Economics

➔ Adam smith is called the father of Modern Economics.

➔ Ragnar Frisch divided economics into microeconomics and
macroeconomics.

Division of Economics

Micro Economics
➔ It is a branch of economics that studies the behavior of
individuals and firms.
➔ The concepts of wages, rent, interest and profit are studied
under Microeconomics.

Macroeconomics
➔ It covers a wide range of Economics.
➔ It takes into consideration the investment, production
consumption in an economy as a whole.
➔ It focuses on the aggregate changes in the economy such as
unemployment, growth rate, gross domestic product and
inflation.
➔ It analyzes the income of a nation, its GDP, Inflation states and
its controlling measures, monetary policy of the central bank
etc.

Type of Economic System

Capitalism
➔ Capitalism is an economic system based on private
ownership.
 ➔ In this type of system private firms are the key players,
they actually focus on their profit and the quality of
service provided by them is also better.
➔ Capitalism is based on Laissez-faire economics, a theory
that restricts government intervention in the economy.

➔ Countries like the USA, Australia, Hong Kong, Singapore

and Canada are Capitalist countries.

Socialism
➔ It is an economic system where the state owns the
resources and utilizes it for public good.
➔ A socialist economy is a system of production where
goods and services are produced directly for use.
➔ In this type of economy there is less or no competition as
the state is the only entrepreneur.
➔ China is the best example of a Socialist country.

Mixed Economy
➔ A mixed economic system is a system that combines
aspects of both capitalism and socialism.
➔ “John Manyhard Keynes” is called the father of mixed
economy.
➔ A mixed economic system protects private property and
allows a level of economic freedom in the use of capital,
but also allows for governments to interfere in economic
activities in order to achieve social aims.
➔ India, Indonesia, France etc are examples of mixed
economies.
➔ France was the 1st country to implement the concept of
mixed economy.
Sector of Economy

Primary sector
● The sector of the economy that includes agriculture and
activities related to agriculture. Examples of the primary sector
are agriculture, mining and quarrying, fisheries, forestry,
woodworking etc.

Secondary sector
● The sector of the economy in which the main emphasis is on
manufacturing and industrial activities.
● In this, the products obtained from the primary sector are used
as raw materials.
● Industry, manufacturing, water supply, electricity supply, gas
etc. come under the secondary sector.

Tertiary sector
● The sector of the economy in which various types of services
are produced is called 'Tertiary Sector'.
● Tertiary sector provides its services to the primary and
secondary sector.
● Medical, business, hotels, banking, insurance, real estate, public
administration, transport, communication and storage come
under the tertiary sector.

Quaternary Sector
● Some economists have included a new category of economy
which is an advanced form of the third category, called the
'quaternary sector' of the economy.
● In this sector, services related to the field of knowledge are
included.
 ● For example information technology, technical skills,
management related skills, statisticians, software developers,
research and researchers etc.

Quinary Sector
● The fifth sector of the economy deals with higher quality
services.
● It consists of gold collar professionals who are experts in their
field.
● For example: legal advisor, financial manager, scientist,
researcher etc.

Classification of Economy

On the role of government ● Capitalist economy

● Socialist economy
● Mixed economy

Depending on the stage of ● Developed economy

development ● Developing economy
● Underdeveloped economy

Based on different regions ● Agriculture based economy

● Industrial system
● Service economy

On the basis of interrelationship ● Open economy

with the rest of the world ● Closed economy

Indian Economy
Important ideas about the economy of India before
independence
● First of all, Dadabhai Naoroji in his book 'The Poverty and
Un-British Rule in India' drew people's attention to the outflow
of Indian wealth.
 ● Renowned economist Ramesh Chandra Dutt in his book
'Economic History of India' mentioned 'Drain of wealth'.
● In 1938, Subhash Chandra Bose formed the National Planning
Committee, whose chairman was Pandit Jawaharlal Nehru.
● In 1944, eight industrialists of the then Bombay, under the
leadership of Sir Ardeshir Dalal, presented a 15-year plan, also
known as the 'Bombay Plan'.
● In 1945, MN Roy presented 'People's Plan' and in 1950,
Jayaprakash Narayan presented 'Sarvodaya Yojana'.

CHARACTERISTICS OF INDIAN ECONOMY

(i) Mixed economy: India is a mixed economy country, in which the
qualities of both capitalism and socialism are found. It is the
principal feature of the Indian economy which differentiates it from
other economies of the world.
(ii) Federal economy: It implies that the Governmental economic
activities and institutions operate at two levels- at central level and
at state level. For eg. Railways, post, etc. come under the central.
(iii) Underdeveloped or developing character: We have all features
of an undeveloped economy such as low per capita income and
widespread poverty; economic inequalities; unemployment; low level
of technology, etc.
(iv) Progressive character: A number of things suggest the
progressive character of the Indian economy such as the
development of basic industries (Iron and steel, fertilizers, etc.)
improvement in education (National Education policy-2020), Health,
etc.
(v) Dual character: Indian economy encompasses the features of
both types of economies- underdeveloped as well as progressive.
National Income

GDP (Gross Domestic Product)

● The total monetary value of all final goods and services
produced in an economic system during a given time period is
called 'Gross Domestic Product'.
● It includes all final goods and services—those are produced by
the economic agents located in that country regardless of their
ownership and that are not resold in any form.
● For example a car manufactured in India by a German
company will be included in India's GDP whereas a car
manufactured in Germany by Tata will not be included in
India's GDP.
● Final goods and services are included in the calculation of GDP
and intermediate products are not included during this.
● It is used throughout the world as the main measure of output
and economic activity.

Nominal GDP and Real GDP

● In Nominal GDP, the value of goods and services is calculated
on the basis of current year's price.
● The value of goods and services in Real GDP is calculated on
the basis of base year prices.
● Real GDP is considered the best way to calculate the economy
of a country.

GNP (Gross National Product)

● Gross National Product (GNP) is referred to as the total value
of all the goods and services produced by the residents and
businesses of a country, irrespective of the location of
production.
 ● GNP = GDP + Factor income earned by the domestic factors of
production employed in the rest of the world - Factor income
earned by the factors of production of the rest of the world
employed in the domestic economy

Or

GNP = GDP + Net factor income from abroad

● A part of the capital gets consumed during the year due to

wear and tear. This wear and tear is called depreciation.

NNP (Net National Product)

● Net national product or NNP is the market value of all the
finished goods and services that are produced by citizens of a
nation, living domestically and internationally during a year.
● Net national product is also referred to as the value that is
obtained by subtracting depreciation from the gross national
product (GNP).
● NNP = GNP - Depreciation

NDP (Net Domestic Product)

● Net domestic product is obtained by deducting the amount of
depreciation from gross domestic product.
● In other words, 'Net Domestic Product' is obtained after
adjusting or deducting the total amount of wear and tear that
occurs while producing goods and services.
● It is also commonly referred to as Net GDP.
● NDP = GDP - Depreciation
Per capita income

● Per capita income is a measure of the amount of money

earned per person in a nation or geographic region.
● Per capita income can be used to determine the average
per-person income for an area and to evaluate the standard of
living and quality of life of the population.
● Per capita income for a nation is calculated by dividing the
country's national income by its population.

Personal Income and Disposable Income

● Personal income is the amount of money collectively received
by the inhabitants of a country.
● Sources of personal income include money earned from
employment, dividends and distributions paid by investments,
rents derived from property ownership, and profit sharing from
businesses.
● Personal income is generally subject to taxation.
● Disposable Income: Personal Income – Taxes
i.e. money in hand to spend.

Measurement of National income

There are three methods to calculate National Income:

1. Income Method
2. Product/ Value Added Method
3. Expenditure Method

INCOME METHOD
In this National Income is measured as flow of income.

We can calculate NI as:

NET NATIONAL INCOME = Compensation of Employees Operating
surplus mixed (w +R +P +I) + Net income + Net factor income from
abroad.

Where,

W = Wages and salaries

R = Rental Income

P = Profit

I = Mixed Income

Product/ Value Added Method

In this, National Income is measured as the flow of goods and

services.

We can calculate NI as:

NATIONAL INCOME = G.N.P – COST OF CAPITAL – DEPRECIATION –

INDIRECT TAXES

Expenditure Method
In this National Income is measured as flow of expenditure.

We can calculate NI through Expenditure method as:

Y = C + I + G + (X-M),

where Y = GDP at Market Price,

C = Private Sector’s Expenditure on final consumer goods,

G = Govt’s expenditure on final consumer goods,

 I = Investment or Capital Formation,

X = Exports,

I = Imports,

X-M = Net Exports

Economic planning in india

Historical Background
➔ Joseph Stalin, president of the then USSR, implemented the
first Five-Year Plan in the late 1920s. India too followed the
Socialist path.
➔ Socialism is an economic system where the state owns the
resources and utilizes it for public good.
➔ 1938 :- The Indian National Congress set up a “National
Planning Committee” under the chairmanship of Jawaharlal
Nehru. However its recommendation was not implemented due
to the beginning of the 2nd world war.
➔ 1944 :- Eight leading industrialists of Bombay presented the
“Bombay plan”.
➔ 1944 :- Shriman Narayan Agarwal gave “Gandhian Plan”.
➔ 1945 :-MN Roy gave the “People’s plan”.
➔ 1950 :- JP Narayan gave the Sarvodaya Plan”.
➔ 15th March 1950 :- The Planning Commission was established
with PM Jawaharlal Nehru as Chairman
➔ 1st Jan, 2014 :- PM Narendra Modi replaced the Planning
commission with NITI Aayog.

Planning Commission
● It was a non-constitutional and non-statutory body.
 ● It was established on 15 March,1950.
● Responsible for formulating India’s five years plans for social
and economic development in India.
● Prime minister of India is the Ex-officio chairman of the
planning commission.

National Development Council

➔ It is an extra-constitutional body responsible for building
co-operation between the planning commission and states of
India.
➔ All plans proposed by the Planning commission have to be
approved by it.
➔ It was established on 6th August, 1952.
➔ Prime Minister of India is ex-officio chairman of NDC.
➔ Since the inception of NITI Aayog, NDC has had no work
assignment but it is not published till now.

NITI Aayog
➔ Established- January 1, 2015
➔ President- Prime Minister
➔ Vice President- Suman Berry
➔ CEO - Parameswaran Iyer
➔ Full name of NITI - National Institute for Transforming India
➔ It acts as an advisory body or "think tank" to the Government
of India.
➔ Arvind Panagariya was the first Deputy Chairman of NITI
Aayog.
Five-year plans
● The form of economic planning in India was based on a
decentralized and mixed economy, in which qualities of both
socialist and capitalist are found.
● The main objective of economic planning in India was to
achieve economic prosperity and self-sufficiency and to
eradicate poverty and achieve full employment.
● The first idea related to planning in India was presented by M.
Visvesvaraya. For this, he presented a ten-year plan.
● 1944 :- Eight leading industrialists of Bombay presented the
“Bombay plan”.
● 1944 :- Shriman Narayan Agarwal gave “Gandhian Plan”.
● 1945 :-MN Roy gave the “People’s plan”.
● 1950 :- JP Narayan gave the Sarvodaya Plan”.
● 15th March 1950 :- The Planning Commission was established
with PM Jawaharlal Nehru as Chairman.
● Economic planning is a subject of the concurrent list. Therefore,
both the Center and the State have the right to make laws on
this.

Five Year Plan Key Objectives

Plan Duration

First 1951-1956 Focuses on Agriculture and

community Development

Second 1956- 1961 focused on Rapid Industrialisation

Third 1961-1966 Spread of basic industries

Fourth 1969-1974 Attainment of self-reliance and

development with stability

Fifth 1974-1978 Removal of poverty (Garibi Hatao)

 and Attainment of self-reliance.

Sixth 1980-1985

Seventh 1985-1990 Achieve self-reliance

Eighth 1992-1997

Ninth 1997-2002 Self-reliance, quality of life,

generation of productive employment,
and regional balance.

Tenth 2002-2007 Primarily focused on achieving a GDP

growth rate of 8 per cent.

Eleventh 2007-2012 faster and more inclusive growth

Twelfth 2012-2017 Faster, more inclusive and sustainable

growth

First five year

● The first five year plan was based on the 'Harrod-Domar
model'.
● Agriculture sector was given prominence during this five year
plan.
● To make this scheme successful, a community development
program was started on October 2, 1952, whose objective was
to develop agriculture, animal husbandry and village industry
in the village.

