Compilation of

DAILY CLASS NOTES

Indian Economy

1
 INDEX
1. Introduction ............................................................................................................................ (3 to 10)

2. Basics of Economics ............................................................................................................. (11 to 16)

3. Indian Economy On The Eve Of Independence................................................................ (17 to 23)

4. Indian Economy (1947- 1991) ................................................................................... ……. (24 to 30)

5. Indian Economy_ LPG Era................................................................................................. (31 to 35)

6. Human Development and Related Concepts ..................................................................... (36 to 43)

7. Employment and Poverty .................................................................................................... (44 to 53)

8. Employment and Poverty or Rural Development............................................................. (54 to 59)

9. Rural Development (Part - II)............................................................................................. (60 to 65)

10. Basics of Macroeconomics................................................................................................... (66 to 70)

11. Basics of Macroeconomics (Part – 2).................................................................................. (71 to 76)

12. Money and Banking ............................................................................................................. (77 to 81)

13. Money and Banking (Part - II) ........................................................................................... (82 to 86)

14. Money and Banking (Part - III).......................................................................................... (87 to 92)

15. Money and Banking (Part - IV) .......................................................................................... (93 to 97)

16. Government Budgeting ..................................................................................................... (98 to 101)

17. Government Budgeting (Part - II) .................................................................................. (102 to 107)

18. Government Budgeting (Part - III) and Open Economy ............................................. (108 to 113)

19. Open Economy (Part - II)................................................................................................ (114 to 119)

20. Open Economy (Part - III) .............................................................................................. (120 to 123)

21. Open Economy (Part - IV) .............................................................................................. (124 to 132)

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 Lecture -01
Introduction

3
 Introduction

Prelims Syllabus:
❖ Economic and Social Development – Sustainable Development,
Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.

Books to be Followed:
❖ Indian Economic Development - Class XI
❖ Introductory Microeconomics - Class XII
❖ Introductory Macroeconomics - Class XII

❖ NCERT WALLAH - Economy

Importance of Economy:

4
Economy vs Economics:
❖ Economics as a discipline is the study of the choice.
➢ A person has unlimited wants but limited resources therefore there is a need to
create a balance between both. A
person makes different choices every
moment such as what is more
important and what is not.
➢ The process of management of
unlimited wants with the limited or
scarce resources available is called
Economics.
➢ Economics is the study of how scarce resources are used to produce and meet
demand.
❖ The Economy is the implementation of the theories of economics.
➢ The Economy is the study of ‘economics in action’.
➢ The word Economy always comes with the name of any place/state/country.
➢ Example: Indian Economy, American Economy, etc.
❖ There are two branches of economics i.e.
1. Micro Economics
2. Macro Economics
Micro Economics vs Macro Economics:

Micro Economics Macro Economics

❖ Micro literally means small. ❖ Macro literally means large.

❖ The microeconomics takes into account ❖ Under macroeconomics, the economy of

small components of the economy. the country is considered as a whole.

❖ It studies economics at the individual ❖ It studies economics at the aggregate

level. level.

5
❖ It studies individual, household, and ❖ It studies the decisions of the
business decisions. Government and countries of the world.

❖ It is also called Price Theory. ❖ It is also called Income Theory.

❖ It is useful for individual investors. ❖ It is useful for Fiscal and Monetary Policy
decisions.

❖ The Fiscal policy is the policies of the Government whereas the Monetary policy is the
policies of the Central Bank of India i.e. Reserve Bank of India (RBI).

Fundamental Questions of Economy:

❖ What to Produce and How Much to Produce?

➢ Under this, the item that is to be

produced like a pen, car, etc., and
the quantity of the product
produced will be decided.
➢ It involves the problem of allocation
of resources.
❖ How to Produce?
➢ Under this, the method, or techniques of production i.e., through the use of labor
or machines will be decided.
➢ An economy that largely uses labor to produce goods is called a Labour-Intensive
Economy.
➢ Example: Since the population of Bangladesh is large, therefore mostly labor, that
is available cheaply, is used to produce goods. Hence, Bangladesh is a labor -intensive
economy.

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 ➢ An economy that largely uses machinery to produce goods is called a Capital-
Intensive Economy.
❖ For Whom to Produce?
➢ It deals with the problems of distribution of total production among the owners of
the factors of production.
➢ Under this, whether the products will be produced for the rich or poor will be
decided.
Types of Economy:

There are three types of Economy:

❖ Socialist Economy
❖ Capitalist Economy

❖ Mixed Economy

Socialist Economy Capitalist Economy Mixed Economy

❖ When the government, ❖ When the individual or ❖ When the government as

i.e., the public sector the market, i.e., the well as the individuals
decides the product to be private sector decides the and market decides the
produced, the quantity of product to be produced, product to be produced,
the product produced, the quantity of the the quantity of the
the method of production product produced, the product produced, the
for the product, and for method of production for method of production
whom the product is the product, and for for the product, and for
produced, then it is whom the product is whom the product is
known as the Socialist produced, then it is produced, then it is
Economy. known as the Capitalist known as the Mixed
Economy. Economy.

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❖ There is government ❖ There is little interference ❖ It has features of both
interference in the from the government in socialist as well as
economy. the economy. capitalist economy.

❖ The role of the public ❖ The role of the private ❖ The role of both the
sector is seen more in the sector is seen more in the public and private
Socialist Economy. Capitalist Economy. sectors is seen in the
Mixed Economy.

❖ Examples: North Korea, ❖ Examples: USA, Japan, ❖ Example: India, etc.

Venezuela, Cuba, China, etc.
etc.

Production Possibility Frontier:

❖ Example: Suppose an individual has one acre of land and wants to produce wheat and
rice on the land. Suppose that the maximum production of wheat and rice on one acre
of land is 10 kg and 15 kg respectively. Now there are three choices available before
him/her:

1. Choice 1: Produce only rice and not wheat. Suppose he produced 10 kg of rice and 0
kg of wheat (represented by A in the figure).
2. Choice 2: Produce only wheat and not rice. Suppose he produced 15 kg of wheat and
0 kg of rice (represented by B in the figure).

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3. Choice 3: Produce both wheat and rice. Both could be produced equally or unequally
(as the quantity of wheat/rice sown increases, the quantity of rice/wheat sown
decreases) Suppose he produced 14 kg of wheat and 7 kg of rice (represented by C in
the figure).
These three choices can be presented on the graph as follows:

❖ Case I: Points on the Curve: This is possible when all the resources are utilized at their
utmost capacity by the individual. (Represented by A, B, and C in the figure)

❖ Case II: Points Inside the Curve: This is possible in case of improper use of resources by
the individual. (Represented by E in the figure)

❖ Case III: Points Outside the Curve: The point outside the curve is not possible as 10 kg
of rice and 15 kg of wheat is the maximum productivity of one acre of land with the
present resources. (Represented by D in the figure)
❖ Production Possibility Frontier refers to the collection of all possible combinations that
can be produced using given resources.
Opportunity Cost or Economy Cost:

❖ It is the cost of the next best alternative foregone.

❖ Example: Suppose an individual has the choice of buying a laptop or mobile with the
financial resources available. The individual decides to buy the mobile instead of the
laptop. Here the opportunity cost will be the cost of the laptop.
Positive and Normative Economics:

❖ In Positive Economics, we study how different mechanisms function in the economy.

➢ Anything can be proved right or wrong based on facts or data given.
➢ It tells us what is present in reality.

➢ Example: The Government of India announced Pradhan Mantri Garib Kalyan Yojana
of Rs 1.70 Lakh Crore for the poor to help them fight the battle against coronavirus.
Here since the figure of investment (Rs 1.70 lakh crore) is given, it could be verified
whether the Government invested this much amount of money or not in the scheme.
Hence, it is an example of Positive Economics.

❖ In Normative Economics, we decide whether these mechanisms are desirable or not.

➢ It tells what is desirable in the economy or what ought to be in the economy.

9
 ➢ Example: The Government should increase the quantity of free ration provided to
the poor under the Pradhan Mantri Garib Kalyan Yojana. Here no facts are given
rather it is a type of suggestion that the Government should at least do this for the
poor. Hence, it is an example of Normative Economics.

❖ The Fiscal policy is the policies of the Government whereas the Monetary policy is the
policies of the Central Bank of India i.e., Reserve Bank of India (RBI).

❖ Economics: Study of how scarce resources are used to produce and meet demand.
❖ Economy: Study of ‘economics in action’.
❖ Microeconomics: Study of economics at the individual level.
❖ Macro Economics: Study of economics at the aggregate level.
❖ Socialist Economy: The government, i.e., the public sector decides the product to be
produced, the quantity of the product produced, the method of production for the
product, and for whom the product is produced.
❖ Capitalist Economy: Individual or the market, i.e., the private sector decides the
product to be produced, the quantity of the product produced, the method of
production for the product, and for whom the product is produced.
❖ Mixed Economy: The Government as well as the individuals and market decides the
product to be produced, the quantity of the product produced, the method of
production for the product, and for whom the product is produced.
❖ Production Possibility Frontier: Collection of all possible combinations that can be
produced using given resources.
❖ Opportunity Cost/Economy Cost: Cost of the next best alternative foregone.
❖ Positive Economics: Study of how different mechanisms function in the economy.
❖ Normative Economics: Study of whether these mechanisms are desirable or not.

10
 Lecture -02
Basics of Economics

11
 Basics of Economics

❖ Development
❖ Sectors of Economy

❖ Disguised Unemployment
❖ Organised and Unorganised Sector

Development:

❖ The notion of development is different for different sets of people.

➢ Example: A girl previously confined indoors without educational opportunities will
experience significant development if given the chance to attend school. In contrast,
a boy already attending school may not perceive the same level of development
because he is already engaged in the educational system. Development varies
according to individual circumstances and opportunities.
❖ The development of a particular set of people can be destructive for other sets of people.
➢ Example: For a villager, development means sustaining life with local resources.
However, an industrialist seeking to establish a factory
in the same village by deforesting it perceives
development differently. Thus, what's developmental
for one can have adverse consequences for another,
highlighting the conflict between environmental
conservation and economic growth.
❖ Development refers to sustained growth which brings positive change in the lives of
people.
➢ Example 1: Merely increasing one's income from 1000 to 1200 rupees does not
necessarily signify essential development. True development encompasses sustained
growth, improved living standards, good health, access to quality education, and
other holistic improvements that enhance overall well-being. Income alone is not
an adequate measure of development.

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 ➢ Example 2: The statistics presented in the
chart for Haryana do not conclusively indicate
the highest level of development among states.
Despite Haryana's higher growth rate, Kerala
surpasses in areas like literacy and healthcare.
Hence, while Haryana shows greater growth,
overall development is more prominent in
Kerala due to its comprehensive well-being
indicator.
❖ While a millionaire may not necessarily find peace despite wealth, an individual earning
modestly and enjoying a harmonious family life may be considered more developed. It
highlights that well-being extends beyond monetary success.
➢ Development can be compared between the individuals as well as between the
countries on similar lines.
❖ While averages are useful for comparison, they hide disparities.
➢ Example: Country A has a higher average income (Rs 500) than Country B (Rs
200). However, this does not necessarily indicate greater development because
Country A may have hidden income inequality, which impacts overall well-being
and development despite the higher average income.

Sectors of Economy:

❖ Primary Sector: It involves activities related to raw materials and natural resources.
➢ Examples: agriculture, farming, forestry, etc.
➢ Steel is used as a raw material for car manufacturing. The extraction of steel from
iron ore so that it can be transformed into finished products and sold is an activity
belonging to the Primary sector.
❖ Secondary Sector: This sector contains activities that involve the processing and
manufacturing of raw materials into finished products.
➢ Examples: construction, manufacturing, etc.
➢ The automotive sector uses steel to construct various parts of a car and cars are
produced in factories. Hence, the automobile industry is an example of the

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 Secondary Sector because it takes the resources
obtained from the Primary sector and makes
products for consumers.
❖ Tertiary Sector: This sector contains activities that
provide services to individuals or businesses.
➢ Examples: transportation, teaching, banking, etc.
➢ Cars sold in auto dealerships are an example of
the Tertiary sector because manufactured goods are sold by the companies to their
customers.

Example of Parle-G Biscuits:

It goes through numerous stages (primary – secondary – tertiary) to reach the consumer.

❖ Primary sector: Farmer grows the wheat (raw material)

❖ Secondary sector: Wheat is processed into biscuits in factories.
❖ Tertiary sector: It provides transport to send biscuits from the factory to the market

Aspect Primary Sector Secondary Tertiary Sector

Sector

Employment ❖ Maximum employment ❖ Minimum employment

in 1947 was from in 1947.
Primary Sector
❖ In 2023, maximum
employment comes
from this sector.

Total income ❖ Maximum income in ❖ Maximum income from

1947. this sector in 2023
❖ Minimum income in
2023 (due to unequal
distribution of wealth)

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Disguised Unemployment:

❖ When more people are engaged in a job than what is actually needed for the work, it
is called Disguised Unemployment.
➢ Example: In a farming sector, 5kg of rice is produced by two individuals working
on the land. Even with the addition of two more workers, the total output remains
unchanged, indicating surplus labour with minimal productivity impact.

Organized and Unorganized Sector:

❖ Organized Sector: Those activities where terms of employment are based on rules and
regulations and job security is ensured fall under the Organised Sector.
➢ Example: Government Employees
❖ Unorganized Sector: Those activities that are often outside the control of the
government are termed Unorganized Activities.
➢ Examples: Labourers, Daily wage workers, etc.

Aspect Organised Employment Unorganised Employment

Leave Policies Typically, organized jobs have Unorganized labor, such as daily
provisions for paid medical leave and wage workers, often lack such
defined notice periods. benefits, and taking a leave might
result in a loss of income.

Rules and Organised employment is governed Unorganized employment often

Regulations by established rules and regulations lacks formal regulations, leading to
that provide job security and job insecurity and a lack of
benefits. standardized benefits.

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❖ Development: It involves holistic progress, encompassing economic growth, improved
living standards, and access to education and healthcare.
❖ Sectors of Economy: The economy comprises the primary sector (agriculture),
secondary sector (industry and manufacturing), and tertiary sector (services),
representing the diverse components of economic activity.
❖ Disguised Unemployment: This phenomenon occurs when surplus laborers are engaged
in tasks that do not increase production, often found in the agricultural sector.
❖ Status of Economy of India (1947 vs 2023): India's economy has transformed from
primarily agrarian in 1947 to a diverse, globally competitive economy in 2023,
marked by rapid industrialization and service sector growth.
❖ Organised vs Unorganised Sector: Organised sectors offer job security and regulated
benefits, while unorganized sectors often lack these, leaving workers vulnerable to job
insecurity and inconsistent benefits.

16
 Lecture -03
Indian Economy On The Eve Of
Independence

17
 Indian Economy On The Eve Of Independence

Agriculture:
❖ Agriculture was stagnant at the time of the Independence of India.
❖ The reasons for the stagnation of agriculture are as follows:
❖ Zamindari System:

➢ The Zamindari system, a land revenue collection system in colonial India, resulted
in the diversion of a significant portion of agricultural profits to the zamindars,
who were the intermediaries between the peasants and the British government.
➢ This focus on rent collection left limited resources for investing in agriculture,
modernization, and development.
➢ Zamindars prioritized their income over the improvement of agricultural practices.
❖ Low Technological Development:

❖ During the colonial period, there was a notable lack of technological development
in Indian agriculture.

❖ Outdated and labor-intensive farming methods prevailed, inhibiting progress and

impeding the potential for increased agricultural productivity.

❖ The absence of modern agricultural practices hindered the sector's growth.

❖ Lack of Irrigation Facilities:
➢ Many parts of India, especially arid and dry regions, lacked proper irrigation
facilities.

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 ➢ Inadequate access to water for
irrigation limited the cultivation of
crops and reduced agricultural
output.
➢ Dependence on rain-fed agriculture
made yields vulnerable to variations
in monsoon patterns.
❖ Negligible Use of Fertilizers:
➢ The use of fertilizers to enhance soil fertility and crop yields was minimal during
the colonial era.
➢ The absence of fertilizers resulted in suboptimal soil health, making it challenging
to achieve higher agricultural productivity.
➢ The colonial administration did little to promote the adoption of fertilizers in Indian
agriculture.
❖ Commercialization of Agriculture:

➢ The British colonial policies encouraged the cultivation of cash crops like indigo,
opium, and jute for export, rather than food crops.
➢ This commercialization approach negatively impacted agricultural development by
degrading soil quality and focusing on crops that did not contribute to food
security.
➢ The emphasis on cash crops meant that resources and land were diverted from
food production, affecting the well-being of the local population.

