The main objectives
of monitoring monetary policy are:

 Inflation control

 Control on bank credit

 Interest rate control

The monetary policy (credit policy) of RBI involves the two instruments given in the flow
chart below:

Quantitative Measures

Quantitative measures refer to those measures that affect the variables, which in turn affect
the overall money supply in the economy.
Instruments of quantitative measures:

1. Bank rate −The rate at which central bank provides loan to commercial banks is called
bank rate. This instrument is a key at the hands of RBI to control the money supply in long
term lending. At present it is 7.75%.

 Increase in the bank rate will make the loans more expensive for the commercial
banks; thereby, pressurizing the banks to increase the rate of lending. The public
capacity to take credit at increased rates will be lower, leading to a fall in the volume
of credit demanded.

 The reverse happens in case of a decrease in the bank rate. This increases the lending
capacity of banks as well as increases public demand for credit and hence will
automatically lead to a rise in the volume of credit flowing in the economy.

2. Liquidity Adjustment Facility-

Reserve Bank of India‟s LAF helps banks to adjust their daily liquidity mismatches. LAF has
two components – repo (repurchase agreement) and reverse repo.

(i) Repo Rate: Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to
the banks against securities. When the repo rate increases borrowing from RBI becomes more
expensive.Repo rate is always higher than the reverse repo rate. At present it is 6.75%

(ii) Reverse Repo Rate: It is the exact opposite of repo. In a reverse repo transaction, banks
purchase government securities form RBI and lend money to the banking regulator, thus

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earning interest. Reverse repo rate is the rate at which RBI borrows money from banks.The
banks use this tool when they feel that they are stuck with excess funds and are not able to
invest anywhere for reasonable returns. At present it is 5.75%

(iii)Marginal Standing Facility (MSF): is a new scheme announced by the Reserve Bank of
India (RBI) in its Monetary Policy (2011-12). The MSF would be a penal rate for banks and
the banks can borrow funds by pledging government securities within the limits of the
statutory liquidity ratio SLR.

The scheme has been introduced by RBI for reducing volatility in the overnight lending rates
in the inter-bank market and to enable smooth monetary transmission in the financial
system. Currently, it is 7.75%

2. Varying reserve ratios –

The reserve ratio determines the reserve requirements that banks are liable to maintain with
the central bank. These tools are:

(i) Cash Reserve Ratio (CRR)

It refers to the minimum amount of funds in cash( decided by the RBI) that a commercial
bank has to maintain with the Reserve Bank of India, in the form of deposits. An increase in
this ratio will eventually lead to considerable decrease in the money supply. On the contrary, a
fall in CRR will lead to an increase in the money supply. Currently, it is 4%.

(ii) Statuary Liquidity Ratio (SLR)

SLR is concerned with maintaining the minimum percentage( fixed by RBI) of assets in the
form of non-cash with itself. The flow of credit is reduced by increasing this liquidity ratio
and vice-versa. As SLR rises the banks will be restricted to pump money in the economy,
thereby contributing towards decrease in money supply. The reverse case happens if there is a
fall in SLR, it increases the money supply in the economy. Currently SLR is 21.5%.

STATE BANK OF INDIA

nationalised in 1955

Calcutta, founded in 1806.

umbai

It has a market share of about 20%

in deposits and advances

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Indore, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore,
State Bank of Patiala, State Bank of Travancore

HDFC Bank

world by Forbes in 2009

CATEGORIES OF BANKS IN INDIA

1. Commercial Banks

public

sector
banks include the State Bank Group and other nationalised banks, while private sector banks
include Indian banks and foreign banks

2. Cooperative Banks

Cooperative banks include credit unions, savings and loans associations and building societies
and cooperatives

– mutual help, democratic

decision making and open membership

ontrols of the RBI as well as state governments. Cooperative banks

in general operate under the Cooperative Credit Societies Act 1904, but large Urban
Cooperative Banks operate under the Banking Regulation Act 1949

mary financiers of agricultural activities, small scale

industries and self-employed workers

success of such banks in Britain and Germany

e Bank Ltd. (ABCL) was the first cooperative bank in India. It

was established Vithal Laxman (aka Bhausaheb Kavthekar) in 1889 under the name Anyonya
Sahayakari Mandali Cooperative Bank Ltd. The bank closed functioning in March 2008
following an order by the RBI. Re-opening is under consideration