Second five year

● The second five year plan was based on the 'Mahalanobis
model'. The objective of this plan was to establish a socialist
society.
● The process of industrialization was started in this five year
plan.
 ● During this period three iron and steel plants were established
in the country.
● During this plan in collaboration with the Soviet Union in Bhilai,
Chhattisgarh; A steel plant was established in Durgapur in West
Bengal with the help of Britain and in Rourkela in Odisha with
the help of Germany.

Third Plan
● This five year plan is also known as the 'Gadgil Plan'.
● In the history of the Five Year Plan, the Third Plan is considered
to be the most unsuccessful plan of India.
● During this, the agricultural policy was adopted by the
government which gave birth to the Green Revolution.
● During this five year plan India had to face two wars:
Indo-China war (1962) and Indo-Pak war (1965).

Fourth Five Year Plan

● Its objective was to control high priority inflation and bring
stability to the economic situation.
● Bangladeshi refugees coming to India and bad monsoon were
the main reasons for the failure of the fourth five year plan.
● During this five year plan, 14 commercial banks were
nationalized in July 1969.

Fifth Five Year Plan

● The approach paper of the Fifth Five Year Plan was prepared
by Arthashastra DP Dhar.
● The Minimum Needs Program was started during this plan. The
slogan of Garibi Hatao was given during this five year plan.
● During this plan, 'Food for work' scheme and 'Antyodaya
scheme' were started.
 ● This five-year plan was abolished in 1978 by the Janata Party
government within 4 years.

Seventh Five Year Plan

● The Seventh Five Year Plan was drafted by Ramakrishna
Hegde.
● The Jawahar Rozgar Yojana was started during this five year
plan.
● 'Self-reliance' was the main objective of this five year plan.
● During this plan, for the first time, emphasis was laid on
ecology and environmental protection.

Eighth Five Year Plan

● The Eighth Five Year Plan was drafted under the direction of
Pranab Mukherjee.
● The rate of economic prosperity of this five-year plan was more
than its target.

Ninth Five Year Plan

● The objective of the Ninth Five Year Plan was development with
just distribution and equality.
● Four essential dimensions of the plan were self-reliance, quality
of life, generation of productive employment, and regional
balance.

Tenth Plan (2002-2007)

➠ Primarily focused on achieving GDP growth rate of 8 per cent and
to reduce the poverty ratio by 5 per cent by 2007. The Plan laid
emphasis on the provision of gainful high quality employment to the
labour force, and universal access to primary education by 2007.
➠It also aimed at increasing literacy rate to 72 percent within the
plan, and to increase it to 80 per cent by 2012; and to reduce
decadal rate of population growth between 2001 and 2011 to 16.2
per cent. The Plan had the objective of reducing gender gap in wage
rate and literacy rate by 50 per cent by 2007, and increasing literacy
rate to 72 per cent within the plan period and to 80 per cent by 2012
➠ Other objectives of the plan included increasing the forest and
tree cover to 25 per cent by 2007 and 33 per cent by 2012, and
cleaning of all major polluted rivers by 2007 and other notified
stretches by 2012.

Eleventh Plan (2007-2012)

➠ The Plan laid emphasis on increasing GDP growth from 8 per cent
to 10 per cent, and increasing agricultural GDP growth rate to 4 per
cent per year.
➠ The objective of the Plan was reducing educated unemployment
to less than 5 per cent, and to create 70 million new work
opportunities.
➠ Other objectives of the plan were increasing real wage rate of
unskilled workers by 20 per cent, reducing the total fertility rate to
2.1, and raise the sex ratio for age group 0-6 to 935 by 2011-12 and to
950 by 2016-2017.
➠ It also aimed at lowering gender gap in literacy to 10 percentage
point and increasing the percentage of each cohort going to higher
education from the present 10 per cent to 15 per cent.
➠ The Plan also aimed at attaining WHO standards of air quality in
all major cities by 2011-2012, and provision of clean drinking water
for all by 2009.

Twelfth Plan (2012-2017)

● The Twelfth Five Year Plan (2012-17), as per the draft document
released by the Planning Commission, aims at a growth rate of
8 per cent, which is the revised rate when compared to the
 initial approach paper. Other objectives of the Plan are listed as
follows.

Its focuses on growth- growth which is

• Faster
• Inclusive
• Sustainable

Inflation
➔ Inflation refers to the condition of the economy in which there
is a continuous increase in the prices of goods and services,
and in this situation the value of money decreases because
consumers have to pay more to buy goods in the market.
➔ Inflation is indicative of the decrease in the purchasing power
of a unit of a country’s currency.
➔ This could ultimately lead to a deceleration in economic
growth.
➔ However, a moderate level of inflation is required in the
economy to ensure that production is promoted.
➔ The reason for price rise can be classified under two main
categories:
(1) Increase in demand
(2) Reduced supply

Types of Inflation

Demand-pull Inflation
● When the demand for goods and services in an economy is
more than the supply, then such an economy is said to have
demand-pull inflation.
 ● This type of inflation increases due to increase in population,
urbanization, increase in employment, increase in government
expenditure and increase in income of citizens, because
increase in all these factors leads to increase in demand.
● Due to the increase in employment, the means of income are
created with the people, which increases the demand. Similarly,
urbanization and population growth also induce an increase in
demand.
● Due to an increase in government expenditure, people get
more money, which increases the demand for goods and
services.

Cost-Push Inflation
● When there is an increase in the cost of a commodity in the
process of production, then the inflation generated due to this
is called cost-push inflation.
● This type of inflation arises due to increase in indirect taxes,
higher taxes on intermediate goods used in production of
goods and increase in prices of structural industries (cement,
coal, steel and electricity).
● For example, if there is an increase in international crude oil
prices, it has an adverse effect on the Indian economy because
India is dependent on foreign countries for more than 80% of
its energy needs and also for transportation of goods. As oil is
required.
● Followings are the possible causes for Cost Push Inflation:
● Increase in price of inputs i.e. increase in wages, price of
raw materials etc.
● Hoarding of commodities
● Defective Supply chain
● Increase in indirect taxes
 ● Crude oil price fluctuation
● Low growth of Agricultural sector
● Interest rates increased by RBI

Stagflation
● Stagflation is characterized by slow economic growth and
relatively high unemployment—or economic stagnation—which
is at the same time accompanied by rising prices (i.e. inflation).
● Stagflation can be alternatively defined as a period of inflation
combined with a decline in the gross domestic product (GDP).

Hyperinflation
● Hyperinflation is a situation when inflation rises at an
extremely fast rate. The rate of inflation can increase from 50
times to 300 times.
● The effects of hyperinflation can be devastating for the
economy.
● The major causes of the hyperinflation are; the government
issuing too much currency to finance its deficits; wars and
political instabilities and unexpected increase in people’s
anticipation of future inflation.

Structural Inflation
● Structuralist Inflation is another form of Inflation mostly
prevalent in the Developing and Low-Income Countries.
● This inflation is prevalent in the developing countries mainly
due to the weak structure of their economies.
● As a result of imperfections, some sectors of the economy like
agriculture will witness shortages of supply, whereas some
sectors like consumer goods will witness excessive demand.
 ● Such economies face the problem of both shortages of supply,
under utilization of resources as well as excessive demand in
some sectors.

Deflation
● When there is a decrease in the demand for goods due to
excess supply in the market, then the price also falls rapidly;
Due to which the purchasing power of money increases, this
situation is called currency contraction or currency deflation.
● This is the opposite of inflation, in which the rate of inflation is
negative or below zero.
● The deflation of currency has a positive effect on the consumer
while the borrower suffers a loss. This benefits both the lender
and the fixed income investor.

Disinflation
● Deflation is the process of controlling inflation, under which an
attempt is made to bring the price back to normal by gradually
reducing it.
● Currency deflation is a part of the monetary and fiscal
measures of the government
● Although it is not as harmful to the economy as deflation.

Reflation
● This is such a system of inflation in which an attempt is made
to bring the price to normal level by gradually increasing it.
● In fact it is a process to control deflation.
● To control inflation, the money supply in the economy is
increased by reducing the interest rate, cutting taxes.
 ● Many times the process of inflation is encouraged by the
concerned government to solve the problem of unemployment
and also to increase the demand for goods and services.

Skewflation
● When the price increase is for only a few products instead of all
the products, it is called squelch inflation.
● In other words, when the situation of inflation and deflation of
money exist together in the economy, that situation is called
'squaflation'.
● In such a situation, the rate of inflation remains high in some
areas and the situation of currency contraction is seen in some
areas.

Creeping Inflation
● The condition of the economy in which the rate of inflation is
3% or less is called creeping inflation.
● This type of inflation is commonly seen in developed countries
(USA). This type of inflation is considered good for the
economy.

Headline inflation
● Headline inflation is also called 'overall inflation'. It is issued on
the basis of the Consumer Price index.
● This index covers all consumer goods, including food and fuel.

Core inflation
● Core inflation measures changes in the cost of goods and
services, although it excludes the food and energy sectors, as
their prices are more volatile
 ● Core inflation is important because it is used to determine the
effect of rising prices on consumer income.
● The concept of core inflation was given by Exten in 1981.

Phillips curve
● The Phillips curve is a curve showing the relationship between
the rates of unemployment and inflation in an economy.
● According to this, there is an inverse relationship between the
rates of unemployment and inflation.
● This curve shows that when inflation is low, unemployment
increases and when inflation increases, unemployment
decreases.

How to combat inflation:

❖ The Central Bank (in India RBI) follows a strict monetary policy
i.e. loans became expensive → decrease in money supply.
❖ Tax deduction & subsidy to producers in order to decrease cost
of production.
❖ Curtailing schemes & subsidies that increase money in the
hands of people
❖ Increase contribution to provident funds etc. → so people have
less in hand to spend.

Effect of Inflation

consumer Loss

lender Loss

indebted profit

pensioner Loss

fixed income group Loss

consumer Loss

lender Loss

indebted profit

Import Growth

export Shortage

Measurement of Inflation
● Wholesale Price Index (WPI) and Consumer Price Index (CPI)
are two widely used indices to calculate inflation in the country.
● The Wholesale Price Index is used to calculate inflation in
India.

Wholesale price index:

● The change in the wholesale price of commodities[only Goods]
is shown in the wholesale price index.
● The Wholesale Price Index data is released by the "Office of
the Economic Adviser" of the Ministry of Commerce and
Industry.
● At present, the base year of Wholesale Price Index has been
changed to 2011-12, which was recommended by the working
group of Dr. Soumitra Chowdhary constituted in March, 2012.

Calculation of Wholesale Price Index in Revised Series:

Commodities No. Of Products Weightage

Primary Product 117 22.62

Fuel and Energy 16 13.15

Manufactured Product 564 64.24

● Currently 697 items are included in the wholesale price index.

Consumer Price Index:

● The consumer price index is an index measuring the average
price of goods and services purchased by domestic consumers.
● This index covers economic activities related to education,
communication, transportation, entertainment, clothing, food &
beverages, housing and medical expenses.
● The Consumer Price Index (Rural, Urban and Combined) is
published by the Central Statistics Office (Ministry of Statistics
and Program Implementation).
● The base year of CPI is 2012.

GDP deflator
● Apart from the Wholesale Price Index and Consumer Price
Index, inflation is also calculated by the GDP deflator.
● The GDP deflator measures the difference between real GDP
and nominal GDP, and nominal GDP includes inflation, so it also
measures inflation.
● The problem with the CPI is that it is limited to a few baskets of
goods, but the GDP deflator covers the entire economy.
● The GDP deflator is only available with GDP estimates on a
quarterly basis, while CPI and WPI data are released monthly.