Negative Impacts of British Industrial Policy:

The Industrial policies of the Britishers negatively impacted the Indian Industrial Sector in
the following ways:

❖ Deindustrialization:
➢ The British colonial policies actively discouraged the growth of modern industries
in India. They viewed India as a source of raw materials and a market for British
manufactured goods, thereby inhibiting the development of a self -sustaining
industrial sector in the country.

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 ➢ This led to the stagnation of industrial growth and the perpetuation of a primarily
agrarian economy.
❖ Raw Material Export:
➢ During the colonial era, India's rich
resources, such as cotton, jute, and
minerals, were exploited to serve
British industrial interests. These
raw materials were extracted and
exported to Britain, depriving India
of the potential to add value through domestic processing and manufacturing.

➢ The colonial policy promoted the interests of British industries at the expense of
indigenous industrial development.

❖ Market for Foreign Products:

➢ British industrial products flooded the Indian market, often at the cost of domestic
industries. The colonial administration implemented trade policies that favored
British manufacturers, creating an uneven playing field for Indian producers.

➢ This further curtailed the growth of the Indian industrial sector as foreign goods
undercut local production.
❖ Massive Unemployment:

➢ The negative impact of British industrial policies extended to the destruction of

India's traditional handicraft and cottage industries.

➢ As these industries declined or were forced to shut down, it resulted in widespread

unemployment and poverty among the Indian populace. The displacement of skilled
artisans and craftsmen led to significant joblessness.
❖ Lack of Capital Goods Industries:

➢ British policies did not support the development of capital goods industries in India.
These industries, which produce machinery and equipment essential for the growth
of other industries, remained underdeveloped.
➢ This lack of domestic capital goods production further hindered India's industrial
progress.

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Infrastructure:
❖ Meaning of Infrastructure: Infrastructure refers to the fundamental physical and
organizational structures and facilities that support the functioning of a society or
enterprise. It encompasses various sectors, including transportation, communication,
energy, and public services.

❖ Railways Started in India in 1853-54 from Bombay to Thane: The development of

railways marked a significant milestone in India's infrastructure history. The
inauguration of the first passenger train in 1853-54 from Bombay to Thane laid the
foundation for the country's expansive railway network. This development had multiple
motivations, including economic, military, and administrative interests.

❖ Real Intention Behind Infrastructure Development Was Self-Interest: The construction

of railways and other infrastructure projects in colonial India was primarily driven by
the British colonial administration's self-interest. These initiatives aimed to serve
various purposes.

➢ Military Purpose- To Curb Revolutionary Activities Targeting Britishers: One key

motivation was to enhance the mobility of British troops to suppress any revolutionary
activities targeting colonial rule. The railways and road networks served as critical
means for military movements, ensuring British control.

➢ Agricultural Purpose- Movement of Raw Materials and Finished Products:

Infrastructure, including railways and roads, played a crucial role in facilitating the
movement of raw materials and finished agricultural products. This helped in the
transportation of goods from farmlands to markets, promoting economic interests.

➢ Postal Services- Insufficient for Public: The development of infrastructure also

extended to postal services. However, the existing postal services were often
insufficient to meet the growing communication needs of the public.

➢ Roads- All-Weather Connectivity Was Not Present: Improved road systems were
essential for efficient transportation, especially during adverse weather conditions.

Challenges at the time of Independence:

The following are some of the challenges faced by the Indian economy at the time of
Independence:

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❖ Low Agricultural Productivity:

➢ The British administration imposed agricultural practices that prioritized cash

crops like cotton and indigo over food crops, leading to a decline in food production.
➢ Along with this, the farming methods in India were old and not very productive.
Farmers used traditional techniques that didn't produce much food. This led to food
shortages and hunger.
❖ Underdeveloped Industrial Sector:
➢ India's industrial sector remained
underdeveloped under British rule.
➢ Most industries were geared towards
processing raw materials for export,
rather than producing finished goods
for domestic consumption.

➢ This economic structure limited job

opportunities and hindered industrial growth.

❖ Poverty: Famine in the 1940s in Bengal: Many people in India were very poor. In the
1940s, there was a severe food shortage in Bengal, and many people went hungry.
This happened partly because the British took a lot of food from India for their own
needs. Thus, it is evident that India was trapped in a vicious cycle of Poverty.

❖ Inequality: There was a big gap between the rich and the poor in India. The British
rulers and a few wealthy Indians (zamindars) had a lot of money, but most Indians
lived in poverty. They didn't have the same opportunities and benefits as the wealthy.
❖ Infrastructure: India's infrastructure was underdeveloped, characterised by inadequate
transportation, communication, and public service facilities, which hindered economic
growth and access to essential services

Demography:
❖ Census: In India, the process of counting and recording the population through a census
started in 1872 but was properly carried out from 1881. This helped the British
government understand the size and composition of the population.

22
❖ Education: Back then, most people in India didn't have access to schools. The number
of people who could read and write was very low, only about 16%. Shockingly, the rate
was even lower for females, with only around 7% of them being literate.

❖ Healthcare: The British didn't have good public health facilities. This means that there
weren't enough hospitals and doctors to take care of people. As a result, diseases would
frequently spread, and there were outbreaks, making many people sick.
❖ Life Expectancy: People didn't live very long. The average age at which someone could
expect to live was only about 32 years. This was because of the tough living conditions,
lack of medical care, and diseases.
❖ Infant Mortality Rate: Many babies didn't survive in those days. Out of every 1000
babies born, 218 of them would sadly pass away before they even turned one year old.

23
 Lecture -04
Indian Economy (1947- 1991)

24
 Indian Economy (1947- 1991)

Planning in India:
❖ A plan is a structured framework that outlines how available resources can be effectively
utilized to achieve specific goals and desired results.

❖ The Soviet Union's "Five-Year Plans" served as a blueprint for India's planning system
after independence.
❖ India adopted a structured framework from the Soviet Union for resource allocation
and policy implementation.
❖ The goals included promoting industrialization and ensuring equitable resource
distribution.
❖ These plans were instrumental in India's post-independence development.

Objective/Goals Of Five Year Plan:

❖ Growth: To increase a country's
productive capacity by expanding
industries, agriculture, and services to
produce more goods and services. The
aim is to boost the overall economic
output, create jobs, and improve the
standard of living for the population.

❖ Modernization: Modernization involves the adoption of new technologies and methods

to enhance productivity and efficiency across various sectors.

25
❖ Self-Reliance (Atmanirbhar): Self-Reliance means reducing dependence on imports
from other countries. It aims to enhance a country's capacity to produce essential goods
and services domestically, thereby reducing reliance on other nations for critical
resources and products.
❖ Equity: It aims to ensure that the benefits of economic prosperity are distributed fairly
among all segments of society. This includes addressing income inequality and providing
access to basic services, education, and healthcare to the marginalized and
disadvantaged sections of the population.

Land Reforms in India After Independence:

❖ Abolition of Intermediaries (Zamindari System): After India's independence, the
government abolished the zamindari
system, which was a way of land
ownership where middlemen, called
zamindars, collected rent from
farmers. This change meant that
farmers could directly own and
cultivate the land, eliminating the
need to pay these middlemen.
❖ Land Ceiling: The government set limits on how much land a person or family could
own. This was done to prevent a few people from having too much land, allowing more
people to have access to land for farming. The excess land was redistributed to landless
farmers.
❖ Land Consolidation: Land consolidation involves reorganizing landholdings to make
them more efficient. Small and fragmented land plots were combined to create larger
and more manageable farms. This helped in improving agricultural productivity and
made farming easier for the farmers.
❖ Cooperative Formation: Cooperatives, like Amul, were established to help farmers work
together. In a cooperative, farmers pool their resources and efforts. For example, in
Amul, dairy farmers joined together to collectively market their milk and dairy
products. This way, they had more bargaining power and could get better prices for

26
 their products. It also provided them access to modern technology and resources,
helping them improve their livelihoods.

Challenges in Land Reform:

❖ Lack of Political Will: This means that the government didn't have a strong desire to
bring about changes in land ownership. They often avoided making tough decisions
because they might upset powerful
landowners.
❖ Corruption: Some people involved in
land reform used their positions for
personal gain. They may have taken
bribes or used their influence to
benefit themselves rather than
carrying out reforms properly.

❖ Exceptions - Poor Implementation of Laws: In some cases, even when good laws were
made for land reform, they weren't followed properly. This was because certain people
or groups managed to get around these laws, preventing them from being effective.
❖ Regional Variation: Land reform was carried out differently in various parts of the
country. Some states, like Bengal and Kerala, did a good job with it, while others didn't.
Legal loopholes and varying levels of commitment caused these differences in
implementation.

Green Revolution:
Background Of Green Revolution In India:

❖ 1962 Indo-China War: In 1962, India

had a conflict with China. This created
uncertainty and led to disruptions in
agriculture, making it challenging for
farmers.
❖ 1965 Indo-Pakistan War: Just a few
years later, in 1965, India had another
war, this time with Pakistan. This war had a negative impact on agriculture, along
with poor monsoon seasons, which meant there wasn't enough rain for the crops.

27
❖ Death of Jawaharlal Nehru: The country was also dealing with the loss of its first Prime
Minister, Jawaharlal Nehru, who was a key figure in India's development. His death
was a setback for the nation.

❖ Lal Bahadur Shastri's Slogan - "Jai Jawan, Jai Kisan": Lal Bahadur Shastri was made
the Prime Minister of India in 1964 after the death of Jawaharlal Nehru. He gave the
famous slogan "Jai Jawan, Jai Kisan," which means "Hail the soldier, Hail the farmer."
This slogan was a call to honor and support both the soldiers defending the country
and the farmers producing food.

❖ Continuation by Indira Gandhi: The Green Revolution was further carried out by the
next Prime Minister, Indira Gandhi. It involved the introduction of new agricultural
practices, technologies, and high-yielding crop varieties to increase food production
and help India become self-sufficient in food.

Need for the Green Revolution (Harit Kranti):

❖ Low Agriculture Productivity: Before the Green Revolution, India faced a big problem.
The amount of food being grown by our farmers wasn't enough to feed everyone in the
country. This is because the methods used for farming were very old and not very
effective. India needed to find
new ways to grow more food.

❖ Reduction of Dependency:
Deficit of Wheat- At that time,
India didn't have enough
wheat to feed its people. So, we
had to buy wheat from other
countries, like the USA.
Sometimes, the wheat we
bought was not in good condition, and other times, these countries would refuse to sell
wheat to us. So, India wanted to be able to grow its own wheat to avoid these problems.
Thus, India needed to devise a measure to reduce its dependency on foreign impor ts.

❖ Food Security: Food security means making sure there is enough food for everyone,
especially during tough times like wars or crises. To do this, we needed a way to have
extra food stored and ready to use in case an emergency or crisis situation emerged.

28
 The Green Revolution helped India to produce more food and build a "buffer stock" of
grains so we wouldn't go hungry during difficult times.

Additional Information:
❖ Norman Borlaug is often referred to as the "Father of the Green Revolution" for his
pioneering work in developing high-yielding variety (HYV) seeds, particularly in
wheat. These seeds led to significant increases in crop yields and played a crucial role
in addressing food shortages worldwide.
❖ Similarly, in the context of India, Dr. M.S. Swaminathan is often recognized as the
"Father of the Green Revolution in India." He played a pivotal role in introducing and
promoting the adoption of HYV seeds and modern agricultural practices in India.
Swaminathan's work had a profound impact on Indian agriculture, leading to
increased crop yields, improved food security, and agricultural growth.

Components of Green Revolution:

The Green Revolution indeed involved several key components:

❖ Seeds: High-yielding variety (HYV) seeds that were more productive and disease-
resistant played a central role in increasing agricultural output.

❖ Irrigation: Improved irrigation methods and infrastructure, such as canals and tube
wells, ensured consistent water supply for crops.

❖ Use of Technology: The adoption

of modern farming techniques
and machinery, like tractors,
facilitated more efficient and
productive farming practices.

❖ Fertilizers: The application of

chemical fertilizers enriched the
soil and boosted crop yields.
❖ Management of Pests: Pest control measures were employed to protect crops from
insects and diseases.

29
❖ Loan Facility Provided to Farmers: Access to credit and financial support allowed
farmers to invest in new technologies, seeds, and practices, which were often more
expensive but beneficial in the long run.

Reasons for the Emergence of Public Sector:

The reasons for the emergence of the Public Sector in the Indian Economy are as follows:
❖ Lack of Capital with Private
Sector: The public sector
emerged due to the lack of
funds in the private sector, as
not all industries can be solely
run by private companies.
Government investment was
needed.

❖ Socialist Policies Influenced by

Public Welfare: The Indian government adopted socialist policies to ensure public welfare,
like affordable healthcare and education, making the public sector vital for such services.
❖ Focus on Small Scale Industry: The public sector supports small-scale industries,
creating job opportunities and boosting local economies, as they may struggle to
compete in a purely private market.
❖ Second Five-Year Plan (Industrial Policy 1956): The Industrial Policy of 1956 during
India's Second Five-Year Plan aimed to control and regulate industries, especially in
sectors vital to national development, for balanced economic growth.

30
 Lecture -05
Indian Economy_ LPG Era

31
 Indian Economy_ LPG Era

Import substitution:
❖ Import substitution aims to replace foreign imports with domestic production by
imposing taxes or tariffs and setting import quotas, limiting the maximum allowed
import quantities.
➢ Example: Suppose a bottle costs $20 when produced in the USA, while the same
bottle produced in India costs $30. The consumers of India will be encouraged to
purchase the bottle manufactured in the USA due to its low cost. This will impact
the domestic producers of India. If India imposes a tax of $15 on the imported
product its price will increase to $35. Now, the customers will be discouraged from
purchasing this product and eventually get attracted to the product produced
locally with a relatively low price of $30. In this way, the importing country's
government imposes taxes and duties on the imported items to protect domestic
producers from foreign competition.

Positive Effects of Import Substitution:

❖ Industrial Growth Improved: Import substitution helps local industries grow because
people buy more products made within their country. This boosts the economy.
❖ Employment among Local People: When local industries grow, they need more workers,
which means more people can find jobs in their own country.
❖ Protection from Foreign Competition: Import substitution protects local companies
from foreign companies that might sell products more cheaply. It helps local businesses
compete so the goods produced are competitive with the imported goods.

32
❖ Development of Small-Scale
Industries: For example, think of your
local kirana shops. Import
substitution can help them compete
with big online stores like Amazon,
which is good for local businesses.
Hence, small-scale industries are
promoted which facilitates the
development of domestic industries in the economy.

Negative Effects of Import Substitution:

❖ Lack of Competition: When there's too much protection, local companies might not try
hard to make better products. This can
lead to poor-quality goods. The
countries end up becoming complacent
when competition is reduced.
❖ Lack of Innovation and Outdated
Technology: If companies don't need to
compete, they may not try to make
new and better products. This means we
might not get the latest and greatest stuff in the market. The domestic items will
eventually deteriorate in quality.
❖ Inefficiency: If companies are not efficient to compete, they can become lazy and
wasteful. This can slow down the country's economic growth.
The drawbacks of import substitution became evident in 1991, leading to a decline in
foreign exchange reserves due to domestically produced goods being of poor quality and
domestic industries functioning inadequately. This led to the emergence of LPG Refor ms in
the year 1991.

LPG (Liberalisation, Privatization, Globalization) Reform:

❖ Liberalisation: It refers to the removal of government restrictions and allowing
businesses to decide what to import or export.
❖ Privatisation: It refers to the transition from government ownership to private sector
control of enterprises.

33
❖ Globalisation: It refers to the integration of a country’s economy with the global
economy that helps in greater integration and interdependence.

