Economy

Inflation

1. meaning of inflation
2. Types of inflation
3. Reasons for inflation
4. solution to manage inflation
5. Impact of information
6. Terminology in inflation
7. Measurement of information
8. concept to deflation

Meaning of inflation

Inflation means rise in price in essential goods and services. For example essential goods
and services are those goods and services which are consumed by masses
For example ;petrol and diesel ,rice ,wheat ,vegetable etc. essential items vary from country
to country within country essential items get changed by times.
Rise in the prices of essential commodities but such increase must impact the standard of
living of majority population in negative ways. By analysing above meaning we can infar
that economic is looking for inflation rate but up to certain limit on an annual basis. For
example in India we have set an inflation target 4+-2% Per annual. Inflation upto certain
limit act as incentive for an economy because it increase the salary of existing workforce as
well as this will further increase demand in economic which further Insensitivity The
producer to produce more by making investment and hence will be employment generation
and increase in growth rate.

NOTE:- The above concept best suit for organised economy.

The failure of above concept are on two grounds.

1. Give me economy is unorganised in nature.
2. If the economy is organised then we have observed that existing workforce whose salary
have increased are not ready to spend an economy, Haswell has companies whose profit
has increased out further not ready to invest in economy.

If we maintain inflation rate eight per annum then GDP will increase at a growth of 7 to 8%.
If we want to increase GDP, first then inflation rate required second only production
increase will not increase GDP.

NOTE:- The first and foremost condition to increase growth rate in an economic is to
maintain inflation rate of 4% then only other steps-will effective.
 Types of inflation

There are five types of inflation:-

1. Creeping inflation:- If an inflation rate is 2 to 5% per annum then it is creeping

inflation.
2. Trotting inflation :- If an inflation rate is 6 to 10% per annum then it is a trotting
inflation
3. galloping inflation:- If an economic inflation rate is 11 to 14% per annum then it is
galloping inflation.
4. runaway inflation:- If an inflation rate is 15 to 18% per annum then it is runaway
inflation.
5. Hyper inflation:- If an inflation rate is 20% or more per month is known as hyper
inflation.

Concerned authorities are making efforts to maintain Creeping inflation because this act as
an incentive for an economy. If the efforts of the concerned authority get failed to maintain
creeping inflation, then it will follow certain path that it will be first trotting inflation then
galloping inflation and finally runaway inflation and hyper inflation.
In certain situations, inflation will not follow above path what example wall like situation,
disaster at mass level and similar situation it is observed that creeping inflation Will directly
jump into runaway inflation, but such situation are rare in an economy.
Tottering and galloping inflation out together known as moderate level of inflation, where
has runaway and hyper inflation together known as high level of inflation.

If concerned authority failed to maintain creeping inflation, then concerned authority

required more efforts as compare to creeping inflation. In other words if government failed
to maintain creeping inflation, it can further reverse the inflation path.
If economic is at high level of inflation and concerned authority feel to reverse it, then the
next stage will be deflation ( deflations is more dangerous than Inflation).

Reasons for inflation

In order to maintain creeping inflation in an economy it is required to maintain demand

supply at equilibrium. Whenever this demand and supply equilibrium get disturbed
economic will witnessed inflation. There are three categories for inflation
1. Demands that increase the supply is constant.
2. Demands constant but supply get reduced.
3. Demand get increased but at the same time supply also get reduced.
Six reasons for inflation Are:-

1. Demand pull inflation

2. Cost push inflation
3. Structural inflation
4. Speculation inflation
5. Hourding inflation
6. Cartelisation inflation

1. DEMAND PULL INFLATION:- Under demand pull inflation,it is observed that

whenever money supply get increased or a desired Level( desired level of money supply
with the help of monetary aggregates by RBI) this increase money supply will put a
burden on limited products produced by an economy as per the desired level.
2. COST-PUSH INFLATION:- It is due to increase in the prices of factors of
production(e.g due to climate change, agricultural commodities get reduced )
Example of this inflation:- if gulf country increase the price of crude oil,than Indian
economy has to purchase such oil at high prices which ultimately responsible for increasing
in the price of petroleum products.

3. STRUCTURAL INFLATION:- structural inflation is due to failure of economic policy

of government or the poor quality of infrastructure. In 2019 agricultural commodities
worth Rs.90,000 crore for damage due to the infrastructure in terms of storage and
transportation.
NOTE:- in demand pull inflation demand side is getting disturbed whereas supply is
constant similarly in cost push and structural inflation supplied side is getting disturbed
whereas demand is constant.

4. SPEClATION INFLATION:- in speculation some anti economic elements are creating

artificial demand for essential products.
NOTE:-with respect to speculation of essential commodities it is a crime whereas with
respect to speculation of non-essential commodity is not a crime .

5. HOURDING:- under Hourding,it is observed that some anti-economic elements

deliberately make artificial storage of essential commodities.
6. CARTELISATION INFLATION:- Cartelisation means a groups of companies
producing a some product deliberately increase the price at same Level that is the higher
or due to their vasted interest.
For example:-IN 2014 - 2015, group of cement companies deliberately increase the
price with the intention to see whose cement is more purchased by the consumer.
Government of India can control domestic cartel only.
Q. What are solution or initiative taken by the concerned authority to manage the inflation
in an economy?
ANS:- inflation can be due to any of the reason mentioned above or combination of above
reasons.
If inflation is due to demand poll and within demand for money supply get increased due to
1st two reasons that is printing of currency and inflow of foreign currency ,
then economic will pursue contractionary monetary policy that is reparate as well as other
rates will be increase.
With the help of contractionary monetary policy, RBI is absorbing the excess money supply
and giving time to the economic to produce more and once production get increase the
excess money supply will release into the market.
If money supply is increasing through non-traceable sources that are last three reasons.
a) in case of black money it is the role of tax authority.
b) if money supply is due to monetary laundering, then it is the role of enforcement
directors.
c) if money supply increased due to counterfeit notes, then it is the role of Intelligence
agency.

If inflation increased due to cost push, then there are two approaches that is temporary
approach and permanent approach.

INITIATIVES TAKEN UNDER TEMPORARY APPROACH :-

By increasing burden on their subsidies on government during inflation (but this increase
burden on subsidies will increase government of India’s borrowing).
By reducing indirect taxes
Whenever government takes above steps it will increase the borrowing of government.
( borrowing of government of India of current financial year will increase that is also known
as fiscal deficient will also increase).
Imposition of ban on export of essential commodities.
Increase the import of such essential commodities.
The Above two steps will be responsible for increasing current account efficient.
CAD +FD—> TWIN DEFICITS

INITIATIVES TAKEN UNDER PERMANENT APPROACH :-

1. Government maintain buffer stock of certain agricultural commodities. Government will
release foodgrains from this buffer stock whenever there is shortage of agricultural
comedy it is in the market (buffer stock is Mountain by Food Corporation of India FCI).
2. Currently India is dependent on the import of fertilisers and to reduce its dependency on
such costly fertiliser, Government of India has introduced nano-urea and nano DAP (di-
ammonium phosphate).
3. Edible oil-currently 60% of total consumption of oilseeds is met through imports and to
reduce India dependency in such imported oilseeds, government is promoting natural
palm oil mission( under this mission palm oil cultivation will be promoted in Arunachal
Pradesh and Andaman and Nicobar)
4. Currently India is dependent on the import of crude oil and to counter inflation, due to
increase price of crude oil government of India introduced the concept of strategic
petroleum reserves (under this SPR government has constructed six underground oil
tank which has a capacity to store crude oil for 90 days).
5. Blending of ethanol in petrol, currently the target is to blend 20% ethanol in petrol.
6. Semiconductor is regarded as essential item and currently India import semiconductor
from China, Taiwan, South Korea. In order to reduce it dependency India has
introduced national semiconductor Mission( currently government of India has given
approval to 5 companies with respect to manufacturing of semiconductor out of this five
companies four will be set up a manufacturing plant in Gujarat and one will set up a
manufacturing plant in Assam).

If inflation is due to structural inflation then there is need of good quality of infrastructure
and for such infrastructure following initiative has been taken:-
( Q. What steps can be taken to reduce structural inflation?/ critically discuss or analyse
economic policy with respect to infrastructure?/what is government approach with respect
to management of structural inflation?)

1. National infrastructure pipeline (NIP):-The objective of NIP is to identify infrastructure

project of different ministries (related to infrastructure that can be completed in next five
years the total cost of such project must be around 10 crore)
2. PM gati Shakti Yojana( introduced in 2023):- The objective of PM gaati Shakti yojna is
to ensure the coordination of 16 ministries so that infrastructure project can be made at
less cost, without compromising of the quality of the project.
3. National monetisation pipeline.( introduced in 2021):- under MNP government objective
is to raise six lakh crore in next 4 to 5 years by giving government and utilise asset on
lease. Amount raise under MNP, will be utilised for developing infrastructure under Gati
Shakti.
4. National logistic policy( introduced in 2024):-under national logistic policy, the
objective of government is to connect existing infrastructure in such a way that
transportation/logistic cost get reduced. For example government of India connecting
roads with railway and further railway with waterways with the help of roll on roll of
service under this NLP, government has identified 35 multimodal logistic Park.
5. Surety bond (introduced in 2022):- whenever any infrastructure company apply for
infrastructure project, they have required surety bond in another words, if that does not
have surety bond their quotation will be not accepted. Surety bond is an agreement
among three parties I.e government, Infrastructure company and insurance company. As
per this bond, if infrastructure company deviates from its quotation and due to such
deviation if there is any financial loss, and such a loss will be given by insurance
company. Before surety bond there was a concept of bank guarantees, in 2022 banks
were not ready to issue bank guarantee, due to burden of non-performing asset.
If inflation is due to Hourding , government of India is implementing essential commodity
ACT.
Shops selling essential items are required to take permission with respect to Hourding from
Ministry of consumer affairs and PDS. This essential commodity act is applicable on only
wholesale and retailer.

If inflation is due to speculation, government is implementing information technology act.

If inflation is due to cartelisation , Government is implementing competition act through this

act, government of India has set up competition commission of India. The role of this body
is to ensure fair competition among the businesses.

Q. What is impact of inflation on Indian economy?

Ans=
1. At moderate level of inflation, households having monthly income Rs.3000 or less are
the one get most impacted. For example gig workers, construction workers, senior
citizens, students etc.
2. At moderate level of inflation, saving rate will decrease.At high level of inflation there
will be withdrawal of savings, that is saving rate will be in negative.
3. At moderate level of inflation, lenders will be having loss where is borrowers will be in
profit(and if high level of inflation is there both will be in loss)
4. At moderate level of inflation, large businessmen and large farmers are in profit.
5. At moderate level of inflation has well as high level of inflation government of India
fiscal deficit will increase.
6. At moderate level of inflation has well as at high level of inflation, Indian currency will
be deprecated.
7. At moderate level of inflation has been as high level of inflation poverty and inequality
will increase
8. At moderate level of inflation and high level of inflation, GDP will Also reduce (no
produce will producer product by purchasing raw material at higher rate)
9. At moderate level of inflation, there will be no new employment generation whereas at
high level of inflation existing workforce will also get unemployed.

TERMINOLOGIST IN INFLATION

1. STAG INFLATION :- Stag inflation is a situation when an economy is having high

inflation as well as unemployment, the consequence of stag inflation is the reduction in
growth rate.
2. SHRINK INFLATION:- shrink inflation is a situation where a company prefers not to
change the price even during inflation but they reduce the quantity and quality of
product. For example parel G
3. DISINFlATION:- this inflation means reduction in the rate of inflation with reference
to comparing rate of inflation. Dis inflation is good or bad depends upon situation. For
example if an desired economy is having inflation rate more than the desired then
 economic will favour this disinflation , where as if inflation rate is less than the desired
one than economy will does not favours disinflation .
4. SKEW INFLATION:- SKew inflation is a situation where it is observed that during
inflation price of some essential commodities whereas price of other
essential,commodities either it remain same or decrease. For example in the year 2021
-2022 price of crude oil are increasing but the price of Stell start decreasing
5. PHILIP CURVE:- Philip curve talks about relationship with inflation rate and
employment rate as per this inflation rate is inversely proportional to unemployment
rate. This relation is valid only for creeping inflation rate.
• INFLATION RATE inversely proportional to UNEMPLOYMENT

MEASUREMENT Of INFLATION:-
• Inflation can be measured from the following tools:-
1. PRODUCER PRICE INDEX ( PPI):- Measured by using Producer price. PPI is
recommended by BN goldan Commiittee 2014 and govt is considering to introduce it
by 2027.
2. WHOLESALE PRICE INDEX(WPI):- Measured by using wholesale prices.
3. CONSUMER PRICE INDEX( CPI):- Measured using retail price( including indirect
taxes). CPI is also known as retail inflation.
4. GDP DEFLATION

Measuring inflation at different Level will help economy to identify the level, where
inflation is increase as well as the reason for increasing of such inflation.