Banking

History
○ 1770 :- Bank of Hindustan was established.
 ○ 1786 : “General Bank of India” was established.
○ 1809 : Bank of Bengal by East India Company.
○ 1840 : Bank of Bombay by East India Company.
○ 1843 : Bank of Madras by East India Company.
: These three banks were known as the Presidency
Bank.
○ 1865 : Allahabad bank was established.
: Oldest existing Public Sector Bank.
○ 1894 : Punjab National Bank was established.
: It was the first Indian bank to have been started
solely with Indian capital investments.
○ 1935 : RBI was established.
○ 1955 : Imperial Bank was converted as state Bank of
India (SBI)

Classification of Banks

Scheduled Commercial Bank

➔ To simplify, the scheduled commercial banks are those banks which carry
out the normal business of banking such as accepting deposits, giving out
loans and other banking services.
➔ All these banks have been included in the 2nd schedule of RBI Act 1934.
➔ Time to time some banks are included and some are removed. For
example, six banks were removed from the 2nd schedule because of
merger with other banks.
➔ They are. namely, Syndicate Bank, Oriental Bank of Commerce, United
Bank of India, Andhra Bank, Corporation Bank, and Allahabad Bank

:- Banks which have been incorporated in the 2nd schedule of

RBI Act 1934.
:- These banks classified into
<A> Private Banks / निजी बैंक
Eg.- ICICI Bank, Axis Bank, Kotak Mahindra Bank etc.
 <B> Public Banks (PSBs) / सार्वजनिक बैंक (पीएसबी)
Eg.: SBI, PNB, etc.

<C> Foreign Bank Eg.: HSBC, Citi Bank, Deutsche Bank, Bank
Bahrain & Kuwait .

<D> Regional Rural Bank / क्षेत्रीय ग्रामीण बैंक

➔ The Indian Government set up RRB on 2nd October
1975.
➔ These banks grant credit to the weaker section of
rural areas mainly small and marginal farmers, small
entrepreneurs, agriculture labourers.
➔ These banks are sponsored by the central
government, state governments and a sponsor
central bank collectively.

Central government holds 50% share

State governments holds 15% share
Sponsor Bank holds 35% share

Non - Scheduled Commercial Bank / Cooperative Banks

:- It includes
[A] Urban cooperative bank
[B] Rural Cooperative Bank.

➠ What is Cooperative societies?

:- It is an autonomous association of people bound together to
fulfill common social, cultural and economical needs.
:- It is said that the system of cooperation is as old as human
society.
:- These groups are sub-divided into two sub-groups.
 [a] Agricultural societies.
:- Mostly found in rural areas.
[b] Non-Agricultural societies
:- Mostly found in urban Areas
:- Societies based on cottage industry are also found in
rural areas.

:- In order to support these societies, the Indian government

announced a policy in 2002. The major objective of this policy
were
<A> Provision of financial and infrastructural support
<B> Reduction in regional imbalance
<C> Strengthening of training human resource development
and cooperation education.

Nationalization of banks
➔ After independence, all the major banks of India were under
private ownership which was a cause of concern as the people
belonging to rural areas were still dependent on unauthorized
money lenders for financial assistance which led to their
exploitation even after independence.
➔ In Order to get rid of the problem of non-availability of credit
for poor rural sections from the organized sector, the banks
were nationalized under the Banking Regulation Act, 1949.
➔ Also the Reserve Bank of India was nationalized in 1949.
➔ After the formation of the State Bank of India in 1955, several
banks were nationalized in the time period 1969-1991.
➔ 14 Banks nationalized in 1969
➔ In 1980, another 6 banks were nationalized

A point to be noted in respect of SBI

 ➔ In 1955, the Government of India and Reserve Bank of India
jointly established the State Bank Of India i.e. they both have
joint ownership of SBI.
➔ In 2007, Reserve Bank’s share of SBI was transferred to the
government of India.
➔ SBI is governed by a board of directors headed by a chairman.
The chairman and managing directors of the bank are
appointed by the government.
➔ It is evident that the SBI works under the Government of India,
but it is also a fact that SBI is not called a nationalized bank.

RBI
● The Reserve Bank of India is the apex bank of India which
regulates and controls all the monetary policies of India.
Hence, it is called the “Monetary Authority of India''.
● RBI was established in April, 1935.
● The affairs of RBI are governed by a central board of directors,
which are fourteen in number, including the governor and four
deputy governors.

Functions of RBI
➔ Monetary Management Authority
➔ Regulation and Supervision of the Banking and Non-Banking
Financial Institutions.
➔ Regulation of Foreign Exchange Market, Government Securities
Market and Money Market.
➔ Management of Foreign Exchange Reserves.
➔ Current Account and Capital Account Management.
➔ Banker to Central and State governments
➔ Debt Manager of Central and State Governments
➔ Banker to Banks
 ➔ Issuer of Currency
➔ Oversight of Payment and Settlement Systems

● The Security Printing and Minting Corporation of India Limited

(SPMCIL)
Printing Press :- Nasik (Maharashtra)
:- Dewas (Madhya Pradesh)
Mint :- Noida
:- Mumbai
:- Kolkata
:- Hyderabad

Money Supply
● The meaning of money supply is related to the total amount of
currency, which is kept by people in various forms in the
economy.
● The main elements of the money supply are the currency kept
by people and the demand deposits made by commercial
banks.
● In India, the demand for money supply is generally measured
as M1, M2, M3, M4.
● Among all the concepts of money supply, M1 and M2 is the
narrowest and most important measure of money supply.
● M3 and M4 is a broad measure of money supply.
● M1 is the most liquid and M4 is the least liquid."

Measure Description Liquidity

Currency with the public + Demand

M1 deposits with the banking system + Highest
Other deposits with the RBI
M2 M1+ Post office savings deposits Intermediate

M1+ Time Deposit with the Banking Lower than M1

M3
System and M2

M3+ All deposits with the post office

M4 Lowest
(except National Savings Certificates)

Types Of Deposit

Type of
Deposit Description

● A basic account used for daily transactions.

Savings ● Money deposited in a savings bank account earns
Bank interest.
Deposits ● These accounts typically come with withdrawal
restrictions but offer easy accessibility.

● A type of fixed deposit where the interest earned is

reinvested back into the deposit instead of being
Reinvestme
regularly paid out.
nt Deposits
● The interest is compounded quarterly and is paid along
with the principal amount at the time of maturity.

● A financial instrument provided by banks that offers a

Fixed higher rate of interest than a regular savings account.
Deposits ● The money is deposited for a fixed period, and
withdrawal before maturity can result in penalties.

● A type of term deposit offered by banks in which a

fixed amount is deposited at regular intervals on a
Recurring
monthly basis.
Deposits
● This is suitable for individuals who have a regular
income and can make consistent deposits each month.
 Types Of money

Type of
Money Description

● A currency whose acceptance or not as a form of

Credit payment depends entirely on the will of the payee.
Money For example hundi, promissory note, bill of
exchange etc.

● This is the type of money that we're most familiar

with today.
● It has no intrinsic value; its value comes from the
Fiat Money government declaring it as legal tender, meaning
it must be accepted as a form of payment within a
country.
● currency notes and coins.

● A type of commodity money that specifically

Metallic
refers to coins made from precious metals like gold
Money
and silver.

Reserve ● Currency in circulation + Bank deposits with RBI +

Money (M0) Other deposits with RBI

● Money whose face value is greater than its cost of

Token Money
production, like most modern coins.

Important Committee

Committee Formed Headed By Purpose

Kelkar Committee (on Recommend tax

2002 Vijay Kelkar
Tax Reforms) reforms

Kelkar Committee (on Outline a roadmap for

2012 Vijay Kelkar
Fiscal Consolidation) fiscal consolidation
Narasimham M. Recommend financial
1991
Committee I Narasimham system reforms

Narasimham M. Recommend banking

1998
Committee II Narasimham sector reforms

Suresh Review methodology

Tendulkar Committee 2005
Tendulkar for poverty estimation

Monetary policy
➔ Monetary policy refers to the credit/money control measures
adopted by the central bank of a country.
➔ In the case of the Indian economy, the RBI is the sole
monetary authority which decides the supply of money in the
economy.

Objective of Monetary Policy

● The main objective of monetary policy is to maintain price

stability while keeping in mind the objective of growth as price
stability is a necessary precondition for sustainable economic
growth.
● In India, the RBI plays an important role in controlling inflation
through the consultation process regarding inflation targeting.
● The current inflation-targeting framework in India is flexible.
● The Reserve Bank of India Act, 1934 (RBI Act) was amended by
the Finance Act, 2016, to provide for a statutory and
institutionalized framework for a Monetary Policy Committee,
for maintaining price stability, while keeping in mind the
objective of growth.
● The Monetary Policy Committee is entrusted with the task of
fixing the benchmark policy rate (repo rate) required to contain
inflation within the specified target level.
 ● The Government of India, in consultation with RBI, notified the
‘Inflation Target’ in the Gazette of India dated 5 August 2016
for the period beginning from the date of publication of the
notification and ending on March 31, 2021, as 4%.
● At the same time, lower and upper tolerance levels were
notified to be 2% and 6% respectively.

Monetary policy committee

● Established in the year 2016, under section 45ZB of the RBI Act,
1934.
● It is a six member body which has to hold at least 4 meetings
in a year.
● Three of these members are from RBI and the other three
members are appointed by the Central Government.
● It is headed by the RBI Governor.
● The central government set up this committee to determine the
policy interest rate needed to achieve the inflation target.

The instruments of monetary policy are of two types:

1. Quantitative, general or indirect (CRR, SLR, Open Market
Operations, Bank Rate, Repo Rate, Reverse Repo Rate)

2. Qualitative, selective or direct (change in the margin money,

direct action, moral suasion)

Let’s have discuss of these instruments :

Repo Rate
● The repo rate is the interest rate at which a country's
central bank loans money to commercial banks.
● The Reserve Bank of India (India's central bank) employs
repo rates to control liquidity in the economy.
 ● The Repo rate is connected to the repurchase option' or
repurchase agreement' in banking.
● The Reserve Bank of India (RBI) increased the repo rate
by 35 basis points to 6.25% on December 7, 2022, for the
fifth consecutive time.

Reverse Repo Rate

● Reverse Repo Rate is defined as the rate at which the
Reserve Bank of India (RBI) borrows money from banks
for the short term.
● It is an important monetary policy tool employed by the
RBI to maintain liquidity and check inflation in the
economy.
● The Reverse Repo Rate helps the RBI get money from the
banks when it needs.
● In return, the RBI offers attractive interest rates to them.
● The Reverse Repo Rate is decided by the Monetary Policy
Committee (MPC), headed by the RBI Governor.

Marginal Standing facility

● The rate at which scheduled commercial banks decide to

exchange their SLR with RBI to meet their very short term
liquidity requirement is called Marginal Standing Facility.
● The RBI first mentioned the MSF in the annual monetary policy
review in the financial year 2011-12.
● It was fully implemented on 9 May 2011.
● In this, all scheduled commercial banks can take loans up to 1%
of their total deposits for one night.
Difference Between RR, RRR and MSF

Repo Rate Reverse Repo Rate Marginal Standing Facility

Repo Rate is the rate Reverse Repo Rate is Marginal Standing Facility
at which the Central the rate offered by the (MSF) is a special window
Bank grants loans to RBI to the banks that for commercial banks to
the commercial banks deposit funds with it. borrow from the RBI
against government against approved
securities. government securities.

Rate of interest in The Reverse Repo rate The interest rate of MSF is
case of Repo rate is has always a lower higher than the Repo
higher than the interest rate than the Rate.
Reverse Repo Rate repo rate

Repo rate controls the Reverse Repo Rate MSF controls the
inflation in the controls the money mismatch in short-term
economy supply in the economy asset liability more
effectively

The purpose of Repo The purpose of the MSF controls a severe

Rate is to fulfill the reverse repo rate is to shortage of liquidity.
deficiency of funds. maintain liquidity in
the economy.

Bank Rate Policy:

➢ The rate at which RBI provides long term loans to

commercial banks is called bank rate.
➢ Also known as the discount rate, bank rates are interest
charged by the RBI for providing funds and loans to the
banking system.
➢ An increase in bank rate increases the cost of borrowing
by commercial banks which results in the reduction in
 credit volume to the banks and hence the supply of
money declines.
➢ An increase in the bank rate is the symbol of the
tightening of the RBI monetary policy.

Open Market Operations:

➢ An open market operation is an instrument which involves

buying/selling of securities like government bonds from
or to the public and banks.
➢ The RBI sells government securities to control the flow of
credit and buys government securities to increase credit
flow.

Cash Reserve Ratio (CRR):

➢ Cash Reserve Ratio is a specified amount of bank

deposits which banks are required to keep with the RBI in
the form of reserves or balances.
➢ The higher the CRR with the RBI, the lower will be the
liquidity in the system and vice versa.