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3. Regional Rural Banks

(Haryana), Jaipur (Rajasthan), Malda (WB). Currently there are 91 RRBs

4. Scheduled Banks

Act 1934

i. The paid up capital and collected funds of the bank must not be less than Rs 5 lakhs

ii. Any activity of the bank should not adversely affect the interest of deposition

g benefits

i. They are eligible for obtaining loans on Bank Rate from the RBI

ii. They acquire membership of the clearing house

s in operation

5. Non-Scheduled Banks

-Scheduled Banks are those that are not included in the list of Scheduled Banks

compelled to deposit these funds with the RBI

-Scheduled Banks in operation

GOVERNMENT ENTITIES IN BANKING

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1. Small Industries Development Bank of India (SIDBI)
a. Established in 1990, headquarters Lucknow
b. The main objective of the SIDBI is to aid the growth and development of micro, small and
medium scale industries in India
c. It provides direct credit to micro, small and medium enterprises, supports microfinance
institutions and refinancing to state level finance bodies

2. Industrial Development Bank of India (IDBI)

a. Established in 1964, headquarters Mumbai
b. The IDBI is the tenth largest development bank in the world. It is one of India‟s largest
public sector bank
c. Its main objective is to provide credit and other banking facilities to industries in India
d. However, in 2004 the IDBI was re-designated as a commercial bank, following the
Industrial Development Bank (Transfer of Undertaking and Repeal) Act 2003, and renamed
IDBI Ltd
e. Following this, the commercial banking division, IDBI Bank was merged into IDBI

3. Industrial Finance Corporation of India (IFCI)

a. The IFCI is the first development finance institution in the country to cater to the needs of
Indian industry
b. Established 1948, headquarters New Delhi
c. The IFCI was established to provide long term low interest credit to corporate borrowers
d. In 1993, the IFCI was re-registered as a commercial company under the Indian Companies
Act 1956, and renamed IFCI Ltd

4. National Bank for Agricultural and Rural Development (NABARD)

a. Partly owned by the RBI
b. Established 1982, headquarters Mumbai
c. NABARD serves as the apex development bank in India for economic activities in rural
areas
d. The main objective of NABARD is to facilitate credit flow for agriculture and small scale
industries
e. NABARD provides refinance to State Cooperative Agriculture and Rural Development
Banks (SCARDBs), State Cooperative Banks (SCBs), Regional Rural Banks (RRBs),
Commercial Banks and other financial institutions approved by the RBI
f. NABARD coordinates the rural financing activities of all institutions engaged in
developmental work
g. NABARD has 28 regional offices (state capitals), one Sub Office (in Port Blair) and one
Special Cell (in Srinagar)
h. NABARD is famous for its Self Help Group (SHG) Bank Linkage Programme, which
serves as an important tool for microfinance

5. National Housing Bank (NHB)

a. Wholly owned subsidiary of the RBI

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b. Established in 1987, headquarters New Delhi
c. Established mainly to provide long term finance to individual households

6. Export-Import Bank of India (EXIM Bank)

a. Established 1981, headquarters Mumbai
b. The main objective of the EXIM Bank is to provide financial assistance to exporters and
importers with a view to promoting the country‟s international trade
c. It acts as the apex financial institution for financing foreign trade in India

Competition Commission of India

The Competition Commission of India is a statutory authority with the mandate to enforce
competition Act 0f 2002. The objective of the CCI is to create and sustain fair competition in
the economy which will provide a „level playing field‟ to the producers, while making the
markets work for the welfare of the consumers.

The Competition Act, 2002, after amendment by the Competition (Amendment) Act, 2007,
follows the ideals of modern competition laws. The Act established the Competition
Commission of India (CCI), from 14th October 2003 to achieve the aforementioned
objectives.

The Competition Act 2002 prohibits anti-competitive agreements between enterprises, or the
abuse of dominant position by these enterprises.

Functions of Competition Commission of India (CCI):

 It is the duty of the CCI to eliminate such practices that have adverse effect on
competition.

 It is mandated to promote and sustain competition while protecting the interests of

consumers.

 CCI ensures freedom of trade in the Indian market.

 The Commission also gives opinion on competition issues when asked by a statutory
authority which is established under law.

 It is also required to undertake competition advocacy.

 The CCI also creates public awareness and imparts training on competition issues.

 Additionally, an appellate body called „Competition Appellate Tribunal„ was also

set up based on the Amendment Act of 2009, which allows for final appeal to
Supreme Court of India.

 CCI is therefore, fully empowered to carry out the mandated functions.

