INDIAN

ECONOMY
HANDBOOK
For Civil Services Examination

KETAN

FIRST EDITION
KETAN
B.TECH, IIT DELHI
UPSC CSE 2015: AIR 860
Ketan, an esteemed alumnus of IIT Delhi, has always been driven
by a passion for economics. His profound understanding of the
subject also helped him secure an All India Rank of 860 in the Civil
Services Examination, 2015. But beyond the accolades and academic
achievements, he finds immense joy in imparting knowledge, making
complex economic concepts accessible and engaging for all.
When he's not delving into the intricacies of economics or
enlightening eager minds, Ketan is a connoisseur of contemporary
culture. He has a penchant for memes, often using humor as a tool to
make learning more enjoyable. A devout comedy fan, he believes in
the power of laughter and often draws parallels between the world of
economics and comedic situations.
In his downtime, you'll find Ketan immersed in a game of chess
(https://www.chess.com/member/ketanomy). His relaxed and
"chilled out" demeanor, combined with his multifaceted interests,
makes him not just a distinguished academic but also a relatable
individual. Dive into this book and experience economics through the
lens of a true enthusiast.
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To the dedicated UPSC Aspirants,
Greetings!
Before you delve into the pages of this book, I would like to set the stage for
what you are about to
embark upon. This book is not intended for students pursuing a degree in economics,
nor is it designed
for those who have chosen economics as their optional subject in the UPSC
examination.
This book has been meticulously crafted for aspirants, who will encounter economics
as an integral
part of the General Studies (GS) in the UPSC Civil Services Prelims and Mains. I
speak from experience,
having been in your shoes. With four mains, two interviews, and one selection under
my belt, I
understand the unique challenges and gaps in the available resources for UPSC GS
economics.
The journey of creating this book was inspired by the realization that there isn't
a definitive guide
for UPSC GS economics. Certain topics, such as agriculture and industry, often
remain untouched in
many books, while others are delved into with such depth that it becomes
overwhelming and, frankly,
unnecessary for the scope of the UPSC GS.
I've tailored this book with my students in mind, aiming to provide a comprehensive
yet concise
resource. My hope is that it will demystify the subject for you. Economics, though
daunting for many,
can be incredibly enlightening once its basic concepts are understood. Not only
will this knowledge
serve you well in the UPSC examination, but it will also enrich your perspective on
the world and its
intricate workings.
If you've chosen this book as a companion in your UPSC journey, I am humbled by
your choice and
wish you the very best.
Best of luck, and may your efforts bear fruit!
Warm regards,
Ketan
UPSC CSE- 2015 AIR-860
Economics Faculty, UPSCprep.com
Table of Contents
1. Introduction to
Economics .........................................................................
.....................................2
2. National Income
Accounting ........................................................................
.................................14
3. Growth &
Development .......................................................................
.........................................30
4. Inclusive
Growth ............................................................................
..............................................40
5. Inequality &
Poverty............................................................................
.........................................49
6.
Money .............................................................................
............................................................57
7.
Inflation .........................................................................
..............................................................71
8. Monetary
Policy ............................................................................
...............................................95
9. Public
Finance ...........................................................................
................................................. 111
10.
Taxation...........................................................................
........................................................ 130
11.
Banking............................................................................
........................................................ 159
12. Financial
Market ............................................................................
.......................................... 199
13. Agriculture & allied
sectors ...........................................................................
............................ 233
14.
Industry ..........................................................................
......................................................... 282
15.
Infrastructure ....................................................................
....................................................... 298
16.
Service ...........................................................................
.......................................................... 313
17. External
Sector ............................................................................
............................................. 328
18. International Economic
Organisations......................................................................
................. 366
19. Planning in
India .............................................................................
...........................................20
20.
Unemployment ......................................................................
.................................................. 421
21. Human Resource
Development .......................................................................
.......................... 432

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1. Introduction to Economics

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Contents
Definition ........................................................................
........................................................................ 4
Basic
Concepts ..........................................................................
.............................................................. 4
Goods..............................................................................
.................................................................... 4
Services ..........................................................................
..................................................................... 5
Utility ...........................................................................
....................................................................... 5
Cost ..............................................................................
....................................................................... 6
Opportunity
Cost: .............................................................................
.................................................. 6
Price .............................................................................
....................................................................... 6
Indifference
Curve .............................................................................
................................................. 7
Types of
Economics .........................................................................
....................................................... 7
Macroeconomics ....................................................................
............................................................ 7
Microeconomics ....................................................................
............................................................. 8
Concepts of
Microeconomics ....................................................................
............................................. 8
Demand ............................................................................
.................................................................. 8
Supply ............................................................................
..................................................................... 9
Market
Equilibrium........................................................................
................................................... 11
Competition:.......................................................................
.................................................................. 11
Perfect
Competition: ......................................................................
.................................................. 11
Monopolistic
Competition:.......................................................................
........................................ 11
Oligopoly: ........................................................................
................................................................. 11
Monopoly: .........................................................................
............................................................... 11
Monopsony: ........................................................................
............................................................. 12
Previous Year Prelims
Questions .........................................................................
................................. 13

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Chapter 1
Introduction to Economics
Definition
Economics is a social science that focuses on the study of how societies allocate
and use scarce
resources. At its core, economics is concerned with the problem of scarcity, which
arises because human
wants and needs are virtually unlimited while the resources available to satisfy
them are limited. This
fundamental problem drives much of economic inquiry and analysis.
Economists study how individuals, businesses, and governments make decisions about
the
allocation of resources, including labor, capital, and natural resources, to meet
their needs and desires.

Basic Concepts
Goods

Goods refer to the physical or tangible products that are produced and consumed in
an economy.
Goods can be categorized into two main types: consumer goods and capital goods.
Consumer Goods: Consumer goods are products that are purchased by individuals or
households for
their personal consumption. These goods are used directly to fulfill people's needs
and desires.
Examples- food items, clothing, electronics like smartphones and televisions, and
everyday items like
furniture and household appliances.
Capital Goods: Capital goods are goods that are used by businesses to produce other
goods or
provide services. These goods are not meant for direct consumption but are used in
the production
process. Capital goods include machinery, equipment, tools, and buildings used in
manufacturing,
agriculture, construction, and other industries. For example, a tractor used by a
farmer to cultivate crops
or a printing press used by a publishing company to print books are considered
capital goods.
Goods can also be further classified based on their durability or lifespan. Durable
goods are those
that are used over an extended period, usually more than three years. Examples of
durable goods
include cars, refrigerators, furniture, and laptops. Non-durable goods, on the
other hand, are consumed
quickly or have a short lifespan. Items like food, beverages, toiletries, and
stationery are non-durable
goods.

Introduction to Economics |

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Another way to classify goods is based on their rivalry and excludability. Rivalry
refers to the extent
to which the consumption of a good by one person reduces its availability for
others. Excludability refers
to the ability to prevent others from using or consuming a good. Based on these
characteristics, goods
can be classified as private goods, public goods, common goods, and club goods.
Private goods are both rivalrous and excludable. These goods are owned by
individuals or
companies and can be bought and sold in the market. Examples of private goods are
clothing, personal
electronics, and privately owned vehicles. If you buy a new smartphone, it belongs
exclusively to you,
and others cannot use it without your permission.
Public goods, on the other hand, are non-rivalrous and non-excludable. These goods
are provided by
the government or public institutions for the benefit of society as a whole. Public
goods are available to
everyone, and one person's consumption does not diminish its availability for
others. Examples of public
goods include street lighting, national defense, and public parks. For instance, if
the government builds a
park in your neighborhood, you can enjoy its benefits, and others can as well.
Common goods are rivalrous but non-excludable. These goods are available for use by
anyone, but
their consumption by one person reduces the amount available for others. Common
goods often face
the challenge of overuse or depletion. Examples of common goods are fisheries,
forests, and grazing
lands. If a fishing lake is open for everyone, each additional fish caught by a
fisherman reduces the
number of fish available for others.
Club goods are excludable but non-rivalrous. These goods are provided by private
organizations or
clubs, and people can join or pay to access them. Examples of club goods include
cable television,
private golf courses, and subscription-based services like Netflix. If you
subscribe to a streaming service,
you can enjoy its content, but your usage does not affect the availability of that
content for other
subscribers.

Services

Unlike physical goods, services are intangible and cannot be held or touched. They
are activities or
tasks performed by individuals or businesses to fulfill the needs and wants of
others. They include a
wide variety of sectors such as hair salons, education, banking, healthcare,
transportation, and
entertainment.

Services are often consumed or experienced simultaneously as they are produced.

Unlike goods,
which can be produced and stockpiled before being sold, services are usually
produced and consumed in
real-time or on-demand. They rely heavily on human skills, expertise, and
interactions.
Utility

Utility refers to the satisfaction or usefulness that a person derives from

consuming a good or
service. It is a subjective measure and varies from person to person. For example,
imagine you are
hungry, and you eat a slice of pizza. The satisfaction or happiness you get from
eating that slice of pizza
is the utility you derive from it.
Marginal utility, on the other hand, is the additional utility gained from
consuming one more unit of
a good or service. It helps us understand how the satisfaction changes as we
consume more of a
particular item. To illustrate this, let's say you eat the first slice of pizza
when you are really hungry. The
enjoyment and satisfaction you get from that first slice are high, and let's say
you assign it a value of 10
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@Ketanomy
units of utility. Now, you decide to eat a second slice of pizza. The enjoyment you
get from the second
slice may be slightly less than the first one, let's say 8 units of utility. The
difference between the first
and second slice, which is 2 units of utility, represents the marginal utility of
the second slice.
The law of diminishing marginal utility states that as a person consumes more and
more units of a
good or service, the additional satisfaction or utility derived from each
additional unit will decrease. This
means that the more you consume of something, the less additional satisfaction you
will get from
consuming more of it. To continue with our pizza example, let's say you eat a third
slice of pizza. By this
point, you may be getting full, and the satisfaction you derive from the third
slice might be even lower,
let's say 5 units of utility. The marginal utility keeps diminishing with each
additional slice.
The law of diminishing marginal utility has important implications for consumer
behavior and
decision-making. It explains why we tend to seek variety and explore different
goods and services to
maintain or increase our overall satisfaction. As the marginal utility of a
particular item decreases, we
may start looking for alternatives to fulfill our needs or seek out other sources
of satisfaction.

Cost

Cost refers to expenses incurred in order to produce goods or services. Costs can
be divided into
different categories, such as fixed costs, variable costs, and total costs.
Fixed costs are costs that do not change with the level of production. Imagine you
want to start a
small bakery. You need to rent a shop and buy baking equipment. The rent you pay
for the shop and the
monthly payment for the equipment are fixed costs. It doesn't matter how many
loaves of bread you
produce, these costs remain the same.
Variable costs vary with the level of production. For example, the cost of flour,
sugar, and other
ingredients you use to make bread will increase as you produce more loaves. The
more bread you bake,
the higher your variable costs will be.
Total cost is the sum of both fixed costs and variable costs. Average cost is
calculated by dividing the
total cost by the quantity of goods produced. It gives you an idea of how much it
costs, on average, to
produce each unit of output.

Opportunity Cost: Opportunity cost is a concept that highlights the value of the
next best

alternative that is forgone when making a choice. It represents the benefits or

profits you could have
gained if you had chosen a different option. For example, if you decide to use your
baking skills to start a
bakery, your opportunity cost might be the potential income you could have earned
by working as a
chef in a restaurant.
Understanding the different costs is crucial for businesses and individuals to make
informed
decisions. By comparing costs and benefits, they can evaluate the profitability of
different options and
make choices that maximize their overall welfare.

Price

Price refers to the amount of money or value that is assigned to a good or service.
It is the exchange
rate at which two parties agree to trade a particular item. Prices are influenced
by various factors, such
as supply and demand, production costs, competition, government intervention and
market conditions.

Introduction to Economics |

@Ketanomy
Indifference Curve

An indifference curve is a graphical representation that shows different

combinations of two goods
that provide the same level of satisfaction to an individual. The word
"indifference" means that the
individual is equally happy or satisfied with any point on the curve.

The slope of an indifference curve is downward sloping, which means that as the
quantity of one
good increases, the quantity of the other good decreases to maintain the same level
of satisfaction. This
concept is known as the diminishing marginal rate of substitution. It implies that
individuals are willing
to give up less of one good in exchange for more of the other good as they consume
more of that good.
By analyzing indifference curves, economists can study consumer preferences, make
predictions
about consumer choices, and understand how individuals allocate their resources to
maximize their
satisfaction or utility.

Types of Economics
Macroeconomics and microeconomics are two main branches of economics that focus on
different
levels of analysis and different economic phenomena.

Macroeconomics is concerned with the study of the economy as a whole, including the
aggregate
behavior of households, firms, and governments. It examines the performance of the
economy in terms
of overall output, income, and employment, and the factors that affect these
variables. Macroeconomic
topics of interest include economic growth, inflation, unemployment, monetary
policy, fiscal policy, and
international trade.

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@Ketanomy
Microeconomics, on the other hand, focuses on the behavior of individual agents,
such as
consumers, firms, and industries, and how their interactions in markets determine
prices and the
allocation of resources. Microeconomics seeks to understand how individuals and
firms make decisions,
how markets work, and how government policies affect the behavior of these agents.
Topics of interest
in microeconomics include supply and demand, market structure, consumer behavior,
producer
behavior, and the economics of information.
Concepts of Microeconomics
Demand

Demand refers to the quantity of a good or service that consumers are willing and
able to buy at a
given price and within a specific time period. It represents the desire,
affordability, and intention to
purchase a product.
Determinants of demand:

1. Price of the Product: The most obvious determinant of demand is the price of the
product itself.
Usually, when the price of a product decreases, the quantity demanded increases,
and vice versa. For
example, if the price of smartphones goes down, more people might be interested in
buying them.
2. Income: The income of consumers plays a significant role in determining their
purchasing power.
When people's income increases, they can afford to buy more goods and services,
leading to an increase
in demand. For instance, if people's salaries increase, they might be more willing
to buy luxury items like
expensive jewelry.
3. Price of Related Goods: The prices of related goods, such as substitutes and
complements, can
affect the demand for a particular product. Substitutes are products that can be
used in place of each
other, like tea and coffee. When the price of one substitute increases, people may
switch to the other,
resulting in a change in demand. Complementary goods are products that are used
together, like
smartphones and mobile data plans. If the price of smartphones decreases, the
demand for mobile data
plans may increase, as more people will buy smartphones and want to use them with
data plans.
4. Consumer Preferences and Tastes: Consumer preferences and tastes also influence
demand. If a
new fashion trend becomes popular, the demand for clothing items related to that
trend will likely
increase.
5. Population: The size and demographics of the population can impact demand. An
increase in
population generally leads to an increase in demand for goods and services. For
example, if a new
housing complex is built, the demand for furniture, appliances, and other household
items may rise.
The law of demand: The law of demand states that there is an inverse relationship
between the
price of a product and the quantity demanded, all other factors being equal. This
relationship is
illustrated by the demand curve.

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Elasticity of demand: Elasticity of demand measures the responsiveness of quantity
demanded to a
change in price. It helps us understand how sensitive consumers are to price
changes. There are three
types of elasticity of demand:
1. Elastic Demand: When a change in price leads to a relatively larger change in
quantity demanded,
we say demand is elastic. In this case, consumers are highly responsive to price
changes. For example, if
the price of a luxury car increases, people may decide to buy a different brand or
postpone their
purchase altogether.
2. Inelastic Demand: When a change in price leads to a relatively smaller change in
quantity
demanded, we say demand is inelastic. In this case, consumers are less responsive
to price changes. For
example, if the price of basic groceries increases slightly, people will still buy
them because they are
necessities.
3. Unit Elastic Demand: When a change in price leads to an equal percentage change
in quantity
demanded, we say demand is unit elastic. In this case, the responsiveness of
quantity demanded
matches the change in price.
Exceptions to the law of demand: While the law of demand generally holds true,
there are some
exceptions:
1. Giffen Goods: These are inferior goods that defy the law of demand. As the price
of a Giffen good
increases, the quantity demanded also increases. This happens when the good is an
essential staple for
lower-income consumers. For example, if the price of rice increases significantly,
low-income individuals
may have to spend a larger portion of their budget on rice and may end up buying
more of it despite the
higher price.
2. Veblen Goods: These are luxury goods that also defy the law of demand. As the
price of a Veblen
good increases, the quantity demanded may also increase. This is because the high
price of the good is
seen as a status symbol, making it more desirable for some consumers.

Supply

Supply refers to the quantity of a good or service that producers are willing and
able to offer for sale
at different prices during a specific period. It represents the relationship
between the price of a product
and the quantity producers are willing to produce and sell.
Law of Supply: The law of supply states that there is a direct relationship between
the price of a
product and the quantity supplied, assuming all other factors remain constant. In
simple terms, as the
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@Ketanomy
price of a product increases, the quantity supplied by producers also increases,
and vice versa. This
relationship can be illustrated using a supply curve.

Determinants of supply:
1. Price of inputs: The cost of resources and inputs required to produce a good or
service can affect
supply. For example, if the price of raw materials used in manufacturing increases,
it becomes more
expensive to produce the product, potentially leading to a decrease in supply.
2. Technology: Advancements in technology can enhance production efficiency, reduce
costs, and
increase supply. For instance, the invention of new machinery or automation can
streamline production
processes, allowing producers to supply more goods at lower costs.
3. Number of sellers: If new firms enter the market, the overall supply may
increase. Conversely, if
existing firms exit the market, supply may decrease.
4. Expectations: Expectations about future prices or changes in market conditions
can influence
supply. For example, if producers anticipate a significant increase in the price of
a product in the future,
they might reduce current supply to take advantage of higher profits later.
5. Government regulations: Government policies and regulations can affect the
supply of goods and
services. For instance, imposing restrictions or taxes on certain industries may
reduce their supply, while
subsidies or incentives can increase supply.
Elasticity of supply: Elasticity of supply measures the responsiveness of the
quantity supplied to
changes in price. The concept of elasticity of supply can be categorized into three
types:
1. Elastic supply: If the quantity supplied is highly responsive to price changes,
it is considered
elastic. In this case, a small change in price leads to a relatively larger change
in quantity supplied. For
example, if the price of a particular crop increases, farmers can quickly adjust
their production levels by
planting more of that crop.
2. Inelastic supply: If the quantity supplied is not very responsive to price
changes, it is considered
inelastic. In this case, a change in price has a relatively smaller effect on the
quantity supplied. For
instance, if the price of rare and limited resources, like precious metals,
increases, the quantity supplied
may not change significantly due to their scarcity.
3. Unitary elastic supply: When the percentage change in quantity supplied is equal
to the
percentage change in price, the supply is said to be unitary elastic. In other
words, if there is a 10%
increase in price, the quantity supplied will also increase by 10%, resulting in a
constant supply elasticity
of 1.
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@Ketanomy
Market Equilibrium

Market equilibrium refers to a situation where the quantity of a product or service

demanded by
buyers is equal to the quantity supplied by sellers at a particular price. In other
words, it is the point
where the intentions of buyers and sellers match, resulting in a balance in the
market. Any deviations
from the equilibrium price and quantity will create market imbalances, either as a
surplus (excess
supply) or a shortage (excess demand).

Competition:
Competition refers to the rivalry among sellers in the marketplace who are trying
to attract buyers
and sell their products. It plays a vital role in determining prices, quality, and
variety of goods and
services available to consumers.
Different types of markets based on the level of competition:

Perfect Competition: In a perfectly competitive market, there are many buyers and
sellers

offering identical products. No single buyer or seller has control over the price.
Agricultural markets,
such as wheat or rice, often exhibit characteristics of perfect competition.

Monopolistic Competition: Monopolistic competition refers to a market with many

sellers
offering similar but not identical products. Each seller has some control over the
price and can
differentiate their product through branding, marketing, or product features. Fast-
food chains, like
McDonald's and Burger King, operate in a monopolistically competitive market.
Oligopoly: An oligopoly market consists of a few large sellers dominating the
market. These sellers

have significant market power and can influence prices and market conditions. The
actions of one seller
can have a noticeable impact on others. Examples of industries with oligopolistic
competition include
the automobile industry and the smartphone market.

Monopoly: A monopoly occurs when there is only one seller in the market, dominating
the entire
industry. This seller has complete control over the price and quantity of the
product or service.
Monopolies can be harmful to consumers as they may lead to higher prices and
reduced choices. A
classic example of a monopoly is a public utility company that has exclusive
control over providing
electricity or water in a particular region.

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@Ketanomy
Monopsony: Monopsony is a market structure in which there is only one buyer for a
particular
product or service, while there are multiple sellers. In other words, it is the
opposite of a monopoly.
Single buyer has significant market power and can exert control over the terms of
trade with sellers.
Let's consider an example of a monopsonistic market for labor. Imagine a small town
with a single
large employer, such as a factory or a mine. This employer is the only buyer of
labor in the area, and
there are many individuals looking for jobs as sellers of labor. The single buyer
has the ability to
influence the wage rate and employment conditions. They can choose to hire fewer
workers to keep
wages down and maintain their bargaining power.

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@Ketanomy
Previous Year Prelims Questions

1.

Consider the following statements

2021

Other things remaining unchanged, market demand for a good might increase if
1. Price of its substitute increases
2. Price of its complement increases
3. The good is an inferior good and income of the consumers increases
4. Its price falls
Which of the above statements are correct?
(a) 1 and 4 only
(b) 2, 3 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3
2.

If a commodity is provided free to the public by the Government, then

(a) the opportunity cost is zero.
(b) the opportunity cost is ignored.
(c) the opportunity cost is transferred from the consumers of the product to the
tax-paying public.
(d) the opportunity cost is transferred from the consumers of the product to the
Government.

Answers
1.

13

(a)

2.

Introduction to Economics |

@Ketanomy

(c)

2018
2. National Income Accounting

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Contents
Various measures of National
Income ............................................................................
..................... 16
Gross Domestic
Product ...........................................................................
............................................ 16
Real GDP and Nominal
GDP ...............................................................................
.............................. 18
Gross National
Product ...........................................................................
............................................. 18
GDP vs
GNP................................................................................
........................................................... 19
Net Factor Income from
Abroad ............................................................................
.......................... 19
Depreciation ......................................................................
............................................................... 19
Gross vs
Net ...............................................................................
....................................................... 20
Net Domestic Product
(NDP) .............................................................................
............................... 20
Net National Product
(NNP) .............................................................................
................................ 20
Factors of
Production ........................................................................
................................................... 20
Factor Cost vs Market
Price .............................................................................
................................. 20
GDP
Deflator ..........................................................................
............................................................... 21
National
Income ............................................................................
....................................................... 21
Per capita
Income ............................................................................
..................................................... 22
Transfer
Payments...........................................................................
................................................. 22
Personal
Income ............................................................................
....................................................... 22
Disposable Personal
Income ............................................................................
.................................... 22
Capital-output ratio
(COR)..............................................................................
...................................... 23
Measurement of National
Income ............................................................................
........................... 23
Value Added
Method ............................................................................
........................................... 23
Income
method ............................................................................
.................................................... 24
Expenditure
Method ............................................................................
............................................ 25
Potential
GDP ...............................................................................
........................................................ 25
Factors that inhibit India from achieving its potential
GDP ............................................................. 26
New GDP Series 2011-
12 ................................................................................
...................................... 26
Organizations......................................................................
.................................................................. 27
Previous Year Prelims
Questions .........................................................................
................................. 28
Previous Years Mains
Questions .........................................................................
................................. 29

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National Income Accounting |

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Chapter 2
National Income Accounting
National income accounting is a method of measuring and analyzing the economic
activity of a
country or region. National income accounting is widely used by governments,
central banks, and
international organizations to monitor and analyze economic performance, and to
design and evaluate
economic policies.

Various measures of National Income

There are several measures of national income that are commonly used:
1.
2.
3.
4.
5.
6.
7.

Gross Domestic Product (GDP)

Gross National Product (GNP)
Net Domestic Product (NDP)
Net National Product (NNP)
National Income (NI)
Personal Income (PI)
Personal Disposable Income (PDI)

Gross Domestic Product

Gross Domestic Product, or GDP, is a measure of the total monetary value of all
final goods and
services produced within a country's domestic territory over a specified period of
time, typically a
financial year. It is one of the most widely used indicators of a country's
economic performance.

Total Monetary Value

Final Goods & Services

GDP

Domestic Territory

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Key Term
Total
monetary
value

What is Included

What is Not Included

The monetary value of all goods and services

Non-monetary
goods
and
produced within a country's domestic territory in a services, such as volunteer
work or
given period of time
unpaid household work

Intermediate
goods
and
Final goods
Goods and services that are produced for final
services, which are used as inputs in
and
consumption or investment, including durable goods,
the production of other goods and
services
non-durable goods, and services
services
The geographical boundaries, including airspace
and territorial waters, within which persons, goods,
and capital can circulate freely. These include:
(i) Territory lying within the political frontiers of a
country. It includes territorial waters also.

Domestic
territory

(ii) Ships and aircrafts owned and operated by the

(i) Territorial enclaves (like
residents between two or more countries. For
instance, Passenger planes operated by Air India embassies) used/administered by
between Russia and Japan are parts of domestic foreign governments.
territory of India.
(ii) International organisations
(iii) Fishing vessels, oil and natural gas rigs and which are physically located
within
floating platforms operated by the residents of a geographical boundaries of a
country in the international waters or engaged in country. Their offices form part
of
extraction in areas where the country has exclusive international territory.
rights of operation. For example, fishing boats
operated by Indian fishermen in the international
waters of the Indian Ocean will be considered as a
part of domestic territory of India.
(iv) Embassies, consulates and military
establishments of the country located abroad. To
illustrate, Indian embassies in Russia, America and
other countries will form parts of domestic territory of
India.

Financial
year

17

A period of 12 months used for accounting

purposes. In India, Financial Year starts on 1st April
and ends on 31st March.

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Real GDP and Nominal GDP
Criteria

Nominal GDP

Real GDP

Definition

GDP measured at constant base-year price (A base

GDP measured at current year is a reference year used as a benchmark for
year market prices
measuring changes in economic variables such as prices,
wages, production, and income.)

Calculation

(Price x Quantity) of all

(Price of base year x Quantity) of all goods and
goods and services produced
services produced

Effects
Inflation

Reflects the effects of

Adjusts for the effects of inflation, providing a more
inflation on the economy's
accurate picture of the economy's growth
output

Accuracy

of

Less accurate measure of

economic growth and wellMore accurate measure of economic growth and
being, as it does not adjust for well-being, as it adjusts for the effects of
inflation
inflation

For example, if the base year is 2010, and the quantity of a good produced in 2023
is 100 units, with
a price of Rs 2 per unit, the nominal GDP contribution of that good in 2023 would
be Rs 200. However, if
the price of that good was Re 1 per unit in 2010, the real GDP contribution of that
good in 2023 would
be Re 100, reflecting the effects of inflation.

Gross National Product

Gross National Product, or GNP, is a measure of the total monetary value of all
final goods and
services produced by the citizens of a country, regardless of where they are
located, over a specified
period of time, typically a financial year. It includes the value of goods and
services produced by citizens
who are living and working abroad, and excludes the value of goods and services
produced within the
country by foreign nationals.
Total Monetary Value

Final Goods & Services

GNP

Citizens

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GDP vs GNP
Gross Domestic Product (GDP) and Gross National Product (GNP) are both measures of
economic
activity, but they differ in their approach to measuring economic output.
GDP is a territory-based concept that measures the total value of all final goods
and services
produced within a country's domestic territory. It includes goods and services
produced by both
domestic and foreign-owned firms located within the country's domestic territory.
In contrast, GNP is a citizenship-based concept that measures the total value of
all final goods and
services produced by a country's citizens, regardless of where they are located. It
includes goods and
services produced both domestically and abroad by citizens of the country.

Net Factor Income from Abroad

Net Factor Income from Abroad (NFIA) is the difference between income earned by the
citizens of a
country abroad and income earned by foreigners in the country.
GNP = GDP + Net Factor Income from Abroad (NFIA)

For example, if the GDP of India in a financial year is 10 trillion dollars, and
the Net Factor Income
from Abroad is 0.5 trillion dollars (which means that Indian citizens earned more
income from their
investments or work abroad than foreigners earned in India), then the GNP of India
for that year would
be 10.5 trillion dollars.
Conversely, if the Net Factor Income from Abroad is negative, it means that
foreigners earned more
income in the country than the citizens earned from their investments or work
abroad. In this case, the
GNP will be lower than the GDP.

Depreciation

Depreciation is the decrease in the value of capital goods and assets over time due
to wear and tear,
obsolescence, and other factors. Since capital goods are used in the production of
goods and services,
their decline in value needs to be accounted for to accurately measure the value of
goods and services
produced.
For example, if a machine in a factory costs Rs. 1,000,000 and has a useful life of
10 years, then its
annual depreciation would be Rs. 100,000 (Rs. 1,000,000 divided by 10 years). This
depreciation expense
needs to be accounted for in the company's financial statements to reflect the true
cost of producing
the goods and services. If the depreciation is not accounted for, the value of the
company's assets will
be overstated, and the company's profitability will be understated.

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Gross vs Net

Gross and Net are two important concepts in economics that are used to measure the
value of
goods and services produced in an economy.
Gross refers to the total value of goods and services produced without accounting
for
Depreciation.
Net refers to the value of goods and services produced after accounting for
Depreciation.

•
•

As such,

Net Domestic Product (NDP) = Gross Domestic Product (GDP) - Depreciation

Net National Product (NNP) = Gross National Product (GNP) - Depreciation
Factors of Production
The factors of production are the resources and inputs required to produce goods
and services in an
economy. There are four factors of production:Factors of
Production

Income
Earned

Explanation

Land

Refers to all natural resources such as forests, minerals, water, and

Rent
land itself, which are used to produce goods and services.

Labour

Includes all human resources, such as skills, abilities, and

Wages
knowledge, which are used in the production process.

Capital

Includes all man-made resources, such as machinery, buildings,

Interest
tools, and equipment, used in the production process.

Entrepreneurship

Refers to the ability and willingness of individuals to take risks and

Profit
innovate to produce goods and services.

Factor Cost vs Market Price

Factor cost refers to the total cost of the four factors of production (land,
labour, capital, and
entrepreneurship) that are used to produce goods and services. This includes the
cost of wages, rent,
interest, and profits paid to these factors. Factor cost is an important
consideration for businesses as it
determines the cost of production and profitability.
Market price, on the other hand, refers to the price at which goods and services
are sold in the
market.

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The relationship between factor cost and market price can be expressed through the
following
equation:
Market Price (MP) = Factor Cost (FC) + Indirect Taxes - Subsidies
Indirect taxes refer to taxes paid by producers such as excise duty, customs duty,
and sales tax.
Subsidies, on the other hand, refer to financial assistance provided by the
government to producers to
reduce their cost of production. When indirect taxes are levied on the production
of goods and services,
they increase the cost of production and hence increase the market price.
Similarly, when subsidies are
provided, they reduce the cost of production and hence decrease the market price.
Using these concepts, we can calculate
GDPMP (Gross Domestic Product at Market Price) = GDPFC (Gross Domestic Product at
Factor Cost)
+ Indirect Taxes – Subsidies
NDPMP = NDPFC + Indirect Taxes – Subsidies
GNPMP = GNPFC + Indirect Taxes – Subsidies
NNPMP = NNPFC + Indirect Taxes – Subsidies

GDP Deflator
GDP deflator = (Nominal GDP / Real GDP) x 100
The GDP deflator is used to measure the change in the overall level of prices in an
economy over
time. A rise in the GDP deflator indicates that the overall level of prices has
increased, while a decrease
indicates that the overall level of prices has decreased.

National Income
National Income is the total income earned by the citizens of a country during a
financial year,
calculated as Net National Product (NNP) at factor cost.
National Income (NI) = NNPFC = GNPFC - Depreciation
Real National Income = National Income at base price
Nominal National Income = National Income at current price

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Per capita Income
Per capita income is a measure of the average income earned by an individual in a
country.
PCI = National Income/ Total Population of the country

Transfer Payments

Transfer payments refer to payments made by the government to individuals or other

entities
without any corresponding exchange of goods or services. These payments are made
for various reasons
such as social welfare, redistribution of income, and to support certain economic
activities.
Some examples of transfer payments include: Old age pensions, scholarships etc

Personal Income
Personal income (PI) is a measure of income received by individuals in an economy.
To calculate personal income, we start with national income (NI), which is the
total income earned
by the citizens of a country during a financial year. We then add transfer payments
such as social
welfare payments and subsidies, which are payments made by the government to
individuals or entities
without any corresponding exchange of goods or services.
However, not all of the national income is received by individuals as personal
income. Certain
payments, such as corporate retained earnings, corporate taxes, and social security
taxes are not paid
out to individuals. Therefore, we must deduct these payments from national income
to estimate
personal income.
The formula for calculating personal income is:
PI = NI + Transfer payments - Corporate retained earnings, corporate taxes, Social
security taxes

Disposable Personal Income

Disposable Personal Income (DPI) is a measure of the income that individuals have
available to
spend or save after taxes have been paid. DPI is calculated by subtracting personal
taxes from personal
income.
Personal taxes include all taxes paid by individuals, such as income tax, property
tax, professional
tax, and other taxes that are levied on personal income.

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The formula for calculating DPI is:
DPI = PI - Personal taxes
The disposable income can be used either for consumption or saving. The amount
spent on
consumption is called consumption expenditure, and the amount saved is called
savings. Therefore,
disposable income is equal to consumption expenditure plus savings:
Disposable Income = Consumption Expenditure + Savings
It is an important measure for analyzing consumer behavior and trends in
consumption and saving.

Capital-output ratio (COR)

COR is a measure used to quantify the amount of capital required to produce a unit
of output or
goods and services. It represents the relationship between the amount of capital
invested and the level
of output produced in an economy or a specific industry.
Capital-Output Ratio = Total Capital Stock / Total Output
The capital-output ratio provides insights into the efficiency and productivity of
an economy or
industry. A lower capital-output ratio indicates that less capital is required to
produce a unit of output,
suggesting higher efficiency and productivity. On the other hand, a higher capital-
output ratio indicates
that more capital is needed for the same level of output, which may suggest lower
efficiency.
The capital-output ratio is influenced by various factors, including technology,
the level of
infrastructure, the availability of skilled labor, and the production techniques
employed. Understanding
the capital-output ratio can help identify sectors or industries that require
higher or lower capital
investment relative to their output and guide decision-making regarding resource
allocation and
economic development strategies.

Measurement of National Income

There are three methods of measuring national income:

Value Added Method

The value-added method is a way of calculating national income by adding up the

value added by
each producer in the economy. This method measures the contribution of each stage
of production to
the final output and includes only the value added at each stage.
Here's an example to help you understand the value-added method:

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Let's say there is a simple economy that produces only two goods: bread and jam.
The bread is sold
for Rs 5 per loaf and the jam is sold for Rs 300 per jar. The bakery buys flour for
Rs 2 per loaf. The jam
maker buys fruit for Rs 100 per jar and sugar for Rs 50 per jar. Using the value-
added method, we can
calculate the national income as follows:
Bakery: Revenue from bread sales: Rs 5 per loaf x 1000 loaves = Rs 5000
Value added: Rs 5000 - (Rs 2 per loaf x 1000 loaves) = Rs 3000
Jam maker: Revenue from jam sales: Rs 300 per jar x 100 jars = Rs 30,000
Value added: Rs 30,000 - ((Rs 100 per jar + Rs 50 per jar) x 100 jars) = Rs 15,000
National income: Value added by bakery + value added by jam maker = Rs 3,000 + Rs
15,000 = Rs
18,000
So the national income of this simple economy is Rs 18,000, which is the total
value added by both
the bakery and the jam maker.

Income method

The income method is another way of calculating national income. It measures

national income by
adding up the income earned by various factors of production, such as wages, rent,
interest, and profit.
Let's assume there is an economy that produces only one good, which is rice. The
rice farmers sell
their rice to a rice miller who processes it and sells it to consumers.
Here's the income earned by different factors of production:
1. Wages: The rice farmers hire laborers to help with planting, harvesting, and
transporting the
rice. Let's assume that the farmers pay their laborers a total of Rs. 10,00,000 per
year.
2. Rent: The rice farmers also rent land from landowners to grow their rice. Let's
assume that the
farmers pay a total of Rs. 2,00,000 per year in rent.
3. Interest: The rice miller takes a loan from a bank to buy machinery for
processing the rice. The
miller pays an interest of Rs. 1,00,000 per year on the loan.
4. Profit: The rice miller earns a profit of Rs. 5,00,000 per year from processing
and selling the rice.
Using the income method, we can calculate the national income as follows:
Total wages earned by laborers: Rs. 10,00,000
Total rent earned by landowners: Rs. 2,00,000
Total interest earned by banks: Rs. 1,00,000
Total profit earned by the rice miller: Rs. 5,00,000
Total national income: Rs. 18,00,000 (sum of all the incomes earned by different
factors of
production)
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In this example, the national income of the economy is Rs. 18,00,000, which is the
sum of all the
income earned by the laborers, landowners, banks, and rice miller in the production
of rice.
The income method provides a more comprehensive view of the income earned in the
economy and
helps to understand the contribution of different factors of production.

Expenditure Method

Calculating national income using the expenditure method involves adding up all the
expenditures made
by various sectors in an economy over a specific period. The formula for
calculating National Income
using the expenditure method is as follows:
Y = C + I + G + (X - M)
National income (Y) = Consumption Expenditure (C) + Investment Expenditure (I) +
Government
Expenditure (G) + Net Exports (Exports (X) – Imports (M))
Let's break down each component:
1. Consumption Expenditure (C): Consumption refers to the total spending by
households on
goods and services during the given period. It includes purchases of items like
food, clothing,
housing, healthcare, and other consumer goods and services.
2. Investment Expenditure (I): Investment represents the spending by businesses and
households
on capital goods used for future production. This includes purchases of machinery,
equipment,
buildings, and other productive assets.
3. Government Expenditure (G): Government expenditure refers to the total spending
by the
government on goods, services, and infrastructure projects during the period. It
includes
spending on public services, defense, education, healthcare, and various
development projects.
4. Net Exports (Exports - Imports): Net exports represent the difference between a
country's total
exports (the value of goods and services sold to other countries) and total imports
(the value of
goods and services purchased from other countries). If a country's exports exceed
imports, it is a
trade surplus, and if imports exceed exports, it is a trade deficit.

Potential GDP
Potential GDP, also known as potential output or full employment GDP, refers to the
level of real
GDP an economy can produce when all of its resources are fully utilized, including
labor, capital, and
technology, while maintaining stable inflation.
Let's consider an example to illustrate potential GDP. Imagine a country with a
workforce of 10
million people, factories, machinery, and other physical capital, as well as
technological advancements.
The country's potential GDP would be the maximum level of output it can produce
when all 10 million
workers are employed, factories are running at full capacity, and the available
technology is fully
utilized.
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However, it's important to note that potential GDP does not imply that the economy
always
operates at this maximum level. Economic fluctuations, such as recessions or booms,
can cause actual
GDP to deviate from potential GDP. For instance, during a recession, there may be a
decline in
employment, businesses may operate below full capacity, and overall economic output
may be lower
than the economy's potential.
It's also worth mentioning that potential GDP is an estimate and can change over
time. Factors such
as population growth, changes in labor force participation rates, technological
advancements, and
improvements in productivity can influence the economy's potential output.
Understanding potential GDP is essential for policymakers and economists. It
provides a benchmark
to assess the performance of the economy, evaluate its growth potential, and design
appropriate
policies to achieve sustainable economic growth. When actual GDP falls
significantly below potential
GDP, policymakers may implement measures to stimulate economic activity and bridge
the output gap.
Conversely, if actual GDP exceeds potential GDP, policies may focus on maintaining
price stability and
preventing inflationary pressures.

Factors that inhibit India from achieving its potential GDP

1. Infrastructure Deficiencies: Insufficient infrastructure, such as roads, ports,

railways, and power
supply, can lead to increased transportation costs, inefficient logistics, and
limited connectivity between
regions, which can negatively affect productivity and hinder the overall economic
potential.
For example, if there are frequent power outages in an area, it can disrupt
industrial production and
hamper business operations.
2. Skill Gaps and Education: The quality of human capital plays a crucial role in
economic
development. Skill gaps and deficiencies in education can limit productivity and
hinder innovation.
For instance, if there is a shortage of skilled healthcare professionals, it can
limit the capacity to
provide quality healthcare services, impacting the overall health sector's
potential contribution to GDP.
3. Regulatory Burden and Bureaucracy: Complex and burdensome regulations,
bureaucratic red
tape, and corruption can impede business growth and deter investments. Cumbersome
administrative
processes and delays in obtaining permits can discourage entrepreneurship and
hinder the expansion of
businesses.
4. Income Inequality: When wealth and income are concentrated in the hands of a
few, it can limit
consumption and demand, as a large portion of the population may have limited
purchasing power.
5. Agricultural Sector Challenges: Agriculture still plays a significant role in
the Indian economy, and
challenges in this sector can affect overall growth. Issues such as low
agricultural productivity,
fragmented landholdings, inadequate irrigation facilities, and vulnerability to
climate change can limit
the sector's potential contribution to GDP.

New GDP Series 2011-12

India adopted the new GDP series in 2015, with a base year of 2011-12. This series
replaced the old
series with a base year of 2004-05. The new series uses market prices instead of
factor costs, which
means that it includes indirect taxes and subsidies in the calculation of GDP.
Moreover, the new series also adopts the international practice of valuing
industry-wise estimates
based on Gross Value Added (GVA) at basic prices. GVA is the value of output minus
the value of
intermediate consumption.
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The adoption of the new GDP series with a more recent base year and the use of
market prices
instead of factor costs provide a more accurate measure of the economy's size and
growth rate.
Moreover, valuing industry-wise estimates based on GVA at basic prices allows for a
more detailed
analysis of the contribution of different sectors to the economy.

Organizations
The organization in India responsible for calculating national income is the
Central Statistics Office
(CSO), which is a part of the Ministry of Statistics and Programme Implementation.
The CSO is
responsible for collecting, analyzing and publishing statistical data related to
the Indian economy,
including national income accounts. It uses various methods, including the
production, income and
expenditure methods, to estimate the Gross Domestic Product (GDP) and other
measures of economic
activity. The CSO releases estimates of national income and other macroeconomic
indicators on a
quarterly basis, and these estimates are widely used by policymakers, economists,
and investors to
understand the performance of the Indian economy.

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Previous Year Prelims Questions
1.

Despite being a high saving economy, capital formation may not result in
significant increase in output due to

2018

(a) weak administrative machinery

(b) illiteracy
(c) high population density
(d) high capital-output ratio
2.

With reference to the Indian economy, consider the following statements:

2015

(1) The rate of growth of Real Gross Domestic Product has steadily
increased in the last decade.
(2) The Gross Domestic Product at market prices (in rupees) has steadily
increased in the last decade.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
3.

Economic growth in country X will necessarily have to occur if

2013

(a) there is technical progress in the world economy

(b) there is population growth in X
(c) there is capital formation in X
(d) the volume of trade grows in the world economy
4.

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2013
(a) total value of goods and services produced by the nationals
(b) sum of total consumption and investment expenditure
(c) sum of personal income of all individuals
(d) money value of final goods and services produced

Previous Years Mains Questions

1.

1.
3.

Define potential GDP and explain its determinants. What are the factors that 2020
have been inhibiting India from realizing its potential GDP?

Answers

29

D
C

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2.
4.

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D
D
3. Growth & Development

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Contents
Economic
growth.............................................................................
..................................................... 32
Economic
development .......................................................................
................................................. 32
Measuring Economic
Growth ............................................................................
................................... 32
Important factors that contribute to economic
growth: ................................................................. 33
Jobless
Growth ............................................................................
..................................................... 33
Reasons for jobless
growth: ...........................................................................
.............................. 34
Steps that can be taken to address jobless
growth: .................................................................... 34
Economic
Recession .........................................................................
................................................ 34
Measuring Economic
Development .......................................................................
.............................. 35
Human Development Index
(HDI) .............................................................................
....................... 35
Inequality-Adjusted Human Development Index
(IHDI)................................................................... 36
Gender Inequality Index
(GII) .............................................................................
.............................. 36
Challenges to Economic
Development .......................................................................
...................... 36
Government Initiatives to bring Economic
Development .................................................................... 37
Previous Years Prelims
Questions .........................................................................
............................... 39
Previous Years Mains
Questions .........................................................................
................................. 39

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Chapter 3
Growth and Development
Economic growth refers to an increase in the production of goods and services
within a country
over a specific period. It is typically measured by the growth rate of the Gross
Domestic Product (GDP).
Economic development, on the other hand, is a broader concept that encompasses
various
aspects beyond just economic growth. It focuses on improving the standard of
living, reducing poverty,
and enhancing the well-being of the population. Economic development takes into
account social,
cultural, and institutional factors in addition to economic factors.
For example: Imagine a country that has achieved high economic growth but still
faces significant
income inequality and lacks access to basic education and healthcare for its
citizens. In this case, despite
the economic growth, the country might still be considered underdeveloped because
it has not
effectively translated that growth into improving the overall welfare of its
people.
It's worth noting that economic growth is an essential component of economic
development, as it
provides the necessary resources and opportunities for development to occur.
However, economic
development goes beyond mere growth and focuses on achieving long-term improvements
in the
quality of life for individuals and communities.
There can be situations where economic growth goes against economic development.
1. Environmental Degradation: Industries may exploit natural resources, pollute air
and water, and
contribute to climate change. While this economic growth may generate short-term
benefits, it can
harm the environment, affect public health, and undermine the long-term
sustainability and well-being
of the population.
2. Rising Income Inequality: Economic growth does not always benefit all segments
of society
equally. In some cases, it can exacerbate income inequality, where the rich become
richer while the
poor are left behind. Example: Imagine a scenario where a country achieves
substantial economic
growth driven by sectors that primarily benefit the wealthy, such as finance or
high-end real estate.
3. Neglecting Social Welfare: In the pursuit of economic growth, a country may
prioritize profitdriven policies and neglect social welfare programs. This can lead
to inadequate investment in
education, healthcare, social safety nets, and infrastructure that are crucial for
sustainable
development. The result is a lack of human capital development and an
underprivileged population,
which can hinder long-term economic progress.
4. Production and consumption of harmful products: such as alcohol, cigarettes, or
other addictive
substances.

Measuring Economic Growth

Economic growth is typically measured using indicators such as Gross Domestic
Product (GDP),
Gross National Product (GNP), National Income etc. We have already studied these in
previous chapter.
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Important factors that contribute to economic growth:

1. Investment: Investment involves spending money on things like factories,

equipment,
technology, and infrastructure. When businesses invest, it leads to increased
production and job
creation. Investment also boosts innovation and productivity, which are essential
for long-term
economic growth.
2. Savings: Savings refer to the portion of income that individuals, businesses,
and the government
set aside for future use instead of immediate consumption. Savings contribute to
investment and capital
formation, providing resources for businesses to expand their operations, create
jobs, and foster
economic growth.
3. Human Capital: Human capital refers to the knowledge, skills, and abilities of
people in the
workforce. When people are well-educated and healthy, they can work more
efficiently, come up with
new ideas, and contribute to economic growth.
4. Technological Progress: Technological progress can lead to increased efficiency,
productivity, and
the creation of new industries and jobs. For example, the development of
smartphones and internet
connectivity has transformed the way we communicate and do business, contributing
to economic
growth.
5. Infrastructure: Well-developed infrastructure enables businesses to operate
smoothly, reduces
transportation costs, and attracts investments. It also improves the quality of
life for citizens.
6. Natural Resources: Natural resources, such as minerals, oil, and fertile land,
can contribute to
economic growth. However, it's important to manage and utilize natural resources
sustainably to ensure
long-term economic growth and environmental preservation.
7. Stable Institutions: Stable institutions, including the rule of law, property
rights protection, and an
efficient legal system, are crucial for economic growth. When institutions are
strong and transparent, it
creates an environment where businesses can thrive, investments are protected, and
contracts are
enforced. This fosters trust, attracts investments, and promotes economic growth.
8. Macroeconomic Stability: Macroeconomic stability refers to keeping key economic
indicators,
such as inflation, unemployment, and government debt, in check. When inflation is
low and stable,
businesses and individuals can plan for the future with confidence. Managing
government finances
responsibly and maintaining a stable currency also contribute to economic growth.
9. Trade and Global Integration: Access to larger markets, exposure to foreign
competition, and the
transfer of knowledge and technology can lead to increased productivity and
innovation. Trade
agreements and policies that facilitate exports and imports play a significant role
in leveraging growth
potential.
Jobless Growth

Jobless growth refers to a situation where an economy experiences economic growth,

such as an
increase in GDP (Gross Domestic Product) or overall production, but fails to create
enough new jobs for
the growing population. In other words, even though the economy is expanding,
unemployment
remains high or continues to rise.

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Reasons for jobless growth:

1. Technological Advancements: Technological advancements can lead to increased

automation and
the use of machines instead of human labor. While this can boost productivity and
economic growth, it
may also result in job losses as fewer workers are needed.
2. Skill Mismatch: Jobless growth can occur when there is a mismatch between the
skills demanded
by employers and the skills possessed by the job seekers. For instance, if the
country experiences a
surge in demand for computer programming jobs, but the majority of its workforce
lacks the necessary
skills and qualifications. In this case, despite economic growth, there may be a
shortage of qualified
individuals to fill the available job positions.
3. Structural Changes: Sometimes, an economy undergoes structural changes, such as
a shift from
an agricultural-based economy to a service-oriented economy. During this
transition, certain industries
may decline or become less labor-intensive, leading to job losses. For example, if
the country's economy
evolves from primarily relying on farming to focusing more on services. Farmers who
lose their jobs may
face difficulties finding new employment opportunities in the emerging sectors.

Steps that can be taken to address jobless growth:

1. Enhancing Education and Skills Training: Investing in education and skills

training programs can
help individuals acquire the skills needed for the available job opportunities. By
aligning educational
curricula with the demands of the job market, it becomes easier for people to
develop the required
competencies and increase their chances of finding employment.
2. Promoting Entrepreneurship: Encouraging entrepreneurship can foster the creation
of new
businesses, which, in turn, can generate job opportunities. Governments can support
aspiring
entrepreneurs through startup incubators, access to capital, and business-friendly
policies, thereby
stimulating job creation.
3. Revitalizing Traditional Industries: While transitioning to new industries is
essential, revitalizing
traditional sectors can also contribute to job creation. Governments can provide
incentives and support
to revive declining industries or encourage innovation within them, ensuring that
job losses are
minimized.
4. Labor Market Reforms: Reforms in labor market regulations can help create a more
flexible and
conducive environment for job creation. Simplifying labor laws, reducing
bureaucratic hurdles, and
promoting labor mobility can make it easier for businesses to hire and expand their
workforce.
5. Infrastructure Development: Investments in infrastructure projects, such as
building roads,
bridges, and transportation systems, can stimulate economic growth and create job
opportunities in
construction and related sectors.

Economic Recession

An economic recession refers to a significant and prolonged decline in a country's

overall economic
activity. While the two consecutive quarters of declining GDP is a commonly used
rule of thumb, it's not
the only factor considered in defining a recession. Economists also examine other
economic indicators
such as employment rates, consumer spending, business investment, and industrial
production to assess
the overall health of the economy.
The government can take several steps to help overcome economic recession:

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1. Fiscal Stimulus: The government can implement fiscal stimulus measures by
increasing
government spending on infrastructure projects, such as building roads, bridges, or
schools. This
injection of funds stimulates economic activity, creates jobs, and encourages
consumer spending.
2. Monetary Policy: Central bank can lower interest rates to make borrowing cheaper
for businesses
and individuals, encouraging investment and consumption. Central banks can also
engage in
quantitative easing, which involves purchasing government bonds to increase the
money supply and
provide liquidity to financial institutions.
3. Tax Cuts: The government can reduce taxes on individuals and businesses to
increase disposable
income and incentivize spending. Additionally, targeted tax cuts for specific
sectors or industries can
provide relief to struggling areas of the economy.
4. Support for Small Businesses: Small businesses are particularly vulnerable
during a recession. The
government can provide financial support, such as low-interest loans, grants, or
tax breaks, to help them
stay afloat and retain employees.
5. Job Creation Programs: This may include creating public works projects that
provide employment
opportunities, or offering subsidies to businesses that hire and train new
employees.
6. Regulatory Reforms: Governments can review and streamline regulations to reduce
bureaucratic
burdens on businesses, making it easier for them to operate and expand. This can
encourage
entrepreneurship, innovation, and investment, leading to increased economic
activity.
7. International Cooperation: Countries can collaborate on policies to stimulate
global trade and
restore confidence in the international financial system.