Statutory Liquidity Ratio (SLR):

➢ All financial institutions have to maintain a certain

quantity of liquid assets with themselves at any point in
time of their total time and demand liabilities. This is
known as the Statutory Liquidity Ratio.
➢ The assets are kept in non-cash forms such as precious
metals, bonds, etc.
 Credit Ceiling:

➢ With this instrument, RBI issues prior information or

direction that loans to the commercial bank will be given
up to a certain limit.
➢ In this case, a commercial bank will be tight in advancing
loans to the public.
➢ They will allocate loans to limited sectors.
➢ A few examples of credit ceiling are agriculture sector
advances and priority sector lending.

Moral Suasion:

Under this method RBI urges commercial banks to help in

controlling the supply of money in the economy.

Demonetisation
● The act of stripping a currency unit of its status as a legal
tender.
● Demonetisation is necessary whenever there is a change of
national currency.
● The old unit of currency must be retired and replaced with a
new currency unit.
● Such a step is especially taken to curb the menace of
counterfeiting, black money and money laundering.
● A recent example is demonetisation of 500 and 1000
denomination currency units in India.
● Another example of demonetisation is when the European
Monetary Union nations decide to adopt Euro as their currency.

Demonetisation in India
● For the first time in January 1946, ‘1,000' and '10,000'
banknotes were demonetised.
 ● These two denominations were reintroduced in 1954 along with
currency notes of ‘5,000’.
● But all these three denominations were again demonetised in
January 1978 by the Morarji Desai government.
● The RBI more recently in 2014 had demonetised all banknotes
printed before 2005.
● On 8 November 2016, the Prime Minister announced that Rs.500
and Rs.1000 denomination notes will become invalid.

India post payments Bank

➔ To connect the poor with the banking system, 'India Post
Payments Bank' was started on 1 September 2018.
➔ This bank will be formed as a public company under the
Department of Posts.
➔ The government of India will have 100 percent stake in this
bank.
➔ Through this payment bank, except loan and credit card, all
banking related work like; You can deposit money in the bank,
send money, receive money sent by someone else and you can
also send money to a relative.

NBFC
● Full Name- Non Banking Financial Company
● There are financial institutions in India which are not banks but
which accept deposits and provide credit facilities like banks
are called Non-Banking Financial Companies (NBFCs).
● A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956.
● It acquires shares/stocks/bonds/debentures/securities issued
by the government or local authority.
 ● These companies do investment business, insurance business,
chit fund, nidhi, merchant banking, stock broking, alternative
investment etc.
● NBFCs cannot issue cheques, so they are not part of the
payment and settlement system.
● NBFCs are regulated by SEBI.

Taxation Structure in India

The taxation system in India comprises a three-fold federal structure
(it refers to relations between the Centre and the States of the Union
of India), which includes the following.
1. The Union Government
2. The State Government
3. The Local Bodies

❖ Taxes that are levied by the Indian Government: - Income

Tax, Central Excise Duty (tax imposed on goods for their
production, licensing and sale like alcohol), Customs Duty,
Sales Tax and Service Tax.
❖ Taxes that are levied by the State Government: -
Entertainment Duty(on films), Land Revenue, Profession Tax,
Sales Tax, Stamp Duty and Excise Tax.
❖ Taxes that are levied by the local bodies: - Consumption Tax
(tax levied on consumption spending on goods and services),
Octroi Tax (Tax by Local bodies on certain categories of goods
on entry in state) and Property Tax.
Types of taxation based on determination of rate of tax:

Progressive
● When the rate of tax increases along with the increase in
income, then such taxation is called 'progressive taxation'.
● It is considered the best way of redistributing income in a
country.
● Under this taxation, rich people pay more tax and poor or low
income people pay less.

Proportional
● When no matter how much the income increases but there is no
change in the rate of tax, it is called 'proportional taxation'.

Regressive
● When the rate of tax is reduced with increase in income, it is
called 'regressive taxation'.
● This type of taxation system is imposed equally on all income
groups, that is why the regressive tax system is also called
'indirect tax system'.

Degressive
● When the tax rate increases with the increase in income up to a
certain limit, but becomes constant after that limit, it is called
'regressive taxation'.

Laffer curve
● It was propounded by the economist Arthur Laffer.
● This curve shows the negative relationship between tax rate
and tax revenue.
 ● According to this curve, if the tax rate is increased after a
point, then the tax revenue starts decreasing, on the contrary,
if the tax rate is decreased, then the tax revenue increases.

Taxes in India are divided into two categories-

a) Direct taxes
b) Indirect taxes

Direct tax Indirect tax

Income tax GST

Corporate tax Custom Duty

Wealth Tax Excise Duty

Capital Gains tax Central sales tax

Securities transaction tax

In India, direct taxes are-
● In case of direct taxes (income tax, wealth tax, corporation tax
etc.), the burden falls directly on the taxpayer.
● These are the taxes which cannot be shifted by the taxpayers
to others.
● Corporate Tax, Capital Gains Tax, Fringe Benefit Tax (tax that
companies paid in lieu of benefits they offered their
employees), Securities Transaction Tax, Personal Income Tax
are the example of direct tax.

Income Tax

❖ To fill the treasury, the first Income-tax Act was introduced in

February 1860 by Sir James Wilson (British India's first
finance minister). He is known as father of Income Tax in India.
❖ Father of Tax Reforms of India is known as Raja Chelliah.
❖ Income tax is levied on the income of individuals, Hindu
undivided families, unregistered firms and other associations
of people.
❖ In India, the nature of income tax is progressive.
❖ For taxation purposes income from all sources is added and
taxed as per the income tax slabs of the individual.
● Current income-tax law is governed by the 1961 act, which has
298 sections and four schedules.
● Political parties in India are eligible for 100% tax exemption on
all income sources as per Section 13A of the Income Tax Act.
 ● Agricultural income is not taxable under Section 10 (1) of the
Income Tax Act as it is not counted as a part of an individual's
total income.
● Form 16 is a document that contains all details required to file
the income tax returns.

Corporate Tax

❖ The income-tax paid by domestic companies, and foreign

companies on their income in India is corporate income-tax
(CIT). The CIT is at a specific rate as prescribed by the income
tax act subject to the changes in the rates in the union budget
every year.
❖ Rate of tax is different for domestic and foreign companies.

Capital Gain Tax

● Any profit or gain that arises from the sale of a ‘capital asset’ is
a capital gain.
● This gain or profit comes under the category of ‘income’.
● Hence, the capital gain tax will be required to be paid for that
amount in the year in which the transfer of the capital asset
takes place.
● It is of two types – long term capital gain and short term
capital gain
● When the asset is sold after more than 3 years it is called 'Long
Term Capital Gain' whereas if it is sold in less than 3 years it is
called 'Short Term Capital Gain'.

In India, indirect taxes are-

● Indirect taxes are those taxes which can be shifted by the
taxpayers on others.
 ● If the central government increases the rate of service tax on
various services, then the seller passes on this increase to the
end consumer of the service.
● GST, Anti Dumping Duty, Custom Duty, Excise Duty, Sales Tax
are the example of Indirect tax.

Goods and Services Tax (GST)

● Goods and Services Tax (GST) is an indirect tax imposed on
manufacture, sale, and consumption of goods and services all
over India.
● GST has been added to the constitution under the 101st
Constitutional Amendment Act 2016.
● GST was implemented from July 1, 2017, and thereafter
became the biggest tax reform in the country.
● The first country to impose GST was France in 1954.
● Since then, more than 140 countries have implemented the GST.
● Genesis of GST occurred during the previous NDA Government
under Atal Bihari Vajpayee when it set up the Asim Dasgupta
Committee to design a model for GST.
● GST is levied at four rates viz. 5%, 12%, 18% and 28%.
● The schedule or list of items that would fall under these
multiple slabs are worked out by the GST council.
● GST, which subsumed almost all domestic indirect taxes
(Petroleum, Alcoholic beverages and stamp duty are the major
exceptions) under one head, is perhaps the biggest tax reform
in the history of independent India.

GST Council
● The GST Council was established on 12 September 2016.
● To implement GST, the Constitutional (122nd Amendment) Bill
was passed by both the Houses of the Parliament in 2016.
 ● The GST Council has been notified as a constitutional body to
deal with issues related to GST.
● The Finance Minister of India is the chairman of the GST
Council.
● It is a joint forum of the Center and the States, which was
established by the President in accordance with Article 279A (1)
of the amended Constitution.

There are Four GST types namely:-

SGST (State Goods and Service Tax)

● SGST is levied by the state government on intra-state goods
and service transactions.
● The revenue collected through State Goods and Service Tax is
earned by the state government where the transaction is
made.SGST subsumes earlier taxes such as VAT, entertainment
tax, luxury tax, octroi, tax on lottery and purchase tax.

CGST (Central Goods and Service Tax)

● CGST is levied by the central government on intra-state goods
and service transactions.
● The central government collects the revenue generated
through central Goods and service Tax.
● It is levied along with SGST or UGST and revenues are shared
between the state and the center.

IGST (Integrated Goods and Service Tax)

● Integrated Goods and Service tax is the tax levied on inter
state goods and service transactions.
● It is applicable on imports and exports as well.
 ● Under 1655, the taxes charged are shared by both the center
and state. The soft part of the tax goes to the state wherein the
goods and services are consumed.

UTGST (Union Territory Goods and Service Tax)

● Union Territory Goods and Service Tax is an indirect tax that is
collected when intra-state goods or services are supplied,
along with tax charged as under CGST ACT, 2017.
● Generally, intra-state supply is treated where the location of
the supplier and the place of supply of goods or services are in
the same Union Territory.
● Under GSTIN (Goods and Services Tax Identification Number),
a service tax registration number by the Central is given to
each and every service Board of Excise and Custom (CBEC)
provider.
● All the service providers are under the same format number
which consist of 16 digits.

Taxes Replaced by GST

● GST replaces almost all vital indirect taxes and cesses on goods
and services in the country.

Among the taxes levied by center, GST will subsume the following
● Excise duty
● Additional Duties of Customs (commonly known as CVD)
● Additional Duties of Excise (Goods of Special Importance)
● Central Excise duty & Service Tax
● Special Additional Duty of Customs (SAD)
● Additional Duties of Excise (Textiles and Textile Products)
 ● Central Surcharges and Cesses so far as they relate to supply
of goods and services.
Among the state taxes that would be replaced by GST include:
● State VAT
● Central Sales Tax
● Luxury Tax
● Entry Tax (all forms)
● Entertainment and Amusement Tax (except when levied by the
local bodies)
● Taxes on advertisements
● Purchase Tax
● Taxes on lotteries, betting and gambling
● State Surcharges and Cesses so far as they relate to supply of
goods and services

Excise duty
● Excise duty refers to the taxes levied on the manufacture of
goods within the country.
● It is a form of indirect tax which is generally collected by a
retailer or an intermediary from its consumers and then paid to
the government.
● Although this duty is payable on manufacture of goods, it is
usually payable when the goods are ‘removed’ from the place
of production or from the warehouse for the purpose of sale.
● There is no requirement for the actual sale of the goods for
imposing the excise duty because it is imposed on the
manufacture of such goods.

Customs Duty
● Customs Duty refers to the tax that is imposed on the
transportation of goods across international borders.
 ● It is a kind of indirect tax that is levied by the government on
the imports and exports of goods. Companies that are into the
export-import business need to abide by these regulations and
pay the customs duty as required.

Pigouvian tax
● A Pigovian tax is a tax on any market activity that generates
negative impacts on the environment or society.
● The intention of this tax is to correct an undesirable or
inefficient market outcome.
● A carbon tax is a tax levied on the carbon content of goods
and services.

Dumping
● Dumping is a process where a company exports a product at a
price lower than the price it normally charges in its own home
market.
● This is an unfair trade practice which can have a distortive
effect on international trade.

Anti-dumping duty
● An anti-dumping duty is a protectionist tariff that a domestic
government imposes on foreign imports that it believes are
priced below fair market value.
● Thus, the purpose of anti-dumping duty is to rectify the trade
distortive effect of dumping and re-establish fair trade.
Countervailing duties
● Countervailing duties (CVDs) are levied on imported goods to
compensate for subsidies given to producers of these goods in
the exporting country.
● The objective of CVD is to provide a level playing field between
domestic producers of a product and foreign producers of the
same product who can sell it at a lower price due to subsidies
received from their governments.
● CVD helps to overcome the negative impact on producers of
the same commodity due to foreign competition.

