LECTURE 4

Vishnu Prasanna sir- JF of financial management

Prasanna sir- JF of macro economics

Circular flow of money- connects financial market, labor market, etc.,

Circular flow if the economy:

1. All assets of the economy lie with households.

2. Whatever producer needs, It is proved by household
3. Land, labor, equity
4. HH provide labor, producer give wages. HH provide raw material, producers provide
product.
5. HH doesn’t spend all the amt. but they save in terms of mutual funds, insurance, FD, etc. all
these is called financial market. HH Save, spend, pay taxes to the Govt.
6. Product, raw material is called product market
7. Wages, labor is called labor market.
8. As there is disruption in product mkt., there is disruption in labor mkt.
9. Savings are going out of circular flow and this outflow is called LECKAGE
10. Borrowing money by producers is called investment. this is called injection.
11. If investment money is more than savings, interest rate increase. If investment earned is less
than savings then interest rate decreases.
12. Credit growth rate: the rate at which the credit in the economy is growing. C+ I+ G+ (X-M) if I
is increasing, GDP is also increasing.
13. Credit growth rate India year wise – ceicdata.com
14. If there is sudden increase in credit to corporates, there will be a negative impact in the
future of the economy.
15. Janardhan Poojary loan melas 1980- google (economictimes.indiatimes.com)
16. Written off- if the amount is not given even after given time you say the amount is written
off. This amount is paid through profits of the bank with which the share prices decrease.
17. Waving off – excusing a person if amount is not paid.
18. FISCAL DEFICIT= Income – spending.
19. If less no. of ppl give taxes, govt income reduces and the ability to provide services reduces.
20. With black money, money laundering happens and there will be a huge leakage and circular
flow of income decreases.
21. Jan dhan yojana -> demonetization.

LECTURE 5 – again, imp. for quiz, exams.

DT: 26-oct-2021.

AGGREGATE DEMAND AND AGGREGATE SUPPLY

 1. The circular flow depicts the GDP and this is also called the aggregate demand.
2. As income increases, consumption increases. Even if income is 0, consumption takes place.
3. Aggregate demand: AD= C+I+G+ (X-M)
C=consumption
I= investment
G= govt expenditure
C=a+by is the consumption function.by is the intercept i.e., even if income is zero, there will
be consumption.
4. Investment is dependent on interest rates.
5. As the price increase because of wealth effect, we buy less.
6. Wealth effect
7. Foreign effect
8. Interest rate effect

Aggregate supply:

1. In short term, aggregate supply curve is a horizontal straight line as the companies have
excess capacity available.
2. PMI= Purchase Managers Index. If this goes beyond 50, the economy is optimist and if less
than 50, economy is pessimist.
3. In the long run, the aggregate supply curve is a vertical line.

4. When tech advances, supply curve shifts outward. And hence the prices come down by small
percent.

5. Ss curve is a combination of both short term and long term.

6. As you are going to full capacity, the price increases.

7. As per JBSay, supply creates its own demand.

8. When all resources are employed, it is called full employment.

9. The difference b/w full employment and present employment is called recessionary gap.ie
prices decrease, spending decreases and everything decreases. Here , lot of resources are
unemployed.

10. If the prices increases, spending increases in the economy, it is called inflationary gap.

Lecture 6

Dt: 27-oct -2021

Lecture 9

1. Before 2008. Banking sector in India was very robust with about 2%. with exports falling,
India’s GDP will fall, production in the country comes down. This reduction in money,
effected the mutual fund industry and NBFCs. (non-banking financial corporations.)
2. In order to keep NBFCs healthy, loans from banking …….
3. In addition, all the lending happened during 2005,06,07 in areas of roads, power, coal, oil&
gas, steel, telecom, -large no. of projects got stalled. Because of conflicts between ministries
4. To tide over these global financial problems in 2009, the monetary policy in India was
loosened by a large extent. CRR used to be 9% which was bought down to 4.75 %. Repo rate
was also reduced to around 5%. (4% reduction in repo rate). Apart from these, restructuring
of loans was permitted. (Repayment of loan period will be extended with less interest rate)
5. As assets turn out to be risky, tendency to lend reduces.
6. From 2014, the RBI started insisting better quality of info from banks.
7. As many people were not paying tax and fiscal deficit was increasing, GST was introduced in
2016.
8. Looking at poor quality of assets in 2018, a prompt action where 15 PSU banks were stopped
lending till they improved the liability. This is called great 2012………
9. If current a/c deficit is very high it means exports are high and imports are low. With this
rupee decreased.
10. High fiscal deficit, high current a/c deficit and high inflation will make the rating companies
to degrade the Indian rating.