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Forward Markets Commission (FMC)

What are forward markets?

„Forward‟ or „Futures‟ are contracts for commodities that are traded at futures exchange
similar to shares, but here, actual physical goods are traded. Futures/forwards contracts are
traded on foreign currencies and interest rates also. The commodities that are traded in futue
contracts are corn, crude oil, silver, gold, etc. There are certain benefits of these futures
trading :

 This hedges the participants against price risk(fluctuation in prices influenced by

ecological, political or economic factors)

 Commodity exchanges help in production(farmers observe the price trends and decide
which product to cultivate and in what amount) as well as procurement planning(for
industries which buy agricultural products as raw materials).

 It enables the participation of various informed industry participants, which allow for
efficient price discovery, discounting the local and global factors.

What is FMC?

 The Forwards Market Commission is a statutory entity which is involved in

monitoring and regulating the operations, activities of the Commodities futures market
in India.

 It is setup under the Forward Contracts (Regulation) Act of 1952.

 FMC has its headquarters in Mumbai and a regional office in Kolkata.

 It earlier functioned under the Ministry of Consumer affairs, this was prior to the
NSEL payment crisis. Now it functions under the Department of Economic Affairs of
Ministry of Finance.

Commodity exchanges:

There are 22 exchanges in the country. Out of these twenty two, there are 6 National level
exchanges involved in the Forward Commodity trading in India. These important six national
exchanges are:

1. MCX (Multi-commodity Exchange of India Limited) located in Mumbai.

2. NCDEX (National Commodity and Derivatives Exchange Limited) situated in

Mumbai.

3. NMCE (National Multi-commodity Exchange of India Limited) located in

Ahmedabad.

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 4. ICEX (Indian Commodity Exchange Limited) based in New Delhi.

5. ACEINDIA (Ace Derivatives and Commodity Exchange Limited) located in Mumbai.

6. UCX (Universal Commodity Exchange Limited) located in Navi Mumbai

Securities and Exchange Board of India (SEBI)

The security market in an economy is that segment of a financial market which raises Long-
term Capital through instruments like shares, securities, bonds, mutual funds, debentures.
This market is known as the security market of economy.

The security market in India comprises of a Security regulator (SEBI), stock exchanges,
different share indices, brokers, FIIs,etc.

The security market has two complementary markets – Primary and secondary markets.

Primary Markets: It is a market where those instruments are traded directly between the
entity raising capital and the instrument purchasing entity.

Secondary Markets: The market where those instruments of security market are traded
among the primary instrument holders. These transactions require an institutionalized floor
for trading, this platform is known as the stock exchanges.

The security market in an economy is that segment of a financial market which raises Long-
term Capital through instruments like shares, securities, bonds, mutual funds, debentures.
This market is known as the security market of economy.

The security market in India comprises of a Security regulator (SEBI), stock exchanges,
different share indices, brokers, FIIs,etc.

The security market has two complementary markets – Primary and secondary markets.

Primary Markets: It is a market where those instruments are traded directly between the
entity raising capital and the instrument purchasing entity.

Secondary Markets: The market where those instruments of security market are traded
among the primary instrument holders. These transactions require an institutionalized floor
for trading, this platform is known as the stock exchanges.

The regulator of Indian stock market, is Securities and Exchange Board of India(SEBI). It
is working since 1988 but was granted the statutory status in 1992 by the SEBI Act of 1992.

SEBI has its headquarters located in Mumbai with regional offices in Kolkata, Chennai, New
Delhi and Ahmedabad.

Sebi-fmc merger

Insurance Regulatory and Development Authority (IRDA)

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Insurance is listed as a Union subject in the Seventh Schedule of the Constitution of India.
Therefore, only Union Government has the authority to formulate laws on insurance sector
and a State Government cannot.

 The Insurance Regulatory and Development Authority (IRDA) is a Statutory,

autonomous and apex body to regulate the insurance sector in India.

 It was created upon the recommendations by the Malhotra Committee report of

1994. The report recommended that a independent authority to regulate the
insurance industry in India should be established.

 By the IRDA Act, 1999 this authority was setup. In 2000 it received the staus of a
Statutory body by the Parliament.

 Therefore, IRDA was setup in 2000 as an autonomous body with its headquarters at
New Delhi.

 In 2001, the headquarters of IRDA were shifted to Hyderabad, Telangana.

 New Development: Since July 2014 the FDI limit in the insurance sector has been
raised to 49% by the government. Earlier it was 26 percent.