Measuring Economic Development

Human Development Index (HDI)

HDI is a measure used to assess the overall well-being and development of a

country's population.
The Human Development Index looks at three key dimensions of human development:
1. Health: The HDI considers life expectancy at birth, which reflects the overall
health and healthcare
access within a country.
2. Education: Education is another crucial aspect of human development. The HDI
looks at two
indicators:
-

Mean years of schooling: It reflects the average number of years of education

received by adults
in a country.
Expected years of schooling: It measures the number of years of education that a
child is
expected to receive throughout their life.

3. Standard of living: This dimension focuses on the economic well-being of the

population. It
considers the Gross National Income (GNI) per capita, which reflects the average
income of individuals
in a country.
Using these three dimensions, the HDI combines the indicators to calculate a
composite index
ranging from 0 to 1, where 1 represents the highest level of human development. By
considering health,
education, and standard of living, the HDI provides a more holistic view of a
country's development
beyond just economic factors.
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Inequality-Adjusted Human Development Index (IHDI)

The Human Development Index (HDI) takes into account factors such as life
expectancy, education,
and income. However, the HDI does not consider inequality within a country, meaning
it doesn't capture
disparities in these factors among different groups or regions within a country.

This is where the Inequality-Adjusted Human Development Index (IHDI) comes in. The
IHDI adjusts
the HDI by incorporating the level of inequality within a country. It provides a
more comprehensive
picture of a country's development by considering not only the average achievements
but also the
distribution of those achievements among its population.
The IHDI helps policymakers and researchers identify areas where inequality is high
and take
measures to address them. By considering inequality, it allows for a more nuanced
understanding of
development outcomes and helps guide efforts towards creating more inclusive
societies.

Gender Inequality Index (GII)

The Gender Inequality Index (GII) is a measure used to assess and compare gender
inequality across
countries. It takes into account various indicators related to women's empowerment,
reproductive
health, and economic participation. The index ranges from 0 to 1, with higher
values indicating higher
levels of gender inequality.
Let's break down the components of the GII:

1. Reproductive Health: This component looks at maternal mortality rates and

adolescent birth
rates. It reflects the access women have to reproductive health services and the
risks they face during
childbirth.
2. Empowerment: This component focuses on the political and economic empowerment of
women.
It considers factors such as the percentage of women in parliament and the labor
force participation
rate.
3. Economic Participation: This component looks at gender gaps in employment and
income. It
examines the disparity between men and women in terms of access to employment
opportunities and
earnings.
By considering these indicators and their respective weights, the GII provides a
comprehensive
measure of gender inequality in a country. It helps policymakers identify areas of
improvement and
track progress over time.

Challenges to Economic Development

1. Poverty and Inequality: In many developing countries, a large percentage of the

population lives
in poverty, while a small portion enjoys significant wealth. This creates social
unrest and hampers
economic development.
2. Unemployment and Underemployment: High levels of unemployment and
underemployment can
lead to wasted human potential and reduced productivity. This puts a strain on the
economy and slows
down overall development.
3. Lack of Infrastructure: Insufficient infrastructure can impede economic growth
by limiting
transportation, communication, and energy access.
4. Corruption and Governance: When corruption is widespread, it undermines trust in
institutions,
discourages foreign investment, and diverts resources away from productive sectors.
Weak governance
can hinder economic development by creating an unstable business environment.
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5. Lack of Access to Capital and Credit: Access to capital and credit is crucial
for entrepreneurs and
businesses to invest, expand, and create jobs.
6. Environmental Sustainability: Overexploitation of forests, pollution of water
bodies, and excessive
carbon emissions can damage ecosystems, harm public health, and reduce the
availability of resources
needed for future economic activities.

Government Initiatives to bring Economic Development

Sectors

Government Initiatives

Brief Description

Pradhan Mantri Kisan Samman Nidhi

Direct income support to small and
(PM-KISAN)
marginal farmers
Agriculture

Information on soil nutrients and

recommended fertilizers

Soil Health Card Scheme

Pradhan Mantri Fasal Bima Yojana

Crop insurance against losses due to
(PMFBY)
natural calamities
Free and compulsory education for all
children

Sarva Shiksha Abhiyan (SSA)

Rashtriya
Madhyamik
Abhiyan (RMSA)

Education

Shiksha

Focus on improving
education infrastructure

secondary

Skill development training for better

job prospects

Skill India Mission

Ayushman Bharat - Pradhan Mantri

Health insurance for economically
Jan Arogya Yojana (PM-JAY)
vulnerable sections
Health
Infrastructure

Financial
Systems
MSME
37

National Health Mission (NHM)

Improving healthcare infrastructure

and accessibility

Swachh Bharat Mission

Promoting cleanliness and sanitation

for better public health

Bharatmala Pariyojana

Road development
connectivity and trade

for

improved

Smart Cities Mission

Development
of
infrastructure in selected cities

efficient

Sagarmala Project

Modernizing ports and promoting

port-led industrialization

Pradhan Mantri Jan Dhan Yojana

Financial inclusion through banking
(PMJDY)
services
Atmanirbhar Bharat Abhiyan
Growth and Development |

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Promoting self-reliance and support

for the MSME sector
Sectors

Government Initiatives

Brief Description
Encouraging domestic manufacturing
and entrepreneurship

Make in India

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Previous Years Prelims Questions
1.

Increase in absolute and per capita real GNP do not connote a higher level
of economic development, if
(a) industrial output fails to keep pace with agricultural output.
(b) agricultural output fails to keep pace with industrial output.
(c) poverty and unemployment increase.
(d) imports grow faster than exports.

2018

Previous Years Mains Questions

1.

“Economic growth in the recent past has been led by increase in labour 2022
productivity.” Explain this statement. Suggest the growth pattern that will
lead to creation of more jobs without compromising labour productivity.

2.

Among several factors for India’s potential growth, the savings rate is the 2017
most effective one. Do you agree? What are the other factors available for
growth potential?

3.

The nature of economic growth in India is described as jobless growth. Do

you agree with this view? Give arguments in favour of your answer.

Answers
1.

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2015
4. Inclusive Growth

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@Ketanomy
Contents
Importance of inclusive growth in
India .............................................................................
.................. 42
Salient features of inclusive
growth ............................................................................
......................... 43
Analysis of India’s progress towards achieving inclusive
growth..................................................... 43
Challenges in achieving inclusive growth in
India ............................................................................
44
Investment in Infrastructure for Inclusive Economic
Growth .............................................................. 44
Physical
Infrastructure.....................................................................
................................................. 44
Digital
Infrastructure ....................................................................
.................................................... 45
Intra-generational and Inter-generational Equity in Inclusive
Growth ................................................ 45
Intra-generational
equity ............................................................................
..................................... 45
The relationship between inclusiveness and
sustainability ................................................................. 46
Strategies for Achieving Inclusiveness and
Sustainability ................................................................ 46
Measures for addressing the challenges of inclusive
growth .............................................................. 46
Inclusive Growth in a Market
Economy ...........................................................................
.................... 47
Previous Years Mains
Questions .........................................................................
................................. 48

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Chapter 4
Inclusive Growth
Inclusive growth is a type of economic growth that benefits all members of society,
regardless of
their social or economic status. This means that the growth is not limited to a
select group of people,
but rather it is widely distributed across different segments of the population.
Inclusive growth is characterized by a reduction in poverty, a decrease in
inequality, and an
improvement in the overall well-being of individuals.
Inclusive growth can be achieved through policies and programs that promote equal
access to
education, healthcare, employment, and other basic services. This includes
providing opportunities for
marginalized groups such as women, people with disabilities, and minorities to
participate in the growth
process.

Importance of inclusive growth in India

In India, inclusive growth is particularly important for several reasons. First,
India is a country with a
large and diverse population, with many people living in poverty and facing
significant socio-economic
challenges. For this reason, it is important to ensure that economic growth
benefits all sections of
society, especially those who are marginalized and vulnerable.
Second, inclusive growth is essential for reducing inequality and promoting social
justice. In India,
inequality is a major problem, with vast disparities in income, wealth, and access
to basic services such
as education, healthcare, and sanitation. Inclusive growth can help to address
these inequalities by
providing opportunities for all sections of society to participate in the growth
process and share in its
benefits.
Third, inclusive growth is critical for sustainable development. India faces
several environmental
challenges, including air and water pollution, deforestation, and climate change.
Inclusive growth can
help to promote sustainable development by encouraging the adoption of sustainable
practices and
technologies, and by ensuring that the benefits of economic growth are not achieved
at the expense of
the environment.
For example, if a country's economic growth is driven by the expansion of a
polluting industry, such
as coal mining, then the benefits of that growth may be concentrated in the hands
of a few wealthy
individuals or companies, while the costs of pollution and environmental
degradation are borne by the
local communities and the environment. In contrast, if economic growth is achieved
through the
adoption of clean technologies and sustainable practices, then the benefits can be
shared more widely,
and the costs of environmental degradation can be minimized.
In summary, inclusive growth is essential for promoting social justice, reducing
inequality, and
achieving sustainable development in India.
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Salient features of inclusive growth
1. Reduction of Poverty: One of the key features of inclusive growth is the
reduction of poverty. This
means that policies and strategies are designed to lift people out of poverty and
provide them with the
necessary resources to improve their standard of living. For example, the
government may implement
poverty alleviation schemes such as providing access to education, healthcare, and
social safety nets.
2. Employment Generation: Inclusive growth also focuses on creating job
opportunities for people,
particularly in sectors that are labor-intensive. By creating jobs, people are able
to participate in the
growth process and improve their economic status. For example, the government may
promote the
development of small and medium-sized enterprises (SMEs), which are known to
generate employment.
3. Reduction of Inequality: Inclusive growth aims to reduce inequality by providing
equal
opportunities to all individuals. This means that policies are designed to bridge
the gap between the rich
and the poor, and to ensure that everyone has access to basic services and
resources. For example, the
government may implement affirmative action policies that provide reserved seats in
educational
institutions and government jobs for marginalized communities.
4. Sustainable Development: Inclusive growth also prioritizes sustainable
development, which
means that economic growth is pursued in a way that does not harm the environment
or deplete
natural resources. For example, the government may promote renewable energy and
sustainable
agriculture practices.
5. Human Development: Inclusive growth also focuses on human development, which
means that
policies and strategies are designed to improve the quality of life of people, not
just their income. This
includes access to education, healthcare, and other basic services that contribute
to overall well-being.

Analysis of India’s progress towards achieving inclusive growth

India has been making progress towards achieving inclusive growth in recent years,
but there is still
much work to be done. Inclusive growth can be measured through various indicators
such as the
Multidimensional Poverty Index (MPI), Human Development Index (HDI), and Gender
Inequality Index
(GII).
The Multidimensional Poverty Index (MPI) is a measure of poverty that takes into
account multiple
dimensions of deprivation, such as health, education, and standard of living.
According to the Global
Multidimensional Poverty Index 2021, India's MPI has declined from 54.7% in 2019 to
49.9% in 2021,
indicating a reduction in the number of people living in multidimensional poverty.
This means that India
has made progress in improving access to basic services such as healthcare,
education, and sanitation,
which are essential for inclusive growth.
The Human Development Index (HDI) is a composite measure of three key dimensions of
human
development: health, education, and standard of living. According to the Human
Development Report
2020, India's HDI value has increased from 0.580 in 2000 to 0.645 in 2019,
indicating an improvement in
human development outcomes. However, India still ranks 131 out of 189 countries,
highlighting the
need for further progress towards achieving inclusive growth.
The Gender Inequality Index (GII) is a measure of gender-based inequalities in
three dimensions:
reproductive health, empowerment, and economic activity. According to the Gender
Inequality Index
2020, India's GII value has declined from 0.707 in 2015 to 0.501 in 2020,
indicating progress in reducing
gender-based inequalities. However, India still ranks 140 out of 162 countries,
indicating the need for
further efforts towards achieving gender equality and inclusive growth.
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Other indicators such as the poverty rate, literacy rate, and access to basic
services also reflect
India's progress towards achieving inclusive growth. However, despite these
positive developments,
India still faces several challenges in achieving inclusive growth, such as
regional disparities, genderbased inequalities, and lack of access to basic
services in certain areas. Therefore, there is a need for
continued efforts towards promoting inclusive growth through policies and programs
that address these
challenges and promote equitable development.

Challenges in achieving inclusive growth in India

India is a country with a large population and a diverse range of social and
economic challenges.
Achieving inclusive growth is a major challenge in India. Here are some of the
challenges that hinder the
achievement of inclusive growth in India:
1. Income Inequality: Income inequality is a major challenge in India, as there is
a significant
disparity in income levels between different sections of society. The top 10% of
India's population owns
more than half of the country's wealth, while the bottom 50% owns only 2% of the
wealth. This makes it
difficult to ensure that the benefits of economic growth are shared equitably among
all sections of
society.
2. Regional Disparities: There are significant regional disparities in India, with
some regions being
more developed than others. For example, states like Maharashtra and Gujarat are
more developed
than states like Bihar and Uttar Pradesh. This makes it difficult to ensure that
the benefits of economic
growth are shared equitably across all regions.
3. Unemployment: Unemployment is a major challenge in India, with a large
percentage of the
population being either unemployed or underemployed. This makes it difficult to
ensure that the
benefits of economic growth are shared equitably among all sections of society.
4. Lack of Access to Education and Healthcare: Access to education and healthcare
is limited for
many people in India, particularly those living in rural areas. This limits their
ability to participate in the
workforce and to benefit from economic growth.
5. Social Discrimination: Discrimination based on caste, religion, and gender is a
significant challenge
in India. This limits the ability of certain sections of society to participate in
the workforce and to benefit
from economic growth.

Investment in Infrastructure for Inclusive Economic Growth

Investment in physical and digital infrastructure is a crucial factor in promoting
inclusive growth.

Physical Infrastructure

Physical infrastructure refers to the basic facilities and structures that are
necessary for the
economy to function, such as roads, bridges, ports, airports, and power plants.
Investment in physical
infrastructure can help in inclusive growth in the following ways:
1. Improved Connectivity - Investment in physical infrastructure can help to
improve connectivity
across the country. This can reduce regional disparities and promote inclusive
growth. For example, a
good road network can enable farmers in remote areas to access markets, leading to
better prices for
their produce and a reduction in poverty.

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2. Increased Productivity - Investment in physical infrastructure can lead to
increased productivity.
For example, better transportation facilities can reduce transportation costs and
time, making it easier
for businesses to move goods and people. This can lead to increased economic
activity and job creation.
3. Increased Access to Basic Services - Investment in physical infrastructure can
help to increase
access to basic services such as education, healthcare, and sanitation. For
example, the construction of
schools and hospitals can help to improve the quality of education and healthcare
in rural areas,
reducing the gap between urban and rural areas.

Digital Infrastructure

Digital infrastructure refers to the technology and networks that enable the
exchange of
information, such as the internet, mobile networks, and computer systems.
Investment in digital
infrastructure can help in inclusive growth in the following ways:
1. Improved Access to Information - Investment in digital infrastructure can help
to improve access
to information, which is essential for economic growth. For example, farmers can
use mobile apps to
access information on crop prices, weather forecasts, and agricultural practices,
leading to better
decision-making and increased productivity.
2. Increased Economic Participation - Investment in digital infrastructure can help
to increase
economic participation, especially for marginalized communities. For example, e-
commerce platforms
can help small businesses to sell their products online, reaching a wider customer
base and increasing
their revenue.
3. Improved Service Delivery - Investment in digital infrastructure can help to
improve service
delivery, especially in areas such as healthcare and education. For example,
telemedicine and online
education platforms can help to provide healthcare and education services to people
in remote areas,
reducing the gap between urban and rural areas.

Intra-generational and Inter-generational Equity in Inclusive Growth

Intra-generational equity refers to fairness and justice within a single
generation, which means
that all members of a particular generation should have equal access to resources,
opportunities, and
benefits. For example, in India, there are many regions where people don't have
access to basic
necessities like clean drinking water, education, and healthcare. Intra-
generational equity demands that
every individual within a generation should have equal access to these resources,
regardless of their
caste, religion, gender, or socio-economic status.
On the other hand, inter-generational equity refers to fairness and justice between
different
generations. It means that the current generation should not use up all the
resources and leave nothing
for future generations. For instance, if we over-exploit natural resources such as
forests, water, and
minerals, then the future generations will be deprived of these resources, and it
will create an
inequitable situation. Inter-generational equity demands that we use natural
resources in a sustainable
manner so that future generations can also enjoy the same resources and
opportunities as we do.
Inclusive growth is a concept that seeks to address both intra-generational and
inter-generational
equity. By promoting inclusive growth, we aim to ensure that everyone within a
generation has equal
access to resources and opportunities, and that the benefits of economic growth are
distributed fairly.
Moreover, inclusive growth seeks to ensure that economic growth is sustainable, so
that future
generations can also enjoy the same benefits.
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The relationship between inclusiveness and sustainability
Inclusive growth strategies aim to create opportunities and reduce inequality,
which can lead to
more sustainable economic development over the long term.
Inclusive growth can contribute to sustainability by promoting social and economic
stability, which is
important for long-term growth. Conversely, unsustainable practices can undermine
inclusiveness by
depleting resources and exacerbating inequality.

Strategies for Achieving Inclusiveness and Sustainability

Inclusive growth and sustainability can be achieved through policies and practices
that promote
access to education, healthcare, and other essential services, as well as
opportunities for economic
participation and growth. Sustainable practices can also enhance inclusiveness by
creating jobs and
economic opportunities that benefit marginalized communities and reduce poverty.
Examples of
inclusive and sustainable policies include investments in renewable energy, public
transportation, and
affordable housing.

Measures for addressing the challenges of inclusive growth

1. Policies that promote equality: Governments can develop policies that promote
equality, such as
progressive taxation, minimum wage laws, and affirmative action programs. These
policies can help to
reduce income and wealth inequality and ensure that everyone has access to basic
services and
opportunities.
2. Investment in human capital: Governments and other stakeholders can invest in
human capital
through education and training programs, particularly for disadvantaged groups.
This can help to reduce
the skills gap and ensure that everyone has access to quality education and
training.
3. Access to finance: Access to finance is crucial for economic growth and
development.
Governments and other stakeholders can promote financial inclusion by providing
access to affordable
credit and other financial services, particularly for small and medium-sized
enterprises (SMEs) and
marginalized groups.
4. Support for SMEs: SMEs are the backbone of many economies and can play a
significant role in
promoting inclusive growth. Governments can provide support to SMEs through
policies that promote
entrepreneurship, such as tax incentives and access to finance.
5. Infrastructure development: Infrastructure development is critical for economic
growth and can
help to create jobs and improve access to basic services. Governments can invest in
infrastructure
projects that benefit all members of society, particularly those who are
marginalized or disadvantaged.
6. Social protection: Social protection measures, such as social security,
unemployment insurance,
and health care, can help to reduce poverty and ensure that everyone has access to
basic services.
Governments can develop social protection programs that are targeted at
marginalized groups and
those living in poverty.
7. Stakeholder engagement: Inclusive growth requires the involvement of all
stakeholders, including
the private sector, civil society, and marginalized groups. Governments can promote
stakeholder
engagement through inclusive decision-making processes and partnerships between
different sectors.

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Inclusive Growth in a Market Economy
Inclusive growth in a market economy requires a balance between economic growth and
social
inclusion. Market economies rely on market mechanisms, such as competition and
prices, to allocate
resources and create wealth. However, without appropriate policies and
interventions, market
economies can exacerbate inequality and exclude certain groups from economic
opportunities. Here are
some ways to promote inclusive growth in a market economy:
1. Pro-poor policies: Governments can develop policies that are targeted at
reducing poverty and
inequality, such as progressive taxation, social protection programs, and subsidies
for basic services.
These policies can help to ensure that everyone has access to basic needs and
opportunities, regardless
of their income level.
2. Access to finance: Access to finance is crucial for economic growth and
development.
Governments can promote financial inclusion by providing access to affordable
credit and other financial
services, particularly for small and medium-sized enterprises (SMEs) and
marginalized groups.
3. Investment in human capital: Governments and other stakeholders can invest in
human capital
through education and training programs, particularly for disadvantaged groups.
This can help to reduce
the skills gap and ensure that everyone has access to quality education and
training.
4. Support for SMEs: SMEs are the backbone of many economies and can play a
significant role in
promoting inclusive growth. Governments can provide support to SMEs through
policies that promote
entrepreneurship, such as tax incentives and access to finance.
5. Infrastructure development: Infrastructure development is critical for economic
growth and can
help to create jobs and improve access to basic services. Governments can invest in
infrastructure
projects that benefit all members of society, particularly those who are
marginalized or disadvantaged.
6. Competition policy: Competition policy is essential for promoting market
efficiency and ensuring
that prices reflect market conditions. However, governments need to ensure that
competition policy
does not create market concentration and exclude smaller players from the market.
7. Stakeholder engagement: Inclusive growth requires the involvement of all
stakeholders, including
the private sector, civil society, and marginalized groups. Governments can promote
stakeholder
engagement through inclusive decision-making processes and partnerships between
different sectors.
By balancing market mechanisms with appropriate policies and interventions,
governments can
create an enabling environment that promotes inclusive growth and sustainable
development for all.

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Previous Years Mains Questions
1.

Is inclusive growth possible under market economy? State the significance 2022
of financial inclusion in achieving economic growth in India.

2.

“Investment in infrastructure is essential for more rapid and inclusive 2021

economic growth.” Discuss in the light of India’s experience.

3.

Explain intra-generational and inter-generational issues of equity from the

perspective of inclusive growth and sustainable development.

2020

4.

It is argued that the strategy of inclusive growth is intended to meet the

objectives of inclusiveness and sustainability together. Comment on this
statement.

2019

5.

“Access to affordable, reliable, sustainable and modern energy is the sine

qua non to achieve Sustainable Development Goals (SDGs)”.Comment on
the progress made in India in this regard.

2018

6.

What are the salient features of ‘inclusive growth’? Has India been
experiencing such a growth process? Analyze and suggest measures for
inclusive growth.

2017

7.

Comment on the challenges for inclusive growth which include careless

and useless manpower in the Indian context. Suggest measures to be
taken for facing these challenges.

2016

8.

Capitalism has guided the world economy to unprecedented prosperity.

However, it often encourages shortsightedness and contributes to the
wide disparities between the rich and the poor. In this light, would it be
correct to believe and adopt capitalism driving inclusive growth in India?
Discuss.

2014
9.

With consideration towards the strategy of inclusive growth, the new

Companies Bill,2013 has indirectly made CSR a mandatory obligation.
Discuss the challenges expected in its implementation in the right earnest.
Also, discuss other provisions in the Bill and their implications.

2013

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5. Inequality & Poverty

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Contents
Inequality ........................................................................
...................................................................... 51
Types of
Inequality ........................................................................
................................................... 51
Methods and indicators used to measure
inequality ......................................................................
51
Quintile
Ratio .............................................................................
................................................... 51
Palma
Ratio..............................................................................
..................................................... 51
Lorenz Curve and Gini
Coefficient .......................................................................
......................... 52
Gini
coefficient .......................................................................
...................................................... 53
Reasons for inequality in
India .............................................................................
............................ 53
How to combat
inequality ........................................................................
........................................ 53
Poverty ...........................................................................
...................................................................... 54
Types of
Poverty ...........................................................................
.................................................... 54
Committees on
Poverty ...........................................................................
......................................... 55
Previous Years Prelims
Questions .........................................................................
............................... 56

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Chapter 5
Inequality and Poverty
Despite being one of the fastest growing economies in the world, India continues to
grapple with
high levels of income inequality and widespread poverty. This has significant
implications for the
country's development, as well as the well-being of its citizens.

Inequality
Inequality refers to the unequal distribution of resources or opportunities among
individuals or
groups within a society.

Types of Inequality

Inequality can be broadly classified into social inequality and economic

inequality.

Social inequality: Social inequality refers to differences in social status, power,

and prestige among
individuals or groups. It can include differences in things like education,
occupation, income, race,
gender, caste and religion. For example, in India, the caste system historically
led to social inequality
where people were discriminated against based on their caste, resulting in a lack
of access to resources
and opportunities.
Economic inequality: Economic inequality refers to differences in income, wealth,
and economic
opportunities among individuals or groups. It can include differences in things
like wages, salaries,
property ownership, and access to credit. For example, in India, there is a
significant gap between the
rich and the poor, with the top 1% owning a significant amount of the country's
wealth.

Methods and indicators used to measure inequality

Quintile Ratio

Quintile ratio is a measure of inequality that compares the income or wealth of the
top 20% of a
population with the income or wealth of the bottom 20%. It is a commonly used
measure of inequality
because it is easy to calculate and provides a simple way to understand how income
or wealth is
distributed in a society.
Quintile Ratio = Income or wealth of the top 20% / Income or wealth of the bottom
20%

Palma Ratio

The Palma ratio is an economic measure of income inequality that compares the
income of the top
10% of the population with the income of the bottom 40%. It is named after the
Chilean economist
Gabriel Palma who first proposed the measure.
Palma ratio = (income share of top 10%) / (income share of bottom 40%)
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For example, suppose that in a country, the top 10% of the population earns 30% of
the total
income, while the bottom 40% earns 10% of the total income. The Palma ratio for
this country would be:
Palma ratio = 30% / 10% = 3
The Palma ratio is often used as a measure of income inequality in developing
countries where the
middle class is relatively small and the top and bottom income groups are more
pronounced. In such
countries, the Palma ratio can provide a more accurate picture of inequality than
measures that focus
on the middle-income groups, such as the Gini coefficient.
Like Quintile Ratio, Palma ratio is useful because it is simple to calculate and
easy to interpret.
However, it does have its limitations. For instance, the Palma ratio only considers
the income of the top
and bottom groups, and ignores the distribution of income within each group. In
addition, it may not
capture other dimensions of inequality, such as inequality in access to education,
health care, or other
resources.
Despite these limitations, the Quintile Ratio and Palma ratio are valuable tools
for policymakers and
researchers to understand the nature and extent of income inequality in a society.

Lorenz Curve and Gini Coefficient

The Lorenz curve is a graphical representation of income distribution in a

population. It shows how
the total income in a society is distributed among its members, and how this
distribution compares to
perfect equality.

If the income distribution in this country were perfectly equal, then the Lorenz
curve would be a
straight line at a 45-degree angle. This would mean that each percentile of the
population would earn an
equal share of the total income. However, in reality, income is rarely distributed
equally, and the Lorenz
curve will deviate from this line.
The degree of deviation from the line of perfect equality indicates the level of
income inequality in
the population. The greater the deviation, the greater the inequality.

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Gini coefficient

We can measure the degree of inequality using the Gini coefficient, which is a
numerical measure
that ranges from 0 to 1.
The formula for the Gini coefficient is:
G = (A / (A + B))
Where:
•
•
•

G is the Gini coefficient

A is the area between the Lorenz curve and the line of perfect equality
B is the area under the line of perfect equality

A Gini coefficient of 0 indicates perfect equality (i.e., everyone earns the same
income), while a Gini
coefficient of 1 indicates perfect inequality (i.e., one person earns all the
income and everyone else
earns nothing).
The Lorenz curve is a useful tool for policymakers and researchers because it
provides a visual
representation of income distribution that can help identify the groups that are
most affected by income
inequality. For example, if the Lorenz curve is skewed towards the bottom of the
graph, it indicates that
a large portion of the population is earning very little income. This information
can be used to design
policies that target these groups and help reduce inequality.

Reasons for inequality in India

1. Historical Factors: India's colonial past and the caste system have had a
significant impact on
economic inequality. The caste system, which classifies people into social groups
based on their birth,
has created unequal access to education, job opportunities, and social services for
lower castes, leading
to economic disparities.
2. Unequal Distribution of Resources: In India, there is a significant gap between
the rich and poor in
terms of access to basic resources such as healthcare, education, and sanitation.
This lack of access to
resources can lead to limited opportunities and prevent individuals from breaking
out of the cycle of
poverty.
3. Labor Market Discrimination: Discrimination based on gender, religion, and caste
is prevalent in
India's labor market. For instance, women tend to earn less than men, and certain
castes have limited
access to high-paying jobs. This can create a significant wage gap and contribute
to economic inequality.
4. Unequal Distribution of Land: In India, land ownership is concentrated in the
hands of a few,
leading to unequal access to agricultural resources and limited opportunities for
small farmers. This can
contribute to poverty and economic inequality.
How to combat inequality

Promote education and skill development- By investing in education and training

programs,
individuals can acquire skills that can help them secure better-paying jobs, which
can increase their
income and reduce the income gap.
Progressive taxation policies - It means that individuals who earn more will pay a
higher percentage
of their income in taxes. The revenue generated from these taxes can be used to
fund social welfare
programs such as healthcare, education, and infrastructure, which can benefit those
who are less
fortunate and reduce economic inequality.
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The government can provide subsidies and incentives to businesses that hire
individuals from
marginalized communities, such as women, minorities, and people with disabilities.
By providing equal
opportunities to these groups, the government can promote economic inclusion and
reduce inequality.
Implementing effective social safety net programs can also help combat economic
inequality.
Programs such as food subsidies, healthcare benefits, and housing assistance can
provide a safety net
for those who are struggling financially, and help them meet their basic needs.

Poverty
Poverty is a term used to describe a situation where a person or group of people do
not have
enough resources to meet their basic needs and have a standard of living that is
considered acceptable
within their society.

Types of Poverty

1. Absolute poverty: Absolute poverty is when someone lacks the basic necessities
of life, such as
food, shelter, and clothing. In other words, it's a situation where a person cannot
meet their basic needs
for survival. For example, a family that lives on the streets without access to
proper nutrition,
healthcare, and sanitation facilities is experiencing absolute poverty.
2. Relative poverty: Relative poverty is when someone has less income or resources
than the
average person in their society. In other words, it's a situation where a person's
standard of living is
significantly lower than the average standard of living in their community. For
example, a family that
lives in a small, cramped apartment and struggles to make ends meet despite working
full-time jobs may
be experiencing relative poverty.
3. Urban poverty: Urban poverty refers to poverty that is concentrated in urban
areas, often
characterized by inadequate housing, poor sanitation, and limited access to basic
services such as
healthcare and education. For example, people living in slums or informal
settlements in cities are often
considered to be experiencing urban poverty.
4. Rural poverty: Rural poverty is poverty that is concentrated in rural areas,
where people often
have limited access to basic services, including healthcare, education, and
transportation. For example,
farmers who are unable to afford modern farming techniques and equipment and are
forced to work on
small plots of land may be experiencing rural poverty.
5. Intergenerational poverty: Intergenerational poverty occurs when poverty is
passed down from
one generation to the next. For example, a child born into a family that has been
living in poverty for
generations is more likely to experience poverty than a child born into a more
affluent family.
6. Situational poverty: Situational poverty is a temporary form of poverty that
arises due to specific
life events such as job loss, illness, or a natural disaster. For example, a person
who loses their job and is
unable to find another one immediately may experience situational poverty until
they are able to secure
employment again.

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Committees on Poverty

Tendulkar Committee

Rangarajan Committee

Year

1993

2009

2015

Rural Areas

2400 Kcal

Rs 27

Rs 32

Urban
Areas

2100 Kcal

Rs 33

Rs 47

Items
considered

Food items

Food + Non-food items

Food + Non-food Items

Committee

Lakdawala
Committee

Estimation

Reference
period

55

Mixed recall period - 30 days for all

Modified mixed recall
Uniform Recall items + 365 days for 5 categories of
period - 30 days, 365 days (5
period - expenditure non-food items (durable goods,
categories), 7 days on list items after clothing,
footwear,
institutional
frequently consumed goods
medical
expenses,
educational
every 30 days
- milk, eggs, etc.
expenses)

Inequality and Poverty |

@Ketanomy
Previous Years Prelims Questions
1.

In a given year in India, official poverty lines are higher in some states
than in others because
(a) poverty rates vary from State to State
(b) price levels vary from State to State
(c) Gross State Product varies from State to State
(d) quality of public distribution varies from State to State

Answers
1.

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2019
6. Money

Say hello! |

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Contents
Evolution of
Money .............................................................................
................................................. 59
Functions of
Money .............................................................................
................................................. 59
Types of
Money .............................................................................
....................................................... 60
Fiat
Money..............................................................................
.......................................................... 60
Legal Tender
Money .............................................................................
............................................ 61
Non-legal Tender
Money..............................................................................
.................................... 61
Bank
Money..............................................................................
........................................................ 62
Near
Money .............................................................................
......................................................... 62
Cryptocurrency ....................................................................
............................................................. 62
Key aspects of
cryptocurrencies: .................................................................
................................. 63
NFT (Non-Fungible
Token):............................................................................
............................... 63
Money
Supply ............................................................................
........................................................... 63
Velocity of Money
Circulation .......................................................................
....................................... 64
Deposits ..........................................................................
...................................................................... 64
Time
Deposits: .........................................................................
......................................................... 64
Demand
Deposits: .........................................................................
................................................... 64
Net Demand & Time Liability
(NDTL).............................................................................
....................... 64
Measure of Money
Supply ............................................................................
....................................... 65
Reserve Money (also known as High-Powered Money or Primary
Money) ........................................ 65
Money
Multiplier.........................................................................
......................................................... 66
Previous Years Prelims
Questions .........................................................................
............................... 68

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Chapter 6
Money
Money is a fundamental concept in economics that plays a crucial role in our daily
lives. Without
money, it would be difficult to conduct economic activity, and many of the goods
and services we rely
on would be inaccessible. Understanding the role and functions of money is
essential to understanding
the broader workings of the economy.

Evolution of Money
The concept of money has been around for thousands of years, and it has evolved
over time. In its
simplest form, money is any item that is widely accepted in exchange for goods or
services.
1. Barter System: The barter system was the earliest form of trade, where goods and
services were
exchanged directly for other goods and services without the use of any medium of
exchange or money.
For example, a farmer would exchange their wheat for a blacksmith's tools or
services.
2. Commodity Money: As trade became more complex, people started using commodity
money.
This was a form of money where valuable commodities such as gold, silver, or salt
were used as a
medium of exchange. The value of these commodities was widely recognized, and they
were traded in
exchange for goods and services.
3. Coinage: In ancient times, coins were introduced to make trading more efficient.
Coins were
made of precious metals and had a standardized weight and size. Coins became
popular because they
were portable, easy to count, and store. For example, the Roman Empire introduced
the denarius coin.
4. Paper Money: Paper money was first used in China during the Tang Dynasty (618-
907 AD). The
Chinese used paper money to make large purchases such as land or buildings. Paper
money gradually
became popular as it was easier to carry around and use for transactions.
5. Banknotes: Banknotes were first introduced by the Bank of England in the 17th
century. They
were a form of paper money that represented a promise to pay a specific amount of
gold or silver.
Banknotes allowed people to carry large amounts of money without the risk of theft
or loss.
6. Digital Money: With the advent of the internet and digital technology, digital
money has become
increasingly popular. Digital money can be used to make online purchases, transfer
money between
accounts, and even pay for goods and services in physical stores using mobile
devices. Examples of
digital money include cryptocurrencies such as Bitcoin and Ethereum.

Functions of Money
1. Medium of exchange: One of the primary functions of money is to serve as a
medium of
exchange. In other words, money allows us to buy and sell goods and services
without having to engage
in barter.
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For example, imagine you want to buy a new smartphone. If you had to engage in
barter, you would
have to find someone who wanted to trade their smartphone for something you had to
offer, such as a
bicycle or a book. But with money, you can simply pay for the smartphone with cash
or a digital
payment, making the transaction much easier and more efficient.
2. Unit of account: Money also serves as a unit of account, which means it is used
as a standard
measure of value for goods and services.
For example, if you go to a grocery store and see that a carton of eggs costs ₹50,
you know that the
price is being expressed in terms of money. Money allows us to compare the value of
different goods
and services and make informed choices about how to allocate our resources.
3. Store of value: Money also serves as a store of value, which means it can be
held and used as a
way to store purchasing power over time.
For example, if you receive a paycheck for your work, you can use that money to buy
things
immediately or you can save it for later. By saving money, you are storing the
value of your labor for
future use. This function of money allows us to plan for the future, invest in
long-term goals, and build
wealth over time.
4. Standard of deferred payment: Money also serves as a standard of deferred
payment, which
means it can be used to pay debts or obligations that are incurred in the present
but will be paid in the
future.
For example, if you take out a loan to buy a car, you are incurring a debt that you
will have to pay off
over time. Money serves as a standard of deferred payment because it allows you to
make those future
payments using a stable and widely accepted medium of exchange.
These functions are all critical to the functioning of a modern economy, and they
enable us to
engage in complex economic transactions and planning with ease and efficiency.

Types of Money
Type of Money

Description

Examples

Full-bodied money

Currency that has intrinsic value and is made of

a precious metal like gold or silver

Token money

Coins made of base

Currency that has little or no intrinsic value and
metals like copper and
is used as a substitute for full-bodied money
nickel, Paper Money
Gold coins, silver coins

Currency that represents a claim on a physical

Representative fullGold certificates, silver
commodity or other asset, such as gold or silver,
bodied money
certificates
which is held by the issuing authority

Fiat Money

Fiat money is a type of currency that is not backed by a physical commodity like
gold or silver, but is
instead based on the faith and credit of the government that issues it.

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In other words, the value of fiat money comes from the fact that people believe it
has value and are
willing to accept it in exchange for goods and services. This is in contrast to
commodity money, which
has value because it is made of a valuable commodity like gold or silver.
An example of fiat money is the currency used in India, the Indian rupee. The value
of the Indian
rupee is determined by a number of factors, including the strength of the Indian
economy, the
government's monetary policies, and the demand for the rupee in international
markets. As long as
people have confidence in the Indian government and its ability to manage the
economy, the value of
the rupee will remain relatively stable.
One advantage of fiat money is that it allows for greater flexibility in monetary
policy. Since the
government can control the supply of money, it can use monetary policy tools like
interest rates and
money supply to stimulate or slow down the economy as needed. However, there is
also a risk of
inflation if the government prints too much money, which can reduce the value of
the currency and hurt
the purchasing power of individuals.

Legal Tender Money

Legal tender refers to any form of money that is recognized by law as a valid means
of payment for
debts and taxes. In other words, if you owe someone money or taxes, they must
accept legal tender
money as payment.
For example, in India, legal tender money includes the Indian rupee notes and coins
issued by the
Reserve Bank of India. If you owe someone money and offer to pay with legal tender
money, they
cannot refuse to accept it.
Legal tender laws are important because they help to ensure that there is a
standard form of
payment that everyone can use and accept. Without legal tender laws, it would be
difficult to conduct
business transactions or pay taxes, as people could refuse to accept certain forms
of payment.

Non-legal Tender Money

Non-legal tender money is any type of currency or payment method that is not
recognized as official
legal tender by a government.

Examples of non-legal tender money can include things like gift cards, loyalty
points, and virtual
currencies like Bitcoin. While these forms of payment may be accepted by some
businesses or
individuals, they are not officially recognized as legal tender by the government
and cannot be used to
pay taxes or other government debts.
One advantage of non-legal tender money is that it can offer greater flexibility
and innovation in the
payment system. For example, gift cards and loyalty points can be a convenient way
for businesses to
incentivize customers and encourage repeat business. Virtual currencies like
Bitcoin can also offer
greater privacy and security in transactions, since they are not tied to
traditional banking systems.
However, there are also some risks associated with non-legal tender money. Since
they are not
recognized as legal tender, they may be subject to greater price volatility or
fraud. In addition, if a
business or platform that accepts non-legal tender money goes bankrupt or shuts
down, customers may
be left with little recourse to recover their funds.

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Bank Money

Bank money refers to the money that exists in bank accounts, such as checking and
savings
accounts. This money is created by banks when they make loans to individuals and
businesses, and it is
backed by the assets that the banks hold.
When someone takes out a loan from a bank, the bank creates new money by adding the
loan
amount to the borrower's account. This money is then available for the borrower to
spend or transfer to
others. Similarly, when someone deposits money into a bank account, the bank is
able to lend out a
portion of that money to other borrowers, creating more bank money in the process.
An example of bank money can be seen in a simple scenario where a person takes out
a loan from a
bank to buy a car. Let's say the loan amount is Rs. 1,00,000. When the bank
approves the loan, it adds
Rs. 1,00,000 to the person's checking account. This money is now available for the
person to use to buy
the car. The bank, in turn, has created Rs. 1,00,000 of new bank money.
Another example can be seen when a business deposits Rs. 50,000 in a savings
account. The bank
can use a portion of that deposit to make a loan to another business, creating more
bank money in the
process.
Bank money is an important part of the modern economy, as it allows for the
creation of credit and
the financing of economic activity. However, it is also important to ensure that
banks are properly
regulated and have sufficient reserves to back the bank money they create, in order
to maintain the
stability of the financial system.

Near Money

Near money, also known as quasi-money or quasi-liquid assets, refers to financial

assets that can be
easily converted into cash, but are not themselves considered to be actual money.
These assets are
typically short-term, low-risk investments that can be quickly sold or converted
into cash.
Examples of near money include savings accounts, money market accounts, and short-
term
government securities. While these assets are not considered to be actual money,
they are still highly
liquid and can be easily converted into cash in the short-term.
One way to think about near money is to compare it to cash. Cash is the most liquid
form of money,
since it can be immediately used to purchase goods and services. Near money, on the
other hand, is
slightly less liquid, since it may take some time to sell or convert these assets
into cash.
An example of how near money can be used is in emergency savings. If an individual
wants to have
some money set aside in case of an emergency, they might choose to put their
savings in a money
market account, which is considered a near money asset. While the money is not
immediately available
in the form of cash, it can be quickly accessed if needed and is earning some
interest in the meantime.
Another example of near money is short-term government securities. These are bonds
or other debt
securities issued by the government that have a short maturity, typically less than
a year. While they are
not actual money, these securities are highly liquid and can be quickly sold if
needed. In fact, they are
often used as a tool by the government to manage the money supply and influence
interest rates.

Cryptocurrency

Cryptocurrency is a digital or virtual form of currency that uses cryptography for

secure transactions,
control the creation of new units, and verify the transfer of assets. Unlike
traditional currencies issued
by governments, cryptocurrencies are decentralized and operate on a technology
called blockchain.
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Key aspects of cryptocurrencies:

1. Decentralization: Cryptocurrencies are not controlled by any central authority,

such as a
government or bank. Instead, they rely on a decentralized network of computers
called nodes that
maintain the blockchain. This decentralized nature ensures that no single entity
has complete control
over the currency.
2. Blockchain Technology: Cryptocurrencies utilize blockchain, a public ledger that
records all
transactions. The blockchain consists of a series of blocks, where each block
contains a set of
transactions. Each transaction is encrypted and linked to the previous transaction,
creating a chain of
blocks. This technology ensures transparency, security, and immutability of the
transaction history.
3. Bitcoin (BTC) was the first decentralized cryptocurrency introduced in 2009.
Bitcoin operates on a
peer-to-peer network and allows users to send and receive payments without the need
for
intermediaries, such as banks.
4. Mining and Verification: Cryptocurrencies like Bitcoin use a process called
mining to validate and
verify transactions. Miners use powerful computers to solve complex mathematical
problems, and when
they solve these problems, new blocks are added to the blockchain, and miners are
rewarded with new
coins as an incentive for their computational work.
5. Digital Wallets: Cryptocurrencies are stored in digital wallets, which are
software applications that
allow users to securely store, send, and receive cryptocurrencies. These wallets
provide users with
unique addresses that can be used to send or receive funds.
It's important to note that while cryptocurrencies offer certain advantages such as
decentralization,
security, and fast transactions, they also come with risks. These risks include
regulatory uncertainties,
hacking incidents, potential price volatility and environmental concerns related to
energy consumption
in cryptocurrency mining.

NFT (Non-Fungible Token):

NFT refers to a unique digital asset that represents ownership or proof of

authenticity of a specific
item or piece of content. Unlike cryptocurrencies, which are fungible
(interchangeable), NFTs are oneof-a-kind and cannot be exchanged on a one-to-one
basis.

NFTs have gained popularity in the art and collectibles space. Artists can create
and sell digital
artwork or unique collectibles as NFTs. Each NFT has a distinct digital signature,
verifying its authenticity
and ownership. NFTs are typically bought, sold, and traded on blockchain-based
marketplaces.

Money Supply
The money supply refers to the total amount of money that is circulating in the
economy at any
given time. This includes all the physical currency in circulation, such as coins
and paper money, as well
as deposits held in bank accounts.
The money supply is important because it affects the level of economic activity in
the economy.
When there is more money in circulation, people tend to spend more, which can
stimulate economic
growth. On the other hand, when the money supply is tight, people may be less
willing to spend and
economic growth may slow down.
One way that the money supply can change is through the actions of the central
bank. For example,
if the central bank wants to stimulate economic growth, it may choose to increase
the money supply by
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buying government bonds or lowering interest rates. This makes it easier for banks
to lend money to
businesses and individuals, which can help boost economic activity.
Conversely, if the central bank wants to slow down economic growth and control
inflation, it may
choose to decrease the money supply by selling government bonds or raising interest
rates. This makes
it more expensive for banks to lend money, which can discourage borrowing and
spending.

Velocity of Money Circulation

The velocity of money circulation, also known as velocity of money, refers to the
speed at which
money moves through the economy. In other words, it measures how many times a unit
of currency is
spent within a certain period of time.
For example, imagine you have Rs. 100 in your pocket and you use it to buy a meal
from a local
restaurant. The restaurant owner then uses that Rs. 100 to buy groceries from a
nearby store. The store
owner then uses that Rs. 100 to pay for utility bills, and so on. Each time the Rs.
100 changes hands, it
contributes to the velocity of money circulation.
The velocity of money is important because it helps to determine the level of
economic activity in an
economy. When money is changing hands quickly, it suggests that there is a lot of
economic activity
taking place and people are spending money. Conversely, when money is changing
hands slowly, it
suggests that there is less economic activity and people are holding onto their
money.
One way to calculate the velocity of money is by using the following formula:
Velocity of Money = Gross Domestic Product (GDP) / Money Supply
This formula takes into account the total value of goods and services produced in
the economy
(GDP) and the amount of money in circulation. A higher velocity of money suggests
that the same
amount of money is being used to buy more goods and services, which can help to
stimulate economic
growth.

Deposits
Time Deposits: Time deposits are a type of deposit where money is deposited with a
bank or
financial institution for a fixed period, ranging from a few months to several
years. The money cannot be
withdrawn before the maturity date without paying a penalty.
Demand Deposits: Demand deposits are deposits that can be withdrawn by the
depositor at any

time without any prior notice. The interest rate offered on demand deposits is
usually lower than that
offered on time deposits.

Net Demand & Time Liability (NDTL)

Demand Liabilities are the liabilities of the bank that are payable on demand. Such
as Current
Account, Savings Account, and Demand Draft.
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Time Liabilities, on the other hand, are the liabilities of the bank that are
payable after a certain
period of time. Examples of time liabilities include Fixed Deposits and Recurring
Deposits.
Net Demand and Time Liabilities (NDTL) is the sum total of the demand and time
liabilities of a bank
that are held by the public.

Measure of Money Supply

In India, there are four main measures of money supply that are tracked by the
Reserve Bank of
India (RBI). These measures are known as M1, M2, M3, and M4. Let's take a closer
look at each one:
M1: This is the narrowest measure of money supply in India, and it includes only
the most liquid
forms of money.
M1 = currency in circulation + demand deposits held by commercial banks
M2: This is a broader measure of money supply that includes all the components of
M1, as well as
some less liquid forms of money.
M2 = M1 + savings deposits with Post Office.
M3: This is an even broader measure of money supply that includes all the
components of M1, as
well as some other types of deposits.
M3 = M1 + Net time deposits of commercial banks.
M4: This is the broadest measure of money supply in India, and it includes all the
components of
M3, as well as some other financial assets. In addition to currency in circulation,
demand deposits,
savings deposits, and time deposits, M4 also includes all post office deposits and
all deposits with nonbanking financial companies (NBFCs). In equation form,
M4 = M3 + all post office deposits + all deposits with NBFCs.
These measures of money supply are important for the RBI and other policymakers to
track, as they
can indicate changes in the overall money supply in the economy and help inform
decisions about
monetary policy.

Reserve Money (also known as High-Powered Money or Primary Money)

Reserve money, also known as base money or high-powered money, refers to the total
amount of
currency and reserves held by the central bank of a country.
In India, the central bank is the Reserve Bank of India (RBI), and it holds
reserves of various types of
money, including cash reserves held by commercial banks, deposits held by
commercial banks at the
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RBI, and other types of reserves. These reserves are used by the RBI to implement
monetary policy,
regulate the banking system, and maintain financial stability.
The formula for reserve money is:
Reserve Money = Currency in Circulation + Bankers' Deposits with RBI + Other
Deposits with RBI +
RBI's Other Liabilities
where:
- Currency in Circulation refers to the total amount of physical currency (coins
and banknotes)
circulating in the economy. This includes both the currency held by the public and
by commercial banks.
- Bankers' Deposits with RBI refers to the deposits made by commercial banks with
the RBI, which
serve as a reserve requirement for the banks.
- Other Deposits with RBI includes deposits made by the government, state
governments, and other
entities with the RBI.
- RBI's Other Liabilities includes other types of liabilities held by the RBI, such
as deposits held by
foreign central banks and international organizations.
An example of how reserve money works is as follows:
Suppose the RBI wants to increase the money supply in the economy. It can do this
by purchasing
government securities from commercial banks, which increases the amount of reserves
held by the
banks. This in turn increases the amount of deposits the banks can make with the
RBI, which increases
the reserve money in the economy.
For example, if the RBI purchases government securities worth Rs. 1,000 crore from
commercial
banks, the banks will have an additional Rs. 1,000 crore in reserves. They can then
deposit this money
with the RBI, which increases the RBI's liabilities and thus the reserve money in
the economy.
Overall, reserve money is an important concept in economics and monetary policy, as
it plays a key
role in determining the money supply and regulating the banking system.

Money Multiplier
The Money Multiplier measures the amount of money that the banking system can
create through
the process of credit creation. It is defined as the ratio of the money supply to
the Reserve Money,
which is the base level of money supply in the economy.
Money Multiplier (m) = Money Supply / Reserve Money
The Money Multiplier measures the speed at which credit is being created in the
economy. When
the Reserve Bank of India (RBI) injects money into the banking system, commercial
banks use a portion
of that money to make loans to households and firms. This process of credit
creation increases the
money supply in the economy.
The Money Multiplier indicates the potential increase in the money supply that can
result from an
increase in the Reserve Money. For example, if the Reserve Money increases by Rs.
1000 crore and the
Money Multiplier is 2, then the money supply can potentially increase by Rs. 2000
crore (i.e., 1000 x 2).
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The credit creation process can lead to an increase in the Money Supply, and this
can result in
inflationary pressures in the economy if it is not matched by an increase in the
production of goods and
services. Therefore, the RBI closely monitors the credit creation process and uses
monetary policy tools
to regulate the money supply in the economy and maintain price stability.

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Previous Years Prelims Questions
1.

With reference to Non-Fungible Tokens (NFTs), consider the following

statements:

2022

1. They enable the digital representation of physical assets.

2. They are unique cryptographic tokens that exist on a blockchain.
3. They can be traded or exchanged at equivalency and therefore can be
used as a medium of commercial transactions.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
c) 1 and 3 only
(d) 1, 2 and 3

2.

The money multiplier in an economy increases with which one of the

following?

2021

a) Increase in the Cash Reserve Ratio in the banks.

b) Increase in the Statutory Liquidity Ratio in the banks
c) Increase in the banking habit of the people
d) Increase in the population of the country
3.

If you withdraw 1,00,000 in cash from your Demand Deposit Account at your
bank, the immediate effect on aggregate money supply in the economy will be

2020

(a) to reduce it by 1,00,000

(b) to increase it by 1,00,000
(c) to increase it by more than 1,00,000
(d) to leave it unchanged
4.

The money multiplier in an economy increases with which one of the

following?
(a) Increase in the cash reserve ratio

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2019
(b) Increase in the banking habit of the population
(c) Increase in the statutory liquidity ratio
(d) Increase in the population of the country
5.

Which one of the following statements correctly describes the meaning of

legal tender money ?

2018

(a) The money which is tendered in courts of law to defray the fee of legal
cases
(b) The money which a creditor is under compulsion to accept in
settlement of his claims
(c) The bank money in the form of cheques, drafts, bills of exchange, etc.
(d) The metallic money in circulation in a country
6.

With reference to ‘Bitcoins’, sometimes seen in the news, which of the

following statements is/are correct?
(1) Bitcoins are tracked by the Central Banks of the countries.
(2) Anyone with a Bitcoin address can send and receive Bitcoins from
anyone else with a Bitcoin address.
(3) Online payments can be sent without either side knowing the identity
of the other.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3

Answers
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2016
1.