FOREIGN EXCHANGE MARKET:

1. Exchange rate = it determines the rate of change of one currency to other currency.
2. Foreign exchange dealers. In India most of the commercial banks are identified as foreign
exchange dealers ad are called as authorized by RBI. Any time it says 2 quotes. Foreign
exchange rate will be determined till 4 decimal points. This is called PIPS
3. The bank is ready to buy a dollar at 75.6450 and is called as BID rate. It is ready to sell at
75.6455 and is called ASK rate. The difference b/w bid rate and ask rate is called SPREAD. It
will be communicated in last 2 digits.
4. Foreign currency spoke in terms of one unit exchange is called direct quote. Indirect quote
5. Market has SPOT rate market – which means physical delivery of the currency will happen in
2 days time. Other is FORWARD market- delivery will happen in 1 month/ 3 months/ 6
months depending the contract which you have signed.
6. Need for forward contract: Forward market is present to reduce the uncertainty
7. Arbitrag opportunity. This will exist only for very very less time.
8. Covered interest arbitrage = combining arbitrage with interest rate.
9. Interest rate parity= 1 dollar invested in any country across anywhere on the world, will
fetch same amt of interest provided it is invested in instrument of equal risk. Here there is
free flow of capital across nations.
10. Bill discounting agent
 11. COVERED INTEREST RATE OF ARBITERAGE: US – 2% interest rate, India -10% interest. NRI
borrows $100 from US bank. After 1 year, he needs to repay at $ 102. He converts SPOT
market and converts 7500/- and deposited in Indian market will give him 8250/-. He takes
this to forward market where ongoing is $70. after 1 year he will get $117. This receipt he
can show to a bill discounting agent in USA and charge a fess of $7 and give him $110 and
approaches the bank pays the amount risk free

LECTURE 10, 11

DT-9 Nov-2021

FOREIGN EXCHANGE MARKET (cont.)

1. 2 determinants of foreign exchange market are interest rates and inflation rate.
2. As interest rate of economy rises and cap flows are free the domestic currency exchange
rate to strengthen. This works through interest rate parity. The rise reduces the interest
rate differential.
a) Reduced interest rate differential leads to capital inflows. Which leads to domestic
currency strengthening.
b) Interest rate parity: Instruments of similar risk will yield similar return across all
parts of the world if capital flows are free i.e., interest rate work on interest rate
parity.
3. Inflation rate (I): If I rise in domestic country, the inflation differential between 2
countries rises.
a) This makes domestic goods relatively expensive. Which further leads increase in
imports and decrease exports.
b) Increase in imports will lead to increased demand for dollar. Decrease in exports
leads to decreased supply of dollar
c) As a result, domestic currency will increase.
d) Inflation works through purchasing power parity.: law of one price -$1 should be
able to buy same amount of goods and services across the world if trade and capital
flows across borders is unrestricted.
4. Therefore, inflation and interest rate work in opposite ways.
5. Change of inflation on exchange rate is long term where as a change of interest rate on
exchange rate is short term.
As per the example,
a) Export leads to more strengthening the US dollars so exchange rate increases and
price of the same good in Rs. will increase. In a liberalized exchange rate mechanism,
the exchange rate changes in order to remove price difference between the 2
countries.
b) When inflation rate is very high, export demand increases the output and
employment in US where as increased demand in India leads to declining output and
employment.
c) As inflation keeps on increasing the exchange rate, domestic currency will continue
to weaken.
 d) The big mac index- the economist: article- INDIAN rupee is under -valued by 54/-
e) Current account deficit of USA: article
f) Historical current account deficit of USA (trading economics .com)-The United
States recorded a Current Account deficit of 2.40 percent of the country's
Gross Domestic Product in 2017. 
6. The exchange rates become one of the prime reasons for potential conflicts among
nations. Growing trade deficit implies decreasing output and increasing unemployment.
7. Growing trade deficit in US leads to unemployment. US companies in order to reduce
costs, would like to
a) Outsource production activities to some other country
b) Hire cheaper labor from Mexico, India, Philippines, Brazil etc. which lead to major
policy changes by Trump administration.
c) This also becomes a basis of new firm- global minimum tax D. (min. 15% tax is to be
paid by the companies where ever the company operates in the world).
8. Point 5 cont. article: inflation rates in India since 2006 to 2014. In 2006 inflation was
5.8%, in 2014 it was 6.8%.
9. Prices of a product cannot decrease until we have -ve inflation.