 The members and the Chairman of IRDA are appointed by the Government of India.

Functions of IRDA

 The primary aim to form IRDA has been to create a regulator, that will be able
to regulate and develop the insurance industry in the country, while also controlling all
organizations or individuals who are directly or indirectly involved in the insurance
sector.

 The Insurance Regulatory and Development Authority has been given the powers to
issue such regulations that are related to the insurers, the insurance intermediaries, the
surveyors, or any third party administrators. It can frame provisions for
their registration, or renewal of their licenses as well as to review their functioning for
smooth working of the insurance sector.

 The Insurance Regulatory and Development Authority is also entrusted with

responsibilities of protecting the interest of the policyholders, for whom the insurance
companies and intermediaries are issuing the policies. Even after these powers to
regulate the insurance sector, the Authority remains accountable to the
Central Government for its actions and inactions.

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14th Finance Commission

The Finance Commission is a constitutional body that is setup under the Article 280 of the
Constitution of India by the President every five years. It came into being from the year 1951.
It‟s primary function is to recommend the measures and methods on how measures that need
to be distributed between the Centre and the States.

The 14th Finance Commission was setup by the President in January 2014 under the
chairmanship of the former RBI governor Y V Reddy and its other members were Sushma
Nath, M Govinda Rao, Sudipto Mundle, Abhijit Sen. The fourteenth Finance Commission had
submitted its report to the President Pranab Mukherjee in December 2014.

These recommendations are for a duration of 2015-16 to 2019-20. Its primary job is to
recommend measures and methods about how revenues are to be distributed between the
Centre and States. The key recommendations have been towards its agenda of Cooperative
Federalism. For understanding the States‟s needs, the FFC has ignored the Plan and non-Plan
expenditure distinctions and has taken the entire revenue expenditure in consideration.

The report by 14th Finance Commission had a note of dissent from Abhijit Sen.

The major recommendations of the FFC are:

 Demanding an increase in the share of states in Centre‟s tax revenue from the
current 32% to 42%. This has been thehighest recommended increase by any Finance
Commsission so far.

 This will increase the total devolution to the states from Rs. 3.48 lakhs crore in year
2014-15 to Rs. 5.26 lakh crore in the year 2015-16.

 This higher tax devolution will give increased autonomy in financing and designing
the schemes according to their needs and requirements. This will give them more
power to decide how they spend their money.

 It has also recommended the distribution of grants of Rs. 2.88 lakhs crore to states
towards strengthening of duly elected/constituted Gram Panchayats and Municipal
Bodies.

 These grants are divided into two – a basic grant [90:10 for gram panchayats and
80:20 for municipalties] and a performance based grant for Gram Panchayats and
Municipal bodies.

 11 revenue deficit states gave been identified and Rs. 48,906 crore has been granted as
additional resource for them in the year 2015-16.

 The 14th Finance Commission holds the view that the sharing pattern in respect to
different Centrally Sponsored Schemes should be changed. It has recommended that
States share a greater fiscal responsibility for implementing such schemes.

Implication of this path-breaking recommendation:

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Since, at this time Centre is still pursuing States for GST (Goods and Services Tax), the
increased tax share will be helpful to Centre in this regard. With increased money share in the
taxes, States will be reassured that their financial interests would not be lost if they allow for
GST to be implemented.

Highlights of Union Budget 2015

The Union Finance Minister, Arun Jaitely has presented the Union Budget for the year 2015-
16 on last day of February, as is customary. The Finance minster has tried to balance the
interests of common man as well as the industry.

This budget for year 2015-16 has kept in mind the needs of common man by – incentives for
savings, increased social security and pension coverage of citizens. This also plans to harness
the power of idle gold lying with citizens. The government will increase allocates sum to the
rural jobs scheme.

The Budget 2015 also focuses on needs of business and the corporates by means of
significantly higher allocation for infrastructure, and a phased reduction in the corporate tax
rate. The Finance Minister has also decided to defer GAAR by 2 more years. A agency for
refinancing micro-finance, and a law to handle disputes in public contracts. There will be a
bankruptcy code formulated from this year onwards.

This budget has highlighted that the States to now be equal partners in economic growth. The
Budget speech by the Finance minster claims to make India a cashless society. He also
highlighted that social sector programmes will continue.

The Finance Minister has highlighted the challenges for the economy as poor agricultural
income, and a decline in the manufacturing and there is a need for fiscal discipline.