WHOLESALE PRICE INDEX(WPI)

• Measure inflation for 697 items all this Items are goods only. WPI is complied and
published by office of economic advisory, Department for the promotion of industry
and internal trade(DPIIT), Ministry of commerce and industry.
[ old DPIIT —- new DIPP]
• BASE YEAR:- base year is a reference year which is used for comparison. The base
year for WPI is 2011.
Criteria for selecting Base year:-
• base year must be stable year
• There must be availability of accurate and valid data.
• Base year must be closest year that is the basket size of base year must be present
table to basket size of current year.
WPI is published on monthly basis.
697 items of WPI is divided into three:-

1. Manufactured product— 64.2%

2. Primary articles (natural resources)— 22.6%
3. Fuel and power— 13.2%
CONSUMER PRICE INDEX( CPI)
In CPI there are you there are six categories based on class and area.
1. CPI agricultural labour (AL)
2. CPI rural worker( RW)
3. CPI industrial worker (IW)
4. CPI rural
5. CPI urban
6. CPI rural+urban

The basket size of first three that is AL, RW and IW is 260 Each, whereas the basket size of
rural is 448, basket size of urban is 460 and the basket size of rural plus urban is 299.
The first three are compliant and published by labour bureau, Ministry of labour and
employment. Whereas last three are compliant and published by natural statistical office
NSO, [ CSO—> NSO], Ministry of statistics and programme implementation MOSPI.
The base year for first two that is AL and RW is 1986 1987 whereas for IW is 2016.
The base year for CPI rural , urban and rural plus urban is 2012.
All CBI are published on monthly basis that is 12th of every month.

299 items of CPI combine are classified into six they are:-
1. Food and beverage—- 45.9%
2. Miscellaneous ——28.3% (school hospital transportation)
3. Housing-10.1%
4. Fuel and light-6.8%
5. Clothing and footwear-6.5%
6. Pan, tobacco, intoxicants- 2.4%

DIFFERENCE BETWEEN WPI and CPI

• in WPI, inflation is measured only for good whereas in CP it is measured for both
goods and services.
• In WPI, price does not include indirect tax, whereas for CPI price included indirect
taxes.
• WPI gives less weightage to food items whereas CPI gives more weightage to food
items.
• Inflation rate /inflation target that is 4+-2% is linked to headline CPI where has this
inflation target has no connection with WPI.
• Dearness allowance DA is organised sector is decided on the basis of CPI.

CONCEPT OF HEADLINE AND CORE INFLATION

Headline inflation means measuring inflation for all the items in the basket size, where has
core inflation means measuring inflation for item excluding food and fuel. In other words
for inflation measured inflation for non volatile items.
If core inflation get change frequently in a year, then it is a concern for an economy because
it includes non volatile items And it’s very challenging to reduce its price in a financial year
once it gets increased whereas with respect to volatile items such as food and fuel if price
get increased in a financial year it can be reversed.
 DEFLATION
Deflation is opposite of inflation, where it is observed that price start falling, in other word
inflation rate will be negative.
Q. Why after high inflation , there is deflation?
Ans-during high inflation, the condition of producer and consumer is not good, consumer
has a tendency to spend less amount( in other world there is less generation of demand) at
the same Producer will not produce new products and whatever products producer have
produced earlier will start selling at less price in order to recover some of its loss.
Hence this is reason why after high inflation is deflation.

Deflation is dangerous because circulation of money between producer and consumer gets
stop (even after reducing price consumer has tendency that price will further fall).
• In order to counter deflation following steps are needed.
7. Government should increase it expenditure particularly on infrastructure.
8. Banks should decrease their lending rate
[both the steps must be taken at same time.]

Other situation deflation are:-

1. Situation of liquidity trap :-liquidity trap means majority people decided to hold the
cash.
2. If both government and RBI start pursuing aggressive constructional physical policy as
well as constructional monitory policy.

CONCEPT OF MICRO-ECONOMY:-
There are type of goods based on increase in the income of people.
1. Inferior goods:- inferior goods are those goods whose consumption get reduced with
increase of income.
2. Normal goods:- normal goods are those goods whose consumption remains more or less
same with increase in income.
3. Luxuries goods:- luxurious goods are those goods whose consumption got increase with
increase in income.

Goods are also classified on the basis of price change and hence there are two type of
goods:-
1. Price elastic goods:- Price elastic goods are those goods whose consumption get reduced
in a proportional manner with increase in price.
2. Price inelastic goods:- Price inelastic goods are those goods whose consumption get
reduced in non-proportional manner with increase in price.

Hence there is an inverse relationship between price and consumption with respect to above
relationship that is price and consumption there are two exceptions.
1. GIFFIN GOODs:- GIFFIN goods are those goods whose consumption get increase with
increase in price. For example inferior goods are GIFFIN goods.
2. VEBLEN:- verblen goods are those goods whose consumption get increase with
increase with price this products are purchased for social status.

• Indra Dhanush

Indra Indra Dhanush programme was introduced in 2014 2015 is related to banking sector
and within banking sector it is for public sector banks
Within Indradhanush, there are seven initiatives:-
1. Appointment:- under appointment, it is required that public sector banks must appoint a
best talent of top level of public sector banks.
2. Bank board bureau:- Bank board bureau has given to responsibility.
a) select a talented person for the top post of public sector bank.
b) advice government of India with respect to merger of public sector banks.

3. Capitalisation:- mention that government of India provide capital to public sector banks
on timely basis, for capitalisation Govt arrange money from three sources
a) Budget
b) Government sells its shares in public sector banks.
c) Bank and arrange borrowing for paid-up capital.
4. De-stressing- whenever any entity violates loan agreement, on/ from the 30th days.
From the violation date, it will be declared as stressed asset. This time period is
overlapping with NPA under De-stressing, it has been emphasised that banks must take
actions at this stage of stressed Assets.
5. Employment:- under employment, government empowered banks to hire its staff on its
own.
6. Framework of accountability:- it means setting of parameters such as Basel norms and
provisional norms this parameter will help RBI to judge the condition of banking
system.
7. Governance:- under governance RBI used take feedback from public sector banks as
well as public sector banks closed share their best practice with RBI and other bank on
this experience RBI used to formulate guidelines for public sector bank.

NOtE:- Indra Dhanush program helps to improve operational efficiency of public sector
bank.
In August 2022 the bank board bureau get replaced by financial services institutions bureau
(FSIB).

Prompt corrective action( PCA). The concept of PCA was introduced in 2002 and it was
amended after 2013. PCA will be applicable on all the banks. It will be applicable when
ever fantasy to maintain peace and long and previsionary norms. Action taken under PCA
will be applicable at temporary basis.
.TYPES OF BANK.

Scheduled commercial banks it’s a bank which are mentioned in schedule two of RBI act
1934.
1. Public sector scheduled commercial banks:- public sector banks are those banks where
government of India having at least 51% of shares or more.
2. private sector banks in this bank private entity is having 51% of share or more.
3. Regional rural Banks (RRB):- in 2014-2015 Government of India announced the
merger of regional rural Banks, before 2014-2015 there by 500 RRBs but currently there
are 43 RRBs.
4. Foreign banks.

Merger of public sector banks was recommended it by Nanshiman committee. Whereas in

2014 V.J Nayak committee for the merger of public sector banks. This committee where in
favour of the 3 tier structure of bank.
1. Tire one must include those banks which are of international level. First tire one RBI
has introduced the concept of domestic systematically important banks (D-SIB). D-SIB
Are those banks which recognised as TO BIG TO FAIL. To recognised as D-SIB Bank
asset size( that is property of the promoter- paid up capital + profits ) must be at least
2% of GDP. Currently there are three banks having FSI is more than 2% of GDP they
are SBI, ICICI Bank, HDFC Bank.
2. Tire two include those banks which a national level. What are you to government of
India has merged nationalised bank.
3. Tire three include those banks which are regional level. What tire three government of
India has merged regional rural bank.
This three tire structure of banking system helps to provide banking service as per the need
of their client.

MERGER OF BANK

There are three reasons for doing merger of public sector banks:-
1. Merger of profit making banks helps to create D-SIB.
For e.g. 5 associate SBI and bhartiye mahila bank mergered with SBI it’s means their profit
and their paid-up capital also merged. D-SIB helps to attract international savings this will
further reduce lending rate in the economy.
2. Whenever government merge loss making banks with profit making bank it’s help to
revive the loss making bank, in other words it reduces government burden with respect
to loss making bank
3. Merger of banks helps to reduce government of India’s burden with respect to
capitalisation.
Drawback of mergers of banks:-
1. In case of merger it is observed that strong bank used to dominate over other
banks,especially in term of working rules.
2. Merger of banks will also affect the bank‘s employer in terms of job security and other
services condition.

FINANCIAL INCLUSION

Financial inclusion means availability,accessibility and affordability of banking service as

well as of other financial products. Scheduled commercial banks are fail to ensure financial
inclusion. In other words, they used to serve/ provide banking services to limited section in
an economy. It is observed that schedule commercial bank does not provide banking
services to the poor people and middle-class people because of low profit margin as well as
they don’t provide banking services to super rich specially loan services because of high
risk involved.

Small finance bank SFB and payment bank PB

SFB and PB was introduced in 2013, in the recommendation of nachiket Mor committee.
The objective of SFB is to provide banking services to MSME ( Micro small and medium
Enterprises) marginal and small farmers and unorganised sector. The objective of payment
bank is to provide banking services to migrant workers such as construction workers, Street
renders and gig workers. Small finance bank SFB and payment bank PB are also known has
differentiated bank or niche bank.

Eligibility criteria for small financial bank:-

1. Promoter must have minimum 10 year of experience in financial sector.

2. Promoter has to invest minimum paid-up capital of 200 crore.
3. Promoter need to invest at least 40% of the paid-up capital and rest that is 60% can be
arranged from other sources.
4. Promoter can reduce its share from paid-up capital that is 40% to 26% after 12 year of
small financial bank.
5. Foreign direct invest(FDI) is allowed in small financial blank and that is up to 74%.

working of small financial bank:-

1. Small financial bank is allowed to give load of small value. RBI stated that small
financial bank will give 50% of total loan amount in a year in such that loan per person
must not exist Rs.25 lakh. This provision of RBI ensure financial inclusion.
2. At least 25% branches of small financial bank must be opened in rural areas.
3. Small financial bank can also sell insurance, pension and mutual fund products.
4. Small financial bank are registered under banking regulation act as well as companies
act.
Eligibility criteria for payment bank:-

1. Promoter of payment bank can be

a) promoter of supermarket chain (like big Bazaar)
b) promoter of telecom company.
c). Post Office.
d) promoter of NBFC (nonbanking financial company)
e) promoter of prepaid wallet instrument.

2. The minimum paid-up capital for payment bank is rupees 100 crore.
3. Promoter has to give at least 40% in paid-up capital.
4. Promoter can reduce its share from 40% to 26% after 12 year.
5. FDI is allowed in payment bank but up to 74%.

Working of payment banks:-

1. Payment banks are not allowed to give loans.
2. Payment banks are also not allowed to issue credit cards.
3. Payment banks can issue ATM cum debit card.
4. Payment banks accept deposit but they can only accept deposit up to Rs.2 lakhs. In other
words it means depositors can maintain maximum Rs.2,00,00 in an account.

How can payments banks earn?

Whatever deposit payment bank received they can give such deposit either to the
government as a borrowing or any other bank which will return such amount with the rate of
interest. Payment bank also earn money through transaction cost/charges. at least 25%
branches have to open unbanked area. Payment bank also sell insurance product, pension
products and mutual funds. Payment bank are also registered under banking regulation act
and companies Act .