❖ Dr. Manmohan Singh, the then Finance Minister of India played an essential role in
LPG reform

Reasons for Growth of Service Sector After LPG Reforms of 1991:

❖ Increase in Foreign Investment: Liberalization attracted foreign investment, particularly
in services like IT, resulting in job creation
and business opportunities.
❖ Information Technology and Software
Services increased in India: India became
a global IT hub, providing software
services and contributing significantly to
the economy.
❖ Skilled Workforce: The country's young
and educated population offered a vast pool of skilled labor, driving service sector
growth.
❖ Rise in Startups and Entrepreneurship: The policy changes encouraged entrepreneurship,
leading to the emergence of startups and innovation.
❖ Financial Sector Growth: The financial sector, including banks and non-banking
financial companies, witnessed substantial growth, facilitating economic development.

Why the Industrial Sector Didn't Grow After LPG Reform:

❖ Competition from Imports: Reduction in
trade barriers and lower import duties led
to increased foreign goods' popularity,
impacting the demand for Indian products.
❖ Lack of Infrastructure: Inadequate
infrastructure, including transportation and
logistics, hindered the growth of industries.
❖ Technological Lag: Many Indian companies
lagged in adopting advanced technologies, affecting their competitiveness and efficiency.

34
Reasons Why the Agriculture Sector Didn't Grow After LPG Reform:
❖ Increased International Competition: Lower import duties made foreign agricultural
products more affordable, intensifying competition with domestic produce.
❖ Not Enough Investment in Irrigation
and Fertilizers: Farmers didn't have
good access to water and fertilizers.
Public investment in irrigation and
fertilizers could not increase to the
desired level.
❖ Reduced Subsidies: Reduction in
government subsidies for farmers, such
as on fertilizers, affected their productivity and income.
❖ Lower Import Duties: Reduced import duties on foreign agricultural goods contributed
to their increased popularity.

Overall Analysis:

Positive Impact Negative Impact

❖ Services sector growth rate improved ❖ Agricultural and industrial sector

could not grow at desired level

❖ Access to global market ❖ Increase in inequality. Rich became

richer, poor became poorer

❖ Improvement in living standards ❖ Benefitted developed nations as

compared to developing nations

35
 Lecture -06
Human Development and
Related Concepts

36
 Human Development and Related Concepts

Human Capital:

❖ Human Capital encompasses (includes) skills, collective knowledge, good health, and
abilities within the individuals of a society.

❖ Human Capital is a measure of the skills, education, capacity, and attributes of labor
that influence their productive capacity and earning potential.

❖ Human capital represents enhanced labor productivity. Trained workers will use the
physical capital (like machines) more efficiently.

❖ Good human capital helps in the economic growth and development of the country by
raising production levels. Knowledgeable and skilled workers can make better use of the
resources at their disposal.

❖ Example:

➢ The high economic growth in the US can be attributed to its investment in human
capital by improving the quality of education, health, skills, investment
opportunities, etc.

➢ The US threw nuclear bombs on Hiroshima and Nagasaki in Japan in 1945, which
devastated the whole condition of the country and its economy. Also, Japan does
not have many natural resources and frequently faces natural disasters like cyclones,
earthquakes, etc. Despite facing all these challenges, it is one of the most developed
countries in the world. One of the main reasons behind this was the investment in
human development to improve human capital.

37
 ❖ India recognized the importance of human capital in economic growth long ago.

❖ The Seventh Five-Year Plan says, “Human resources development (read human
capital) has necessarily to be assigned a key role in any development strategy,
particularly in a country with a large population. Trained and educated on sound
lines, a large population can itself become an asset in accelerating economic growth
and in ensuring social change in desired directions.”

Factors Contributing to Human Capital:

❖ Education:

➢ Investments in education convert human beings into human capital.

➢ A quality education helps an

individual improve his/her
knowledge and skills.

➢ The labour skill of an educated

person is more than that of an
uneducated person and hence
the former is able to generate
more income than the latter and
his/her contribution to economic growth is, consequently, more.

❖ Health:

➢ A good health helps in improving labor productivity.

➢ A healthy individual would be able to do work efficiently and thus contribute to

economic growth.

➢ This is because ill health impairs productivity, hinders job prospects, and
adversely affects human capital development.

➢ A sick labor without access to medical facilities is compelled to abstain from work
which leads to a loss of productivity.

38
 ✓ Example: The increasing pollution in Delhi and surrounding areas during the
months of October and November deteriorates the health of individuals thus
impacting their ability to work at their maximum potential.
❖ On-the-Job Training:
➢ The On-the-Job training refers to the training imparted to an individual before
commencing the work in a newly joined organization.
✓ Example: The IAS officers are imparted training in LBSNAA (Lal Bahadur
Shastri National Academy of Administration) prior to commencing their jobs
in their allotted districts.
➢ The On-the-Job training increases labor productivity by improving the skill set and
efficiency of individuals.
❖ Migration:
➢ Migration means the movement of people from one place to another, permanently
or temporarily.
➢ An individual, to get higher salaries and good jobs, migrates from their native place
to another place. Other skilled, and qualified individuals like doctors, engineers, etc.
migrate from one country to another in search of better opportunities.
➢ The migration of individuals helps in improving the opportunities for their growth.
✓ Example: Many people after graduating from their respective colleges move to
cities like Delhi or Mumbai in search of better employment opportunities.
➢ Unemployment is the reason for the rural-urban migration in India.
❖ Information:
➢ The access to information helps in informed decision-making for the individuals.

Physical vs Human Capital:

Physical Capital Human Capital

❖ The physical capital consists of all the ❖ The human capital encompasses
human-made objects that a firm buys or (includes) skills, collective knowledge,
invests in and uses to produce goods and good health, and abilities within the
services. individuals of a society.

39
 Example: It includes all the raw materials, Example: Education, Health, Skills,
land, factory, machinery, etc. required to etc.
set up the factory.

❖ It is tangible i.e. can be touched. ❖ It is intangible i.e. cannot be touched.

❖ The physical capital can be separated from ❖ The human capital is inseparable
its owner. from its owner.

❖ The value of the physical capital decreases ❖ The human capital can depreciate but
with time due to wear and tear. This is it can be improved also with better
known as depreciation. education, health, etc.

Example: Suppose a car purchased today Example: You have studied economics
for Rs 10 lakh would get resold after two lecture today but if you do not revise
years only with Rs 5 lakh due to the it then after some time you will
depreciation of the machinery. forget it. This would result in the
depreciation of knowledge. But
suppose if you revise the lecture daily
and then apply it in your daily life
then this would improve your
knowledge.

❖ The physical capital is highly mobile i.e. the ❖ The human capital is less mobile i.e.
movement of physical capital from one movement of human capital from
country to another is easier. one country to another is a little
difficult.

Example: Suppose you want to go to

the US then you would need to go
through the lengthy process of VISA
clearance.

40
Economic Growth with Human Capital:

❖ Higher Income Generation:

➢ Income increases with the rise in the level of Human Capital.

➢ An increase in the human capital of

an economy will provide its
workforce with a better education,
and skill set. They will get paid
higher in the organization thus
contributing to economic growth.

❖ Health-Related Productivity:

➢ Health is a kind of human capital as well as an input to producing other forms of

human capital. Being unhealthy depresses the ability to work productively and/or
the ability and incentives to invest in human capital.

➢ A healthy individual will come to work daily and thus contribute to the economy.

❖ Innovation through the Latest Development:

➢ A country with good human capital stimulates innovations and will enable its
individuals to get acquainted with new technologies like 5G, artificial intelligence,
robotics, etc. of the world.

➢ Education provides knowledge to understand changes in society and scientific

advancements, thus, facilitating inventions and innovations. The availability of an
educated labor force facilitates adaptation to new technologies.

❖ Decent Standard of Living:

➢ An individual with quality education, health, and skill set would help improve their
standard of living. Human capital formation increases these skills and improves the
quality of life of the masses. Better quality of population means more economic
growth.

❖ Societal Progress:

➢ A society with good human capital will help establish a peaceful environment
favorable for investment.

41
 ➢ When human capital increases in areas such as science, education, and management,
it leads to increases in innovation, social well-being, equality, increased productivity,
and improved rates of participation, all of which contribute to economic growth.

➢ A society full of educated and empowered individuals would not fight among
themselves on petty issues like religion caste, etc., and thus would love together
with harmony.

Additional Information:

Human Capital vs Human Development:

❖ Human Capital: Human Capital considers education and health as a means to increase
labor productivity.

➢ Human capital treats human beings as a means to an end, the end being the
increase in productivity.
➢ In this view, any investment in education and health is unproductive if it does not
enhance the output of goods and services.

❖ Human Development: Human Development is based on the idea that education and
health are integral to human well-being because only when people have the ability to
read and write and the ability to lead a long and healthy life, they will be able to
make other choices that they value.

➢ In the human development perspective, human beings are ends in themselves.

➢ Human welfare should be increased through investments in education and health
even if such investments do not result in higher labour productivity.
➢ In such a view, every individual has a right to get basic education and basic health
care, that is, every individual has a right to be literate and lead a healthy life.

Challenges Related to Human Capital in India:

❖ Financial Constraints: The government does not have enough resources to invest in the
human development of the country.

❖ Poor Quality of Services in Public Facilities: There is a large difference between the
services available in public and private facilities. Better facilities are available in private
schools and hospitals.

42
❖ Affordability: Private schools and hospitals offer better services but they are expensive
and thus not affordable for all
sections of society. Higher
education and intensive health
care become expensive for the
people in India.

❖ Social Disparities: Due to the

old-age discriminating caste
system, there is a lack of
opportunities for the backward
sections of society like Scheduled Castes and Scheduled Tribes.

➢ Many of them are not wealthy enough to afford quality education and health services
for their children.

➢ It is challenging to provide better health and education facilities to tribal people near
their homes in forests.

❖ Monopoly: The economic situation where there is only a single seller in the market is
called a Monopoly. In this situation, the seller dictates its unreasonable terms and the
buyers having no option left have to accept those terms.

➢ Example: Suppose there is only one kirana store in the village and it sells a small
packet of Parle biscuits (worth Rs 5) for Rs 10. The people of the village have to buy
the biscuit at that rate only as there is no other shop in the village. This situation is
an example of a monopoly where there is only one seller (kirana store).

➢ It results in the exploitation of consumers.

43
 Lecture -07
Employment and Poverty

44
 Employment and Poverty

Unemployment:

❖ The Indian Government defines unemployment as a situation in which all those who,
owing to lack of work, are not working but either seek work through employment
exchanges, intermediaries, friends, or
relatives or by making applications to
prospective employers or express their
willingness or availability for work under
the prevailing condition of work and
remunerations.
❖ Unemployment is said to exist when
people who are willing to work at going
wages, cannot find jobs.
❖ The unemployment rate in India
normally lies between 5-6%. But post-
COVID-19 lockdown the rate hiked at a tremendous rate due to the loss of jobs for
many people during the lockdown. The rate of unemployment fell as India eased
lockdown post covid.

45
Additional Information:

❖ There are three sources of data on unemployment in India:

1. Reports of Census of India,
2. National Statistical Office’s (NSO) Reports of Employment and Unemployment
Situation, Annual Reports of Periodic Labour Force Survey (PLFS), and
3. Directorate General of Employment and Training data of Registration with
Employment Exchanges.
❖ Though they provide different estimates of unemployment, they do provide us with
the attributes of the unemployed and the variety of unemployment prevailing in
our country.

Types of Unemployment:

❖ Structural Unemployment
❖ Technological Unemployment
❖ Cyclical Unemployment
❖ Frictional Unemployment
❖ Disguised Unemployment
❖ Seasonal Unemployment

Structural Unemployment:

❖ Example: Suppose there is a computer

engineer who studies coding language such
as C, C++, etc. but firms in the market are
looking to employ those individuals who
have knowledge about artificial intelligence,
cloud computing, 5G, etc. Thus there is a
gap between the supply (skills an individual
possesses) and demand (skills demanded by employer) of labour in the market.
❖ The mismatch between skills required by an employer and those possessed by the
individual is known as the Skill Gap. The unemployment caused due to the skill gap is
Structural Unemployment.

46
Technological Unemployment:

❖ The replacement of humans with machines in the age of

artificial intelligence, robotics, etc. resulting in the loss of
jobs for many people is known as Technological
Unemployment.

Cyclical Unemployment:

❖ A business cycle refers to a pattern of

expansion and contraction of economic
activity in an industry or a country over
time, characterized by fluctuations in
gross domestic product (GDP),
employment levels, and other economic
indicators.
❖ Generally, the rate of unemployment is lower during the expansionist phase of the
business cycle whereas the unemployment rate increases during the contractionist
phase of the business cycle.
❖ Unemployment due to the contractionist phase of the business cycle is known as Cyclical
Unemployment. Typically marked by a recession, these contractions slow economic
growth throughout the economy, and employment rates fall.

Frictional Unemployment:

❖ Frictional Unemployment is a type of unemployment that arises when workers are

searching for new jobs or are transitioning
from one job to another.
❖ The individual is called frictionally unemployed
during the time gap between his old and new
jobs, during which he is unemployed and is
looking or searching for a job. That is why, it
is also known as Search Unemployment.

47
Disguised Unemployment:

❖ Example: Suppose a farmer has four acres of land and he actually

needs only two workers and himself to carry out various
operations on his farm in a year, but if he employs five workers
and his family members such as his wife and children, this
situation is known as disguised unemployment.
❖ When more people are engaged in a job than what is actually
needed for the work, it is called Disguised Unemployment. It is
also known as Hidden Unemployment.

Seasonal Unemployment:

❖ Example:
➢ There is a tourist rush during the summer months in the southern States and
during the winter months in the hill stations. The people employed in the hospitality
industry at these places remain unemployed during the other months when there
is no tourist rush.
➢ The people engaged in agricultural work remain employed during the sowing and
reaping season of crops and remain unemployed during other months. There are
no employment opportunities in the village for all months of the year. When there
is no work to do on farms, people go to urban areas and look for jobs.
❖ Under seasonal unemployment, the individuals are employed for some time period of
the year whereas he/she remains unemployed for the other period of the year.

Formal vs Informal Sector:

Formal Sector Informal Sector

❖ The organizations or firms in the Formal ❖ The firms or organizations in the

Sector follow certain rules and regulations Informal Sector don't follow any
in their administration. rules or regulations in their
❖ All the public sector establishments and administration.
those private sector establishments which
employ 10 hired workers or more are

48
 called formal sector establishments and
those who work in such establishments are
formal sector workers.

❖ People enjoy certain benefits like social ❖ People don't enjoy social security
security, higher wages, regular income, job benefits, get lower wages, have no
security, etc. job security, etc.

❖ Example: engineers employed in company, ❖ Example: farmers, agricultural

etc. laborers, owners of small
enterprises, casual laborers, etc.

❖ In 2011-12, about 6% of people were ❖ In 2011-12, about 94% of people

employed in the formal sector. About 20 were employed in the informal
percent of formal sector and 30 percent of sector.
informal sector workers are women.

❖ There is a slight difference between the formal and organized sectors.

➢ In an organized sector, the firms or organizations apply all the acts, rules, and
regulations introduced by the government.
➢ Whereas in the formal sector, the firms may apply certain acts and may not
apply certain acts of the government.

Need for Employment in the Formal Sector:

There is a need to create more jobs in the formal sector rather than the informal sector
to get rid of the problem of unemployment. The major reasons are:

❖ Social Security:

49
 ➢ In the formal sector, people enjoy
certain social security benefits like
maternity leave (a woman gets
paid leave of approximately six
months during pregnancy and
childbirth), health benefits, etc.,
which are not available in case of
the informal sector.
❖ Higher Income Generation:
➢ The people get higher wages in the case of the formal sector as compared to the
informal sector. Thus people are able to have a decent standard of living and able
to afford basic health and education.
❖ Labor Rights:
➢ In the formal sector, the employed individual enjoys certain labor rights granted
by the labor laws introduced by the government like job security, forming trade
unions, bargains with employers for better wages, etc.
❖ Gender Equality:
➢ There are more opportunities for women in the formal sector.
➢ It is generally seen that females are paid less than males for doing the same work
in the informal sector. But in the formal sector, the males and females get equal
wages for the same work done.
❖ Skill Upgradation:
➢ In the formal sector, employed individuals get training at frequent intervals to
upgrade their skills and thus increase their efficiency in the work.
➢ This also helps in the improvement of human capital.

Poverty:

❖ Earlier poverty was defined only on the basis of money. This was a unidimensional
approach.
❖ But now the definition of poverty has evolved and it has become multidimensional.