Cess
● It is a form of tax levied by the government for the
development or welfare of a particular service or sector.
● It is charged above direct and indirect taxes.
● Cess collected for a particular purpose cannot be diverted to
other purposes.
● It is not a permanent source of revenue for the government,
and it is discontinued when the purpose of levying it is fulfilled.
● Currently, the cess and surcharge collected by the Centre.
● Examples: Education Cess, Swachh Bharat Cess

Surcharge
● Surcharge is an additional charge or tax levied on an existing
tax.
● Unlike a cess, which is meant to raise revenue for a temporary
need, surcharge is usually permanent in nature.
● It is levied as a percentage on the income tax payable as per
normal rates.
● The revenue earned via surcharge is solely retained by the
Centre and, unlike other tax revenues, is not shared with States.
 ● Collections from surcharge flow into the Consolidated Fund of
India.

Aspect Cess Surcharge

Definition Additional tax imposed for a specific Extra charge applied on the existing
purpose or to fund a particular government tax liability.
initiative.

Purpose Typically used for specific purposes like Generally used to meet the overall
education, health, or disaster relief. revenue needs of the government.

Calculation Calculated on the total tax amount. Calculated on the income tax
amount before adding Cess.

Applicability Can be applicable to both individuals and Mainly applicable to individuals and
businesses. corporates with high income levels.

Examples Swachh Bharat Cess, Education Cess in Income Tax Surcharge, applicable on
India. high-income individuals.

Rate Fixed percentage on the total tax liability. Applied as a percentage of the
income tax amount.

Flexibility Can be introduced or withdrawn based on Applied as a fixed percentage and

specific needs or situations. may change with the tax slabs.

Terminology related with tax

Tax evasion
● Tax evasion is an illegal action in which an individual or
company to avoid paying tax liability.
 ● In this deliberately wrong income is shown, tax return is not
filed and misleading statements are presented in relation to
tax.
● Tax evasion is an illegal and criminal activity.

Tax Avoidance
● Tax avoidance is the use of legal methods to reduce taxable
income or tax owed.
● Tax avoidance is not the same as tax evasion, which relies on
illegal methods such as underreporting income and falsifying
deductions.
● Individual taxpayers and corporations can use forms of tax
avoidance to lower their tax bills.
● Tax credits, deductions, income exclusion, and loopholes are
forms of tax avoidance.

Tax shifting
● Tax shifting is the activity of shifting the burden (payment) of a
tax from one person to another.
● For example, in the case of GST, the tax is shifted ultimately
from the producer to the consumer. The manufacturer shifted
the tax burden to the ultimate consumer.

Tax Buoyancy
● If tax revenue increases proportionately more in response to
an increase in national income or output, the tax is said to be
buoyant.
● Tax buoyancy explains this relationship between the changes in
government’s tax revenue growth and the changes in GDP.
● It refers to the responsiveness of tax revenue growth to
changes in GDP.
Micro-Economics
Utility:
● - Utility of a commodity is its want-satisfying capacity. The
more the need of a commodity or the stronger the desire to
have it, the greater is the ability of that commodity.

Marginal Utility
● : - Marginal utility is the change in total utility due to
consumption of one additional unit of a commodity. For Ex.: Let
4 bananas give us 28 units of utility and 5 bananas give us 30
units of total utility. Then marginal utility of the 5th banana or 2
units.

Law of Diminishing Marginal utility:

● - This law states that marginal utility from consuming each
additional unit of a commodity declines as its consumption
increases.

Demand
● Demand: - The quantity of a commodity that a consumer is
willing to buy and is able to afford, at a given price of goods, is
called demand.

Factors affecting demand:

Law of Demand
● This law states that Demand depends on the price of a
commodity. According to this law when other things remain
 constant, there is a negative relation between demand for a
commodity and its price. I.e. When the price of a commodity
increases, demand for it falls and when the price of the
commodity decreases, demand for it rises.

Substitute goods
● Substitute goods are those goods which can be used in place
of another goods and give the same satisfaction to a consumer.
It means with an increase in price of substitute goods, the
demand for a given commodity also rises and vice-versa. For
example, Pepsi and Coke.

Complementary goods
● Complementary goods are those which are useless in the
absence of other goods and which are demanded jointly.
● It means, with a rise in price of complementary goods, the
demand for a given commodity falls and vice-versa. It is also
called Derived demand. For example, pen and refill.

There are three types of goods:

● Normal Commodity: For normal commodities, with a rise in
income, the demand of the commodity also rises and
vice-versa. Shortly, a direct relationship exists between income
of a consumer and demand of normal commodities.
● Inferior Goods: For inferior goods, with a rise in income, the
demand of the commodity falls and vice-versa. In Short, an
inverse relationship exists between the income of a consumer
and demand for inferior goods.
● Necessity Goods: For necessity goods, whether income
increases or decreases, quantity demanded remains constant
Demand function
● It is the relationship between quantity demanded for a
particular commodity and the factors that are influencing it.
● Individual demand function refers to the functional
relationship between individual demand and the factors
affecting the individual demand.
● Market demand function refers to the functional relationship
between market demand and the factors affecting the market
demand.

Movement along the Demand Curve

● It is based on the Law of Demand which states that quantity
demanded of the commodity changes due to the changes in
price of the commodity.
● The change in quantity demanded due to the change in price
of the commodity is known as movement along the demand
curve.

Giffen goods
● Giffen goods are a special category of inferior goods in which
demand for a commodity falls with a fall in its price.
● In case of certain inferior goods when their prices fall, their
demand may not rise because extra purchasing power (caused
by fall in prices) is diverted on purchase of superior goods.
● Elasticity of Demand (eD) - Elasticity of demand is a measure
of responsiveness of the demand for a good to changes in its
prices.
Supply
● It refers to the quantity of a commodity that a firm is willing
and able to offer for sale, at each possible price during a given
period of time.
● In other words, supply is that part of stock which is actually
brought into the market for sale. Stock can never be less than
supply.
● For example, a seller has a stock of 50 tonnes of sugar in the
godown. If the seller is willing to sell 30 tonnes at a price of Rs.
37 per kg, then supply of 30 tonnes is a part of total stock of 50
tonnes.
● Market supply: It refers to the quantity of a commodity that all
firms are willing and able to offer for sale at each possible
price during a given period of time.

Law of Supply
● It states that price of the commodity and quantity supplied
are positively related to each other when other factors remain
constant.
● Movement along the supply curve: The change in quantity
supply due to the change in the price of the commodity is
known as Movement along the supply curve.
● Expansion in supply: The rise in quantity supplied due to the
rise in price of the commodity is known as expansion in supply.
● It is based on the law of supply which states that the quantity
supplied of a commodity rises due to the rise in price of the
commodity.
● The rise in quantity supplied due to the rise in price of the
commodity is known as expansion in supply
Elasticity of supply
● The degree of responsiveness of quantity supplied due to the
changes in determinants of supply (price of other commodities,
price of factors of production, technology, etc) is known as
elasticity of supply.
● Price elasticity of supply: The degree of responsiveness of
quantity supplied due to the changes in price of the commodity
is known as price elasticity of supply

Equilibrium
● In a market, Equilibrium is the condition at which market
supply equals market demand.
● The price at which Equilibrium is reached, called Equilibrium
price.
● The quantity of goods sold and bought at equilibrium prices is
called equilibrium quantity.
● Equilibrium price: The price at which equilibrium is reached is
called equilibrium price.
● Equilibrium quantity: The quantity bought and sold at the
equilibrium price is called equilibrium quantity.
● Equilibrium point: Equilibrium point is the point of intersection
of the demand curve and supply of commodities.
● Producer’s equilibrium: A producer is said to be in equilibrium
when he produces that level of output at which his profits are
maximum. Producer’s equilibrium is also known as profit
maximization situation.

Price Ceiling
● Government-imposed upper limit on the price of a good or
service is called price ceiling.
 ● Price ceiling is generally imposed on necessary items like
wheat, rice, Kerosene, sugar etc and price is fixed, below the
market fixed price since at market-fixed price some-section of
the population is not able to afford these goods.

Fiscal policy
● Tax reforms are concerned with the reforms in the government’s
taxation and public expenditure policies, which are collectively known
as its Fiscal Policy.
● Through fiscal policy the government adjusts its spendings and tax
rate to monitor and influence the nation’s economy.
● Governments use fiscal policy to promote strong and sustainable
growth and reduce poverty.
● In India, Fiscal Policy is formulated by the Ministry of Finance.
● Fiscal policy is implemented through the announcement of the
budget.
● There are 4 tools of fiscal policy – tax, public expenditure, debt and
issue of new currency
● When there is a decrease or increase in these instruments by the
government, its direct effect is seen on the fiscal deficit of the
government.
● By increasing the tax, the government gets more revenue, due to which
the fiscal deficit decreases. On the same reduction in taxes, there is an
increase in the fiscal deficit.

● Similarly, by increasing or decreasing the public expenditure, the fiscal

deficit of the government decreases or increases.
● The government's fiscal deficit had increased to more than 9% of GDP
due to large scale increase in public expenditure during the Korona
period (mainly food subsidy).
Main Objectives of Fiscal Policy
● Maintaining the condition of full employment.
● Keeping the price level stable.
● To stabilize the growth rate of the economy.
● Maintaining a balanced balance of payments.

Fiscal Deficit
● Fiscal deficit is the difference between the government’s total
expenditure and its total receipts (excluding borrowing).
● A fiscal deficit occurs when this expenditure exceeds the revenue
generated.
● Fiscal deficit of a country makes it clear how much resources the
government of that country has to spend and where to spend them.
● Fiscal Deficit = Total Expenditure (Revenue Expenditure + Capital
Expenditure) – (Revenue Receipts + Recoveries of Loans + Other Capital
Receipts (all Revenue and Capital Receipts except loans taken)
● To fulfill the fiscal deficit, the government has to take a loan from
international institutions, which increases national debt.
● For example, during the year 1990-91, the fiscal deficit was about 8.4%
of GDP. At the time of this economic crisis, a loan was taken from the
IMF.
● However, India had to adopt liberalization, globalization and
privatization to obtain loans from the IMF, which proved to be correct
for the Indian economy.
● Due to high fiscal deficit, the growth of GDP also slows down.
● Many times, due to high fiscal deficit, the government of the concerned
country has to borrow money from other countries and international
financial institutions.
Primary deficit
● The difference between the current year's fiscal deficit and interest
payments on borrowings already taken is called 'primary deficit'.
● Current year refers to the year which is currently running:- eg 2023-24
● In other words, the 'primary deficit' is obtained after deducting the
interest payments from the fiscal deficit.
● Primary deficit = Fiscal deficit-Interest payments.

Revenue Deficit
● It is related to the revenue expenditure and revenue receipt of the
government.
● When revenue expenditure is more than revenue receipt, it is called
'revenue deficit'.
● It includes those transactions which involve the current income and
expenditure of the government.
● It does not include capital receipt and capital expenditure.
● Revenue Deficit = Revenue Expenditure - Revenue Receipt

Revenue Expenditure
● Revenue Expenditure is that part of government expenditure that does
not result in the creation of assets.such as salary and pension.
● Revenue expenditure does not reduce the liabilities of the government in
the same way as capital expenditure does.
● Revenue expenditure keeps on increasing the treasury of the
government.
● The salary and allowances of all the departments given by the
government are also under revenue expenditure.
● Interest paid on loans taken by the government, subsidies given
(agriculture subsidy, fertilizers), grants given to states, expenses
incurred in welfare schemes (MNREGA, housing scheme) and old age
pension and scholarship etc. come under revenue expenditure.
Revenue Receipt
● Revenue receipt is such receipt earned by the government, due to which
the government does not create any kind of liability, nor does it
decrease in any kind of assets.
● It is of two types – tax revenue receipt and non-tax revenue receipt.
● The income that the government receives from different types of taxes is
called 'tax revenue'.
● This type of tax includes both direct and indirect taxes.
● For example income tax, corporation tax, capital gains tax, wealth tax
come under direct tax.
● Goods and Services Tax, Excise Duty, Customs Duty come under Indirect
Taxes.
● When the government of a country receives revenue from different
types of sources other than tax, it comes under 'non-tax revenue receipt'.
● In this, different financial services by the government such as printing
currency, issuing postage stamps, profits and dividends received from
public sector units, interest received from loans (internal and external
loans) to the government and the amount received from fines, under this
comes

Revenue Receipt Revenue expenditure

● Tax Revenue Receipt- ● Grant to states
Direct Tax and Indirect Tax ● Subsidy
● Non-Tax Revenue Receipt- ● Defense expenditure
Printing of currency, ● Police administration
receipt of interest, benefits ● Interest payment
and dividends received ● Pension spending etc.
from public sector units
Capital Receipt
● Capital Receipt is the receipt earned by the government which reduces
the assets of the government or increases the liabilities of the
government.
● This receipt to the government includes disinvestment (money received
from selling shares of public companies), recovery of loans, loans taken
by the government (internal and external debt) and provident fund
deposits.