Lecture 12
Dt: 10-nov-2021

1. Fixed exchange rate= a rate fixed by central bank without any consideration
to demand and supply of currency.
2.
 Class 11
1. FIXED EXCHANGE RATES: $ -> exporter-> RBI; $ -> stock market. both defies the market
mechanisms.
2. If rupee is very weak artificially, $ inflow increases and money supply increases. which can
create inflation.
3. Impossible trinity= it says we cannot control exchange rate, inflation rate and interest rate
simultaneously. Any of the 2 can be controlled.
4. Unified mechanism: In 1992 we shifted from fixed exchange rate where 60% of $ was
converted to market price and 40% fixed price by RBI.
5. For current account, rupee is fully convertible at market prices. Imports, exports come in
this.; for capital account you need to have permission from RBI so it is partially convertible.
a) All trade remittances, interest payments are paid through current account
b) Loan, FDI, bonds are part of capital account. Ex., if you need home or assets in
foreign.
6. Free market mechanism
7. 1990, India has open economy to FDI. Along with this we have devalued the rupee. This
made easy for exports as imports would be at lesser price for other countries. With this
foreign currency came into Indian economy. With this ford, Suzuki etc., open factories in
India which will become a surplus.
8. Current account:
Imports exports

100 barrels of oil= -$8500 rice = $100

Natural gas = -$1000 software= $1000

Paying interest = -$100 remittances =$100

Interest received=$50

Total = -$9600 Total =$1250

therefore, current account deficit= - $8350

when we don’t have $ 8350 to balance, it is called …………….

TYPES OF INFLATION

1. Inflation can happen from supply side and demand side.

a) AS can shift leftwards if input prices rise and shifts right if technology improves also if
input prices fall.
2. COST PUSH INFLATION: When supply increases then the demand for inputs would have
increased leading to increase in cost of production. This leads to wholesale price index
increases which leads to COST PUSH INFLATION.
3. DEMAND PULL INFLATION: If demand increases, prices increases, (shift in demand). This may
happen by increase in in economy or change in taste and preferences etc. this is called
demand pull inflation.

4. LAFFER CURVE: it is the relationship between tax rate and tax revenue

5. PHILIPS CURVE: It is the relationship between inflation and unemployment. both are
inversely related.
6. GDP of Indian economy fell by 23% in 2020.
7. RACHANT EFFECT: in 2019, my income is 200/- and spent 160/-
2020 400/- 300/-
2021 200/- you spend more than 160/-. This
is because as you are habituated to spending more you spend more by taking debt or spend
180 and save 20.

Rachant effect

8. Treasury bill
9.
PRACTICE QUESTION 1

Q5- d (ans: Indian economy)

Q6-B
Q7-A
Q8A (multiplier= 1/1-b here b= 0.8 so ans =5)
Q9- C (investment will be made by producers and not households)
Q10- A
Q11-b
Q12- B
Q13-

Dt: 13 Nov 2021

1. Consumption = contribution of private consumption to GDP is 56%.

2. Relative income hypothesis by Dusen Berry: Your consumption is dependent on
consumption of surrounding people where their consumption is dependent on their
income.
a) Feeling of increase in income will affect consumption (ex- stock market increase in
share price).
b) Wealth effect- increase or decrease in level of consumption due to change in wealth.
3. Permanent income hypothesis by Freed man: a person who don’t have job will save
more.
4. A transitory increase in income may not increase consumption. This effects success or
failure of a policy.
5. Saving will not lead to recovery.
6. Apprehension about reduced dd if not looked at rationally will actually bring reduced
demand. -IMP IMP.