50
 ➢ Poverty is defined on the basis of money, access to education, access to health, lack
of opportunities, illiteracy level, lack of general resistance due to malnutrition, lack
of access to healthcare, lack of job opportunities, lack of access to safe drinking
water, sanitation, etc.
❖ Poverty is a multidimensional phenomenon where a person lacks the essential resources
to meet the basic standards of living.
➢ Poverty means hunger, lack of shelter, clean water, and sanitation facilities. It also
means a lack of a regular job at a minimum decent level. Above all, it means living
with a sense of helplessness. Poor people are in a situation in which they are ill-
treated in almost every place.

Causes of Poverty:

❖ Historical Factors:
➢ Earlier India was considered as “sone ki chiriya” but with the advent of Britishers
in India, the economy deteriorated.
➢ The colonial exploitation of Britishers resulted in deindustrialization (ruined
traditional handicrafts and discouraged development of industries like textiles), and
ruralization (people migrating
from towns and cities to
villages) leading to increasing
pressure on the village economy.
This all resulted in millions of
people getting trapped in the
web of poverty.
➢ The low rate of growth persisted
until the nineteen-eighties. This was accompanied by a high growth rate of
population. The two combined to make the growth rate of per capita income very
low. The failure on both fronts: the promotion of economic growth and population
control perpetuated the cycle of poverty.
➢ One of the biggest challenges of independent India has been to bring millions of its
people out of abject poverty. Mahatma Gandhi always insisted that India would be

51
 truly independent only when the poorest of its people became free of human
suffering.
❖ Excessive Population Growth:
➢ The population of India today stands approximately at 140 crore, increasing the
burden on the limited natural resources of the country. This has led to the increasing
problem of unemployment.
➢ Example: The city of Bangaluru was created to equip approximately 10 lakh people
but today more than 1 crore people are living in this city leading to the problem
of traffic congestion on the roads.
❖ Income Inequality:
➢ Although the Indian economy is growing at a faster pace, the gap between the rich
and the poor is widening. The rich are becoming richer and the poor are getting
poorer.
➢ One of the major reasons for this is the unequal distribution of land and other
resources.
➢ Major policy initiatives like land reforms which aimed at the redistribution of assets
in rural areas have not been implemented properly and effectively by most of the
state governments. Proper implementation of the policy could have improved the
lives of millions of rural poor.
❖ Social Factors:
➢ A society fighting on the basis of religion, caste, etc. would regress as compared to
a society where people are living harmoniously.
➢ A society facing the problem of law and order would naturally have an increased
unemployment rate due to a lack of investment opportunities.
❖ Low Agriculture Growth:
➢ Although the green revolution has increased food production in India and made it
a self-sufficient economy, there were disparities in its impacts across India and
across different types of farmers. It has benefitted the big framers as compared to
the small framers.

52
➢ Small farmers need money to buy agricultural inputs like seeds, fertilizer, pesticides,
etc. Since poor people hardly have any savings, they borrow. Unable to repay
because of poverty, they become victims of indebtedness. So the high level of
indebtedness is both the cause and effect of poverty.
➢ Presently, more than a thousand farmers commit suicide every year in India due
to economic hardships.

53
 Lecture - 08
Employment and Poverty or
Rural Development

54
 Employment and Poverty or Rural Development

Poverty Estimation:
❖ After the independence of India, various steps were taken by the Government to
determine the estimation of poverty or poverty line.
➢ The poverty line is a threshold below which individuals or families are considered to
be living in poverty. It is often defined in terms of a minimum level of income or
consumption necessary to meet basic needs.
➢ The determination of the poverty line is influenced by various factors, including the
country’s level of development and its prevailing social norms and economic
conditions.
❖ The Alagh Committee was constituted in 1979 and headed by Y.K. Alagh to carry out
surveys and determine the poverty line for rural and urban areas.
➢ The committee recommended that the poverty line should be defined on the basis
of calorie intake.
➢ The people consuming less than 2400 calories in rural areas or less than 2100
calories in urban areas will be considered poor. The calorie intake limit is set high
for rural areas because more physical work is involved in rural lifestyles than in
urban areas.
❖ The Lakdawala Committee was formed by the Government in 1993.

55
 ➢ The committee defined the poverty line not only on the basis of calorie intake but
also on shelter and clothing.
❖ Tendulkar Committee was formed by the Government in 2005, headed by Suresh

Tendulkar.

➢ It tried to define poverty on the basis of expenditure done by the people.

➢ Those people whose monthly per capita expenditure is less than Rs 1000 in urban

areas and less than Rs 816 in rural areas will be considered poor.

➢ Monthly per capita expenditure means the expenditure incurred by an individual

per month.

➢ Based on the above poverty estimation method, approximately 21.9% of people live

Below Poverty Line in India.

❖ The Rangarajan Committee headed by Dr C. Rangarajan was formed in 2014.

➢ It defined the poverty line on the basis of monthly family expenditure.

➢ Those families whose monthly family expenditure is less than Rs 7035 in urban

areas and less than Rs 4860 in

rural areas will be considered as

poor.

➢ Monthly family expenditure means

the expenditure of a family per

month. The Family here includes an

average of 5 members.

➢ According to this poverty estimation method, approximately 29% of people are

poor in India.

➢ The Government considers the report of the Rangarajan Committee as faulty

because it increased the percentage of poor people in India. Therefore, the

Government presently considers and follows the report of the Tendulkar Committee.

56
Absolute vs Relative Poverty:

Absolute Poverty Relative Poverty

❖ Absolute poverty is a state in which a ❖ Relative poverty is a state in which a

person is unable to meet basic needs person is unable to enjoy normal comforts
for living. of life which are enjoyed by a large
number of people in society.

❖ Example: A person living on the ❖ Example: An engineer earning 12 lakh per

roadside not able to afford food, annum will consider himself relatively
clothing, and shelter which are basic poor in front of billionaire Mukesh
necessities of life is considered to be Ambani, who is the richest person in India.
living in Absolute Poverty.

Measures to Reduce Poverty:

❖ This topic will include all the current social security schemes introduced by the
Government to help the poor live a decent life.

Marginal Propensity to Consume (MPC):

❖ Marginal means a small change in the present things.

❖ Marginal Propensity to Consume is the change in consumption per unit change in
income.
❖ MPC is defined as the proportion of an aggregate raise in pay that a consumer spends
on the consumption of goods and services, as opposed to saving it.
➢ Example: Suppose an individual receives a salary equal to Rs 5000 and gets Re 1
as a bonus. The person spends 60 paise and saves 40 paise out of this Re 1. Then
the MPC would be 0.6 (60 paise/Re 1). This shows the percentage of money
consumed out of the raise in salary of the individual.
❖ The value of MPC will always be less than or equal to 1 but never more than 1.
❖ It will be equal to 0 when the person consumes nothing (equal to Rs 0) out of the
money received whereas it will be equal to 1 when the person consumes all the money
received and saves nothing.

57
MPC = 0 ❖ Consumption is Rs 0 out of the aggregate raise in pay.

0 < MPC > 1 ❖ Consumes some amount out of the aggregate raise in pay.

MPC = 1 ❖ Consumes the whole amount received out of the aggregate raise in pay.

Marginal Propensity to Save (MPS):

❖ Marginal Propensity to Save is the change in savings per unit change in income.
❖ MPS refers to the proportion of a pay raise that a consumer saves rather than spends
on immediate consumption.
➢ Example: Suppose an individual receives a salary equal to Rs 5000 and gets Re. 1
as a bonus. The person spends 60 paise and saves 40 paise out of this Re 1. Then
the MPS would be 0.4 (40 paise/Re 1). This shows the percentage of money saved
out of the total money received by the individual.
❖ The sum of marginal propensity to consume and marginal propensity to save will
always be equal to 1.

MPC + MPS = 1

❖ The value of MPS will always be less than or equal to 1 but never more than 1.
❖ It will be equal to 0 when the person saves nothing (equal to Rs 0) out of the money
received whereas it will be equal to 1 when the person saves all the money received
and consumes nothing.

MPS = 0 ❖ Saving is Rs 0 out of the money received.

0 < MPS > 1 ❖ Saves some amount out of the money received.

MPS = 1 ❖ Saves the whole amount received.

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Paradox of Thrift:

❖ Paradox means having contradictory qualities or situations or phases. Thrift means the
quality of using money carefully and not wastefully.
❖ People generally believe that if he/she saves money then the savings of the country will
also increase in the future. But in reality, when everybody starts to save money, the
products of the companies don’t get sold as no one wants to spend in the market. Thus
in the long term, the revenues of the company decline which negatively impacts the
salary given to the employees of the company. The salary of the employees would be
reduced and thus they would no longer be in a position to save.
➢ This shows the paradox situation wherein the individual thinks that his/her saving
would increase the saving of the company but in reality, it actually deteriorates
the condition of the economy.
❖ The Paradox of Thrift suggests that when individuals in an economy collectively increase
the proportion of their income that they save, the total value of savings in the economy
may not necessarily increase. It can either decline or remain unchanged.
❖ The Paradox of thrift occurs when an increase in the overall savings rate in an economy
does not necessarily lead to total higher savings.
➢ Example: During the COVID-19 pandemic people started to save thinking about
the uncertainties in the future. No one was spending money in the market thus the
companies started facing a difficult situation as their products were not getting
sold. The companies started to cut the salaries of their employees. In fact, many
people were fired from their jobs to cut the cost of the company. The economic
condition deteriorated and people were no longer in a position to save money.

59
 Lecture - 09
Rural Development (Part - II)

60
 Rural Development (Part - II)

Factors of Production:

❖ The various inputs required to produce any goods or services are called the factors of

production.

❖ Essentially there are four key

requirements to produce any

goods or services, which include:

1. Land and Other Natural

Resources:

➢ This will include land and

other natural resources like water, minerals, coal, etc. obtained from the earth.

2. Labour:

➢ This includes the workforce which contributes to production generally through

their skills.

3. Physical Capital:

➢ It includes fixed capital, which will be used in production over many years, like

machines, tools, etc.

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 ➢ It includes working capital, which will be consumed during the production

process, like money in hand, raw materials, etc.

4. Human Capital:

➢ It includes the entrepreneur, who brings all the other factors of production i.e.

land, labor, and physical capital for production.

➢ Example: The essential requirement for the process of making a chair will be:

➢ wood and a place i.e. land (land + natural resources), labor, money and tools

like an axe, etc. (physical capital), and a design or idea of how to make a chair

(human capital)

Agriculture Diversification:

❖ Agricultural diversification involves two aspects:

1. Shift of workforce from farming to allied activities like livestock, poultry, fisheries,

etc.

OR

2. Change in cropping patterns like

sowing different types of crops at

the same time or sowing different

crops than before.

❖ This diversification is essential to

mitigate the risks associated with relying solely on farming for a livelihood.

Need for Agriculture Diversification:

❖ Risk Reduction: It reduces risks like crop failure, etc. for farmers.

❖ Sustainable Livelihoods: Usually farmers work only during the sowing and reaping

season of the crop and for other time periods they have no work to do and thus no

income to sustain their basic lifestyle.

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 ➢ Agricultural diversification will solve this problem as the farmers will have other

avenues to work in allied activities

that are not seasonal in nature.

❖ Tackle Disguised Unemployment:

Diversification will also help solve the

problem of disguised unemployment,

which is mainly seen in the agriculture

sector. These extra members could be

engaged in the other employment opportunities available in the allied sector.

❖ Reducing Farmers’ Suicide: With more avenues to work for farmers, fewer risks involved,
and sustainable livelihood, farmers will never need or want to end their lives due to
economic hardships. According to the National Crime Record Bureau (NCRB), almost
10,000 farmers die by suicide every year in India.

❖ Women Empowerment: Generally women’s participation is seen more in the allied

activities. With more government measures to promote agricultural diversification,
women will come forward to carry out these activities not as a help or duty towards
their families but rather as a profession to earn some money for themselves. This will
make them feel empowered.

❖ Doubling Framers’ Income: In order to double farmers’ income, they also need to
diversify their activities into agriculture as well as the allied sector.

Organic Farming:

❖ Increasing awareness of the harmful effects of chemical-based fertilizers and pesticides

on health has led to a rise in interest in eco-friendly agricultural practices.

❖ Conventional agriculture heavily relies on chemical inputs, which can contaminate food,
and water sources, harm livestock, deplete soil quality, and disrupt ecosystems.
❖ Organic farming is an eco-friendly approach that prioritizes environmental balance.

Chemical inputs like fertilizers, pesticides, etc., which negatively impact our health and

environment, are avoided.

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❖ It aims to restore, maintain, and enhance ecological balance in agriculture.

❖ There is a growing global demand for organically grown food due to its perceived safety
and nutritional value.

Positives of Organic Farming:

❖ Environment Sustainability: The zero usage of chemical inputs in organic farming

protects the environment.

❖ Healthier Food: It provides healthier,

pesticide-free food. This will help people to
remain healthy and disease-free.

❖ Labour Intensive: Due to no use of chemicals,

organic farming requires more workforce to
look after the crops. Thus it will provide
employment to more people.

❖ Contributes to Exports: Due to their chemical-free and high nutritional value, organic
products are more in demand in the world market thus increasing their exports.

❖ Sikkim became the India’s first 100% organic State in 2016.

Challenges of Organic Farming

❖ Expensive: It is more costly than

conventional food products thus
raising the affordability issue for a
large section of society.

❖ Low Initial Yields: In the initial one

or two years of its production, its
productivity or yield will remain low.
This becomes problematic for small farmers as they will earn less.

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❖ Difficult for Small Farmers: In India, almost 86% of farmers are either marginal or
small farmers. Thus they are not able to get much profit after spending so much money
(high production cost) on such a small land.
❖ Shorter Shelf Life: Organic products generally have shorter shelf life i.e. they become
unfit for use in a shorter period of time.

Additional Information:
In India,

❖ farmers having less than one acre of land are called Marginal Farmers.

❖ farmers having land between 1 to 2 acres are called Small Farmers.

❖ farmers having land between 2 to 10 acres are called Medium Farmers.

❖ farmers having more than 10 acres of land are called Large Farmers.

Food Security:
❖ Food security refers to a situation in which all individuals
have access to safe, nutritious, and affordable food.

❖ The three dimensions (3 A) of food security include:

➢ Availability: It refers to the presence of an adequate

food supply within the country.

➢ Accessibility: It means food is within reach of every

individual.

➢ Affordability: It means individuals have enough money

to purchase sufficient, safe, and nutritious food that meets their dietary needs.

Additional Information:
❖ In the 1970s, food security was primarily about the “availability at all times of
adequate supply of basic foodstuffs.”

❖ However, Amartya Sen introduced a new dimension by emphasizing “access” to food

through entitlements, which include what one can produce, exchange in the market,
and state or socially-provided supplies. This led to a significant shift in the
understanding of food security.

65
 Lecture -10
Basics of Macroeconomics

66
 Basics of Macroeconomics

Microeconomics vs Macroeconomics:

Micro Economics Macro Economics

❖ The Microeconomics takes into account ❖ Under macroeconomics, the economy of

small components of the economy. the country is considered as a whole.

❖ It studies economics at the individual ❖ It studies economics at the aggregate

level. level.

❖ It studies individual, household, and ❖ It studies the decisions of the

business decisions. Government and countries of the world.

❖ It is also called Price Theory. ❖ It is also called Income Theory.

❖ It is useful for individual investors. ❖ It is useful for Fiscal and Monetary Policy
decisions.

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Stock vs Flow Variable:

Stock Variable Flow Variable

❖ It represents quantity at a specific point ❖ It represents a change in quantity

in time. over a certain time period.

❖ Example: Bank balance of an individual ❖ Example: Monthly income of an

measured at a specific date and time. individual measured over a period of
one month.

❖ It is static in nature. ❖ It is dynamic in nature.

Circular Flow of Income:

❖ The circular flow of income is an economic model
that reflects how money or income flows through the
different sectors of the economy.

❖ A simple economy assumes that there exist only two

sectors, i.e., Households and Firms.

➢ Households are consumers of goods and services

and the owners of the factors of production (land labour, capital, and enterprise).

➢ However, the firm sector produces goods and services and sells them to households.

❖ In the figure, the two arrows on the top represent the goods and services market. The
arrow above represents the flow of payments for goods and services, and the arrow
below represents the flow of goods and services.