Capital Expenditure
● Capital expenditure is the expenditure incurred by the government of a
country due to which new assets are created and the liability of the
government decreases.
● Land purchased by the Government of India, purchase of new machines
and equipment, repayment of loans, investment, purchase of shares
comes under capital expenditure.

Capital receipt Capital expenditure

● Foreign debt, ● Construction of building
● Internal market credit (construction of new Parliament
● Disinvestment House)
● Provident fund deposit ● Payment of loans
● Government loan ● Purchase of machines
● Investment in new projects
● Infrastructural construction
(highway airports etc.)
FRBM Act
● The Fiscal Responsibility and Budget Management (FRBM) Bill was
introduced by the Atal Bihari Vajpayee Government (then Finance
Minister Yashwant Sinha) in the parliament.
● The Bill was introduced in the year 2000 to provide legal backing to
the fiscal discipline to be institutionalized in India.
● The Bill became an Act in the year 2003 but came into effect from
July 5, 2004.
● The FRBM Act set targets for the Government of India to achieve fiscal
stability, to provide RBI with the flexibility to deal with inflation, to
improve the management of public funds, to strengthen fiscal prudence
and to reduce fiscal deficits.
● The FRBM act requires the government to limit the fiscal deficit to 3% of
the GDP by March 31, 2021, and the debt of the central government to
40% of the GDP by the year 2024-25 as per the latest targets set under
the FRBM Act.
● However, the Finance Ministry is likely to be connected with its internal
fiscal consolidation roadmap and the 2023 Union Budget may target a
fiscal deficit of between 5.5-6 percent of nominal GDP in FY24.
● The roadmap aims for a fiscal deficit target of 4.5 percent of GDP by
2025-26.

Budget
● A Budget is a formal expression of the expected incomes and
expenditures for a definite future period.
● In simple words, the budget is an estimate of income and expenditure
for a definite duration.
 ● The word ‘budget’ has been borrowed from the English word
"Bowgette" which traces its origin from the French word “Bougette”,
which means a leather bag.
● The First Union Budget of Colonial India was introduced on 7 April
1860 by the East India Company to the British Crown. It was presented
by a Scottish Economist and politician James Wilson.

Interesting Facts About Indian Budget

● First Union Budget of Independent India was introduced on 26
November 1947. It was presented by the first Finance Minister RK
Shanmukham Chetty.
● Former Prime Minister Jawaharlal Nehru was the first PM to present the
Union Budget for the FY 1958-1959.
● Former Finance Minister Moraji Desai presented the Union Budget a
record 10 times from 1962-69.
● Former Prime Minister Indira Gandhi was the first woman to present
the Union Budget for the FY 1970-71.
● For FY 1973-74, the Budget was presented by the then Finance
Minister Yashwantrao B. Chavan is called the 'Black Budget' due to a
high budget deficit of Rs 550 crore.
● The Budget presented by the then Finance Minister Manmohan Singh
for the FY 1991-92 is known as 'The Epochal Budget'-- a budget that
changed India forever as it marked the economic liberalization of
the nation.
● The Budget presented by the then Finance Minister P. Chidambaram for
the FY 1997-98 is known as 'Dream Budget' as it proposed to lower the
tax slabs of personal and corporate taxes.
● The Budget presented by the then Finance Minister Yashwant Sinha for
the FY 2000-01 is known as 'The Millenium Budget'-- a budget that
revolutionized India's IT sector.
● In the year 2017, the Rail Budget was merged with the Union Budget.
Types of Budget

Traditional or General Budget

● Traditional budgeting is a method by preparing a budget for any
specific period where the budget of the previous year is considered
as a base and using which the budget of the current year is
prepared.
● In other words, we can say the current year’s budget is prepared
by making some changes in the previous year’ budget.
● Surplus Budget : When Goverments’s generated income greater
than the expenditure.
● Deficit Budget : When the government’s expenditure exceeds its
generated income

Performance Budget
● In the performance Budget, Goals and targets are predefined.
● Performance Budgeting is a method of allocation of funds to any dept,
based on their future set targets.
● In traditional budgeting, previous expenditures are on focus whereas in
future performances, milestones and targets are considered.
● For example- If the AYUSH Ministry demands Rs. 1000 CR for Jan
Aushadhi Yojana. So before allocating this much amount, the AYUSH
ministry will be asked about what targets or goals it will be achieving by
these funds. It can be increasing free vaccination to infants and
children, can be increasing varieties of free medicines in government
hospitals etc.
● For the first time in the world, the performance budget was made in
the USA.
Outcome Budget

● In the outcome budget, allocation of funds are done on various

government schemes but depending on the fact that how much progress
is being made by those schemes from the previous allotted funds.
● It also ensures that where and how the previous allotted funds are being
used and what was the outcome of that particular spending.
● For example- NHAI demands Rs 500 CR for building the next phase of
any bridge. So before allocating this amount, it will be asked to tell how
much that bridge is being built from the previous amount and what is
the purpose of demanding new funds.
● Therefore, in order to reduce this cost, the Government of India
introduced the Outcome Budget in 2005.

Zero Based Budget

● Zero based budgeting is a method of allocating funds to different

departments and ministries but not considering its previous
expenditures or performances.
● In this only thing we consider is why the demanded funds are needed
and one should justify the usage and requirement of demanded funds.

● It does not focuses on 'How much' rather it focuses on 'Why' (for the
demanded funds)
● For Example- If any dept. demands Rs. 100 CR for any of its needs, so
ZBB will ask that particular department why this amount is required and
where this amount will be spent.
● This budget is also known as ‘Sun Set Budget’ which means the
finance department has to present the zero-based budget before the
end of the financial year.
 ● Peter Pyre is known as the father of ‘Zero Based Budgeting’ who
presented this sort of budget in 1970.
● This system of budgeting was first used in the Georgia State of USA.

Gender Budget
● If a budget describes the schemes and plans for the welfare of
children and females, it is known as Gender Budget.
● Through Gender Budget, the Government declares an amount to be
spent over the development, Welfare, Empowerment schemes and
programmes for Females.

Indian Financial Market

● Financial Market refers broadly to any marketplace where the

trading of securities occurs.
● Money Market is a short term financial market where the
duration of transaction is 1-364 days.
 ● Capital market is the market for medium and long term funds.
Capital market has two different segments namely primary
market and secondary market.
➔ Primary Market is also known as New Issue Market, it is the
first time market trading of new securities and later available
for institutions and individuals.
➔ Secondary Market is called secondary because the securities
they have are old and already have been issued in the primary
market for trade.

Securities and Exchange Board of India (SEBI)

● The security market in India is regulated by The Securities and
Exchange Board of India (SEBI), which is similar to the U.S's
Securities and Exchange Commission (SEC)
● The establishment of SEBI took place in 1988, although
statutory powers to it were granted on April 12, 1992 under the
SEBI 1 Act, 1992.
● It plays an essential role in maintaining efficient and stable
investment and financial markets through creation and
enforcement of effectives regulation in India's financial market
place.
● The management of SEBI consists of its own members.
● The management team consists of a chairman nominated by
the Government of India, two members who are officers from
the Union Finance Ministry, one member from the Reserve
Bank of India and five other members who are also nominated
by the Government of India.
Initial public offering (IPO)
● Initial public offering is the process by which a private
company can go public by sale of its stocks to the general
public. Initial public offerings can be used to raise new capital
for companies to gain more funding to monetize the
investments of shareholders.
● A follow-on public offering (FPO) is the issuance of shares to
investors by a company listed on a stock exchange.

Stock Exchange
● A stock exchange is a marketplace, where financial securities
issued by companies are bought and sold.
● Securities issued by companies, such as shares and bonds, are
traded on the stock exchanges, after they have been issued in
the primary market.

BSE (Bombay Stock Exchange)

● The Bombay Stock Exchange, or (BSE) is the oldest stock
exchange in Asia located at Dalal Street in Mumbai/ India.

SENSEX
● The SENSEX-(or SENSitve indEX) was introduced by the
Bombay stock exchange on January 1 1986.
● It is one of the prominent stock market indexes in India.
If the Sensex value increases it means that there is a general
increase in the prices of shares whereas, if the Sensex
decreases it means there is a general decrease in the price of
shares.
National Stock Exchange (NSE)
● The National Stock Exchange was founded in 1992.
● It was recognized as a stock exchange by SEBI under the
Securities Contracts (Regulation) Act, 1956 and the operation
commenced in 1994.
● The NSE's key index is the S&P CNX Nifty, known as the NSE
NIFTY (National Stock Exchange Fifty), an index of fifty major
stocks weighted by market capitalisation.

NIFTY 50
● The NIFTY 50 is the flagship index on the National Stock
Exchange of India Ltd. (NSE).
● The Index tracks the behavior of a portfolio of blue chip
companies, the largest and most liquid Indian securities.
● It includes 50 of the approximately 1600 companies traded
(listed & traded and not listed but permitted to trade) on NSE,
captures approximately 65% of its float-adjusted market
capitalization and is a true reflection of the Indian stock
market.
The NIFTY 50 is owned and managed by NSE Indices Limited
(formerly known as India Index Services & Products
Limited-IISL), India’s first specialized company focused on an
index as a core product.

DEMAT
● A Demat account is also known as Dematerialized account.
● In other words, converting or dematerializing your physical
shares in the electronic format is known as holding a Demat
Account.
● Demat account is used to hold the shares and securities of
publicly traded companies in an electronic form.
Bond
● A bond is a loan to a company or government. It pays investors
a fixed rate of return. A bond could be issued by a country’s
government or by a company to raise funds.
● Debentures
Debentures are long-term financial instruments that are issued
by companies to borrow money.

Mutual Fund
● A mutual fund is a type of group investment or A Mutual Fund
is a professionally managed firm of collective investments.
● A group of investors (retail or institutional in nature) jointly
invest in stocks, bonds, short-term investments, or other
securities.

Participatory Notes (PNs)

● Participatory Notes or P-Notes (PNs) are financial instruments
issued by a registered foreign institutional investor (FII) to an
overseas investor who wishes to invest in Indian stock markets
without registering themselves with the market regulator, the
Securities and Exchange Board of India (SEBI).

Insurance
● The basic concept of insurance is to spread the loss of a few
over many. Insurance industry includes two sectors-Life
Insurance and General Insurance. Life Insurance in India was
introduced by Britishers. A British firm in 1818 established the
Oriental Life Insurance Company at Calcutta, now Kolkata.
 ● Life Insurance Corporation (LIC) of India was established in
September, 1956 General Insurance Corporation (GIC) was
established in November, 1972.
● The committee on Insurance Sector Reforms was set-up in 1993
under the chairmanship of R.N. Malhotra which submitted its
report in 1994.
● Indian Insurance sector has low penetration particularly in
rural areas. It also has low turnover and profitability despite a
high premium rate.
● The insurance sector was opened up for private participation
with the enactment of the Insurance Regulatory and
Development Authority Act, 1999 (IRDA). The headquarter of
IRDA is at Hyderabad.
● The Life Insurance Corporation has its Central Office in
Mumbai, 8 Zonal Offices at Mumbai, Kolkata, Delhi, Chennai,
Hyderabad, Kanpur, Bhopal and Patna, 113 Divisional Offices,
73 Customer Zones, 2048 Branch Offices and 1346 Satellite
Offices as on 31 March, 2014, spreads the message of
Insurance the length and breadth of India.

Poverty
● Poverty is a state or condition in which a person lacks the
resources for a minimum standard of living.