SAVINGS

1. Whenever I don’t have income, I should be able to use my savings.

2. When savings are completed, you will spend less so income generation for
others will reduce. When you spend more income of others increase and
multiplier effect increases.
3. Life cycle income by Modigliani: The present consumption is made by ‘future
expected income’. Ex- present MBA done by you. “a consumer will have an
assessment of life time income and plan average consumption on basis of that.”
 FISCAL POLICY:

1. Velocity of money- the rate at which a currency note changes hands in the economy.
2. When a country is not able to payback the debts, the asset prices will start to decline.
Corruption increases.
3. When transactions stop, poverty increases.
After mid term

Class 15

11-dec-2021

1. India’s economy has reached 35% of budget deficit in the first 7 months of this fiscal.
2. In last 3 years the formal economy has reached 80% from a level of 50%.
3. https://tradingeconomics.com/india/gdp-growth-annual
The growth of the economy has declined in small percentage saying that the spending
capacity of people has reduced from 2019. It further has gone down due to virus and
gradually started increasing from Jan 2021.
The policy rates in recent times were unchanged.
4. Negative sentiments reduce the spending of people leading to reduce in GDP growth. Due to
omicron variant, the growth in the economy is reducing i.e., shifting leftwards.
If interest rates are increased, buyers and sellers become too conscious.
5. Relation b/w interest rate and investment: it is opposite. If int. rate increases, investment in
economy decreases. (graph1)
6. Investment saving curve (IS): if investment increases it means that income is increasing then
GDP also increases. (graph2)
The slope will change upon:
a) In an economy where the less responsiveness with investment rates with respect to
interest rates will have steeper IS curve.
b) Multiplier effect: it is the income of continuous spending. This leads to Marginal
Propensity of Spending.
c) Investment elasticity: response if investment to the change in the interest rate. Higher
the response, flatter is the curve.
d) Multiplier effect which further depends on Marginal propensity to consume. Higher the
MPC, higher will be the multiplier and higher multiplier effect leads to higher income
generation from the same amount of investment.
7. Responsiveness of investment to interest rate change is recorded on the Y axis, while
responsiveness of multiplier effect id recorded on X- axis.
8. The govt. Buys currency keeping fiscal deficit in control as averted a potential situation of
ratings downgrade. If downgrade happens, investor community amount reduces leading to
rupee value decreases and import value increases. So, govt gets more loans to compensate
the same which leads to more deficit.
Lecture 16

Dt: 11-dec-21

DEMAND FOR MONEY

1. Money is the most liquid form of financial asset.

2. Different kinds of financial assets:
a) Land
b) Bonds
c) Shares
d) Gold
e) Fixed deposits etc.
3. People would wish to hold money with themselves rather than depositing money or
buying stocks or gold etc. because
a) Speculative demand for money: Uncertain value of these assets hence some money
is to be kept as cash with ourselves.
● This depends upon the interest rates prevailing in the economy. Higher the
interest rate, lesser the demand for money.
● Shows inverse relationship b/w demand for money and interest rate.
b) Transaction demand for money: we may not make investments of the whole
income as we need transactions in the daily life. Groceries, entertainment, medical
expenses etc.
● This demand depends upon income. This is a positive relation i.e., higher the
income, higher the transactions demand for money.
c) Precautionary demand for money: higher the income, we wish to keep higher
amount of money as cash with us for emergency purposes.
● Rickshawala and rich trader going to Delhi from Mumbai. The rich trader
would generally wish to keep higher amount of cash for unforeseen
emergency situations.
● Hence, we can say that the precautionary demand for money directly
proportional to income of the people.
● Demand for money is a function of interest rate and income.
● Hence, demand for money is a negatively sloped curve given interest rate is
on y- axis and demand on x-axis. If income rises the demand for money
curve shifts outwards to right.
● Monetary policy is announced bi-monthly i.e., every 2 months.
4. Money supply is determined by the monetary policy committee or the central bank of
the country and remains fixed till the new policy is announced. India, bimonthly policy.
5. Equilibrium in the money market:
When the demand for money and supply of money curves intersects.
6. Demand for money and interest rates have positive relationship and this curve exhibiting
the relationship is called ‘LM curve’. (Seller side)
● We have income on x-axis and interest rates on y-axis.
● LM curve represents the equilibrium in the money market.
● Intersection of LM curve and IS curve represents simultaneous equilibrium in the
money and good market.
7. Global financial crisis:
a) Started in 2008.
b) Started with dotcom.
● Dotcom bubble crisis: before 2000, companies started to invest in
ecommerce business.
● 2000- Y2K problem
● 2001- 9/11 NY crash
● 2008- global financial crisis
● Sub-prime crisis: loans which were given to those even without a job (Ninja
loans), basically with no collateral or security.
● As interest rates on bonds reduce, the income earned from large financial
institutions from USA reduces and they withdraw the money from Indian
banks.
● Housing for all: USA law. i.e., home for everyone so the US government
reduced the interest rate below 1%. A house needs cement, steel,
electricity, carpet, furniture, architects etc., if the demand for house
increases, the demand for all others as well increases. This fights
recessionary trends. This created demand for pricing and real estate prices
increased. This also made people to invest in house and rich people bought
more houses and the prices increased further more. With more demand for
housing loans, there will be less money in banks. In order to manage the
loans, the banks increased the Leverage ratio (if we put re1 of own equity,
they can borrow rs.10 here leverage ratio is 1:10)