Business correspondent (bank Saathi)

Business correspondent is an agent of scheduled commercial banks, who provide banking

services on behalf of scheduled commercial bank in unbanked area. Agent can be individual
or organisations.
Individuals include:-
1. Any shop in an area which is running from generation.
2. Retired government officers (staying in that area plus no corruption).
3. Owner of petrol pump.
Organisations include:-
1. Any company located( working) in unbanked area.
2. NGOs working in unbanked area.
3. Payment banks.
4. Common service centre set up by Ministry of electronics and information or technology.
Banking services provided by Business correspondent are :-
1. They accept deposit.
2. They provide loan also.
3. They will also recover the loan amount.
4. They also have an ATM for people in that area.

RRB ( regional rural bank)

RRB set up in 1975 through our are we act 1976.

CAPITAL MARKET
1. Bound
2. Alternate investment fund
3. Terminology in share market

1. BOUND
Bonds are financial instrument issued by government and private sector to raise borrowing
for long-term.
1. GREEN BOUND:- Green bond is issued to raise borrowing from environmental
friendly projects, such as solar energy. In India green bonds were first issued by YES
BANK. Green bonds can be issued by either by government or private sector. Banks can
also issue this bond but on the behalf of government or private sector.

Green washing:- Green washing mean that companies has raised money or borrowing for
green project through green bond but in reality such project is not environmental friendly
project

2. MUNICIPAL BOUND:- Muncipal bound are issued by municipalities to raise

borrowing for civic projects. This bounds are issued by those municipalities which are
not having any loans at at present or if they are having loan it must not be NPA.
Municipalities has to invest 20% of the project cost where is rest amount they can raise
from municipal bonds. Municipal bonds are also known as Muni bound.
3. MASALA BOUND:-masala bond is a rupee denominated bound that is borrower will
take borrowing from foreign country in Indian rupee rather than foreign currency. In
case of masala bond, the burden of exchange rate is on lender. In India first time masala
bond was issued by IFC (international finance Corporation)behalf of private company in
2014.
Currently masala bond can be issued in London stock exchange.
4. ELEPHANT BOUND:-elephant born is currently a proposal given by Surjit S Bhalla
committee. The objective of this bond is to attract black money available in either in
India or foreign countries. Under elephant bond if any entity disclose its black money,
government will return 50% of black money after deducting taxes and rest 50% will be
holed by the government for 25 years which will be written without any interest.
5. MAHARAJA BOUND:- Maharaja bond is the rupee denominated bond issued in
foreign market to raise borrowing for infrastructure project. Currently it is issued by
London stock exchange.

2. ALTERNATIVE INVESTMENT FUND

Alternative investment fund-The concept of AIF was introduced in 2012, it is a new way to
arrange fund which is different from traditional method of arranging fun. In AIF it is
observed that both parties deals directly without any platform or intermediate. This AIF is
regulated by SEBI or RBI. Government of India appointed a panel headed by Narendra
Modi to review AIF. This panel recommended that AIF must be categorise into three that is
category 1 category 2 category 3.
• Category 1 include those investments which are responsible for immediate growth.
• Category 2 includes those investment which will insurer growth but after certain time.
• Category 3 includes those investment which will give high returns but give high loss
in certain situation.

ANGEL INVESTOR AND VENTURE CAPITALIST

Angel investor and venture capitalist are those investors who invest in startup’s.
Angel investors prefer to invest in high risk start-ups whereas venture capital list prefer to
invest in moderate risks start-ups. Angel investor invest their own money where has venture
capital list invest their money as well as public money.

NATIONAL INVESTMENT INFRASTRUCTURE FUND (NIIF)

NIIF is the name of the company registered under companies act. NIIF promoters are
government of India and group of foreign government. The objective of NIIF is to provide
investment to economically viable infrastructure project. NIIF was set up in 2015. This
company started with corpus rupees 40K cr ( 20k cr —> GOI + 20k cr —> groups of
foreign government). Profits of NIIF where divided in the ratio of 49% -51% that is 49% is
of government of India and 51% is of group of foreign government.

3. TERMINOLOGY IN SHARE MARKET

• IPO:- IPO stands for initial public offering. IPO means that promoted of a company is
selling the shares of a company for the first time to the public. IPO will be done once
in its life time by the company.
• FPO:- FPO stands for follow-on public offering. FPO Means that promoted father
wants to a dilute its shares to raise investment for the company . FPO can be done
more than once but not multiple times because promoter is required to hold at least
30% share of the company.

ANCHOR INVENTOR
Those investors which are offered IPO and FPO before its launch. Anchor investors will be
invested whenever share market is in turbulence. Anchor investor is introduced in advance
to regain the market confidence. Anchor investor had to invest minimum Rs.10cr.
 DERIVATIVES
Derivatives means driving the underlying value of an assets .Assets here include,
1. GOLD
2. CRUDE OIL
3. Agricultural commodities.
4. Shares.
5. Bullion

[ Government is proposing to include freshwater in this list]

In derivative there is no exchange of physical items. Derivatives are more dangerous than
share market. Derivatives are trading on commodity market exchange CMX. CMX is
regulated by SEBI.

Derivatives are of two types:-

1. FURTURE :- in future once a person bett over a commodity it’s a bett is final. (No
chance of changing).
2. OPTIONAL:- in options there is option to change its bett but under certain period of
times. (Have chance of changing bett)

CURRENCY SWAP
Currency swap means that to company decided pre determined value the exchange rate for
future transaction.
INVESTMENT MODEL ( public private partnership PPP)

There are three type of investment model:-

1. Built operate transfer BOT model:- Under BOT model, it is the responsibility of
infrastructure company to design and construction project using their own money and
then recover such amount by imposing Townes user pay charges and once cost is
recovered project will be transferred to government of India.
2. Engineering, procurement and construction EPC model:- under EPC model, it is the
responsibility of infrastructure company to design and construct the project and once
certain cost of project is over government of India will release certain amount and on
completion of project government release complete amount.
3. Hybrid annuity model HAM:-
• with respect to financial risks government is ready to share 40% of project cost
whereas 60% will be given by infrastructure company.
• With respect to operational risks, government States that we will arrange NOC (non
objection certificate ) with respect to land acquisition and environmental clearance
before allocating the project whereas other optional risks are on infrastructure
company.
• Government stated that in case of unpredictable market risks the government is ready
to share the loss with infrastructure company.
• In case of unpredictable situation there may be benefits to a company then company
will share such benefit with government.

ANAlYSIS Of BOT and EPC MODEl:-

In both, private sector is important private sector will ensure efficiency in terms of:-
a) timely completion of project.
b) adoption of latest technology.
c) project will be made at less cost.

• In BOT model, there is no button on government budget where as in EPC model there
is a button on government budget.
• BOT model will be successful in those areas where profits are very high, whereas EPC
model will be used where profit are very less and even no profit.
• BOT model works on user pays principle, whereas EPC model does not follow.
• For examples, BOT Model- airport ,Highway. EPC model-project in himalayan.

In an infrastructure there are three type of risks.

1. Financial risks:- Financial risk is the risk associated with arrangement of funds for
infrastructure project.
2. Operational risks :- operational risk is associated with construction related to challenges
for example issue in acquiring land for the project.
3. Market risks :- market risk is associated with failure of market for such as inflation.
 Financial risks Operational Market risks
risk
BOT model Private Private Private
EPC model Govt +private Private Private
HAM model Govt +private Govt +private Govt +private

In last 5 to 6 year 98% were allocated under EPC and HAM model and 2% were given
under BOT model.

• MUTUAL FUND:- in mutual fund group of people pool their money to purchase the
shares with the help of professional fund manager. In mutual fund there is no
guarantee of return as share market is subject to market risks.

• HEDGE FUND:- hedge fund is like mutual fund but in this fund managers insure
certain returns even during market fluctuation but in case of market clash then such a
return are not insured.
 FISCAL POLICY

• Meaning of fiscal policy

• Component of budget
• Type of deficit
• Sources of government borrowing
• Concept of public debt
• Fiscal responsibility and budget management act FRBM
• Government budgeting
• Type of fiscal policy

FISCAL POLICY
Fiscal policy means strategy with respect to management of money available with
government of India.
Government of India have three type of funds:-
1. Consolidated fund of India
2. Public account fund of India.
3. Contingency fund of India.
Budget is linked to consolidate fund of India has budget is the part of fiscal policy.

SALIENT FEATURES OF GOVERNMENT BUDGET:-

• Government first decide expenditures and then decide source of money for such
expenditure.
• Government budget is for fixed time period that is one year (financial year /fiscal
year).
• In the context of government we use the word receipt rather than income because
government used to collect money rather than earning it.
• Budget is future document. Budget mean and annual financial statement of estimated
expenditure and estimated receipt for coming financial year.

COMPONENT OF BUDGET
There are two type of component in budget 1. receipts 2. expenditure.
1. Receipts-receipts are classified into revenue receipts and capital receipts.
2. Expenditures:- expenditures is classified into revenue expenditure and capital
expenditure.

• revenue expenditure of rather classify into tax revenue and not in tax revenue. Tax
revenue include direct tax and indirect tax. For example direct tax - income tax ,
indirect tax- GST tax. Nontax revenue includes :-
a) fees and fines
b) profits and dividends government received from PSU(Dividends is the bonus that
government receives over the profit).
c) User pay charges -every person have to pay certain charges provided by the government
of India.
d) interest received by government of India
e) donation / grants

CAPITAL RECEIPTS INCLUDES:-

a) recovery of principal amount /loan
b) disinvestment - government sell it’s shares in PSU.
c) Borrowing taken by government of India.

Q. Why we have classification of receipt?

Ans:- receipts are classified on the basis of liability as well as Asset loss. In case of revenue
receipt, there is no liability as well as no asset loss On part of government of India.
( liability means responsibility to return the money collected by government of India,
whereas asset loss means money is collected by selling some valuable asset of government
of India)
• In case of recovery of loan, if a borrower defaulted, then government of India will
have assets loss as well as liability.
• In case of disinvestment, government collect money by selling the shares and this sale
of share is known as asset loss for the government but at the same time government
will have liability in the form of buy bank of shares clause.
• In case of borrowings there is only liability.

REVENUE EXPENDITURE :-

Revenue expenditure includes administrative expenses, subsidies, government schemes,

defence expenditures, interest paid by government of India and grants given by the
government of India.

CAPITAL EXPENDITURE :-

Capital expenditure includes infrastructure, loan given by government of India to states /

foreign government, returning of principal amount by government of India.

1. Borrowing taken by GOT—> Interest paid by GOI+ Returning of PA by GOI

2. Borrowing given by GOI—> Interest received by GOI+ Recovery of PA.

Expenditure is classified on the basis of asset creation. Asset creation means investment on
acid is responsible for generating more returns that what is invested over a period of time.
Revenue expenditure is not responsible for asset creation, whereas capital expenditure is
responsible for asset creation.
Infrastructure are of two types that is physical infrastructure and social infrastructure.
Physical infrastructure includes road, railways, aviation, energy etc and it is responsible for
Asset creation. Hence it is a part of capital expenditure.
Social infrastructure includes school, hospital, universities etc and they are not responsible
for asset creation. Hence it is a part of revenue expenditure.

Whenever considering asset creation, government of India consider a complete sector and
within that sector, government used to calculate net profit or loss for example in India some
PSU are in profit and some are in loss but overall PSU is in net profit.

• Revenue receipt and revenue expenditure together are known as revenue budget.

• Capital receipts and capital expenditure together are known as capital budget.

Revenue budget is recovering that this receipts are collected on periodic basis, and similarly
expenditure is also done on periodic basis.
Capital budget is non-recovering in nature, that is Capital receipts are raised whenever
required. Similarly, capital expenditure are done whenever required.
The total expenditure of government of India for financial year 2025 is 48 lakh cr.( 12lakh
cr capital expenditure + 36 lakh cr revenue expenditure).
[ revenue received +recovery +disinvestment =32 lakh cr. rest of the amount will be taken as
borrowing ( 16 lakh cr)]
In case of India revenue expenditure is more than capital expenditure. India budget is
deficient in nature. there are three type of budget:-
1. Deficit budget(E>R)
2. Neutral budget(E=R)
3. Surplus budget(E<R)

Reason for having deficit budget are:-

1. There is burden of poverty on government of India.
2. India’s geographical location required government of India to spend more on defence.
3. India is having unorganised economic that is there is less tax collection in India.