Types of Poverty

Absolute Poverty
● A condition where household income is below a necessary level
to maintain basic living standards (food, shelter, housing).
● Poverty line is used in India to estimate absolute poverty.
 ● Poverty line is the line which reveals the average monthly
expenditure per person by which people can meet their
minimum needs.
● People whose monthly consumption expenditure is below the
poverty line are considered 'poor'.
● This method of determining poverty is also called the
'headcount method'.

Relative Poverty
● It is defined from the social perspective that is living standard
compared to the economic standards of the population living in
surroundings. Hence it is a measure of income inequality.
● Usually, Relative poverty is measured as the percentage of the
population with income less than some fixed proportion of
median income.
● Relative poverty is measured in two forms-
➔ Lorenz curve method
➔ Gini coefficient

Lorenz curve method

● This method was propounded by Max O. Lorenz in 1905.
● Through this method, income inequality among the citizens of a
country is known.
● A line is drawn at 45 degrees in the Lorenz curve, which is
called the 'absolute equality line'.
● The farther the Lorenz curve is from the line of absolute
equality, the more unequal the distribution of income, while the
closer it is to the line of absolute equality, the more equal the
distribution of income.
Gini coefficient
● The Gini coefficient was developed by the Italian statistician
Corrado Gini in 1912.
● It is the most commonly used method of measuring the
inequality of the distribution of income, which measures the
difference between each pair of incomes.
● The value of the Gini coefficient lies between 0 and 1.
● When its value is 0, it shows equality of national income
whereas when its value is 1, it shows a perfectly unequal
distribution of national income.

Main facts related to poverty

Culture of poverty
● Oscar Lewis first presented the concept of culture of poverty.
● According to this, despite economic changes, poor people
remain poor because of the influence of their culture.
● Their own culture does not encourage them to rise above
poverty.

Vicious circle of poverty

● Economist Ragnar Nurks introduced the concept of the vicious
circle of poverty in his 1953 book 'The Problem of Capital
Formation in Underdeveloped Countries'.
● According to this view, poor countries remain poor because of
the vicious cycle of poverty.
● Poverty trap generally happens in developing and
under-developing countries, and is caused by a lack of capital
and credit to people.
Type of Poor
1. Always Poor :- Who always stays below the poverty line.
:- Ex. beggars.
2. Usually poor :- Who usually lie below the poverty line but
occasionally come above the poverty line.
:- Ex. Casual workers
3. Churning poor :- Who regularly move in and out of the
poverty line.
:- Ex. Small farmers, seasonal workers.
4. Occasionally poor :- Who are rich most of the time but
may sometimes come below the poverty line due to Bad
luck or anything else.
:- Ex. SMSEs owner, shareholders etc.
5. Never/Non Poor :- Who never even come close to the
poverty line.
Ex.: Millionaires family.

Committee related with Poverty

● The first official attempt to measure poverty in India was
made in 1962 by the DR Gadgil Committee constituted by the
Planning Commission.
● This committee had suggested to consider ₹ 20 utility
expenditure per person per month as the poverty line.

Dr Y K Alagh Committee
● Formed by the Planning Commission in the year 1977.

● This committee defined poverty on the basis of 'minimum food

energy per day'.
 ● On this basis, 2400 calories per person per day for rural areas
and 2100 calories per person per day for urban areas were
considered the poverty line.

Lakdawala Committee
● The expert group constituted by the Planning Commission in
the year 1989, submitted its report in 1993.
● This committee suggested different poverty lines for all the
states.
● Based on this, separate price indices were adopted for rural
and urban areas.
● Consumer price index for agricultural laborers for rural areas
and consumer price index for industrial union for urban areas
were adopted.

Suresh Tendulkar Committee

● The Planning Commission, headed by Suresh Tendulkar,
constituted the committee in 2005, which submitted its report
in 2009.
● This committee accepted the multidimensional form of poverty
and suggested a per capita daily expenditure of ₹ 27 in rural
areas and ₹ 33 in urban areas.

C Rangarajan Committee
● In the year 2012, the Planning Commission constituted a
committee on poverty under the chairmanship of C.
Rangarajan.
● This committee considered ₹ 972 for rural area and ₹ 1407 for
urban area as the basis of poverty line per person monthly
consumer at all India level.
Hashim Committee
● An expert committee headed by Professor SR Hashim was
constituted to identify the poor living in urban areas, which
submitted its report in December 2012.
● According to this committee, the urban poor can be identified
on the basis of three types of weaknesses, which are as follows-
➔ Residential weakness
➔ Social weakness
➔ Occupational weakness

Unemployment
● All persons of working age (15-59 years) in a country are
collectively referred to as the 'labour force' of that country.
● This group includes both the employed and the unemployed.
● In terms of employment, 8 hours of work per day for 273 days
is called 'standard year' and the person who is in employment
for so many days is considered as 'full employment'.
● People who have the ability and willingness to work, but when
they cannot get employment under the prevailing wages, then
they come under the category of unemployed.

Measure of unemployment in india

● The National Sample Survey Organization collects data to
measure unemployment in India.
● There are three methods of unemployment measurement
prevalent by this organization-
➔ Usual Status
➔ Current Weekly Status
➔ Current Daily Status
 ● When a person is not able to get employment for more than
half of the days (183 days) in a year, then he is considered
unemployed in 'Usual Status'.
● If a person does not get employment even for 1 hour in a week,
then he is considered unemployed of 'current weekly level'.
● When a person cannot get employment even for 1 hour in a
particular day, then he is considered unemployed of 'current
daily status'.

Okun's Law
● This law states the interrelationship between the growth rate
and the unemployment rate of a country.
● According to this rule, if the GDP of a country increases by 3%,
then the unemployment rate of that country will decrease by
1%.
● Thus, if there is a 1% increase in the unemployment rate in a
country, then there will be a decrease of about 3% in the GDP
of that country.

Main types of unemployment

Structural unemployment
● The type of unemployment that arises due to structural
changes in the economy.
● This unemployment is due to backwardness of industrial
structure, lack of capital and old production technology etc.
● Lack of skills among people is also one of the major reasons for
structural unemployment.
● Structural unemployment is a common feature of developing
and underdeveloped countries.
Disguised Unemployment
● That type of unemployment in which more workers are
employed than the number of people required to do any work
is called 'disguised or invisible unemployment'.
● Technically a person whose marginal productivity is zero, that
is, he does not contribute anything extra to production; This is
called 'disguised unemployment'.
● This type of unemployment is normally seen in agriculture or
the primary sector.

Cyclical Unemployment
● Cyclical unemployment usually arises due to fluctuations in the
market.
● In an economy, when the level of economic activity increases
during an economic boom, the amount of employment
increases, while on the contrary, in the event of an economic
recession, employment decreases.
● This unemployment is generally of temporary nature and it is
mainly seen in developed countries America and European
countries.

Frictional Unemployment
● When a person leaves his employment and searches for
another employment. During this, the unemployment
generated during the period of leaving employment and
getting employment is called 'friction unemployment'.
● Retrenchment of jobs due to change in technology etc. is the
main reason for this unemployment. This unemployment is
commonly seen in developed countries.
● For example, layoffs in the IT sector
Seasonal Unemployment
● A person getting employment at any time of a year or for a few
months and remaining unemployed at other times is called
'seasonal unemployment'.
● Seasonal unemployment is most commonly found in the rural
areas of India. Normally this unemployment is visible in the
agriculture sector.

Agriculture

Minimum Support price

● Minimum Support Price is a fixed price paid by the Government
of India to the farmers for the purchase of certain crops whose
MSP is declared before the crop sowing season.
● It is aimed at saving the farmers from price fluctuations in the
market and ensuring farmers a better income for them.
● The MSP fixed by the government is considered as being
remunerative for farmers. But the point to be noted is that
MSPs do not have legal backing.
● MSPs were first introduced in 1966-67 when the country
adopted Green Revolution technologies.
● To boost domestic production and encourage farmers to plant
the high yielding varieties, the government resorted to MSP.
● It is fixed by the central Government based on the
recommendations of the Commission for Agricultural Costs and
Prices (CACP) which is a statutory body.
● CACP submits two separate reports for Kharif and Rabi
seasons and based on these, center fixes MSPs twice a year.
● The MSP is fixed by the Central Government for 22 crops.
● They belong to the family of cereals (7), pulses (5), oilseeds (7)
and commercial crops (3).
 ● Apart from these crops, 'Fair and Remunerative Price' is issued
for sugarcane crop.

CACP
● Full Name- Commission For Agricultural Costs And Prices.
● This commission determines the minimum support price of 22
agricultural commodities in the country and plays an important
role in determining many policies in the agricultural sector in
the country.

PDS
● The public distribution system means the system of
management of the food economy and distribution of food
grains at affordable prices through Ration shops.
● This PDS system is run by the ministry of consumer affairs,
food and public distribution.
● Under the PDS, presently the commodities namely wheat, rice,
sugar are distributed.
● The main agency providing food grains to the PDS is the Food
Corporation of India (FCI) which was set up in 1965.
● The primary duty of the Corporation is to undertake the
purchase, storage, movement, transport, distribution and sale
of food grains and other foodstuffs.

NABARD
● Full Name - National Bank for Agriculture and Rural
Development
● It was established on July 12, 1982.
● Headquarters in Mumbai.
 ● NABARD was established on the recommendation of the B
Sivaraman Committee.
● It functions under the Ministry of Finance, Government of
India.
● It is an apex regulatory body for the overall regulation of
Regional Rural Banks and Apex Cooperative Banks in India.
● It is an apex institution of rural credit structure, which provides
loans for the promotion of agriculture, small scale industries,
cottage and village industries and handicrafts etc.

e-NAM
● It was Launched by the GoI in 2016.
● eNAM is a pan-India electronic trading portal which connects
the existing APMC mandis to create a unified national market
for agricultural commodities.
● Small Farmers Agribusiness Consortium (SFAC) is the leading
agency for implementing eNAM under the aegis of the Ministry
of Agriculture and Farmers Welfare.
● In six years of e-NAM, 1000 mandis have been integrated
across 18 states and UT.

Mega food park

● MFP is the flagship program of the Ministry of Food Processing
Industries which proposes a demand driven/pre-marketed
model with strong backward/forward linkages and sustainable
supply chain.
● The Scheme of Mega Food Park aims at providing a
mechanism to link agricultural production to the market by
bringing together farmers, processors and retailers so as to
ensure maximizing value addition, minimizing wastage,
 increasing farmers income and creating employment
opportunities particularly in the rural sector.
● The Mega Food Park Scheme is based on the “Cluster”
approach and envisages creation of state of art support
infrastructure in a well-defined agri / horticultural zone for
setting up of modern food processing units in the industrial
plots provided in the park with a well-established supply chain.
● The Mega Food Park projects are executed by a Special
Purpose Vehicle (SPV), a Body Corporate registered under the
Companies Act.
● A Mega Food Park located in the area of a minimum of 50
acres works in a cluster based approach.

Kisan Credit Card Scheme (KCC)

● The Kisan Credit Scheme (KCC) was introduced in 1998
based on a model scheme prepared by the National Bank
for Agriculture and Rural Development (NABARD).
● The scheme was introduced to meet the various credit
requirements of the agriculture sector by giving financial
assistance to farmers.
● Farmers can avail loan for a period of up to 3 years.
● The Age of the applicant should be between 18 to 75
years.

Industry

Index of Industrial Production

● The Index of Industrial Production (IIP) is an index that
indicates the performance of various industrial sectors of the
Indian economy.
 ● It is calculated and published by the Central Statistical
Organisation (CSO) under the “Ministry of Statistics and
Programme Implementation” every month.
● It is a composite indicator of the general level of industrial
activity in the economy.
● IIP index is currently calculated using 2011-2012 as the base
year.
● The eight core industries of India represent about 40.27% of
the weight of items that are included in the IIP.

IIP Index Components

● Mining, manufacturing, and electricity are the three broad
sectors in which IIP constituents fall.
● The relative weights of these three sectors are 77.6%
(manufacturing), 14.4% (mining) and 8% (electricity).
● Electricity, crude oil, coal, cement, steel, refinery products,
natural gas, and fertilizers are the eight core industries that
comprise about 40 per cent of the weight of items included in
the IIP.