2.

3.

4.

5.

6.

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7. Inflation

Say hello! |

@Ketanomy
Contents
Types of
Inflation .........................................................................
......................................................... 74
Creeping
Inflation .........................................................................
.................................................... 74
Trotting
Inflation .........................................................................
..................................................... 74
Running
Inflation .........................................................................
..................................................... 75
Galloping
Inflation .........................................................................
................................................... 75
Hyperinflation.....................................................................
.............................................................. 75
Mismatch between Demand and
Supply ............................................................................
................. 75
Demand Pull
Inflation: ........................................................................
.............................................. 75
Cost Push
Inflation:.........................................................................
.................................................. 75
Market
Equilibrium:.......................................................................
................................................... 76
Reasons behind demand-pull inflation and cost-push
inflation: ..................................................... 76
Measures of
inflation .........................................................................
.................................................. 76
Producer Price Index
(PPI) .............................................................................
................................... 76
Wholesale Price Index
(WPI) .............................................................................
............................... 77
Consumer Price Index
(CPI) .............................................................................
................................. 77
1. CPI - Urban (CPI-
U): ...............................................................................
................................... 78
2. CPI - Rural (CPI-
R): ...............................................................................
..................................... 78
3. CPI - Combined (CPI-
C): ...............................................................................
............................. 78
4. CPI-Industrial Workers (IW), CPI-Agricultural Labourer (AL), CPI-Rural Labourer
(RL): ........... 78
Comparison of Wholesale Price Index (WPI) and Consumer Price Index
(CPI): ............................... 78
GDP
deflator ..........................................................................
........................................................... 79
Effects of
Inflation .........................................................................
....................................................... 81
Measures to control
inflation .........................................................................
...................................... 81
Monetary
measures ..........................................................................
............................................... 81
Fiscal
measures...........................................................................
...................................................... 82
Concepts related to
Inflation..........................................................................
...................................... 82
Deflation .........................................................................
.................................................................. 82
Disinflation ......................................................................
................................................................. 82
Stagflation .......................................................................
................................................................. 83
Reflation .........................................................................
.................................................................. 83
Open
Inflation..........................................................................
......................................................... 84
Headline
Inflation .........................................................................
.................................................... 84
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Core
Inflation .........................................................................
........................................................... 84
Bottleneck
Inflation .........................................................................
................................................. 85
Base
Effect ............................................................................
............................................................ 85
Inflationary
Gap ...............................................................................
................................................. 86
Deflationary
Gap ...............................................................................
............................................... 86
Phillip’s
Curve .............................................................................
...................................................... 87
Business
Cycle..............................................................................
......................................................... 87
Economic
Recovery ..........................................................................
.................................................... 89
V-shaped
recovery:..........................................................................
................................................. 89
U-shaped
recovery: .........................................................................
................................................. 90
Swoosh-shaped
recovery: .........................................................................
....................................... 90
Z-shaped
recovery: .........................................................................
.................................................. 90
W-shaped
recovery: .........................................................................
................................................ 90
L-shaped
recovery: .........................................................................
.................................................. 90
Previous Years Prelims
Questions .........................................................................
............................... 91
Previous Years Mains
Questions .........................................................................
................................. 94

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Chapter 7
Inflation
Inflation is a sustained increase in the general price level of goods and services
in an economy over a
period of time. When inflation occurs, the purchasing power of money decreases,
meaning that the
same amount of money will buy fewer goods and services than before. When the rate
of inflation is
moderate, it can have some positive effects on the economy, but when it becomes too
high, it can lead
to several negative consequences.

Types of Inflation
There are different types of inflation, each characterized by the rate and speed of
price increases.
These include:

Creeping Inflation

Creeping inflation is a situation where the general level of prices in an economy

gradually and slowly
rises over time generally upto 3% per year. This means that the cost of goods and
services increases
gradually over time, and the purchasing power of money decreases.
For example, imagine a pack of bread costs Rs 50 today, but in a year's time, it
costs Rs 51 due to
creeping inflation. This means that your money can buy less than it could a year
ago.
Creeping inflation is considered good for the economy. There are a few reasons for
this:
1. Encourages spending: When there is a little bit of inflation, people tend to
spend more money as
they anticipate that prices will continue to increase. This increased spending can
help boost economic
growth.
2. Stimulates investment: Creeping inflation can encourage businesses to invest and
expand as they
seek to take advantage of the increased demand for goods and services.
3. Helps reduce debt: If you have a fixed-rate loan, creeping inflation can help
reduce the real value
of the amount you owe over time, making it easier to pay back.

Trotting Inflation

Trotting inflation generally means steady increase in prices, typically ranging

from 3-10% annually.
For example, let's say that in India, the price of a kilogram of rice increases
from ₹50 to ₹55 over the
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course of a year. This would be an example of trotting inflation. While it may not
seem like a huge
increase, if it continues year after year, it can lead to significant price
increases over time.

Running Inflation

This type of inflation is faster than trotting inflation, with prices increasing at
a rate of 10-20% per
year. For example, let's say that the price of a kilogram of rice in India
increases from ₹50 to ₹65 over
the course of a year. This would be an example of running inflation. Prices are
increasing at a faster rate,
which can put a strain on people's budgets.

Galloping Inflation

Galloping inflation is an even faster type of inflation, with prices increasing at

a rate of 20-100% per
year. For example, let's say that the price of a kilogram of rice in India
increases from ₹50 to ₹150 over
the course of a year. This would be an example of galloping inflation. Prices are
increasing at a much
faster rate, which can make it difficult for people to afford basic necessities.

Hyperinflation

Hyperinflation is the most severe type of inflation, with prices increasing at a

rate of over 1000% per
year. This type of inflation can lead to a complete breakdown of the economy and
society, as people's
savings become worthless and businesses struggle to operate. One famous example of
hyperinflation
occurred in Germany in the 1920s, when the price of a loaf of bread went from 250
marks to over 200
billion marks in just a few years.

Mismatch between Demand and Supply

Demand Pull Inflation:

Demand-pull inflation occurs when the demand for goods or services in an economy
exceeds the
supply, leading to an increase in prices. In this scenario, consumers have more
money to spend, and
they are willing to pay higher prices to secure the goods or services they desire.
This increased demand
puts pressure on the available supply, causing prices to rise.
For example, let's say that there is an increase in disposable income due to higher
wages or
government stimulus. Consumers now have more money to spend, and they may decide to
spend it on
goods like cars or housing. As the demand for these goods increases, manufacturers
and builders
increase their prices to match the rising demand, causing the overall price level
to increase in the
economy.

Cost Push Inflation:

Cost-push inflation occurs when the cost of producing goods or services increases,
leading to an
increase in prices. This type of inflation is often caused by factors such as
rising wages, raw material
costs, or taxes, which increase the cost of production for firms. These firms then
pass on these increased
costs to consumers by raising prices, causing inflation.

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For example, let's say that the price of oil, a key input in the production of many
goods and services,
increases dramatically. This increase in the cost of oil will increase the cost of
production for many firms,
such as transportation companies or manufacturers. These firms will then pass on
these increased costs
to consumers by raising prices, causing the overall price level in the economy to
increase. Similarly, if
there is an increase in the minimum wage, the cost of labor will increase for
firms, which may lead to
cost-push inflation.

Market Equilibrium:

Market equilibrium is a state where the demand for a particular good or service
equals the supply of
that good or service, resulting in a stable price. At this point, neither consumers
nor producers have any
incentive to change their behavior, and the market is said to be in equilibrium.
Let's take an example of a market for apples. If the demand for apples is high and
the supply is low,
the price of apples will increase until the quantity demanded by consumers falls
and the quantity
supplied by producers increases, eventually leading to a stable price point where
the two quantities are
equal. Similarly, if the supply of apples is high and the demand is low, the price
will decrease until a
stable equilibrium point is reached.

Reasons behind demand-pull inflation and cost-push inflation:

Demand-Pull Inflation

Cost-Push Inflation

1. Increase in consumer demand for goods and

services
2. Expansionary fiscal policies that boost
government spending
3. Easy availability of credit and low interest rates
4. Growth in population and consumer spending
5. Optimistic business expectations leading to
increased investments

1. Increase in production costs, such as wages

and raw materials
2. Rise in energy prices or input costs
3. Imposition of taxes or regulations that raise
production costs
4. Supply chain disruptions or shortages in key
commodities
5. Increase in import prices due to exchange
rate fluctuations

Measures of inflation
Producer Price Index (PPI)

The PPI is a measure of the average change over time in the prices that producers
receive for the
goods and services they produce. In other words, it measures the price that
producers charge for their
products at the wholesale level, before those products reach the final consumer.
The PPI is calculated by
measuring the changes in the prices of a basket of goods and services that are
representative of the
types of products that producers sell.
Formula:
PPI = (Total revenue from selling goods at current prices / Total revenue from
selling goods at
base year prices) x 100
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- The "Total revenue from selling goods at current prices" is the total amount of
money that
producers are making from selling their goods and services at the current prices.
- The "Total revenue from selling goods at base year prices" is the total amount of
money that
producers would have made if they had sold the same goods and services at the
prices that prevailed in
a chosen base year.
- Dividing the current revenue by the base year revenue gives us a ratio that tells
us how much
prices have changed since the base year. Multiplying that ratio by 100 gives us the
percentage change in
prices.
For example, let's say that in the base year, a producer sold 100 units of a
particular product for $10
each, for a total revenue of $1,000. In the current year, the same producer sells
100 units of the same
product for $12 each, for a total revenue of $1,200. Using the PPI formula, we can
calculate the
percentage change in prices as follows:
PPI = ($1,200 / $1,000) x 100
PPI = 120
So in this example, the PPI would be 120, meaning that prices have increased by 20%
since the base
year.

Wholesale Price Index (WPI)

Wholesale price index (WPI) is an economic indicator that measures the change in
the average price
level of goods that are traded in the wholesale market. In India, the wholesale
price index is calculated
and published by the Office of the Economic Adviser, Ministry of Commerce and
Industry.

The basket of goods used to calculate WPI includes around 697 items that are
classified into three
major groups: primary articles, fuel and power, and manufactured products. The
weightage of each
group in the basket is as follows:
- Primary articles: 22.62%
- Fuel and power: 13.15%
- Manufactured products: 64.23%

Consumer Price Index (CPI)

Consumer Price Index (CPI) is a measure of the average change over time in the
prices paid by
consumers for a basket of goods and services.
In India, the CPI is calculated by the Ministry of Statistics and Programme
Implementation (MOSPI)
on a monthly basis. The index measures the price changes in a basket of goods and
services that
represent the consumption pattern of households in urban and rural areas of India.
The basket of goods and services used in the calculation of CPI includes a wide
range of items such
as food, clothing, housing, fuel and light, transport, education, and medical care.
The number of articles
in the basket and the weightage of each item are reviewed and revised periodically
to ensure that it
accurately reflects the consumption pattern of households in India.
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CPI = (Cost of basket of goods and services in current year / Cost of basket of
goods and services in
base year) x 100
To understand this formula better, let's take an example. Suppose the cost of the
basket of goods
and services in the base year (2010) was Rs. 100 and the cost of the same basket in
the current year
(2021) is Rs. 150. Then, the CPI for 2021 would be calculated as follows:
CPI = (150 / 100) x 100 = 150
This means that the cost of living has increased by 50% since the base year.
The weightage of different items in the basket of goods and services is determined
by the
proportion of expenditure on each item by households in India. For example, food
and beverages have a
weightage of 45.86%, housing has a weightage of 10.07%, and transport and
communication have a
weightage of 8.59%.
In India, there are four types of Consumer Price Index (CPI) that are compiled by
the Ministry of
Statistics and Programme Implementation (MOSPI). These are:

1. CPI - Urban (CPI-U): This index measures the changes in the prices of a basket
of goods and
services consumed by households residing in urban areas of India.

2. CPI - Rural (CPI-R): This index measures the changes in the prices of a basket
of goods and
services consumed by households residing in rural areas of India.

3. CPI - Combined (CPI-C): This index is a weighted average of the CPI-U and CPI-R,
with weights
based on the population distribution of urban and rural areas in India. The CPI-C
is considered the most
comprehensive measure of inflation in India.
4. CPI-Industrial Workers (IW), CPI-Agricultural Labourer (AL), CPI-Rural Labourer
(RL): This index measures the changes in the prices of a basket of goods and
services consumed by

industrial workers, Agricultural labourers and Rural Labourers in India. The basket
of goods and services
for the CPI-IW, CPI-AL & CPI-RL is different from the CPI-U and CPI-R and includes
items such as housing,
education, medical care, and recreation.

Comparison of Wholesale Price Index (WPI) and Consumer Price Index (CPI):
Criteria

WPI

CPI

Full Form

Wholesale Price Index

Consumer Price Index

Goods at the wholesale level

Goods and services at retail level

Primary Articles: 22.62%

Fuel and Power: 13.15%
Manufactured Products:
64.23%

CPI (Combined)

Basket of
Goods

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•
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•
•

Food and Beverages- 45.8%

Pan, Tobacco & Intoxicants- 2.38%

@Ketanomy
Criteria

WPI

CPI
•
•
•
•

Clothing & Footwear- 6.5%

Housing- 10%
Fuel & Light- 6.8%
Miscellaneous- 28.3%

Frequency

Weekly

Monthly

Target
Audience

Producers and traders

Households and consumers

Coverage

Covers goods at the wholesale

level

Covers goods and services at retail level

Base Year

2011-12

2012

Published by

Purpose

Office of the Economic

Adviser (OEA), Ministry of
Commerce and Industry

Used as a measure of inflation

and to set prices in trade
transactions

CPI-Urban, CPI-Rural, CPI-Combined- National

Statistical Office (NSO) in the Ministry of Statistics and
Programme Implementation.
CPI-Industrial Workers (IW), CPI-Agricultural
Labourer (AL), CPI-Rural Labourer (RL)- Labour
Bureau in the Ministry of Labour and Employment
Used as a measure of inflation affecting
households and consumers, and to make policy
decisions

GDP deflator

The GDP deflator is a measure of the price level of all the goods and services
produced within a
country's borders in a given period of time, typically a year. It is a widely used
tool to track inflation and
changes in the overall price level of an economy.
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The formula for calculating the GDP deflator is:
GDP deflator = (Nominal GDP / Real GDP) x 100
Here, nominal GDP refers to the value of all goods and services produced within an
economy in
current prices, while real GDP is the value of all goods and services produced
within an economy in
constant prices (i.e. prices from a base year).
Let's take an example to understand this better. Suppose an economy produces only
two goods:
burgers and hot dogs. In year 1, it produces 100 burgers at a price of $2 each, and
200 hot dogs at a
price of $1 each. So, the nominal GDP in year 1 would be:
Nominal GDP = (100 burgers x $2 per burger) + (200 hot dogs x $1 per hot dog)
Nominal GDP = $200 + $200
Nominal GDP = $400
Now, let's suppose that in year 2, the economy produces the same number of burgers
and hot dogs,
but the price of burgers has increased to $3 each, while the price of hot dogs has
remained the same at
$1 each. So, the nominal GDP in year 2 would be:
Nominal GDP = (100 burgers x $3 per burger) + (200 hot dogs x $1 per hot dog)
Nominal GDP = $300 + $200
Nominal GDP = $500
To calculate the real GDP, we need to use a base year. Let's assume that year 1 is
the base year. So,
to calculate the real GDP in year 1, we simply use the prices from year 1. However,
to calculate the real
GDP in year 2, we need to use the prices from year 1 as well. So, the real GDP in
year 1 and year 2 would
be:
Real GDP in year 1 = (100 burgers x $2 per burger) + (200 hot dogs x $1 per hot
dog)
Real GDP in year 1 = $200 + $200
Real GDP in year 1 = $400
Real GDP in year 2 = (100 burgers x $2 per burger) + (200 hot dogs x $1 per hot
dog)
Real GDP in year 2 = $200 + $200
Real GDP in year 2 = $400
Now that we have the nominal GDP and real GDP for both years, we can calculate the
GDP deflator
for each year:
GDP deflator in year 1 = (Nominal GDP in year 1 / Real GDP in year 1) x 100
GDP deflator in year 1 = ($400 / $400) x 100
GDP deflator in year 1 = 100
GDP deflator in year 2 = (Nominal GDP in year 2 / Real GDP in year 1) x 100
GDP deflator in year 2 = ($500 / $400) x 100
GDP deflator in year 2 = 125
As we can see, the GDP deflator has increased from 100 in year 1 to 125 in year 2.
This indicates that
the overall price level of the economy has increased by 25% between year 1 and year
2.

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Effects of Inflation
1. Reduced purchasing power: Inflation erodes the purchasing power of money. As
prices rise, the
same amount of money can buy fewer goods and services, leading to a decrease in
real income for
individuals and households.
2. Increased production costs: Rising prices of inputs, such as raw materials and
labor, can squeeze
profit margins and make it more expensive for businesses to produce goods and
services.
3. Redistribution of wealth: Those with fixed incomes, such as pensioners or low-
wage workers, may
find it difficult to keep up with rising prices, while those with assets or
investments that can keep pace
with inflation may see their wealth preserved or even grow.
4. Uncertainty and reduced investment: Businesses may hesitate to invest or expand
due to
uncertain future costs and demand. This can lead to lower levels of investment,
which can impact
economic growth and job creation.
5. Impact on savings and investments: Inflation can erode the value of savings and
fixed-rate
investments. If the rate of inflation exceeds the return on investments or savings
accounts, the real
value of those funds will decrease over time.
6. Distortion of price signals: As prices rise, it becomes more challenging to
distinguish between
changes in relative prices and changes driven by general inflation. This can lead
to misallocation of
resources and inefficiencies in the allocation of goods and services.
7. Wage-price spiral: When prices rise, workers may demand higher wages to maintain
their
purchasing power. However, if wages rise faster than productivity, it can further
fuel inflationary
pressures, creating a cycle of rising prices and wages.
8. International competitiveness: High inflation rates can impact a country's
international
competitiveness. If domestic prices rise faster than those in other countries, it
can make exports more
expensive and imports relatively cheaper, potentially leading to a deterioration in
the trade balance.

Measures to control inflation

There are several measures that can be used to control inflation, and they can be
broadly classified
into two categories: monetary measures and fiscal measures.

Monetary measures are those that are undertaken by the central bank to regulate the
money
supply in the economy. The goal is to make money more expensive or less available
to borrowers, which
can reduce demand for goods and services and help bring down inflation.
1. Increasing the interest rate: When the central bank raises the interest rate,
borrowing becomes
more expensive. This reduces the demand for loans and credit, leading to a decrease
in spending by
businesses and consumers, and can help slow down inflation. For example, if the
interest rate on a loan
is 10%, and it is raised to 12%, the cost of borrowing increases, and it becomes
more challenging for
businesses to invest and consumers to spend.
2. Reducing money supply: By reducing the money supply, the central bank can make
money more
scarce, which can reduce inflation. This is usually achieved by selling government
securities or increasing
the reserve requirement for banks. When banks have to hold more reserves, they have
less money to
lend out, which can reduce the money supply and limit inflation.

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Fiscal measures, on the other hand, are those that are undertaken by the government
to
influence the overall level of spending in the economy. The government can use
these measures to
reduce demand for goods and services, which can help to reduce inflation.
1. Increase taxes: When the government increases taxes, people and businesses have
less money to
spend, which can reduce demand for goods and services and help slow down inflation.
For example, if
the government increases taxes on fuel, people may drive less, leading to a
decrease in the demand for
petrol/diesel.
2. Reduce government spending: When the government reduces its spending, it can
help reduce the
overall level of demand in the economy, which can help slow down inflation. For
example, if the
government decides to postpone infrastructure development projects, this can lead
to a reduction in
demand for construction materials and services.

Concepts related to Inflation

Deflation

Deflation is a term used to describe a decrease in the overall price level of goods
and services in an
economy.
Let's say you're an Indian consumer and you go to the grocery store to buy some
basic food items. If
you notice that the prices of those items are lower than they were the last time
you went to the store,
that could be a sign of deflation. For example, if the price of a kilogram of rice
was ₹50 last week and
now it's ₹40, that's deflation.
Deflation can happen for a variety of reasons. One common cause is a decrease in
demand for goods
and services. When people are buying less, businesses might lower their prices to
try to entice
customers to make purchases. However, if this trend continues for a long time, it
can lead to a cycle of
lower prices, which can cause consumers to hold off on spending even more, leading
to further
reductions in demand and prices. This cycle is known as a deflationary spiral.
Another cause of deflation can be an increase in the supply of goods and services.
If there's an
oversupply of a particular product, businesses may lower their prices to sell off
their excess inventory.
This can lead to a drop in the price of that product, and potentially other related
products as well.
Deflation can have both positive and negative effects on the economy. On the one
hand, lower
prices can be good for consumers because they can buy more with the same amount of
money.
However, deflation can also lead to economic problems such as decreased investment,
increased
unemployment, and decreased economic growth.

Disinflation

Disinflation refers to a decrease in the rate of inflation. In other words, it's a

slowdown in the rate at
which prices of goods and services are rising. Disinflation is not the same as
deflation, which refers to an
actual decline in the general price level of goods and services.
For example, suppose the inflation rate in India was 6% in the previous year, but
this year it has
decreased to 3%. This means that there has been disinflation of 3%.
While it can have both positive and negative effects on the economy, it is
generally viewed as a
positive development as it reduces the cost of living for consumers.
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Stagflation

Stagflation is a term used to describe an economic situation where there is both

high inflation and
high unemployment. This is a rare occurrence because inflation and unemployment are
typically
inversely related -- as one goes up, the other goes down.

Stagflation can occur due to a variety of factors, such as supply shocks, external
shocks, or monetary
policy failures. Let me give you a few examples.
Imagine that there is a sudden increase in oil prices due to political unrest in
the Middle East. This
would increase the cost of production for companies that rely on oil, such as
transportation and
manufacturing industries. These companies would then pass on their increased costs
to consumers by
raising prices. As a result, the overall price level in the economy would increase,
leading to inflation.
However, at the same time, the increased cost of production might cause companies
to cut back on
hiring, leading to higher unemployment.
Another example could be a situation where a government tries to stimulate the
economy by
printing more money, but it is not successful. Instead, the increased money supply
might lead to
inflation, while the lack of real economic growth might lead to unemployment.
Stagflation is a challenging economic situation because the usual policy tools used
to combat
inflation or unemployment can be ineffective or even counterproductive in this
scenario. For example, if
a government tries to reduce inflation by raising interest rates, it might also
increase unemployment,
making the situation worse.

Reflation

Reflation refers to the deliberate attempt by governments or central banks to boost

economic
activity and raise prices after a period of economic contraction or deflation.

During a period of deflation, people tend to hold onto their money and delay
purchases because
they expect prices to fall further. This leads to a decrease in demand, which in
turn causes prices to drop
even further. This can lead to a vicious cycle of falling prices and economic
activity.
Reflationary policies aim to break this cycle by stimulating demand and increasing
the money supply
in the economy. The most common methods of achieving reflation include fiscal
policy (such as
government spending and tax cuts) and monetary policy (such as lowering interest
rates and increasing
the money supply).
For example, during the Great Depression of the 1930s, U.S. President Franklin D.
Roosevelt
implemented a series of reflationary policies known as the New Deal. This included
massive government
spending on public works projects, job creation programs, and social welfare
programs. These policies
helped to stimulate demand and put people back to work, which in turn helped to
revive the economy.
Another example of reflationary policy is quantitative easing (QE), which is a form
of monetary
policy used by central banks to increase the money supply and lower interest rates.
This involves the
central bank buying government bonds or other assets from financial institutions,
which injects new
money into the economy and lowers the cost of borrowing. This can stimulate lending
and investment,
which in turn can help to boost economic activity.

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Open Inflation

Open inflation is a type of inflation that occurs due to factors that are outside
the control of a
government or central bank. In other words, it is inflation that is caused by
external factors that affect
the supply and demand of goods and services in the economy.
One common example of open inflation is when the global price of oil increases.
Since oil is an
essential input in many industries, such as transportation and manufacturing, an
increase in its price can
cause the cost of producing goods to go up. As a result, businesses may pass on
these higher costs to
consumers by raising prices, leading to inflation.
Another example of open inflation is when a natural disaster occurs, such as a
hurricane or
earthquake. This can disrupt supply chains and cause shortages of goods and
services, leading to higher
prices.
Open inflation is different from closed inflation, which is inflation that occurs
due to internal factors
within an economy, such as an increase in the money supply. Closed inflation can be
controlled by a
government or central bank through monetary policy measures, such as adjusting
interest rates or the
money supply. However, since open inflation is caused by external factors, it can
be more difficult to
control.

Headline Inflation

Headline inflation is the overall rate of inflation that is reported in the news
and on economic
indicators. It is usually measured by the Consumer Price Index (CPI), which tracks
the price changes of a
basket of goods and services that are commonly consumed by households.
For example, if the headline inflation rate is reported as 2%, it means that the
average prices of
goods and services in the economy have increased by 2% over the past year.
It's important to note that headline inflation may not reflect the actual inflation
experienced by
individuals or specific groups in the economy. This is because different types of
goods and services may
have different rates of price increase, and individuals' consumption patterns may
differ from the basket
of goods and services used to measure headline inflation.

Core Inflation

Core inflation is a measure of inflation that excludes certain volatile items that
can cause prices to
fluctuate rapidly and unpredictably. This is done to get a more accurate picture of
underlying inflation
trends in the economy.
Items that are excluded include food and fuel prices, which can be influenced by
factors such as
weather, geopolitical events, and natural disasters.
For example, let's say that the price of gasoline suddenly goes up by 50% due to a
major supply
disruption. This would cause a sharp increase in overall inflation, but it would
not necessarily be
indicative of a sustained increase in inflationary pressures in the economy. By
excluding such volatile
items, core inflation provides a more stable and reliable measure of inflationary
pressures in the
economy.

Core inflation is an important measure because it helps policymakers make decisions

about
monetary policy. For instance, if core inflation is rising, it may indicate that
the central bank needs to
tighten monetary policy (such as raising interest rates) in order to prevent
inflation from spiraling out of
control.
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Bottleneck Inflation

Bottleneck inflation is a type of inflation that occurs when there is a shortage or

scarcity of certain
goods or services in the economy, causing prices to rise rapidly. This shortage or
scarcity creates a
"bottleneck" in the supply chain, which leads to higher prices for the goods or
services that are in short
supply.

Let me give you an example to make this clearer. Imagine that there is a sudden
increase in demand
for smartphones in India, but the supply of smartphone components, such as
microchips, is limited due
to a global shortage. As a result, the price of smartphones in India will increase,
even if there is no
increase in the demand for other goods or services. This is because the limited
supply of microchips has
created a bottleneck in the smartphone supply chain, leading to higher prices for
smartphones.
Another example could be if there is a drought in a certain region of India that
produces a lot of rice.
This could lead to a shortage of rice, causing the price of rice to rise rapidly.
This, in turn, could cause an
increase in the prices of other goods and services that use rice as an input, such
as food products or
animal feed.
Bottleneck inflation is usually temporary and tends to subside once the bottleneck
in the supply
chain is resolved. However, it can have a significant impact on the overall level
of inflation in the short
term. It can also be challenging to control with monetary policy measures, such as
adjusting interest
rates, as it is caused by factors beyond the control of central banks.

Base Effect

The base effect refers to the distortion in the calculation of percentage changes
in economic
indicators, such as inflation or GDP growth, that can arise due to changes in the
base year or period used
for comparison.
Let me give you an example. Let's say that in the year 2020, the price of a certain
good was Rs. 100.
In the year 2021, the price of the same good increased to Rs. 120. If we calculate
the percentage change
in the price from 2020 to 2021, we get a 20% increase.

Now, let's assume that in the year 2022, the price of the same good falls to Rs.
110. If we calculate
the percentage change in the price from 2021 to 2022, we get a 8.33% decrease.
However, if we
calculate the percentage change in the price from 2020 to 2022, we get a 10%
increase, which may not
reflect the actual trend in prices since it includes the impact of the unusually
high price increase in 2021.
This is an example of the base effect. The use of different base years or periods
for comparison can
lead to distortions in the calculation of percentage changes, making it difficult
to accurately gauge the
underlying trends in economic indicators.
The base effect is an important concept in economics as it highlights the need to
carefully consider
the base year or period used for comparison when analyzing economic indicators. It
can also be relevant
for policymakers when making decisions based on economic data.

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Inflationary Gap

Inflationary gap is a term used in economics to describe a situation where the

actual output of an
economy exceeds its potential output, resulting in an increase in prices or
inflation. In other words, it's a
situation where there is too much demand for goods and services in an economy,
which causes prices to
rise.
To understand inflationary gap, it's important to first understand the concept of
potential output.
Potential output is the level of production an economy can sustainably produce over
the long term
without causing inflation. It's determined by factors like the size of the labor
force, the availability of
capital and technology, and the level of productivity.
Now, let's say that the actual output of an economy exceeds its potential output
due to increased
demand from consumers and businesses. This means that there is more demand for
goods and services
than the economy can produce without causing inflation. As a result, businesses may
start raising their
prices to take advantage of the high demand and make more profits.
For example, let's say that there is a sudden increase in consumer spending in
India due to a festive
season. People are buying more clothes, food, and gifts, leading to an increase in
demand for these
goods and services. However, the production capacity of the economy remains the
same. As a result,
businesses may start raising their prices to take advantage of the high demand and
make more profits.
This leads to an inflationary gap.
Inflationary gap can have a number of negative consequences for an economy. For
one, it can lead
to inflation, which can erode the purchasing power of consumers and reduce the
overall standard of
living. It can also make exports more expensive, which can hurt the competitiveness
of an economy in
the global market.
To avoid an inflationary gap, governments and central banks can use various policy
tools to manage
demand and control inflation.

Deflationary Gap

A deflationary gap occurs when the total spending in an economy is insufficient to

purchase all the
goods and services that the economy is capable of producing. In other words, there
is a gap between the
potential output of the economy and the actual output, leading to a decrease in
prices and a decrease in
economic activity.
To understand this concept better, let's take an example. Let's say that an economy
is capable of
producing 1000 units of goods and services, but the total spending in the economy
is only enough to
purchase 900 units. This means that there is a deflationary gap of 100 units (1000
- 900).
As a result of this gap, there will be a decrease in demand for goods and services,
leading to a
decrease in prices. Businesses will respond to this by reducing their output and
laying off workers, which
further reduces spending in the economy. This cycle can continue until the economy
reaches a new
equilibrium point where the output equals the total spending.
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Governments can try to address a deflationary gap by increasing their own spending,
lowering taxes,
or increasing the money supply through monetary policy. By doing so, they can
stimulate spending and
help the economy to reach a new equilibrium point with higher levels of economic
activity and
employment.

Phillip’s Curve

The Phillips Curve is a graphical representation that shows the relationship

between unemployment
and inflation. It was named after an economist named A.W. Phillips who first
noticed the relationship in
the UK economy in the 1950s.

The basic idea behind the Phillips Curve is that when unemployment is low, there is
a higher
demand for workers and employers have to compete for them by offering higher wages.
As wages
increase, businesses have to charge higher prices for their products to maintain
their profit margins. This
increase in prices is what we call inflation.
Conversely, when unemployment is high, there are more workers than there are
available jobs. As a
result, workers have less bargaining power and wages tend to stay low. This means
that businesses don't
have to raise their prices as much, and inflation remains low.
So, the Phillips Curve shows us that there is a tradeoff between unemployment and
inflation.

Business Cycle
The business cycle refers to the regular and recurring fluctuations in the level of
economic activity,
which includes growth in gross domestic product (GDP), employment, income, and
other economic
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indicators. These fluctuations occur due to changes in the overall demand and
supply of goods and
services in the economy, which lead to changes in economic output and employment.

The business cycle has four primary phases, which are expansion, peak, contraction,
and trough.
Each of these phases represents a different stage in the economic cycle and has
distinct characteristics:
1. Expansion: During the expansion phase, the economy experiences a period of
growth, which is
characterized by rising GDP, increasing employment opportunities, and higher income
levels. This
growth is typically accompanied by a rise in consumer and business confidence,
leading to increased
investment and spending.
2. Peak: The peak phase represents the height of the economic cycle, where economic
activity
reaches its highest point before beginning to slow down. During this phase, the
economy may
experience inflation, as the demand for goods and services outstrips supply,
leading to rising prices.
3. Contraction: In the contraction phase, economic activity starts to slow down,
leading to a decline
in GDP and employment opportunities. This phase is typically characterized by lower
consumer and
business confidence, leading to reduced spending and investment.
4. Trough: The trough phase represents the lowest point in the economic cycle,
where economic
activity is at its lowest. During this phase, unemployment rates may be high, and
businesses may
struggle to stay afloat. This phase is followed by Expansion phase.

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Economic Recovery
In general, an economic recovery refers to the process of an economy returning to
its pre-recession
levels of economic activity. In other words, when an economy experiences a downturn
or recession, a
recovery is when it starts to bounce back and regain its footing.
There are a few different types of economic recoveries that economists typically
talk about.

V-shaped recovery:

V-shaped recovery occurs when an economy experiences a sharp and rapid decline
followed by an
equally rapid rebound. In this scenario, the recovery is quick and strong, bringing
the economy back to
its pre-crisis level or even higher.
Example: During the COVID-19 pandemic, some industries witnessed a sharp decline in
output and
employment due to lockdown measures. As restrictions eased and economic activities
resumed, these
industries quickly bounced back, showing a V-shaped recovery.

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U-shaped recovery:

U-shaped recovery happens when an economy experiences a prolonged downturn before

gradually
bouncing back. The recovery is slower than a V-shaped one, but it eventually
reaches pre-crisis levels.
Example: After the global financial crisis of 2008, many economies experienced a U-
shaped
recovery. It took some time for consumer and business confidence to improve, and
thus, the recovery
process was more gradual.

Swoosh-shaped recovery:

Think of the "swoosh" symbol of the Nike sports brand. A swoosh-shaped recovery is
similar to a Ushaped one but with a more prolonged and gradual upward slope. It
takes longer for the economy to
recover fully, and the rebound may not be as sharp as in a V-shaped recovery.
Example: Following the 2020 COVID-19 recession, some countries experienced a
swoosh-shaped
recovery. The economy slowly improved, but certain sectors faced ongoing
challenges, causing a more
gradual rebound.

Z-shaped recovery:

Z-shaped recovery occurs when an economy experiences multiple ups and downs before
eventually
stabilizing and recovering.
Example: During times of uncertainty, like when a country faces frequent policy
changes or
international trade fluctuations, the economy might follow a Z-shaped recovery path
with several
fluctuations before achieving stability.

W-shaped recovery:

W-shaped recovery is characterized by a double-dip recession. After an initial

decline, the economy
starts recovering (the first upward stroke of the "W"), but then faces another
downturn before
eventually rebounding again.
Example: In some situations, a country might experience a W-shaped recovery if a
short-lived
economic improvement is followed by another setback, such as a new crisis or a
second wave of a
pandemic.

L-shaped recovery:

L-shaped recovery is the most challenging scenario. It happens when the economy
experiences a
sharp decline and remains stuck at a low level for an extended period without
significant recovery.
Example: In cases where an economy faces persistent structural issues or fails to
implement
effective policies, it may undergo an L-shaped recovery, experiencing a long period
of stagnation with
little or no improvement.
Understanding these economic recovery patterns can help you analyze how different
factors
influence the trajectory of an economy during and after a crisis.

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Previous Years Prelims Questions
1.

With reference to the Indian economy, demand-pull inflation can be

caused/increased by which of the following?

2021

1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below.
a) 1, 2 and 4 only
b) 3, 4 and 5 only
c) 1, 2, 3 and 5 only
d) 1, 2, 3, 4 and 5
2.

3.

Which one of the following is likely to be one of the most inflationary in its
effects?
a) Repayment of public debt
b) Borrowing from the public to finance a budget deficit
c) Borrowing from the banks to finance a budget deficit
d) Creation of new money to finance a budget deficit
Which of the following factors/policies were affecting the price of rice in India
in the recent past?
(1) Minimum Support Price
(2) Government’s trading
(3) Government’s stockpiling
(4) Consumer subsidies
Select the correct answer using the code given below:
(a) 1, 2 and 4 only
(b) 1, 3 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4

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2021

2020
4.

Consider the following statements :

2020

(1) The weightage of food in Consumer Price Index (CPI) is higher than that
in Wholesale Price Index (WPI).
(2) The WPI does not capture changes in the prices of services, which CPI
does.
(3) The Reserve Bank of India has now adopted WPI as its key measure of
inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3
5.

With reference to inflation in India, which of the following statements is

correct?

2015

(a) Controlling the inflation in India is the responsibility of the Government

of India only
(b) The Reserve Bank of India has no role in controlling the inflation
(c) Decreased money circulation helps in controlling the inflation
(d) Increased money circulation helps in controlling the inflation
6.

Which of the following brings out the ‘Consumer Price Index Number for
Industrial Workers’?
(a) The Reserve Bank of India
(b) The Department of Economic Affairs
(c) The Labour Bureau
(d) The Department of Personnel and Training

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2015
7.

Consider the following statements :

2013

(1) Inflation benefits the debtors.

(2) Inflation benefits the bond-holders.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
8.

A rise in general level of prices may be caused by

2013

(1) an increase in the money supply

(2) a decrease in the aggregate level of output
(3) an increase in the effective demand
Select the correct answer using the codes given below.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
9.

Which one of the following is likely to be the most inflationary in its effect?
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit

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2013
10. Supply of money remaining the same when there is an increase in demand for
money, there will be

2013

(a) a fall in the level of prices

(b) an increase in the rate of interest
(c) a decrease in the rate of interest
(d) an increase in the level of income and employment

Previous Years Mains Questions

1.

Do you agree that the Indian economy has recently experienced V-shaped 2021
recovery? Give reasons in support of your answer.

Answers
1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

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94
8. Monetary Policy

Say hello! |

@Ketanomy
Contents
Classification of Monetary
Policy ............................................................................
............................. 97
Expansionary Monetary
Policy: ...........................................................................
............................. 97
Contractionary Monetary
Policy: ...........................................................................
.......................... 97
Goals of Monetary
Policy ............................................................................
......................................... 98
Monetary Policy Framework in
India .............................................................................
...................... 98
Monetary Policy Committee
(MPC)..............................................................................
.................... 98
Instruments of Monetary
Policy ............................................................................
............................... 99
Quantitative
Methods ...........................................................................
........................................... 99
Cash Reserve Ratio
(CRR) .............................................................................
................................ 99
Statutory Liquidity Ratio
(SLR) .............................................................................
......................... 99
Comparison between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR) ................ 100
Liquidity Adjustment Facility
(LAF) .............................................................................
................ 100
Marginal Standing Facility
(MSF) .............................................................................
................... 101
Standing Deposit Facility
(SDF) .............................................................................
...................... 102
Open Market Operations
(OMOs) ............................................................................
.................. 102
Qualitative
Methods............................................................................
........................................... 103
Credit
Rationing .........................................................................
................................................. 103
Moral
Suasion ...........................................................................
.................................................. 103
Margin requirements and loan-to-value (LTV)
ratio .................................................................. 103
Limitations of Monetary policy in
India..............................................................................
................ 104
Transmission of monetary
policy ............................................................................
........................... 104
Marginal Cost of Funds Based Lending Rate
(MCLR) ..................................................................... 105
Previous Years Prelims
Questions .........................................................................
............................. 106

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Chapter 8
Monetary Policy
Monetary policy is the process by which the Reserve Bank of India (RBI) uses
various monetary
policy tools to regulate the money supply in the economy and achieve macroeconomic
objectives such
as economic growth, price stability, and financial stability.
By adjusting interest rates and using other tools, the central bank can influence
borrowing and
spending in the economy, which can have ripple effects on employment, inflation,
and economic
growth.

Classification of Monetary Policy

There are two main types of monetary policy: expansionary and contractionary.

Expansionary Monetary Policy:

Expansionary monetary policy is used by the central bank to stimulate economic

growth by
increasing the money supply and lowering interest rates. This can be done in a
number of ways, such as
by buying government bonds, lowering the reserve requirement for banks, or lowering
the interest rate
at which the central bank lends money to commercial banks. By increasing the money
supply, more
money is available for businesses and individuals to borrow and spend, which can
lead to increased
economic activity and job creation.
For example, during the COVID-19 pandemic, the RBI implemented an expansionary
monetary policy
by lowering interest rates and providing liquidity to the banking system through
various measures. This
was done to support economic growth and provide relief to individuals and
businesses affected by the
pandemic.

Contractionary Monetary Policy:

Contractionary monetary policy, on the other hand, is used to slow down the economy
and control
inflation by reducing the money supply and raising interest rates. This can be done
by selling
government bonds, raising the reserve requirement for banks, or raising the
interest rate at which the
central bank lends money to commercial banks. By reducing the money supply,
borrowing and spending
become more expensive, which can lead to a decrease in economic activity and
inflation.

For example, if the economy is growing too quickly and inflation is rising, the RBI
might implement a
contractionary monetary policy by raising interest rates to discourage borrowing
and spending. This can
help to cool down the economy and bring inflation under control.

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Goals of Monetary Policy
The primary goals of monetary policy in India are:
1. Controlling inflation: One of the most important goals of monetary policy is to
control inflation.
Inflation is the rate at which the general price level of goods and services in an
economy is increasing. If
inflation is too high, it can lead to a decrease in the purchasing power of money,
which can ultimately
lead to an economic downturn. The RBI tries to keep inflation within a target range
of 2-6% by adjusting
interest rates, liquidity in the market, and other monetary tools.
For example, if the RBI believes that inflation is too high, it can raise interest
rates. This makes
borrowing money more expensive, which can reduce spending in the economy and lower
inflation.
2. Promoting economic growth: Another important goal of monetary policy is to
promote economic
growth. This can be achieved by keeping interest rates low to encourage borrowing
and spending. When
people and businesses can borrow money at lower interest rates, they are more
likely to invest in new
projects and expand their businesses, which can lead to economic growth.
For example, if the RBI believes that the economy needs a boost, it can lower
interest rates. This
makes borrowing money cheaper, which can encourage businesses to invest in new
projects, create
jobs, and contribute to economic growth.
3. Maintaining financial stability: Monetary policy also plays an important role in
maintaining
financial stability. This means ensuring that the financial system is stable and
secure, and that the
banking system is able to withstand any shocks or crises.
For example, if the RBI believes that the banking system is at risk of collapse, it
can increase liquidity
in the market by injecting money into the banking system. This helps banks meet
their obligations and
ensures that people have access to their money.

Monetary Policy Framework in India

The monetary policy framework in India is guided by an agreement between the
government and
the central bank called the Monetary Policy Framework Agreement (MPFA). The MPFA
sets out the
objectives, targets, and instruments of monetary policy, as well as the process for
decision-making and
communication.
One of the key objectives of the monetary policy framework in India is to maintain
price stability,
which means keeping inflation under control. The RBI uses a target for consumer
price inflation (CPI) as
its guide for setting interest rates. Currently, the target for CPI inflation in
India is 4% with a +/- 2%
tolerance band. This means that the RBI aims to keep inflation within a range of 2%
to 6%.
Another objective of the monetary policy framework in India is to support economic
growth. The RBI
tries to achieve this by ensuring that credit is available to businesses and
households at reasonable
interest rates.
Monetary Policy Committee (MPC)

The MPC is a committee created by the Reserve Bank of India (RBI) to make decisions
about the
country's monetary policy. The government changed the RBI Act in 2016 to create
this committee.

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The MPC has six members, including the RBI Governor as the Chairperson, the RBI
Deputy Governor
in charge of monetary policy, one official nominated by the RBI Board, and three
members representing
the Government of India. The external members hold office for four years.
The committee meets regularly, and at least four members, including the Governor or
Deputy
Governor, must be present for the meeting to proceed. The decisions of the MPC are
based on a
majority vote, and in case of a tie, the RBI Governor has the casting vote.
It is important to note that the decisions of the MPC are binding on the RBI,
meaning that the RBI
must follow the decisions made by the committee.

Instruments of Monetary Policy

There are two main types of instruments of monetary policy: quantitative and
qualitative.

Quantitative Methods

Quantitative methods of monetary policy are tools used by the Reserve Bank of India
(RBI), to
directly influence the quantity of money and credit in the economy. These methods
involve changing the
amount of money available for lending, which affects interest rates, inflation, and
economic growth.

Cash Reserve Ratio (CRR)

The cash reserve ratio is the percentage of deposits that banks are required to
keep in cash or with
the central bank as a reserve.

For example, if you deposit Rs. 1000 in your bank account and the RBI has set the
cash reserve ratio
at 4%, then the bank is required to keep Rs. 40 (4% of Rs. 1000) in cash or with
the central bank and can
lend out only Rs. 960 to borrowers.
The purpose of the cash reserve ratio is to ensure that banks have enough money in
reserve to meet
their obligations and prevent bank runs. It also helps the central bank control the
money supply in the
economy. If the central bank wants to increase the money supply, it can lower the
cash reserve ratio,
allowing banks to lend out more money. On the other hand, if the central bank wants
to decrease the
money supply, it can raise the cash reserve ratio, limiting the amount of money
that banks can lend out.

Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio (SLR) is a requirement set by the Reserve Bank of India
(RBI) which
mandates banks to hold a certain proportion of their deposits in safe and easily
convertible assets like
cash, gold, and government securities. The idea behind this requirement is to
ensure that banks have
enough funds on hand to meet their obligations to depositors, such as withdrawals
or other financial
emergencies.
Let's take an example to understand this better. Suppose a bank has Rs.1,000 crore
in deposits from
its customers. If the SLR requirement is 18%, the bank would need to set aside
Rs.180 crore (18% of
Rs.1,000 crore) as SLR.
Out of this Rs.180 crore, the bank may choose to hold a portion in cash, some in
gold, and the rest in
government securities. The bank cannot use this money for any other purpose like
lending or
investment.
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SLR has an impact on the liquidity of banks. If the SLR is increased, banks have to
hold a larger
portion of their deposits in liquid assets, which can reduce the funds available
for lending. On the other
hand, if the SLR is decreased, banks have more funds available to lend, which can
boost economic
growth.

Comparison between Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
CRR

SLR

It is the percentage of deposits that banks must

It is the percentage of deposits that banks
maintain in liquid assets such as cash, gold, and
must keep in cash reserves with the RBI.
government securities.
Cash reserves to be kept in Bank’s vault or
with the RBI.

Liquid assets to be kept with the bank itself.

No interest is paid on the cash reserves held

Returns are earned on the liquid assets held by
by the RBI.
the bank.
Decreases the liquidity in the banking system
Decreases the liquidity in the banking system as
as banks have to keep aside a portion of their banks have to maintain a certain
portion of their
deposits as cash reserves, which reduces the deposits in liquid assets, which also
reduces the
funds available for lending.
funds available for lending.

Liquidity Adjustment Facility (LAF)

The Liquid Adjustment Facility (LAF) is a tool used by the Reserve Bank of India
(RBI) to manage the
liquidity (availability of money) in the banking system. The LAF comprises two
types of transactions repo and reverse repo.

Repo Rate: Repo stands for repurchase agreement. Essentially, a repo transaction is
a short-term
borrowing arrangement between the RBI and commercial banks. Here's how it works:
Let's say a bank needs cash to meet its immediate funding requirements. It can
approach the RBI
and offer some of its government securities as collateral. The RBI will then lend
money to the bank, but
with an agreement to repurchase the securities at a future date at a slightly
higher price, which includes
the interest charged on the loan. The difference between the original price and the
repurchase price is
the interest earned by the RBI, and this interest rate is called the repo rate.
For example, suppose a bank needs INR 10 crore to meet its short-term funding
requirements. It
offers INR 12 crore worth of government securities as collateral to the RBI. The
RBI will lend the bank
INR 10 crore, but with an agreement to repurchase the securities at a future date
for INR 12.25 crore,
which includes a 2.5% interest charge. Therefore, the repo rate in this case is
2.5%.
The repo rate has a direct impact on the cost of borrowing money in the economy.
When the RBI
raises the repo rate, it becomes more expensive for banks to borrow from the
central bank. Banks, in
turn, increase their lending rates, making it more expensive for individuals and
businesses to borrow
money. This reduces the demand for credit, which can help to control inflation. On
the other hand,
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when the RBI lowers the repo rate, it becomes cheaper for banks to borrow money,
leading to lower
lending rates, and this can increase demand for credit, thus boosting economic
growth.

Reverse Repo Rate: Reverse repo rate is the interest rate at which the RBI borrows
money from
commercial banks. It is the opposite of the repo rate. When the RBI borrows money
from banks, it
provides collateral in the form of government securities. This means that the
commercial banks lend
money to the RBI and receive government securities as collateral.
Why does the RBI borrow money from commercial banks? Well, one reason is to absorb
excess
liquidity from the market. When there is too much money circulating in the economy,
it can lead to
inflation. To counter this, the RBI borrows money from banks at a higher interest
rate, which reduces
the amount of money available for lending and investment in the market.
Let's say the reverse repo rate is set at 5%. This means that if a commercial bank
lends money to the
RBI, it will receive an interest rate of 5% on that money. This rate is decided by
the RBI based on various
factors such as inflation, economic growth, and liquidity in the market.

Bank Rate
The Bank Rate is the rate at which the Reserve Bank of India (RBI) lends money to
commercial banks
for long-term loans. It is also known as the discount rate. This means that the
commercial banks can
borrow money from the RBI for a longer period of time, usually for a year or more,
and the interest rate
charged on this loan is the bank rate.
By changing the bank rate, the RBI can influence the money supply and inflation in
the economy.
When the bank rate is increased, it becomes more expensive for banks to borrow
money from the RBI.
As a result, banks have less money to lend to individuals and businesses, which
reduces the money
supply in the economy.

Comparison of repo rate and bank rate

Repo Rate

Bank Rate

The interest rate at which the RBI

The interest rate at which the RBI lends money to
lends money to commercial banks for
commercial banks for short-term loans.
long-term loans.
Short-term loans, usually for overnight or up to 14 days.
Commercial banks need to pledge securities such as
government bonds or treasury bills as collateral to borrow
money from the RBI.

Long-term loans, usually for a year or

more.
Collaterals are not required
Marginal Standing Facility (MSF)

The Marginal Standing Facility is a tool used by the Reserve Bank of India (RBI) to
provide emergency
funding to banks that are facing temporary liquidity problems. The MSF is a window
that allows banks to
borrow funds overnight from the RBI in case they are unable to borrow from other
sources.

Let's understand this with an example. Suppose there is a commercial bank that is
in need of funds
to meet its daily operational requirements. It can borrow funds from other banks or
financial
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institutions, but for some reason, it is unable to do so. In such a scenario, the
bank can approach the RBI
for funds under the Marginal Standing Facility.
The MSF rate is higher than the repo rate, which is the rate at which banks can
borrow funds from
the RBI through the regular repo window. This means that banks have to pay a higher
interest rate when
they borrow funds under the MSF. The difference between the MSF rate and the repo
rate is known as
the MSF spread.
The purpose of the MSF is to provide an additional liquidity source to banks in
times of stress. This
tool helps banks to meet their urgent funding requirements and avoid a situation
where they default on
their obligations due to a lack of funds.
It is important to note that the MSF is not meant to be a regular source of funding
for banks. It is
only meant to be used in emergency situations where other sources of funding are
not available.

Standing Deposit Facility (SDF)

The SDF is a facility that allows banks to deposit excess funds with the central
bank, typically
overnight, in exchange for interest.

Let's say you're a bank and you have more cash on hand than you need to meet your
reserve
requirements. Instead of letting that cash sit idle, you could deposit it in the
SDF with the central bank.
In return, the central bank would pay you interest on those deposits, which would
help you earn some
extra money.
The interest rate on the SDF is typically lower than the central bank's other
interest rates, such as
the benchmark interest rate or the discount rate. This is because the SDF is meant
to be a risk-free
option for banks to park their excess funds, rather than a way to make a profit.
Why does the central bank offer the SDF? One reason is to help regulate the money
supply. By
offering a safe and reliable place for banks to deposit their excess funds, the
central bank can prevent
those funds from circulating in the economy and potentially causing inflation.
Another reason for the SDF is to help the central bank manage interest rates. By
adjusting the
interest rate paid on SDF deposits, the central bank can influence the overall
level of interest rates in the
economy.

Open Market Operations (OMOs)

OMOs involve buying or selling government securities (such as bonds) in the open
market, which
affects the amount of money that banks have available to lend.
Let me give you an example. Suppose the RBI wants to increase the money supply in
the economy to
boost economic growth. To do this, it can purchase government securities from banks
and other
financial institutions in the open market. When the RBI buys these securities, it
pays for them by
depositing money into the banks' accounts. This increases the banks' reserves,
which means they have
more money available to lend out to businesses and individuals. This increase in
lending can stimulate
economic activity and help to boost growth.