• Steps taken by government to reduce its borrowing:-

To reduce borrowing government has to make efforts to reduce its expenditure and at the
same time government has to increase its receipts. To reduce expenditure government has
taken following initiatives:-

1. AUSTERITY MEASURES:- In austerity measure, government is making effort to

reduce its administrative expenditure, for example government of India issued a circular
which stated that government meeting will be conducted in government building.
Similarly government of India also started hiring contractual employee for government
services.
2. RATIONALISATION OF SUBSIDIES:- Government imposes limit on number of
cylinder which will be given on subsidies cylinder, through a scheme pahal scheme.
 Government has introduced the concept of direct benefit transfer DBT, and it helps to
reduce the transaction cost of government of India.
3. RATIONALISATION OF GOVERNMENT SCHEMES:- there are multiple schemes
run by government to reduce poverty. Government merged all this scheme in order to
reduce its expenditure.
4. DEFENCE EXPENDITURE:- in case of defence expenditure, government of India is
allowing private sector to manufacture defence components , which are not threat to
national security. For example bullet-proof jacket.
5. RE-STRUCTURING LOAN so that government can save its interest payment.
6. MERGER OF BANKS also reduce government expenditure with respect to paid-up
capital.

• Steps taken to increase the receipts of government of India:-

7. Government is promoting cashless economy
8. Government has introduced text reforms such as simplification of taxes, introduction of
GST etc.
9. Government has increased the tax bas.( text base means government has identify new
economic activity and then impose. For example government impose tax on crypto
currency, government also impose tax on online games.)
10. Government has also taken steps to reduce the cases of tax evasion.
11. Government has also taken action, on money laundering.
12. Government introduce the concept of national monetisation pipeline.
13. Government also sell the enemy’s property.
14. Government also sell the scrap.
NOTE:- All the receipt expect disinvestment will become part of consolidated fund of
India.Disinvestment become a part of public account of India.

TYPE OF DEFICIET

There are five type of deficit:-

1. Budget deficit:- Budget deficit is used till 1997 and after that it get replaced by fiscal
deficit. Fiscal deficit is the difference between total expenditure and total receipts. Here
total receipts include the borrowing already arranged before the presentation of budget
for coming financial year. Hence the value of budget deficit will only tell the amount of
borrowing for the required. In other words it hide the information with respect to the
borrowing already arranged before the presentation of budget. Budget deficit does not
tell the health of government finances.
2. Fiscal deficit:- fiscal deficit is different between the total expenditure and total receipt
which exclude the borrowing already arranged before the presentation of budget. Hence
the value of fiscal deficit mention about the total borrowing needed by government of
India for coming financial year.
{ Q. What steps can be taken to reduce fiscal deficit of government of India?}
The value of FD will be more than budget deficit. The total following for the financial year
2025 is 16 lakh crore rupees . This amount is fiscal deficit of government of India. In terms
of GDP, fiscal deficit is 4.9% of GDP(3.7 billion dollar). As per, first formula of FD it
means FD is the difference between total expenditure and total receipt (total receipt
excluding borrowing already arranged by government )
FD=Total expenditure-total receipt (exclude borrowing)
As Per formula 2 fiscal deficit means some of budget deficit and borrowing already arrange
it that is it includes borrowing already includes.
FD = BD + borrowing already arranged by GOI

3. Revenue deficit :- revenue deficit means the difference between revenue expenditure
and revenue receipts. (RD=RE-RR )The value of revenue deficit indicates that out of
total borrowing how much boring is needed for revenue expenditure. The value of
revenue deficit will be either equal to fiscal deficit or less than that.

If FD is 100 and RD is zero, it means that the total borrowing will be used for capital
expenditure. If FD is 100 and RD is also 100 , It means that the total borrowing will be used
for revenue expenditure.
NOTE- if government continuously take a borrowing for revenue expenditure it means that
government will be in a situation of debt trap.
4. Effective revenue Deficit :- ERD is the difference between revenue deficit and grants
given by government of India to the state for asset creation. The value of ERD will be
less than RD. The concept of ERD was introduced in the year 2012. It was introduced
with the intention to mention that grants given for the asset creation to the states are
currently considered as burden. But when in future, states become independent The
receipts with respect to grants will reduce and hence are the must be calculated in terms
of EDR. Nk Singh committee was not in favour of ERD because it stated that it is a no
game he also stated that if central government want to give grants to the state they can
do so but not by taking borrowing.
5. Primary deficit :-primary deficit is the difference between fiscal deficit and interest
payment. The value of primary deficit tells that the amount of borrowing left for capital
expenditure and five items of revenue expenditure.
PD=FD-IP
~ if PD Value is equal to 0, it means that total borrowing is utilised to repay the interest
payment of past borrowing.
~If PD value is equal to FD it means total borrowing is utilised for capital expenditure and
five items of revenue expenditures.
~ if PD value is in negative it means out of the total borrowing that is if 100 PD rupees
Rs.60 is utilised for interest payment and Rs.40 is left for capital expenditure and five items
of revenue expenditure.
Government of India is trying to achieve the following parameters that is
FD=3% of GDP
RD=0. PD=FD
Fiscal consolidation and fiscal prudence
This two terms together known as fiscal discipline. The objective of fiscal consolidation and
fiscal prudence is to reduce the government expenditure as well as increase government
receipts . In fiscal consolidation government identifies unnecessary expenditure as well as
government also identify the new source of receipt. Fiscal prudence means there must be an
efficient way to do the expenditure as well as raise the receipts.
{Q. What steps are taken by the government to ensure that the fiscal consolidation and
fiscal prudence?/ or to reduce fiscal deficit/how to reduce borrowing?}

SOURCES OF BORROWING

GOVERNMENT HAS 4 SOURCES OF BORROWING

1. PUBLIC :- public means government of India is taking borrowing by attracting
domestic savings. Domestic savings are with banks, insurance and pension companies,
NBFCs and retail investors.
2. PRINTING OF CURRENCY BY RBI:- it means that RBI will print of fresh currency
for borrowing purpose of government.
3. FOREIGN GOVERNMENT :- Government of India will take borrowing from foreign
governments such as USA, UAE, Russia etc.
4. INTERNATIONAL ECONOMY ORGANISATION :- Government will take borrowing
from World Bank, IMF, Asian development bank, as well as through international
market with the help of. Such as JP Morgan, Bloomberg etc
NOTE- The first source of following our internal source of following where is lost to source
are external source of Borrowing.

IMPACT OF BORROWING:-
To understand the impact of borrowing, we assume that government takes a total borrowing
from any one sources
A government face all the following from the public, it means very less domestic savings is
left for private sector and this situation is known as crowding out effect. Crowding out effect
will further increase the interest rate for the private sector and finally private sector will
delay their investment .
If government takes all the following through printing of currency then it will be responsible
for increasing in money supply, which will further responsible for high inflation.
In India printing of currency for borrowing is banned from 2006 onwards.
If government takes all the borrowing from foreign government,it will impact the
sovereignty of the country. If government takes borrowing from international organisations,
they provide borrowing on condition.

NOTE:- source of borrowing known as DEFICIT FINANCING. Printing of currency is also

known as direct monetised deficit.
CONCEPT OF PUBLIC DEBT

Debt talks about past borrowing of government of India for which the government is still
paying interest, where as fiscal deficit talks about future borrowing of the government.
Hence fiscal deficit will become a part of debt next financial year.
Public debt have two parts:-
1. INTERNAL DEBT:-Internal debt means that government of India has taken past
borrowing from within the country.
2. EXTERNAL DEBT:- external debt means that the government of India has taken the
borrowing outside the India as well as President of India ROI has taken the borrowing
outside the country. ROI include, private sector and state governments.
In case of public debt consolidate fund of India pledge. permission is required by the ROI
because it helps to increase credibility of a country in terms of economic credit rating. The
record of public debt is maintained by RBI. public debt will be more than the government of
India debt

PUBLIC DEBT =GOI DEBT +ROI

GENERAL GOVERNMENT DEBT

General government debt is debt of central government +Debt of all state government + UT
debt having state legislature. As per IMF report issued in the year 2024 India’s public debt is
100% of GDP whereas general government debt is around 81% of GDP.

OTHER CENTRAL LIABILITY

Government of India used to collect money from public through its various saving schemes
such as provident fund, new pension scheme etc. Money collected through savings scheme
will be a part of public account fund of India. Government have a liability on Public account
which it full filled by providing this money either as investment or borrowing to
economically viable project.
If money is transferred from public account fund of India to consolidated fund of India it
will be regarded as borrowing taken from the budget. RBI used to release a report titled as
“Public debt and other central liability”.

FRBM ACT( fiscal responsibility and budget management)

This act was introduced in 2003 but implement in 2004. The objective of FRBM is to ensure
that the government must follow the path of fiscal consolidation and fiscal prudence. The
intention of FRBM act is that government must not favour “populist budget”.

SALIENT FEATURES OF FRBM ACT:-

1. It defined the target of a RD and FD. FD must be 3% of GDP by 2008-2009 and RD
must be 0 by 2008 to 2009. favour of borrowing but it must be in limit and utilised for
capital expenditure.
2. FRBM act impose a ban on printing of currency by RBI for borrowing purpose from
2006 onwards.
3. FRBM act impose limit on the central liability of government of India. For example
improvident fund, the upper limit (that is maximum limit) a person can deposit in a year
is 1.5 lakhs per year.
4. Government has to present three annual report to the Parliament at the time of budget
presentation this reports Are:-
a) fiscal policy statement :- Fiscal policy statement mentions about the annual target of FD
and RD which government will achieve.
b) fiscal policy strategy framework :-fiscal policy Strategy framework mention’s about
government proposal with respect to decrease in expenditure as well as increase in the
receipt with the intention to know how government will achieve its annual target of FD and
RD.
c) micro- economic framework :-The objective is to ensure while achieving FD and RD,
other macro parameters does not get impact negatively. For example if any government
remove fertiliser subsidy it will be responsible for the disturbance of other micro-parameters
such as food inflation in an economy.
5. In case of economic disturbance, government is allowed to break the above target of FD
and RD( Break but only 0.5%of GDP)
NOTE- FRBM act Control borrowing of the government whereas it does not control
expenditure and other receipts of the government.

RICARDIAN EQUIVALENCE

RICARDIAN EQUIVALENCE stated that whatever borrowing taken by the current

government will be returned by the future government either by taking another borrowing or
by putting burden on the taxpayers.

N.K.SINGH COMMITTEE:-

1. Government appointed this committee in 2016, and this committee submitted its report
in 2017. The objective of this committee is to review FRBM and suggest
recommendation if required.
2. COMMIITTEE RECOMMENDED:-
• NK Singh committee recommended it to reduce general government debt. In 2017
general government debt was 68% of GDP and committee recommended it to reduce
to 60% of GDP by 2022 to 2023.
• Committee recommended That FD must be brought to 3% of GDP by 2019 and it
must be stabilised for another three years.
• Revenue deficit must be brought to 0.8% of GDP by 2019 and the committee was not
in favour of effective revenue deficit.
• Escape clause, committee introduced the concept of escape clause which states that
whenever there is any economic disturbance, physical deficit target can be break by
0.5% of GDP and in case of economy is in favourable, FD must be try to reduce by
0.5%.
FD=3%+-0.5% of GDP( escape clause)
• NK Singh committee was in favour of changing the name of FRBM act, and it must
be fiscal responsibility and debt management ACT FRDM.
• Committee recommended to set up their member body known as FISCAL COUNCIL .
The objective of fiscal council is to review government strategy with respect to FD
and RD and if required, Council can give advice to the government.
NOTE-currently government has accepted the first recommendation of NK Singh
committee.