➢ The uppermost arrow, going from the households to the firms, represents the
spending the households undertake to buy goods and services produced by the
firms.
➢ The second arrow going from the firms to the households is the counterpart of the
arrow above. It stands for the goods and services which are flowing from the firms
to the households. This flow is what the households are getting from the firms, for
which they are making the expenditures.

68
❖ The two arrows at the bottom of the diagram similarly represent the factors of the

production market.

➢ The factors of production required to produce goods or services in the firms include

land, labour, physical capital, and human capital.

✓ The households provide services to the firms in the form of land, labour, physical

capital, and human capital. This is called Factor Services.

✓ The lowermost arrow going from the households to the firms symbolizes the

Factor services that the households are rendering to the firms. Using these

services the firms are manufacturing the output.

➢ The arrow above this, going from the firms to the households, represents the

payments made by the firms to the households for the services provided by the

latter.

✓ The firms in return give rent (for land), wages (for labour), interest (for physical

capital), and profit (for human capital) to the household for their services. This

is called Factor Payment.

❖ Households spend their income on goods and services produced by firms. Firms pay

income to factors of production. The circular flow of income between households and

firms continues year after year.

Tax vs Subsidies:

Tax Subsidies

❖ Taxes are charges imposed by the ❖ A subsidy is a benefit given to individuals

government on individuals’ and firms’ and firms by the government.

income and revenue.

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Factor Cost vs Market Price:

Factor Cost Market Price

❖ Factor cost refers to the various costs ❖ Market price represents the final value
(rent, wages, interest, and profit) linked of goods and services that customers
to factors of production (land, labour, pay in the market.
physical capital, and human capital).

❖ It represents the price of goods at the ❖ It represents the price of goods in the
factory where it is being produced. market. Therefore, it includes tax and
Therefore, it does not include tax and subsidies. The taxes get added to the
subsidies. factor cost and subsidies get subtracted
from the factor cost.

Market Price = Factor Cost + Indirect Tax - Subsidies

Gross Domestic Product (GDP):

❖ GDP refers to the final market value of goods and services produced within an economy
(or domestic territory) in a particular time period.
❖ The value of goods and services imported from abroad will not be included in the GDP
of India as it is not produced inside the territory of India.
❖ The value of goods and services exported abroad from India will be included in the GDP
of India as it is produced on the territory of India.
❖ The domestic territory of a country includes its:
➢ area within political border,
➢ embassies, consulates, and military establishments all over the world (the Indian
embassy in the US, UK, etc, although located in the US and UK, will be considered
as its domestic territory),
➢ ships, aircraft, etc. run by the countrymen,
➢ territorial waters up to 12 nautical miles in the ocean from the land boundary of
the country,
➢ fishing vessels, oil rigs, and floating platforms operated by nationals in international
waters.

70
 Lecture -11
Basics of Macroeconomics
(Part – 2)

71
 Basics of Macroeconomics Part 2

Additional Information:

❖ For the purpose of calculating the GDP of a country, its domestic territory will not
include the offices of international organizations located within its political border.

Methods to Calculate Gross Domestic Product (GDP)

❖ There are three methods to calculate a country's
GDP:

1. Expenditure Method

2. Income Method

3. Value Addition Method

Expenditure Method:

❖ Under this method, the GDP of a country is determined by calculating the expenditure
incurred in producing the goods and services in a country.

❖ The expenditure method calculates the GDP by measuring the spending firms receive
for final goods and services produced.

❖ This method includes the following things for the calculation of GDP:

1. Consumption Expenditure (C): This denotes the expenditure incurred by individuals

and firms for the consumption of goods (like pens, cars, etc.) and services (like
restaurants, etc.)

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 2. Investment Expenditure (I): This denotes the expenditure incurred by individuals
and firms for the purpose of investment like buying machines, land, etc.
3. Government Expenditure (G): This denotes the expenditure incurred by the
Government.
4. Net Exports (NX): Exports are added, as they were produced inside the domestic
territory of a country, whereas imports are subtracted, as they were produced in
the foreign country i.e. outside the domestic territory of a country.

NX = X - M
Here, X denotes Exports, and M denotes Imports.

GDP at Market Price = C + I + G + NX

Income Method:
❖ Revenue related to goods and services made in a country are distributed among the
factors of production.
❖ Under this method, the GDP of a country is determined by calculating the revenue
(rent, wages, profit, and interest) obtained by producing goods and services in exchange
for providing factors of production (land, labor, physical capital, and entrepreneurship)
in a country.
❖ The income method calculates the GDP by summing up all factor payments (wages,
interest, profit, rent).
❖ This method includes the following things for the calculation of GDP:
1. Rent received in exchange for land
2. Wages received in exchange for labor
3. Profit received in exchange for physical capital
4. Interest received in exchange for entrepreneurship
Value Addition Method:
❖ This method is also called as Production Method or
Gross Value Addition Method.
❖ Example: Suppose a farmer has a sack of wheat worth
Rs 100. This wheat is processed into flour in a factory

73
 and becomes worth Rs 200, adding a value of Rs 100 at this stage. Again this flour is
used to make breads worth Rs 300, adding a value of Rs 100 at this stage. Thus in
this whole process from wheat to bread, there is a value-addition of worth Rs 200 (Rs.
100 + 100) by all the firms.
❖ The net contribution made by a firm is called its value added.
➢ If we include depreciation in value added then the measure of value added that we
obtain is called Gross Value Added.
➢ If we deduct the value of depreciation from gross value added we obtain Net Value
Added.
❖ Under this method, the GDP of a country is determined by aggregating the value added
in the production of goods and services by all the firms in a country.
❖ This method measures the GDP by calculating the aggregate value of final goods and
services produced by all firms.
❖ Through this method, we get the GDP at Factor Cost.
Method Used in India to Calculate GDP:
❖ Generally the Expenditure method and Value Addition method are used to measure
the GDP of a country.
❖ The Value Addition method is used to analyze the performance of various sectors of the
economy.
Net Domestic Product (NDP):
❖ The wear and tear losses incurred in a product due to its use as time passes by is called
depreciation.

Net = Gross - Depreciation

❖ The NDP represents the Gross Domestic Product (GDP) of a country minus
depreciation.

NDP = GDP - Depreciation

Gross National Product (GNP):

❖ Under Gross Domestic Product (GDP), we focus on where the goods and services are
being produced - whether within the domestic territory of a country or in a foreign
country, whereas under GNP, we focus upon who produce the goods and services -
whether nationals or foreigners.

74
❖ GNP represents the value of all the final goods and services that are produced by the
normal residents of a country, including income earned by domestic factors of
production abroad minus income earned by foreign factors of production within the
country.
❖ It is calculated as GDP plus net factor income from abroad.

❖ GNP refers to all the economic output produced by a nation’s normal residents, whether
they are located within the national boundary or abroad.

GNP = GDP + Income earned by nationals of a country abroad - Income earned by

foreigners within a country

Net Factor Income from Abroad (NFIA) = Income earned by nationals of a country abroad -
Income earned by foreigners within a country
GNP = GDP + NFIA

Net National Product (NNP):

❖ NNP is obtained by subtracting depreciation from GNP.

❖ Depreciation does not contribute to anyone’s income, so it is deducted to obtain a more

accurate measure of income.

Net National Product (NNP) = Gross National Product (GNP) - Depreciation

Nominal vs Real GDP:

Nominal GDP Real GDP

❖ Nominal GDP is the total value of goods ❖ Real GDP evaluates goods and services
and services produced in an economy at at constant (base-year) prices, allowing
current market prices. for a comparison of production volumes
across different years.

❖ It does not account for changes in ❖ Real GDP helps eliminate the impact of
prices over time. price changes, making it a useful tool
for assessing actual changes in economic
production.

75
❖ It is difficult to analyze economic ❖ Economic growth can be analyzed
growth. easily.

❖ Example: Suppose a firm produces ❖ Example: For the same example,

shoes. In the month of October, it keeping the base price constant at Rs.
produced 50 units of shoes, the price 200 per shoe, the Real GDP for the
was Rs 200 per shoe. The Nominal GDP month of October was Rs 10,000
for October month was Rs 10,000. In (50*200), and for the month of
the month of November, the firm November was Rs 1200 (6*200).
produced 6 units of shoes at a price of
Rs 2000 per shoe. Therefore nominal
GDP in the month of November was Rs
12,000.

❖ The above example shows that the GDP ❖ The above example shows that the GDP
of a country will also increase if there is of a country will only increase if there
some increase in the price of the goods, is an increase in the production of goods
even though there is a decrease in the and services and is not due to the
production of goods. This does not increase in the price of goods and
reflect the true picture of the economy. services. This will reflect the true
picture of the economy.

76
 Lecture -12
Money and Banking

77
 Money and Banking

Issues with GDP Estimation:

❖ Non-Uniform Distribution of GDP: With the
measure of GDP, we cannot estimate the income
of wealthy and poor people. There might be a
case wherein the GDP of a country is increasing
but the poor people in the country are becoming
poorer and the rich becoming richer. This means
that the economic growth in the country is only
benefitting a few sections of the society.

➢ According to the Oxfam Report, the richest one percent of Indians now hold more
than 40% of the country's wealth, while the bottom half of the population
collectively holds only 3%. The wealth held by the top five percent is 61.7%, nearly
20 times greater than the 3% held by the bottom half.

❖ Non-Monetary Exchanges Not Included:

➢ The GDP includes the final market value of goods and services produced in the
country. Many essential services, such as household work and caregiving, and barter
exchanges are not accounted for in GDP because they do not involve market
transactions. This exclusion can lead to an underestimation of the actual
contribution of these activities to the well-being of the population.

78
 ➢ Barter exchange is not included in the GDP of a country. In a Barter system, goods
(or services) are directly exchanged against each other. However since money is not
being used here, these exchanges are not registered as part of economic activity.

Barter Exchange:
❖ It refers to the trade of goods and services between two parties without the use of
money.

❖ Externalities Not Included: Suppose there is a shoe factory that is producing shoes. The
factory donates some percentage of its profits every year to the education of young
children. But the factory is also causing air pollution to the environment and
discharging untreated wastes into the nearby river, thus polluting the river. This will
harm the environment as well as the people living in the nearby area. In this case, the
value of shoes produced by the factory will be included in the GDP but the damage
caused by it to the environment and society, called Negative Externalities, is not
accounted for in the GDP. Also, the good work done by the factory like children’s
education, called Positive Externalities, is also not accounted for.

Positive and Negative Externalities:

❖ Externalities refer to the benefits (or harms) a firm or an individual causes to another
for which they are not paid (or penalized).
❖ Here the benefits caused by a firm or individual to another is called Positive
Externalities (eg: a shoe factory donates some of its profit to the education of
children) and the harms caused by a firm or individual to another are called Negative
Externalities (eg: a shoe factory polluting air and the nearby river).

Evolution of Money:
❖ Barter System:
➢ Barter System is the trade of goods and services
between two parties without the use of money.
➢ Example: Suppose there is a fruit seller and a
person who has eggs. Imagine that the fruit seller
wants to buy a dozen eggs whereas the person
wants to buy 1 kg of fruit. The person will buy
1 kg of fruit from the fruit seller by giving him
12 eggs. Thus here the fruit-seller gets the eggs and the person gets the fruits by
exchanging goods with each other without using money.

79
 ➢ This is also called Double Coincidence of Wants. Suppose in the above example the
fruit-seller does not want eggs but the person who wants to buy fruits only has
eggs for exchange. So until and unless the wants of both the fruit-seller ( i.e. he
wants eggs in exchange for fruits) and the person (he wants fruits in exchange for
eggs) do not match, the exchange of goods and services will not happen.
➢ Issues with the Barter System: There were some problems with the system such as
✓ Perishable items like eggs, vegetables, etc, could not be stored for long and thus
could not be used to buy goods and services.
✓ The wants of both parties i.e. buyer and seller may not match like in the above
example the fruit-seller does not want eggs.
❖ Commodity Money:
➢ The people started using some physical objects as a medium like coffee beans, apples,
etc, to exchange goods and services.
✓ Example: The person will sell eggs in exchange for coffee beans and then
exchange those coffee beans with the fruit seller to buy fruits.
➢ The commodity money is one which has some intrinsic value. Example: The coffee
beans can be used to make coffee, apples can be eaten, etc.
✓ Intrinsic value refers to the internal value of a commodity.
➢ Issues with the Commodity Money: There were also some issues with the commodity
money.
✓ The commodity could be perishable and thus cannot be stored for a long time
like apples.
✓ The commodity money was non-uniform. The size and shape of coffee beans
may vary from one individual to another.
✓ The supply of commodities is limited and uncertain. For Example: coffee beans
could not be grown due to unfavorable climatic conditions.
❖ Metallic Coins:
➢ Metals like gold, silver, copper, etc were minted into coins and began to be used as
a medium of exchange.
➢ The metallic coins had intrinsic value.

➢ Issues with the Metallic Coins: There were some issues with the metallic coins.

80
 ✓ With the increasing demand, generally it was seen that the purity of the coins
started deteriorating. People began to forge coins at their homes thus
decreasing the intrinsic value of coins.
❖ Paper Money:

➢ Paper money or currency notes are being currently used by people as a medium of
exchange.

➢ It does not have intrinsic value. They are non-perishable, and uniform.

❖ Plastic Money:

➢ The plastic money is in the form of credit cards and debit cards.

➢ It removes the need for carrying money for transactions.

❖ Electronic Money:

➢ Electronic Money is the transfer of money using an electronic device like a

smartphone or tablet, etc.

➢ Mobile payment services like BHIM, Googlepay, etc. to make payments for the
purchase of goods and services.

❖ Cryptocurrencies:
➢ Cryptocurrencies are stored and traded using computer applications or specially
designated software. Example: Bitcoin.
➢ It is operated by decentralized authorities, unlike government-issued currency
notes.

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 Lecture -13
Money and Banking (Part - II)

82
 Money and Banking (Part - II)

Functions of Money:
❖ Medium of Exchange:

➢ Money is used as a medium of exchange to buy and sell goods and services.

➢ The double coincidence of wants is

necessary in a barter system where
goods are directly exchanged
without the use of money, but
transactions in terms of money
make it all easier.

➢ Money serves as an intermediate

step in an economy, eliminating the
need for a double coincidence of wants.

❖ Unit of Account:

➢ This means money acts as a common measure of the value of goods and services.

➢ In the barter system, there was confusion regarding the value of different items.
Example: For buying 1 kg of fruits, one individual was ready to give one dozen eggs
and another individual was ready to give 1 kg of wheat. This created confusion
among people about what is the real worth of 1 kg of fruit.

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 ➢ But with the evolution of paper money, this confusion was done away with as
everything could now be valued in terms of money. Example: For everyone 1 kg of
fruit will be worth Rs. 100.

❖ Store of Value:

➢ This means money can be stored or preserved for a longer period as a saving or
wealth.

➢ In the barter system, this was not possible as the perishable items could not be
stored for longer periods.

❖ Standard of Deferred Payment:

➢ Deferred payment means making payment of debt, usually involving repayment in

installments, at a later date after buying the goods and services on loan at present.

➢ Example: Suppose you buy a mobile phone worth Rs 18000 on loan. You decided
to pay Rs 3000 in installments for 6 months.

Earning of Banks:

❖ Individuals deposit their surplus income as savings in banks and in return banks pay
some interest (suppose 4%) on
deposits of individuals. This interest
will be considered a loss for banks as
they have to pay the interest to
individuals from their profit.

❖ But in reality, this is not the case.

Banks also give loans to individuals
and charge interest (suppose 12%) on
that, which is double or more than the interest paid by banks to individuals on their
deposits.

❖ Thus the gap between the the interest charged by banks on loans and interest paid by
banks on deposits (12% - 4% = 8%) becomes the income for the banks.

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Asset vs Liability:

Asset Liability

❖ Items of value are called assets. ❖ Liability refers to the debt that an
individual or firm owes.

❖ The ownership of assets lies with the ❖ The burden of liability lies on individuals
owner of individuals or firms. or firms that owe it.

❖ They generate revenue or income for ❖ They are an expense for individuals or
individuals or firms. firms.

❖ Example: your house, your car, your ❖ Example: your house loan, your car loan,
mobile phone, your share in the stock credit card payments, installments or
market, etc are your assets. EMI of loans, etc are your liabilities.