On the other hand, if the RBI wants to decrease the money supply in the economy to
control
inflation, it can sell government securities in the open market. When the RBI sells
these securities, it
takes money out of the banks' reserves. This decreases the amount of money that
banks have available
to lend out, which can reduce borrowing and spending in the economy and help to
cool off inflation.

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Qualitative Methods

Qualitative measures are tools used by central banks to influence the behavior of
financial
institutions and individuals in the economy. These measures focus on changing the
structure of financial
markets and how money is lent and borrowed rather than just adjusting the overall
money supply.

Credit Rationing

Credit rationing involves the setting of credit limits, i.e., the maximum amount
that a bank can lend
to its customers. The central bank can impose restrictions on the lending
activities of banks and financial
institutions by setting a limit on the amount of credit that they can extend to
their customers.

Credit rationing is typically used when traditional monetary policy tools such as
interest rates are
not enough to influence economic activity. This is because credit rationing can be
more targeted and
precise, allowing the central bank to control the supply of credit to specific
sectors or regions of the
economy.
For example, if the RBI believes that the real estate sector is overheating, it can
ask banks to limit
the amount of money they lend to real estate developers.

Moral Suasion

Moral suasion is used by central bank to influence the behavior of banks and
financial institutions in
the economy. It involves the use of persuasion and moral pressure rather than
direct regulatory action
to achieve a desired outcome.
Moral suasion is often used in situations where the central bank wants to encourage
a certain
behavior, but does not want to use heavy-handed regulatory measures that may have
unintended
consequences. It can also be used to complement other monetary policy measures such
as interest rate
adjustments and reserve requirement changes.
One example of moral suasion in action was during the global financial crisis of
2008. The Reserve
Bank of India (RBI) used moral suasion to encourage banks to increase their lending
to small and
medium-sized enterprises (SMEs), which were particularly hard-hit by the crisis.
The RBI communicated
its expectations to the banks and financial institutions and encouraged them to
adopt a more
accommodative lending stance towards SMEs. The moral pressure placed on these
institutions helped to
increase lending to SMEs, which in turn helped to support the economy during a
difficult time.

Margin requirements and loan-to-value (LTV) ratio

Margin requirements involve setting a minimum percentage of the purchase price of a

security that
must be paid in cash, with the remaining balance financed by the broker. This means
that the investor
has to put down a certain amount of their own money before they can borrow the
rest.

For example, let's say an investor wants to buy Rs 10,000 worth of stock. If the
margin requirement
is 50%, the investor must put down Rs 5,000 of their own money and can borrow the
remaining Rs 5,000
from their broker. If the margin requirement is increased to 60%, the investor
would need to put down
Rs 6,000 of their own money to buy the same amount of stock.
By adjusting margin requirements, central banks can influence the amount of money
that investors
are able to borrow to invest in securities. This can have a significant impact on
the demand for securities
and can help to regulate the overall level of economic activity in the country.
Loan-to-value (LTV) ratio is another tool used by central banks to regulate the
amount of money
that can be borrowed by consumers to buy homes and other real estate. The LTV ratio
is the amount of
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the loan compared to the value of the property being purchased. For example, if a
home is worth Rs
1,00,000 and the borrower is taking out a Rs 80,000 mortgage, the LTV ratio would
be 80%.
Central banks can adjust the LTV ratio to influence the amount of money that
consumers are able to
borrow to buy real estate. For example, if the central bank raises the LTV ratio
from 80% to 90%,
borrowers will be able to borrow more money to buy a home. This can lead to an
increase in housing
prices and stimulate economic activity. On the other hand, if the central bank
lowers the LTV ratio,
borrowers will be able to borrow less money to buy a home, which can help to
prevent the housing
market from overheating and prevent a potential housing bubble.

Limitations of Monetary policy in India

1. Limited Scope: The RBI can only control the supply of money and the interest
rate, but it cannot
control the demand for money. This means that even if the RBI reduces the interest
rate, it may not lead
to increased borrowing and spending by individuals and businesses.
2. Time Lags: Monetary policy measures take time to have an effect on the economy.
For example, a
reduction in interest rates may take several months to filter through the economy
and have an impact
on consumption and investment.
3. Structural Constraints: Certain structural constraints in the Indian economy can
limit the
effectiveness of monetary policy. For example, India has a large informal sector
that is not affected by
interest rate changes, and this can limit the impact of monetary policy on the
overall economy.
4. Dependence on Fiscal Policy: Fiscal policy, which involves government spending
and taxation, can
also affect the economy. In India, fiscal policy has a significant impact on the
economy, and the
effectiveness of monetary policy can be limited if fiscal policy is not supportive.
5. External Factors: India's economy is also affected by external factors such as
global economic
conditions, oil prices, and international trade. These factors are outside the
control of the RBI, and they
can limit the effectiveness of monetary policy in stabilizing the economy.

Transmission of monetary policy

Transmission of monetary policy refers to how the actions of the Reserve Bank of
India (RBI), such as
changing the interest rates, affect the lending rates of commercial banks. This is
important because the
lending rates determine how much individuals and businesses will have to pay for
loans from banks, and
can impact their spending and investment decisions.
When the RBI changes its monetary policy stance, it expects the commercial banks to
adjust their
lending rates accordingly. For example, if the RBI reduces the repo rate (the rate
at which it lends to
commercial banks), it expects the commercial banks to reduce their lending rates to
customers as well.
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This should make borrowing cheaper and encourage more people to take out loans for
various
purposes, leading to higher spending and economic growth.
However, sometimes the transmission of monetary policy doesn't happen as expected,
and the
banks may not pass on the rate cuts to their customers, or they may not pass on the
full extent of the
rate cuts. This can happen for various reasons, such as the banks having high non-
performing assets
(NPAs) or not having enough liquidity.
To improve transmission of monetary policy, the RBI has taken various measures. One
such measure
is the introduction of the Marginal Cost of Funds Based Lending Rate (MCLR) system,
which replaced the
earlier Base Rate system. Under the MCLR system, the lending rates of banks are
based on the marginal
cost of funds, rather than the average cost of funds as under the Base Rate system.
This should make
the transmission of policy rate changes more effective, as any changes in the
policy rates should be
reflected more quickly in the MCLR.

Marginal Cost of Funds Based Lending Rate (MCLR)

MCLR is the benchmark interest rate used by banks in India to determine the lending
rates for
various loans, such as home loans, personal loans, and business loans.

Imagine you want to take a home loan from a bank. The bank needs to determine the
interest rate it
will charge you for the loan. The MCLR takes into account the cost of funds for
banks, which includes
various components such as deposit rates, operational expenses, and profit margins.
Let's say the current MCLR of a bank is 7%. This means that if you take a home
loan, the interest rate
you will be charged will be based on this MCLR rate. However, there is an
additional component called
the "spread" that is added to the MCLR.
The spread represents the bank's profit margin and covers other factors such as the
risk associated
with lending to different borrowers, administrative costs, and desired
profitability. So, if the bank's
spread is 0.5%, the actual interest rate you will be charged for your home loan
will be MCLR (7%) +
Spread (0.5%) = 7.5%.
The MCLR and the spread can vary across banks and loan products. The Reserve Bank
of India (RBI)
provides guidelines to banks on calculating the MCLR and ensuring transparency in
the interest rate
setting process. These guidelines help promote a fair and consistent approach to
determining lending
rates.

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Previous Years Prelims Questions
1.

With reference to the Indian economy, consider the following statements:

2022

1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy
government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the
market.
3. If interest rates in the USA or European Union were to fall, that is likely
to induce RBI to buy dollars.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

2.

In India, which one of the following is responsible for maintaining price stability
by controlling inflation?

2022

(a) Department of Consumer Affairs

(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India

3.

If the RBI decides to adopt an expansionist monetary policy, which of the

following would it not do?
(1) Cut and optimize the Statutory Liquidity Ratio
(2) Increase the Marginal Standing Facility Rate
(3) Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:

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2020
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
4.

Which one of the following is not the most likely measure the Government/RBI
takes to stop the slide of Indian rupee?

2019

(a) Curbing imports of non-essential goods and promoting exports

(b) Encouraging Indian borrowers to issue rupee-denominated Masala
Bonds
(c) Easing conditions relating to external commercial borrowing
5.

(d) Following an expansionary monetary policy

What is/are the purpose/purposes of the `Marginal Cost of Funds based
Lending Rate (MCLR)’ announced by RBI?

2016

(1) These guidelines help improve the transparency in the methodology

followed by banks for determining the interest rates on advances.
(2) These guidelines help ensure availability of bank credit at interest rates
which are fair to the borrowers as well as the banks.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
6.

With reference to the Indian economy, consider the following

(1) Bank rate
(2) Open market operations

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2015
(3) Public debt
(4) Public revenue
Which of the above is/are component/ components of Monetary Policy?
(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4
7.

When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50
basis points, which of the following is likely to happen?

2015

(a) India’s GDP growth rate increases drastically

(b) Foreign Institutional Investors may bring more capital into our country
(c) Scheduled Commercial Banks may cut their lending rates
(d) It may drastically reduce the liquidity to the banking system
8.

In the context of Indian economy; which of the following is/are the

purpose/purposes of ‘Statutory Reserve Requirements’?
(1) To enable the Central Bank to control the amount of advances the banks
can create
(2) To make the people’s deposits with banks safe and liquid
(3) To prevent the commercial banks from making excessive profits
(4) To force the banks to have sufficient vault cash to meet their day-to-day
requirements
Select the correct answer using the code given below.
(a) 1 only
(b) 1 and 2 only

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2014
(c) 2 and 3 only
(d) 1, 2, 3 and 4
9.

If the interest rate is decreased in an economy, it will

2014

(a) decrease the consumption expenditure in the economy

(b) increase the tax collection of the Government
(c) increase the investment expenditure in the economy
(d) increase the total savings in the economy
10.

An increase in the Bank Rate generally indicates that the

2013

(a) market rate of interest is likely to fall

(b) Central Bank is no longer making loans to commercial banks
(c) Central Bank is following an easy money policy
(d) Central Bank is following a tight money policy
11.

In the context of Indian economy, Open Market Operations’ refers to

(a) borrowing by scheduled banks from the RBI
(b) lending by commercial banks to industry and trade
(c) purchase and sale of government securities by the RBI
(d) None of the above

Answers
1.

2.

3.

4.

5.

6.

7.

C
8.

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2013
9.

11.

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D
9. Public Finance

Say hello! |

@Ketanomy
Contents
Budget ............................................................................
.................................................................... 114
Components of
Budget.............................................................................
...................................... 114
Receipts ..........................................................................
................................................................ 114
Revenue
Receipts ..........................................................................
............................................. 115
Capital
Receipts ..........................................................................
................................................ 116
Expenditure .......................................................................
............................................................. 116
Revenue
expenditure .......................................................................
.......................................... 116
Capital
expenditure .......................................................................
............................................. 116
Type of
Budget ............................................................................
....................................................... 116
Balance
Budget ............................................................................
................................................... 116
Surplus
Budget ............................................................................
................................................... 117
Deficit
Budget ............................................................................
..................................................... 117
Other types of
Budget ............................................................................
........................................ 117
Performance
Budget.............................................................................
...................................... 117
Zero-based
Budget ............................................................................
......................................... 117
Incremental
Budget ............................................................................
........................................ 117
Gender
Budget ............................................................................
............................................... 117
Outcome
Budget ............................................................................
............................................ 117
Types of
Funds .............................................................................
....................................................... 118
Consolidated Fund of India (Article
266) ..............................................................................
.......... 118
Public Account of India (Article
266(2))............................................................................
.............. 119
Contingency Fund of India (Article
267(1)) ...........................................................................
......... 119
Type of
Deficits ..........................................................................
......................................................... 119
Revenue
Deficit ...........................................................................
................................................... 119
Fiscal
Deficit ...........................................................................
......................................................... 119
Primary
Deficit ...........................................................................
..................................................... 119
Effective Revenue
Deficit ...........................................................................
.................................... 119
Budget
Deficit ...........................................................................
...................................................... 120
Public
Debt ..............................................................................
........................................................... 120
Internal
debt ..............................................................................
..................................................... 120
External
debt ..............................................................................
.................................................... 120
Components of India's domestic
debt: .............................................................................
............. 121
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Components of India's external
debt: .............................................................................
............... 121
Debt to GDP
Ratio .............................................................................
............................................. 122
Public Expenditure
Management ........................................................................
............................... 123
Challenges in India's Public Expenditure
Management: ................................................................ 123
Steps taken by the government to address the
challenges: .......................................................... 123
Fiscal Responsibility and Budget Management (FRBM)
Act............................................................... 124
Previous Years Prelims
Questions .........................................................................
............................. 125
Previous Years Mains
Questions .........................................................................
............................... 128

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Chapter 9
Public Finance
Public finance is essentially the study of how governments manage their finances,
including how
they raise and spend money to achieve their goals. The primary objectives of public
finance are to
promote economic growth, ensure social equity and justice, and stabilize the
economy during times of
economic turbulence. Governments use a variety of tools and policies such as
taxation, public spending,
borrowing, and fiscal policy to attain these goals. All of this is wrapped up in
the Government's annual
financial statement, commonly referred to as the Budget.

Budget
Components of Budget
Budget

Receipts

Revenue
Receipts

Expenditure

Capital Receipts

Tax Revenue

Debt Capital
Receipts

Non-tax
Revenue

Non-debt Capital
Receipts

Revenue
Expenditure

Capital
Expenditure

Receipts
Budget receipts refer to the total amount of money that the government expects to
receive during a
particular fiscal year through various sources such as taxes, fees, and other
revenues. These receipts are
an essential component of the government's budgeting process as they determine the
total amount of
money that the government has available to spend.
Budget receipts can be further classified into two types: revenue receipts and
capital receipts.
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•
•

Revenue receipts refer to the regular income generated by the government, such as
taxes,
duties, and fees.
Capital receipts, on the other hand, refer to the money received by the government
from nonrecurring sources, such as the sale of assets, borrowings, or foreign aid.

Receipts
Revenue
Receipts

Capital
Receipts

Revenue Receipts
Revenue receipts refer to the regular and recurring income generated by the
government during a
particular fiscal year, primarily through taxation, duties, fees, and other similar
sources.
Revenue receipts can be further categorized into two types: tax revenue and non-tax
revenue.
•
•

Tax revenue is generated by levying taxes on individuals and businesses, such as

income tax,
corporate tax, and sales tax.
Non-tax revenue includes fees and charges collected by the government for services
provided,
such as license fees, user charges, and fines.

Revenue
Receipts
Tax
Revenue

Non-Tax
Revenue

Tax Revenue
Tax revenue refers to the funds collected by the government through various forms
of taxes
imposed on individuals, businesses, and other entities. Taxes are the most
significant source of revenue
for most governments.
Tax revenue can be further classified into direct taxes and indirect taxes.
•
•

Direct taxes are levied on income or wealth, such as income tax and wealth tax.
Indirect taxes, on the other hand, are levied on goods and services, such as sales
tax, valueadded tax (VAT), and customs duties.

Non-tax Revenue
Non-tax revenue refers to the income generated by the government from sources other
than taxes.
These revenues are typically earned from fees, fines, licenses, permits, and other
charges collected by
the government for providing specific services or for the use of government-owned
resources.
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Capital Receipts
Capital receipts refer to the funds received by the government from non-recurring
sources, primarily
from the sale of assets or borrowings. These receipts are different from revenue
receipts, which are the
regular and recurring income generated by the government through taxation, fees,
and other sources.
Capital receipts can be further classified into two categories: debt capital
receipts and non-debt
capital receipts.
•

Debt capital receipts refer to the funds received by the government through
borrowings, both
from domestic and external sources. These borrowings can be in the form of long-
term loans,
bonds, or other securities issued by the government. The repayment of these
borrowings is
usually spread over a longer period, and the government is required to pay interest
on the
amount borrowed.

Non-debt capital receipts, on the other hand, refer to the funds received by the
government
from the sale of assets, such as land, buildings, and other properties, and from
the recovery of
loans granted by the government to various entities. These receipts are not
associated with any
repayment obligations, and they do not require the government to pay interest.

Expenditure
Expenditure refers to the funds spent by the government on various programs,
services, and
activities to achieve its policy goals. Government expenditure can be classified
into two categories:
revenue expenditure and capital expenditure.

Expenditure
Revenue
Expenditure

Capital
Expenditure

Revenue expenditure refers to the regular and recurring expenses incurred by the
government in
providing public services and welfare programs, such as salaries of government
employees,
maintenance and operating costs of government offices and facilities, and social
welfare programs like
healthcare and education.

Capital expenditure, on the other hand, refers to the expenses incurred by the
government on longterm investments, such as infrastructure development,
construction of public facilities, and other capital
assets.
Type of Budget
Based on the difference between Receipts and Expenditure,

Balance Budget: A balance budget is a type of budget where the total estimated
receipts is equal
to the total estimated expenditure. This means that the government does not plan to
borrow any
money to finance its expenditure.
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Surplus Budget: A surplus budget is a type of budget where the total estimated
receipts is higher
than the total estimated expenditure. This means that the government plans to save
money or use the
surplus to pay off debts.
Deficit Budget: A deficit budget is a type of budget where the total estimated
expenditure is higher

than the total estimated receipts. This means that the government plans to borrow
money to finance its
expenditure.

Other types of Budget

Performance Budget: A performance budget is a type of budget where the allocation
of funds is

based on the performance and outcomes of government programs and services. This
type of budget
emphasizes the achievement of specific objectives and outcomes rather than simply
providing funds for
a specific program or department.

Zero-based Budget: A zero-based budget is a type of budget where each program or

department's

budget starts from zero and must justify its entire budgetary needs each year. This
approach requires all
expenditures to be justified and evaluated based on their cost-effectiveness and
contribution to
achieving government goals.

Incremental Budget: An incremental budget is a type of budget where the previous

year's budget
is used as a base, and adjustments are made to reflect changes in economic
conditions and policy
priorities. This approach is often criticized for failing to consider the
effectiveness of existing programs
and services.
Gender Budget- Gender Budget process involves analyzing the budget through a gender
lens, to
identify how budget allocations and expenditures affect men and women differently.
This analysis can
reveal areas where women are disadvantaged or discriminated against, and where
changes in budget
allocation and expenditure can promote gender equality and empower women.
The Gender Budget can be integrated into the overall budgetary process of the
government, from
planning and formulation to implementation and evaluation. This approach helps to
ensure that gender
considerations are incorporated into all stages of the budget process, and that
budgetary policies and
decisions promote gender equality and women's empowerment.
The Gender Budget has several benefits, including:
i.
ii.
iii.
iv.

Promoting gender equality: by identifying areas where budget allocation and

expenditure can
promote women's empowerment and address gender-based inequalities.
Improving budget transparency and accountability: by identifying how budgetary
policies and
decisions affect men and women differently.
Enhancing policy effectiveness: in promoting gender equality and women's
empowerment.
Fostering public participation: by engaging civil society organizations and women's
groups in
the budget process.

Outcome Budget
An Outcome Budget is a type of budget that emphasizes the outcomes or results of
government
programs and services rather than just the inputs and outputs. Unlike traditional
budgets that focus on
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inputs such as budgetary allocations and outputs such as the number of services
delivered, the Outcome
Budget focuses on the impact of government programs and services on the lives of
citizens.
The Outcome Budget involves several steps:
i.

ii.

iii.

Identifying outcomes: The first step is to identify the outcomes or results that
government
programs and services are expected to achieve. These outcomes should be measurable,
specific,
and aligned with the government's policy priorities and objectives.
Allocating resources: The second step is to allocate resources based on the desired
outcomes
rather than just the inputs and outputs. The budgetary allocations should be linked
to the
expected outcomes, and the resources should be allocated in a way that maximizes
the impact
on the desired outcomes.
Monitoring and evaluation: The third step is to monitor and evaluate the
performance of
government programs and services based on the expected outcomes. This involves
measuring
the impact of the programs and services on the desired outcomes and making
adjustments as
needed to improve their effectiveness and efficiency.

The Outcome Budget has several benefits, including:

i.

ii.
iii.
iv.

Enhancing accountability: by measuring the impact of government programs and

services on
the desired outcomes and holding government officials accountable for achieving
these
outcomes.
Improving transparency: by providing citizens with information on the impact of
government
programs and services on their lives.
Promoting efficiency: by ensuring that resources are allocated in a way that
maximizes their
impact on the desired outcomes.
Fostering innovation: by encouraging government officials to think creatively and
develop new
and more effective ways of achieving the desired outcomes.

Types of Funds
There are three types of funds:

Consolidated Fund of India (Article 266)

The Consolidated Fund of India (CFI) is the primary fund of the Government of India
used to meet
the expenses of the government, except for exceptional items. The sources of funds
for the CFI include
all the Budget receipts like revenue receipts, borrowings, and recoveries of loans.
A vote of parliament is
required for any expenditure made from the CFI, except for expenditure that is
'charged' on the CFI,
which is non-votable. The CFI is used for two types of expenditure:
i.

ii.

Expenditure ‘charged’ on the CFI- This refers to those expenses that are required
to be made by
law, such as the salary of the President, judges of the Supreme Court and High
Courts, and other
expenses relating to the constitutional provisions.
Expenditure ‘made’ from the CFI- This refers to those expenses that are approved by
parliament
every year in the form of the Union Budget.
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Public Account of India (Article 266(2))
The Public Account of India accounts for flows of those transactions where the
Government is
merely acting as a banker. These funds do not belong to the Government and have to
be paid back in
some time to their rightful owners. The sources of funds for the Public Account of
India include
provident funds and small savings. No vote of parliament is required for any
expenditure made from the
Public Account of India.

Contingency Fund of India (Article 267(1))

The Contingency Fund of India is established to provide a source of funds to meet
urgent and
unforeseen expenditures of the government. The fund is placed at the disposal of
the Union
Government, in the name of the President. The sources of funds for the Contingency
Fund of India
include parliament grants and recoveries of loans. No vote of parliament is
required for any expenditure
made from the Contingency Fund of India, and the maximum amount that can be kept in
this fund is INR
30,000 crore. The amount spent from this fund is later replenished by the approval
of the Parliament.

Type of Deficits
Revenue Deficit
Revenue Deficit = Revenue Expenditure - Revenue Receipts
In other words, the revenue deficit is the difference between the government's
regular revenue
(such as tax collections) and its regular expenditure, excluding capital
expenditures.

Fiscal Deficit
Fiscal deficit is a measure of the total borrowing requirements of the government.
Total Expenditure – Total Receipts (excluding borrowings)
To finance the fiscal deficit, the government may resort to borrowing from the
market through the
sale of government securities such as bonds and treasury bills. However, excessive
borrowing can lead
to a rise in interest rates and crowd out private sector investment.

Primary Deficit
Primary deficit is a measure of the government's deficit that excludes interest
payments on past
borrowing.
Primary Deficit = Fiscal Deficit - Interest Payments
The primary deficit is an essential indicator of the government's ability to meet
its current
obligations without relying on past borrowing. It is also an important measure of
the government's
ability to control its finances and reduce its debt burden in the long term.

Effective Revenue Deficit

Effective revenue deficit is a measure of the government's deficit that takes into
account the
revenue expenditure that does not result in the creation of assets or increase in
the productivity of the
economy.
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Effective Revenue Deficit = Revenue Deficit - Grants for Creation of Capital Assets
The effective revenue deficit is an important measure of the government's ability
to manage its
finances efficiently and prioritize spending on activities that promote long-term
economic growth.
Revenue expenditures that do not result in asset creation or increase in
productivity are often viewed as
unproductive, and a high effective revenue deficit may indicate inefficiencies in
government spending.

Budget Deficit
The budget deficit is the difference between total government expenditure and total
receipts.
Budget Deficit (BD) = Total Expenditure – Total Receipts
When there is a deficit, the government has to finance it through various means
such as deficit
financing. In the past, the government used ad-hoc treasury bills with a maturity
period of 91 days to
finance the deficit. However, if the government did not return the money, the
Reserve Bank of India
(RBI) would resort to currency printing until 1997.
Currently, the RBI provides ways and means advances (WMA) to the government to
finance the
deficit. The WMA is a temporary loan that the RBI provides to the government for a
specific period, and
the government must return the money within the same year. If the government cannot
return the
money, it will have to pay a higher rate of interest in the next financial year and
borrow less. This
mechanism eliminates the need for the government to print currency to finance the
deficit.

Public Debt
The government borrows money when its total expenditure exceeds its total receipts.
Public debt
refers to the total amount of money borrowed by the government from domestic and
foreign sources to
finance its expenses.
The sources of public debt can be broadly classified into two categories: internal
debt and external
debt.

Internal debt refers to the amount of money borrowed by the government from
domestic sources

such as:
•
•
•
•

Individuals: through bonds and treasury bills

Central Bank: RBI
Commercial Banks: SBI, BoB etc
Non-banking financial institutions: LIC

External debt, on the other hand, refers to the amount of money borrowed by the
government
from foreign sources such as
•
•

Multilateral agencies like the World Bank, International Monetary Fund (IMF), and
Asian
Development Bank
Foreign Governments: Japan, South Korea etc

Public debt is an important tool for governments to finance their expenditure and
investments.
However, excessive public debt can lead to a variety of economic problems such as
inflation, reduced
economic growth, and increased interest payments. Therefore, it is important for
the government to
carefully manage its borrowing and repayment strategies to ensure sustainability of
public debt.
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Components of India's domestic debt:
Component

Approx. Share
in Total Domestic
Debt (%)

Description

Government
Securities

Long-term bonds issued by the central and

state governments to borrow funds from the
market.

Around 70%

Treasury Bills

Short-term debt instruments issued by the

government with maturities of up to one year.

Around 5%

State Development
Loans

Bonds issued by state governments to raise

funds for development and infrastructure projects.

Around 10%

Market Stabilization
Bonds issued by the RBI to absorb excess
Scheme (MSS) Bonds liquidity from the market.

Negligible

Ways and Means

Advances

Short-term advances provided by the RBI to the

central government to bridge temporary
mismatches in receipts and expenditures.

Negligible

Small Savings
Schemes

Savings schemes like National Savings

Certificates, Public Provident Fund, etc.

Around 15%

Please note that the percentages provided are approximate figures and can vary
based
on the specific time period and market conditions. It's important to refer to the
latest
data from reliable sources for the most up-to-date information on the composition
of
India's domestic debt.

Components of India's external debt:

Component

Description

Approx. Share
Sovereign/Nonin India's Total
Sovereign
External Debt (%)

Multilateral
Institutions

Loans from international

financial institutions like the World
Bank, IMF, ADB, etc.

9-12%

Sovereign

Bilateral Loans

Loans from foreign governments

and official agencies through
bilateral agreements

5-7%

Sovereign

External
Commercial

Loans raised by Indian entities

from non-resident lenders like

15-18%

Non-Sovereign

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Component

Description

Approx. Share
Sovereign/Nonin India's Total
Sovereign
External Debt (%)

Borrowings (ECBs) international banks and financial

institutions
Sovereign Bonds

Debt securities issued by the

Indian government in international
markets

22-25%

Sovereign

Export Credit

Loans extended by foreign export

credit agencies and international
banks to finance India's imports

5-8%

Non-Sovereign

Commercial loans obtained from

Commercial Loans international banks and financial
institutions

15-18%

Non-Sovereign

Miscellaneous components such

as NRI deposits and trade credit

15-18%

Non-Sovereign

Others

The "Sovereign/Non-Sovereign" column indicates whether the component is associated

with the sovereign (government) or non-sovereign entities (private entities,
corporations, etc.)
within India.
•

Please note that the figures provided are approximate. It's always advisable to
refer to
the latest official reports or publications for the most up-to-date information on
India's
external debt composition.
Debt to GDP Ratio
Debt-to-GDP ratio is a measure of a country's debt in relation to its economic
output. It is calculated
by dividing the total debt of a country by its gross domestic product (GDP) and
expressing the result as a
percentage.
The debt-to-GDP ratio is an important indicator for assessing a country's economic
health and its
ability to manage its debt. It is commonly used by policymakers, investors, and
credit rating agencies to
evaluate a country's creditworthiness and economic stability.
A high debt-to-GDP ratio can have several negative effects on a country's economy,
such as higher
interest payments on debt, lower investor confidence, and reduced government
spending on social
programs and public services. However, in certain cases, such as during times of
economic crisis or war,
governments may need to increase their debt levels to finance necessary programs
and initiatives.

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Public Expenditure Management
Public Expenditure Management refers to the prudent and efficient use of government
financial
resources to achieve good governance. It aims to promote:
•
•
•

Aggregate fiscal discipline: Aligning public expenditures with total revenues to

maintain fiscal
sustainability.
Allocative efficiency: Allocating resources to programs aligned with strategic
priorities.
Operational efficiency: Providing public services at a reasonable quality and cost.

Challenges in India's Public Expenditure Management:

1. Fiscal deficit: Balancing increased government spending demands with fiscal
discipline.
2. Subsidy burden: Managing the growing burden of subsidies, such as fertilizer and
welfare
subsidies.
3. Banking sector issues: Addressing challenges like the Twin-Balance sheet crisis
and nonperforming assets.
4. Public Sector Enterprises (PSEs): Dealing with loss-making PSEs and considering
disinvestment
or privatization.
5. Populist schemes: Managing fiscal deficit implications of schemes like farm loan
waivers and
higher MSPs.
6. Low tax base and tax-to-GDP ratio: Expanding the tax base and improving tax
revenue
collection.
7. Operational inefficiencies: Overcoming bureaucratic inefficiencies and enhancing
transparency
and accountability.

Steps taken by the government to address the challenges:

Fiscal reforms:
•
•

Fiscal Responsibility and Budget Management (FRBM) Act: Setting targets for fiscal
deficit
reduction.
Outcome-based budgeting: Aligning budgetary allocations with strategic priorities
and desired
outcomes.

Technology adoption:
•
•

Public Fund Management System: Online platform for monitoring government scheme
progress.
Digital platforms: Enhancing transparency, accountability, and operational
efficiency.

Capacity building:
•
Investing in the training and development of government officials and implementing
agencies.

Subsidy rationalization:
•

Reviewing and rationalizing subsidies to allocate resources efficiently.

Governance strengthening:
•

Anti-corruption measures: Enhancing governance frameworks and curbing corruption.

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•

Institutional mechanisms: Strengthening institutions responsible for public

expenditure
management.

Deepening fiscal federalism:

•

Devolving more tax revenue to states from the divisible tax pool.

Public Debt Management Agency (proposed):

•

Managing internal and external debts of the government effectively.

Fiscal Responsibility and Budget Management (FRBM) Act

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 aims to ensure
fiscal discipline
for the Centre by setting targets for fiscal indicators, such as the fiscal
deficit, revenue deficit, and the
debt-to-GDP ratio. The act was introduced by the Indian government to address the
problem of high
fiscal deficit and rising public debt.
The key objectives of the FRBM Act are:
i.
ii.
iii.

To achieve fiscal consolidation by bringing down the fiscal deficit and revenue
deficit to
sustainable levels.
To bring down the debt-to-GDP ratio to a manageable level.
To promote inter-generational equity by ensuring that the government does not
burden future
generations with excessive debt.

The targets are set for a period of five years, with annual targets to be achieved
in each year.
The FRBM Act requires the government to place a Medium-Term Fiscal Policy Statement
before
Parliament every year. The statement outlines the fiscal policy of the government
for the next three
years, including the targets set for the fiscal deficit, revenue deficit, and the
debt-to-GDP ratio.
The FRBM Act also provides for the establishment of a Fiscal Responsibility and
Budget Management
(FRBM) Committee. The committee is responsible for reviewing the government's
fiscal performance
and making recommendations for fiscal consolidation.

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Previous Years Prelims Questions
1.

With reference to the Indian economy, consider the following statements:

2022

1. A share of the household financial savings goes towards government

borrowings.
2. Dated securities issued at market-related rates in auctions form a large
component of internal debt.
Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

2.

Which among the following steps is most likely to be taken at the time of an
economic recession?

2021

a) Cut in tax rates accompanied by increase in interest rate

b) Increase in expenditure on public projects
c) Increase in tax rates accompanied by reduction of interest rate
d) Reduction of expenditure on public projects
3.

Consider the following statements

(1) The Fiscal Responsibility and Budget Management (FRBM) Review
Committee Report has recommended a debt to GDP ratio of 60% for the
general (combined) government by 2023, comprising 40% for the Central
Government and 20% for the State Governments.
(2) The Central Government has domestic liabilities of 21% of GDP as
compared to that of 49% of GDP of the State Governments.
(3) As per the Constitution of India, it is mandatory for a State to take the
Central Government’s consent for raising any loan if the former owes any
outstanding liabilities to the latter.
Which of the statements given above is/are correct?
(a) 1 only

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2018
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

4.

There has been a persistent deficit budget year after year. Which
action/actions of the following can be taken by the Government to reduce the
deficit?

2016

(1) Reducing revenue expenditure

(2) Introducing new welfare schemes
(3) Rationalizing subsidies
(4) Reducing import duty
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4
5.

Which of the following is/are included in the capital budget of the Government
of India?
etc.

(1) Expenditure on acquisition of assets like roads, buildings, machinery,

(2) Loans received from foreign governments
(3) Loans and advances granted to the States and Union Territories
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only

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2016
(c) 1 and 3 only
(d) 1, 2 and 3
6.

There has been a persistent deficit budget year after year. Which of the
following actions can be taken by the government to reduce the deficit?

2015

(1) Reducing revenue expenditure

(2) Introducing new welfare schemes
(3) Rationalizing subsidies
(4) Expanding industries
Select the correct answer using the code given below.
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 only
(d) 1,2,3 and 4
7.

With reference to Union Budget, which of the following is/are covered under
Non-Plan Expenditure?
(1) Defence expenditure
(2) Interest payments
(3) Salaries and pensions
(4) Subsidies,
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1, 2, 3 and 4

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2014
(d) None
In India, deficit financing is used for raising resources for

8.

2013

(a) economic development

(b) redemption of public debt
(c) adjusting the balance of payments
(d) reducing the foreign debt

Previous Years Mains Questions

1.

Distinguish between Capital Budget and Revenue Budget. Explain the

components of both these Budgets.

2021

2.

The public expenditure management is a challenge to the Government of India

in the context of budget-making during the post-liberalization period. Clarify it.

2019

3.

One of the intended objectives of Union Budget 2017-18 is to ‘transform,

energize and clean India’. Analyse the measures proposed in the Budget 201718 to
achieve the objective.

2017

4.

Women empowerment in India needs gender budgeting. What are the

requirements and status of gender budgeting in the Indian context?

2016

5.

What were the reasons for the introduction of Fiscal Responsibility and Budget
Management (FRBM) Act, 2013? Discuss critically its salient features and their
effectiveness.

2013

Answers
1.

2.

B
3.

4.

5.

6.

7.

Plan/Non-plan
8.
Expenditure distinction
does not exist after
abolition of Planning

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Commission

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10. Taxation

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Contents
Classification of
Taxes..............................................................................
........................................... 133
Direct and Indirect
Tax ...............................................................................
.................................... 133
Cess and
Surcharge..........................................................................
............................................... 134
Taxation in
India .............................................................................
.................................................... 134
Direct Taxes in
India .............................................................................
.............................................. 136
Personal Income
Tax ...............................................................................
....................................... 136
Corporate
Tax ...............................................................................
.................................................. 138
Minimum Alternate
Tax ...............................................................................
.................................. 138
Capital Gains
Tax ...............................................................................
............................................. 138
List of Direct Taxes levied in
India: ............................................................................
..................... 139
Indirect Taxes in
India..............................................................................
........................................... 141
Goods and Services Tax
(GST) .............................................................................
........................... 144
New taxes introduced by Government of India in recent
times: ....................................................... 146
Long-Term Capital Gains Tax
(LTCG): ...........................................................................
.................. 146
Dividend Distribution Tax (DDT)
Replaced: .........................................................................
........... 147
Tax on Digital Services (Equalization
Levy):.............................................................................
....... 147
Tax-GDP
Ratio .............................................................................
........................................................ 147
India's Tax-GDP
ratio: ............................................................................
......................................... 147
Reasons for low Tax-GDP ratio in
India: ............................................................................
............. 148
Government initiatives to increase Tax-GDP
ratio: ........................................................................ 148
Tax
Expenditure .......................................................................
........................................................... 148
Benefits:..........................................................................
................................................................ 148
Criticisms: .......................................................................
................................................................ 149
Tax Evasion vs Tax
Avoidance..........................................................................
................................... 149
Black
Money .............................................................................
.......................................................... 150
Impact of black money on the
economy ...........................................................................
............. 150
Government initiatives to tackle Black
Money .............................................................................
. 151
Money
Laundering ........................................................................
..................................................... 151
Tax
Haven .............................................................................
.............................................................. 153
Indirect
Transfers .........................................................................
...................................................... 154
Global Treaties and Agreements related to
taxation .........................................................................
154
Double Taxation Avoidance Agreement
(DTAA): ...........................................................................
154
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Base Erosion and Profit Shifting
(BEPS): ...........................................................................
.............. 154
Global Minimum
Tax: ..............................................................................
....................................... 155
Advance Pricing Agreement
(APA): ............................................................................
.................... 155
General Anti-Avoidance Rule
(GAAR): ...........................................................................
................. 155
Previous Years Prelims
Questions .........................................................................
............................. 156
Previous Years Mains
Questions .........................................................................
............................... 157

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Chapter 10
Taxation
Taxation plays a crucial role in generating government revenue and shaping economic
policies. In
essence, taxation involves the collection of mandatory payments from individuals
and businesses, which
are then used to fund public goods and services such as education, healthcare,
defense, and
infrastructure.

Classification of Taxes
One way to classify taxes is based on their fairness or equity. This means that
taxes are designed to
ensure that individuals and businesses contribute to the government's revenue in a
way that is fair and
just.
1. Progressive taxes: These are taxes that increase as income increases. This means
that those with
higher incomes pay a higher percentage of their income in taxes. This is considered
to be fair because
those who can afford to pay more, contribute more to society. For example, in
India, the income tax
system is progressive, with higher earners paying a higher percentage of their
income in taxes.
2. Regressive taxes: These are taxes that decrease as income increases. This means
that those with
lower incomes pay a higher percentage of their income in taxes. This is considered
to be unfair because
it places a greater burden on those who can least afford it. For example, GST on
basic necessities such as
food and clothing is regressive because it takes up a larger proportion of the
income of low-income
individuals.
3. Proportional taxes: These are taxes that remain the same, regardless of income.
This means that
everyone pays the same percentage of their income in taxes. This is considered to
be fair because
everyone contributes an equal share to the government's revenue. For example,
property tax in India is
a proportional tax, where everyone who owns property pays the same percentage of
its value in taxes.

Direct and Indirect Tax

Taxes can be of two types based on who pays the taxes:

1. Direct Taxes: These are taxes that are directly imposed on individuals or
entities and cannot be
passed on to others. Some examples of direct taxes in India are income tax, wealth
tax, and capital gains
tax.
For instance, if you are an individual earning a salary or income from other
sources, you are required
to pay income tax directly to the government. Similarly, if you are a company
earning profits, you are
required to pay corporate tax directly to the government.
2. Indirect Taxes: These are taxes that are collected by intermediaries and passed
on to the end
consumer. The burden of these taxes is ultimately borne by the final consumer, even
though they are
collected from intermediaries.
For example, goods and services tax (GST) is an indirect tax that is collected by
businesses when they
sell goods or services to consumers. The tax is embedded in the price of the goods
or services, and the
final consumer pays the tax when they purchase the goods or services.
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Cess and Surcharge

Cess: A cess is a type of tax levied on top of existing taxes and is utilized for a
specific purpose. It
acts as a tax on tax. These cesses are applicable to all taxpayers, and the revenue
collected from them
goes into the Consolidated Fund of India.

Cess

Purpose

Rate
0.5% on value of taxable
Swachh Bharat Cess
Cleanliness drive
services
0.5% on value of taxable
Krishi Kalyan Cess
Agricultural initiatives
services
Health and education
4% on income tax and
Health and Education Cess
initiatives
corporation tax
Road and Infrastructure
Development of roads and
Varies based on specific
Cess
infrastructure
goods or services
Financing educational
Varies based on specific
Cess on Crude Oil
programs
circumstances
Duty on Tobacco and
Varies based on specific
Promoting public health
Tobacco Products
tobacco products
Surcharge: Surcharge is an additional tax imposed on individuals or entities with
higher income
levels. It is applied on top of the regular tax amount. The government utilizes
surcharge to increase the
tax burden on those with higher taxable income. One example is the surcharge on
income tax, where
individuals earning above a certain income threshold are subject to an additional
tax rate. The surcharge
rate varies based on the total income of the taxpayer and can range from 10% to
37%. Unlike cess,
surcharge does not have a specific designated purpose. The revenue generated from
surcharge goes
into the Consolidated Fund of India and can be used for any government expenditure
as deemed
necessary.

Total Income of Taxpayer (in

INR)
Up to 50 lakhs
50 lakhs to 1 crore
1 crore to 2 crores
2 crores to 5 crores
Above 5 crores

Surcharge
Rate
Nil
10%
15%
25%
37%

Taxation in India
The Indian Constitution lays down the framework for the country's taxation system.
The
Constitution divides the powers to tax between the central government, the state
governments and the
local authorities such as panchayats and municipalities.
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Article

Provision

Explanation

This article states that no tax can be levied or collected without the
No
taxation authority of law. This means that any tax that is levied must be
Article 265 without authority
authorized by a law passed by the Parliament or state legislature.

This article sets out the powers of the central government and state
governments with regard to taxation. The central government can levy
taxes on subjects specified in List I (Union List), while the state
Article 246
governments can levy taxes on subjects specified in List II (State List).
(Schedule
Distribution
of Both central government and state governments can make laws to levy
VII)
legislative powers
taxes on subjects specified in List III (Concurrent List)

Grants from the

This article provides for grants from the central government to
Union to certain certain states, to make up for any deficiency in the revenue of
those
Article 277 states
states.

Goods
and
This article provides for the creation of a GST Council to oversee the
Article 279A Services Tax (GST)
implementation of the Goods and Services Tax (GST).

Powers,
authority,
responsibilities
Article 243G Panchayats

Article
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authority,
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This article, introduced by the 73rd Amendment Act, provides for

and the power of Panchayats to levy, collect, and appropriate taxes, duties,
of tolls, and fees. The taxes that Panchayats can levy are subject to the
limits prescribed by the state legislature.

This article, introduced by the 74th Amendment Act, provides for

and the power of Municipalities to levy, collect, and appropriate taxes,
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Article

Provision

243W

responsibilities
Municipalities

Explanation
of duties, tolls, and fees. The taxes that Municipalities can levy are subject
to the limits prescribed by the state legislature.

To give you an example, let's say the central government wants to levy a tax on
cigarettes. To do so,
they would need to pass a law authorizing the tax, and the tax would need to fall
under the subjects
listed in List I of the Constitution. On the other hand, if a state government
wanted to levy a tax on
movie tickets, they would need to pass a law authorizing the tax, and the tax would
need to fall under
the subjects listed in List II of the Constitution.
Similarly, if a Panchayat wants to levy a tax on property within its jurisdiction,
they would need to
pass a law authorizing the tax, and the tax would need to fall within the limits
prescribed by the state
legislature. The same would apply to Municipalities that want to levy a tax.

Direct Taxes in India

Personal Income Tax

Personal income tax is a type of direct tax that is levied on the income earned by
individuals. In
India, the income tax is governed by the Income Tax Act, 1961. The income tax is a
progressive tax,
which means that the rate of tax increases with the increase in income.
Here's how personal income tax works in India. First, an individual needs to
determine their taxable
income. This includes income from various sources, such as salary, rental income,
business income, and
capital gains. Certain deductions and exemptions are allowed, such as deductions
for contributions to
certain savings schemes and exemptions for certain types of income.
Once the taxable income is determined, the income tax is calculated based on the
tax rates and
slabs specified by the government. The tax rates and slabs are revised from time to
time in the Union
Budget.
For the financial year 2023-24, the tax rates and slabs for individuals are as
follows:

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Income range

Tax rate

Up to Rs. 3 lakh

Nil

Rs. 3 lakh to Rs. 6 lakh

5%

Rs. 6 lakh to Rs. 9 lakh

10%

Rs. 9 lakh to Rs. 12 lakh

15%

Rs. 12 lakh to Rs. 15 lakh

20%

Above Rs. 15 lakh

30%

Let's say an individual has a taxable income of Rs. 8 lakh. The income tax they
would need to pay can
be calculated as follows:
•
•
•

Up to Rs. 3 lakh: Nil

Rs. 3 lakh to Rs. 6 lakh: 5% of Rs. 3 lakh = Rs. 15,000
Rs. 6 lakh to Rs. 8 lakh: 10% of Rs. 2 lakh = Rs. 20,000
Total tax liability = Rs. 15,000 + Rs. 20,000 = Rs. 35,000

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Corporate Tax

Corporate tax is a type of direct tax in India that is levied on the profits earned
by companies and
corporations. It is a tax on the income or capital of businesses and is paid by
companies registered under
the Companies Act, 2013.
The current corporate tax rate in India is 25% for companies with a turnover of up
to Rs. 400 crore
and 30% for companies with a turnover above Rs. 400 crore. The government has
reduced the corporate
tax rate in recent years to boost economic growth and attract foreign investment.
Let's say a company has a turnover of Rs. 300 crore in the financial year 2020-21.
It would be liable
to pay corporate tax at a rate of 25% on its profits earned during that year. If
the company had a profit
of Rs. 50 crore in that year, it would have to pay Rs. 12.5 crore as corporate tax
(25% of Rs. 50 crore).

Minimum Alternate Tax

The Minimum Alternate Tax (MAT) is a type of direct tax that is levied on companies
that are
otherwise exempt from paying income tax. MAT was introduced in India in 1987 as a
way to ensure that
all companies, including those that might be eligible for various tax exemptions
and deductions, pay a
minimum amount of tax to the government.
Here's how MAT works: if a company's tax liability, calculated under the normal
provisions of the
Income Tax Act, is lower than a certain percentage of its book profit, then the
company is required to
pay tax at the higher of the two rates. Currently, the rate of MAT is 15% of the
book profit.
To give you an example, let's say a company has a book profit of Rs. 1 crore, but
due to various
deductions and exemptions, their taxable income is only Rs. 50 lakh. If the regular
tax liability on this
taxable income is less than Rs. 15 lakh (15% of the book profit of Rs. 1 crore),
the company would have
to pay tax at the higher rate of Rs. 15 lakh under the MAT provisions.
It's important to note that MAT is applicable only to companies, not to individuals
or partnerships.
Also, companies that are already paying a higher amount of tax under the regular
provisions of the
Income Tax Act are not required to pay MAT.

Capital Gains Tax

Capital gains tax is a type of direct tax that is levied on the profits that an
individual or business
earns from the sale of a capital asset, such as real estate, stocks, bonds, or
mutual funds.
Here's how capital gains tax works in India:
Let's say you buy a piece of land for Rs. 50 lakh, and then sell it a few years
later for Rs. 70 lakh. The
profit you make from the sale is Rs. 20 lakh, and this profit is considered a
capital gain. You would then
need to pay capital gains tax on this Rs. 20 lakh profit.
There are two types of capital gains tax in India: short-term capital gains tax and
long-term capital
gains tax. The rate of tax you pay depends on how long you held the asset before
selling it.

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List of Direct Taxes levied in India:
Tax

Description

Levied by

Income tax

Tax on income earned by individuals

Central
Government

Corporate tax

Tax on the profits earned by companies and corporations

Central
Government

Capital gains tax

Tax on the profits earned from the sale of a capital asset, such as
Central
Government
real estate, stocks, bonds, or mutual funds

Securities
transaction tax

Tax on transactions made in the stock market, such as the

purchase or sale of equity shares, derivatives, or equity-oriented
Central
Government
mutual funds

Central
Government
Dividend
distribution tax

Tax on the dividends paid by companies to their shareholders

Abolished in
2020

Tax on the non-monetary benefits provided by employers to their

Central
Fringe benefits tax employees, such as company cars, club memberships, or free
housing Government

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Tax

Description

Levied by
Abolished in
2009

Central
Government

Wealth tax

Tax on the net wealth of individuals and Hindu Undivided Families

Abolished in
(HUFs) that exceed a certain threshold
2016

Gift tax

Tax on the value of gifts received by individuals and HUFs, except

Abolished in
for gifts received from specified relatives or on certain occasions
1998

Estate duty

Tax on the value of assets left behind by a deceased person

Abolished in
1985

Property tax

Tax on the value of real estate property owned by individuals and

State
organizations
Governments

Profession tax

Tax on the income earned by professionals such as lawyers,

State
Governments
doctors, and architects

Tax on the profits earned by companies and corporations that are

Minimum Alternate not liable to pay any income tax or pay a tax at a rate lower
than the
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Central
Tax

Description

Tax (MAT)

MAT rate

Levied by
Government

Indirect Taxes in India

Tax

Description

Levied
by
(Centre or State)

A tax on the supply of goods and services, which replaced

Levied jointly by
Goods and Services multiple indirect taxes previously levied by both the central
and the Centre and the
Tax (GST)
state governments.
States

A tax on the manufacture or production of goods, levied by

Levied by the
Central Excise Duty the central government.
Centre

Customs Duty

A tax on imports and exports of goods, levied by the central

Levied by the
government.
Centre

Service Tax

A tax on the provision of certain services, levied by the

Levied by the
central government.
Centre

Value Added Tax

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A tax on the value added at each stage of the supply chain,

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Levied by the
Tax

Description

(VAT)

levied by state governments.

Levied
by
(Centre or State)
States

A tax on various forms of entertainment, such as movie

Levied by the
Entertainment Tax tickets and amusement parks, levied by state governments.
States

Luxury Tax

Levied by the
A tax on the use of luxury goods and services, such as highend hotel rooms, levied
by state governments.
States

Octroi

A tax on goods entering a city or town, levied by local bodies

Levied by Local
such as municipal corporations or councils.
Bodies

Entry Tax

Levied by the
A tax on goods entering a state, levied by state governments. States

Purchase Tax

Levied by the
A tax on the purchase of goods, levied by state governments. States

Protective Duty

142

A tax on imported goods to protect domestic industries from

Levied by the
foreign competition, levied by the central government.
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Tax

Description

Safeguard Duty

Levied
by
(Centre or State)

A tax on imported goods to protect domestic industries from

Levied by the
a sudden surge in imports, levied by the central government.
Centre

A tax on imported goods to offset the advantage given to

foreign producers by subsidies provided by their government,
Levied by the
Countervailing Duty levied by the central government.
Centre

A tax on imported goods to prevent their sale at a price lower

than their normal value in the exporting country, levied by the
Levied by the
Anti-dumping Duty central government.
Centre

Central Sales Tax

A tax on the sale of goods that are sold between different
Levied by the
(CST)
states in India, levied by the central government.
Centre

State Excise Duty

A tax on the manufacture or sale of goods within a state,

Levied by the
levied by state governments.
States

Several indirect taxes have been subsumed under the Goods and Services Tax (GST) in
India. The
following taxes are no longer levied by the Centre or the States after the
introduction of GST:
1. Central Excise Duty
2. Service Tax
3. Additional Customs Duty or Countervailing Duty (CVD)
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4. Special Additional Duty of Customs (SAD)
5. Central Sales Tax (CST)
6. State VAT/Sales Tax
7. Entertainment Tax (except on the taxes levied by local bodies)
8. Octroi and Entry Tax
9. Purchase Tax
10. Luxury Tax
11. Taxes on lottery, betting, and gambling

However, it's important to note that some taxes, such as Customs Duty, are still
levied by the Centre
even after the introduction of GST. Additionally, some goods and services are
exempted from GST or are
taxed at a lower rate, such as essential goods, healthcare services, and
educational services.

Goods and Services Tax (GST)

What is GST?

GST is an indirect tax that was introduced in India on July 1, 2017. It replaced
multiple indirect taxes
such as VAT, excise duty, and service tax, with a single unified tax. GST is levied
on the value-added at
each stage of the supply chain, with the ultimate consumer bearing the tax burden.

Types of GST:
There are four types of GST in India:
- CGST (Central Goods and Services Tax): Levied by the central government on intra-
state supply of
goods and services
- SGST (State Goods and Services Tax): Levied by state governments on intra-state
supply of goods
and services
- IGST (Integrated Goods and Services Tax): Levied by the central government on
inter-state supply
of goods and services
- UTGST (Union Territory Goods and Services Tax): Levied by Union Territory
governments on intrastate supply of goods and services in Union Territories
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GST Council:
The GST Council is a constitutional body that was created to oversee the
implementation of GST. It is
responsible for making recommendations on issues related to GST such as tax rates,
exemptions, and
other related matters. The council is headed by the Union Finance Minister, and
comprises the Finance
Ministers of all the states and Union Territories.