STATUS OF FISCAL DEFICIT IN INDIA

• Government was required to achieve fiscal deficit target of 3% of GDP by 2008-2009,
but government was unable to achieve it due to sub-prime lending crisis this crisis is
also known as north Atlantic financial crisis NAFC. sub-prime lending crisis means
that the developed countries started giving loan at a very less rate of interest and at the
same time the deposit rate was more than the loan rate in this situation people started
taking loan for its day to day expenditure and later on default. The countries mostly
affected by this crisis PIGS countries (that is Portugal Italy Greece and Spain).
• Due to this crisis, Indian economy get impacted and government has to spend
expenditure on government schemes and as well as government has to provide tax
benefit. this action of the government increase the gap between expenditure and
receipts.
• 2010, the government kept the same at the target but extended the deadline that is by
31 March 2014.
• In 2014, again government was not able to achieve target because of scams and
inflation in an economy.
• In 2014, govt kept the Same FD target (3%of GDP) with the deadline of 31st March
2019. again the government was not able to achieve this target due to demonetisation
of GST.
• In 2019, government changes the FD target i.e. 4.5% of GDP which has to be
achieved by 31st March 2022, again government was not able to achieve the target
because of pandemic.
• Dure to pandemic fiscal deficit if GOI reached to 9.2% of GDP by 2022. In 2022
government decided to reduce its fiscal deficit to 6.8% of GDP by 31st March
2023(govt of India has achieved this target).
• In 2023, government setup a fiscal deficit target of 5.6%of GDP which has to be
achieved by 31th March 2024.(govt has achieved this target)
• In 2024 government set a fiscal deficit target of 4.9% of GDP , which has to be
achieved by 31st March 2025.

FISCAL STIMULUS

FISCAL STIMULUS means that government will be deliberately increased its expenditure
and reduce it receipts.
The intention of giving FS is to receive the economy
Government budgeting
Budget mentioned about the list of expenditure and whereas budgeting mention about the
reason /logic behind expenditure as well as so for source of receipts.
To present a budget on first feb every year the process start 7 to 8 months before fab that is
in the month of August of previous year. finance ministry will give a form to every ministry
which is required to mention their receipts and expenditure and for this process two months
time period is given. by 15th October every ministry submit their expenditure and receipts
to finance ministry for approval. Within the finance Ministry, expenditure part is approved
by Department of expenditure and receipts Is approved by department of revenue.
Once expenditure and receipt get approved. This two department will submit the approved
expenditure and receipts to the Department of economy affairs for completion.
NOTE:- department of economy affairs is also responsible for preparation of budget speech
of finance minister as well as preparation of economic survey.

THERE ARE 5 TYPE OF BUDGETTING

1. INCREMENTAL BUDGETTING:-Budget is by taking the reference of previous year.

2. ZERO BASED BUDGETING :-it means that budget is made through scratch. In other
words budget is prepared by taking into account as well as conducting the survey of the
expenditure and receipts raise by the ministry.
Analysis of incremental budgeting and zero based budgeting:-
• incremental budgeting is less time consuming whereas zero based budgeting is time
consuming.
• Incremental budgeting does not require expertise where is zero based budgeting
required expertise.
• Incremental budgeting is less expensive compared to zero based budgeting.
• Zero based budgeting gives a scope to introduced a latest technology in a budget
where has incremental budgeting favours The old policy which can be outdated in
nature.

3. OUT PUT AND OUT COME BUDGETING:- output budgeting was removed in 2006
with outcome budgeting. Output budgeting emphasis in means(there maybe possibility
that mean does not give desired result) whereas outcome budgeting emphasis on end
result. For example in case of output budgeting government focus on construction of
number of schools and in case of outcome budgeting government focus on increase the
student enrolment in the school.
4. GENDER BUDGETING:- Gender budgeting was introduced in 2006. The objectives
of gender budgeting is to ensure allocation expenditure for vulnerable gender women
and transgender. In case of India gender budgeting allocate expenditure for women only
and hence it is also known as WOMEN BUDGETING .
{ Q. How Women budgeting helps to ensure women empowerment?
Ans- in India all ministries are required to set up women budget cell and the role of women
budget cell is to formulate two type of scheme-
a) part A/ cone A:- part A include those schemes where women are the exclusive
beneficiaries for example PM Awaz Yojana where women is the exclusive beneficiary that is
the house will be allotted in the name of women.
b)Part B/ cone B:- part B includes those schemes where both men and women are a
beneficiary but government ensures that the at least 30% of the expenditure of scheme must
be given to women.
NOTE:- Women budget cell also have to ensure that schemes are to be implemented at
ground level and they have to prepare a report for the same. Hence women budgeting is
more than budgeting that is it allocated the money for women and it reviews the
performance of such schemes. Women budgeting also ensure women empowerment in all
dimensions. }

5. PERFORMANCE BUDGETING :- performance budgeting emphasise on analysing

the amount spent by the government on various initiatives. Low this budgeting ensures
efficiency of every single rupee spent by the government.
NOTE:-In India, while preparing a budget, a combination of incremental budgeting, zero
based budgeting, outcome budgeting and gender budgeting is used.

CHANGES MADE IN BUDGET AFTER 2015

• Railway B is merged with general budget.
• Advantage in the presentation of budget date that is first February every year.
• Budget has removed the concept of vote on account.
• Budget has done away with plan and non-plan expenditure.
• After 2021, government of India started presenting the budget or paper less budget.
NOTE:- Shankaracharya committee recommended to change the financial year and the new
financial year must be 1st Jan to 31 December.

MONETARY POLICY

Monetary policy means strategy formulated to regulate money supply in the market. Market
here means private sector and banks.
Before the beginning of financial year, RBI has an information with respect to amount of
money supply in a financial year and hence RBI will tell the producer to produce product as
per the demand in a financial year. If money supply get increased in the economy then
monitory policy will absorb the increase money supply and give time to the producer to
produce more and once the production is as per the new money supply then money is a
game released by the RBI.

STOCK AND FLOW

Stock of money supply means the amount of money supply required in the economy at a
particular point of time as well as market is producing a product as per the available stock of
money supply. For example if RBI estimated that 356 lakhs crore in the stock of money
supply it means economy is producing product as per this stock and hence there will be a
price stability.
Flow of money supply means increase in the money supply that is more than the stock
money supply for example if there is 50 lakhs cr is inflow of money supply in the market
and now the money supply is 400 lakh cr but the products are produced as per the 350 lakhs
cr. Hence this additional increase in the money supply will be now responsible for inflation.
NOTE- monetary policy with the help of monetary policy tool Will absorb the additional
money supply for the temporary basis so that the producers get a time to produce more.

THERE ARE 5 REASONS FOR INCREASE IN FLOW OF MONEY SUPPY

1. Printing of currency by RBI
2. Inflow of foreign currency
3. Black money
4. Money laundering
5. Counterfeit notes
Monetary policy means that monetary policy committee and RBI are making efforts to
manage the stock and flow of money supply with the help of monitory policy tool to control
inflation.

TOOLS OF MONETARY POLICY

There are two type of monetary policy tools.
1. QUANTITATIVE MONETARY POLICY TOOLs ⚒
2. QUALITATIVE MONETARY POLICY TOOLS ⚒

• QUANTITATIVE MONETARY POLICY TOOLs ⚒ includes,

1. Cash reserve ratio CRR
2. Statutory liquidity ratio SLR
3. Repo rate
4. Reserve repo rate
5. Marginal standing facility MSF
6. Open market operation OMO

• QUALITATIVE MONETARY POLICY TOOLS ⚒

1. Moral suasion
2. Direct action
3. Margin requirement
4. Credit rationing
5. Consumer credit regulation/ control (CCR/ CCC)

• Cash reserve ratio CRR and Statutory liquidity ratio SLR

⁃ This two together known as statutory reserve requirement.
⁃ in a bank there are two type of deposit:-
1. DEMAND DEPOSIT:-demand deposit is further classified as current account and
saving account CASA.
CURRENT ACCOUNT-current account is usually opened by those entity having day to day
transaction and on current account no deposit rate is offered by the bank.
SAVING ACCOUNT- saving account is usually opened by salary people and on this bank
used to offer deposit rate.
2. TIME DEPOSIT:-Time deposit is further classified into fixed deposit and recurring
deposit.
FIXED DEPOSIT-In fixed deposit some amount is deposited with bank for long term.
RECURRING DEPOSIT- in recurring deposit depositor will deposit some monthly deposit
every month in order to have large saving after certain time period.

NOTE -from the depositor point of view this are regarded as deposit but from the bank
point of view this are regarded as liability. HencHence for deposit bank use of term demand
liability and time liabilities.

# Cash reserve ratio CRR

CRR means that certain percentage of total deposit, banks have to maintain with RBI. In
CRR money will be given in cash form only. CRR is maintained on weekly basis.

OBJECTIVE OF CRR:-

1. It helps to ensure price stability/ manage inflation while reducing money supply.
2. CRR also helps to protect some of the money of depositors in case of bank failure.

#Statutory liquidity ratio SLR

SLR means that banks have to maintain certain percentage of deposit with bank itself.
In SLR, the amount has to maintain in three forms
1. CASH
2. GOLD
3. RBI approved securities (only 5 till now)

NOTE-SLR for every bank you saying but the amount of SLR have to maintain in different
proportion by different banks.

Banks will get RBI approved securities whenever they give borrowing to the central
government has well as state government. Currently there are 4 RBI approved securities:-
1. Treasury bill ( T-bill)
2. CASH MANAGEMENT BILL
3. DATED GOVERNMENT SECURITIES
4. STATE DEVELOPMENT LOANS

When banks maintained SLR amount under RBI approved securities, bank will get returns
in the form of interest. Whenever banks maintain SLR amount in gold, in that case banks
will get returns because value of gold get appreciated.
In case of gold form banks will purchase either physical gold or sovereign gold bond.
Amount invested by bank in sovereign gold bond will go to the government has a borrowing
and it will be regarded as RBI approved securities.
NOTE:- manciple bond is not regarded as RBI approved securities. If bank maintain SLR in
cash there is no return.

If banks does not follow the compliance norms of RBI, then RBI can change the proportion
of SLR and tell the bank to maintain the majority SLR in cash.
CRR and SLR amount will not be spent in a market again, otherwise if it is spent in the
market it will dissolve the purpose of monitory policy.

OBJECTIVE OF SLR
⁃ it ensure the price stability /control inflation
⁃ It also helps to protect some amount of depositors.
⁃ SLR helps to reduce some impact of crowding out effect.

BANK RATE
Bank rate means the rate at which commercial banks take a loan from RBI for long-term.
Under bank rate loan is given without mortgage.
{ NOTE- If bank arrange money by issuing COD, then banks are required to maintain CRR
and SLR raise through COD. If banks arrange money through call Money/ notice money /
Term money then banks has to maintain SLR only. If money arranged using bank rate or
repo rate then No SLR and CRR have to maintained.}

REPO RATE
Under repo rate commercial bank used to take a loan from RBI for short-term (less than one
year). In case of repo rate , banks are required to give a collateral and co-lateral will be RBI
approved securities only.
As a co-lateral, RBI approved security must be of same value that is equivalent value to
loan value.
Under repo rate commercial banks cannot use securities maintained under SLR as a co
lateral. In other words, commercial banks can use those RBI approved securities which are
maintained through non-SLR amount.
NOTE- repo rate will always be less than bank rate. Bank rate will further decide the
lending rate of a bank. In other words bank rate will decide the minimum lending rate of
every bank. Minimum lending rate of a bank will be different. When ever any bank
calculate its minimum lending rate it takes into account of four factor:-
1. Bank rate
2. Size of deposits
3. Negative carrying on CRR
4. Tenor
Minimum lending rate is also known as minimum cost if lending rate.
 REVERSE REPO RATE
Reverse repo rate means whenever any commercial banks have excess deposit, then such
excess deposit bank used to give it to RBI and RBI in return offer them interest over such
deposit. In reverse repo rate RBI will give them RBI approved securities.
Deposit rate on saving account will be less then reverse repo rate.

MARGINAL STANDING FACILITY

MSF is similar to repo rate, that is commercial bank take a borrowing from RBI, for a short
time. Under MSF co-lateral is required and it must be RBI approved security only.
In MSF,SLR securities can be use. In repo rate it is mandatory to re-purchase the securities,
whereas in MSF it is not mandatory.
There is a relationship between bank rate, MSF, repo rate and reverse repo rate and all this
tool work together.
Bank rate> MSF>Repo rate>Reserve repo rate( till 2022)
But now,
Bank rate = MSF>Repo rate>SDF
6.75=. 6.75>6.50>6.25
This rates are aligned to each other (that is gap between this rate must be same)
⁃ whenever money supply get increase in the market from the desired level, monetary
policy will increase the repo rate and this rate will increase all other rates, including
deposit rate, lending rates.
⁃ When lending rates get increase it means that borrower will delay their investment and
not ready to take at high rate of interest and hence deposit will remain with banks only.
⁃ At the same time, with increase in repo rate, deposit rate will also increase and this
increase deposit rate will attract supplier deposit increase money supply to the banking
system and hence deposit will further increase. Now all the banks will give excess
deposit to the RBI under reverse repo rate.
⁃ Hence rate is inversely proportional to money supply
NOTE - under repo rate, Banks can take a borrowing from the RBI, but up to certain limit
only, if bank has exhaust their repo rate limit, then they will take a loan under MSF. In MSF
also there is a limit for the loan amount and if bank exhaust that limit then banks will take a
loan under bank rate. In case of bank rate there is no limit and no Mortage because RBI is
regarded as lender of last resort for banks.