The highlights of Union Budget 2015-16 are :

On Taxation:

 Abolition of Wealth Tax.

 An additional 2% surcharge is applicable on the super rich with income of over Rs. 1
crore.
 The Rate of corporate tax will be reduced to 25% over next four years.
 There is no change in income tax slabs.
 The total exemption of up to Rs. 4,44,200 can be achieved, as has been shown by the
finance minster.
 From now, a 100% tax exemption can claimed for contribution to Swachch Bharat,
apart from CSR.
 The Service tax has been increased from present 12.36% to 14 per cent.

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On Agriculture

 Rs. 25,000 crore have been allocated for Rural Infrastructure Development Bank.
 Rs. 5,300 crore allocated for supporting Micro Irrigation Programme.
 The target for farmers credit is set at 8.5 lakh crore.

On Infrastructure

 The finance minister allocated Rs. 70,000 crores to Infrastructure sector.

 Provision for Tax-free bonds for projects in rail road and irrigation.
 The PPP model for infrastructure development will be revitalized and government will
bear majority of the risk.
 „Atal Innovation Mission‟ will be established to draw on the expertise of entrepreneurs
and researchers in order to foster scientific innovations. An allocation of Rs. 150 crore
has been made.
 The Government proposes to set up five ultra mega power projects, each of 4000 MW.

On Education:
 There will be new AIIMS setup in Jammu and Kashmir, Punjab, Tamil Nadu,
Himachal Pradesh, Bihar and Assam.
 New IITs will be set up in Karnataka and Indian School of Mines (ISM) Dhanbad to
be upgraded to IIT.
 A PG institute of Horticulture will be setup in Amritsar.
 Kerala will have University of Disability Studies.
 A Centre of film production, animation and gaming to will be set up in Arunachal
Pradesh.
 New IIM will come up in Jammu and Kashmir and Andhra Pradesh.

On Defence:
 An increase of 9.87 % over last year‟s allocation, of Rs. 2,46,726 crore.
 There will be a focus on Make in India for quick manufacturing of Defence
equipment.

On Welfare Schemes:
 The GST and JAM trinity (Jan Dhan Yojana, Aadhaar and Mobile) will improve
quality of life and help in passing on the benefits to common man.
 There will be 6 crore toilets built across the country under the Swachh Bharat
Abhiyan.
 The „MUDRA‟ bank will be refinancing the micro finance organisations to encourage
the 1st generation SC/ST entrepreneurs.
 The government plans to provide housing for all by 2020.
 80,000 secondary schools will be upgraded.
 DBT will be expanded from 1 crore to 10.3 crore further.

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  For the „Atal Pension Yojana‟ the government will be contributing 50% of the
premium limited to Rs. 1,000 a year.
 The New scheme for physical aids and provide assistance in form of listening devices
for people aged over 80 .
 The Government will use Rs. 9,000 crore the unclaimed funds in PPF/EPF for Senior
Citizens Fund.
 Rs. 5,000 crore additional allocation to be provided for MGNREGA.
 The Government will create universal social security system for all Indians.

On Renewable Energy:
 Rs. 75 crore will be provided for electric cars production.
 Renewable energy target for 2022 has been set up as: 100 K MW in solar, 60K MW in
wind, 10K MW in biomass and 5K MW in small hydro power.

On Tourism:
 The develpoment schemes for churches and convents in old Goa will be implemted.
 From now on Hampi, Elephanta caves, Forests of Rajasthan, Leh palace, Varanasi ,
Jallianwala Bagh, Qutub Shahi tombs at Hyderabad will be under the new tourism
scheme.
 From now on Visa on Arrival will be available for 150 countries.

On Gold:
 From now on Sovereign Gold Bond will be available, as an alternative to purchasing
metal gold.
 A New scheme for depositors of gold in order to earn interest and for jewellers to
obtain loans on their metal accounts will be introduced. In order to come up with an
Indian gold coin, which will be carrying the Ashok Chakra on it. This will reduce the
demand for foreign coins and also recycle the gold available in the country.

In Financial Sector:
 The Forward Markets Commission (FMC) will be merged with the Securities and
Exchange Board of India (SEBI).
 NBFCs that are registered with the RBI and have the asset size of Rs 500 crore and
above will be considered as as „financial institution‟ under the SARFAESI Act, 2002.
This will enable them to fund SME and mid-corporate businesses.
 From now on Permanent Establishment norms will be modified so that mere presence
of offshore fund managers in the country does not lead to adverse tax consequences.

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