Significance of GST:
GST has brought about significant changes in the way indirect taxes are collected
and administered
in India. Some of the key benefits of GST are:
- Simplification of tax administration: GST has simplified the tax administration
by replacing
multiple indirect taxes with a single tax.
- Reduction in tax evasion: GST has made it difficult for businesses to evade
taxes, as it is a unified
tax that is levied and collected by both the central and state governments.
- Boost to economic growth: GST has helped to boost economic growth by increasing
the ease of
doing business, reducing transaction costs, and improving the competitiveness of
Indian businesses.

Benefits of GST:
Some of the key benefits of GST are:
- Reduction in the cascading effect of taxes: Under the previous tax regime,
businesses had to pay
tax on tax, leading to a cascading effect. GST has eliminated this by allowing
businesses to claim input
tax credit on taxes paid on purchases.
- Rationalization of tax rates: GST has rationalized tax rates by bringing
uniformity in tax rates
across the country. This has helped to reduce the compliance burden for businesses.
- Increase in tax revenue: GST has helped to increase tax revenue for both the
central and state
governments, as it is a more efficient and transparent tax system.

Compensation to States
When GST was introduced in India on July 1, 2017, it replaced multiple indirect
taxes levied by the
central and state governments. This shift from the previous tax structure to GST
had the potential to
disrupt the revenue streams of the states, especially if their tax collections were
lower than expected
during the initial period.
To address this concern, the GST compensation mechanism was devised as a temporary
measure to
provide financial support to the states. The compensation is provided for a period
of five years from the
implementation of GST, as mandated by the GST (Compensation to States) Act, 2017.
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The compensation to states is funded through the GST Compensation Cess, which is
levied on
certain goods and services that fall under the highest GST tax slab. The proceeds
from this cess are
collected in a dedicated fund known as the GST Compensation Fund.
The calculation of compensation to states is based on the difference between the
projected growth
rate of state tax revenues and the actual growth rate. If a state's tax revenue
growth is lower than the
projected growth rate, the shortfall is compensated by the central government using
the funds from the
GST Compensation Fund. The compensation mechanism is designed to ensure that no
state faces a
revenue deficit during the transition period.
The intent is to allow the states to gradually adjust to the new tax regime and
become self-reliant in
generating tax revenues.

Challenges with GST:

While GST has brought about significant benefits, there are also some challenges
associated with it.
Some of the key challenges are:
- Technical glitches in the GST Network: The GST Network, which is the IT
infrastructure for GST, has
faced several technical glitches since its launch. This has led to delays in filing
returns and other
compliance-related issues.
- Compliance burden for small businesses: GST compliance can be a burden for small
businesses, as
they may not have the resources to comply with the complex tax rules.
- Revenue loss for some states: Some states, especially those that were previously
reliant on certain
indirect taxes, have experienced revenue losses under GST.

New taxes introduced by Government of India in recent times:

Long-Term Capital Gains Tax (LTCG): In the Union Budget 2018, the government
reintroduced
the Long-Term Capital Gains (LTCG) tax on equity investments. This tax is
applicable to the gains made
from the sale of listed securities or equity-oriented mutual funds that are held
for more than one year.
Example: Let's say an individual purchased shares of a company for Rs. 100,000 and
held them for
more than one year. After a year, the value of the shares increased to Rs. 150,000,
resulting in a gain of
Rs. 50,000. If the individual decides to sell the shares, they will be liable to
pay LTCG tax on the gain of
Rs. 50,000 at the applicable rate of 10%.
Benefits: The reintroduction of LTCG tax helps in creating a more equitable tax
structure by treating
long-term gains differently from short-term gains. It encourages long-term
investment and discourages
short-term speculative trading.

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Dividend Distribution Tax (DDT) Replaced: In the Union Budget 2020, the government
abolished the Dividend Distribution Tax (DDT) that was previously levied on
companies distributing
dividends. Instead, the tax liability was shifted to the recipients of dividends,
making it taxable in their
hands.
Example: Suppose a company declares a dividend of Rs. 10 per share, and an
individual holds 1,000
shares of that company. Previously, the company would have deducted DDT (at a rate
of 15% plus
applicable surcharge and cess) and distributed the remaining amount to the
shareholders. However,
after the change, the individual will receive the entire dividend amount of Rs.
10,000, and the tax
liability on this dividend will be based on their income tax slab rate.
Benefits: The replacement of DDT with the new tax structure benefits individual
shareholders as
they are now liable to pay taxes on dividend income according to their respective
income tax slabs. This
change eliminates the double taxation on dividends, as companies are no longer
required to pay DDT
before distributing dividends. It provides greater transparency and reduces the tax
burden on
companies, encouraging them to distribute higher dividends to shareholders.

Tax on Digital Services (Equalization Levy): The Equalization Levy, popularly known
as the
"Google Tax," was introduced in 2016. It is a tax applicable to specified digital
services provided by
foreign companies operating in India.
Example: If an Indian company engages in online advertising services provided by a
foreign
company, it is required to withhold the prescribed Equalization Levy from the
payment made to the
foreign entity and deposit it with the government.
Benefits: The tax on digital services ensures that foreign digital service
providers contribute to the
Indian tax system. It helps create a level playing field for domestic service
providers by preventing unfair
competition from foreign entities. Additionally, it acts as a means to capture tax
revenue from the
rapidly growing digital economy, ensuring that the tax system keeps pace with
changing business
models and technological advancements.

Tax-GDP Ratio
Tax-GDP ratio is a measure of the total tax revenue collected by the government as
a percentage of
the country's Gross Domestic Product (GDP).
Tax-GDP ratio = (Total Tax Revenue / GDP) x 100

India's Tax-GDP ratio:

India's tax-GDP ratio has been historically low. In the financial year 2020-21,
India's tax-GDP ratio
was around 9.9%, which is much lower than that of developed countries like the
United States, United
Kingdom, and Germany, where the tax-GDP ratio is around 25-30%.
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Reasons for low Tax-GDP ratio in India:

1. Large informal sector: A significant portion of the Indian economy is informal,

which means it is
not registered with the government and does not pay taxes. This results in lower
tax revenues for the
government.
2. Tax evasion: Many individuals and businesses in India evade taxes by
underreporting income or
hiding assets. This reduces the amount of tax revenue collected by the government.
3. Low compliance: The complexity of India's tax system, along with the cumbersome
and timeconsuming tax compliance process, often leads to low compliance by
taxpayers.

Government initiatives to increase Tax-GDP ratio:

1. Simplifying the tax system: The government has undertaken several reforms to
simplify the tax
system, including the introduction of the Goods and Services Tax (GST), which has
replaced multiple
indirect taxes with a single tax.
2. Improving tax administration: The government has taken measures to improve tax
administration, such as increasing the use of technology, reducing the compliance
burden, and
enhancing the capacity of tax authorities.
3. Increasing tax base: The government has launched various initiatives to increase
the tax base,
such as the Voluntary Disclosure of Income Scheme, which allows taxpayers to
voluntarily disclose their
undeclared income and pay taxes on it.
4. Cracking down on tax evasion: The government has also taken steps to crack down
on tax
evasion, such as implementing the Benami Transactions (Prohibition) Act, which
allows for the
confiscation of assets held under a fictitious name to evade taxes.

Tax Expenditure
Tax expenditure refers to the revenue losses incurred by the government due to
provisions in the
tax code that provide exemptions, deductions, credits, deferrals, and other
benefits to taxpayers. It's like
the government giving up potential tax revenue by providing special treatment
through the tax system.

Benefits:

1. Encouraging Desired Behavior: Tax expenditure is often used as a tool to

incentivize certain
behaviors or activities that the government wants to promote. For example, tax
breaks for renewable
energy investments.

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2. Stimulating Economic Growth: Tax expenditure can stimulate economic growth by
providing
financial incentives to individuals and businesses. For instance, tax credits for
research and development
activities.
3. Reducing Tax Burden: Tax expenditure can provide relief to individuals and
businesses by
reducing their tax burden. This can help increase disposable income, encourage
consumer spending, and
provide businesses with more capital for investment, expansion, and job creation.
4. Addressing Social Issues: Tax expenditure can be used to address social issues
and promote
fairness. For example, tax credits for low-income individuals or families can help
alleviate poverty and
provide support to those in need.

Criticisms:

1. Selective Benefits: Critics argue that tax expenditure can create an uneven
playing field and
perpetuate income inequality.
2. Revenue Loss: Tax expenditure reduces government revenue, which can impact
funding for public
services and programs.
3. Complexity and Loopholes: The presence of tax expenditure provisions can
complicate the tax
system and create opportunities for tax avoidance and evasion.
4. Lack of Effectiveness: There can be instances where the desired behavioral
changes or economic
impacts fall short of expectations, raising concerns about the efficiency and
effectiveness of tax
expenditure measures.

Tax Evasion vs Tax Avoidance

Tax evasion is when someone illegally avoids paying their taxes. This can include
hiding income, not
reporting income, claiming false deductions, or not filing tax returns altogether.
For example, let's say a
business owner earns Rs. 50 lakhs per year but only reports earning Rs. 30 lakhs to
the government. This
is considered tax evasion and is illegal.
Tax avoidance, on the other hand, is when someone uses legal means to reduce the
amount of taxes
they owe. This can include taking advantage of tax deductions, credits, or
exemptions. For example, let's
say a business owner invests in a tax-saving scheme that allows them to deduct Rs.
1 lakh from their
taxable income. This is considered tax avoidance and is legal.
In essence, the key difference between tax evasion and tax avoidance is legality.
Tax evasion is
illegal and can lead to fines or even criminal charges, while tax avoidance is
legal and is a common
practice among taxpayers.

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It's important to note that while tax avoidance is legal, it can still be
controversial. Some argue that
it allows the wealthy to pay less in taxes than they should, while others argue
that it's a legitimate way
to reduce the tax burden on individuals and businesses.

Black Money
Black money refers to income or assets that are earned or acquired through illegal
means and are
not reported to the government for tax purposes.
There are several ways black money can be generated in India. Some examples
include:
- Underreporting of income: An individual or a business may underreport their
income to the tax
authorities to avoid paying taxes on the full amount.
- Bribery: An individual or a business may pay bribes to public officials to avoid
paying taxes or to get
preferential treatment.
- Money laundering: Black money generated through illegal activities may be
laundered through
legal channels to make it appear as legitimate income or assets.
- Hawala transactions: Hawala is an informal method of transferring money without
using formal
banking channels. This method is often used to transfer black money across borders.
The impact of black money on the Indian economy is significant. When individuals or
businesses do
not pay taxes on their income or assets, it reduces the government's revenue. This
can lead to a shortfall
in funds for public services and infrastructure development. Black money can also
create an uneven
playing field for businesses that do pay taxes, as non-compliant businesses can
offer products and
services at lower prices due to their lower tax burden.

Impact of black money on the economy

1. Loss of tax revenue: When tax revenues decline, the government may face
budgetary constraints,
leading to reduced investments in key sectors.
2. Distortion of economic indicators: Since Black Money is not accounted for in
official records, it
creates an inaccurate picture of the economy. Key indicators like GDP (Gross
Domestic Product), per
capita income, and poverty levels may be misrepresented due to the presence of
unaccounted income.
This can misguide policymakers and hinder effective decision-making.
3. Erosion of the formal economy: Black money encourages a parallel or underground
economy,
which operates outside the legal system. This can undermine the formal economy in
several ways. First,
it creates unfair competition because businesses involved in the underground
economy can offer goods
or services at lower prices since they avoid taxes and regulatory compliance costs.
This puts legitimate
businesses at a disadvantage, leading to reduced growth and job opportunities.
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Additionally, black money often fuels corruption, as individuals may resort to
bribes or illicit
payments to avoid legal consequences. Such corrupt practices further weaken
institutions, undermine
public trust, and hinder economic progress.
4. Inequality and social implications: Black money exacerbates economic inequality
within a society.
Those who evade taxes and accumulate unaccounted wealth often belong to the higher
income
brackets, widening the wealth gap between the rich and the poor. This inequality
can have severe social
implications, including reduced access to essential services, limited opportunities
for upward mobility,
and heightened social unrest.

Government initiatives to tackle Black Money

- Demonetization: In 2016, the Indian government demonetized high-value currency

notes to tackle
black money. The move aimed to eliminate unaccounted cash holdings and force
individuals to deposit
their unreported income into bank accounts.
- Voluntary Disclosure Schemes: The government has introduced several Voluntary
Disclosure
Schemes (VDS) in the past, where individuals or businesses can declare their
unreported income and
assets without fear of prosecution.
- Introduction of Benami Transactions (Prohibition) Act: The government introduced
the Benami
Transactions (Prohibition) Act in 2016 to tackle the issue of benami transactions,
which refers to
property or assets held in someone else's name to evade taxes.
- Implementation of Goods and Services Tax (GST): The implementation of GST has
reduced tax
evasion by bringing more businesses into the formal tax net.

Money Laundering
Money laundering refers to the process of making illegally obtained money, known as
"dirty
money," appear as though it came from legal sources. The purpose of money
laundering is to hide the
true origins of the funds, making it difficult for authorities to trace and link
them to criminal activities.
Money laundering generally involve three main stages: placement, layering, and
integration.
1. Placement: In this stage, the illicit funds are introduced into the legitimate
financial system. This
can be done by depositing cash into bank accounts, purchasing assets such as real
estate or luxury
goods, or using money transfer services. For instance, a person involved in drug
trafficking might deposit
large amounts of cash into multiple bank accounts to blend it with legitimate
funds.
2. Layering: In this stage, the goal is to create complex transactions to obscure
the audit trail and
make it difficult to trace the origin of the funds. This involves multiple layers
of transactions and
transfers, often across different jurisdictions or financial institutions. For
example, the launderer might
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move funds between various bank accounts, make investments, or conduct
international wire transfers
to confuse investigators.
3. Integration: In the final stage, the laundered money is reintroduced into the
legitimate economy,
making it appear as legitimate income or assets. This can be done by investing in
businesses, purchasing
more properties, or simply spending the money on lavish lifestyles. The launderer
may use these funds
freely without raising suspicions. For instance, the launderer could start a
legitimate business and use
the illicit funds to finance its operations.
Money laundering have evolved with advancements in technology and globalization.
Here are some
examples of how money laundering is conducted using modern methods:
1. Cryptocurrencies: The rise of cryptocurrencies, such as Bitcoin, has provided
new opportunities
for money laundering. Criminals can use digital currencies to transfer funds
globally with relative
anonymity. They can convert illicit funds into cryptocurrencies, move them through
multiple digital
wallets, and then convert them back into traditional currencies, effectively
obscuring the trail of the
money. Cryptocurrencies' decentralized nature and the use of blockchain technology
make it challenging
for authorities to trace these transactions.
2. Online Payment Systems: Online payment systems, like PayPal, Venmo, or other
digital wallets,
can be exploited for money laundering purposes. Criminals can create multiple
accounts, conduct
transactions between these accounts, and then withdraw funds or transfer them to
other bank
accounts. These systems provide a quick and convenient way to move money globally,
making it harder
for authorities to detect suspicious activities.
3. Money Mules: Money mules are individuals who are recruited to facilitate money
laundering by
receiving illicit funds into their own bank accounts and then transferring them to
other accounts or
overseas. Criminals often exploit unsuspecting individuals by offering them
financial incentives or posing
as legitimate job opportunities. Money mules provide a layer of separation between
the illegal activities
and the funds' ultimate destination, making it challenging to trace the source of
the money.
4. Offshore Accounts and Tax Havens: Money launderers frequently utilize offshore
accounts and
jurisdictions with lax financial regulations and strict secrecy laws. They can
establish shell companies or
open bank accounts in these locations to disguise the ownership and control of the
funds. By funneling
money through offshore accounts, criminals can hide the true origin of the funds,
making it difficult for
authorities to follow the money trail.
5. Online Gambling and Casinos: Online gambling platforms and physical casinos can
be exploited
for money laundering. Criminals can use illicit funds to gamble and then cash out
their winnings as clean
money. The complex transactions and large volume of cash flowing through these
establishments can
make it challenging for authorities to distinguish between legitimate gambling
activities and money
laundering.
To tackle money laundering, the Government of India has taken several initiatives:

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1. The Prevention of Money Laundering Act (PMLA): The PMLA is the primary
legislation in India
that addresses money laundering. It provides a legal framework for the detection,
investigation, and
prevention of money laundering activities. The law imposes obligations on financial
institutions to report
suspicious transactions to the authorities and establishes penalties for non-
compliance.
2. Financial Intelligence Unit-India (FIU-IND): The FIU-IND is the central agency
responsible for
collecting, analyzing, and disseminating information related to suspicious
financial transactions. It acts
as the nodal agency for receiving and analyzing suspicious transaction reports from
banks and other
financial intermediaries.
3. Know Your Customer (KYC) Norms: The government has implemented stringent KYC
norms to
ensure that financial institutions properly identify their customers and maintain
records of their
transactions. These measures help in establishing the identity of customers and
detecting any suspicious
or unusual activities.
4. International Cooperation: India actively participates in international forums
like Financial Action
Task Force (FATF) and cooperates with other countries to combat money laundering.
It has signed
various bilateral and multilateral agreements for exchanging information, freezing
assets, and
extraditing individuals involved in money laundering.

Tax Haven
A tax haven is a country or territory that has very low or no tax rates, and which
is used by
individuals and companies to avoid paying taxes in their home country. This is
usually done by moving
money or assets to the tax haven, where it can be kept without attracting
significant tax liability.
For example, let's say a wealthy Indian businessperson wants to avoid paying high
taxes on their
income. They could set up a company in a tax haven country like the Cayman Islands
or Bermuda, and
transfer their assets to that company. Because the tax rates in the tax haven are
so low, they would pay
very little tax on their income.
To counter tax havens, many countries have implemented various measures to prevent
individuals
and companies from avoiding taxes. Here are a few examples of countermeasures
against tax havens:
1. Tax treaties: Countries can enter into tax treaties with each other, which
provide for the
exchange of information and the prevention of tax evasion. These treaties help
countries to track down
and tax income that has been moved to tax havens.
2. Taxation of controlled foreign corporations (CFCs): Many countries tax the
income of CFCs, which
are companies that are based in tax havens but controlled by residents of another
country. This helps to
prevent individuals and companies from using tax havens to avoid taxes.
3. Blacklisting: Some countries maintain a list of tax havens that are not
cooperative in tax matters.
They may apply stricter regulations or impose penalties on transactions with these
tax havens.
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4. Automatic exchange of information: Countries can also agree to automatically
exchange financial
information, which helps to detect and prevent tax evasion.

Indirect Transfers
Indirect transfer refers to a situation where shares or ownership of a company are
transferred, but
the real value of those shares comes from the underlying assets of another company
located in a
different country. This becomes important because the gains from such transfers can
potentially escape
tax liabilities in that country.
Let's look at an example to clarify this concept. In 2007, there was a big deal
involving UK based
Vodafone, a well-known telecommunications company, and Hutchison Essar, an Indian
telecommunications company (now known as Vodafone Idea).
Vodafone wanted to expand its presence in India, so it acquired the shares of a
foreign company
called Hutchison Whampoa, based in Hong Kong, which held a substantial stake in
Hutchison Essar. So
even though Vodafone didn't directly buy those Indian assets, it indirectly gained
control over them
through the shares it purchased.
The problem came when the Indian tax authorities said that this kind of indirect
transfer should be
taxed because it involved valuable Indian assets. Vodafone disagreed and said they
shouldn't be taxed
since it was a deal between two foreign companies. This disagreement led to a big
legal fight.

Global Treaties and Agreements related to taxation

Double Taxation Avoidance Agreement (DTAA): A DTAA is an agreement between two
countries that aims to avoid double taxation of income that may arise in both
countries. For example, if
an Indian resident earns income from a foreign country, they may be liable to pay
tax on that income in
both India and the foreign country. A DTAA can help avoid this situation by
allowing for the tax paid in
one country to be credited against the tax liability in the other country. India
has signed DTAA
agreements with many countries, including the United States, the United Kingdom,
and Singapore.
Base Erosion and Profit Shifting (BEPS): BEPS is an initiative led by the
Organisation for

Economic Co-operation and Development (OECD) to combat tax avoidance strategies

used by
multinational companies. These strategies involve shifting profits to low-tax
jurisdictions and taking
advantage of loopholes in tax laws. The BEPS project aims to develop international
standards and
guidelines to prevent such tax avoidance. As a country with good working
relationship with the OECD,
India has committed to implementing BEPS standards.
Let's say there is a multinational company that operates in several countries,
including India. The
company has a subsidiary in a low-tax country, where it books most of its profits.
However, the
subsidiary does not actually perform much of the company's actual operations, as
those are carried out
by the company's employees in India.
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Under BEPS, tax authorities in India may investigate this situation and determine
that the profits
booked in the low-tax country are not justified by the actual economic activity
that took place there. The
tax authorities may then require the company to pay additional taxes on those
profits in India, where
the actual economic activity took place.
BEPS guidelines provide tax authorities with a framework to identify and address
such tax avoidance
strategies, in order to ensure that companies are paying their fair share of taxes.

Global Minimum Tax: The global minimum tax is a proposed tax that would ensure that
multinational companies pay a minimum level of tax on their profits, regardless of
where they are
located. The idea behind this tax is to prevent companies from shifting profits to
low-tax countries. The
proposal is being discussed among countries in the G20 and the OECD, and India is a
part of these
discussions.
Advance Pricing Agreement (APA): An APA is an agreement between a taxpayer and tax

authorities that determines in advance the transfer pricing methodology to be

applied to transactions
between related parties. This can help avoid disputes between taxpayers and tax
authorities.

Let's say that an Indian company, ABC Pvt Ltd, has a subsidiary in the United
States, XYZ Inc. ABC Pvt
Ltd purchases goods from XYZ Inc at a certain price. However, the Indian tax
authorities suspect that the
price at which the goods are being sold is not an arm's length price (i.e., the
price that would be charged
between two unrelated parties in a similar transaction).
To avoid any potential tax disputes, ABC Pvt Ltd and the US tax authorities can
enter into an APA.
The APA would ensure that the price at which the goods are being sold is at arm's
length and would
avoid any tax disputes in the future.

General Anti-Avoidance Rule (GAAR): GAAR is a provision in Indian tax law that aims
to
prevent tax avoidance through the use of artificial and contrived transactions.
GAAR gives the tax
authorities the power to recharacterize transactions that are deemed to be designed
primarily for tax
avoidance purposes. This provision aims to ensure that taxpayers are not able to
avoid tax through
artificial structures.
Let's say a company wants to avoid paying taxes on profits it earned in India. To
do this, the
company creates a complex web of transactions involving several subsidiaries and
holding companies
located in different countries, including tax havens.
Under GAAR, the tax authorities can investigate and recharacterize these
transactions if they are
deemed to be designed primarily for tax avoidance purposes. The tax authorities may
determine that
the transactions are artificial and contrived, and reclassify them as if they had
been structured
differently to reflect the economic reality of the situation.
In this case, the tax authorities may treat the company's subsidiaries and holding
companies as a
single entity and tax the profits earned in India accordingly. This could result in
the company paying
higher taxes on its profits, as it would no longer be able to use artificial
structures to avoid tax.
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Previous Years Prelims Questions
1.

Which one of the following effects of creation of black money in India has been
the main cause of worry to the Government of India?

2021

a) Diversion of resources to the purchase of real estate and investment in

luxury housing
b) Investment in unproductive activities and purchase of precious stones,
jewellery, gold etc.
c) Large donations to political parties and growth of regionalism
d) Loss of revenue to the State Exchequer due to tax evasion

2.

What is/are the most likely advantages of implementing ‘Goods and Services Tax
(GST)’?

2017

(1) It will replace multiple taxes collected by multiple authorities and will thus
create a single market in India.
(2) It will drastically reduce the ‘Current Account Deficit’ of India and will
enable it to increase its foreign exchange reserves.
(3) It will enormously increase the growth and size of the economy of India
and will enable it to overtake China in the near future.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

3.

Consider the following statements :

(1) Tax revenue as a percent of GDP of India has steadily increased in the last
decade.
(2) Fiscal deficit as a percent of GDP of India has steadily increased in the last
decade.
Which of the statements given above is/are correct ?

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2017
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

4.

A decrease in tax to GDP ratio of a country indicates which of the following?

2015

(1) Slowing economic growth rate

(2) Less equitable distribution of national income
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

5.

The sales tax you pay while purchasing a toothpaste is a

(a) tax imposed by the Central Government
(b) tax imposed by the Central Government but collected by the State
Government
(c) tax imposed by the State Government but collected by the Central
Government
(d) tax imposed and collected by the State Government

Previous Years Mains Questions

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2014
1.

Discuss how emerging technologies and globalisation contribute to money 2021

laundering. Elaborate measures to tackle the problem of money laundering both
at national and international levels.

2.

Explain the rationale behind the Goods and Services Tax (Compensation to 2020
States) Act of 2017. How has COVID-19 impacted the GST compensation fund and
created new federal tensions?

3.

Enumerate the indirect taxes which have been subsumed in the goods and 2019
services tax (GST) in India. Also, comment on the revenue implications of the GST
introduced in India since July 2017.

4.

Comment on the important changes introduced in respect of the Long term 2018
Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget
for 2018-2019.

5.

What is the meaning of the term ‘tax expenditure’? Taking the housing sector as
2013
an example, discuss how it influences the budgetary policies of the government.

6.

Discuss the rationale for introducing the Goods and Services Tax (GST) in India.
Bring out critically the reasons for the delay in roll out for its regime.

Answers
1.

2.

3.

4.

5.

Sales Tax subsumed in

GST.
Hence
this
question is no more
relevant

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2013
11. Banking

Say hello! |

@Ketanomy
Contents
Evolution of Banking in
India .............................................................................
................................. 162
Pre-
independence: .....................................................................
.................................................... 162
Post-independence 1947-
1991: .............................................................................
........................ 162
Post-independence since
1991: .............................................................................
........................ 162
Banks .............................................................................
..................................................................... 163
Primary
functions: ........................................................................
.................................................. 163
Secondary
functions: ........................................................................
.............................................. 163
Bank Balance
Sheet .............................................................................
............................................... 164
Classification of
Banks .............................................................................
........................................... 165
Reserve Bank of India
(RBI) .............................................................................
................................... 165
Schedule and Non-Schedule
Banks .............................................................................
....................... 166
Public Sector
Banks .............................................................................
............................................... 168
Scheduled Private Sector
Banks .............................................................................
............................ 168
Scheduled foreign
banks .............................................................................
....................................... 168
Regional Rural
Banks .............................................................................
............................................. 168
Small Finance
Banks .............................................................................
.............................................. 169
Scheduled Payment
Banks .............................................................................
.................................... 169
Cooperative
Banks .............................................................................
................................................. 170
Non-Banking Financial
Company ...........................................................................
............................. 170
Difference between Bank and
NBFC ..............................................................................
.................... 172
All India Financial Institutions
(AIFIs) ...........................................................................
...................... 173
Small Industries Development Bank of India
(SIDBI)...................................................................... 173
National Bank for Agriculture and Rural Development
(NABARD) ................................................ 174
Export-Import Bank of
India .............................................................................
.............................. 175
National Housing Bank
(NHB) .............................................................................
............................ 175
Micro Units Development and Refinance Agency
(MUDRA) ......................................................... 176
Understanding Financial Position of a
Bank ..............................................................................
......... 176
Bank
Run................................................................................
......................................................... 176
Capital Adequacy Ratio
(CAR)..............................................................................
........................... 177
Basel
Norms..............................................................................
...................................................... 178
India and
Basel..............................................................................
.............................................. 179
Non-Performing Assets
(NPAs) ............................................................................
........................... 179
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Initiatives to tackle NPA crisis in
India .............................................................................
........... 181
Committees on Banking Sector
Reforms............................................................................
................ 183
Financial
Inclusion .........................................................................
..................................................... 184
Challenges in achieving financial
inclusion: ........................................................................
........... 185
Measures taken to promote Financial
Inclusion: ........................................................................
... 185
Initiatives to promote Cashless
transactions ......................................................................
............... 186
Previous Years Prelims
Questions .........................................................................
............................. 188
Previous Years Mains
Questions .........................................................................
............................... 197

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Chapter 11
Banking
Banking is an integral part of any modern economy, providing a range of financial
services to individuals,
businesses, and governments. Banks are financial intermediaries that accept
deposits and use those
funds to provide loans, investments, and other financial services. They play a
crucial role in the
allocation of credit, payment system, and liquidity provision in the economy.

Evolution of Banking in India

Pre-independence:

Before India gained independence from British rule in 1947, banking was largely
controlled by
foreign banks. The first bank in India, the Bank of Hindustan, was established in
1770 by a group of
European merchants. Over the years, more foreign banks opened branches in India,
such as the Bank of
Bengal, the Bank of Bombay, and the Bank of Madras.
In the late 19th century, some Indian entrepreneurs started their own banks to
cater to the needs of
the Indian people. For example, in 1894, the Punjab National Bank was founded to
promote Indian selfreliance in the banking sector. However, these Indian banks
faced many challenges, including limited
access to capital and competition from the more established foreign banks.

Post-independence 1947-1991:

After independence, the Indian government nationalized most of the foreign banks in
the country,
including the Bank of India and the Imperial Bank of India, which became the State
Bank of India. This
move was made to promote Indian control over the banking sector and to ensure that
the banking
system served the needs of the Indian people.
The government also established several new banks, such as the Industrial
Development Bank of
India (IDBI) and the National Bank for Agriculture and Rural Development (NABARD),
to promote
industrial and agricultural development in the country. These banks were also
nationalized, meaning
that the government had a controlling stake in their operations.
However, the banking sector in India was largely regulated and had limited
competition. Banks were
required to follow strict rules and regulations, and interest rates were set by the
government. This made
it difficult for banks to innovate and compete with each other, which in turn
limited access to credit and
other financial services for the general public.

Post-independence since 1991:

Starting in the early 1990s, the Indian government began to liberalize the banking
sector, allowing
for more private sector participation and competition. This was part of a broader
set of economic
reforms that aimed to modernize and liberalize the Indian economy.
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Today, India has a mix of public sector, private sector, and foreign banks
operating in the country.
The Reserve Bank of India (RBI) still regulates the banking sector, but banks have
more autonomy in
setting interest rates and conducting their operations. This has led to greater
innovation and
competition in the sector, which has in turn increased access to credit and other
financial services for
the general public.
The government has also launched several initiatives to promote financial
inclusion, such as the
Pradhan Mantri Jan Dhan Yojana, which aims to provide every household in India with
a bank account.

Banks
Let's start with the definition of a bank. A bank is a financial institution that
accepts deposits from
individuals and organizations and provides loans, credit, and other financial
services to its customers.
Banks play a crucial role in the economy by facilitating financial transactions and
promoting economic
growth.

Primary functions:

There are two primary functions of banks:

1. Accepting deposits: One of the primary functions of a bank is to accept demand
and time
deposits from its customers. Banks offer various types of deposit accounts like
savings accounts, current
accounts, fixed deposit accounts, etc. These accounts allow customers to deposit
their money in the
bank and earn interest on it.
2. Providing loans: The second primary function of banks is to provide loans to
individuals and
organizations. Banks offer various types of loans like personal loans, home loans,
car loans, business
loans, etc. These loans help people and businesses to meet their financial needs.

Secondary functions:

1. Providing financial advice: Banks also provide financial advice to their

customers. They have
financial experts who can guide their customers in making wise financial decisions.
For example, if you
want to invest your money, you can seek advice from your bank's financial expert.
2. Issuing credit and debit cards: Banks also issue credit and debit cards to their
customers. These
cards allow customers to make cashless transactions.
3. Providing safe deposit boxes: Banks also provide safe deposit boxes to their
customers to store
their valuables like jewelry, documents, etc.
4. Foreign exchange services: Banks also provide foreign exchange services to their
customers. For
example, if you are traveling to a foreign country, you can exchange your local
currency for the currency
of the country you are traveling to at your bank.

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Bank Balance Sheet

Assets

Liabilities

Cash

Deposits

Loans

Borrowings

Investments

Bank's Capital

Buildings and Equipment

Other Liabilities

Other Assets

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Classification of Banks
RBI

Scheduled
Banks
Commercial
Banks

Small Finance
Banks

Non-scheduled
Banks

Payments
Banks

AIFIs

Co-operative
Banks

NABARD

Public Sector
Banks

Urban

SIDBI

Private Sector
Banks

Rural

NHB

Foreign Banks

EXIM

Regional Rural
Banks

MUDRA

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is the apex monetary authority in India,
established under the
Reserve Bank of India Act, 1934. As the central bank of the country, the RBI plays
a pivotal role in
formulating and implementing monetary policy, regulating and supervising the
banking sector,
ensuring financial stability, and undertaking key functions as follows:
1. Monetary Policy Formulation: The RBI is entrusted with the task of formulating
and executing the
monetary policy of India. It uses various instruments, such as the repo rate,
reverse repo rate, and
cash reserve ratio, to influence money supply and credit conditions in the economy.
The aim is to
maintain price stability and support sustainable economic growth.
2. Currency Issuance and Management: The RBI has the sole authority to issue
currency notes and
coins in India. It undertakes the responsibility of ensuring an adequate supply of
currency to meet
the demands of the economy while preventing excess liquidity that may lead to
inflationary
pressures.
3. Banking Regulation and Supervision: As the regulator of the banking sector, the
RBI enforces
prudential norms and guidelines to ensure the soundness and stability of banks. It
issues licenses for
new banks, monitors their operations, and intervenes when necessary to safeguard
depositor
interests and maintain the integrity of the financial system.
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4. Foreign Exchange Management: The RBI manages India's foreign exchange reserves
and
formulates policies to govern foreign exchange transactions. It aims to maintain
exchange rate
stability and support the balance of payments position.
5. Developmental Role: Apart from its regulatory and supervisory functions, the RBI
plays a
developmental role in fostering a well-functioning financial system. It promotes
financial inclusion
initiatives, encourages the adoption of technological innovations, and facilitates
the development of
financial markets.
6. Banker to the Government: The RBI acts as the banker to the central and state
governments. It
conducts their banking operations, manages their accounts, and facilitates the
issuance and
redemption of government securities.
7. Banker's Bank: The RBI serves as the banker's bank, meaning that it provides
banking services to
other banks. Commercial banks can maintain their deposits with the RBI, and it
offers various
facilities, such as interbank funds transfer and settlement systems, to support
smooth banking
operations.
8. Lender of Last Resort: In times of financial crisis or liquidity shortages, the
RBI acts as the lender
of last resort for banks. It provides emergency financial assistance to banks
facing temporary
liquidity problems to prevent widespread panic and maintain stability in the
banking system.
9. Financial Stability and Surveillance: The RBI actively monitors the financial
system for potential
risks and vulnerabilities. It conducts periodic assessments and stress tests to
ensure the stability and
resilience of the financial sector.

Schedule and Non-Schedule Banks

Criteria

Schedule Banks

Schedule

Listed in the 2nd Schedule of the RBI Act

Non-Schedule Banks

Not listed in the 2nd Schedule

of the RBI Act

Compliance
with
Required to comply with all RBI guidelines
Required to comply with only
RBI guidelines
and regulations
basic RBI guidelines and regulations
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Criteria

Schedule Banks

Non-Schedule Banks

Eligible to borrow from the RBI's various

Not eligible to borrow from the
Borrowing from RBI credit facilities
RBI's credit facilities

Required to maintain a certain percentage of

CRR (Cash Reserve their net demand and time liabilities as CRR with
Not required to maintain CRR
Ratio)
the RBI
with the RBI

Loans from RBI

Eligible for loans from the RBI under certain

Not eligible for loans from the
schemes and conditions
RBI

Paid-up Capital

Required to have a minimum paid-up capital

No
specific
minimum
of Rs. 100 crore
requirement for paid-up capital

Membership

Not necessarily a member of

Member of clearinghouses and payment clearinghouses
and
payment
systems
systems

Examples

etc.

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State Bank of India, HDFC Bank, ICICI Bank,

@Ketanomy

Ujjivan Small Finance Bank,

Janalakshmi Financial Services, etc.
Public Sector Banks
Public sector banks are financial institutions under the control of the government,
which means that
more than 50% of their shares are owned by the government. In India, there are
currently 12 public
sector banks, including the State Bank of India, Bank of India, Punjab National
Bank, and Canara Bank.
They are subject to government regulations and oversight. This means that the
government can
influence their policies, lending practices, and decision-making to align with the
broader economic and
social goals of the country.
Public sector banks also play a critical role in financial inclusion, as they are
required to provide
banking services to all segments of society, including those in rural areas and
low-income groups.

Scheduled Private Sector Banks

Scheduled Private Sector Banks are banks that are owned by private entities, not
the government.
They have shareholders who own the bank and have invested their money in it.
There are 21 Scheduled Private Sector Banks in India. Some examples of these banks
are Axis Bank,
ICICI Bank, HDFC Bank, and Kotak Mahindra Bank. These banks operate like any other
bank, accepting
deposits from customers, giving out loans, and providing other financial services.
Even though these banks are privately owned, they are still subject to regulatory
oversight from the
Reserve Bank of India (RBI). This means that the RBI is responsible for making sure
these banks follow
certain rules and regulations to protect their customers and the overall financial
system.
For example, the RBI might require the bank to conduct regular audits to make sure
everything is
running smoothly. This regulatory oversight helps maintain the stability and
integrity of the banking
system.

Scheduled foreign banks

Scheduled foreign banks are banks that are based outside of India but have opened
branches or
offices within India. These banks are allowed to operate in India as they have
obtained the necessary
approvals and licenses from the Reserve Bank of India (RBI).
For example, HSBC, Standard Chartered Bank, and Citibank are foreign banks that
operate in India.
These banks have their headquarters in other countries but have set up branches in
various cities across
India, such as Mumbai, New Delhi, and Bangalore.
Just like any other bank operating in India, scheduled foreign banks have to follow
the rules and
regulations set by the RBI. They are subject to the same regulatory oversight and
supervision as Indian
banks, and they must comply with the various guidelines and policies set by the
RBI.

Regional Rural Banks

Regional Rural Banks (RRBs) were established to help bridge the gap in credit
availability that rural
people often face due to lack of access to banking facilities.
RRBs are jointly owned by the central government, the state government, and a
sponsor bank. The
central government owns 50% of the bank, the state government owns 15%, and the
remaining 35% is
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owned by a sponsor bank. The sponsor bank is usually a nationalized bank that helps
with the
management and operation of the RRB.
There are several Regional Rural Banks operating in India. For example, Baroda
Uttar Pradesh Gramin
Bank, Andhra Pradesh Grameena Vikas Bank, Bihar Gramin Bank.

Small Finance Banks

Scheduled small finance banks are a type of bank that is licensed by the Reserve
Bank of India (RBI)
under its Guidelines for Licensing of Small Finance Banks in the Private Sector.
These banks specialize in
providing financial services such as loans, deposits, and insurance to micro-
industries, small farmers, and
the unorganized sector.
Scheduled small finance banks have a mandate to promote financial inclusion and
reach underserved
segments of the population. They are required to maintain a minimum capital
adequacy ratio of 15%,
which ensures that they have enough capital to meet their obligations. In addition,
they are required to
maintain a priority sector lending target of 75%, which means that at least 75% of
their loans should be
directed towards priority sectors such as agriculture, micro and small enterprises,
and weaker sections
of society.
Currently, there are 10 scheduled small finance banks operating in India. Examples
of these banks
include AU Small Finance Bank and Capital Small Finance Bank.

Scheduled Payment Banks

Scheduled payment banks (SPBs) are a type of bank in India that are licensed by the
Reserve Bank of
India (RBI) to provide payment services to customers. These banks are not
authorized to lend money or
issue credit cards, but they can accept deposits from customers and provide other
payment-related
services.
One of the key features of SPBs is that they focus on serving low-income customers
in rural and remote
areas who may not have access to traditional banking services. SPBs use technology,
such as mobile
banking and online banking, to provide convenient and affordable payment services
to their customers.
Here are some examples of the types of services that SPBs might offer:
- Remittances: Many people who work in cities or other areas send money back home
to their families
in rural areas. SPBs can help facilitate these remittances by providing a secure
and convenient way to
transfer money from one account to another.

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- Savings accounts: SPBs can offer savings accounts to customers, which allow them
to earn interest on
their deposits. These accounts typically have lower minimum balance requirements
than traditional
banks, which makes them more accessible to low-income customers.
- Bill payments: SPBs can help customers pay their utility bills, such as
electricity and water bills, through
online or mobile banking. This makes it easier for customers to manage their
finances without having to
travel to a physical bank branch.
- Merchant payments: SPBs can help merchants accept digital payments from
customers, such as
through a mobile app or QR code. This can help promote digital transactions and
reduce the reliance on
cash.
Some examples of scheduled payment banks in India include Airtel Payments Bank,
Fino Payments Bank,
and Paytm Payments Bank.

Cooperative Banks
Cooperative banks are financial institutions that are owned and operated by their
members. These
members are typically individuals or businesses in the same geographic area or
industry who have come
together to pool their financial resources and provide banking services to
themselves and others.
There are two types of cooperative banks: urban and rural. Urban cooperative banks
operate in cities
and towns, while rural cooperative banks operate in rural areas. Both types of
banks are regulated by
the Reserve Bank of India (RBI).
The primary objective of cooperative banks is to provide affordable and accessible
financial services to
their members, who are often people from lower-income groups who may not have
access to traditional
banking services. They offer a range of financial products and services such as
savings accounts, fixed
deposits, loans, and remittance services.
Cooperative banks are also unique in that they operate on a principle of democratic
control. Each
member of the bank has one vote, regardless of the amount of money they have
deposited or
borrowed. This ensures that the bank is run in the best interests of its members,
rather than for the
benefit of external shareholders.

Non-Banking Financial Company

As the name suggests, these are financial institutions that operate outside the
traditional banking
system. NBFCs provide a range of financial services such as loans, credit,
investment advice, and wealth
management services to individuals and businesses.

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The main difference between NBFCs and banks is that while banks accept demand
deposits from
customers, NBFCs do not take demand deposits and rely on other sources of funding
such as time
deposits, borrowings from banks, financial markets, and issuing bonds or
debentures.
In India, NBFCs play an important role in providing financial services to the
unbanked and underserved
segments of the population. For example, many small and medium-sized enterprises
(SMEs) may not
have access to bank loans due to various reasons such as insufficient credit
history or collateral. In such
cases, NBFCs can step in and provide the necessary financing.
Let me give you some examples of NBFCs in India. Bajaj Finance, L&T Finance,
Mahindra Finance, and
Shriram Transport Finance are some of the well-known NBFCs in India. These
companies provide a
variety of financial services to individuals and businesses, such as personal
loans, home loans, vehicle
loans, and equipment financing.
One important thing to note is that NBFCs are regulated by the Reserve Bank of
India (RBI), which sets
out various rules and regulations for their operations. For example, NBFCs must
maintain a certain level
of capital adequacy and adhere to certain prudential norms. The RBI also has the
power to supervise and
inspect NBFCs to ensure that they are complying with these regulations.
There are several categories of NBFCs based on their activities and regulatory
requirements. Here are
the main types:
1. Asset Finance Companies (AFCs): These NBFCs primarily focus on financing the
purchase of physical
assets such as vehicles, machinery, and equipment. They provide loans and leases
for these assets, and
may also offer services like insurance and maintenance.
Example: Shriram Transport Finance Company, which provides financing for commercial
vehicles.
2. Investment Companies (ICs): These NBFCs primarily invest in various types of
securities such as
stocks, bonds, and mutual funds. They may also offer portfolio management services
to their clients.
Example: Bajaj Capital, which provides investment advice and manages client
portfolios.
3. Loan Companies (LCs): These NBFCs primarily provide loans to individuals and
businesses. They may
specialize in certain types of loans, such as personal loans, business loans, or
housing loans.
Example: Bajaj Finserv, which provides a wide range of loans including personal
loans, home loans, and
business loans.
4. Infrastructure Finance Companies (IFCs): These NBFCs primarily focus on
financing infrastructure
projects such as roads, bridges, airports, and power plants. They provide long-term
loans and project
financing for these projects.
Example: L&T Infrastructure Finance Company, which provides financing for various
infrastructure
projects.
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5. Microfinance Companies (MFIs): These NBFCs primarily provide small loans to low-
income individuals
and businesses. They may also provide other financial services such as savings
accounts and insurance.
Example: Bandhan Bank, which started as an MFI and now offers a range of banking
services.
6. Systemically Important Core Investment Companies (CICs): These NBFCs are large
and
interconnected with the financial system. They are required to follow stricter
regulations and have
higher capital requirements than other types of NBFCs.
Example: Aditya Birla Financial Services Limited.

Difference between Bank and NBFC

Feature

Bank

NBFC

Definition

A financial institution licensed to

receive deposits and make loans.

A company that offers financial

services without holding a banking
license.

Regulation

Regulated by the RBI

Regulated by the RBI but with

different set of guidelines

Deposit Acceptance

Can accept demand deposits.

Cannot accept demand deposits.

Deposit Insurance

Deposits are usually insured up

to a certain limit (e.g., DICGC in
India).

Deposits are not insured.

Payment and
Settlement System

Part of the payment and

settlement system. Can issue
cheques.

Not a part of the payment and

settlement system. Cannot issue
cheques.

Branching Norms

Subject to stricter branching

norms.

Relatively more lenient branching

norms.

Capital
Requirement

Generally have higher capital

requirement norms.

Might have lower capital

requirement norms compared to
banks.

Foreign Investment

May have restrictions on foreign

investment.

Often have more lenient foreign

investment norms.

Priority Sector
Lending

Banks are mandated to lend a

certain portion to priority
sectors.

NBFCs might have different or no

such obligations.

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All India Financial Institutions (AIFIs)
All India Financial Institutions (AIFIs) are a group of financial institutions that
were set up by the Indian
government to provide long-term funding to key sectors of the Indian economy, such
as infrastructure,
agriculture, housing, and small-scale industries. These institutions are owned and
controlled by the
government of India and operate at the national level.

Small Industries Development Bank of India (SIDBI)

SIDBI was established in 1990 by an Act of Parliament to promote and develop the
MSME (Micro, Small
and Medium Enterprises) sector in India.
The main objective of SIDBI is to provide financial and non-financial assistance to
MSMEs, which play a
crucial role in the Indian economy by generating employment opportunities and
contributing to GDP
growth. SIDBI operates as a principal financial institution for MSMEs in India and
provides a range of
financial and developmental services to them.
Here are some examples of the services offered by SIDBI:
1. Direct Financing: SIDBI offers various types of loans and credit facilities to
MSMEs, including working
capital loans, term loans, equipment financing, and project financing. These loans
are designed to meet
the diverse financial needs of MSMEs at different stages of their business
lifecycle.
2. Refinancing: SIDBI also offers refinancing to banks and other financial
institutions that lend to
MSMEs. This helps increase the availability of credit to MSMEs and reduces the cost
of borrowing for
them.
3. Developmental Services: In addition to financing, SIDBI also provides various
non-financial services to
MSMEs such as training and capacity building, market development assistance,
technology upgradation,
and support for export promotion.
4. Venture Capital: SIDBI has also set up a subsidiary called SIDBI Venture Capital
Limited (SVCL) that
provides venture capital and private equity financing to innovative and high-growth
potential MSMEs.
5. Microfinance: SIDBI has also promoted the development of microfinance
institutions (MFIs) that
provide credit and other financial services to low-income households and small
businesses in rural and
semi-urban areas.
Overall, SIDBI plays a crucial role in the development and growth of the MSME
sector in India by
providing financial and non-financial support to MSMEs. By doing so, it helps
create more jobs, boosts
economic growth, and promotes entrepreneurship in the country.

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National Bank for Agriculture and Rural Development (NABARD)

NABARD was established in 1982 by the Government of India to provide financial and
developmental
support to the agriculture sector and rural areas. NABARD is an apex development
bank in India that
focuses on the development of rural areas by promoting agriculture, rural
entrepreneurship, and rural
livelihoods.
NABARD operates as a development bank, which means that it provides credit and
other financial
services to individuals, organizations, and institutions involved in agriculture
and rural development. The
bank has a wide range of financial products and services, including credit
facilities, investment
opportunities, and other development programs.
Let's take a closer look at some of the key areas where NABARD works:
1. Agriculture Credit: NABARD provides credit facilities to farmers and rural
entrepreneurs to help them
meet their financial needs. The bank provides credit through various channels, such
as commercial
banks, regional rural banks, and co-operative banks.
2. Rural Infrastructure Development: NABARD supports the development of rural
infrastructure by
providing funds for the construction of roads, bridges, irrigation systems, and
other essential facilities.
3. Microfinance: NABARD supports the development of microfinance institutions
(MFIs) that provide
financial services to low-income households and small-scale businesses in rural
areas. The bank provides
loans to these MFIs, which in turn provide credit to their clients.
4. Sustainable Livelihoods: NABARD promotes sustainable livelihoods in rural areas
by supporting the
development of agriculture, fisheries, and other rural livelihoods. The bank
provides technical assistance
and training to farmers and rural entrepreneurs to help them improve their
productivity and income.
Here are a few examples of how NABARD has helped farmers and rural entrepreneurs:
1. NABARD provided financial support to a group of women farmers in Bihar to help
them start a poultry
farm. The bank provided them with credit facilities, technical assistance, and
training to help them
manage their farm and improve their income.
2. NABARD supported the construction of a rural road in a village in Rajasthan. The
road helped farmers
transport their produce to the market and improved their access to essential
services such as healthcare
and education.
3. NABARD provided credit to a microfinance institution in Tamil Nadu to help them
provide financial
services to small-scale businesses in the area. The microfinance institution was
able to provide loans to
local entrepreneurs, helping them start and expand their businesses.
In summary, NABARD is an important development bank in India that focuses on the
development of
agriculture and rural areas. The bank provides credit, financial services, and
technical assistance to
farmers and rural entrepreneurs to help them improve their livelihoods.
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Export-Import Bank of India

Exim Bank is a specialized financial institution that provides financial assistance

to Indian exporters and
importers. It was established in 1982 by the Indian government to promote
international trade by
providing financial assistance and advisory services to exporters and importers.
Exim Bank provides a wide range of financial services to Indian exporters and
importers, including preshipment and post-shipment finance, export credit, export
credit guarantees, overseas investment
finance, and lines of credit to foreign governments and entities.
To give you an example, let's say a small Indian manufacturer wants to export their
goods to a foreign
country but does not have enough funds to finance the shipment. They can approach
Exim Bank for
financial assistance and avail of pre-shipment finance, which will provide them
with the necessary funds
to produce and ship the goods. Similarly, if an Indian importer wants to import
goods from a foreign
country, they can approach Exim Bank for post-shipment finance to pay for the goods
after they have
been received.
Exim Bank also provides export credit guarantees to Indian exporters to protect
them against the risk of
non-payment by foreign buyers. This helps exporters to expand their business by
reducing their risk
exposure while exporting their goods.
In addition to these services, Exim Bank also provides advisory services to Indian
exporters and
importers. For example, they offer market intelligence reports, export counseling,
and trade information
services to help Indian businesses make informed decisions and expand their
international trade.

National Housing Bank (NHB)

The National Housing Bank is a financial institution in India that was established
in 1988 under the
National Housing Bank Act. It was created to provide financial support to the
housing sector in India,
promote home ownership, and regulate housing finance companies.
One of the main functions of the NHB is to provide refinancing facilities to banks
and housing finance
companies. Refinancing refers to the process of providing loans to financial
institutions so that they can
then lend to individuals or businesses. In the case of the NHB, it provides
refinancing specifically for the
housing sector.
For example, if a bank provides a home loan to an individual, it can then seek
refinancing from the NHB
to support its lending activities. This helps to ensure that there is sufficient
funding available for the
housing sector, which in turn promotes home ownership and the development of the
housing industry.
Another function of the NHB is to regulate housing finance companies in India. This
involves setting
standards for their operations, such as the minimum capital requirements and
prudential norms for
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lending. By regulating these companies, the NHB aims to promote the stability and
sustainability of the
housing finance industry.
In addition, the NHB also provides technical assistance and training to housing
finance companies, and
conducts research and analysis to support the development of the housing sector.