⁃ with increase in repo rate it is accepted that banks will increase its lending rate and
deposit rate but if banks are not able to do so, then monetary policy will be failure.
⁃ When any bank is not changing its lending rate and depository, it means borrower will
take borrowing from such banks and it is failure of monetary policy, but once such a
bank exhaust its deposit, they will arrange money again through repo rate and once it
exhaust it repo rate limit, it will use MSF and now bank will force to increase its
lending rate.
 OPEN MARKET OPERATION OMO

0MO means sell and purchase of RBI approved securities /government securities by the
RBI. Whenever RBI sells government securities it means the intention is to reduce money
supply in the market. Whenever RBI purchase government securities it means it intention is
to increase money supply in the market.
NOTE- here sale and purchase of government securities mean that whatever government
securities already issued by the government will be traded between RBI and public. SLR
and CRR and open market operation will work independently and this three tools will be
used rarely. Because frequently use of this tools will be responsible for change in money
supply immediately whenever repo rate will change money supply increase in gradual
manner in an economy.
SECURITISATION-in securitisation ation banks, used to raise loan from insurance and
pension companies as well as NBFCs by giving secure loan as a montage.

QUALITATIVE TOOLs
MORAL SAUSION -in this, RBI used to conduct an informal meeting with those banks
which are not implementing Repo rate and request such bank to coordinate.
DIRECT ACTION- if banks is not implementing the repo rate, then RBI can impose a fine
over such banks.
MARGINAL REQUIREMENT-marginal requirement is the difference between the loan
value and montage value. If the MR is zero it means an entity has given montage equivalent
to 100%of loan value. And if the margin requirement is equal to loan value it means no
Mortage is given by entity.
CREDIT RATIONING- It means that RBI provides guidelines that some sectors in an
economy must get loan at less rate of interest as compare to other sectors. Priority sector
lending is an example of credit rationing .

CONSUMER CREDIT REGULATION/CONTROL

It deals with down payment and maturity period of a loan. If money supply has increased in
all the sectors then quantitive tools will be used whereas if money supply has increased in
few sectors only and in other words it has either remain seen or reduced, then a combination
of qualitative and quantitative tools will be used.
Qualitative tools are considered as qualitative because they emphasises on specific sector.

WAYS AND MEANS ADVANCES

Ways and means advances are used by GOI and state government. Wherever there is
mismatch between receipts and expenditure. In this situation government will takes money
from RBI. In the case of mismatch m government will not take borrowing because
arranging borrowing is complex task for government. As well as if borrowing is taken for
mismatch, government fiscal deficit will increase. Under ways and means advances RBI
will give money for maximum 90 days and RBI will charges interest rate which is
equivalent to repo rate. If government failed to return this money after 90 days than
government has to return it with additional +2% interest rate over repo rate.

MONETARY POLICY COMMITTEE (MPC)

MPC was setup in 2016 on the recommendation of urjit Patel committee. MPC was
formulated after amending RBI ACT 1934. MPC is a statutory body.

STRUCTURE OF MPC

⁃ MPC comprise of 6 members. Out-off 6 members , 3 members are the representative of

RBI and other 3 members are representative of GOI.
⁃ 3 member representatives of RBI are:
• RBI governor ( chairperson of MPC)
• Deputy governor in charge of monetary policy department.
• RBI official appointed by board
{ RBI board comprises of RBI Governor , All deputy governor , finance minister on behalf
of government of India. These 3 members will be a member of MPC, till the time they hold
the post in RBI}
⁃ 3 members who are representative of government of India are
• those member having special knowledge in the field of banking, finance and
economics.
⁃ this three members will be recruited by search cum selection committee. This three
members must not be any public servant. This three members will be selected for four
years and they will not eligible for reappointment.
{ search cum selection committee comprised of six members and the six members are:-
1. cabinet secretary( chairperson of search cum selection)
2. RBI governor
3. Secretary, Department of economic affairs Ministry of finance.
And rest three members are selected by government having special knowledge in the field
of banking finance and economic.}

WORKING OF MPC

The role of MPC is to decide repo rate as well as decide how repo rate is aligned to other
rates. Repo rate will be decided on the basis of simple majority. In case of Trai, RBI
governor will give second casting board. MPC has to conduct at least four meetings in a
financial year. MPC meeting will be conducted when minimum four person are presented.

• ROLE Of RBI

1. RBI used to hold the meeting of MPC, in the meeting whatever decisions are taken
along with the details has to be published in next 15 days from the date of meeting.
2. RBI implements the repo rate. In other words, it ensures that banks change their lending
rate and deposit rate as per the new repo rate.
3. Also, RBI takes a decision on usage of qualitative monitory policy told.
4. In case, economy is unable to achieve inflation target for continuous of nine months on
continuous three quarters, then it is regarded as failure of monitory policy.
5. RBI will give failure report which will mention about:-
⁃ reason for failure
⁃ By what time economy will achieve inflation target
⁃ What possible steps will be taken to achieve inflation target.
• ROLE OF GOVERNMENT OF INDIA

⁃ Government of India will decide the inflation target once in a five-year.

⁃ The concept of inflation target was introduced in 2016 and it was also amended in RBI
act.
⁃ Currently monetary policy has a single objective that is to ensure price stability
(inflation target).
⁃ {Currently inflation target has been decided twice that is for the year 2016 to 2021 and
2021 to 2026 and both the time information target is maintained at 4+-2%}
NOTE:- from 2016 onwards monetary policy get failed only once that is Jan 2022 to
September 2022.

MEASUREMENTS OF MONEY SUPPLY

Money supply is measured with the help of monetary aggregates that is M1, M2,M3 and
M4.
M1 is equal to currency with public +demand deposit with banker + deposit with RBI.
M2= M1+ raising account with post office
M3= M2+ Time deposit with bankers.
RELATIONSHIP BETWEEN FISCAL POLICY AND MONETARY POLICY

Types of monetary policy- There are two types of monetary policy

1. Contractionary monetary policy:- (Dear /tight /Hawkish) whenever the intention of
monitory policy is to reduce money supply then it is known as contractionary monetary
policy. Contractionary monetary policy is also known as dear monitory policy, tight
monetary policy ,hawkish monetary policy.
Contractionary monetary policy will be used to control inflation that is whenever the
inflation is more than 6%.

2. Expansionary monetary policy:-( cheap/dovish) whenever the intention of monitory

policy is to increase the money supply, then it is known as expansionary monetary
policy. Expansionary monetary policy is also known as cheap monetary policy ,dovish
monitory policy.
The expansion in monetary policy will be used in whenever inflation is under control and
the intention is to increase growth rate by increasing money supply.

TYPES OF FISCAL POLICY:-

There are 2 types of fiscal policy:-

1. Contractionary fiscal policy:- In contractionary fiscal policy, Government is
deliberately decreasing its expenditure, whereas at the same time deliberately increasing
the receipt.

2. Expansionary fiscal policy:- IN expansionary fiscal policy, government is deliberately

increasing its expenditure and decreasing its receipt. Expansionary fiscal policy, is used
whenever economy is having burden of welfare as well as in the case of fiscal stimulus.
In case of India expenditure is more than rise, but if we observe the trend of fiscal deficit it
can be stated that government is following the contractionary fiscal policy.
Whenever monitory policy is contractionary nature, the intention is to reduce money supply
from the market, but if at the same time if government spend the money with high velocity
then the purpose of monetary policy will fail. In other words it is accepted that fiscal policy
must reduce its velocity of money.
{ NoTE:- velocity of money:-The speed at which money is exchanged in economy. In case
if monitory policy is expansionary in nature, then RBI except from the fiscal policy that
government must increase its velocity of money. According to FRBM act fiscal policy must
be in sync with monitory policy.}

FAILURE OF MONETARY POLICY

1. If money supply get increased due to illegal sources then monitory policy will not work.
2. If banks are not implementing the repo rate or they are delaying the implementation of
repo rate.
3. If the reason for inflation is other than demand pull.
4. If fiscal policy is not coordinating with monetary policy.
5. Competition given by fin tech and share market to the banks. In other words Pentek and
share markets are offering better returns as compare to bank and people prefer to put
their money in Pinterest and share markets. It means the increase in money supply will
remain as a part of market only. And to absorb this increase in money supply it is
required it must be a part of bank.

STANDING DEPOSIT FACILITY ( SDF)

The concept of STF was introduced in 1 April 2022. It is a temporary quantitative monitory
policy tool which has replaced reverse repo rate. Standing deposit facility is similar to
reverse repo rate That is whatever axis deposit bank have, they can give it to RBI under
SDF but under SDF, RBI will not give any RBI approval securities.
In pandemic although economy comes to stand still but at the same time there is inflow of
excess foreign currency through share market in India and for this inflow RBI does not have
enough RBI approved securities to absorb it and hence it replace reverse repo rate with SDF.
Currently MSF and bank rate are equal because government requested RBI that the bank
must provide loans to private sector at less rate after Covid with the intention to recover in
economy(already because of Covid and Russia Ukraine war private sector confidence is
very low and if MSF and BR are not equal or you can say MSF rate is more than bank
rate ,lending rate will increase, which will further reduce the confidence of private sector).
Currently SDF is less then repo rate and Reppo rate is less than MSF and MSF is equal to
bank rate.
Bank rate=MSF> repo rate >SDF
BALANCE OF PAYMENT

1. Meaning of balance payment

2. Component of balance payment
3. Concept of current account
4. Concept of foreign direct investment and foreign portfolio investment
5. Concept of exchange rate
6. Concept of depreciation and appreciation
7. Concept of convertibility

MEANING Of BALANCE OF PAYMENT

Balance of payment means an annual statement /record of inflow and outflow of foreign
currency from a country to rest of the world.
• Balance of payment record is maintained by RBI.
• The source of inflow and outflow of currency or export and import of goods and
services.
• Inflow and outflow of foreign investment in borrowing. Inflow and outflow of
donations

THERE ARE THREE TYPE OF BOP

1. BOP surplus (that is inflow foreign is more than outflow of foreign currency)
2. BOP deficit (that is inflow of foreign currency is less then outflow of FC)
3. BOP neutral (that is inflow of foreign currency is equal to outflow of FC)

In real sense either an economic is having BOP surplus or BOP deficit. Currently India is
having BOP surplus country. Whenever there is BOP deficit it can be stated that nation is
under debt (Nation include both private and government).
In case of India, there is forex reserve having $700 billion and if there is an BOP deficit then
India has a capacity to absorb the deficit up to $700, billion. If the deficit further increases
then there will be BOP crisis.

ThERE ARE TWO TYPES OF ECONOMY:-

1. CLOSED ECONOMY:- closed economy is that there is restriction on inflow and outflow
of foreign currency.
2. OPEN ECONOMY:- Open economy means that there is no restrictions on inflow and
outflow of foreign currency. Concept of WOP is valid for open economy only.
 COMPONENT OF BOP

In BOP, there are 4 BOP:-

.
1 CURRENT -VE
ACCOUNT

.
2 CAPITAL +Positive
ACCOUNT
+Positive
.
3 FOREX
RESERVES

.
4 NET ERROR AND +positive
OMISSIONS

• In case of India, capital account is surplus positive in nature. Similarly forex reserve
and net error and omission is positive in nature. But current account is negative in
nature and hence overall BOP is surplus in nature.

• CURRENT ACCOUNT :- is further divided into 2

a) visible current account ( measurable goods):- trading in goods (export and import of
goods ).It is also known as merchandise trade.

b) Invisible current account ( immeasurable service):-

1. Trade in service (export and import of service)
2. Factor income(Factor income means the return of generated on foreign investment or a
Borrowing)
3. Transfer payment ( transfer payment means there is a transfer of foreign currency but
without exchange of goods and services from one country to another country. Transfer
payment include 1) donation charity grants 2)gifts 3)remittances.)