Asset and Liability of Bank:

❖ The loans given by banks are the assets of the bank as
the bank owns that money (given in the form of a loan)
and it is also earning revenue or income, in the form of
interest charged, on that money.
❖ The deposits done by individuals or firms in banks are
liabilities of banks as the banks owe that money to the
individuals or firms and it also has to pay the interest on that deposit.

Additional Information:
Non-Performing Assets (NPA)
❖ The loans given by banks are its assets. But when for some reason, the individuals or
firms are unable to pay back the loans to banks, then it becomes NPAs for banks i.e.
these assets are not performing for banks due to non-payment of interest and
principal amount of the loan for 90 days or more.

Reserve Bank of India (RBI):

❖ RBI is the central bank of India.
❖ The RBI was established in 1935, in accordance with the RBI Act of 1934.
❖ The RBI is governed by one Governor (currently Shaktikanta Das) and not more than
four Deputy Governors.

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 ➢ They are appointed by the Government of India.
❖ The headquarters of RBI is located in Mumbai whereas it has offices all over the country.
Functions of RBI:
❖ Issuer of Bank Notes: The RBI is the
issuer of the bank notes of India
except for the Re. 1 note, which is
issued by the Finance Ministry of the
Government of India.
➢ The coins and Re 1 note are issued
by the Government of India.
❖ Frames the Monetary Policy: The RBI frames the Monetary Policy of India.
❖ Banker to Government and Banks: The RBI acts as a banker to the Government (both
Central and State Governments). This means that the Government deposits its money
or takes loans directly from RBI.
❖ Represents India: The RBI represents India at international financial meetings.
❖ Lender of Last Resort: The RBI is the lender of the last resort to deal with financial
difficulties in times of emergency.
❖ Regulator of Banks: The RBI is the regulator of banks and banker of banks in the
country.
❖ Custodian of Foreign Exchange Reserves: Foreign exchange reserves are kept in the
custody of RBI.
➢ Foreign exchange reserves are the reserves of the Government of India and are held
by the RBI. These usually include foreign currencies (like the US dollar, etc.), gold,
etc. It is used for the payment of import bills of the country.
Assets and Liabilities of Reserve Bank of India (RBI):
❖ The RBI is the banker of banks and regulator of banks. Thus the banks deposit their
surplus income or profits with the RBI to earn interest and also take loans from the
RBI in times of need.
❖ Thus the deposits of banks with the RBI is the liability for RBI and the loans given by
RBI to banks is the asset of RBI.
Repo Rate:
❖ It is the interest rate at which the Reserve Bank of India (RBI) gives loans to the banks.

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 Lecture -14
Money and Banking (Part - III)

87
 Money and Banking (Part - III)

Inflation:
❖ Example: Suppose you went to the market to buy 1 kg of tomatoes which was worth
Rs 50. Now after one month, you again went to the market to buy a kg of tomatoes.
But now the price of tomatoes increased to Rs 70. Again after a month, the price of
a kg of tomatoes increased to Rs 80. This increase in the price of tomatoes refers to
inflation.

❖ The sustained rise in prices of goods and services is called Inflation.

❖ The inflation occurs when there is less supply as compared to demand (or there is more
demand as compared to supply) for goods and services in the market.

❖ To control inflation in the market, the RBI will lower demand in the market by
decreasing the money supply in the hands of individuals.

Deflation:

❖ The opposite of inflation is termed deflation.

❖ Example: Suppose you went to the market to buy 1 kg of tomatoes which was worth
Rs 50. Now after one month, you again went to the market to buy a kg of tomatoes.
But now the price of tomatoes decreased to Rs 40. Again after a month, the price of
a kg of tomatoes decreased to Rs 30. This decrease in the price of tomatoes refers to
deflation.

❖ The sustained decline in prices of goods and services is called Deflation.

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❖ The deflation occurs when there is more supply as compared to demand (or less demand
as compared to supply) for goods and services in the market.

❖ To control deflation in the market, the RBI will increase demand in the market by
increasing the money supply in the hands of individuals.

Disinflation:

❖ Example: Suppose you went to market to buy 1 kg of tomatoes which was worth Rs
50. Now after one month, you again went to the market to buy a kg of tomatoes. But
now the price of tomatoes increased to Rs 100. The percentage increase in the price
of tomatoes is 100% ({Final Value - Initial Value / Initial Value} * 100). Again after a
month, the price of a kg of tomatoes increased to Rs 120. Now, the percentage increase
in the price of tomatoes is 20%. Here the prices of tomatoes are increasing but the rate
of increase in the price of tomatoes is decreasing i.e. from 100% to 20%. This reduction
in the rate of increase in the price of tomatoes refers to disinflation.

❖ Inflation wherein the increase in price is reduced with time is called Disinflation.

Cash Reserve Ratio (CRR):

❖ Example: Suppose a bank has deposits of Rs

100 crore. Now it cannot give the whole
amount as a loan to firms or individuals. It
needs to keep a certain percentage of
deposits (say 4% of deposits i.e. Rs 4 crore)
with the Reserve Bank of India (RBI). Here
the percentage of deposit that is kept with the RBI by the bank refers to CRR.

❖ CRR refers to the specified portion of deposits that a bank has to keep with the Reserve
Bank of India (RBI).

❖ In other words, the percentage of cash required to be kept in reserves against the
bank's total deposits, is called the Cash Reserve Ratio.

❖ The CRR has to be in the form of cash only.

❖ The Reserve Bank of India (RBI) pays no interest rate on the CRR.

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❖ If the Reserve Bank of India (RBI) increases CRR, then the bank will have to keep more
portion of deposits with the RBI meaning less portion of deposit will be left with the
bank to give loans. Thus the capacity of banks to give loans will decrease leading to
reduced money supply in the market.

❖ Similarly if the Reserve Bank of India (RBI) decreases CRR, then the bank will have to
keep less portion of deposits with the RBI meaning more portion of deposits will be left
with the bank to give loans. Thus the capacity of banks to give loans will increase
leading to increased money supply in the market.

↓ Money Supply in the Market Control Inflation

↓ CRR ↑ Money Supply in the Market Control Deflation

Statutory Liquidity Ratio (SLR):

❖ Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a
commercial bank has to maintain in the form of cash, gold, and securities.

❖ It is basically the reserve requirement that banks are expected to keep before offering
credit to customers.

❖ These are not reserved with the Reserve Bank of India (RBI), but with banks themselves.

❖ The SLR is fixed by the RBI. The banks earn interest on the SLR.
❖ If the Reserve Bank of India (RBI) increases SLR, then the bank will have to keep more
portion of deposits with themselves meaning less portion of deposit will be left with the
bank to give loans. Thus the capacity of banks to give loans will decrease leading to
reduced money supply in the market.

❖ Similarly if the Reserve Bank of India (RBI) decreases SLR, then the bank will have to
keep less portion of deposits with themselves meaning more portion of deposits will be
left with the bank to give loans. Thus the capacity of banks to give loans will increase
leading to increased money supply in the market.

↑ SLR ↓ Money Supply in the Market Control Inflation

↓ SLR ↑ Money Supply in the Market Control Deflation

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Thus, CRR (Cash Reserve Ratio) and SLR have been the traditional tools of the central
bank's monetary policy to control credit growth, flow of liquidity, and inflation in the
economy.

Government Security:
❖ A Government Security (G-Sec) is a tradeable instrument issued by the Central
Government or the State Governments. It acknowledges the Government’s debt
obligation.
❖ It is a certificate that usually mentions the principal amount (loan amount to be raised),
interest rate, maturity date, etc. On the date of maturity, the Government promises
to pay back the principal amount along with the interest rate.

Repo Rate:
❖ It is the interest rate at which the Reserve
Bank of India (RBI) gives loans to the banks
against the collateral of government
securities, except for government securities
kept in the form of Statutory Liquidity Ratio
(SLR).
❖ The bank makes an agreement with the RBI
that it will take back or repurchase its
securities in the future, after repaying the loan called a Repurchase Agreement/
Operation/ Option/ Obligation (Repo).
❖ If RBI increases the Repo rate, the banks will borrow less from the RBI, as the interest
on the loan is high. Thus the banks will have less funds to give loans in the market
leading to decreased money supply in the economy.
❖ If the RBI decreases the Repo rate, the banks will borrow more from the RBI, as the
interest on the loan is less. Thus the banks will have more funds to give loans in the
market leading to increased money supply in the economy.

↑ Repo Rate ↓ Money Supply in the Market Control Inflation

↓ Repo Rate ↑ Money Supply in the Market Control Deflation

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Reverse Repo Rate:
❖ It refers to the interest rate at which the
banks keep their excess funds with the
Reserve Bank of India (RBI).

❖ Also it refers to the interest rate at which

the RBI borrows from banks against the
collateral of government securities, except
for government securities kept in the form of Statutory Liquidity Ratio (SLR).

❖ If the Reserve Bank of India (RBI) increases the Reverse repo rate, then banks will park
more amount with the RBI thus decreasing the amount available with the bank to give
loans to individuals or firms leading to reduced money supply in the market.
❖ If the Reserve Bank of India (RBI) decreases the Reverse repo rate, then banks will park
less amount with the RBI thus increasing the amount available with the bank to give
loans to individuals or firms leading to increased money supply in the market.

↑ Reverse Repo Rate ↓ Money Supply in market Control Inflation

↓ Repo Rate ↑ Money Supply in market Control Deflation

Standing Deposit Facility (SDF):

❖ SDF is the same as the Reverse Repo rate except government securities are not used
here.

❖ SDF refers to the interest rate at which the RBI borrows from banks.

❖ The main purpose of SDF is to reduce the excess liquidity in the system, and control
inflation.

❖ The unique feature of SDF is that it is a collateral-free liquidity absorption mechanism

to absorb liquidity from the commercial banking system into the RBI. Collateral-free
means the RBI will not give any collateral like G-Secs while the bank gives funds to the
RBI.

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 Lecture -15
Money and Banking (Part - IV)

93
 Money and Banking (Part - IV)

❖ Open Market Operation

❖ Monetary Policy Committee
❖ Money Supply
❖ Quantitative Tools of RBI
❖ Qualitative Tools of RBI

Open Market Operation:

❖ The buying and selling of government securities in the open market is termed as Open
Market Operations.
➢ Selling of securities helps in controlling inflation by RBI.
➢ Buying of securities by RBI helps to improve growth.
❖ Open market operation is an operation which is conducted by RBI in India from time
to time to absorb or inject liquidity into the system.
❖ The objective of Open Market Operation is to regulate the money supply in the economy.
❖ When the RBI wants to increase the money supply in the economy, it purchases
government securities from the market.
❖ When the RBI wants to decrease the money supply in the economy, it sells government
securities to suck out liquidity from the system.

Monetary Policy Committee:

❖ The Monetary Policy Committee of RBI is a statutory body constituted as per Section
45ZB under the RBI Act of 1934 by the Central Government.
❖ It decides the RBI's benchmark interest rates to maintain price stability while keeping
in mind the objective of growth.
Composition of Monetary Policy Committee:
❖ This committee is composed of 6 members.
❖ Three members of the committee are from RBI:
➢ The RBI governor is the chairman of the Monetary Policy Committee.

94
 ➢ The Deputy Governor of RBI is in charge of the monetary policy committee.
➢ An officer of the Central Bank to be nominated by the RBI board.

❖ The other three members are nominated by the government who are experts in finance,
economics, etc.

❖ All decisions taken in this committee are by voting.

❖ The quorum of monetary policy should be 4 members.

❖ The Governor of RBI has a casting vote when there is an incidence of a tie.

❖ There are a minimum of 4 meetings that should be conducted in a year.

❖ The monetary policy is answerable to the government when the inflation rate is outside
the 2% to 6% limit for 6 months.

Money Supply:
❖ The Reserve Bank of India controls the money supply in the economy.

❖ Four measures are used by RBI to calculate the supply of money in an economy:

➢ M1: Cash/coins with public + Demand liability with bank + Other deposits with RBI
➢ M2: Cash/coins with public + Demand liability with bank + Post office deposits +
Other deposits with RBI
➢ M3: Cash/coins with public + Demand liability with bank + Time liabilities with
bank + Other deposits with RBI
➢ M4: Cash/coins with public + Demand liabilities with bank + Post office deposits +
Time liabilities with bank + Other deposits with RBI.

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Liquidity:

❖ The ease with which something can be converted into cash is termed as Liquidity.

❖ Liquidity order: M1 > M2 > M3 > M4.

❖ Narrow Money:

➢ M1 and M2 are combinedly called narrow money.

❖ Broad Money:

➢ M3 and M4 are combinedly called broad money.

Quantitative Tools of RBI:

❖ Quantitative instruments are related to the volume and amount of money. These tools
are used to control the overall level of currency and the volume of bank credit in the
economy.

❖ Various Quantitative Qualities of RBI:

➢ Repo rate
➢ Statutory liquidity ratio (SLR)
➢ Standing deposit facility (SDF)
➢ Fixed reverse repo rate
➢ Open market operation

Qualitative Tools:
❖ The qualitative tools of monetary policy encompass mechanisms such as credit
rationing, consumer credit regulation, guidelines, margin requirements, and ethical
persuasion.

❖ The qualitative tools are:

➢ Moral Suasion: It persuades banks to follow RBI policy through informal

communication.
➢ Margin Requirement: It is a qualitative method of credit control adopted by the
central bank to stabilize the economy from inflation or deflation.
✓ The margin requirement refers to the difference between the current value of
the security offered for the loan (called collateral) and the value of the loan
granted.

96
➢ Credit rationing: Credit Rationing is a method by which the RBI seeks to limit the
maximum amount of loans and advances and, also in some instances, fix ceilings
for specific categories of loans and advances. It is also called selective credit control.
➢ Direct Action: RBI takes action against banks if they don’t fulfill the conditions and
requirements of RBI. RBI may refuse to rediscount their papers, give excess credits,
or charge a penal rate of interest over and above the Bank rate, for credit
demanded beyond a limit.

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 Lecture -16
Government Budgeting

98
 Government Budgeting

Budget:

❖ The Government Budget is an annual financial statement that contains the

Government’s estimated receipts and expenditures.

❖ The Government is mandated to form a budget under Article 112 of the Indian
Constitution.

❖ This statement, presented before the Parliament, encompasses the estimated receipts
and expenditures of the government for a particular financial year, running from 1
April to 31 March.

❖ The money received by the government is called Receipt whereas the money spent by
the government is called Expenditure.

❖ The budget has four components:

1. Revenue Receipt

2. Capital Receipt
3. Revenue Expenditure

4. Capital Expenditure

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 Revenue Receipt Capital Receipt

❖ Revenue Receipt is the money received ❖ Capital Receipt is the money received
by the government which is generally by the government which is generally
recurring in nature. non-recurring.

❖ It includes taxes, interest on loans, fees ❖ It includes recovery of loans, disinvest-

for services rendered by the ment, etc.
government, dividends of public sector
undertakings, etc.

❖ It has no impact on assets or liabilities. ❖ It reduces assets or increases liabilities.

Revenue Expenditure Capital Expenditure

❖ It means the money spent by the ❖ It means the money spent by the
government which is generally government which is generally non-
recurring in nature. recurring in nature.

❖ It includes expenses necessary for the ❖ It includes infrastructure creation,

normal functioning of government acquisition of land, buildings, machi-
departments and services, salaries/ nery, and equipment, investment in
pensions to government employees, shares, loans and advances by the
subsidies, interest payments on Central Government to State and Union
government debt, grants distributed to Territory Governments, Public Sector
State Governments and other parties, Undertakings (PSUs), and other parties.
etc.

❖ It has no impact on assets or liabilities. ❖ It increases assets or decreases liabilities.

100
Additional Information:
Public Sector Undertakings (PSUs) or Public Sector Enterprises (PSEs)

❖ PSUs or PSEs are those companies in which the government (Central or State) owns
more than 50% share of the company.

❖ Example: Bharat Petroleum Corporation Limited (BPCL), National Thermal Power

Station (NTPS), etc.

Dividend:

❖ It means the part of the profit of a company paid to the shareholders i.e. the people
who own shares in it.

❖ In the case of a public sector undertaking, the Government constitutes one of the
shareholders of the company and thus receives the profit of the company.

Disinvestment:

❖ It means the selling off of a portion of shares of Public Sector Undertakings (PSUs)
by the government to the public.

❖ The government's primary objectives behind disinvestment were:

➢ To instill financial discipline, and enable modernization.