● Leveraging
Rs.100------------leverage is 1:10, so it takes deposits of 1000 @6% for 1 year
Total money it has =1100
Loans this 1100 @10%
Total cost of interest on deposits =Rs. 60
Money it needs to repay after 1 year= 1060
Earns= 1100+110=1210
Profit = 1210-1060-100(his own share) =150
Implies: investment of 100 gives profit of 50 or 50%

● Leveraging going wrong:

Rs.100------------leverage is 1:10, so it takes deposits of 1000 @6% for 1 year
Total money it has =1100
Loans this 1100 @10%
Total cost of interest on deposits =Rs. 60
Money it needs to repay after 1 year= 1060
Suppose 30% of the loan gets defaulted, he gets bank principal amount of
770 + interest of 77= 847
So, he should repay 1060. So, he gets bankrupt

● If own equity was 500 instead of Rs. 100:

Total amount of Rs. 1100, he owns 500
He has borrowed 600@ 6%
Total money he needs to repay =636
 How much did he get after 30% default on loans = 847
847-636 = 211 is still left to be paid.

● As the leverage in the banking sector increased the real estate sector has
boomed.

c) Whenever a system tries to evade risk, risk increases and accumulates.

Lecture 17

14-dec-2021

1. Prime customers
2. Sub- prime customers
3. Mortgage Bills Security (MBS) also called Collateral Debt Obligations (CDO)
Lehman brothers, EMI payers- C1, C2, C3
4. LEHMEN brothers get money from mortgages. They give the money in
a) Tranche 1 where these securities are the EMI’s of monthly customers with 1.2, 1.3 %
interest rates. 🡪 less risky
b) Tranche 2 where includes C1 customers and C2 type of customers. 🡪 moderate risk
c) Tranche 3 includes C1, C2, C3 type of customers. 🡪high risk so high interest rate.
d) More demand for Tranche 3 so the banks should focus more on C3 customers.
5. General Motors =GM🡪 prices fall 🡪 share prices fall