• CAPITAL ACCOUNT :- is further included

1. FOREIGN INVESTMENT:- further includes

a) Foreign direct investment FDI :- purchase assets of the company + control ownership.
(shares 1%-9%)
b) Foreign portfolio investment FPI:- purchase assets (shares 10%or more).

{foreign portfolio investment enters India through stock market whereas foreign direct
investment enters India either by stock market or without stock market. in foreign portfolio
investment, foreign entity purchased assets of a company that is in the form of shares but in
the case of foreign direct investment foreign entity purchased a set as well as ownership of
the company.)
If a foreign entity invested in Indian company in such a way that it holds maximum 9% of
shares it will be regarded as foreign portfolio investment but if foreign entity purchased
10% or more shares than it will be regarded as foreign direct investment. But once it is FDI
it can’t be converted to FDI. 10% criteria for FDI is given by mayarane committee in 2014 .
This 10% loss for listed companies. In case of unlisted company there is no concept of FPI
and every foreign investment will be regarded as FDI only.}

2. FOREIGN BORROWING:- further includes

a) External commercial borrowings
b) External assistant
c) Trade credit

3. BANKING CAPITAL TRANSACTIONS .

Q. What can be done to reduce India’s current account deficit or India’s current account
deficit can be become current account surplus?.
Ans:- Currently it is very challenging for India to become current account surplus. But India
can make efforts to reduce its current account deficit. Current account has two company that
is visible and invisible. At present visible is in negative where is invisible is in positive but
overall in case of current account are negative.
In order to reduce current account deficient, government of India is making efforts to reduce
merchandise trade deficit as well as in case of invisible India has already released its
potential.

NATURE OF INDIAS IMPoRT OF GOODS:-

India basically import essential items such as:-

1. Crude oil (India’s 80% consumption of crude oil is made through import. Whereas in
case of ethanol blending, India is dependent on import of ethanol. Shifting from crude
oil to electric vehicle and renewable energy will provide it a solution to environment
problems but it does not make Indian energy independent)
2. Fertiliser (India is also important fertilisers)
3. Oil seeds(in case of oilseeds, India 58% of total consumption of oilseeds is made
through imports).
4. Semi-conductor(currently India is importing semiconductor for its Digital India
mission)
5. Critical minerals (in order to make renewable energy, electric vehicles and electronic
industries successful, there is need of critical minerals and currently India is depended
on the import of such critical minerals.

NOTE:- all the above mentioned items are essential items and the demand for such essential
items are getting increase in India. Hence it is very difficult to reduce the import bill of such
essential items. India also import done essential items such as gold. Government of India
introduced the concept of sovereign gold bond scheme with the intention to reduce the
import of physical gold but this gets failed because in India people used to invest on
jewellery rather than gold bars. India also import of hoti-culture products such as
kiwi,Dragon fruit ,broccoli etc.

• NATURE OF EXPORTS OF GOOD

India is exporting low value products such as:-

1. Petroleum products.
2. Jewellery.
3. Smartphones.
4. Pharmaceutical.
5. Electrical goods
NOTE:- in case of India( export )India is exporting value additional only . India used to
export raw material such as iron rods to China, Japan etc. And used to import finished
products such as steel from China and Japan. India also exports low value agricultural
products such as rice wheat etc.
After observing India’s export and import of goods, it can be stated that India is importing
essential products of high-value as well as non-essential products which are also of high-
value. But at the same time India is exporting the products of low value. This is the main
reason for having merchandise trade deficit.
In order to increase India exports, there is need to diversify market for Indian products as
well as there is a need to diversify India’s exported product that is from low value product to
higher value.

For product diversification government has taken following initiatives:-

1. One district one product.
2. Make in India.
3. Production linked incentive scheme PLI.
4. Special economic zone SEZ.
For market diversification government has taken following initiatives:-
1. Free trade agreement FTA.
2. Government also participating in international connectivity programmes. Such as
international North South transect corridor. This corridor will connect India to Europe.

SPECIAL ECONOMIC ZONE( SEZ)

1. SEZ Are designated area within a country, where products produced are meant for
exports only.
2. SEZ, the intention is to produce quality goods and services at less prices, and for this
government is providing quality infrastructure and various tax benefit. This intention of
SEZ, is to increase export by making Indian products competitive in international
markets
3. Product manufacturers /assemble in SEZ, if enters into non-SEZ area will be considered
as foreign goods that is government of India will impose import duty over such products
within the intention to protect industries in non-SEZ area.
NOTE:- SEZ concept was introduced in 2005. In 2017, government of India appointed Baba
Kalyani committee to review SEZ. Baba Kalyani committee submitted its report in 2019
-2020. This committee was in the favour of the removal of SEZ. Committee stated that SEZ
are provided so many benefits in terms of infrastructure and tax concession but still their
exports are very less as compare to non-SEZ area. for example in the financial year 2019
2020, India’s total export of goods was 410 billion $, and out of that SEZ contribution was
100 billion dollars and non-SEZ was 310 billion $.

NOTE-currently India’s export of goods are in range of 430 billion dollar to 450 billion
Dollar and whereas India’s import of goods is in the range of 650 billion dollars to 700
billion dollars.

There are 4 reasons for the failure of SEZ:-

1. SEZ Are enjoying tax benefits, but after 2017 the same tax benefit is enjoyed by non
SEZ in the form of free trade agreement.
2. Government is providing quality infrastructure to non-SEZ after 2014 -2015.
3. Companies are more interested to set up their base in non-SEZ area because of market
size. Most of the SEZR declared due to the vested interests such as there is naxised
between state government and real estate agents and they dialiberty announce an area
as SEZ in order to get more profit.

FREE TRADE AGREEMENT

Free trade agreement means that there will be agreement between two or more countries
with respect to free movement of goods and services that is there will be either non-tax or
minimum tax.
Hence free trade agreement is symbiotic relationship where country decided to mutually
reduce their Taxes. The intention of retail agreement is to increase the export of both the
countries.

In case of India free trade agreement failed to increase India’s export because of:-
1. When India sign free trade agreement with Bangladesh, it results into relocation of
textile industry from India to Bangladesh and Bangladesh used to import raw cotton
from India and now India used to import finished product .
2. Similarly India sign read trade agreement with UAE and it results into increase in the
import of gold.
3. When India sign free trade agreement with South Korea, it is observed that South Korea
auto mobile companies start importing car products from South Korea.
Although FTA has not help us to increase exports but it helps us to control inflation in
economy(when importing essential goods it control inflation example crude oil). in case of
India free trade agreement hasn’t helped to increase the export but on the other hand it has
increased import in India. other reason for the failure of free trade agreement is that Indian
companies are not ready to face competition from foreign companies/goods.
Free trade agreement follows the principle of product origin in an country and it is
frequently observed that partner countries violate this principle.

CHALLENGES IN EXPORTS:-

1. Policy paralyses
2. The issue of price war that is great follow the principle of comparative advantages
3. Developed countries are currently implementing their environmental commitment in
terms of reducing carbon emission and in this context this countries are proposing
carbon tax on foreign products. For example European Union proposes carbon border
adjustment tax on steel, manufactured in additional ways.

Initiatives taken by government to increase Indian exports:-

1. Government has introduced foreign trade policy in 2023.

Previous foreign trade policy used to come for time period of five years. But this foreign
trade policy has no deadline and this policy has adopted the best practises of previous
policies such as product diversification and market diversification.
Foreign trade policy has also set up a target of export goods and services which has to be
achieved by 2030.
2. The government is developing export hub for faster movement of goods and services.
(Export hub will be set up in those area where products can be delivered in less time).
3. Government is also promoting Global exports with the help of E commerce. E-
commerce will help to boost the export of single product at global level and it will give
benefits to China like one district one product.
4. Government is incentivising farmers to grow horticulture product such as fruits and
vegetables.
5. With respect to manufacture products, government is making efforts to improve the
quality of the product. Government is ensuring that every manufactured product (either
manifested by branded or non-branded company )must follow certain minimum
standards for example government of India boost the export of toys from India by
setting up certain minimum standards.

CAPITAL ACCOUNT

Foreign investment:- foreign investment Are of 2 types:-

FOREIGN DIRECT INVESTMENT and FOREIGN PORTFOLIO INVESTMENT

1. FOREIGN DIRECT INVESTMENT:-There are two types of FDI:-

1. GREEN FIELD FDI:-Greenfield FDI means that foreign investors enters into India with
investment and started a business /economic activity from scratch. For example Hyundai
motors, Kia motors, Amazon etc.
2. BROWN FIELD FDI:- brownfield FDI means that foreign investors /entity enters India
with investment and invested in existing company in the country. For example Maruti
Suzuki, hero Honda etc.
In India, there are more green field FDI as compare to brown field FDI.

Any joint venture of foreign and Indian company which started a new company in India
then it is regarded as green field FDI. For example :- tower company of Israel and Adani
group of India is planning to set up a new semiconductor industry in India which will be
now regarded as greenfield FDI.
In India FDI can entry through 2 routes that is 1. automatic route 2. Government Route .

• AUTOMATIC ROUTE:-in automatic route foreign investors can invest in particular

sector by registering with government of India. Registration of FDI will be done with
Ministry of commerce and industry. under autonomic Route those sectors will be
permitted which are not a threat to our national security or domestic industry. For
example auto mobile sector, food outlets etc.
• GOVERNMENT ROUTE:- under government Route foreign investors are required to
register as well as take permission from government of India. Registration will be
done with Ministry of commerce and industry and permission will be given by
concerned ministries. In government route those sectors are permitted where there is
security concerns as well as domestic industry concerned but such concern our
manageable with precaution. For example chemical industry, defence industry, space
industry etc.

SECTOR WHERE FDI IS NOT ALLOWED:-

1. Nuclear energy / atomic energy
2. Railway operation (but for and can construct coach, or railway items but never operate it
)
3. Lottery/ gambling /betting and casinos
4. Agriculture (cultivation of crops such as rice, wheat, cotton, sugar cane, jute, pulses and
millets can be done only by Indians. Whereas FDI is allowed for the cultivation of
horticultural, aquaculture, animal husbandry, mushroom seed manufacturing products)
5. Chit funds
6. Land purchase (FDI is not allowed for land purchase but allowed in real state, (land
owner is Indian )but for construction of building can borrow money or for material )
7. Tobacco products (FDI is not allowed in manufacturing of tobacco products . only
export tobacco products from foreign countries).
NOTE:- to provide single window clearance for FDI government has set of invest India
portal. The intention of this portal is to attract foreign investment by reducing bureaucratic
hurdles that is RED TAPISM. In other words PM of India stated that foreign investment
must be welcomed with red carpet rather than red tapism.
{FDI received 70-80 billion dollars per annual in last 10 years}
NET FDI= INFLOW -OUTFLOW
Net FDI means the difference between inflow and outflow of FDI. In last 10 years the
average net FDI is around $40-$50 billion. currently government has set a target for FDI
and the target is hundred billion dollars per annum.

In order to increase FDI in India, India need to take following steps:-

• FDI wants that investment must be safe in our country that is whenever FDI enters in
a country it accepted from the government that rules and regulation must be either
remain same or is change it must be progressive in nature. For example, in case of
Vodafone, government of India impose tax on Vodafone and this action of the
government has given a wrong message to other FDI. similarly recently Supreme
Court allowed the state government to impose lease charges on mining site from the
previous data.
Foreign direct investors warned that if there is any dispute between foreign investment and
government, it must be resolved in less time by international courts. But Indian government
stated that such case must be resolved by Indian judiciary first and if not satisfied then it
will be resolved by international courts.

In 2015 -2016 Government of India introduced bilateral investment treaty, and according to
this treaty for my dispute will be resolved in India in maximum time period of five years
and then it will be deal by international courts (except in case of UAE3 years).

FBI are looking for strong patent laws from government of India.

FBI require that government must identify certain offences which they have criminalised.
For example if a company fails to pay GST on time, GST authority can in prison the
promoter of the country and hence there is a need to de-criminalised such offence.
India’s FDI policy must be better than its competitors in Asia.

Government must offer the quality infrastructure to FDI.

• IN last five years that is from 2019 to 2024, India received FDI worth $ 233
Billion . Out of 233 billon dollars 50% FDI is received by Maharashtra and Karnataka,
whereas 90% of the total FDI is received by Maharashtra ,Karnataka ,Tamil Nadu ,Gujarat
and Delhi. After analysing the above data it is observed that FDI is not received by all the
states in an equitable manner.