➢ To harness private capital and managerial expertise to elevate the performance

of Public Sector Units (PSUs).

101
 Lecture -17
Government Budgeting (Part - II)

102
 Government Budgeting (Part - II)

Functions of Budget:
❖ Redistribution Function:
➢ It is defined as the government’s role in
altering the distribution of income to
achieve a distribution considered ‘fair’ by
society. Budget helps take money from
those who have it in excess and redistribute
it among those who need it.
➢ This is achieved through the government’s
interventions like transfers and tax collections, which affect the personal disposable
income of households. This ensures income distribution in a fair manner.
❖ Allocation Function:
➢ Budget helps allocate money where it is needed in time.
➢ Budget helps ensure allocation of funds pending on defense and infrastructure.
➢ The Government provides certain goods and services, called public goods like
national defense, government administration, etc., that cannot be provided by the
market mechanism.
➢ The broken link between producers and consumers, due to the absence of a payment
process, necessitates government intervention to provide such goods. The financing
of public goods is done by the Government through the budget, allowing usage
without any direct payment.

103
❖ Stabilization Function:
➢ It refers to the government’s intervention to correct fluctuations in income,
employment, and overall economic stability by either expanding or reducing
aggregate demand, based on the prevailing economic conditions.
➢ During hard times or emergencies, the government comes forward to help the
people of the country by launching different social schemes.
➢ This ensures economic growth during times of economic stress. Example: During
the COVID-19 pandemic, the Government launched the Pradhan Mantri Garib
Kalyan Yojana to help the country's needy people.

Types of Budget:
❖ There are two types of expenditure i.e. revenue
and capital expenditure. Also, there are two
types of receipts i.e. revenue and capital
receipts.
❖ When the government’s income is greater than
spending then it is called Surplus Budget.
❖ When the government’s spending is greater
than income then it is called Deficit Budget.
❖ When both spending and income of the government are equal then it is called Balanced
Budget.

❖ Income > Spending → Surplus Budget

❖ Income < Spending → Deficit Budget
❖ Income = Spending → Balanced Budget

Types of Deficit:
❖ A government deficit arises when the
government spends more than its revenue
collections.
❖ There are three types of deficit:
1. Revenue Deficit
2. Gross Fiscal Deficit
3. Primary Deficit

104
Revenue Deficit:

❖ Revenue Deficit is the excess of the government’s revenue expenditure over revenue
receipts.

❖ It only accounts for transactions affecting the current income and expenditure of the

government.

❖ A revenue deficit indicates government dis-saving, utilizing savings from other

economic sectors to finance part of its consumption expenditure, thereby necessitating

borrowing for both investment and consumption requirements.

Revenue Deficit = Revenue Expenditure - Revenue Receipt

Gross Fiscal Deficit:

❖ The capital receipts are of two types:

1. Debt Creating Capital Receipts: This includes loans.

2. Non-Debt Creating Capital Receipts: This includes recoveries of loans and proceeds

from the sale of PSUs i.e. disinvestment, which do not give rise to debt.

❖ Gross Fiscal Deficit is the difference between total government expenditure and total
receipts, excluding borrowings. This shows the borrowings of the Government therefore

it is a crucial indicator of the financial health of the public sector and economic

stability.

❖ A significant share of revenue deficit in fiscal deficit implies a large portion of borrowing

is used for consumption expenditure rather than investment.

❖ Gross Fiscal Deficit = Total Expenditure - Total Income

❖ Total Expenditure = Revenue Expenditure + Capital Expenditure

❖ Total Income = Revenue Receipt + (Capital Receipt - Loans/Borrowings of the

Government)

❖ Non-Debt Capital Receipt = Capital Receipt - Loans/Borrowings of the Government

105
Primary Deficit:

❖ Primary Deficit shows the interest payment done by the present Government for the
loans borrowed by the previous Governments.

❖ The Government uses this to show its current performance separate from the effect of
bad policies adopted by the previous Governments.

Primary Deficit = Gross Fiscal Deficit - Interest Payment on Previous Loans

Government Security:
❖ A government security is a type of paper issued by the Government to support public
spending. Government securities are called investment products issued by the both
central and state governments of India in the form of bonds, treasury bills, or notes.

Modern Means of Money:

National Electronic Fund Real Time Gross Settlement Immediate Payment Service
Transfer (NEFT) (RTGS) (IMPS)

❖ Money transfer on a ❖ Real-time money transfer. ❖ Real-time money transfer.

half-hourly basis.

❖ It is generally used ❖ It is generally used by big ❖ It is generally used by

by retail customers. business individuals. retail customers.

❖ The minimum limit ❖ The minimum limit of ❖ The minimum limit of

of money transfer is money transfers is Rs 2 money transfer is Re 1
Re 1 and there is no lakh and there is no and the maximum is Rs 5
maximum limit. maximum limit. lakh (differs from bank to
bank).

Legal Tender:
❖ Money that the other person is under compulsion to accept is called a Legal Tender.
'Legal tender' is the valid money used for payment of the debt and is also recognized
by the law of the land.

106
❖ The currency notes and coins issued by the Government of India and RBI constitute
the legal tender in India. Example: Re 1 note, Rs 100 note, Rs 5 coin, etc.

❖ But the plastic money issued by banks like debit cards, credit cards, etc, do not
constitute legal tender in India.

Fiat Money:

❖ Fiat money means any currency or coins or digital currency that is issued by the
government. It is not backed by any physical commodity like gold or silver, but rather
by the government.

❖ Currency notes and coins in India are fiat money, with the RBI promising to provide
purchasing power equal to the value printed on them.

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 Lecture -18
Government Budgeting
(Part - III) and Open Economy

108
 Government Budgeting (Part - III) and Open Economy

Fiscal Policy:
❖ The policy framed by the Government which involves adjustment of spending levels
(expenditure) and tax rates (receipt) to stabilize the levels of output and employment
is called Fiscal policy.

❖ Fiscal policy aims to boost output and income and stabilize economic fluctuations by
creating either a surplus budget (total receipts > expenditure), a deficit budget (total
expenditure > receipts), or a balanced budget (expenditure = receipts).

Monetary Policy:

❖ The policy framed by the Reserve Bank of India (RBI) to control credit growth, flow of
liquidity, and inflation in the economy is called the Monetary policy.

Progressive Tax, Regressive Tax, and Proportional Tax

❖ Progressive Tax: In progressive taxation, higher

income attracts higher tax rates. The income
tax imposed on the income of individuals is an
example of progressive taxation as the tax rate
increases with the increase in income.

➢ Example: In the graph, it is shown that

there is no taxation imposed on individuals
earning between $0 to $10000, a 15% tax rate is imposed on individuals earning

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 between $10000 to $20000, a 25% tax rate is imposed on individuals earning
between $20000 to $30000 and so on. Here, the individual who gets high incomes
pays a higher proportion of their income as tax. A progressive tax is a tax where
the tax rate increases with an increase in the taxpayer’s income.
❖ Regressive Tax: A regressive tax is a type of tax that is assessed irrespective of income
i.e. same tax rates will be imposed on every individual irrespective of whether the
person is rich or poor.
➢ A regressive tax is imposed on the goods and services. The Goods and Services Tax
(GST) is an example of a regressive tax as the same tax rate is imposed on every
individual buying the same product.
➢ Example: Suppose a packet of Parle G biscuit is worth Rs 5 in which its
manufacturing cost is Rs 4 and a tax of Rs 1 is imposed on it. Any individual
whether rich or poor, will pay the same tax on buying a packet of this biscuit that
other consumers pay irrespective of their income levels. Thus, a regressive tax
system levies the same percentage on products or goods purchased regardless of
the buyer's income.
➢ A regressive tax does not increase with an individual's earnings or income level.
Rather, the percentage of tax paid by individuals decreases as their income
increases. Example: Suppose a tax of Rs 500 is imposed on individuals, then the
percentage of tax paid by an individual earning Rs 10000 is 5%, Rs 20000 is
2.5%, and Rs 30000 is 1.6%.

❖ Proportional Tax: In a proportional tax rate, the tax rate happens to be a particular
portion of the profits of individuals.

➢ Example: Suppose a proportional tax rate of 10% is imposed on the profits of

individuals. Now the person earning Rs 1000, Rs 10000, and Rs 100000 will pay
a tax of Rs 100, Rs 1000, and Rs 10000 respectively.
➢ Here the same tax rate is imposed on the profit of individuals. But here the tax
paid by the individuals increases as the profit of individuals increases.

❖ The graph below represents that as the income increases the progressive tax increases,
the proportional tax remains the same as the income increases, and the regressive tax
decreases as the income increases.

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Direct and Indirect Tax:
❖ Direct Tax: The direct tax is a type of tax that an individual or organization pays
directly to the government. The burden of tax and the responsibility of paying the tax
lies on the same individual.

➢ The income tax (imposed on the income of individuals) and corporate tax (imposed
on the profit of business) are examples of direct tax as the taxes levied and paid by
the same individuals.
➢ Example: Suppose the individual earning Rs 1 lakh pays a tax of Rs 15000 to the
Government. Here the tax is paid out of the pocket of the individual and the
responsibility to collect and pay the tax to the government also lies on the
individual.

❖ Indirect Tax: The indirect tax is a tax that is levied on the consumption of goods and
services.

➢ The burden of tax and the responsibility to pay the tax lies on different individuals.
The taxes are levied and paid by the different individuals.

✓ The Goods and Services Tax (GST) is an example of an indirect tax.

➢ Example: Suppose you went to a restaurant to eat some food. Now a tax rate of
Rs 18% is imposed on you in the bill of the restaurant. Here the tax is paid out of
your pocket but the responsibility to collect the tax lies on the restaurant owner
who in turn will pay the tax to the Government on your behalf. The tax is levied
on you but ultimately paid by the restaurant owner.

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Goods and Services Tax (GST):

❖ Prior to GST, different tax rates were imposed by different States on goods and
services. This created confusion among people.

❖ The Central Government decided to introduce GST from 1st July 2017 to promote
the notion of One Nation, One Tax, One Market.

❖ The Goods and Services Tax (GST) is a comprehensive single indirect tax imposed on
the supply of goods and services from the manufacturer or service provider to the
consumer, applicable throughout India.

❖ The GST was introduced in the country through the 101st Constitutional Amendment
Act, 2016.

❖ It replaced or subsumed all the indirect taxes, like Entertainment Tax, Excise duty,
Luxury tax, Services tax, etc., imposed by different States on goods and services.

❖ It is a destination-based consumption tax. A consumption/ destination-based tax is

levied at the time of consumption of goods or services. It is a tax we pay for using goods
or services. Example: A good produced in Maharashtra is being sold in Bihar. Thus, GST
will be levied in Bihar where goods and services are consumed.

❖ The GST comprises three taxes:

1. Central GST (CGST): It is levied and collected by the Central Government.

2. State GST (SGST): It is levied on transactions within the States.

3. Integrated GST (IGST): It is levied on inter-state transactions.

❖ Five standard GST rates are applied: 0%, 5%, 12%, 18%, and 28% on all goods and/or
services.

❖ Special provisions exist for five petroleum products, alcoholic liquor for human
consumption, and tobacco products, not subsumed in GST.

GST Council:

❖ The GST Council decides the different tax rates imposed on goods and services.
❖ It consists of representatives from the Central and State Governments. The Chairperson
of the GST Council is the Union Finance Minister.

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❖ The decisions in the Council are taken through voting and for any decision to be passed,
it needs a 3/4th (75%) majority.

❖ The voting power of the Central Government and State Governments are 1/3rd
(33.33%) and 2/3rd (66.66%) respectively.

Crowding In and Crowding Out:

❖ Crowding In: When increased government spending increases the spending of the
private sector, it is termed as Crowding In Effect.

➢ The government spending on its capital creation like infrastructure, machinery,

etc. increases the confidence of the private sector to enter and invest more in the
economy.

❖ Crowding Out: When increased government spending decreases the spending of the
private sector, it is termed as Crowding Out Effect.

Sometimes the Government spends more than its income on capital creation. In this case,
the Government finances its spending through borrowing from the banks and private
players, which decreases the borrowing capacity of the private sector (as there is less
money available with the banks or individuals to give loans to the private sector). This
reduces the investment of the private sector in the economy.

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 Lecture -19
Open Economy (Part - II)

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 Open Economy (Part - II)

Open Economy and Closed Economy:

❖ Closed Economy: A closed economy is an economy that does not export/import goods
and services to/from other countries of the world.

➢ No country in the world can be completely called a closed economy in this era of
globalization.

❖ Open Economy: An open economy is one which interacts with other countries of the
world by trading in goods, services, and financial assets.

➢ An open economy is an economy that exports/imports goods and services to/from

other countries of the world.
➢ India is an example of open economy. The introduction of LPG (Liberalization,
Privatization, Globalization) reforms in 1991, opened the Indian economy to the
world for trade and commerce. These reforms ushered in a new era of economic
liberalization for India, making the country more attractive to foreign investment
and private enterprises by scrapping many of the restrictions that had been
imposed throughout the 20th century.

Balance of Payments (BoP):

❖ Export means selling a product made in our country
to another country of the world. Example: Shoes
produced in India are sold in the USA.

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❖ Import means selling a product in our country that was made in some other country
of the world. Example: Shoes made in the USA are being sold in India.

❖ The BoP records transactions between residents of a country and the rest of the world
over a specified period of time.

❖ BoP includes two types of accounts:

1. Current Account

2. Capital Account

Current Account:

❖ Current account records transactions based on the

trade of goods, services, and transfer payments.

❖ This account includes:

1. Trade in Goods: This includes export and

import of goods. The purchase of foreign goods
or imports decreases the domestic demand for
goods and services in our country whereas selling goods to foreign countries or
exports increases the domestic demand for goods and services in our country. The
difference between the value of exports and imports of goods within a specified
time period is called the Balance of Trade (BoT).
✓ A balanced BoT occurs when the value of exports equals the value of imports.

✓ A Surplus BoT (Trade Surplus) arises when a country exports more goods than
it imports.
✓ A Deficit BoT (Trade Deficit) arises when a country imports more goods than
it exports.
2. Trade in Services: This includes the export and import of services. Example:
Banking, transport, computer and information services, etc.
3. Transfer Payments: This includes receipts received ‘for free’ by residents of a
country without the provision of any goods or services in return. It comprises gifts,
remittances (money sent by our relatives from other countries into our country),
and grants (giving loans for free i.e. at no interest rate and the loan is not taken
back) from either the government or private citizens living abroad.

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❖ Balance on Invisibles: It is the difference between the value of exports and imports of
invisibles within a specified period. Invisible trade refers to an international transaction
that does not involve tangible goods, but services, such as consultancy services,
insurance, banking, intellectual property, international tourism, etc. In other words, it
is the import and export of services between countries. Invisibles encompass services,
transfers, and flows of income occurring between different countries.

❖ Current Account Surplus: When exports (receipt of foreign currency) of goods, services,
and transfer payments are more than imports (payment of foreign currency) of goods,
services, and transfer payments then it is called Current Account Surplus.

❖ Current Account Deficit: When imports of goods, services, and transfer payments are
more than exports of goods, services, and transfer payments then it is called a Current
Account Deficit.
❖ Balanced Current Account: When imports of goods, services, and transfer payments
are equal to exports of goods, services, and transfer payments then it is called a
Balanced Current Account.

Current Account Surplus Balanced Current Account Current Account Deficit

Receipts > Payments Receipts = Payments Receipts < Payments

❖ It reflects a nation’s status as either a lender (surplus) or a borrower (deficit) with

other countries.

Capital Account:

❖ The capital account records international

transactions of assets in various forms of wealth i.e.
in the form of investment, external commercial
borrowing, and external assistance.

❖ This account includes:

1. Investment: It is of two types:

a. Foreign Direct Investment (FDI): Foreign Direct Investment is where the foreign
investors invest in the companies of our country with the long-term motive

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 and start acquiring a role in the management of the companies. Example: India
allows FDI in railway infrastructure, insurance, etc.

b. Foreign Portfolio Investment (FPI): Foreign Portfolio Investment allows foreign

investors to invest in the companies of our country with the motive of earning
short-term gains. Example: A foreign investor buys the shares of Reliance
Industries for one week and when the price of shares increases, he/she sells the
shares in the share market.