Micro Units Development and Refinance Agency (MUDRA)

MUDRA was launched in 2015. The main aim of Mudra is to provide financial
assistance to small and
micro-businesses in the country, which often struggle to get loans from traditional
banks due to lack of
collateral or credit history.
Mudra offers loans ranging from Rs. 50,000 to Rs. 10 lakh to these small
businesses, with the objective
of promoting entrepreneurship, job creation, and economic growth in the country.
The loans are
categorized into three types - Shishu, Kishor, and Tarun - based on the stage of
the business and the
amount of loan required.
- Shishu: Loans up to Rs. 50,000, for businesses that are in their initial stages
and require small amounts
of capital to get started.
- Kishor: Loans ranging from Rs. 50,000 to Rs. 5 lakh, for businesses that have
already been established
but require additional capital to expand their operations.
- Tarun: Loans ranging from Rs. 5 lakh to Rs. 10 lakh, for businesses that are
well-established and need a
significant amount of capital for growth and expansion.
One of the unique features of Mudra loans is that they do not require collateral or
a guarantor, making
it easier for small businesses to obtain credit.
For example, let's say a woman in a small village wants to start her own tailoring
business. She has the
skills but lacks the funds to purchase a sewing machine and raw materials. She can
approach a Mudraapproved lender and apply for a Shishu loan of up to Rs. 50,000
without providing any collateral or
guarantor. Once approved, she can use the loan to purchase the necessary equipment
and materials to
start her business. With her new business up and running, she can repay the loan in
affordable
installments, which will not only help her grow her business but also contribute to
the local economy.

Understanding Financial Position of a Bank

Bank Run

A bank run occurs when many depositors (people who have put their money into a
bank) suddenly and
rapidly withdraw their money from the bank. This can be caused by rumors or fears
that the bank may
not be able to fulfill its obligations to its depositors, which can lead to a loss
of confidence in the bank.
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When many people try to withdraw their money from a bank at the same time, it can
create a vicious
cycle. The first few people to withdraw their money might be able to get their
money out without any
problems, but as more people try to do the same thing, the bank may not have enough
cash on hand to
give everyone their money back.
If a bank run is not handled properly, it can lead to the bank failing and
potentially causing a wider
financial crisis. This happened during the Great Depression in the United States,
when many banks failed
due to bank runs and a lack of government intervention.
Let's look at an example to illustrate how a bank run might happen. Imagine that a
rumor starts
spreading in a small town that Bank A is in financial trouble and might not be able
to pay back its
depositors. This rumor causes a few people to start withdrawing their money from
the bank. As more
people hear about the rumor and start withdrawing their money as well, the bank's
cash reserves start
to dwindle.
To try to stop the bank run, Bank A might place limits on how much money each
person can withdraw or
ask the government for help. However, if these measures are not effective or if the
rumors continue to
spread, the bank run could continue until the bank fails.

Capital Adequacy Ratio (CAR)

Capital Adequacy Ratio (CAR) is a measure of a bank's financial strength and

ability to withstand
financial losses. It is a ratio of a bank's capital to its risk-weighted assets.
CAR ensures that banks have
enough capital to absorb unexpected losses and protect their depositors' funds.
CAR = (Tier I Capital + Tier II Capital) / Risk-Weighted Assets
Where:
- Tier I Capital includes equity capital, disclosed reserves, and other instruments
that are considered the
most reliable and permanent sources of a bank's capital.
- Tier II Capital includes subordinated debt, undisclosed reserves, revaluation
reserves, general
provisions, and hybrid instruments.
Risk-Weighted Assets (RWA) are calculated by assigning a risk weight to each asset
class based on its
credit risk. For example, loans to a corporate borrower may have a higher risk
weight than loans to a
government entity.
Now let's look at an example to understand how CAR works:
Suppose Bank A has a Tier I Capital of INR 100 crore, Tier II Capital of INR 50
crore, and Risk-Weighted
Assets of INR 1000 crore.
Then, Bank A's CAR will be calculated as follows:
CAR = (Tier I Capital + Tier II Capital) / Risk-Weighted Assets
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CAR = (INR 100 crore + INR 50 crore) / INR 1000 crore
CAR = 15%
This means that Bank A has a capital buffer of 15% of its risk-weighted assets to
absorb any unexpected
losses.
The Reserve Bank of India (RBI) plays a crucial role in ensuring that banks
maintain an adequate CAR.
The RBI sets the minimum CAR requirement for banks in India. Indian public sector
banks must maintain
a CAR of 12% while Indian scheduled commercial banks are required to maintain a CAR
of 9%. The RBI
also conducts regular stress tests to assess the ability of banks to withstand
adverse economic
conditions. If a bank's CAR falls below the minimum requirement, the RBI may take
corrective actions,
such as restricting dividend payouts or requiring the bank to raise additional
capital.

Basel Norms

Basel norms are a set of international banking regulations that were developed by
the Basel Committee
on Banking Supervision. The aim of these norms is to promote financial stability by
providing a
framework for banks to manage financial risks.
Basel I: Basel I, introduced in 1988, was the first set of Basel norms. It
established the minimum capital
requirements for banks based on their credit risk. Banks were required to hold
capital equal to at least
8% of their risk-weighted assets.
Basel II: Basel II, introduced in 2004, was an updated set of regulations that
focused on improving the
accuracy of risk assessment by banks. It introduced three pillars of risk
management:
- Pillar 1: Minimum capital requirements based on credit risk, operational risk,
and market risk.
- Pillar 2: Supervisory review of a bank's risk management framework and internal
controls.
- Pillar 3: Disclosure requirements for a bank's risk profile and risk management
practices.
Basel III: Basel III, introduced in 2010, was a response to the global financial
crisis of 2008. Its main aim
was to strengthen the banking system's ability to deal with financial shocks. Basel
III introduced a
number of measures to improve the quality and quantity of capital that banks hold,
as well as their
liquidity and risk management practices. The key parameters of Basel III are:
- Capital Adequacy Ratio (CAR): This measures a bank's capital as a percentage of
its risk-weighted
assets. Banks are required to hold a minimum CAR of 8%, but some regulators require
higher levels.
- Liquidity Coverage Ratio (LCR): This measures a bank's ability to withstand a
short-term liquidity
shock. It requires banks to hold a minimum amount of high-quality liquid assets to
meet their
obligations for a period of 30 days.
- Net Stable Funding Ratio (NSFR): This measures a bank's long-term funding
stability. It requires banks
to maintain a minimum amount of stable funding sources to ensure they can meet
their obligations for a
longer period of time.
- Leverage Ratio: This measures a bank's capital against its total exposure,
without applying risk weights.
It provides a simple measure of a bank's leverage and acts as a backstop to the
risk-weighted measures.
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Implementation: Each country has its own regulator that is responsible for
implementing the Basel
norms. Regulators have the power to set higher minimum standards than those set by
the Basel
Committee, and they can impose additional requirements as necessary.
In summary, Basel norms are a set of international banking regulations that aim to
promote financial
stability by providing a framework for banks to manage financial risks. The norms
have evolved over
time, with Basel I establishing minimum capital requirements, Basel II introducing
three pillars of risk
management, and Basel III introducing a number of measures to improve the quality
and quantity of
capital that banks hold, as well as their liquidity and risk management practices.
The implementation of
the norms is the responsibility of each country's regulator.

India and Basel

India is a member of the Basel Committee on Banking Supervision and has implemented
the Basel
norms to improve the stability of its banking system. The Reserve Bank of India
(RBI) has been actively
involved in implementing the Basel norms in India.
Achievements:
a. Compliance with Basel I norms: India implemented the Basel I norms in 1999 and
has since then made
significant progress in adopting the Basel II and III norms.
b. Higher capital adequacy ratio: The Reserve Bank of India (RBI) has set a higher
minimum capital
adequacy ratio (CAR) than the global minimum of 8%. Indian public sector banks must
maintain a CAR of
12% while Indian scheduled commercial banks are required to maintain a CAR of 9%.
c. Implementation of LCR and NSFR: The RBI has introduced guidelines for liquidity
coverage ratio (LCR)
and net stable funding ratio (NSFR) for Indian banks to ensure their resilience
against short-term and
long-term liquidity shocks.
d. Improved risk management practices: The Basel norms have helped Indian banks to
improve their risk
management practices, including better assessment of credit risk, operational risk,
and market risk.

Challenges:
a. Compliance for smaller banks: Smaller banks in India may face challenges in
complying with the Basel
norms due to limited resources and technical capabilities.
b. Weaknesses in credit risk management: Some Indian banks still face challenges in
credit risk
management, which may lead to high levels of non-performing assets (NPAs) and
stress on their balance
sheets.
d. Limited adoption of Basel III norms: While India has made significant progress
in adopting the Basel III
norms, there are still some gaps in their implementation, such as in the areas of
leverage ratio and
counterparty credit risk.

Non-Performing Assets (NPAs)

Non-Performing Assets (NPA) are loans or advances extended by banks and financial
institutions that
have stopped generating income or interest for the lender because the borrower has
stopped making
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payments. In other words, when a borrower defaults on their loan repayment for a
period of 90 days or
more, the loan is classified as an NPA.

Category

Definition

Sub-Standard
Assets

A sub-standard asset is one that has remained NPA for a period less than or equal
to 12
months.

Doubtful
Assets

A doubtful asset is one that has remained in the sub-standard category for 12
months
or more.

Loss Assets

A loss asset is one where the bank or financial institution has deemed it
impossible to
recover the outstanding amount, either through foreclosure or other means.

The main reason why NPAs are a cause for concern is because they can have a
significant impact on the
financial health of banks and financial institutions. When a large number of loans
become NPAs, it can
lead to a decline in the profits of the bank or financial institution, and in some
cases, can even threaten
their solvency.
NPA Ratio = Gross NPAs / Gross Advances
The NPA ratio is a commonly used metric to measure the level of NPAs in a bank or
financial institution.
The gross NPAs represent the total value of loans that have been classified as
NPAs, while gross
advances represent the total value of loans extended by the bank or financial
institution.
NPA crisis in India
In India, the NPA crisis began in the early 2010s and has been a major problem for
the banking sector
ever since. The crisis arose due to several reasons:
1. Economic slowdown: One of the main reasons for the NPA crisis in India is the
economic slowdown
that the country has been experiencing. When the economy is not doing well,
businesses and individuals
struggle to repay their loans. This results in banks accumulating a large number of
bad loans.

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2. Fraud and malpractices: Another reason for the NPA crisis is the prevalence of
fraud and malpractices
in the banking sector. Some borrowers have taken loans with no intention of
repaying them or have
diverted the funds for other purposes. In other cases, banks themselves have been
involved in
fraudulent activities such as giving loans to ineligible borrowers or inflating the
value of collateral.
3. Inadequate risk management: Banks are supposed to assess the risk associated
with lending to a
particular borrower and take adequate measures to mitigate the risk. However, in
some cases, banks
have not done a good job of assessing the risk, resulting in loans turning bad.
Adverse effects of the NPA crisis on the banking sector and the economy:
- Banks have to set aside a certain amount of money as provisions for NPAs, which
reduces their
profitability and affects their ability to lend further.
- The overall credit culture of the country is affected when a large number of
loans turn bad, causing
banks to become cautious about lending and making it difficult for borrowers to get
loans.
- Investment and growth are affected as a result of reduced lending by banks.
- The government may have to provide financial assistance to banks to help them
deal with the NPA
crisis, which can put a strain on the government's finances.
- The reputation of the banking sector is damaged, which can reduce public trust
and confidence in the
sector.
- The NPA crisis can also lead to job losses and a slowdown in economic activity,
as businesses that are
unable to repay their loans may have to shut down.

Initiatives to tackle NPA crisis in India

1. Debt Recovery Tribunals (DRTs): These are special courts set up to handle cases
related to the
recovery of bad loans. The DRTs were established in 1993 and were given powers to
seize and sell the
assets of the defaulters. This helped banks to recover some of their bad loans.
For example, if a borrower had taken a loan to buy a house and had defaulted on
payment, the DRTs
could seize the house and sell it to recover the loan amount.

2. Lok Adalats: These are informal courts where disputes related to recovery of bad
loans can be
settled out of court. Lok Adalats were established in 1987 and were given powers to
settle cases through
mediation and conciliation. This helped in reducing the burden on the courts and
also helped banks to
recover their bad loans faster.
For example, if a borrower had defaulted on payment of a loan, the bank could
approach a Lok Adalat to
settle the case out of court. The Lok Adalat could then mediate between the
borrower and the bank and
come up with a mutually agreed upon settlement plan.

3. SARFAESI Act 2002: The Securitisation and Reconstruction of Financial Assets and
Enforcement of
Security Interest (SARFAESI) Act was passed in 2002 to give more powers to banks
and financial
institutions to recover bad loans. The act gave banks the power to seize and sell
the assets of defaulters
without going to court.
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For example, if a borrower had defaulted on payment of a loan, the bank could use
the SARFAESI Act to
seize and sell the assets pledged as collateral to recover the loan amount.

4. Asset Reconstruction Companies (ARCs): These are companies set up to buy bad
loans from
banks and financial institutions at a discount and then try to recover them. ARCs
were set up in India in
2003 to help banks get rid of their bad loans and also to inject liquidity into the
system.
For example, if a bank had a bad loan of Rs. 100 crore, an ARC could buy it for Rs.
70 crore and then try
to recover the loan amount from the borrower. This helped banks to clean up their
balance sheets and
focus on lending to good borrowers.

5. Mission Indradhanush: The Mission Indradhanush was launched by the Indian

government in 2015
with the aim of cleaning up the banking system and reducing the number of NPAs. The
mission has
seven main components, which can be remembered by the acronym ABCDEFG:
A - Appointments: Besides induction of talent from the Private Sector into the
public banks,
separation of the posts of Chief Executive Officer and the Managing Director, in
order to check
the excessive concentration of power and smooth functioning of the banks.
B - Bank Board Bureau (BBB): This involves setting up a board to oversee the
functioning of
public sector banks and improve their governance. The BBB is responsible for
appointment of
directors, setting up of remuneration policies and helping banks with mergers and
acquisitions.
C - Capitalisation: This involves providing adequate capital to public sector banks
so that they
can absorb the losses arising from NPAs. The government has provided capital to
banks in
multiple tranches since the launch of the mission.
D - De-stressing: This involves measures to reduce stress on banks due to NPAs.
This includes
setting up of asset reconstruction companies, creation of a market for distressed
assets and
strengthening of debt recovery tribunals.
E - Empowerment: This involves empowering banks to take quick and effective
decisions to
resolve NPAs. Banks have been given more autonomy to take decisions on resolution
of NPAs
and the Insolvency and Bankruptcy Code (IBC) was enacted to provide a time-bound
resolution
framework for NPAs.
F - Frameworks: This involves putting in place a robust regulatory framework to
prevent the
recurrence of NPAs in the future. Measures such as enhanced supervision, stricter
lending
norms and effective fraud detection systems have been put in place to prevent NPAs.
G - Governance reforms: This involves reforms in the governance structure of public
sector
banks. Measures such as setting up of a Banks Board Bureau and implementation of a
performance-based incentive scheme have been taken to improve the functioning of
public
sector banks.

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6. Insolvency and Bankruptcy Code 2016: This is a law that was passed in 2016 to
provide a time-

bound and efficient resolution process for bankruptcy cases. The code aims to
consolidate the existing
bankruptcy laws in India and provide a clear framework for resolving insolvency
cases.

For example, if a company had accumulated a large amount of debt and was unable to
repay it, the
Insolvency and Bankruptcy Code provides a process for the company to be declared
insolvent and for its
assets to be sold off to repay its creditors.

7. Bad Bank: In August 2020, the government of India announced the creation of a
'Bad Bank' to
address the NPA crisis in the country. The Bad Bank is essentially a platform that
will buy bad loans from
banks at a discounted price and then work to recover them. The idea behind the Bad
Bank is to allow
banks to offload their bad loans and focus on their core business of lending.
In essence, a Bad Bank is an ARC owned mainly by the Government.
For example, if a bank had a bad loan of Rs. 100 crore, the Bad Bank could buy it
for Rs. 70 crore and
then work to recover the loan amount from the borrower. This would help the bank to
clean up its
balance sheet and focus on lending to good borrowers.

Committees on Banking Sector Reforms

1. Narasimham Committee I (1991): The committee was formed in 1991 to review the
banking system
in India. Some of its major recommendations were:
- Reduction of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
- Liberalization of the banking sector
- Establishment of Asset Reconstruction Companies (ARC)
The committee also recommended the establishment of a Board for Financial
Supervision (BFS) to
oversee the functioning of banks.
2. Narasimham Committee II (1998): The committee was formed in 1998 to review the
progress of
banking sector reforms. Its major recommendations were:
- Reduction of the government's stake in public sector banks to below 33%
- Establishment of a Credit Information Bureau (CIB)
- Creation of a separate Debt Recovery Tribunal (DRT) for speedy recovery of bad
loans
The committee also recommended the introduction of prudential norms for income
recognition, asset
classification, and provisioning.
3. Rangarajan Committee (1998): The committee was formed to review the priority
sector lending
norms. Its major recommendations were:
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- Increase in the priority sector lending target from 40% to 50%
- Introduction of a sub-target of 10% for agriculture and 12% for exports
- Introduction of priority sector lending certificates (PSLC) to facilitate
compliance with priority sector
lending targets
4. Khan Committee (2012): The committee was formed to review the governance of
boards of banks in
India. Its major recommendations were:
- Separation of the post of Chairman and CEO in public sector banks
- Establishment of a Banks Board Bureau (BBB) to improve the governance of public
sector banks
- Introduction of a new performance evaluation system for CEOs of public sector
banks
5. Nayak Committee (2014): The committee was formed to review the governance of
bank boards in
India. Its major recommendations were:
- Establishment of a Bank Investment Company (BIC) to hold the government's stake
in public sector
banks
- Creation of a holding company structure for public sector banks
- Establishment of a new autonomous body to oversee the appointment of top
executives in public
sector banks
These are some of the major committees that have made recommendations on banking
sector reforms
in India. The recommendations made by these committees have had a significant
impact on the
functioning of the banking system in India.

Financial Inclusion
Financial inclusion is the process of providing access to financial services and
products to all sections of
society, including those who are economically marginalized and financially
excluded. In India, financial
inclusion is considered to be a critical tool for poverty alleviation, social
inclusion, and economic
development.
Here are a few reasons why financial inclusion is significant in India:
1. Promoting Financial Empowerment: By providing access to financial services and
products such as
savings accounts, loans, and insurance, financial inclusion can help individuals
and families improve their
economic well-being, build assets, and become more financially empowered.
2. Boosting Entrepreneurship: Financial inclusion can also boost entrepreneurship
by providing access
to credit, which can help small businesses grow and create more employment
opportunities.
3. Promoting Digitalization: Financial inclusion can help promote the use of
digital transactions, which
can make financial transactions more convenient, secure, and efficient. This can
help reduce corruption
and promote transparency in financial transactions.
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Challenges in achieving financial inclusion:

1. Low Financial Literacy: Financial literacy levels in India are relatively low,
particularly in rural areas.
This makes it difficult for people to understand and use financial products and
services.
2. Limited Access to Formal Financial Services: Many individuals and families,
particularly those living in
rural areas, do not have access to formal financial services such as banks and
insurance companies. This
limits their ability to save, invest, and access credit.
3. High Cost of Delivery: The cost of delivering financial services to remote and
underserved areas can
be high, making it difficult for financial institutions to operate profitably in
these areas.
4. Lack of Trust: Many people in India do not trust formal financial institutions,
which can make it
difficult to promote financial inclusion.
5. Inadequate Infrastructure: The lack of adequate physical and digital
infrastructure, such as roads and
internet connectivity, can also make it difficult to deliver financial services to
remote areas.

Measures taken to promote Financial Inclusion:

1. Pradhan Mantri Jan Dhan Yojana: This is a government scheme launched in 2014
with the aim of
providing access to banking facilities to the unbanked population. Under this
scheme, individuals can
open a bank account with zero balance and also receive a Rupay debit card and
insurance cover.
2. Pradhan Mantri Mudra Yojana: This scheme aims to provide credit to micro and
small enterprises,
which may not have collateral to secure loans. The loans are provided by banks and
non-banking
financial companies (NBFCs) up to Rs. 10 lakh.
3. Digital India: The government's Digital India campaign aims to promote the use
of digital technology
for various services, including financial services. Initiatives like the Unified
Payment Interface (UPI) and
Bharat Bill Payment System (BBPS) have made it easier for individuals to access and
use financial
services.
4. Financial Literacy: The government also promotes financial literacy among the
population, especially
in rural areas. Initiatives like the National Centre for Financial Education (NCFE)
and Financial Literacy
Centres (FLCs) have been set up to educate people on financial management and
planning.
5. Priority Sector Lending: Banks are required to lend a certain percentage of
their loans to priority
sectors like agriculture, micro, small, and medium enterprises (MSMEs), and low-
income households.
This helps to ensure that those who may have been excluded from the formal
financial system due to
lack of collateral or low income can still access credit.

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6. Microfinance Institutions (MFIs): Microfinance institutions provide small loans
to individuals and
small businesses who may not have access to traditional banking services. These
loans are typically
provided without collateral and at lower interest rates than those offered by
moneylenders. MFIs have
played a significant role in promoting financial inclusion in India, especially in
rural areas.
7. Business Correspondents (BCs): Business correspondents are individuals or
entities authorized by
banks to provide basic banking services like deposit and withdrawal of cash,
opening of accounts, and
remittance services in areas where banks may not have a physical presence. BCs are
typically local
entrepreneurs who are familiar with the area and the community.
8. Aadhaar Enabled Payment System (AEPS): AEPS is a system that allows individuals
to access their
bank accounts using their Aadhaar number and biometric authentication. This system
has helped to
make financial services more accessible to individuals who may not have traditional
forms of
identification or documentation.
9. JAM Trinity: The JAM Trinity refers to the integration of three platforms - Jan
Dhan Yojana, Aadhaar,
and Mobile numbers. By linking these platforms, the government aims to provide
seamless and secure
access to financial services and benefits like direct benefit transfer (DBT) to
eligible beneficiaries.
10. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Pradhan Mantri Suraksha
Bima Yojana
(PMSBY): These are two government-backed insurance schemes that provide life and
accident insurance
coverage, respectively, to individuals at a very low premium. These schemes have
been designed to
provide financial protection to low-income individuals who may not have access to
traditional insurance
products.

Initiatives to promote Cashless transactions

1. Unified Payments Interface (UPI) and BHIM App: The National Payments Corporation
of India (NPCI)
launched UPI in 2016, enabling users to perform instant bank transfers through
their mobile phones.
Building on UPI, the BHIM app was introduced as a user-friendly platform for
cashless transactions. To
ensure security during transactions, the BHIM app employs three levels of
authentication: device ID and
mobile number, bank account sync, and PIN creation.
2. Core Banking Solutions (CBS): CBS enables seamless operations across various
banks and branches,
facilitating cashless transactions for customers across the country.
3. QR Code Payments: The promotion of QR code payments has empowered small
businesses to accept
digital payments with ease.
4. Direct Benefit Transfers (DBT): The government offers benefits and subsidies
through direct transfers
to beneficiaries' bank accounts, reducing cash dependence and enhancing financial
inclusion.
5. Demonetization: The 2016 demonetization move encouraged people to adopt digital
payment
methods in the wake of the cash crunch, leading to a significant surge in cashless
transactions.

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6. RuPay Cards: RuPay is a type of debit and credit card payment network introduced
by the National
Payments Corporation of India (NPCI). As a domestic payment network, RuPay is
designed to provide an
indigenous and cost-effective alternative to international card schemes like Visa
and Mastercard. With
seamless integration of all ATMs in the country, RuPay cardholders can also
conveniently access cash
nationwide.
7. Aadhaar Enabled Payment System (AePS): In remote areas with limited banking
infrastructure, AePS
leverages Aadhaar biometric authentication to enable cashless transactions,
promoting financial
inclusion.
8. Merchant Discount Rate (MDR): The Merchant Discount Rate (MDR) is the fee
charged by banks and
payment service providers to merchants for accepting digital payments from
customers. It covers the
costs associated with payment processing, technology infrastructure, and
transaction risk. The
government has taken measures to regulate the MDR, ensuring fairness and
transparency in the
cashless transaction ecosystem for merchants accepting digital payments.
By implementing these initiatives and creating a favorable environment for cashless
transactions, the
Indian government has transformed the country's payment landscape, making digital
payments more
accessible, secure, and widely adopted across the nation.

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Previous Years Prelims Questions
1.

With reference to the ‘Banks Board Bureau (BBB)’, which of the following
statements are correct?

2022

1. The Governor of RBI is the Chairman of BBB.

2. BBB recommends for the selection of heads for Public Sector Banks.
3. BBB helps the Public Sector Banks in developing strategies and capital
raising plans.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

2.

In India, the Central Bank’s function as the “lender of last resort” usually refers
to
which of the following?

2021

1. Lending to trade and industry bodies when they fail to borrow from other
sources
2. Providing liquidity to the banks having a temporary crisis
3. Lending to governments to finance budgetary deficits
Select the correct answer using the code given below
a) 1 and 2
b) 2 only
c) 2 and 3
d) 3 only

3.

Consider the following statements:

1. The Governor of the Reserve Bank of India (RBI) is appointed by the
Central Government.
2. Certain provisions in the Constitution of India give the Central Government
the right to issue directions to the RBI in the public interest.
3. The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?

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2021
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
4.

With reference to Urban Cooperative Banks in India, consider the following

statements:

2021

1. They are supervised and regulated by local boards set up by the State
Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949
through an Amendment in 1996
Which of the statements given above is/are correct?
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
5.

What is the importance of the term “Interest Coverage Ratio” of a firm in India?

2020

(1)It helps in understanding the present risk of a firm that a bank is going to
give a loan to.
(2) It helps in evaluating the emerging risk of a firm that a bank is going to
give a loan to.
(3) The higher a borrowing firm’s level of Interest Coverage Ratio, the worse
is its ability to service its debt.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
6.

Consider the following statements:

The Reserve Bank of India’s recent directives relating to ‘Storage of Payment

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2019
System Data’, popularly known as data diktat, command the payment system
providers that
(1) they shall ensure that entire data relating to payment systems operated
by them are stored in a system only in India
(2) they shall ensure that the systems are owned and operated by public
sector enterprises
(3) they shall submit the consolidated system audit report to the Comptroller
and Auditor General of India by the end of the calendar year
Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
7.

Which of the following is not included in the assets of a commercial bank in

India?

2019

(a) Advances
(b) Deposits
(c) Investments
(d) Money at call and short notice
8.

The Chairman of public sector banks are selected by the

(a) Banks Board Bureau
(b) Reserve Bank of India
(c) Union Ministry of Finance
(d) Management of concerned bank

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2019
9.

What was the purpose of the Inter Creditor Agreement signed by Indian banks
and financial institutions recently?

2019

(a) To lessen the Government of India’s perennial burden of fiscal deficit and
current account deficit
(b) To support the infrastructure projects of Central and State Governments
(c) To act as independent regulator in case of applications for loans of Rs. 50
crore or more
(d) To aim at faster resolution of stressed assets of Rs. 50 crore or more
which are-under consortium lending
10. Which one of the following best describes the term “Merchant Discount Rate”
sometimes seen in the news?

2018

(a) The incentive given by a bank to a merchant for accepting payments

through debit cards pertaining to that bank.
( b) The amount paid back by banks to their customers when they use debit
cards for financial transactions for purchasing goods or services.
(c) The charge to a merchant by a bank for accepting payments from his
customers through the bank’s debit cards.
(d) The incentive given by the Government, to merchants for promoting digital
payments by their customers through Point of Sale (PoS) machines and debit
cards.
11. Which one of the following links all the ATMs in India ?

2018

(a) Indian banks’ Association

(b) National Securities Depository Limited
(c) National Payments Corporation of India
(d) Reserve Bank of India
12. Consider the following statements:
(1) Capital Adequacy Ratio (CAR) is the amount that banks have to maintain
in the form of their own funds to offset any loss that banks incur if the
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2018
holders fail to repay dues.
(2) CAR is decided by each individual bank.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
13. With reference to digital payments, consider the following statements:

2018

(1) BHIM app allows the user to transfer money to anyone with a UPIenabled bank
account.
(2) While a chip-pin debit card has four factors of authentication, BHIM app
has only two factors of authentication.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
14. With reference to the governance of public sector banking in India, consider
the
following statements
(1) Capital infusion into public sector banks by the Government of India has
steadily increased in the last decade.
(2) To put the public sector banks in order, the merger of associate banks
with the parent State Bank of India has been affected.
Which of the statements given above is/are correct ?

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2018
(a) 1 only
b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
15. What is the purpose of setting up Small Finance Banks (SFBs) in India?

2017

(1) To supply credit to small business units

(2) To supply credit to small and marginal farmers
(3) To encourage young entrepreneurs to set up business particularly in rural
areas.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
16. Which of the following is the most likely consequence of implementing the
‘Unified Payments Interface (UPI)’?

2017

(a) Mobile wallets will not be necessary for online payments.

(b) Digital currency will totally replace the physical currency in about two
decades.
(c) FDI inflows will drastically increase.
(d) Direct transfer of subsidies to poor people will become very effective.
17. The term ‘Core Banking Solutions’ is sometimes seen in the news. Which of the
following statements best describes/describe this term?
(1) It is a networking of a bank’s branches that enables customers to operate
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2016
their accounts from any branch of the bank on its network regardless of where
they open their accounts.
(2) It is an effort to increase RBI’s control over commercial banks through
computerization.
(3) It is a detailed procedure by which a bank with huge non-performing
assets is taken over by another bank.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
18. The establishment of ‘Payment Banks’ is being allowed in India to promote
financial inclusion. Which of the following statements is/are correct in this
context?

2016

(1) Mobile telephone companies and supermarket chains that are owned and
controlled by residents are eligible to be promoters of Payment Banks.
(2) Payment Banks can issue both credit cards and debit cards.
(3) Payment Banks cannot undertake lending activities.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3
19. ‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to
(a) develop national strategies for the conservation and sustainable use of
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2015
biological diversity
(b) improve banking sector’s ability to deal with financial and economic stress
and improve risk management
(c) reduce the greenhouse gas emissions but places a heavier burden on
developed countries
(d) transfer technology from developed countries to poor countries to enable
them to replace the use of chlorofluorocarbons in refrigeration with harmless
chemicals
20. The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time
Liabilities’, sometimes appearing in news, are used in relation to

2014

(a) banking operations

(b) communication networking
(e) military strategies
(d) supply and demand of agricultural products
21. What is/are the facility/facilities the beneficiaries can get from the services
of
Business Correspondent (Bank Saathi) in branchless areas?
(1) It enables the beneficiaries to draw their subsidies and social security
benefits in their villages.
(2) It enables the beneficiaries in the rural areas to make deposits and
withdrawals.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

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2014
22. The Reserve Bank of India regulates the commercial banks in matters of

2013

(1) liquidity of assets

(2) branch expansion
(3) merger of banks
(4) winding-up of banks
Select the correct answer using the codes given below.
(a) 1 and 4 only
(b) 2, 3 and 4 only
(c) 1, 2 and 3 only
(d) 1, 2, 3 and 4
23. Consider the following liquid assets:

2013

(1) Demand deposits with the banks

(2) Time deposits with the banks
(3) Savings deposits with the banks
(4) Currency
The correct sequence of these decreasing order of Liquidity is
(a) 1-4-3-2
(b) 4-3-2-1
(c) 2-3-1-4
(d) 4-1-3-2
24.

Priority Sector Lending by banks in India constitutes the lending to

(a) agriculture

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2013
(b) micro and small enterprises
(c) weaker sections
(d) All of the above
25. Which of the following grants/ grant direct credit assistance to rural
households?

2013

(1) Regional Rural Banks

(2) National Bank for Agriculture and Rural Development
(3) Land Development Banks
Select the correct answer using the codes given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Previous Years Mains Questions

Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing the unbanked
to the institutional finance fold. Do you agree with this for financial inclusion
of
the poor section of the Indian society? Give arguments to justify your opinion.
Answers
1.

1.

2.

3.

4.

5.

6.

7.

8.

9.
D

10.

11.

12.

13.

14.

15.

16.

17.

18.

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2016
19.

20.

21.

22.

23.

24.

25.

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12. Financial Market

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Contents
Types of Financial
Market ............................................................................
...................................... 202
Money Market
Instruments .......................................................................
........................................ 204
Call Money and Notice
Money .............................................................................
.......................... 204
Treasury Bills (T-
Bills).............................................................................
......................................... 205
Cash Management Bills
(CMB) .............................................................................
.......................... 205
Certificate of Deposits
(CDs)..............................................................................
............................. 206
Commercial Papers
(CPs)..............................................................................
.................................. 206
Capital
Market ............................................................................
........................................................ 207
Primary Market
Instruments .......................................................................
................................... 207
Initial Public Offer
(IPO) .............................................................................
................................. 207
Follow on public offer
(FPO) .............................................................................
.......................... 208
Preferential
Issue .............................................................................
........................................... 208
Rights
Issue .............................................................................
.................................................... 208
Debt and
Equity ............................................................................
.................................................. 209
Secondary or Stock
Market ............................................................................
................................ 210
Shares ............................................................................
............................................................. 211
Debentures ........................................................................
......................................................... 212
Bonds .............................................................................
............................................................. 212
Derivatives .......................................................................
............................................................... 217
Futures ...........................................................................
............................................................. 217
Options ...........................................................................
............................................................ 218
Swaps .............................................................................
............................................................. 218
Forwards ..........................................................................
........................................................... 219
Government Securities Market in
India .............................................................................
................ 219
What is a Government Security (G-
Sec)? .............................................................................
.......... 219
Investment
Funds .............................................................................
.................................................. 221
Types of Investment
Funds .............................................................................
............................... 221
Mutual
fund ..............................................................................
.................................................. 221
Hedge
Funds .............................................................................
.................................................. 222
Alternative Investment Fund
(AIF) .............................................................................
................ 222
Real Estate Investment Trust
(REIT) ............................................................................
............... 223
Infrastructure Investment Trusts
(InvITs) ..........................................................................
......... 223
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Investors .........................................................................
.................................................................... 223
Types of
Investors..........................................................................
................................................. 223
India's securities market
infrastructure ....................................................................
......................... 224
Stock
Exchange ..........................................................................
......................................................... 225
Securities and Exchange Board of
India .............................................................................
................ 226
Composition .......................................................................
............................................................ 226
Tenure of
Chairman...........................................................................
............................................. 226
Functions .........................................................................
............................................................... 226
Appellate
Mechanism..........................................................................
........................................... 226
Various reforms implemented by
SEBI...............................................................................
............ 227
Previous Years Prelims
Questions .........................................................................
............................. 228

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Chapter 12
Financial Market
Financial markets are platforms where buyers and sellers trade financial
securities, such as stocks,
bonds, currencies, and commodities, among others. These markets serve as a medium
through which
individuals, businesses, and governments can access funds or invest surplus funds
in a profitable
manner.

Types of Financial Market

There are two main types of financial markets - the money market and the capital
market.

Financial
Market

Money Market

Capital Market

Call Money &

Notice Money

Secondary
Market

Primary Market

Treasury Bills

IPO

Shares/Stocks

Debentures

Bonds

Derivatives

Cash
Management
Bills

FPO

Futures

Certificate of
Deposits

Preferential
Issue

Options

Commercial
Papers
Rights Issue

Swaps

Forwards

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Criteria

Money Market

Capital Market

Meaning

A segment of the financial market that

A segment of the financial market that deals
deals with short-term borrowing and with long-term financing, typically more than
lending, typically less than one year.
one year.

Purpose

Provides a platform for companies to raise

Provides a platform for institutions and funds for long-term capital expenditures,
such
individuals to manage their short-term as investment in property, plant, and
liquidity needs.
equipment.

Instruments
traded

Treasury bills, commercial paper,

certificate
of
deposit,
repurchase
Shares, debentures, bonds, securities, and
agreements, and call money.
derivatives.

Risk

Relatively higher risk as the instruments

Low risk as the instruments traded are traded are subject to market volatility and
generally considered safe and are backed depend on the financial performance of the
by the creditworthiness of the issuer.
issuing company.

Returns

Can generate higher returns as the

Typically lower returns due to the investment horizon is longer and there is a
lower risk associated with money market higher risk associated with capital market
instruments.
instruments.

Reserve Bank of India (RBI)

Regulatory
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Criteria

Money Market

Capital Market

body

(SEBI)

Money Market Instruments

Concept

Borrower

Lender

Duration

Example

Call Money

Banks
and
financial
institutions

Banks
and
financial
institutions

Shortterm

Borrowing money from other

banks and they can ask for it
back whenever they want.

Treasury
Bill

Government

Investors

Shortterm

Giving the government some

money for a short time and
getting interest.

Commercial
Bill

Businesses

Banks
Shortterm

Borrowing money from a bank

to buy something for your
business.

Certificate
of Deposit

Individuals

Banks

Shortterm

Putting your money in a bank

for a while and getting interest.

Commercial
Paper

Companies

Investors

Shortterm

Borrowing money from a big

group of people to buy supplies
or pay employees.

Call Money and Notice Money

Call money is a short-term money market instrument that is used for borrowing and
lending money in
the inter-bank market. It is called "call" money because the lender can demand
repayment at any time,
or "call" back the money. This makes it a very flexible instrument for banks to
manage their short-term
liquidity needs. Call money is generally used for overnight transactions, but it
can also be extended for a
few days.
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For example, suppose Bank A has a temporary shortfall of funds, while Bank B has
surplus funds that it
wants to lend out. Bank A can borrow money from Bank B in the call money market at
an agreed
interest rate. This rate can change on a daily basis, depending on the demand and
supply of funds in the
market. At the end of the day, Bank A will have to repay the money to Bank B, along
with the agreed
interest.
Notice money, on the other hand, is similar to call money, but with a slightly
longer tenor. It is a shortterm money market instrument that is used for borrowing
and lending money in the inter-bank market
for a fixed period of time, ranging from 2 to 14 days. Notice money transactions
are done through a
notice, which is given by the lender to the borrower, specifying the date on which
the lender wants the
money back.
For example, let's say Bank C wants to borrow money from Bank D for 7 days. Bank D
can lend the
money to Bank C in the notice money market at an agreed interest rate. The notice
period gives Bank D
a bit more certainty about when it will get its money back, compared to call money.

Treasury Bills (T-Bills)

Treasury bills, also known as T-bills, are short-term debt securities issued by the
Reserve Bank of India
(RBI) on behalf of the Government of India. These bills are issued with a maturity
period of 14 days, 91
days, 182 days, and 364 days.
The Government of India issues T-bills to raise money to meet its short-term
financial requirements. It's
important to note that T-bills are considered to be one of the safest investment
options as they are
backed by the government's creditworthiness.
T-bills are also highly liquid and can be easily traded in the secondary market.
They are usually sold
through an auction process and can be bought by anyone, including individuals,
firms, banks, and other
financial institutions.
For example, let's say that the Government of India needs to raise funds to finance
some of its shortterm expenditures. It decides to issue a 91-day T-bill with a face
value of Rs. 1,000. The auction is held,
and the T-bill is sold to the highest bidder at a discount. Suppose the highest
bidder agrees to pay Rs.
990 for the T-bill. In that case, they will receive the T-bill with a face value of
Rs. 1,000 when it matures
after 91 days, thereby earning a profit of Rs. 10.

Cash Management Bills (CMB)

CMBs are short-term debt instruments issued by the Reserve Bank of India (RBI) on
behalf of the
Government of India to meet its short-term cash needs. The tenure of CMBs usually
ranges between 14
days to 91 days.

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Like Treasury Bills, CMBs are also auctioned, and the bids are accepted at a
discount rate. CMBs can be
held till maturity, or they can be traded in the secondary market. CMBs are also
issued in electronic
form, which makes it easy for investors to buy and sell them.
For example, let's say that the Government of India needs funds to pay for its
immediate expenses. It
decides to issue a 30-day CMB with a face value of Rs. 10,000. The auction is held,
and the CMB is sold
to the highest bidder at a discount. Suppose the highest bidder agrees to pay Rs.
9,950 for the CMB. In
that case, they will receive the CMB with a face value of Rs. 10,000 when it
matures after 30 days,
thereby earning a profit of Rs. 50.

Certificate of Deposits (CDs)

CDs are short-term, negotiable promissory notes issued by banks and financial
institutions to raise funds
from the market. The tenure of CDs usually ranges between 7 days to 1 year, and
they are issued at a
discount to face value.
Investors can buy CDs directly from the issuing bank or financial institution, or
they can purchase them
from the secondary market.
For example, let's say that a bank needs funds to meet its lending requirements. It
decides to issue a 90day CD with a face value of Rs. 1,00,000. The CD is issued at
a discount of, say, Rs. 98,000. The investor
will receive the face value of Rs. 1,00,000 when the CD matures after 90 days,
thereby earning a profit of
Rs. 2,000.

Commercial Papers (CPs)

CPs are unsecured, short-term debt instruments issued by highly rated corporates
and financial
institutions to raise funds from the market. The tenure of CPs usually ranges
between 7 days to 1 year,
and they are issued at a discount to face value.
For example, let's say that a highly rated corporate needs funds to meet its
working capital
requirements. It decides to issue a 60-day CP with a face value of Rs. 1,00,000.
The CP is issued at a
discount of, say, Rs. 98,500. The investor will receive the face value of Rs.
1,00,000 when the CP matures
after 60 days, thereby earning a profit of Rs. 1,500.

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Capital Market
The capital market is a market for long-term funds with a maturity ranging from
more than one year.
The capital market can be further classified into two segments:
•
•

Primary Market: This is the market where new securities are issued by companies for
the first
time to raise funds. This is also called the new issue market.
Secondary Market: This is the market where existing securities are traded among
investors
without the involvement of the issuing company. This is also called the stock
market or the stock
exchange.
Primary Market

Secondary Market

Also known as the "new issue market"

Also known as the "stock exchange" or

"secondary market"

Deals with the issuance of new securities to the

Deals with the trading of previously issued
public for the first time
securities among investors
Securities are sold by the issuer (company,
Securities are bought and sold among investors
government, etc.) to raise funds
without the involvement of the issuer
Primary market transactions help companies
Secondary market transactions provide liquidity
raise capital to fund business operations or to investors by allowing them to buy
and sell
expansion
securities easily
Prices of securities in the primary market are
Prices of securities in the secondary market are
determined by the issuer based on market demand
determined by market forces of supply and demand
and supply
Examples include initial public offerings (IPOs),
Examples include stock exchanges, over-therights issues, and private placements
counter markets, and electronic trading platforms

Primary Market Instruments

Initial Public Offer (IPO)

An Initial Public Offering (IPO) is a process through which a private company

becomes a public
company by selling its shares to the public for the first time. The company which
offers its shares is
known as the issuer.

Once the IPO is launched, members of the public can buy shares of the company by
subscribing to
the offer. If the demand for the shares exceeds the supply, the share price may go
up, and if the demand
is lower than the supply, the share price may go down.
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An example of an IPO is the recent public offering of the Indian food delivery
company, Zomato. In
July 2021, Zomato launched its IPO and offered its shares to the public. The IPO
was oversubscribed,
which means that the demand for shares was higher than the number of shares
offered. As a result, the
share price of Zomato increased on the day of listing, providing significant
returns to the investors who
subscribed to the IPO.

Follow on public offer (FPO)

A Follow-on Public Offer (FPO) is a process through which a public company raises
additional capital
by issuing new shares to the public.
An FPO is different from an IPO as in an IPO, a private company becomes a public
company for the
first time by issuing shares to the public. However, in an FPO, an already public
company raises
additional capital by issuing new shares. By issuing additional shares, the
ownership of the company is
diluted, which means that the existing shareholders will hold a smaller percentage
of the company's
shares.
An example of an FPO is the public offering of Reliance Industries Limited in 2020.
Reliance
Industries Limited had already issued shares and was listed on the stock exchange.
In July 2020, the
company announced an FPO and raised additional capital by issuing new shares to the
public. The funds
raised through the FPO were used to reduce the company's debt and for other capital
expenditures.

Preferential Issue

Preferential Issue is a method of raising capital by companies in which they offer

shares to select
investors on a preferential basis. This means that the shares are issued to a
specific group of investors,
typically promoters, institutional investors, or high net worth individuals, at a
price that is usually lower
than the market price.
Preferential issues are usually made to raise capital quickly and to avoid the
lengthy and
complicated process of a public issue.
An example of a Preferential Issue is the recent issue by Adani Ports and Special
Economic Zone Ltd.
In February 2021, the company announced a preferential issue of shares to raise
around Rs 3,000 crore.
The shares were offered to a group of investors, including a subsidiary of the
Qatar Investment
Authority, at a price of Rs 800 per share, which was significantly lower than the
market price of the
shares at that time. The funds raised through this issue were to be used for debt
reduction and capital
expenditure.

Rights Issue
A Rights Issue is a method of raising capital by companies by offering its existing
shareholders the
right to buy additional shares of the company at a discounted price. It's a way for
the company to raise
funds from its existing shareholders without diluting the ownership percentage of
the existing
shareholders.
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For example, if a company announces a rights issue of 1:3, it means that for every
three shares held
by a shareholder, they will be offered the right to buy one additional share at a
discounted price.
The shareholders have the option to either buy the additional shares or sell their
right to buy the
shares to other investors. The discounted price at which the shares are offered to
the shareholders is
usually lower than the current market price, making it an attractive investment
opportunity for the
shareholders.
An example of a rights issue is the recent issue by Tata Motors Limited in January
2021. The
company announced a rights issue of up to 533.5 million shares to its existing
shareholders at a price of
Rs. 150 per share, which was a discount of around 10% from the market price at that
time. The funds
raised through this rights issue were to be used to repay the company's debt and to
fund its growth
plans.

Debt and Equity

Financial debt refers to the debt incurred by financial institutions and

corporations to finance their
operations and investments. This includes loans from banks, corporate bonds, and
other debt
instruments issued by financial entities.

Non-financial debt, on the other hand, is the debt incurred by non-financial

entities such as
households, governments, and non-profit organizations. It includes debt related to
personal
consumption, government expenditures, infrastructure projects, and other non-
financial activities.

Aspect

Ownership

Return

Repayment

209

Debt

Equity

Debt represents a loan or

obligation

Equity represents ownership in a company

Interest payments (coupon)

Variable returns through dividends and

capital appreciation
Debt must be repaid at maturity

No repayment obligation, perpetual

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Aspect

Debt

Equity

Risk

Debtholders have priority claim

Voting Rights

No voting rights for debtholders

Control

No control over company's

management

Debtholders have priority over

Subordination equity

Examples

Bonds, Debentures, Money Market

Instruments

Secondary or Stock Market

Equity investors bear higher risk and volatility

Equity shareholders generally have voting

rights

Equity shareholders have control and voting

rights

Equity holders are subordinated to debt

holders in liquidation

Stocks, Shares

This is the market where existing securities are traded among investors.

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Products available in a Secondary Market

Shares

Shares, also known as stocks, are units of ownership in a company. Owning shares in
a company
entitles the shareholder to a portion of the company's profits, as well as a say in
how the company is run
through voting rights at shareholder meetings.

When a company wants to raise capital, it can do so by issuing more shares to the
public or to
institutional investors. These shares can be bought and sold on the stock market,
and their value is
determined by supply and demand, as well as various other factors such as the
company's financial
performance and industry trends.
For example, let's say that Company XYZ has issued 100 shares of stock, and you
purchase 10 of
those shares. You now own 10% of the company, and you are entitled to 10% of the
company's profits.
If the company's profits increase, your investment in the shares will increase in
value, and you may be
able to sell your shares for a profit. On the other hand, if the company's profits
decrease, the value of
your investment in the shares will decrease, and you may end up selling your shares
at a loss.
There are two main types of shares - equity shares and preference shares.
1. Equity Shares: Equity shares are also known as ordinary shares. They represent
ownership in the
company and provide shareholders with voting rights and a share in the company's
profits. The
value of equity shares fluctuates based on the performance of the company and
demand and
supply in the market. Equity shareholders have the potential to earn higher returns
as they are
entitled to a share in the company's profits.
2. Preference Shares: Preference shares are a type of share that provides fixed
dividends to the
shareholders before any dividends are paid to equity shareholders. Preference
shareholders are
given priority over equity shareholders in terms of dividends and repayment of
capital in case
the company is liquidated. However, they do not have any voting rights, which means
they do
not have a say in the company's decisions. Preference shares are preferred by
investors who
seek regular income and are risk-averse as they offer a fixed rate of return.
It's important to note that companies may also issue different classes of shares
with varying rights
and restrictions, such as non-voting shares or shares with limited voting rights.

Dividend
Dividend is a payment made by a company to its shareholders out of its profits or
reserves. It is a
way for a company to distribute its profits to its owners, the shareholders.
When a company makes a profit, it can decide to either retain the profit within the
company or
distribute it among its shareholders in the form of a dividend. Companies usually
declare dividends at
regular intervals, such as quarterly or annually.

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Dividends are usually paid on a per-share basis, so the amount of dividend a
shareholder receives is
proportional to the number of shares they own. For example, if a company declares a
dividend of Rs. 5
per share and a shareholder owns 100 shares, then the shareholder will receive Rs.
500 as dividend.

Debentures

Debentures are a type of long-term debt instrument issued by companies, which are
essentially
loans that are paid back with interest at a fixed rate. In other words, debentures
are a way for
companies to borrow money from investors or the public for a long period of time,
usually 10-30 years,
to finance their operations or expansion plans.
Unlike equity shares, debenture holders do not have any ownership rights in the
company.
However, they do have a priority claim on the company's assets in case of
liquidation, which means that
if the company goes bankrupt, the debenture holders will be paid back before the
equity shareholders.
Debentures can be secured or unsecured. Secured debentures are backed by some sort
of collateral,
such as company assets or property, which gives the debenture holders a greater
level of security.
Unsecured debentures, on the other hand, are not backed by any collateral and are
riskier for the
investor.
Debentures can also be convertible or non-convertible. Convertible debentures allow
the holder to
convert their debentures into equity shares of the company at a predetermined rate,
giving them the
opportunity to participate in the company's growth potential. Non-convertible
debentures, as the name
suggests, cannot be converted into equity shares.
An example of debentures would be a company that needs to raise a large amount of
capital to
build a new factory. Instead of taking out a loan from a bank, the company issues
debentures to the
public. Investors can then buy these debentures, which will provide the company
with the necessary
funds. The debenture holders will receive interest payments at a fixed rate and
will eventually receive
their principal back at maturity.

Bonds

Bonds are debt instruments issued by companies, governments, or other organizations

to raise
capital. When an entity issues a bond, it is essentially borrowing money from
investors. In return, the
entity agrees to pay the investors interest at a fixed rate, usually annually or
semi-annually, until the
bond matures. At maturity, the entity repays the principal amount of the bond to
the investors.
Some of the common types of bonds include:
1. Coupon Bonds: Coupon bonds, also known as bearer bonds, are a type of bond that
comes with
interest coupons attached to them. These bonds are issued by governments,
corporations, and
other institutions to raise funds for various purposes, such as financing projects
or expanding
operations.

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When you buy a coupon bond, you are essentially lending money to the issuer, who
promises to repay the principal amount (the amount you invested) at the bond's
maturity date.
In addition to the principal repayment, coupon bonds also pay periodic interest
payments to
bondholders. The interest payments are usually made semi-annually, annually or
quarterly and
the coupon rate is fixed at the time of issuance.
For example, let's say you bought a coupon bond from XYZ Corporation for Rs.
10,000. The
bond has a coupon rate of 5%, which means that you will receive Rs. 500 as interest
every year
until the bond matures. The bond has a maturity period of 10 years, which means
that at the
end of 10 years, you will receive the principal amount of Rs. 10,000 along with the
final interest
payment.
Coupon bonds are tradable securities and can be bought and sold in the secondary
market.
One important thing to note about coupon bonds is that the coupon rate remains
fixed
throughout the life of the bond, but the market interest rates may fluctuate. If
the market
interest rates rise above the bond's coupon rate, the bond may become less
attractive to
investors, and its market price may decline. On the other hand, if the market
interest rates fall
below the bond's coupon rate, the bond may become more attractive, and its market
price may
increase. This relationship between bond prices and market interest rates is known
as the
bond's price-yield relationship.
2. Government Bonds: These are bonds issued by governments to raise funds. They are
generally
considered to be safe investments because they are backed by the creditworthiness
of the
government. For example, the Government of India issues bonds such as Sovereign
Gold Bonds,
Government of India Savings Bonds, etc.
3. Corporate Bonds: These are bonds issued by companies to raise funds for their
business
operations. Corporate bonds generally offer higher interest rates than government
bonds but
also carry a higher risk of default. For example, Tata Steel issued a 10-year bond
with a coupon
rate of 8.25% in 2021.
4. Municipal Bonds: These are bonds issued by state or local governments to raise
funds for public
projects such as schools, hospitals, and highways. For example, Municipal
Corporation of
Greater Mumbai issued municipal bonds worth Rs. 2000 crore in 2021 to fund its
infrastructure
projects.
5. Zero Coupon Bonds: These are bonds that do not pay any interest but are issued
at a discount to
their face value. The investor earns a return by buying the bond at a discount and
receiving the
face value at maturity. For example, a zero coupon bond with a face value of Rs.
1,000 may be
issued at a discount of Rs. 800. At maturity, the investor receives Rs. 1,000,
earning a return of
Rs. 200.
6. Sovereign Gold Bond: A Sovereign Gold Bond (SGB) is a government security
denominated in
grams of gold. It offers an alternative to holding physical gold and is aimed at
providing investors
with the opportunity to invest in gold, without having to worry about the storage
and security of
physical gold.
•
•
213

SGBs are issued by the Reserve Bank of India (RBI) on behalf of the government and
are
traded on stock exchanges.
The bonds have a maturity period of 8 years, with an option to exit after the 5th
year.
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•
•
•

The price of the bond is determined based on the average closing price of gold of
999
purity for the previous 3 days, as published by the India Bullion and Jewellers
Association Limited.
SGBs offer investors an interest rate of 2.5% per annum, payable semi-annually on
the
initial investment amount. They also provide capital gains on redemption of the
bond
based on the prevailing market value of gold.
Additionally, investors are allowed to use the bonds as collateral for loans.