Q. What must be done to insure that all states must benefits from FDI?
Ans- Government of India required that every state government must have its land bank
policy that is state must arrange land for foreign invested in advance for economic
development.(land is a state subject)
Central government wants that state government must increase floor area ratio that it it must
be minimum 5 or more.
Central government required that States must develop a ecosystem for particular sectors.
For example Tamil Nadu is known for manufacturing of white goods that is A/C. Similarly
Bangalore is known for IT sector and now semiconductor ecosystem is developing in
Gujarat and Assam.

States have to ensure law and order.

• IN India FDI is a myth.

According to IMF, whatever FDI is coming from outside the country is regarded as FDI.
Whereas according to RBI, a fresh money coming from outside is regarded as FDI. Fresh
money means money is generated in other country and then channelise to India. In other
words if a profit is generated in India and such profit is taken outside the India and again
brought back to India RBI does not consider it as FDI (but the challenge is that RBI find it
difficult to identify such profit).

In the year 2000, MNC raise a concern that they have to pay taxes on their profit in multiple
countries and this is the reason such a company does not expand their bases at global level.

OECD( organisation of economic cooperation and development) signed an agreement

known as double taxation avoidance DTAA. According to DTAA MNCs have to pay a tax in
any one country that is either host country (host country means Ware country is having
base) or operating company(where countries earning profit).

DTAA resulted into the emergence of tax heaven countries. Tax heaven countries are those
countries where taxes on profit are very less. Tax heaven countries further resulted into the
concept of base erosion and profit shift under base erosion and it is observed that company
left its original base in order to ship the profit from operating country and the intention is to
pay less taxes to the government.

MNCs in India used to shift their profit outside the country and then Again channelised
Such profit to India as FDI. India mostly received FDI from Singapore, Mauritius, Cayman
Islands and other islands and all these countries are considered as tax heaven countries. Out
of top 10 countries from where India is receiving FDI, 50 to 60% countries are tax heaven
countries.

2. FOREIGN PORTFOLIO INVESTMENT( FPI)

FPI can be either individual or company. FBI are required to register with securities and
exchange board of India SEBI before investing in such stock market. Foreign portfolio
investment is also regarded as hot money(they are not stable) because this invested used to
withdraw their money whenever they get good returns in any other international stock
market. Whenever foreign investor invest/ withdraw money on speculation, it has an impact
on an economic in terms of money supply and exchange rate. In order to stop such
behaviour of foreign investors, James Tobin proposed a text which is known as Tobin tax.
According to this tax, if a foreign investor invest in international market it has to hold its
money for certain time period, to reduce speculation and if they withdraw this money before
the time period they have to pay heavy taxes. Currently India government has not impose
Tobin tax.

P-NOTES (participatory notes)

In India many foreign investors, invest in India’s stock market P note. in India, SEBI does
not recognise P notes but at the same time does not taken any legal action against P note.
Under the P-note foreign investors, invest money in Indian stock market without registering
with SEBI, but with the help of registered investors, that is foreign investors will give
money to register the investor and this registered investor will further invest this money and
in this process the registered investor will issue P note to the foreign investor. this foreign
investors are not registering with SEBI, because they does not want to follow compliance
norms of SEBI. In other words they are looking for freedom in terms of withdrawing money
or investing on money at any time of the day.(because registered investor have to follow
process register then invest then withdraw etc).( through P notes registered investors are
running black market of shares).

CONCEPT OF AMERICAN DEPOSITORY RECEIPTS/GLOBAL DEPOSITORY

RECEIPTS /INDIAN DEPOSITORY RECEIPTS :-
~This three financial instruments are part of capital market.
~ American depository receipts means if a non-American company wants to raise fund from
US stock market they can do so with the help of American bank that is American banks will
list it self on US stock exchange on behalf of non-American company and in return issue
ADR to non-American company.
~ in case of global depository receipt, non-European companies can take money from
european stock market with the help of european banks.
~ In he of IDR, non-Indian company can take money from Indian stock market with the help
of Indian bank.

EXCHANGE RATE:-
Exchange rate means the amount of local currency need to be spent to get a single unit of
foreign currency. For example 1 dollar equal to ₹50,It means ₹50 has to be spent to get a
single dollar. Exchange rate never remain same.

There are two types of exchange rate

1. Fixed exchange rate:-Exchange rate is decided by government by intervening through

forex reserve for example China use fixed exchange rate.
2. Flexible exchange rate:-Exchange rate is decided by market forces that is demand and
supply of foreign currency and in case of flexible exchange rate government will not
intervene.
• managed exchange rate:-in case of India we follow manage exchange rate that is
combination of fixed and flexible exchange rate under this up to certain range ₹50-₹80
exchange rate is decided by market forces whereas beyond this range exchange rate is
decided by government intervention through forex reserve.
• Countries having managed exchange rate and fixed exchange rate will maintain forex
reserve whereas countries having fixable exchange rate does not maintain forex
reserve

DEPRECIATION :-

Depreciation means a foreign currency become costly. In other words more local currency is
required to spend to get a single unit of foreign currency. For example if before depreciation
exchange rate was one dollar equal to ₹50 it means ₹50 are needed to purchase a single unit
of Dollar but after depreciation if one dollar is equal to ₹60 it means now ₹60 are needed to
purchase one dollar.

APPRECIATION:-

Appreciation mean that foreign currency has become cheaper for example before
appreciation one dollar is equal to ₹50 but after appreciation one dollar is equal to ₹40.

REASONS FOR APPRECIATION AND DEPRECIATION:-

Assume that foreign currency is a product and in every economy foreign currency is limited.
and whenever the demand for this foreign currency get increase, then local currency
depreciate. (If foreign currency demand increase at limited time than depreciation )
Hence importer is responsible for depreciation of the currency similarly outflow of foreign
currency either by investors or borrowers as well as any other entity is also responsible for
depreciation of currency. If economy want that currency must not get the price yet, even the
demand for outflow is increased they can do so in two ways:-

1. Increase the inflow of foreign currency.

2. Infusing foreign currency from the forest reserve in the market.

In the case of appreciation, it is observed that supply of foreign currency get increase but the
demand for foreign currency is either same or reduced and hence in this situation, local
currency will get appreciate. If economic does not want to appreciate the currency that is
after the increase of in the supply of foreign currency, they can do so by taking following
steps:-
1. By increasing the outflow of foreign currency.
2. By absorbing the excess supply of foreign currency in forex reserve.
STERILISATION :- it is a process in which RBI used to absorb foreign currency from the
market whenever there is excess money as well as used to release foreign currency in the
market whenever there is a deficit in the market.

Hence STERILISATION has to objective:-

1. Stability of exchange rate.

2. Management of money supply.
Therefore STERILISATION is also regarded as part of open market operation.

IMPACT OF DEPRECIATION

• whenever currency get the appreciation, exporters will have benefits whereas importer
will have lost. Whenever currency get depreciate, exporter have two choices to get
profit:-
1. If exported, export the same quantity what is used to export earlier for a dollar after
depreciation he will have more profit.
2. If exported on depreciation increase the quality of product then also exporter has profit
because Indian products will become competitive in international market and hence
there will be more demand for Indian product in international market.
• whenever currency get depreciate import become costly, where as exports will be
cheaper
• In case of appreciation, exported will have lost whereas importer will have profit.
• In case of depreciation economy current account deficit will reduce.
• The above impact will be valid for only those economy which our NET EXPORTOR
for example China.
• India is NET IMPORTER Country, and within imports India is importing essential
items.
• In case of India depreciation is responsible for inflation(because India is importing
essential items such as crude oil and hence the price of such essential items become
costly in India). (depreciation will not responsible for inflation in China because
China is net exporter country)
• In case of India depreciation will increase current account deficit CAD.
• If suppose there is an inflation in any economy then importer of the country will make
arrangement to import such products from foreign countries, and this action of the
importer will result into demand for limited foreign currency and this will further
result into depreciation of currency. India is also importing other essential items apart
from food and hence after depreciation price of such other essential item will increase.
• There for inflation can also become the reason of depreciation.
• Information can be a reason as well as consequence of appreciation. Hence in India
economy depreciation of currency can be due to non-inflation factor for example
foreign investors withdraw money from stock market. For example inflation in
economy needs to increase import which put pressure in limited foreign currency and
then depreciation. This depreciation will further increase inflation.
• In case of India depreciation is not responsible for attracting FDA in India because
along with depreciation there is inflation also. Whereas in case of China depreciation
attract FDI because there depreciation is not responsible for inflation.

There for to attract FDI in India India need to become NET EXPORTER.

FOREX RESERVE

In case of India forex reserve is maintained by RBI. Currently India forex reserves is around
$700 billion. Forex reserve will not remain stable.
OBJECTIVE OF FOREX RESERVE IN INDIA

1. To manage exchange rate and money supplier.

2. In case of BOP deficient /crisis, RBI will use forex reserve to solve the problem of BOP
crisis.
in India forex reserve is maintained in four forms:-

1. HARD CURRENCY (this are those currency those are accepted at international level
and currently they USA Dollar, european, Pound, Yen,yuan) {this Are net exporter
countries}
2. GOLD
3. SPECIAL DRAWING RIGHTS SDR
4. RESERVE TRANCHE

There is three types of foreign borrowing:-

1. External commercial borrowing :-external commercial boring me a boring taken by

the private sector from outside the country that is from recognised lender (recognised
lender mean foreign government regulates such lenders) under external commercial
borrowing, borrowing has two taken for a minimum maturity period of three years.
External commercial borrowing will become a part of public debt.
2. External Assistance :-external assistance is a borrowings taken by government as well
as NGO, which is not working for profit. Under external assistance borrowing will be
taken for long-term and at a very less rate of interest. External assistance is also known
as soft loan. For example Japanese government has given the soft loan for the
construction of Delhi Metro as well as bullet train. External assistant is also a part of
public debt. External assistant is a borrowing and it’s a part of capital account. Different
from donations which is part of current account.

3. TRADE CREDIT:- trade credit will be used by the importer of a country. Under trade
credit importers will issue trade credit to a foreign person from whom importer has
purchased the product or recognised lender of foreign country. Trade credit is also a part of
public debt.
BANKING CAPITAL TRANSACTION BCT

BCT mean for them or non-residence having a bank account with Indian bank. There are
two types of BCT:-

1. Foreign currency non-resident account FCNR:- FCNR mean that non-resident is

having a bank account with Indian bank and in such bank account, non-resident is
maintaining money in foreign currency. FCNR is maintained by MNCs not by
individual.
2. Non-resident ordinarily rupee account NROR:- NROR it mean non-resident is
maintaining a bank account with Indian banks and in such bank account money is
maintained in Indian rupees. This account is used by tourists .

VOSTRO:- Under VOSTRO Account, Indian bank will open a bank account on behalf of
Russian Bank and maintain money in such account in Indian rupees.
Having more vostro Account means that there will be a less pressure on the dollar and hence
this will prevent the depreciation of Indian rupees. Having more vostro Account mean that
India is doing trade in Indian rupee and this is known as DE DOLLARISATION

NOSTRO:- IN NOSTRO Account, Indian Banks will maintain its bank account with
foreign bank and in such bank account, money is maintained in foreign currency other than
hard currency.

NET ERROR AND OMISSION

NET Error and omission. Means that RBI will mention any errors while maintaining the
value of current account and capital account as well as any foreign currency ceased by law
and order agency in India

CONCEPT OF CONVERTIBILITY

Convertibility means freedom to convert local currency into foreign currency or vice versa.
in case of India, convertibility is allowed on current account that is full freedom to convert
local currency of any amount in foreign currency and vice versa. Whereas in case of capital
account full convertibility is not allowed. For example in case of FDI there are restrictions.
Similarly in borrowing there are restrictions, there for capital account is partial convertible.
Hence in India BOP is partially convertible.
Government of India appointed Tarapur committee 1 (1995-1996) and Tarapore committee
2(2005-2006) to review convertibility in India and this committee was in favour of full
convertibility on certain conditions.

This conditions Are:-

1. Fiscal deficit must be 3% and receive deficit must be zero.

2. Banking condition must be strengthen(NPA is less)
3. Inflation must be maintained as per inflation target.
4. Country must maintain a forex reserve and it must be equivalent to at least 11 months of
import bill .