Lecture 18

15- dec-2021

1. House prices decrease, Mortgage Backed Securities (MBS) decrease => net worth of
individuals decrease => demand decreases =>stock prices of various companies decrease =>
various companies holding MBS, net worth decreases
As Lehman brothers, AIG 🡪 either got bankrupt or on verge of bankruptcy🡪 scare and
insecurity in the business environment🡪 consumption decrease 🡪 aggregate demand
decreases 🡪VISCIOUS CYCLE 🡪 this needs monetary and fiscal intervention.
2. Govt and FED needed to infuse confidence. Since US is a capitalist economy and giving
confidence to Pvt sector companies involved Govt providing support to them🡪 ownership of
 Govt rising in pvt sector🡪 nature of the economy undergoes a change🡪US didn’t want this to
happen 🡪 Hence, loans were given at zero percent interest rate.
● All this money is coming from ‘printing more dollars’. this is called
‘Quantitative easing’. $80-$85 billion were printed every month.
● So much money couldn’t be absorbed within the US economy. So, flight of
capital to emerging economies like China, India, South Africa happened.
● This money was put in stock markets of their countries. With this, prices,
money supply increased, inflation increased.
This is the reason we had a high inflation in 2010 to 2014. Very high inflation
due to increased money supply and high prices of crude oil.
● Impact on current account deficit (CAD): (X-M) decreased and CAD rises 🡪
4% of GDP.
● GDP growth rate in 2009-10 = 6.22%, 2010-11= 8.5%
● Looking at leading economic conditions we see that 8.5.% growth doesn’t
look as attractive. Easy money flowing into the economy may actually do
more harm to the economy.
● From 2008-2013 US kept printing $80 billion on an average every month.
● May 2013, US indicated that the economy has stabilized and hence they may
reduce Quantitative Easing (i.e., stop printing more money).
3. Inflow of dollars, stock markets went up. With this the share prices went up. other
economies started investing in stock market leading to appreciation of rupee.
● In May 2013, When US said printing will be stopped🡪 no more large flows of $ in
India 🡪 stock market will become stagnant 🡪investors will start pulling out.
● For several years the $ had been flowing into India thus, strengthen the rupee. Now,
all of a sudden flow stopped and rupee started to weaken.
● https://economictimes.indiatimes.com/markets/stocks/news/rupee-slipped-from-
53-67-to-69-15-in-4-months-arun-jaitley-blames-us-fed-for-the-fall/articleshow/
38858616.cms
little confidence in India’s economy despite the economy showing the high growth
rates.
4. From Rs. 57 /$ in may rupee fell to 69/$ by end of august.
This slide was arrested by offering 4% higher interest rates (than LIBOR) to NRIs on fixed
deposit of 3 years.
Raghuram Rajan🡪 RBI governor
Thus, helped in stabilizing rupee as $20 billion came in this economy
After 3 years when, thus money is to be repaid there is a possibility of rupee weakening
again.

Lecture 19
17- dec-2021
 INDIA’S ECONOMIC HISTORY

1. FISCAL DECIFIT NEEDS TO BE CONTROLLED- EXCESSIVE BORROWING SHOULD BE

CONTROLLED
2. Manage money supply= inflation doesn’t exceed certain limit while there is adequate
liquidity to carry out transactions of goods and services produced in the economy.
3. Consistent growth generated through domestic factors rather than relying on
4. If inflation is high investment reduce.

INDIAN ECONOMY AT INDEPENDENCE

1. Population very high

2. Very little literacy rate 🡪 1951-18% literate

India England
Colony industrial revolution
Vast land resource’ cheap huge production capacity
Vast population-> market required raw material and agricultural produce
Process

Left the economy unpotential

Indian wealth transported to England

Agri, mining

3. Export potential – low

4. Investment potential- low
5. Government income- low
6. So, they set 5-year plan -> 1951-56 -> largely focused on agriculture (17%)

Irrigation and energy (27%)

Common roads, social welfare

Increased agriculture income, but didn’t contribute to tax resources

2.1% growth rate

7. Second 5 yr. plan -> heavy energy industries -> capital intensive savings
Growth rate: 4.27%

allocation of funds towards heavy industry left little to be spent on agriculture

8. 3rd 5 yr. plan: 1961-66

 1962: Chinese invasion
1964: JLN, Lal Bahadur shastri war
1965: war
Funds allocated to defense -> less funds for irrigation
1966,1967,1968 🡪sever drought in all 3 yrs. This also period of high inflation, discontent.
1969 -> aid from US for wheat and rice

Since resources were scarce, we went for centralized planning. 🡪 heavy industries model
🡪 heavy import dependency, heavy foreign human resource, oil dependency 🡪 heavy
foreign exchange (which has to be repaid)🡪 we kept rupee very strong. 1947 -> 1$ =1 Re.
1 barrel = 1$ = 1Re. 🡪 imports were cheap, exports were impossible 🡪killed all aspirations
of exporters 🡪 killed entrepreneurial skills
1970s Permit Raj / License Raj was prevalent
If 100 units was the permission, if the company produces 120 units the managers were
penalized with License Raj as they producers extra 20 units.