For example, let's say that an investor wants to invest in gold but does not want
to purchase
physical gold due to the storage and security concerns. The investor decides to
invest in a
Sovereign Gold Bond instead. The investor purchases SGBs worth Rs. 50,000 at a
price
determined based on the average closing price of gold for the previous 3 days. The
investor will
receive an interest of 2.5% per annum, which will be paid semi-annually. After 8
years, the
investor will receive the maturity amount based on the prevailing market value of
gold at that
time.
7. Green Bond: A green bond is a type of bond that is specifically issued to
finance projects with
environmental benefits.
The concept of green bonds has gained popularity in recent years due to growing
concern
about climate change and the need for sustainable development.
Green bonds work like other bonds, in that investors purchase the bond and receive
regular
interest payments until the bond reaches maturity. At maturity, the investor
receives the full
principal amount of the bond.
For example, a company may issue a green bond to finance the construction of a wind
farm.
8. Masala Bond: Masala bonds are rupee-denominated bonds issued in offshore
markets. They are
named "masala" because the term refers to Indian cuisine and the bonds are
denominated in
Indian rupees. These bonds are issued by Indian companies to raise funds from
foreign
investors.
Masala bonds are typically issued in overseas financial centers such as London,
Singapore,
and Hong Kong, and are available to foreign investors who want to invest in the
Indian market.
One of the benefits of masala bonds is that they can help Indian companies
diversify their
investor base by attracting foreign investment without being subject to exchange
rate risk.
For example, let's say that an Indian company, XYZ Ltd., wants to raise funds to
finance its
expansion plans. It decides to issue masala bonds with a face value of Rs. 100
crore, offering a
coupon rate of 7% per annum and a maturity period of 5 years. The bonds are issued
in London
and are subscribed by foreign investors who are looking to invest in the Indian
market. The
company receives Rs. 100 crore in funds, which it can use for its expansion plans.
The investors
receive regular interest payments in Indian rupees, and the principal amount is
repaid at

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maturity. Any change in exchange rate during this period does not put additional
burden on the
company.
9. Social Impact Bond: A social impact bond (SIB), also known as a pay-for-success
bond, is a
financial instrument designed to encourage private investment in social programs
that provide
measurable social outcomes.
In a social impact bond, private investors provide upfront funding to social
service providers,
such as non-profits or community organizations, to deliver specific social
programs. The
government agrees to repay investors only if the social program achieves
predetermined
outcomes.
For example, let's say that a non-profit organization wants to provide job training
to
homeless individuals to help them find employment. The non-profit organization
needs funding
to support the program, but traditional funding sources may not be available. The
non-profit
organization may turn to a social impact bond to raise the necessary funds.
Private investors would provide the initial funding to the non-profit organization.
The
government would then agree to repay the investors their initial investment plus a
return, but
only if the program meets certain predetermined outcomes, such as a 20% increase in
employment for the participants. If the program is successful in meeting the
predetermined
outcomes, the government will repay the investors. If not, the investors may lose
some or all of
their investment.
10. Electoral Bonds: Electoral bonds are a type of financial instrument that can be
purchased by
individuals and companies in India to donate funds to political parties.
The process of purchasing electoral bonds is done through a designated bank during
a
specific period of time. The donor can purchase the bond in multiples of Rs. 1,000,
Rs. 10,000,
Rs. 1 lakh, Rs. 10 lakhs, or Rs. 1 crore. The donor's identity remains anonymous,
and the political
party receiving the donation only knows the value of the bond and not the identity
of the donor.
Political parties (registered under Representation of the People Act 1951 and which
has
secured atleast 1% votes polled in the last Lok Sabha or State Legislative Assembly
Elections) can
redeem the electoral bonds at authorized banks and receive the value of the bond in
their
account. The bonds must be redeemed within 15 days of issuance.
Electoral bonds are seen as a means of curbing the use of black money in political
funding
and bringing transparency to the process. However, some critics argue that the
anonymity of
donors undermines the purpose of transparency and accountability in political
funding.
For example, if a company wants to donate funds to a political party, they can
purchase
electoral bonds worth Rs. 10 lakhs from a designated bank. The company's identity
remains
anonymous, and the political party receiving the funds only knows that they have
received a
bond worth Rs. 10 lakhs. The party can redeem the bond at an authorized bank and
receive the
value of the bond in their account.
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11. Inflation-Indexed Bonds: Inflation-indexed bonds (IIBs) are a type of bond
where the principal
value and interest payments are adjusted to account for changes in inflation. These
bonds are
designed to help protect investors from the erosion of purchasing power caused by
inflation.
Unlike traditional fixed-rate bonds, the coupon rate of IIBs is lower because it
includes an
inflation adjustment component.
Here's how inflation-indexed bonds work:
Let's say you purchase an inflation-indexed bond with a face value of ₹10,000 and a
fixed
interest rate of 2%. Each year, the bond's principal value is adjusted based on the
prevailing
inflation rate. If the inflation rate for the first year is 3%, the principal value
of the bond will be
increased by 3% to account for the rise in prices. So, in this case, the principal
value after the
first year would be ₹10,300. The interest payment for the first year would be 2% of
₹10,300,
which is ₹206.
12. Convertible Bonds: Convertible bonds are a type of bond that gives the
bondholder the option to
convert the bond into a predetermined number of the company's common stock shares.
It
combines the characteristics of both debt and equity instruments.
Here's how convertible bonds work:
Imagine a company issues convertible bonds with a face value of ₹10,000 and a
conversion
ratio of 10:1. This means that each bond can be converted into 10 shares of the
company's
common stock.
If the bondholder decides to convert the bond, they can submit the bond and receive
10
shares of the company's common stock in exchange. The conversion can usually be
done at any
time during the bond's maturity period, as specified in the terms of the bond.
The benefit of convertible bonds is that they offer the potential for both fixed
income
through the bond's interest payments and the opportunity to participate in the
company's
growth if the bond is converted into equity. These bonds typically offer a lower
interest rate
compared to traditional bonds because of the added benefit of potential equity
upside.
For example, if the company's stock price rises significantly during the bond's
maturity
period, the bondholder can choose to convert the bond into shares and benefit from
the price
appreciation. However, if the stock price does not rise significantly, the
bondholder can
continue to receive regular interest payments until the bond matures.

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Voting
Rights

Concept

Definition

Issued By

Purpose

Return

Shares

A unit of ownership
in a company

Publicly traded
companies,
Private
companies

To raise
equity
capital
for the
company

Dividend
payments
, Capital
gains

Voting
rights in
certain
matters
.

Bonds

A
type
of
investment where
an investor lends
money to an entity
(e.g. government,
corporation) for a
fixed period of time.

Governments,
Corporations,
Municipalities

To raise
debt
capital
for the
entity.

Interest
payments

No
voting
rights.

Debenture
s

A type of bond that

is not secured by
collateral, and relies
solely on the issuer's
creditworthiness.

Governments,
Corporations,
Municipalities

Same as
bonds.

Interest
payments

No
voting
rights.

Derivatives

Derivatives are financial instruments that derive their value from an underlying
asset or security.
The underlying asset can be anything, like a stock, bond, commodity, currency. The
value of a derivative
is based on the value of its underlying asset, but it is not the same as owning the
asset itself.
There are several types of derivatives, including futures, options, swaps, and
forwards. Let's take a
closer look at each of them:

Futures

Futures are a type of financial instrument that allow individuals or organizations

to buy or sell an
asset at a predetermined price and time in the future. Futures contracts are
legally binding agreements
between two parties, where the buyer agrees to purchase a certain quantity of an
underlying asset from
the seller at a future date, and at a price that is agreed upon today.

Futures are commonly used in financial markets to speculate on the future price
movements of
assets such as commodities, stocks, and currencies. For example, a farmer may sell
a futures contract for
their crop harvest to lock in a guaranteed price for their goods. Similarly, an
investor may buy a futures
contract for a certain stock if they believe that the stock's price will increase
in the future.
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Futures contracts are standardized and traded on exchanges, such as the National
Stock Exchange
(NSE) or the Bombay Stock Exchange (BSE) in India. Futures contracts have a
specified expiry date, which
is when the transaction is completed and the buyer pays the agreed-upon price for
the asset.
Futures contracts can be settled in two ways - either by physical delivery or by
cash settlement. In
physical delivery, the underlying asset is delivered to the buyer at the specified
price and time. In cash
settlement, the buyer receives a cash payment equal to the difference between the
agreed-upon price
and the market price of the asset at the time of the contract's expiry.
Futures trading involves a high degree of risk, as price movements can be
unpredictable and volatile.

Options

An option is a contract between two parties giving the buyer (holder) the right,
but not the
obligation, to buy or sell an underlying asset at a specified price (strike price)
within a specified time
period. The seller (writer) of the option is obligated to sell or buy the asset at
the specified price if the
buyer chooses to exercise their option.
There are two main types of options: call options and put options. A call option
gives the holder the
right to buy an underlying asset at the strike price, while a put option gives the
holder the right to sell an
underlying asset at the strike price.
Let's say you're interested in purchasing shares of a company that are currently
trading at Rs. 100
per share, but you're not sure if the price will go up or down in the next few
months. You could purchase
a call option, giving you the right to buy the shares at a specified price (say,
Rs. 110) within a specified
time period (say, 3 months). If the price of the shares does go up to Rs. 120
during that time period, you
could exercise your option and purchase the shares at the lower strike price of Rs.
110, thereby earning
a profit of Rs. 10 per share.
On the other hand, if the price of the shares remains below the strike price of Rs.
110, you could
choose not to exercise your option and simply let it expire. In this case, you
would lose the premium you
paid to purchase the option but would not be obligated to buy the shares at the
higher strike price.
Overall, options can be a useful tool for investors looking to hedge against risk
or speculate on the
future movements of an underlying asset.

Swaps

Swaps are financial contracts between two parties to exchange cash flows at a
future date. These
cash flows are based on a specific underlying asset or financial instrument, such
as interest rates,
currencies, or commodities. The two most common types of swaps are interest rate
swaps and currency
swaps.

Interest rate swaps involve two parties exchanging interest payments. For example,
a company that
has borrowed money at a variable interest rate may enter into an interest rate swap
to exchange the
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variable rate for a fixed rate. In this case, the company would pay a fixed
interest rate to the other party
in exchange for receiving the variable interest rate payments.
Currency swaps involve two parties exchanging cash flows denominated in different
currencies. For
example, a company in India that needs US dollars may enter into a currency swap
with a US company
that needs Indian rupees. The Indian company would pay the US company a fixed rate
of Indian rupees
in exchange for receiving a fixed rate of US dollars.
Swaps are often used by companies and financial institutions to manage their risks
and hedge
against unfavorable market conditions. They can also be used for speculative
purposes, such as betting
on future interest rates or currency exchange rates.

Forwards

Forwards are a type of financial contract between two parties where they agree to
buy or sell an
underlying asset at a predetermined price on a specific date in the future. These
contracts are traded
over-the-counter (OTC) and are customized according to the needs of the two parties
involved. In
contrast to futures, traders cannot buy or sell forward contracts on the exchange
before the delivery
date, limiting their flexibility in trading.
Let's say you are a farmer who has grown a crop of wheat and expects to harvest it
in six months.
You want to ensure that you get a good price for your wheat when you sell it, but
you are worried that
the price might drop in the next six months. On the other hand, a food processing
company wants to
ensure that it has a steady supply of wheat for the next six months at a price it
can afford.
You and the food processing company could enter into a forward contract where you
agree to sell
your wheat to the company at a fixed price in six months. This means that you have
locked in the price
you will receive for your wheat, and the company has locked in the price it will
pay.
For example, let's say the current market price for wheat is Rs. 20 per kilogram,
and you and the
company agree to a forward contract at Rs. 25 per kilogram in six months. If the
market price drops to
Rs. 18 per kilogram, you will still receive Rs. 25 per kilogram from the company,
and if the market price
rises to Rs. 30 per kilogram, the company will still pay only Rs. 25 per kilogram
to you.
In this way, forward contracts provide certainty to both parties by eliminating the
risk of price
fluctuations in the future.

Government Securities Market in India

What is a Government Security (G-Sec)?

A Government Security (G-Sec) is a type of investment issued by the Central

Government or State
Governments in India. G-Secs can be short-term, known as treasury bills, with
maturities of less than
one year, or long-term, called Government bonds or dated securities, with
maturities of one year or
more. The Central Government issues both treasury bills and bonds, while State
Governments issue
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bonds, also known as State Development Loans (SDLs). G-Secs are considered very
safe as they have
practically no risk of default, making them risk-free investments.

Type of Government
Security

Description

Features

Short-term debt
Treasury Bills (T-bills) instruments

- Issued in 91 days, 182 days, and 364

days tenors. Don't pay regular interes.
Issued at a discount, redeemed at face
value

Cash Management
Bills (CMBs)

Short-term debt
instruments

- Similar to T-bills, but with maturities

less than 91 days. Help manage
temporary cash flow mismatches

Dated GSecs/Government
Bonds

Long-term
government
securities

- Have fixed or floating interest rates.

Interest paid every six months. Tenor
ranges from 5 to 40 years

Long-term state
government
SDL (State
Development Loans) securities

- Similar to Dated G-Secs, but issued by

State Governments. Have fixed or
floating interest rates. Tenor varies by
state

Government securities (G-Secs) are initially bought through primary market auctions
conducted by
the Reserve Bank of India (RBI) through the Negotiated Dealing System - Order
Matching (NDS-OM).
NDS-OM is an electronic platform that facilitates the auction process and allows
market participants
to submit their bids for G-Secs. In the primary market, interested buyers,
including individuals,
institutional investors, banks, and financial institutions, participate in auctions
by placing bids for the
desired quantity and price (yield or coupon rate) of the G-Secs being offered.

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Successful bidders are allotted G-Secs based on their bid prices, and the
securities are credited to
their respective accounts in dematerialized (demat) form. NDS-OM ensures
transparency, efficiency,
and competitiveness in the auction process, making it easier for investors to
participate in
government debt auctions.
Subsequently, in the secondary market, G-Secs are traded among investors on stock
exchanges such
as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), as well
as over-thecounter (OTC) markets. Most G-Secs are held in demat form, and investors
can easily trade them
through their demat accounts.

Investment Funds
Investment funds, are a type of investment vehicle where individuals pool their
money together to
invest in a diversified portfolio of assets, such as stocks, bonds, and other
securities. The fund is
managed by a professional fund manager, who makes investment decisions based on the
investment
objective of the fund.

Types of Investment Funds

Mutual fund

A mutual fund is an investment vehicle that pools money from many individual
investors to
purchase a diversified portfolio of stocks, bonds, or other securities.
Essentially, it's like a big basket of
investments that many people contribute to, and then a professional fund manager
uses that money to
invest in a variety of assets.

Here's an example to help illustrate how mutual funds work: Let's say you want to
invest in the stock
market, but you don't have the time or expertise to research and choose individual
stocks. Instead, you
could invest in a mutual fund that holds a diversified portfolio of stocks selected
by a professional fund
manager. By buying shares in the mutual fund, you're essentially buying a piece of
that diversified
portfolio.
The benefits of investing in a mutual fund include diversification (since the fund
holds many
different securities), professional management (since the fund is managed by an
experienced
professional), and accessibility (since mutual funds are widely available to
individual investors).
There are many different types of mutual funds, including
•
•
•
•
•

Equity funds - which invest primarily in stocks

Bond funds - which invest in fixed-income securities like bonds
Hybrid funds - which invest in both stocks and bonds
Index funds - which track the performance of a specific market index (like the S&P
500)
Actively managed funds - where the fund manager makes decisions on which securities
to buy
and sell in an attempt to outperform the market.

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Investors in a mutual fund typically earn returns through capital appreciation (an
increase in the
value of the securities held by the fund) or through dividend or interest income
generated by the
securities in the fund's portfolio.

Hedge Funds

A hedge fund is a type of investment fund that pools money from investors and uses
advanced
investment strategies to generate high returns. Hedge funds are usually only open
to wealthy investors
and require a high minimum investment.
Unlike mutual funds, which invest in a variety of assets like stocks, bonds, and
commodities, hedge
funds can invest in almost anything, including derivatives, real estate,
currencies, and even art. Hedge
funds are known for their use of complex financial instruments and techniques, such
as leverage, short
selling, and options trading, to maximize returns.
Hedge funds are also known for their high management fees and performance fees.
Hedge funds are not as tightly regulated as mutual funds, which means they have
more freedom to
pursue their investment strategies. This can lead to higher returns, but also
higher risks.
An example of a hedge fund is the Bridgewater Associates, one of the largest hedge
funds in the
world, which uses a variety of quantitative and qualitative investment strategies
to generate returns for
its investors.

Alternative Investment Fund (AIF)

Alternative Investment Fund (AIF) is a type of pooled investment vehicle in India

that pools together
capital from different investors and invests it in non-traditional assets such as
private equity, hedge
funds, real estate, and other alternative investments. AIF is regulated by the
Securities and Exchange
Board of India (SEBI).
AIFs are different from traditional investment funds such as mutual funds, as they
are not regulated
under the same laws and have fewer restrictions on the types of assets they can
invest in. They are
designed for high net worth individuals and institutional investors who are looking
for higher returns
and are willing to take higher risks.
There are three categories of AIFs in India, Category I, Category II, and Category
III, each with
different investment strategies and requirements:
•
•
•

Category I AIFs invest in start-ups, MSMEs, social ventures, infrastructure, or

other areas that
the government or regulators consider economically or socially desirable.
Category II AIFs invest in debt or equity securities of companies that are not
listed on a stock
exchange, or in listed securities that are not frequently traded.
Category III AIFs use complex trading strategies and invest in derivatives,
commodities, or other
high-risk assets with the aim of generating high returns for investors.

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One example of an AIF in India is the KKR India Alternative Credit Opportunities
Fund, which is a
Category II AIF managed by KKR, a global investment firm. The minimum investment
requirement for
this fund is INR 1 crore.

Real Estate Investment Trust (REIT)

A real estate investment trust (REIT) is a type of investment vehicle that allows
individuals to invest
in real estate without actually owning physical property. Instead, REITs own and
operate incomegenerating real estate properties such as shopping malls, apartments,
office buildings, hotels, and
warehouses.
When you invest in a REIT, you are essentially buying shares of that company, which
in turn invests
your money in real estate properties. The income generated from these properties,
such as rent or lease
payments, is then distributed among the shareholders in the form of dividends.
REITs are required by
law to distribute at least 90% of their taxable income to their shareholders, which
makes them an
attractive investment option for those seeking a steady stream of income.
In India, REITs were introduced in 2014 and they operate under the regulations of
the Securities and
Exchange Board of India (SEBI). The first REIT launched in India was Embassy Office
Parks REIT, which is a
joint venture between Embassy Group and Blackstone Group. The minimum investment
requirement for
investing in REITs in India is typically Rs. 50,000.

Infrastructure Investment Trusts (InvITs)

Infrastructure Investment Trusts (InvITs) are a type of investment vehicle that

invests in
infrastructure projects like highways, power transmission lines, and renewable
energy assets. They work
similar to REITs, but instead of investing in real estate, they invest in
infrastructure projects. InvITs are
regulated by the Securities and Exchange Board of India (SEBI).

Investors
Investors are individuals or entities who put their money into different investment
avenues with the
expectation of earning a return on their investment.

Types of Investors

1. Retail Investors: These are individuals who invest smaller amounts of money in
various
investment options, such as mutual funds, stocks, and bonds.
2. Institutional Investors: These are large organizations, such as pension funds,
insurance
companies, and mutual funds that invest on behalf of their clients or members.
Institutional
investors have a higher level of financial knowledge and can invest in riskier
assets like private
equity or hedge funds.
3. Accredited Investors: These are high-net-worth individuals or entities with more
than a certain
amount of investable assets or income, as defined by regulatory authorities.
Accredited
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4.
5.

6.
7.

investors have access to exclusive investment opportunities, such as private equity

or venture
capital.
Foreign Institutional Investors (FIIs): These are institutional investors from
other countries who
invest in the securities of the domestic market. FIIs can include hedge funds,
pension funds, and
sovereign wealth funds.
Angel Investors: These are wealthy individuals who invest their personal funds in
startup
companies, usually in exchange for an equity stake. Angel investors provide seed
capital to
startups that have a high potential for growth but are unable to secure funding
from traditional
sources.
Venture Capitalists: These are professional investors who invest in early-stage
companies with
high growth potential. Venture capitalists usually invest larger amounts of money
than angel
investors and provide more hands-on support to the startup.
Private Equity Investors: These are investors who provide capital to companies that
are not
publicly traded, usually in exchange for equity ownership. Private equity investors
typically
invest in mature companies with a track record of success and aim to improve their
operations
and profitability.

India's securities market infrastructure

1. Securities and Exchange Board of India (SEBI): SEBI is the primary regulatory
authority
responsible for overseeing and regulating India's securities market. It formulates
rules and regulations,
ensures investor protection, and promotes fair and transparent practices in the
market.
2. Stock Exchanges: India has several prominent stock exchanges where securities
are listed and
traded. The two major national stock exchanges are the National Stock Exchange of
India (NSE) and the
Bombay Stock Exchange (BSE). These exchanges provide a platform for buyers and
sellers to trade a
wide range of financial instruments, including equities, derivatives, and debt
securities.
3. Depositories: The two depositories in India are the National Securities
Depository Limited (NSDL)
and the Central Depository Services Limited (CDSL). They operate as custodians of
securities in
electronic (dematerialized) form. Investors hold their securities in demat
accounts, which eliminates the
need for physical certificates and simplifies the transfer and settlement process.
4. Clearing Corporations: Clearing corporations ensure the smooth settlement of
trades executed
on stock exchanges. They act as intermediaries between buyers and sellers,
guaranteeing the fulfillment
of trade obligations. In India, the two major clearing corporations are the
National Securities Clearing
Corporation Limited (NSCCL) for the NSE and the Indian Clearing Corporation Limited
(ICCL) for the BSE.
5. Electronic Trading Platforms: In addition to traditional floor-based trading,
electronic trading
platforms have become popular in India. The NSE and BSE have introduced their
electronic trading
platform, where orders are matched electronically, ensuring faster and more
efficient execution of
trades. Online brokerage platforms like Zerodha and Groww provide seamless access
to these electronic
trading platforms, enabling investors to place orders and execute trades online.

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6. Negotiated Dealing System - Order Matching (NDS-OM): NDS-OM is an electronic
platform used
for primary market auctions of government securities. It facilitates the auction
process and allows
market participants to submit bids for G-Secs.
7. Payment and Settlement Systems: Payment and settlement systems ensure the
transfer of funds
between buyers and sellers after the trade is executed. The Real-Time Gross
Settlement (RTGS) and the
National Electronic Funds Transfer (NEFT) systems are commonly used for settling
funds in India.

Stock Exchange
A stock exchange is a marketplace where stocks and other securities are bought and
sold. It provides
a platform for companies to raise capital by issuing and selling shares, and for
investors to buy and sell
these shares.
In India, the two leading stock exchanges are the National Stock Exchange (NSE) and
the Bombay
Stock Exchange (BSE).
Basis
Comparison

of

Brief Introduction

BSE

NSE

Oldest stock exchange

in Asia

Largest stock exchange in India

Founded In

1875

1992

Benchmark Index

Sensex (30 companies)

Nifty 50 (50 companies)

Website

bseindia.com

nseindia.com

Around 7400

Around 1790
Market
Capitalization

Around Rs 266 trillion

Around Rs 199 trillion

Global Rank (by

market capitalization)

10th

11th

Total
Companies

Listed

Combination
of
Trading Mechanism electronic and traditional
trading
Liquidity

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Fully electronic trading platform

In case of liquidity, NSE is a clear winner, since
volume traded in NSE are much higher compared
to BSE
Securities and Exchange Board of India
SEBI is an autonomous regulatory body established under the Securities and Exchange
Board of
India Act, 1992 to protect the interests of investors in securities and promote the
development and
regulation of the securities market.

Composition

SEBI is governed by a board of directors consisting of nine members, including one

chairman, two
members from the Union Finance Ministry, one member from the Reserve Bank of India,
and five
members nominated by the government. Out of these five members, three are full-time
members.

Tenure of Chairman

The tenure of the SEBI chairman is three years or until they attain the age of 65
years, whichever is
earlier. However, the government can extend the tenure of the chairman by one year
at a time, up to a
maximum of two years.

Functions

SEBI has a wide range of functions to regulate and promote the securities market.
Some of the key
functions of SEBI are as follows:
1. Regulating the securities market: SEBI is responsible for regulating both
primary and secondary
securities markets. It can frame rules, regulations, guidelines, and directions for
intermediaries
and financial institutions operating in securities markets.
2. Protecting investors' interests: It ensures that investors get fair treatment,
and their rights are
not violated.
3. Promoting transparency: SEBI promotes operational transparency and disclosure of
information
to ensure investor protection.
4. Registration and regulation of intermediaries: SEBI regulates intermediaries
such as
stockbrokers, sub-brokers, bankers to the issues, and venture capital funds.
5. Regulating substantial acquisition of shares and takeovers: SEBI regulates
substantial
acquisition of shares and takeovers to prevent market manipulation and ensure
transparency.

Appellate Mechanism

Any person aggrieved by an order of SEBI can file an appeal with the Securities
Appellate Tribunal
(SAT). SAT is a quasi-judicial body that hears appeals against orders passed by
SEBI. If a person is not
satisfied with the SAT's decision, they can further appeal to the Supreme Court.
Suppose a company issues shares to the public for the first time, and some of the
investors complain
that they were misled about the company's financial position. SEBI would
investigate the matter, and if
it finds that the company has violated any securities laws, it can take action
against the company and its
intermediaries. This action may include imposing fines, issuing warnings, or even
suspending the
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company's trading on the stock exchange. The investors can also appeal to the SAT
if they are not
satisfied with SEBI's decision.

Various reforms implemented by SEBI

1. Securities Market Code: The Securities Market Code aims to create a single
unified code that
governs all aspects of the securities market, making it easier for investors and
market participants to
understand and follow the rules. It was proposed in Budget 2021.
2. Investor Charter: The Investor Charter is a document created by SEBI to educate
and inform
investors about their rights and responsibilities while participating in the
securities market.

3. Circuit Breaker System: The Circuit Breaker System is a mechanism introduced by

SEBI to prevent
excessive volatility and sudden price swings in the stock market. When certain
predetermined
thresholds are breached, trading is temporarily halted to allow investors to cool
down and reassess
their positions. The circuit breaker system helps maintain market stability and
reduces the impact of
sharp market movements.
4. PAN Card: The PAN (Permanent Account Number) card is a unique identification
number issued
by the Indian government to individuals and entities involved in financial
transactions, including
securities trading. A PAN card is mandatory for opening a demat account and
participating in the
securities market. It helps track financial activities and prevents tax evasion.
5. Investor Protection Fund: The Investor Protection Fund is a reserve fund set up
by stock
exchanges under SEBI's guidelines. It aims to compensate investors in case of
fraud, default, or other
unforeseen events that cause financial losses.
6. Insider Trading Regulations: SEBI established stringent regulations against
insider trading,
prohibiting individuals with access to privileged information from trading in
securities based on such
information. This ensures a level playing field for all investors.

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Previous Years Prelims Questions
1. With reference to the India economy, what are the advantages of
“InflationIndexed Bonds (IIBs)”?

2022

1. Government can reduce the coupon rates on its borrowing by way of

IIBs.
2. IIBs provide protection to the investors from uncertainty regarding
inflation.
3. The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
2. With reference to the expenditure made by an organisation or a company,
which of the following statements is/are correct?

2022

1. Acquiring new technology is capital expenditure.

2. Debt financing is considered capital expenditure, while equity financing
is considered revenue expenditure.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
3. Convertible Bonds, consider the following statements:
1. As there is an option to exchange the bond for equity, Convertible
Bonds pay a lower rate of interest.
2. The option to convert to equity affords the bondholder a degree of
indexation to rising consumer prices.
Which of the statements given above is/are correct?
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2022
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
4. With reference to India, consider the following statements:

2021

1. Retail investors through Demat account can invest in Treasury Bills and
Government of India Debt Bonds in the primary market
2. The “Negotiated Dealing System-Ordering Matching” is a government
securities trading platform of the Reserve Bank of India.
3. The “Central Depository Services Ltd” is jointly promoted by the Reserve
Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
a) 1 only
b) 1 and 2
c) 3 only
d) 2 and 3
5. Indian Government Bond yields are influenced by which of the following?

2021

1. Actions of the United States Federal Reserve

2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates.
Select the correct answer using the code given below
a) 1 and 2 only
b) 2 only
c) 3 only
d) 1, 2 and 3
6. With reference to the Indian economy, consider the following statements :
(1) Commercial Paper is a short-term unsecured promissory note.
(2) Certificate of Deposit is a long-term Instrument issued by RBI to a
corporation.
(3) ‘Call Money’ is short-term finance used for interbank transactions.
(4) “Zero-Coupon Bonds’ are the interest-bearing short-term bonds issued

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2020
by the Scheduled Commercial Banks to corporations.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 4 only
(c) 1 and 3 only
(d) 2, 3 and 4 only
7. In the context of the Indian economy, non-financial debt includes which of the
following?

2020

(1) Housing loans owed by households

(2) Amounts outstanding on credit cards
(3) Treasury bills
Select the correct answer using the code given below :
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
8. Consider the following statements:
(1) The Reserve Bank of India manages and services Government of India
Securities but not any State Government Securities.
(2) Treasury bills are issued by the Government of India and there are no
treasury bills issued by the State Governments.
(3) Treasury bills offered are issued at a discount from the par value.
Which of the statements given above is/are correct?

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2018
(a) 1 and 2 only
(b) 3 Only
(c) 2 and 3 only
(d) 1, 2 and 3
9. What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond
Scheme’ and ‘Gold Monetization Scheme’?

2016

(1) To bring the idle gold lying with Indian households into the economy
(2) To promote FDI in the gold and jewellery sector
(3) To reduce India’s dependence on gold imports
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
10. What does venture capital mean?

2014

(a) A short-term capital provided to industries

(b) A long-term start-up capital provided to new entrepreneurs
(c) Funds provided to industries at times of incurring losses
(d) Funds provided for replacement and renovation of industries
Answers
1.
3.
5.
7.
9.
231

A
C
D
D
C
Financial Market |

2.
4.
6.
8.
10.
@Ketanomy

A
B
C
C
B
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13. Agriculture & allied sectors

Say hello! |

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Contents
Cropping
Seasons ...........................................................................
.................................................... 237
Cropping
Systems ...........................................................................
.................................................... 237
Factors leading to changes in cropping patterns in
India: ............................................................. 238
Way forward for increasing crop
diversification: ..................................................................
......... 239
Government of India
initiatives:.......................................................................
.............................. 240
Integrated Farming System
(IFS) .............................................................................
....................... 240
Irrigation Systems in
India .............................................................................
..................................... 241
Sources of
irrigation ........................................................................
............................................... 241
Types of
irrigation.........................................................................
.................................................. 242
Micro-
irrigation ........................................................................
...................................................... 242
Key challenges for micro-irrigation in
India: ............................................................................
.. 243
Government of India
initiatives .......................................................................
........................... 244
Precision
farming ...........................................................................
................................................. 244
Zero Budget Natural Farming
(ZBNF) ............................................................................
................. 245
Storage, transport and marketing of agricultural
produce ................................................................ 246
Challenges to storage of agricultural
products: .........................................................................
.... 246
Challenges to transportation of agricultural products in
India: ..................................................... 246
Challenges to upstream and downstream processes of agricultural product
marketing: ............. 247
Upstream Process (Production and Pre-
Marketing): ................................................................. 247
Downstream Process (Processing and
Distribution): .................................................................
247
Initiatives taken by Government of India to improve storage, transportation and
marketing of
Agriculture
produce ...........................................................................
................................................... 248
E-technology in aid of
farmers ...........................................................................
................................ 249
Agriculture-
Finance ...........................................................................
................................................. 250
Challenges: .......................................................................
.............................................................. 250
Government
reforms/initiatives: ..............................................................
..................................... 250
Agriculture
Insurance .........................................................................
................................................ 250
Challenges: .......................................................................
.............................................................. 250
Government
reforms/initiatives: ..............................................................
..................................... 251
Direct and Indirect Agriculture
subsidies .........................................................................
.................. 251
Direct
Subsidies: ........................................................................
..................................................... 251
Indirect
Subsidies: ........................................................................
.................................................. 251
Concerns and issues regarding agricultural
subsidies: ................................................................... 252
Government
Initiatives: ......................................................................
............................................ 253
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Minimum Support
Price .............................................................................
........................................ 253
MSP
Crops .............................................................................
......................................................... 253
Determination of
MSP ...............................................................................
..................................... 257
Key concerns related to
MSPs: .............................................................................
.......................... 258
Way
forward ...........................................................................
........................................................ 258
Recommended Policy
Reforms: ..........................................................................
....................... 258
Public Distribution System
(PDS) .............................................................................
........................... 259
Objectives of the
PDS: ..............................................................................
...................................... 259
Functioning of the
PDS: ..............................................................................
.................................... 259
Limitations and Challenges of the
PDS: ..............................................................................
............ 259
Revamping the
PDS: ..............................................................................
......................................... 260
National Food Security
Act ...............................................................................
.................................. 260
Salient
features: .........................................................................
.................................................... 260
Issues of buffer stocks and food
security: .........................................................................
................. 261
Objective of buffer
stocks: ...........................................................................
.................................. 261
Buffer
norms:.............................................................................
..................................................... 261
Challenges of buffer
stocks: ...........................................................................
................................ 261
Way
forward: ..........................................................................
........................................................ 262
Shanta Kumar
Committee .........................................................................
................................. 262
Agricultural
Revolutions .......................................................................
.............................................. 262
Technology
Missions ..........................................................................
................................................ 264
List of Technology Missions in
Agriculture: ......................................................................
.............. 264
Latest Technologies Used in
Agriculture: ......................................................................
................. 265
Issues with Technology
Missions: .........................................................................
......................... 266
Way
Forward: ..........................................................................
....................................................... 266
Economics of animal
rearing ...........................................................................
................................... 266
Types: ............................................................................
................................................................. 266
Benefits of Animal
Rearing: ..........................................................................
.................................. 267
Challenges in Animal
Rearing: ..........................................................................
.............................. 267
Government
Initiatives: ......................................................................
............................................ 268
Committee on Doubling Farmers'
Income ............................................................................
............. 268
Food Processing
Industry ..........................................................................
......................................... 269
Scope and
Significance: .....................................................................
............................................. 269
Location considerations for Food Processing
Industries: ............................................................... 270
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Upstream Requirements for Food Processing
Industries: ............................................................. 270
Downstream Requirements for Food Processing
Industries:......................................................... 271
Key Components of Supply Chain Management in the Food Processing
Industry: ....................... 271
Challenges in Supply Chain
Management: .......................................................................
.............. 272
Government Initiatives to Promote Food Processing
Industry: ..................................................... 272
Land Reforms in
India .............................................................................
............................................ 273
Key Aspects of Land
Reforms: ..........................................................................
.............................. 273
Successes of Land
Reforms:...........................................................................
................................. 274
Challenges and Limitations of Land
Reforms: ..........................................................................
...... 274
Government Initiatives to Address Land
Reforms: ........................................................................
274
Previous Years Prelims
Questions .........................................................................
............................. 276
Previous Years Mains
Questions .........................................................................
............................... 278

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Chapter 13
Agriculture and allied sectors
Agriculture is a vital sector of the country's economy, playing a crucial role in
providing food security
and contributing to overall economic growth. With over half of the Indian
population dependent on
agriculture for their livelihoods, the sector is a major source of employment and
income generation in
rural areas. Agriculture also contributes significantly to the country's gross
domestic product (GDP), with
the sector accounting for around 17-18% of India's GDP.

Cropping Seasons
Season

Time period

Kharif

June
to
Paddy,
maize,
millet,
Summer cropping season, crops
September/October cotton, sugarcane, groundnut suited to warm and wet conditions

Rabi

October/November
Wheat, barley, gram, peas,
Winter cropping season, crops suited
to March/April
mustard
to cool and dry conditions

Zaid

Watermelon, muskmelon,
Short cropping season between Rabi
cucumber, bitter gourd, bottle and Kharif, crops grown in hot and dry
gourd, sponge gourd
conditions before the onset of monsoon

March to June

Major crops

Brief description

Cropping Systems
Cropping systems refer to the different ways that crops are grown on a piece of
land. In India, the
most common cropping systems are:

1.

2.
3.

Monocropping: Monocropping is the practice of growing a single crop on a piece of

land for an
extended period. This system is easy to manage and allows for specialization, but
it can lead to
soil depletion and pest problems. Examples of crops commonly grown using this
system in India
include rice, wheat, and cotton.
Intercropping: Intercropping involves growing two or more crops on the same piece
of land at
the same time. This system can increase soil fertility, reduce pest problems, and
maximize land
use efficiency, but it requires more management and may result in lower yields for
individual
crops. Examples of crops commonly grown using this system in India include legumes
and pulses,
which are often intercropped with cereals like maize or sorghum.
Crop rotation: Crop rotation involves growing different crops on the same piece of
land in a
planned sequence. This system can improve soil health, reduce pest problems, and
increase
yields, but it requires more planning and management. Examples of crops commonly
grown using
this system in India include rice and wheat being rotated with legumes or oilseeds.
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4.

5.

Relay cropping: Relay cropping involves planting a second crop in the same field
before the first
crop is harvested. This system can increase yields and soil health, but it requires
careful
management and timing. Examples of crops commonly grown using this system in India
include
wheat being relay cropped with mung beans or lentils.
Agroforestry: Agroforestry involves integrating trees or other woody perennials
with crops or
livestock. This system can improve soil fertility, reduce erosion, and provide
additional income,
but it requires more management and may result in lower yields for individual
crops. Examples of
crops commonly grown using this system in India include fruit trees like mango or
guava being
integrated with vegetable crops.

Allelopathy
Allelopathy is a process by which plants release chemicals into the environment
that can have an
impact on other plants or organisms. These chemicals can be released through plant
roots, leaves, or
other parts of the plant, and they can have both positive and negative effects.
For example, some plants produce allelopathic chemicals that can inhibit the growth
of nearby
plants, which can help them compete for resources such as water, nutrients, and
sunlight. Other plants
produce allelopathic chemicals that can repel pests or predators, providing a
natural defense
mechanism.
Allelopathic effects can be either direct or indirect. Direct effects occur when
allelopathic chemicals
are released directly onto neighboring plants, while indirect effects occur when
the chemicals are
released into the soil and affect other organisms in the ecosystem.
One common example of allelopathy in India is the use of marigold plants to control
nematode pests
in vegetable crops. Marigold plants produce allelopathic chemicals that can repel
nematodes, which can
be a major pest in vegetable crops. Farmers may plant marigold in between their
vegetable rows or
rotate marigold with their vegetable crops to take advantage of these allelopathic
effects.
By understanding how allelopathic chemicals work, farmers in India and around the
world can use
this process to their advantage in managing pests, improving soil health, and
maximizing crop yields.

Factors leading to changes in cropping patterns in India:

1.

2.

3.
4.

Climate Change: In recent years, parts of India have experienced erratic rainfall
patterns and
increased instances of extreme weather events like droughts and floods. As a
result, farmers in
drought-prone regions may shift from water-intensive crops like paddy rice to more
droughttolerant crops such as millets or pulses. Additionally, farmers in flood-
prone areas may opt for
flood-resistant crop varieties.
Water Availability: In regions facing water scarcity, farmers may switch from
water-intensive
crops to crops that require less water or adopt water-saving irrigation methods
like drip
irrigation. For example, farmers in Gujarat have shifted from traditional cotton
cultivation to
drought-tolerant crops like castor, which requires less water.
Technological Advancements: The Green Revolution in India led to the widespread
adoption
of high-yielding crop varieties, such as wheat and rice, supported by irrigation
facilities and
agrochemical inputs. This technological advancement significantly influenced the
cropping
patterns in regions like Punjab, Haryana, and western Uttar Pradesh.
Government Policies: In recent years, the Indian government has promoted the
cultivation of
pulses by offering minimum support prices, subsidies, and procurement support to
incentivize

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5.

6.

7.

8.

farmers. This has led to an increase in the cultivation of pulses in states like
Madhya Pradesh and
Maharashtra.
Market Demand and Prices: Changes in market demand and prices can influence
cropping
patterns. For example, the rise in demand for fruits and vegetables, both
domestically and
internationally, has prompted farmers in several states like Maharashtra and
Karnataka to shift
from traditional crops to horticultural crops. Farmers in Gujarat have transitioned
from
traditional crops to cash crops like sesame and cumin due to higher market prices.
Land Availability and Soil Fertility: In regions where agricultural land is limited
or soil fertility
has declined due to intensive farming practices, farmers may opt for alternative
crops or cropping
systems. In Punjab, where excessive use of water and agrochemicals has led to soil
degradation,
some farmers have started exploring organic farming practices or diversifying into
crops like
maize or pulses.
Socioeconomic Factors: Changing socioeconomic factors can also drive changes in
cropping
patterns. With increasing urbanization and changing dietary preferences, there is a
growing
demand for high-value horticultural crops. In response, farmers in states like
Maharashtra and
Tamil Nadu have shifted from traditional crops to vegetables, fruits, and
floriculture to cater to
urban markets and earn higher incomes.
Government Programs and Schemes: Government programs and schemes can influence
cropping patterns. For instance, initiatives like the National Watershed
Development Project for
Rainfed Areas (NWDPRA) have promoted diversification of cropping patterns by
supporting
farmers to adopt sustainable farming practices and introducing alternative crops
suited to local
conditions.

Way forward for increasing crop diversification:

1.

2.
3.
4.
5.
6.
7.

Market Research and Demand Analysis: Understanding market trends, consumer

preferences, and price dynamics is essential for making informed crop selection and
diversification decisions. This will help farmers focus on crops that have high
demand and are
profitable.
Capacity Building and Training: Providing farmers with training in modern
cultivation
practices, post-harvest handling, and value addition techniques will enhance their
skills and
knowledge, leading to improved crop quality and marketability.
Access to Quality Inputs: Ensuring availability and accessibility of quality seeds,
fertilizers, and
pesticides is vital. Establishing seed banks and nurseries can help farmers access
improved
varieties suitable for local conditions.
Infrastructure and Value Chain Development: Developing storage facilities,
processing units,
and efficient transportation networks will reduce post-harvest losses and enable
farmers to
access wider markets.
Farmer Producer Organizations (FPOs) and Cooperatives: Encouraging the formation of
FPOs and cooperatives can empower farmers by providing them collective strength in
postharvest processes, marketing, and value addition.
Risk Management and Financial Support: Offering crop insurance programs like the
Pradhan
Mantri Fasal Bima Yojana (PMFBY) can provide a safety net to farmers in case of
crop failures or
adverse weather conditions.
Research and Development: Investing in agricultural research to develop new crop
varieties
suited to local conditions, including traits like drought resistance, disease
resistance, and
enhanced nutritional value, will boost productivity and resilience.

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8.
9.
10.
11.
12.

Policy Support and Incentives: Government subsidies, market-oriented procurement

policies,

and favorable regulatory frameworks can motivate farmers to diversify their crops
and invest in
agri-business.
Increase Variety Replacement Ratio (VRR): Phasing out old varieties of seeds and
replacing
them with hybrid and improved seeds will contribute to higher crop yields and
productivity.
Use of Hybrid Technology in Vegetables: Encouraging the adoption of hybrid
technology in
vegetable cultivation can result in better-quality produce and increased yields.
Smart Horticulture: Leveraging technology and precision agriculture techniques can
optimize
resource utilization and enhance productivity in horticultural crops.
Shift Focus from Agriculture to Agri-Business: Promoting entrepreneurship in
agriculture
and supporting agripreneurs can lead to value addition, processing, and marketing
of agricultural
products, fostering a more robust agricultural economy.

Government of India initiatives:

1.

2.
3.
4.
5.
6.
7.

National Mission on Agricultural Extension and Technology (NMAET): This mission

aims

to improve the knowledge and skills of farmers in adopting new crops and cropping
systems
through the dissemination of modern agricultural technologies and extension
services.
National Food Security Mission (NFSM): The NFSM focuses on increasing the
production and
productivity of pulses, oilseeds, and coarse cereals in regions dominated by rice
and wheat.
Rashtriya Krishi Vikas Yojana (RKVY): This scheme aims to increase farmers' income,
promote sustainable farming practices, and reduce the dependence on water-intensive
crops.
Paramparagat Krishi Vikas Yojana (PKVY): The PKVY promotes the shift from
chemicalintensive farming to organic farming practices.
Soil Health Card Scheme (SHCS): The SHCS provides farmers with information about
the
health of their soil, nutrient deficiencies, and appropriate crop recommendations.
This helps
farmers make informed decisions about crop selection and nutrient management.
Sub-Mission on Agroforestry: Part of the National Mission for Sustainable
Agriculture (NMSA),
this sub-mission encourages the integration of tree cultivation with agricultural
crops, promoting
agroforestry and diversification of income sources for farmers.
Pradhan Mantri Krishi Sinchai Yojana (PMKSY): This scheme focuses on improving
irrigation infrastructure and promoting water-saving technologies like micro-
irrigation systems.
These initiatives enable farmers to explore new crop options that were previously
not feasible
due to water constraints.

Integrated Farming System (IFS)

Integrated Farming System (IFS) is a holistic approach to farming that involves the
integration of
multiple agricultural activities and enterprises on the same farm. It aims to
maximize resource efficiency,
enhance productivity, and promote sustainable and diversified income sources.

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Features of IFS:
1.
2.
3.
4.
5.
6.
7.
8.

Improved Income Generation: By integrating various enterprises such as crops,

livestock,

poultry, fishery, and agroforestry, farmers can diversify their income sources and
reduce their
dependence on a single crop or activity.
Efficient Resource Utilization: IFS promotes the efficient use of resources by
creating synergies
between different components of the farm. For example, crop residues can be used as
livestock
feed, and livestock waste can be utilized as organic fertilizer for crops.
Nutrient Cycling and Recycling: IFS encourages the recycling of nutrients within
the farm
ecosystem. Livestock waste, crop residues, and organic matter are used to enrich
the soil,
reducing the need for external chemical inputs.
Risk Mitigation: Diversifying production and income sources through IFS can help
farmers
mitigate risks associated with weather fluctuations, market volatility, or disease
outbreaks
affecting a single enterprise.
Increased Productivity: The interactions between different components in IFS can
lead to
increased productivity. For instance, livestock manure can enhance soil fertility,
benefiting crop
yields.
Environmental Sustainability: IFS practices often minimize the use of chemical
inputs,
promote soil and water conservation, reduce soil erosion, and foster biodiversity
conservation.
Utilization of Local Resources: IFS encourages the use of locally available
resources such as
crop residues, livestock waste, and indigenous breeds, which can contribute to
economic and
ecological sustainability.
Capacity Building and Empowerment: Successful implementation of IFS requires
farmers to
possess knowledge and skills in multiple agricultural domains. Training and
capacity-building
initiatives empower farmers to adopt and adapt IFS practices effectively.

Irrigation Systems in India

Sources of irrigation

Irrigation refers to the process of supplying water to agricultural lands to

support crop growth.

1.
2.
3.
4.

Rainfall: Rainfall is a natural and primary source of irrigation. However, rainfall

is unpredictable

and varies across regions and seasons. In India, regions with high and reliable
rainfall, such as the
northeastern states, rely on rainfall as the main source of irrigation.
Surface Water: Surface water refers to water from rivers, lakes, reservoirs, and
canals that can
be used for irrigation. It involves diverting water from these sources to
agricultural fields through
a system of canals and channels.
Groundwater: Groundwater is water stored beneath the earth's surface in aquifers.
It is
accessed through wells, tube wells, and bore wells for irrigation purposes.
Tanks and Ponds: Tanks and ponds are small reservoirs created by building
embankments
across streams or depressions. They collect rainwater during the monsoon season and
store it for
irrigation purposes during dry periods.
Example: In the state of Karnataka, tanks called "Kalyanis" are commonly used for
irrigation.

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5.

6.

Dams and Reservoirs: Dams and reservoirs are large structures built across rivers
to store water

for irrigation, hydroelectric power generation, and other purposes. Water from
these reservoirs is
released for irrigation through canals.
Example: The Sardar Sarovar Dam on the Narmada River in Gujarat.
Lift Irrigation: Lift irrigation involves lifting water from lower sources, such as
rivers or canals,
to higher elevation agricultural lands. Pumps or mechanical devices are used to
lift water and
distribute it through pipes or channels.
Example: The Chambal Lift Irrigation Project in Madhya Pradesh lifts water from the
Chambal
River and supplies it to fields in the Malwa region.

Types of irrigation
1.

2.
3.

4.
5.

Flooding Irrigation: In flooding irrigation, the field is flooded with water to

create a shallow

layer. It's like filling the field with water to create a small pond. This method
is commonly used for
crops like rice, where fields are leveled, and water is maintained at a consistent
depth for a
specific duration. The water slowly seeps into the soil, providing moisture to the
plant roots.
Furrow Irrigation: Furrow irrigation involves creating small channels, called
furrows, between
rows of crops. Water is supplied through these furrows, allowing it to infiltrate
the soil and reach
the plant roots.
Sprinkler Irrigation: Sprinkler irrigation uses sprinklers that spray water over
the field. It's like
having tiny rain showers over the crops. Sprinklers can be mounted on moving pipes
or fixed in
place, and they distribute water evenly over the crops. This method is efficient in
reducing water
loss due to evaporation.
Drip Irrigation: Drip irrigation involves the use of small tubes with emitters to
deliver water
directly to the plant's root zone. Water is released slowly and directly onto the
roots, ensuring
efficient water use and minimizing water loss.
Subsurface Irrigation: Subsurface irrigation delivers water directly to the root
zone of plants
below the ground surface. Perforated pipes or tubes are buried in the soil, and
water is supplied
through these pipes. It seeps out slowly, providing moisture to the plant roots.
This method helps
reduce water loss through evaporation and minimizes weed growth.

Micro-irrigation

Micro-irrigation, including drip irrigation and sprinkler irrigation, can play a

significant role in
addressing India's water crisis.
1.

2.

3.

Water Efficiency: Micro-irrigation systems are designed to deliver water directly

to the root
zone of plants, minimizing losses due to evaporation, runoff, and deep percolation.
Compared to
conventional irrigation methods like flood irrigation, micro-irrigation can reduce
water use by 3070%.
Precise Water Application: Micro-irrigation allows for precise control over the
amount and
timing of water delivered to plants. Farmers can adjust the irrigation schedule
based on crop
water requirements, soil moisture levels, and climatic conditions. This targeted
approach reduces
over-irrigation and ensures that crops receive the right amount of water when they
need it.
Reduced Salinization and Waterlogging: By avoiding excessive water application,
microirrigation helps prevent waterlogging and salinization of soils, which are
common problems in
areas with poor drainage and high salt content. This promotes healthy root
development and
improves crop productivity.
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4.
5.

6.

7.

8.