2. External Commercial Borrowing: External Commercial Borrowing is an instrument

that helps Indian firms and organizations raise funds from outside India in foreign
currencies. This includes short-term loans taken by individuals from foreign
countries.

3. External Assistance: This includes aid (giving loans at a low-interest rate) and loans
taken from international organizations like the World Bank, International
Monetary Fund (IMF), etc.
❖ The capital account is in balance when capital inflows (like receipt of loans from abroad,
sale of assets or shares in foreign companies) are equal to capital outflows (like
repayment of loans, purchase of assets or shares in foreign countries).

❖ The surplus in the capital account arises when capital inflows are greater than capital
outflows, whereas a deficit in the capital account arises when capital inflows are lesser
than capital outflows.

Capital Account Surplus Balanced Capital Account Capital Account Deficit

Inflows > Outflows Inflows = Outflows Inflows < Outflows

Depreciation and Appreciation:

❖ Depreciation: Suppose today $1 is equal to Rs 80. This means that a dollar can be
bought by giving Rs 80. Now after one day $1 becomes equal to Rs 90. This means
that now for buying a dollar we will pay Rs 90, more than earlier. This shows that the
rupee has become weak against the dollar or the demand for the rupee has decreased
in the international market, which is called the depreciation of the rupee.

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 ➢ The change in market forces i.e. demand and supply which makes foreign currency
costlier is called depreciation.

❖ Appreciation: Suppose today $1 is equal to Rs 80. This means that a dollar can be
bought by giving Rs 80. Now after one day $1 becomes equal to Rs 70. This means
that now for buying a dollar we will pay Rs 70, less than earlier. This shows that the
rupee has become strong against the dollar or the demand for rupees has increased in
the international market, which is called the appreciation of the rupee.

➢ The change in market forces i.e. demand and supply which makes foreign currency
cheaper is called appreciation.

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 Lecture -20
Open Economy (Part - III)

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 Open Economy (Part - III)

Law of Demand:
❖ As the price of a good decrease, the quantity demanded increases, and vice-versa, if
other things are kept constant.
❖ Example: Generally we have seen that, whenever the price of products drops during
the sale on any online shopping platform, the product becomes out of stock after some
time due to increased demand for the product. If the price of a watch decreases from
Rs.5000 to Rs.4000, the demand for the watch among consumers will automatically
increase.

Normal vs Inferior Goods:

❖ Normal Goods: Normal goods are products for which demand increases as income rises
and it decreases as income falls.
➢ Example: Mahipal buys one branded t-shirt with a monthly salary of Rs 10000.
After some time, his income increases to Rs 1 lakh/month. So now he started to
buy 10 branded shirts as it is affordable for him. Thus, it appears that in this case,
the branded t-shirt is a normal good because, with an increase in income, the
demand for it increases.

❖ Inferior Goods: Inferior goods are those that see a decrease in demand as consumer
income rises and also an increase in demand as income decreases.

➢ Example: Ramsha earns Rs 10000/month and goes to the office by government

bus. Since the income is less the demand for government buses will be high. After

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 some time when her income increased to Rs 1 lakh/month, she started commuting
to the office by her car. Thus, in this case, the government bus is an inferior good
because the demand for such goods decreases as the income of the individual
increases.

Substitute Goods and Complementary Goods:

❖ Substitute Goods: Substitute goods are those which can be used in place of each other.
Example: Tea and coffee are substitute goods as a person will drink only one of them
at a time.

➢ Suppose in the above example the price of a cup of tea and coffee is worth Rs 10.
After some time, the price of a cup of tea increases to Rs 20. Now according to
the law of demand, if the price of the product increases its demand will decrease
therefore the demand for tea decreases. Now people will switch to coffee as its price
is still less than tea. Thus the demand for coffee will increase. This shows that with
the increase in price of a product, its demand decreases, and simultaneously the
demand for its substitute product increases.

❖ Complementary Goods: Complementary goods are products typically consumed

together. Example: Bread and butter are complementary goods as a person will want
to eat both of them together to have a better taste.

➢ Suppose in the above example the price of butter increases, its demand will
decrease. The demand for bread will also decrease as people like to eat them
together. This shows that with the increase in price of a product, its demand
decreases and simultaneously the demand for its complementary product decreases.

Total Utility and Marginal Utility:

❖ Utility in economics means the satisfaction or happiness one gets after using something.

❖ Utility is measured in two ways:

1. Total Utility: Total Utility is the total happiness one gets from all the things one
has. Example: Suppose an individual buys 20 chocolates from a shop. The total
utility will measure the total happiness of the child after getting 20 chocolates.

2. Marginal Utility: Marginal Utility tells how much one’s happiness changes when
he/she gets one more thing. Example: Suppose an individual buys 20 chocolates

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 from a shop. The marginal utility will measure the happiness of the child in getting
one more chocolate, i.e, the 21st chocolate.

Law of Diminishing Marginal Utility:

❖ This law says that as a person consumes more units of a good or service, the additional
utility or satisfaction derived from each unit decreases.

❖ Example: Three bites of candy are better than two bites, but the twentieth bite does
not add much to the experience beyond the nineteenth one.

Marginal Rate of Substitution:

❖ Marginal Rate of Substitution is the rate at which a consumer is willing to trade one
good for another while maintaining the same level of satisfaction.

Law of Diminishing Marginal Rate of Substitution:

❖ Consumers are less willing to exchange goods as they have more of one.

➢ Example: Suppose there are two individuals A and B. A has 50 oranges and B has
20 packets of coffee. A wants a packet of coffee so he exchanges his 5 oranges with
B to get it. Now A has 45 oranges and a packet of coffee. Again A wants a packet
of coffee, he again exchanges his 5 oranges with B to get a packet of coffee. Now
A has 40 oranges and 2 packets of coffee. Again A wants a packet of coffee, but
now he want to give only 2 oranges in exchange of a packet of coffee as he already
has 2 packets of coffee. Thus, the rate of substitution is diminishing.

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 Lecture -21
Open Economy (Part - IV)

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 Open Economy (Part - IV)

Budget Line:
❖ The Budget Line represents a bundle with the cost equal to M, where M is the Total
Money.

❖ The term budget line refers to a graphical representation of all the potential
combinations of two commodities that can be bought within a certain income and
price.

❖ Example: Suppose an individual has ₹100 to

spend on two items: mangoes and coffee.

➢ Let P1 be the Price of Mangoes and X1

be the quantity of mangoes purchased.
Let P2 be the Price of Coffee and X2 be
the quantity of coffee purchased.
➢ If the mangoes cost ₹2 each and coffee
cost ₹ 5 each, the budget line would show the various combinations you can afford.
➢ The first option is to buy 20 sachets of coffee (₹5/coffee) but no mangoes. This is
represented by Point A (0,20) on the graph.
➢ Alternatively, you could buy 50 mangoes (₹2/mango) but no coffee. This is
represented by Point B (50,0) on the graph.
➢ Or you might decide to buy a mix, like 25 mangoes and 10 coffee, staying within
your budget ₹100. This is represented by Point C (25, 10) on the graph.

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❖ The cost of each combination must be less than or equal to the consumer’s money
income, i.e., P 1X1 + P 2X2 = M.
❖ Budget Set: It is the collection of all the bundles available to the consumer at market
price.
The Elasticity of Demand:
❖ Price elasticity of demand is a measure of the responsiveness of demand of a good to
change in price.

Elasticity = % change in demand

% change in price.

❖ Example:

➢ Let's consider the price of the laptop was ₹30,000 and it was demanded by 1 lakh
people. The price of a laptop increased to ₹40,000 from ₹30,000, i.e., an increase
of 33.33%. As a result, the quantity demanded decreased by 50%, i.e., from ₹1
lakh to ₹50,000. This illustrates the elasticity of demand.

✓ On the other hand, the price of a necessary medicine which was demanded by
50 people was ₹100. Now if the price of medicine increases to ₹150, the
quantity demanded still remains the same i.e 50 people. This demonstrates
inelastic demand. People might still buy the medicine despite an increase in
price because it's essential for their health, showing that their demand is less
sensitive to price changes. Therefore, demand for essential goods is considered
to be inelastic.

Fixed Cost and Variable Cost:

❖ Fixed Cost: Fixed cost is the cost that remains constant regardless of the level of
production. Example: Rent, lease payment, etc.
❖ Variable Cost: Variable cost is the cost that changes with the level of production.
Example: Raw materials, labor, etc.
❖ Total Production Cost: Total Production Cost refers to the complete expense incurred
by a firm in producing a certain level of output. It encompasses both fixed costs and
variable costs.

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 Total Cost = Fixed Cost + Variable Cost

❖ Example:
➢ Let's consider a factory that produces garments. The total cost (TC) of producing
garments involves both fixed and variable costs.
➢ Fixed costs could involve the monthly rent for the factory space, which remains
constant regardless of the number of garments produced by the factory.
➢ Variable costs might include the cost of raw materials like cloth which increase as
more garments are produced.

Perfectly Competitive Market:

❖ A perfectly competitive market is a theoretical model where many small firms produce
identical products, allowing for unrestricted entry and exit into the market.
❖ Example: An agricultural market often comes close to the model of a perfectly
competitive market. In an agricultural mandi, there are multiple vegetable sellers selling
the same quality of potato at Rs. 20/Kg. Similarly, there are multiple buyers who have
the option to purchase potatoes from different available buyers. Thus, an agricultural
mandi is an example of a perfectly competitive market.

Characteristics of a Perfectly Competitive Market:

❖ Multiple buyers and sellers.

❖ Manufacturing and selling of identical products.

❖ Freely enter and exit the market.

❖ Information is readily available.

Monopoly, Duopoly, and Oligopoly:

❖ Monopoly: A monopoly exists when a single entity

dominates the entire market for a particular
product or service.

➢ Example: Indian Railway Catering and Tourism

Corp (IRCTC) enjoys a strong monopoly because it has a 100% market share in the
rail network. IRCTC is the only entity authorized by Indian Railways to offer online
railway tickets and manage catering services on trains and major static units at

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 railway stations. The company also enjoys a monopoly in distributing packaged
drinking water at all railway stations and trains under the ‘Rail Neer’ brand.

❖ Duopoly: A duopoly occurs when a market is dominated by two entities that collectively
have significant control over the market.
➢ Example: Food delivery Apps (Swiggy vs
Zomato): In India, if someone wants to order
food online, only these two companies deliver
food & it isn’t other companies that don’t exist.
Many other companies were operating in this
segment, but they were acquired or merged
with one of the companies. Some notable companies were Foodpanda, Uber Eats,
and Dineout. As only two companies have a duopoly in the food delivery space,
customers now have limited options.
❖ Oligopoly: Oligopoly refers to a market structure
dominated by a small number of large firms,
typically four or fewer, where each firm's action
significantly impacts the other.
➢ Example: The oligopolist industries include the
automobile industry, where a few major
companies like Toyota, Volkswagen, and Ford
dominate the global market.

Competition among suppliers is good for customers. Therefore, in a monopoly suppliers

benefit the most, not the customers.

National Income and Personal Income:

National Income:
❖ National Income (NI) is Net National Product (NNP) evaluated at Market Price (MP)
while taking into account indirect tax and subsidies. This gives a Net National Product
at Factor Cost (NNP FC) which is considered as national income.

❖ NNP FC = National Income

❖ Market Price - Taxes + Subsidies = Factor Cost

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Personal Income:
❖ Personal income includes all the income received by individuals in a year.

❖ Personal Income = National Income - Undistributed Profit - Corporate Tax - Interest

Payment by Household + Interest Payment to Household + Transfer payment

Exchange Rate System:

❖ Devaluation: A government action that increases the exchange rate making the
domestic currency cheaper is called Devaluation.

➢ Example: Suppose intially, $1 = ₹80. Due to certain economic reasons or policy

decisions, the government issuing the currency decided to devalue the ₹ and now
$1 = ₹90. This is the devaluation of the currency.
❖ Revaluation: Revaluation occurs when the government decreases the exchange rate
thereby making domestic currency costlier.
➢ Example: Suppose initially the $1 = ₹80. To revalue, the government decided to
change the rate to $1 = ₹70.
❖ Depreciation: Depreciation refers to a decline in the value of a country's currency
concerning other currencies in a floating exchange rate.
➢ For example: Suppose initially, $1 = ₹70. Due to market forces of supply and
demand, the value of rupees decreases, and the exchange rate changes to $1 = ₹80.
This indicates a depreciation of the Indian rupee against the US dollar. The rupees
had lost value compared to the dollar meaning it now takes more rupees to buy
one dollar
➢ Impact of Depreciation:

✓ Exports Become Cheaper: Indian goods become more competitive in the

international market as they are now relatively cheaper for foreign buyers in
terms of dollars. This could potentially boost Indian exports.
▪ Example: Let's consider initially $1 = ₹100. A person, Angel who has a
brand of chocolates in India sells them in the US market. The price of these
chocolates in India is ₹50/chocolate and in the USA, they are sold at
$0.5/chocolate (as $1 = ₹100). Now, if rupees depreciate, let's say to $1 =

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 ₹200. The same chocolates priced at ₹200/chocolate now appear cheaper
in USD terms because now the customer is buying chocolate at
$0.25/chocolate as compared to $0.5/chocolate. Thereby, depreciation
leads to an increase in Indian Exports.

✓ Imports Become Costlier: Example: Anmol imports oil in India from Saudi
Arabia. Let us assume, 1$ = ₹100. Anmol buys oil in dollars from Saudi Arabia.
The Indian rupee depreciates, i.e. from 1$ = ₹100 to 1$ = ₹200. So from now
on, Anmol will pay ₹200 as compared to ₹100 after depreciation for buying
the same quantity of oil. Hence, imports become costlier when Indian rupees
depreciates.
❖ Appreciation: Appreciation refers to an increase in the value of a country's currency
concerning other currencies in a floating exchange rate system.
➢ Impact of Depreciation:

✓ Exports Become Costlier: Example: Let's consider the above example, if the
Indian rupee appreciates and moves from $1 = ₹100 to $1 = ₹50 then the
same chocolate now seems costlier for a customer buying chocolate in the US.
Previously, chocolates cost $0.5, now they cost $1 because of the appreciation
of Indian currency. This results in the loss of Angel’s goods and ultimately decline
in Indian exports. Hence, the Appreciation of Indian currency results in a decline
in exports.

✓ Imports Become Cheaper: Imported goods priced in dollars become relatively

cheaper for Anmol in terms of rupees. For example, Let us assume, 1$ = ₹100.
When the rupee appreciates to $1= ₹50, the same product now costs ₹50 as
compared to ₹100 after appreciation. Hence, imports become cheaper when
the Indian rupee appreciates.

Depreciation ❖ Exports Become Cheaper ❖ Imports Become Costlier

❖ Increase in Exports ❖ Decrease in Exports

Appreciation ❖ Exports Become Costlier ❖ Imports Become Cheaper

❖ Decrease in Exports ❖ Increase in Exports

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Exchange Rate System:

❖ Exchange Rate System refers to the way a country determines and manages the value

of its currency in relation to other currencies.

❖ There are three types of Exchange Rates:

➢ Fixed Exchange Rate

➢ Flexible Exchange Rate

➢ Managed Floating Exchange Rate

Fixed Exchange Rate System:

❖ In this system, governments or central banks set the exchange rate of their currency

against another currency and maintain this rate by buying or selling their currency.

❖ Advantages of Fixed Exchange Rate System:

➢ This brings stability because exchange rates remain constant.

➢ It enhances predictability by enhancing proper planning.

➢ It helps in controlling inflation.

❖ Disadvantages of Exchange Rate System:

➢ Monetary policy independence may be lost.

➢ Maintenance is costly.

Flexible Exchange Rate System:

❖ Under this system, exchange rates are determined by market forces of supply and

demand without direct government intervention. Fluctuations in currency values occur

based on market conditions.

❖ Advantages of Flexible Exchange Rate System:

➢ Monetary policy independence was maintained.

➢ It is less costly as compared to the fixed exchange rate.

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❖ Disadvantages of Flexible Exchange Rate System:

➢ It promotes a lot of uncertainties

➢ It promotes trade shocks.

Managed Floating Exchange Rate:

❖ It is a hybrid of both flexible and fixed exchange rate systems where exchange rates are
mostly determined by market forces, but government or central banks may
occasionally intervene to stabilize or influence the currency's value.



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