1973 -> first oil shock to the world. Arab increased oil prices $2 to $12 🡪 huge inflation;
India = 28%

1975: emergency
1977: Congress voted out -> Janata Party -> Morarji Desai -> even more welfare
schemes. they believed in dividing the resources fore equity which led to more
discomfort. So, Janatha party came down and in 1980 Congress came up 🡪 strong
growth rate 🡪 needs high investments 🡪need high consumption 🡪 came up with Loan
Melas (loans with low interest rate, no collateral)

9. 1980-1987 : Liberal fiscal policy 🡪 increases disposable income

But domestic production isn’t of good quality 🡪 so cheap imports were happening 🡪
higher import bill 🡪 more demand for $ more borrowing of $.

1984 -> Indira assassinated

1984 Rajiv Gandhi 🡪 followed liberalized imports and disposable income 🡪 increase in
imports.

Harshad Mehta scam

Janata Dal 🡪 V P Singh 🡪 Chandrashekar

10. Rent control:

10,000
 4000 D
40000

50 million 100 million

10 million

10,000 cash; 4000 receipt rest black money

Lecture 20
18-dec-2021

1. Literacy rate was 18% in 1980, population was very high, poverty was very high
2. First five- year plan -> 1951-56 -> planned economy model
target set for 5 yrs.
GDP= 2.1% -> modest
Largely the income of the population was from agriculture.
17% = agriculture and communication
27% = energy and irrigation
Total= 40%
Rainfall pretty good leading to growth rate of 3.5%
This didn’t yield much income for govt. so, second 5 yr. plan was made.
3. Second 5 yr. plan: 1956- 61
● Focused more on development of Public Sector Units (PSUs) and rapid
industrialization like Steel, power, fertilizers and chemicals, capital intensive
industries.
● We had poor, less skills. Little export income, very strong rupee which further
erodes potential to exports.
● Likely impact will be:
a) Increased external debt
b) Employing poorly skilled people and hence compromising on productivity also
poor labor industrial policies -> trade unions.
c) High skilled people come from foreign countries like Russia and other European
countries.
d) Increase the divided (economic prosperity) b/w skilled and unskilled people.
 e) Deviation from agriculture began.
● 1957 -> we have the first balance of payment crisis. 🡪 devaluation of rupee.
● Second 5 yrs. Plan targeted growth of 4.5% but we achieved 4.27% due to starting
of new infrastructure
4. Third 5 yr. plan: 1961to 66
● Signed Panchsheel agreement which is peace with neighbors
● 1962 -> Chinese invasion
● Spend money on agriculture and industrialization but due to war, the resources of
agriculture started diverting to the war. This led to increase in inflation. At this time
India has suffered from high inflation.
● 1964 -> Jawaharlal Nehru, Lal Bahadur Shastri increased expenses on defense. Jai
Jawan Jai Kisan.
● 1965 -> Pakistan attack -> thwart
● High inflation , very low growth , high expenditure, low production.
● Jan 1966 we lost Lal Bahadur Shastri.
● Indira Gandhi became PM 🡪 split in the Congress🡪 Congress (I) ; I=India
● 1966,1967,1968🡪

5. 1980-1987: liberal fiscal policy

Liberal imports
Liberal loan policy
Higher consumption 🡪 higher GDP
Huge pressure on external front (foreign exchange)
● Bofors scam 🡪 united front 🡪 V P Sings
● 1987-90🡪 disintegration USSR in process 🡪 export earnings from east Europe countries
decreased
● Gulf war 🡪 oil prices increase 🡪import bill increase…….
● ……
● ……….
● Sept. 1990 🡪 some gold with govt and with RBI valued at 1968 prices =$520 million
Revalued at $3300 million 🡪 foreign exchange reserves 🡪 pledged our gold to Bank of
Switzerland and Bank of England
Thus averted the BOP crisis.
● Congress returned to Grower 🡪 PV Narasimha Rao and Manmohan Singh🡪 Liberalization,
Privatization and Globalization. 🡪 devalued rupee to 🡪 competent enhancing exports.