Maharatna Industries in India

● In our country, a Public Sector Undertaking (PSU) is a
government-owned corporation.
● These companies are owned and operated by the Union
Government of India, or a state government, or both.
● This company’s equity is majorly owned by the government,
hence the named PSU.
● The Public Sector Enterprises are run by the Government under
the Department of Public Enterprises of Ministry of Heavy
Industries and Public Enterprises.
● The need for setting up of PSUs arises because industrial
development of any country requires a strong foundation
supported by reliable infrastructure.
● Infrastructure development is fundamentally a
capital-intensive industry, which may not be lucrative for the
private sector.
● After economic reforms, various PSUs have been awarded
additional financial autonomy by the Government.
● Which means that the Government has given them greater
autonomy in their functioning to compete in the global market
in order to support these enterprises in becoming global
players.
● Currently, this level of financial autonomy is divided into the
following three categories:
➔ Maharatna
➔ Navratna
➔ Miniratna Category -I and II

● The company already holds Navratna status.

● It is listed on the Indian stock exchange fulfilling the minimum
prescribed public shareholding according to the SEBI
regulations.
● The Average annual turnover of the company during the last 3
years is more than Rs 25,000 crore.
● The Average annual net worth during the last 3 years is more
than Rs 15,000 crore.
● The Average annual net profit after tax during the last 3 years
is more than Rs 5,000 crore.
● The company should have a significant global presence or
international operations.
List of Maharatna Companies in India
1. Bharat Heavy Electricals Limited
2. Bharat Petroleum Corporation Limited
3. Coal India Limited
4. GAIL (India) Limited
5. Hindustan Petroleum Corporation Limited
6. Indian Oil Corporation Limited
7. NTPC Limited
8. Oil & Natural Gas Corporation Limited
9. Power Grid Corporation of India Limited
10. Steel Authority of India Limited

MSME Ministry
● The Micro Small and Medium Enterprises (MSMEs) are classified
as per the MSME Act-2006.
● On 9 May 2007, the Ministry of Micro, Small and Medium
Enterprises was formed by merging the Ministry of Small
Industries and Ministry of Agriculture and Rural Industries.
● New classification of micro, small and medium industries which
is applicable from 1 July 2020.

Classification Micro Small Medium

Manufacturing Investment 1 Investment 10 Investment 50 Crore

Crore and Crore and and Turnover 250
Turnover 5 Turnover 50 Crore
Crore Crore

Service Investment 1 Investment 10 Investment 50 Crore

Crore and Crore and and Turnover 250
Turnover 5 Turnover 50 Crore
Crore Crore
Export Processing Zone (EPZ) / निर्यात प्रसंस्करण क्षेत्र (EPZ)
● An Export Processing Zone (EPZ) is a Customs area where one
is allowed to import plant, machinery, equipment and material
for the manufacture of export goods under security, without
payment of duty.
● Asia's first EPZ was set up in Kandla, Gujarat in 1965.

Special Economic Zones (SEZs)

● An SEZ is an enclave within a country that is typically duty-free
and has different business and commercial laws chiefly to
encourage investment and create employment.

The chief objectives of the SEZ Act are:

➔ To create additional economic activity.
➔ To boost the export of goods and services.
➔ To generate employment.
➔ To boost domestic and foreign investments. To develop
infrastructure facilities.

Economic Reform 1991

● New Economic Policy of India was launched in the year 1991
under the leadership of PV Narasimha Rao.
● Former Prime Minister Manmohan Singh is considered to be the
father of New Economic Policy (NEP) of India. Manmohan
Singh introduced the NEP on July 24,1991.
● In 1991, India met with an economic crisis relating to its
external debt.
● The government was not able to make repayments on its
borrowings from abroad; foreign exchange reserves, which we
 generally maintain to import petrol and other important items,
dropped to levels that were not sufficient for even a fortnight.
● The crisis was further compounded by rising prices of essential
goods.
● All these led to introducing a new set of policy measures which
changed the direction of our developmental strategies.
● Three main steps taken under the Economic Policy 1991 were:
➔ Liberalization
➔ Privatization
➔ Globalization

Steps taken under Liberalization:

● Under this policy, industrial licensing was abolished for
industries except for a list of 18 industries which was later
reduced to six industries.
These six industries are :
➔ Liquor
➔ Cigarette
➔ Defence Equipment
➔ Industrial Chemicals
➔ Drugs
➔ Hazardous Chemicals

Steps taken under Privatisation:

● Sales of shares of PSU’s:- Indian Government started selling
shares of PSU’s to public and financial institutions e.g.
government sold shares of Maruti Udyog Ltd. Now the private
sector will acquire ownership of these PSUs. The share of the
private sector has increased from 45% to 55%.
● Disinvestment in PSUs:- The government has started the
process of disinvestment in those PSUs which had been running
 into loss. It means that the government has been selling out
these industries to the private sector. Government has sold
enterprises worth Rs.30,000 crores to the private sector.
● Minimisation of Public Sector: Previously the Public Sector
was given importance with a view to help in industrialization
and removal of poverty. But these PSUs were not able to
achieve this objective and policy of contraction of PSU’s was
followed under new economic reforms. Number of industries
reserved for the public sector was reduced from 17 to 2. These
are:-
➔ Railways
➔ Atomic Energy

Steps taken under globalization:

● Reduction in tariffs: - Custom duties and tariffs imposed on
imports and exports are reduced gradually just to make the
Indian Economy attractive to the global investors.
● Long term trade policy: - Foreign trade policy was enforced
for a longer duration. Here policies were made liberal. All
controls on foreign trade have been removed, open
competition has been encouraged.
● Partial Convertibility of Indian currency: - Indian currency
was allowed to convert in the currency of other countries to
encourage flow of foreign investment in terms of Foreign
Institutional Investment (FII) and Foreign Direct Investment
(FDI).
● Increase in Equity limit of Foreign Investment: - Equity limit
of foreign capital investment has been raised from 40% to
100%. In 47 high priority industries FDI had been allowed to an
extent of 100%.
Foreign Trade

Balance of payment
● It is a record of buying and selling of various commodities by a country
from other countries. It is done for a particular period of time. It can be
quarterly, half yearly or annually.
● In simple words, whatever a country trades with other countries in the
world is maintained as an official statement for a given period of time
and that record is termed as balance of payment.
● Let us take an example- Suppose in the year 2022 our country India
uses amount X in buying the products (Import) from other countries and
gains amount Y by selling products (Export) to different countries. So
the maintained statement or ledger of these amounts X and Y will be the
BOP for year 2022.
● It includes capital goods, consumer goods, services and Remittances.
● It is used to determine the money flow in the country whether the
country is gaining or losing in terms of Import-Export.
● Suppose if we import of Rs 500 Cr and export of Rs380 CR then BOP will
be negative which is not considered profitable.
● But if we import Rs 380 CR and export Rs 500 CR then it is termed as
profitable and BOP is positive.This profit amount of Rs 120 CR is also
called Surplus.
● When all the elements are correctly included in the BOP, it should be zero
in a perfect scenario. This means the inflows and outflows of funds
should balance out.
● There are three accounts under the balance of payments-
➔ Current account
➔ Capital account
➔ Financial account
Current Account
● The current account monitors the inflow and outflow of goods
and services between countries.These goods and services can
be anything like leather, agricultural products or services of
Personnels like doctors or engineers.
● It also includes receipts from engineering, tourism,
transportation, business services, stocks.
● It covers all the receipts and payments made with respect to
raw materials and manufactured goods.
● Let us take an example- If India sells Milk to Pakistan for Rs 20
Lac and buys onions from Pakistan for Rs 6 Lac then this
transaction will be monitored under Current account having
Current account surplus of Rs 14 Lac.

Capital Account
● All capital transactions or flow of international transactions in terms of
assets (Non-financial) between the countries are monitored through the
capital account.
● Capital transactions include purchasing and selling assets like land,
Vehicles, foreign exchange reserves and properties.
● The capital account also includes the flow of taxes, loans and borrowing
and investments by migrants moving out/into a different country.
● Let us take an example - Suppose an American buys property in India
of Rs.8 CR and an Indian buys a house in USA for Rs.12 CR, then the
current account is deficit by Rs.4 CR and vice-versa will give a surplus of
Rs. 4 CR.

Financial account
● In this flow of funds is monitored made on the investments in
Businesses, Real Estates and stocks between one country and
another (Joint Business Ventures between the countries)
Forex Reserves
● Forex reserves or foreign exchange reserves (FX reserves) are
assets that are held by a nation’s central bank or monetary
authority.
● It needs to be noted that most foreign exchange reserves are
held in US dollars.
● It is used to back its liabilities – like the native currency issued
and also reserves deposited by financial institutions or the
government with the central bank.

India’s Forex Reserve include:

➔ Foreign Currency Assets
➔ Gold reserves
➔ Special Drawing Rights
➔ Reserve Tranche position with the International Monetary Fund
(IMF).

Special Drawing Rights

● It was created by the International Monetary Fund in 1969 as
an international reserve asset for its member countries.
● The SDR is neither a currency nor a claim on the IMF, but is a
potential claim on the freely usable currencies of IMF members.
SDR can be exchanged for these currencies.

International Organization

International Monetary Fund (IMF)

● The IMF was conceived at the United Nations Conference in
July 1944 at Bretton Woods, New Hampshire, United States.
 ● Its headquarters is in Washington, D.C. Is in.
● The International Monetary Fund (IMF) is an intergovernmental
organization that was established to stabilize exchange rates in
international trade.
● IMF is an organization of 190 countries.

Purpose of IMF
➔ To promote international monetary cooperation.
➔ Ensuring balanced international trade.
➔ Ensuring exchange rate stability.
➔ Eliminating or reducing exchange restrictions by promoting the
system of multilateral payments.
➔ To provide economic assistance to member countries to
eliminate adverse balance of payments.

World Bank
● The World Bank is an international financial institution,
established along with the International Monetary Fund (IMF)
at the Bretton Woods Conference in 1944.
● The World Bank Group consists of five international
organizations.
● Of these five organizations, India is the only one not to be a
member of the International Center for Settlement of
Investment Disputes.

Organization Establishment Purpose

International bank 1944 To reconstruct and develop the

for Reconstruction economy of the countries involved
and Development in the Second World War.

International 1960 This institution provides loans and

Development grants to poor countries.
Association

international 1956 The main objective of this

finance institution is to encourage private
corporation investment in member countries.

Multilateral 1988 The objective of this organization

Investment is to promote foreign direct
Guarantee Agency investment in developing
countries.

International Center 1966 The objective of this organization

for Settlement of is to resolve disputes related to
Investment Disputes investment.

New Development Bank (NDB)

● New Development Bank, formerly known as BRICS Bank, is the
official name of the New Development Bank (NDB) established
by the BRICS group of countries.
● It is a multilateral development bank which was jointly
established by the BRICS countries in the year 2014 at the 6th
BRICS Summit held in 'Fortaleza', Brazil.
● As an alternative to the World Bank and the International
Monetary Fund (IMF), the New Development Bank (NDB) was
established by the BRICS countries, including India, with a
capital of $100 billion.
● The bank was formally launched in July, 2015.
● KV Kamath of India was the first President of NDB.
● Its headquarters is located in Shanghai, (China).
 ● Its objective is to mobilize financial resources for infrastructure
projects for sustainable development of BRICS countries and
other emerging and developing economies.

G-20 Group
● This group was formed in the year 1999.
● This group includes 20 countries including the European Union.
● It is a group of countries with developed and emerging
economies of the world.
● This group controls 85 percent of the world's industry and 75
percent of global trade.
● The G-20 grouping of developed and emerging economies was
organized in the year 2008.
● The group works closely with the Financial Stability Board,
International Labor Organization, International Monetary
Fund, Organization for Economic Co-operation and
Development, World Bank and World Trade Organization to
ensure economic stability and sustainable development.

World Trade Organization (WTO)

● The World Trade Organization (WTO) is the only global
international organization dealing with the rules of trade
between nations.
● Its headquarters is in Geneva, Switzerland.
● The WTO officially commenced on 1 January 1995 under the
Marrakesh Agreement, signed by 123 nations on 15 April 1994,
replacing the General Agreement on Tariffs and Trade (GATT).
● India is a founding member country. At present it has 164
members.
● It is a global international organization in the context of trade
between the countries of the world. It executes its business
activities through agreements.
● This organization issues guidelines for world trade and provides
loans to member countries according to their needs.