Better Crop Health and Yield: Micro-irrigation provides a more uniform water
distribution
across the field, ensuring that each plant receives adequate moisture. This leads
to improved crop
health, uniform growth, and higher yields.
Optimal Fertilizer Application: Micro-irrigation systems can be integrated with
fertigation,
which is the application of fertilizers through irrigation water. This enables
precise and efficient
delivery of fertilizers directly to the root zone, reducing nutrient losses and
enhancing nutrient
uptake by crops.
Enhanced Crop Diversification and Productivity: Micro-irrigation systems allow
farmers to
cultivate a wider range of crops, including high-value horticultural crops, fruits,
and vegetables.
These crops often have higher market value and can contribute to increased farm
incomes and
improved livelihoods.
Adaptability to Water Scarcity: Micro-irrigation systems are particularly suitable
for regions
facing water scarcity or low-quality water resources. They enable farmers to make
the most of
limited water supplies by maximizing water use efficiency and reducing dependency
on
freshwater sources.
Climate Resilience: Micro-irrigation systems can help farmers cope with climate
change impacts
such as erratic rainfall patterns, droughts, and heatwaves. By providing precise
control over water
application, farmers can adapt to changing climate conditions and ensure the
survival and
productivity of their crops.

Key challenges for micro-irrigation in India:

1.
2.
3.
4.

5.
6.
7.
8.

Cost and Affordability: The initial investment cost for installing micro-irrigation
systems can be

relatively high compared to traditional irrigation methods. This cost includes

equipment such as
drip lines, sprinklers, filters, and control systems.
Limited Awareness and Knowledge: Awareness programs, training, and extension
services are
needed to educate farmers about micro-irrigation and build their capacity to adopt
and manage
the systems.
Access to Credit and Financing: especially for small-scale farmers who may not have
the
financial means to make upfront investments.
Technical Skills and Maintenance: Farmers need to understand how to design and
install the
system, manage water distribution, control pests and clogging, and perform regular
maintenance.
Ensuring adequate technical support, training, and after-sales services are crucial
to overcome
this challenge.
Power Supply and Energy Costs: Micro-irrigation systems often require a reliable
and
continuous power supply for pumps, filters, and control systems. Dependence on
diesel
generators or alternative power sources can increase operating costs.
System Design and Adaptation: Designing micro-irrigation systems that suit the
specific crop,
soil, and local conditions is critical for their effectiveness. The lack of
customized system design
and adaptation to local contexts can limit the success of micro-irrigation.
Procurement and Quality Control: Farmers need access to reliable suppliers and
assurance of
the quality and durability of the components.
Scale and Infrastructure: Scaling up micro-irrigation adoption requires supportive
infrastructure, including water sources, storage structures, and well-maintained
distribution
networks.

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Government of India initiatives

Pradhan Mantri Krishi Sinchai Yojana (PMKSY): Launched in 2015, PMKSY aims to
provide

1.

end-to-end solutions for irrigation supply chain, including water sources,

distribution networks,
farm-level applications, and efficient water use. It includes various sub-schemes
like Accelerated

Irrigation Benefit Programme (AIBP), Har Khet Ko Pani (Water to Every Field), and
Per
Drop More Crop to enhance irrigation infrastructure, promote micro-irrigation, and
improve

water use efficiency.

Micro-Irrigation Fund (MIF): The government established the MIF in 2019 with a
corpus of

2.

₹5,000 crores to promote micro-irrigation projects across the country. The fund
provides financial
assistance to farmers and encourages the adoption of drip and sprinkler irrigation
systems.
Pradhan Mantri Fasal Bima Yojana (PMFBY): PMFBY, launched in 2016, is a crop
insurance
scheme that provides financial support to farmers in the event of crop loss due to
natural
calamities, pests, or diseases. The scheme encourages farmers to adopt modern
technologies like
irrigation, leading to improved water management practices.
National Watershed Development Project for Rainfed Areas (NWDPRA): NWDPRA,
initiated in 2015, aims to enhance rainwater harvesting and conservation in rainfed
areas. It
promotes soil and water conservation measures, afforestation, and integrated
watershed
management practices to improve soil moisture availability and water security.
National Mission for Sustainable Agriculture (NMSA): NMSA, launched in 2014-15,
promotes sustainable agricultural practices, including efficient water use. It
encourages the
adoption of technologies like drip and sprinkler irrigation, promotes conservation
agriculture, and
supports capacity building of farmers for sustainable water management.

3.

4.

5.

Precision farming

Precision farming, also known as precision agriculture or smart farming, is an

advanced approach to
agricultural management that utilizes technology and data to optimize crop
production and resource
efficiency. It involves the use of various tools and techniques to tailor farming
practices to the specific
needs of individual plants or small areas within a field. Some key components and
technologies of
precision farming include:
1.
2.
3.
4.

244

Energy-Friendly Irrigation Pumps: Precision farming incorporates energy-efficient

irrigation pumps that enable precise control over water application, reducing water
wastage
and optimizing water use.
Micro-Irrigation: Micro-irrigation systems, such as drip irrigation and sprinkler
systems,
deliver water and nutrients directly to the roots of plants, resulting in more
efficient water
use and increased crop yields.
Climate-Smart Technologies: Precision farming integrates climate-smart technologies
that
allow farmers to adapt to changing climate conditions and mitigate the impacts of
climate
change on agriculture.
Internet of Things (IoT): IoT devices are used to collect real-time data from the
field, such
as soil moisture, temperature, and weather conditions. This data is then analyzed
to make
informed decisions about irrigation, fertilization, and pest management.

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Remote Sensing and GIS: Remote sensing technologies, including satellite imagery
and

5.

drones, are used to monitor crop health, identify stress factors, and assess field
conditions.
Geographic Information Systems (GIS) help in spatially analyzing data for better
decisionmaking.
Variable Rate Technology (VRT): VRT enables farmers to apply inputs (e.g.,
fertilizers,
pesticides) at variable rates across a field based on the specific needs of
different areas,
taking into account soil variations and crop requirements.
Data Analytics: Precision farming relies on data analytics to process and analyze
large
volumes of data collected from various sources. Data-driven insights help farmers
optimize
production, reduce costs, and enhance sustainability.

6.
7.

Precision farming is transforming agriculture by leveraging modern technology to

address the
challenges of feeding a growing global population while promoting sustainable
agricultural practices. As
technology continues to advance, precision farming is expected to play an
increasingly important role in
the future of agriculture.

Zero Budget Natural Farming (ZBNF)

Zero Budget Natural Farming (ZBNF) is an agricultural practice developed by Subhash

Palekar, an
Indian agriculturist and activist. It is based on a set of farming methods that aim
to promote sustainable
agriculture while minimizing or eliminating the use of external inputs and
chemicals. The key principles
and practices of ZBNF are as follows:
1.

2.
3.
4.
5.
6.
7.
8.

Zero Budget Approach: The central tenet of ZBNF is to minimize or completely

eliminate the

use of external inputs such as seeds, fertilizers, and pesticides. Farmers rely on
natural processes
and locally available resources to nourish the soil and crops.
Indigenous Seeds: ZBNF emphasizes the use of indigenous seeds that are well-adapted
to local
agro-climatic conditions. Preserving and using traditional seeds helps maintain
crop diversity and
reduce the dependence on costly hybrid or genetically modified seeds.
Natural Fertilizers: Instead of chemical fertilizers, ZBNF encourages the use of
natural fertilizers
like compost, vermicompost (produced using earthworms), and green manure (cover
crops grown
specifically to improve soil fertility).
Biopesticides and Natural Pest Management: Farmers prepare their own biopesticides
using
botanical extracts, microbial formulations, and other natural substances to manage
pests and
diseases without relying on synthetic chemical pesticides.
Mulching and Crop Residue Management: The practice of covering the soil surface
with
organic materials, such as crop residues, straw, or leaves, helps retain moisture,
suppress weed
growth, and improve soil health by enhancing microbial activity and organic matter
content.
Intercropping and Crop Diversity: Intercropping, mixed cropping, and crop rotation
are
employed to improve soil fertility, reduce pest infestations, and increase overall
productivity.
Crop diversity is essential for maintaining soil health and breaking pest cycles.
Water Conservation: ZBNF promotes water conservation techniques like drip
irrigation,
rainwater harvesting, and retaining soil moisture through mulching and organic
matter.
Livestock Integration: ZBNF encourages integrating livestock into the farming
system. Livestock
waste serves as a valuable source of organic manure, contributing to soil fertility
and reducing the
need for external inputs.
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ZBNF is gaining popularity as a sustainable and cost-effective alternative to
conventional chemicalintensive farming.

Storage, transport and marketing of agricultural produce

Challenges to storage of agricultural products:
1.

2.

3.

4.

5.
6.

Inadequate Storage Infrastructure: The existing storage infrastructure, including

warehouses,

cold storage facilities, and silos, is insufficient to meet the storage

requirements of the vast
quantity of agricultural produce in India. Many storage facilities lack proper
ventilation,
temperature control, and pest management systems, leading to post-harvest losses.
Inefficient Supply Chain Management: Weak linkages between producers, storage
facilities,
and markets contribute to supply chain inefficiencies. Inadequate transportation
infrastructure,
lack of proper handling practices, and delays in moving produce from farms to
storage facilities or
markets can result in quality deterioration and higher losses.
Post-Harvest Losses: Inadequate storage facilities and poor post-harvest management
contribute to significant losses of agricultural produce. Factors like moisture,
pests, molds, and
inadequate temperature control can lead to spoilage, decay, and reduced shelf life,
resulting in
financial losses for farmers.
Lack of Modern Storage Technologies: The adoption of modern storage technologies
like
Controlled Atmosphere (CA) storage, Modified Atmosphere Packaging (MAP), and cold
chain
facilities is limited in India. These technologies can extend the shelf life of
perishable products,
maintain product quality, and reduce post-harvest losses.
Inefficient Market Linkages: Lack of real-time information, price volatility, and
middlemen
influence can lead to farmers receiving lower prices for their produce and
inadequate market
access.
Lack of Quality Standards and Certifications: Standardization and certification of
storage
facilities based on quality, hygiene, and compliance with safety norms are
essential.

Addressing these issues requires a comprehensive approach that includes improving

storage
infrastructure, enhancing post-harvest management practices, strengthening supply
chain linkages,
promoting the adoption of modern storage technologies, and implementing quality
standards and
certifications.

Challenges to transportation of agricultural products in India:

1.
2.
3.
4.

Inadequate Infrastructure: Limited access to proper roads and transport

infrastructure
particularly in rural areas hampers the timely and efficient movement of
agricultural products.
Poor Connectivity: Many agricultural regions in India lack proper connectivity to
major markets
and transportation hubs. This increases transportation costs and delays, impacting
the overall
efficiency of agricultural supply chains.
Post-Harvest Losses: Inadequate transportation infrastructure and handling
facilities contribute
to post-harvest losses. Lack of refrigerated storage and transport facilities for
perishable goods
such as fruits, vegetables, and dairy products leads to spoilage and reduced shelf
life.
Inefficient Logistics: Fragmented logistics operations, suboptimal routing, and
inadequate
coordination among various stakeholders contribute to inefficiencies.

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5.
6.

7.

High Transportation Costs: High transportation costs, including fuel prices, tolls,
and fees, can
significantly impact the profitability of agricultural products.
Seasonal Demand and Congestion: Seasonal variations in agricultural production lead
to
spikes in demand during peak harvesting periods. This can lead to congestion,
longer wait times
at transportation hubs, and increased transportation costs due to limited
availability of trucks and
other modes of transport.
Regulatory and Administrative Bottlenecks: Cumbersome paperwork, multiple check-
posts,
and bureaucratic procedures at state borders and toll plazas can cause delays and
increase
transaction costs.

Addressing these issues requires a comprehensive approach involving investments in

transportation
infrastructure, improving connectivity, strengthening logistics and supply chain
management, promoting
cold chain facilities, and simplifying regulatory procedures.

Challenges to upstream and downstream processes of agricultural product marketing:

Upstream Process (Production and Pre-Marketing):
1.
2.
3.

4.

Fragmented Production: Agriculture in India is characterized by small landholdings,

leading to
fragmented production. This fragmentation hinders economies of scale, resulting in
higher
production costs and reduced bargaining power for farmers.
Lack of Infrastructure: Inadequate infrastructure for storage, cold chain,
transportation, and
market linkages leads to post-harvest losses, lower quality of produce, and limited
access to
markets.
Information Asymmetry: Farmers often face challenges in accessing accurate market
information, including crop demand, prices, and market trends. This lack of
information hampers
their ability to make informed decisions regarding crop selection, timing of
production, and selling
strategies.
Limited Access to Credit: Farmers, particularly small-scale farmers, often face
challenges in
accessing formal credit facilities for agricultural production. Lack of credit
availability and highinterest rates can limit their ability to invest in inputs,
modern technology, and infrastructure.

Downstream Process (Processing and Distribution):

1.
2.

3.
4.

Value Addition and Processing: Insufficient processing infrastructure hampers the

development of food processing industries, which could add value to agricultural

commodities
and increase farmers' income.
Inefficient Supply Chains: The agricultural supply chains in India are often
characterized by
multiple intermediaries, leading to high marketing margins and price disparities
between farmers
and consumers. Inefficient supply chains result in increased marketing costs, post-
harvest losses,
and delayed access to markets.
Quality and Grading Standards: Quality control and grading standards for
agricultural
produce are often lacking or inconsistently implemented. This poses challenges in
maintaining
product quality, meeting export requirements, and accessing premium markets.
Price Volatility and Market Risks: Farmers face price volatility due to market
fluctuations,
seasonality, and perishability of agricultural products. Lack of risk mitigation
mechanisms and
limited access to futures markets can leave farmers vulnerable to price risks.

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5.

Limited Market Integration: Integration of agricultural markets across regions and

states in
India remains limited. Barriers such as state-level regulations, market taxes, and
restrictions on
movement of goods impede efficient market integration and hinder price discovery.

Initiatives focusing on infrastructure development, market information

dissemination, value
addition, credit accessibility, and streamlining supply chains can help improve the
efficiency and
effectiveness of agricultural product marketing in India.

Initiatives taken by Government of India to improve storage, transportation and

marketing
of Agriculture produce
1.

2.

3.

4.
5.

6.

7.

8.
9.

Pradhan Mantri Kisan Sampada Yojana (PMKSY): This scheme aims to modernize and

strengthen the entire value chain of food processing, from farm gate to the market.
It provides
financial assistance for the development of infrastructure such as cold storages,
warehouses,
packaging centers, and agri-logistics hubs.
Creation of Agri-Logistics Infrastructure: Under various schemes like the Scheme
for
Integrated Cold Chain and Value Addition Infrastructure and the Agriculture Export
Policy, the
government focuses on building efficient agri-logistics infrastructure to reduce
post-harvest
losses and improve food processing and export capabilities.
Mega Food Parks: The government has established Mega Food Parks to provide state-
of-the-art
food processing infrastructure. These parks create a conducive environment for food
processing
units to thrive by providing common facilities like cold storage, testing
laboratories, and
warehousing.
National Agricultural Cooperative Marketing Federation of India (NAFED): NAFED
plays
a crucial role in facilitating marketing and procurement operations for
agricultural produce. It
ensures fair prices and market access to farmers, promoting their welfare.
Electronic National Agriculture Market (e-NAM): e-NAM is an online platform that
facilitates transparent and efficient trading of agricultural commodities across
multiple markets. It
promotes price discovery, reduces intermediaries, and provides farmers with a
competitive and
transparent market platform.
Infrastructure Development Fund: The government has established an Infrastructure
Development Fund to provide long-term financing for the creation of agriculture
infrastructure.
This fund helps develop critical infrastructure like irrigation facilities, roads,
and post-harvest
handling facilities.
Agricultural Produce Market Committee (APMC) Reforms: To liberalize agricultural
marketing and create an open and competitive market, the government has introduced
reforms
in APMCs. The Model APMC Act allows farmers to sell their produce directly to
buyers, bypassing
the traditional mandi system, thereby giving them more control over their produce
and better
prices.

Operation Green Scheme: This scheme focuses on stabilizing the prices of perishable

horticultural crops by establishing price stabilization funds, creating value

chains, and linking
production centers to consumer centers through efficient logistics.
Gramin Agricultural Markets (GrAMs): The government is setting up Gramin
Agricultural
Markets to create a network of rural markets that provide farmers with facilities
for sorting,
grading, packaging, and direct sale to consumers.

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10.

Kisan Rail and Kisan Udan: Kisan Rail is a special train service for the
transportation of
perishable agricultural produce, while Kisan Udan is a scheme to facilitate air
transportation of
such produce. These initiatives aim to improve transportation and reduce the time
taken to reach
markets.

E-technology in aid of farmers

E-technology, including digital platforms, mobile applications, and online
services, has emerged as a
powerful tool to support farmers in various aspects of agricultural production,
marketing, and
knowledge dissemination:
1.

2.
3.

4.

5.
6.

7.

8.

Access to Market Information: E-technology platforms provide farmers with real-time

market
information on crop prices, demand trends, and market intelligence. Farmers can
make informed
decisions regarding when, where, and at what price to sell their produce, leading
to better
market outcomes.
E-Commerce and Direct Selling: Online marketplaces and e-commerce platforms connect
farmers directly with buyers, eliminating intermediaries and enabling farmers to
fetch better
prices for their produce.
Mobile Banking and Digital Payments: E-technology enables farmers to access
financial
services through mobile banking and digital payment systems. It improves
convenience and
security in financial transactions, making it easier for farmers to receive
payments, access credit,
and engage in financial management.
Crop Advisory and Weather Forecasting: Mobile applications and online portals
provide
farmers with crop advisory services, offering guidance on crop management
practices, pest
control, and fertilizer recommendations. They also provide access to weather
forecasting, helping
farmers make timely decisions related to irrigation, sowing, and harvesting.
Access to Inputs and Agri-Services: E-technology platforms facilitate online
procurement of
agricultural inputs such as seeds, fertilizers, and machinery. Farmers can compare
prices, access a
wider range of products, and place orders conveniently.
Farmer Producer Organizations (FPOs) and Market Linkages: E-technology helps in the
formation and management of Farmer Producer Organizations (FPOs) by providing tools
for
documentation, inventory management, accounting, and e-governance. It enables FPOs
to
establish direct market linkages, negotiate better prices, and collectively engage
in marketing
activities.
Agricultural Knowledge and Training: Online platforms and mobile applications
disseminate
agricultural knowledge and provide training resources to farmers. They offer access
to video
tutorials, webinars, expert advice, and best practices in farming techniques,
empowering farmers
with up-to-date information and skills enhancement.
Data Analytics and Farm Management: E-technology platforms equipped with data
analytics
and farm management tools help farmers monitor and analyze their farming
operations. They
enable precision agriculture, enabling farmers to optimize input usage, monitor
crop health, and
manage resources efficiently.

However, it is important to ensure widespread access to digital infrastructure,

digital literacy, and
equitable adoption of e-technology to avoid leaving behind marginalized farming
communities.
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Agriculture-Finance
Agriculture finance refers to the financial services provided to farmers and other
stakeholders in the
agricultural sector to help them with various aspects of their business, such as
purchasing inputs,
managing cash flow, and investing in new technology or infrastructure. Agriculture
finance is critical to
the growth and success of the agricultural sector, which is a major source of
livelihood for millions of
people in India.

Challenges:
1.
2.
3.
4.

Lack of access to formal credit: Many farmers in India rely on informal sources of
credit, such

as moneylenders, because they do not have access to formal financial institutions

like banks.
High interest rates: Even when farmers do have access to formal credit, the
interest rates can
be prohibitively high, making it difficult for them to repay their loans.
Seasonal fluctuations: Agriculture is a seasonal business, which can make it
difficult for farmers
to manage their cash flow throughout the year.
Limited collateral: Many farmers do not have the assets or collateral required to
secure loans
from formal financial institutions.

Government reforms/initiatives:
1.
2.
3.
4.

Pradhan Mantri Fasal Bima Yojana: This government-sponsored crop insurance scheme
provides financial support to farmers in the event of crop damage or loss due to
natural
calamities, pests, or diseases.
Kisan Credit Card scheme: This scheme provides farmers with access to credit at
subsidized
interest rates to help them purchase inputs like seeds, fertilizers, and
pesticides.
Interest subvention scheme: This scheme provides a 2% interest subvention to
farmers who
repay their loans on time, with an additional 3% subvention for prompt repayment.
eNAM platform: This online platform facilitates electronic trading of agricultural
commodities,
helping farmers to access new markets and get better prices for their products.

Agriculture Insurance
Agriculture insurance refers to the process of providing insurance coverage to
farmers for their
crops and livestock to protect them from losses due to natural disasters, pest
attacks, or any other
unforeseen circumstances.
Challenges:
1.
2.

Lack of awareness among farmers about the benefits of agriculture insurance.

Limited availability of insurance coverage for small and marginal farmers.

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3.
4.

Insufficient data on crop yield and damage to calculate accurate premiums.

The involvement of multiple stakeholders and the complexity of the insurance
process can
also make it challenging for farmers to avail of insurance coverage.

Government reforms/initiatives:
1.

2.
3.
4.

The Pradhan Mantri Fasal Bima Yojana (PMFBY) was launched in 2016 to provide

affordable crop insurance coverage to farmers.

The government has increased the budget allocation for agriculture insurance
schemes to
provide wider coverage and reduce premiums for farmers.
The government has also taken steps to improve the technology infrastructure for
agriculture
insurance, such as using remote sensing and satellite imagery to assess crop damage
and
calculate payouts more accurately.
The government has also collaborated with private insurance companies to increase
the
reach of insurance coverage and make the process more accessible to farmers.

Direct and Indirect Agriculture subsidies

In India, agricultural subsidies are provided by the government to support farmers
and promote
agricultural development. These subsidies can be categorized into direct and
indirect subsidies:

Direct Subsidies:
1.

2.

Input Subsidies: These subsidies aim to reduce the cost of agricultural inputs for
farmers.

Examples include:
i.
Fertilizer Subsidies: The government provides subsidies on fertilizers, such as
urea, DAP
(Di-Ammonium Phosphate), and potash, to make them more affordable for farmers.
ii.
Seed Subsidies: Subsidies are provided on certified seeds to encourage their
adoption
and improve seed quality.
iii.
Irrigation Subsidies: Financial assistance is given to farmers for the installation
of
irrigation infrastructure, including drip irrigation and sprinkler systems.
iv.
Power Subsidies: Subsidies on electricity tariffs are provided to farmers for
agricultural
purposes like irrigation and operating machinery.
Credit Subsidies: These subsidies aim to enhance access to affordable credit for
farmers.
Examples include:
i.
Interest Subsidies: Interest rate concessions or subsidies are provided on
agricultural
loans to reduce the cost of borrowing for farmers.
ii.
Loan Waivers: Periodically, the government announces loan waivers for specific
categories of farmers or for certain crops to provide debt relief.

Indirect Subsidies:
1.

Price Support and Procurement: The government intervenes in the market by procuring
agricultural commodities at minimum support prices (MSPs), ensuring farmers receive
a

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2.

3.
4.

guaranteed price for their produce. This price support mechanism helps stabilize
agricultural
incomes and incentivizes production.
Crop Insurance: The government provides subsidized crop insurance schemes, such as
the
Pradhan Mantri Fasal Bima Yojana (PMFBY), to protect farmers against crop losses
due to natural
disasters, pests, or diseases. Premiums for crop insurance are subsidized, reducing
the financial
burden on farmers.
Infrastructure Development: The government invests in the development of rural
infrastructure, including roads, storage facilities, market yards, and cold chains,
to improve
market access and reduce post-harvest losses.
Research and Development (R&D): Public investment in agricultural R&D aims to
enhance
productivity, develop improved crop varieties, and promote sustainable farming
practices. These
investments indirectly benefit farmers by providing them with better technology and
knowledge.

Concerns and issues regarding agricultural subsidies:

1.
2.
3.
4.
5.
6.

7.
8.

Cost and Budgetary Pressures: Agricultural subsidies can impose a significant

burden on

government budgets.

Inequitable Distribution: Large farmers often benefit more than small and marginal
farmers.

This inequality in subsidy distribution can exacerbate existing socio-economic

disparities in the
agricultural sector.
Distorted Market Dynamics: Price support mechanisms and procurement operations can
create market distortions by artificially inflating prices, affecting market
competitiveness and
private investment.
Subsidy Rationalization and Targeting: Subsidy schemes may suffer from leakages,
inadequate identification mechanisms, and difficulties in reaching marginalized
farmers who
need support the most.
Environmental Impact: Some agricultural subsidies, particularly input subsidies,
may
incentivize excessive use of inputs such as fertilizers and water, leading to
environmental
degradation, soil nutrient imbalances, and water pollution.
Market Distortions and International Trade: Agricultural subsidies provided by
countries
can distort international trade patterns and create imbalances in global markets.
Subsidies in one
country can impact the competitiveness of agricultural products from other
countries, affecting
farmers' income in those regions.
Subsidy Dependency: Overreliance on subsidies can lead to a dependency mindset
among
farmers, it can create a disincentive for farmers to explore alternative income
sources or adopt
sustainable farming practices.
Fiscal Sustainability and Reforms: Ensuring the long-term fiscal sustainability of
agricultural
subsidies and initiating necessary reforms to streamline subsidy programs remain
critical. There
is a need to strike a balance between supporting farmers' welfare and promoting
fiscal discipline.

Addressing these issues requires regular review and evaluation of subsidy programs,
transparent
targeting mechanisms, effective monitoring and evaluation systems, and the
promotion of sustainable
agricultural practices. A holistic approach that considers the socioeconomic and
environmental
dimensions of agricultural subsidies is essential for their effectiveness and
equitable distribution.

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Government Initiatives:
1.

2.

3.

4.

5.

6.

Direct Benefit Transfer (DBT) Scheme: The DBT scheme aims to provide financial
assistance

directly to farmers' bank accounts, eliminating intermediaries and reducing

leakages. This
ensures that subsidies reach the intended beneficiaries promptly and efficiently.
Soil Health Card Scheme (SHCS): The SHCS provides farmers with information about
the
nutrient status of their soil. By knowing their soil health, farmers can optimize
the usage of
fertilizers and other inputs, reducing unnecessary expenses and minimizing
environmental
impacts. This approach promotes sustainable agricultural practices and better
resource
management.
Neem-Coated Urea: Neem-coated urea is a form of urea fertilizer that has a coating
of neem, a
natural insect repellent. This helps reduce the diversion of subsidized urea for
non-agricultural
purposes, as neem-coated urea is less attractive to industries and traders for
illicit use. Ensuring
that subsidized urea reaches farmers for agricultural purposes leads to improved
fertilizer usage
and increased crop productivity.
Subsidy Rationalization and Targeting: The government is reviewing subsidy schemes
to
ensure that they are targeted at small and marginal farmers rather than being
captured by large
landholders. This targeted approach optimizes the allocation of resources and
fosters inclusive
growth in the agricultural sector.
Crop Insurance - Pradhan Mantri Fasal Bima Yojana (PMFBY): PMFBY provides crop
insurance coverage to farmers, protecting them against crop losses due to natural
calamities.
This reduces the need for ad hoc subsidies during distress situations and provides
farmers with
financial security.
Technology and Extension Services: Investing in technology and extension services
helps
farmers access information about best practices, new crop varieties, weather
forecasts, and
market trends. This knowledge empowers farmers to make informed decisions, adopt
modern
farming techniques, and improve productivity. Reducing dependency on input
subsidies and
enhancing productivity contributes to the overall economic growth of the
agricultural sector.

Minimum Support Price

Minimum Support Prices (MSPs) are the prices set by the government to provide a
guaranteed
minimum price for certain agricultural commodities in order to protect farmers from
price fluctuations
and ensure their income security.

MSP Crops
Category

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Major
Producer

Category

Commodity

Cereals

Paddy

West Bengal,
Punjab

Used to make rice dishes, biryani, idli, dosa, and other culinary
preparations.

Wheat

Punjab,
Haryana

A major staple food crop, used to make chapati, bread, noodles,

pasta and various baked goods. Also used for brewing beer and
whiskey.

Maize

Karnataka,
Rajasthan

Used for consumption in various forms, such as cornbread,

tortillas, and corn flakes. Also used for animal feed, biofuels, and
industrial applications.

Sorghum

Maharashtra,
Karnataka

Used for consumption as flour, flatbreads, and alcoholic

beverages. Also used for animal feed, fodder, and in the
production of brooms and other products.

Pearl Millet

Rajasthan,
Gujarat

Important in arid regions for consumption, especially as bajra roti.

Used as animal feed, and the straw is used for fodder and
thatching roofs.

Barley

Rajasthan,
Uttar Pradesh

Used as a food grain for consumption, animal feed, and in making

malt for beer and whiskey.

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Category

Pulses

255

Commodity

Major
Producer

Various Uses

Ragi

Karnataka,
Tamil Nadu

A nutritious cereal used for consumption, especially in Karnataka,

as ragi mudde, dosa, and porridge. Also used in traditional
alcoholic beverages.

Gram

Madhya
Pradesh,
Maharashtra

Widely used in Indian cooking to make dal, chana masala,

hummus, and various snacks like roasted chana. Also used for
animal feed and green manure.

Tur (Pigeon
Pea)

Maharashtra,
Karnataka

Essential in making traditional dal, sambar, and various curries in

Indian cuisine. Also used for animal feed, green manure, and as a
cover crop.

Moong
(Green
Gram)

Rajasthan,
Maharashtra

Used in various dishes, especially in the form of dal and desserts.

Sprouted moong is used in salads and snacks. Also used for
animal feed and green manure.

Urad (Black
Gram)

Madhya
Pradesh,
Maharashtra
Used in various culinary preparations like dal makhani, idli, dosa,
and papad. Also used for making flour, and as a primary
ingredient in certain desserts.

Lentil

Madhya
Pradesh, Uttar Widely used in Indian cooking for making dal, soups, stews, and
Pradesh
salads. Also used in various international cuisines.

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Category

Oilseeds

256

Commodity

Major
Producer

Various Uses

Groundnut

Gujarat,
Andhra
Pradesh

Used for cooking oil, peanut butter, snacks like roasted peanuts,
and in confectionery products like chikki and peanut brittle. Also
used for animal feed.

RapeseedMustard

Rajasthan,
Uttar Pradesh

Important for producing mustard oil, used in Indian cooking, and

as a massage oil. The meal after oil extraction is used as animal
feed.

Soybean

Madhya
Pradesh,
Maharashtra

Used for oil extraction to produce soybean oil, as well as for

making soy milk, tofu, and various soy-based products. Also used
for animal feed and biodiesel.

Sesamum

Gujarat,
Madhya
Pradesh

Used for producing sesame oil, which is used in cooking, dressing,

and traditional medicines. Sesame seeds are also used as toppings
on various dishes.

Sunflower

Karnataka,
Andhra
Pradesh

Used for cooking oil, snacks like sunflower seeds, and in the
confectionery industry. Also used for bird feed, and in the
production of biodiesel.

Safflower

Rajasthan,
Gujarat

Used for producing safflower oil, which has various culinary and
medicinal uses. The seeds are also used for bird feed and in the
production of cosmetics.

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Category

Commodity

Nigerseed

Commercial
Copra
Crops

Major
Producer

Various Uses

Karnataka,
Andhra
Pradesh

Primarily used for oil extraction to produce nigerseed oil, which is

used in cooking and as a drying oil in paints and varnishes. Also
used for bird feed.

Kerala, Tamil
Nadu

Used for producing coconut oil, which is widely used in cooking,

cosmetics, and traditional medicines. Also used as a dried fruit
and for coconut-based products.

Sugarcane

Uttar Pradesh, Used for sugar production, jaggery, and ethanol. The juice is also
Maharashtra
consumed as a beverage and used for various culinary purposes.

Cotton

Gujarat,
Maharashtra

Used for producing cotton fiber, a major raw material for the
textile industry. Cottonseed oil is used in cooking and for animal
feed.

Raw Jute

West Bengal,
Bihar

Used for making jute bags, ropes, twine, and various handicrafts.
Jute fiber is also used for geotextiles and as a natural fiber in
certain industrial applications.

Determination of MSP

The Minimum Support Price (MSP) for crops and the Fair and Remunerative Price (FRP)
for
sugarcane are determined in India to ensure that farmers get a fair and reasonable
price for their
produce. The Commission for Agricultural Costs and Prices (CACP) calculates the
cost of producing
crops and sugarcane, taking into account factors like seeds, fertilizers, labor,
and other expenses.
The government then ensures that the MSP for crops and FRP for Sugarcane is at
least 1.5 times the
production cost, giving farmers a 50 percent profit margin. The final approval for
MSP and FRP is
given by the Cabinet Committee on Economic Affairs (CCEA).
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Key concerns related to MSPs:
1.

2.

3.

4.
5.
6.
7.
8.

Limited Coverage: MSPs are announced for a limited number of crops, leaving many
agricultural commodities outside the purview of price support. This can create
income disparities
among farmers and discourage diversification into other crops.
Inadequate Procurement: The actual procurement of crops at MSPs often falls short
of the
intended targets due to limited procurement infrastructure, lack of adequate
storage facilities,
and logistical challenges. This results in many farmers not being able to sell
their produce at the
MSP.
Regional Disparities: MSPs are uniform across states and regions, irrespective of
variations in
production costs, market conditions, and regional demand. This can lead to regional
disparities,
as farmers in certain areas may face higher production costs and lower market
prices compared
to MSPs.
Market Distortions: The reliance on MSPs can create market distortions by
artificially inflating
prices and impacting market dynamics. This can discourage private investment and
hinder the
growth of efficient markets.
Benefit to Large Farmers: MSPs often benefit large farmers more than small and
marginal
farmers. The procurement operations tend to be concentrated in regions with better
infrastructure, leaving farmers in remote areas with limited access to MSP-based
procurement.
Fiscal Burden: The cost of MSP operations, including procurement, storage, and
distribution,
puts a significant fiscal burden on the government.
Inflationary Pressure: The high procurement prices and the buffer stock created
through MSP
operations can contribute to inflationary pressure in the economy, affecting
consumers'
purchasing power and food affordability.
Distorted Crop Choices: The focus on MSPs for certain crops can lead to imbalanced
cropping
patterns, with farmers growing crops covered by MSPs, even if they are not suitable
for local
agro-ecological conditions or have lower market demand.

Way forward
Recommended Policy Reforms:
1.
2.
3.

Agricultural Tribunal: Consider replacing the Commission on Agricultural Costs &

Prices

(CACP) with an agricultural tribunal, as suggested by the NITI Aayog report. This
would provide an
independent and transparent mechanism for resolving issues related to pricing and
cost in
agriculture.
Minimum Reserve Price: Replace the Minimum Support Price (MSP) with a Minimum
Reserve
Price, which can serve as a starting point for auctions at mandis. This approach
can promote fair
and competitive pricing of agricultural produce.
Creation of Unified National Market: Establish a competitive, stable, and unified
national
market to enable better price discovery. A well-functioning national market will
facilitate
efficient trade and benefit both farmers and consumers.

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Public Distribution System (PDS)
The Public Distribution System (PDS) in India is a government-run program aimed at
providing
essential food grains and other essential commodities to the vulnerable sections of
society at affordable
prices.

Objectives of the PDS:

1.
2.
3.
4.

Food Security: The primary objective of the PDS is to ensure food security by
providing access to

essential food grains at subsidized rates to the economically weaker sections of

society.
Price Stabilization: The PDS helps stabilize food prices by procuring surplus
agricultural
produce from farmers at Minimum Support Prices (MSPs) and distributing them at
controlled
prices to consumers.
Poverty Alleviation: By making essential food grains available at affordable
prices, the PDS aims
to reduce the financial burden on low-income households and alleviate poverty.
Nutritional Support: The PDS also aims to address nutritional deficiencies by
providing access
to staples like rice, wheat, and coarse grains, especially for vulnerable groups
such as pregnant
women, lactating mothers, and children.

Functioning of the PDS:

1.
2.
3.
4.
5.

Procurement: The government procures food grains from farmers through agencies like
the

Food Corporation of India (FCI) at MSPs to build buffer stocks.

Allocation: The procured food grains are allocated to states based on their
population and
needs, and each state is responsible for the distribution within its jurisdiction.
Fair Price Shops: Fair Price Shops (FPS) are established at various locations to
distribute food
grains and other essential commodities to eligible beneficiaries.
Ration Cards: Eligible households are issued ration cards, categorizing them into
priority and
non-priority households. These cards determine the quantity and type of commodities
they can
purchase at subsidized rates.
Subsidized Distribution: Beneficiaries can purchase food grains and other essential
commodities at subsidized rates from FPS, with the price difference being borne by
the
government.
Limitations and Challenges of the PDS:
1.
2.
3.
4.
5.

Leakage and Pilferage: One of the major challenges of the PDS is the issue of
leakage and

pilferage, where subsidized commodities meant for the poor are diverted to the open
market or
sold on the black market.
Inclusion and Exclusion Errors: There are instances of inclusion errors (ineligible
households
receiving benefits) and exclusion errors (eligible households being excluded from
the system),
leading to inefficiencies and inequities in targeting.
Quality and Variety: The PDS primarily focuses on staple food grains, lacking
diversity in terms
of nutritious food items and other essential commodities.
Infrastructural Challenges: Limited storage facilities, inadequate transportation
infrastructure,
and logistical challenges contribute to inefficiencies in procurement, storage, and
distribution.
High Administrative Costs: The administrative costs associated with the PDS,
including
transportation, storage, and monitoring, are often high, impacting the overall
effectiveness of the
system.

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Revamping the PDS:
1.
2.
3.
4.
5.
6.

Digitization and Biometric Authentication: Introducing technology-based solutions

like

digitized ration cards, Aadhaar-based biometric authentication, and electronic

point of sale
(ePOS) systems can help reduce leakages and improve transparency.
Targeting and Identification: Implementing robust systems for targeting and
identifying
beneficiaries, such as the use of socioeconomic databases, can help ensure that
benefits reach
the intended beneficiaries.
Strengthening Supply Chain Infrastructure: Investments in storage facilities,
transportation
infrastructure, and last-mile connectivity can help streamline procurement,
storage, and
distribution processes.
Nutritional Diversification: Expanding the range of commodities available through
the PDS to
include nutritious food items like pulses, oils, and fortified products can address
nutritional
deficiencies.
Public-Private Partnership: Exploring partnerships with private players for last-
mile delivery,
inventory management, and technology solutions can improve the efficiency and
effectiveness of
the PDS.
Grievance Redressal Mechanism: Establishing an effective grievance redressal
mechanism to
address beneficiary complaints and improve accountability within the system.

National Food Security Act

The National Food Security Act (NFSA) is an important legislation in India that
aims to provide food
security and ensure access to adequate and affordable food for all citizens.

Salient features:
1.

2.
3.

4.
5.
6.

Targeted beneficiaries: The NFSA identifies eligible beneficiaries for receiving

subsidized food

grains. It divides the population into priority households and Antyodaya Anna
Yojana (AAY)
households. AAY households, considered the poorest of the poor, receive a higher
quantity of
subsidized food grains.
Coverage: The act covers up to 75% of the rural population and up to 50% of the
urban
population. The eligible beneficiaries are identified through a process of
household surveys
conducted by the state governments.
Subsidized food grains: Under the NFSA, eligible beneficiaries are entitled to
receive 5
kilograms of food grains per person per month at subsidized rates. The subsidized
food grains
include wheat at Rs. 2 per kilogram, rice at Rs. 3 per kilogram, and coarse grains
at Rs. 1 per
kilogram.
Maternity benefits: Pregnant women and lactating mothers are entitled to receive
nutritious
food, free of charge, during pregnancy and for six months after childbirth under
the Integrated
Child Development Services (ICDS) scheme.
Women Empowerment: Eldest women (18 years or above) considered as head of household
for issuing ration cards.
Mid-day meal scheme: The act provides for the continuation of the Mid-Day Meal
Scheme,
which aims to provide cooked meals to school children to enhance their nutrition
and encourage
school attendance.

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7.

8.
9.

Transparent and accountable system: The NFSA emphasizes the use of technology and
computerization for the identification of beneficiaries, allocation of food grains,
and their
distribution. It promotes the use of Aadhaar-based biometric authentication to
ensure
transparency and minimize leakages.
Grievance redressal mechanism: The act establishes a robust system for grievance
redressal
at the district and state levels. It provides for the appointment of District
Grievance Redressal
Officers to address complaints related to the implementation of the act.
State responsibilities: The NFSA places the responsibility of implementing the act
on the
respective state governments. They are responsible for the procurement, storage,
and
distribution of food grains to the eligible beneficiaries in a timely and efficient
manner.

The National Food Security Act aims to address issues of hunger, malnutrition, and
food insecurity in
India. It strives to provide a legal entitlement to food and ensure that no citizen
goes hungry.

Issues of buffer stocks and food security:

Objective of buffer stocks:

•
•

•
•

Ensure higher returns for farmers by purchasing food grains at Minimum Support
Prices (MSP).
Enhance food security by maintaining adequate stocks to meet the food requirements
of the

population.

Stabilize food prices by releasing buffer stocks during periods of high prices or
scarcity.
Support welfare programs by providing food grains for schemes like the Targeted
Public

Distribution System (TPDS) and other social programs.

Buffer norms:

•
•
•

Operational stocks: Food grains used for distribution in welfare programs.

Food security stocks: Reserves maintained to cover any gaps in procurement.
Excess stocks: Surplus beyond the minimum stocking norms, which can be exported,
allocated to
states, or sold in the open market.

Challenges of buffer stocks:

•
•
•
•
•
•
•
•
•

High logistics and administration costs, limiting effective storage and

distribution.
Dual wastage: Simultaneous occurrence of hunger and food spoilage due to improper
storage.
Issues with warehousing infrastructure, including inadequate space and facilities.
Wastage caused by rats, rain, frost, and other factors in outdoor storage.
Transportation problems leading to losses and deterioration during transit.
Diversion and theft, where buffer stocks are misused or redirected to unauthorized
recipients or

illicit markets.

Perceived trade distortion by other countries, leading to trade disputes.

Skewed crop patterns and environmental impact due to integration of buffer stocks
with MSP
for rice and wheat.

Open-ended procurement without accurate estimation of overall buffer stock

requirements.

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Way forward:

Implement recommendations from the Shanta Kumar committee to enhance the Financial
Corporation of India's (FCI) effectiveness and management.

Shanta Kumar Committee

The committee was tasked with reviewing and suggesting reforms for the FCI, the
central agency
responsible for procuring and distributing food grains in the country.

Key recommendations:
1.
2.
3.

4.

5.
6.

Reduction in the coverage of the National Food Security Act (NFSA): The committee

suggested reducing the coverage of subsidized food grains under the NFSA from 67%
to 40% of
the population. This was proposed to focus resources on the most vulnerable
sections of society.
Gradual introduction of cash transfers: The committee recommended the introduction
of
direct benefit transfers (DBT) for food subsidies and Minimum Support Price (MSP)
payments to
farmers.
Decentralized procurement: FCI should engage in full-fledged grain procurement only
in states
with weaker procurement capabilities. States with successful procurement systems,
such as
Haryana, Punjab, Andhra Pradesh, Chhattisgarh, Madhya Pradesh, and Odisha, should
handle
their own procurement.
Rationalization of food grain storage: By leveraging private sector warehousing and
implementing a negotiable warehouse receipt (NWR) system. This would allow farmers
to deposit
their produce in authorized warehouses and receive bank advances based on the value
of their
produce.
Phasing out of the levy rice system: The committee suggested eliminating the
compulsory
purchase of rice by the government from mills, known as the levy rice system. It
proposed that
only the remaining rice beyond a certain percentage could be sold by mills in the
open market.
Strategic sales of excess stocks: The committee recommended that the FCI should
have more
flexibility to conduct business and sell surplus food grains in the open market or
for exports when
necessary. This would help prevent unnecessary accumulation of excess stocks.
Agricultural Revolutions

Revolution

Focus

Green
Revolution

Aims to increase agricultural productivity through the introduction

of high-yielding crop varieties, modern agricultural techniques,
and improved irrigation. It primarily targeted wheat and rice
production. The period of this revolution is from the 1960s to the

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Revolution

Focus

1970s.

White
Revolution

Also known as Operation Flood, it aimed to transform India's

dairy sector. It involved the establishment of milk cooperatives,
the use of modern dairy technology, and promoting the
crossbreeding of cows for higher milk yields. The White
Revolution took place from the 1970s to the 1990s.

Blue
Revolution

Focused on the development of the fisheries sector. It included

measures such as the promotion of aquaculture, modernization of
fishing practices, and improvement of fish seed production.

Evergreen
Revolution

An extension of the Green Revolution, it emphasizes sustainable

agricultural practices and natural resource management. It aims to
ensure food security while preserving the environment.

Yellow
Revolution

Targeted the production of oilseeds in India. It aimed to reduce

India's dependence on oilseed imports and increase domestic
production through the use of technology and research.

Focused on the growth of the jute industry in India. It aimed to

Golden Fiber promote the cultivation, processing, and export of jute and jute
Revolution
products.

Grey

263

Centered on the production and distribution of fertilizers in India.

It aimed to boost agricultural productivity by ensuring the
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Revolution

Focus

Revolution

availability of fertilizers to farmers at affordable prices.

Pink
Revolution

Aimed to modernize and boost the production and processing of

meat and poultry products.

Silver
Revolution

Concentrated on the poultry sector, especially egg production. It

involved the adoption of modern poultry farming techniques and
technology to increase egg production.

Red
Revolution

It involves the modernization of the meat industry.

Protein
Revolution

Focused on the production and promotion of pulses (leguminous

crops) in India. It aimed to increase the production and
consumption of protein-rich pulses to address malnutrition and
improve soil health.

Technology Missions
The objectives of harnessing technology in agriculture are to drive innovation and
growth in the
sector, increase productivity and efficiency, reduce post-harvest losses, enhance
sustainability, and
improve the livelihoods of farmers.

List of Technology Missions in Agriculture:

1. Technology Mission on Oilseeds, Pulses, and Maize (TMOPM)

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2. National Mission on Oilseeds and Oil Palm (NMOOP)
3. National Mission on Sustainable Agriculture (NMSA)
4. National Livestock Mission
5. Mission for Integrated Development of Horticulture
6. National Mission on Food Processing
7. Technology Mission on Cotton
8. Jute Technology Mission
9. Technology Mission on Coconut
10. National Saffron Mission

Latest Technologies Used in Agriculture:

1. Precision Agriculture: Utilizing GPS, sensors, drones, and satellite imagery to

collect data on soil
conditions, crop health, and weather patterns for informed decision-making and
optimized resource
use.
2. Internet of Things (IoT): Deploying IoT devices and sensors in agricultural
fields to monitor and
control parameters like soil moisture, temperature, and nutrient levels, enabling
real-time data and
remote monitoring.
3. Vertical Farming: Growing crops in vertically stacked layers or shelves with
controlled
environments and artificial lighting, reducing water consumption and enabling year-
round
cultivation, especially suitable for urban areas.
4. Robotics and Automation: Utilizing robotics for tasks like seeding, planting,
harvesting, and
sorting to improve efficiency and precision in agricultural operations.
5. Blockchain: Transparent and secure recording and sharing of agricultural data,
enhancing
traceability, reducing fraud, and fostering trust among stakeholders.
6. Artificial Intelligence (AI) and Machine Learning: Analyzing vast agricultural
data to generate
insights and predictions, optimizing crop management, disease detection, yield
forecasting, and pest
control.
7. Biotechnology and Genetic Engineering: Developing genetically modified crops
with desirable
traits such as pest resistance, drought tolerance, and improved nutritional
content.
8. Farm Management Software: Providing tools for farm planning, record-keeping,
financial
analysis, and decision support to enable data-driven decision-making.
9. Remote Sensing and Satellite Imaging: Aiding in early detection of crop stress,
disease
outbreaks, and water management.
10. Climate-Smart Technologies: Including drought-resistant crop varieties, water-
efficient irrigation
systems, agroforestry practices, and carbon sequestration techniques.

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Issues with Technology Missions:
1.

2.
3.
4.
5.

Limited Awareness and Adoption: Smallholders may lack awareness or resources to

adopt

new technologies effectively.

Implementation Challenges: Coordination and integration with stakeholders like Self
Help
Groups (SHGs), NGOs, and Panchayati Raj Institutions may pose challenges.
Financial Constraints: Small and marginal farmers may face financial barriers in
adopting
expensive technologies.
Inadequate Infrastructure: Insufficient infrastructure, such as cold storage
facilities and postharvest management systems, may hinder technology adoption.
Gap between Research and Farm: Slow adoption of research findings on the ground may
hinder technology adoption and utilization.

Way Forward:
1.

2.
3.
4.
5.
6.
7.
8.

Embrace Digital Technologies: Promote the use of blockchain, big data analytics,
artificial
intelligence, and precision agriculture to improve efficiency and decision-making
in farming.
Empower Smallholder Farmers: Provide access to finance, markets, and information to
support smallholders in adopting new technologies.
Foster Public-Private Partnerships: Collaborate with private sector entities to co-
create and
commercialize technologies, making them more accessible to farmers.
Promote Capacity Building: Invest in training programs and knowledge dissemination
to
enhance farmers' skills in using modern technologies effectively.
Emphasize Sustainability: Encourage the adoption of sustainable practices like
integrated pest
management, conservation agriculture, and agroforestry.
Strengthen Infrastructure: Develop and improve infrastructure, including cold
storage facilities
and market linkages, to reduce post-harvest losses.
Promote Farmer Entrepreneurship: Provide training, mentorship, and financial
resources to
empower farmers as "agriprenuers" and enhance their entrepreneurial skills.
Monitor and Evaluate: Establish robust monitoring and evaluation mechanisms to
assess the
effectiveness and impact of technology missions, allowing for continuous
improvement and
learning.

Economics of animal rearing

Types:
1.

Dairy Farming: Involves raising cattle primarily for milk production, which is a
valuable source

of nutrition and an essential part of a balanced diet.

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2.
3.
4.
5.
6.

Poultry Farming: Focuses on raising chickens and producing eggs for human
consumption,

providing a significant source of protein.

Goat and Sheep Farming: Involves raising goats and sheep for various purposes, such
as milk
production, meat, wool, or hides, offering a diversified source of income.
Beekeeping: Involves the cultivation of honeybees for honey production, which is
not only a
valuable food item but also plays a crucial role in biodiversity and crop
pollination.
Fish Farming (Aquaculture): Focuses on breeding and rearing fish in controlled
environments,
contributing to the production of a vital protein source for human consumption.
Sericulture: Involves the cultivation of silkworms to produce silk, which is a
highly valuable and
sought-after natural fiber.

Benefits of Animal Rearing:

1.

2.
3.
4.
5.
6.
7.
8.
9.

Source of Food: Animal rearing provides a continuous supply of essential food items
like meat,

milk, eggs, and honey, contributing to a balanced diet.

Nutrient Recycling: Animals consume agricultural byproducts, crop residues, and
grass,
converting them into organic fertilizer through their manure.
Soil Fertility and Health: Animal manure is rich in essential nutrients like
nitrogen, phosphorus,
and potassium, which enhance soil fertility, structure, moisture retention, and
nutrient
availability.
Integrated Pest Management: Certain animals like chickens can help in pest control
by
consuming insects, while goats graze on weed-infested areas.
Diversification and Income Generation: Animal rearing diversifies income streams as
farmers
can earn from various products like meat, milk, eggs, wool, or honey.
Energy and Labor Utilization: In some cases, animals are used for tilling fields,
reducing the
need for mechanized labor.
Sustainability and Resilience: Animal rearing practices, when done sustainably,
contribute to
biodiversity conservation and improve the resilience of agricultural systems.
Cultural and Social Significance: In many cultures, certain animals hold symbolic
and social
importance and may be considered status symbols.
Insurance: Animals can serve as collateral for emergency loans, providing a safety
net for
farmers during challenging times.

Challenges in Animal Rearing:

1.

Limited Grazing Land: In densely populated areas, the availability of grazing land
for livestock

2.

Inadequate Animal Healthcare: Access to quality veterinary care is a challenge,

especially in

3.
4.
5.

becomes limited, leading to overgrazing and degradation of pastures.

rural areas, which can result in the spread of diseases and reduced productivity of
livestock.
Poor Breeding Practices: Due to inadequate breeding practices, there may be a
decline in the
quality and productivity of animals over time.
Lack of Proper Infrastructure: Insufficient infrastructure for housing, feeding,
and waste
management can adversely affect the health and well-being of livestock.
Feed Availability and Quality: Farmers may face challenges in obtaining adequate
and quality
feed, resulting in nutritional deficiencies in animals.
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6.
7.
8.
9.

Climate Change and Natural Disasters: Events like floods, droughts, and heatwaves
can cause

significant loss of livestock and disrupt animal rearing practices.

Lack of Financial Support and Credit: Small-scale farmers may struggle to access
financial
support and credit for investing in animal rearing.
Socio-Cultural Factors: Some socio-cultural practices, such as using animals for
religious rituals
or sacrifices, can lead to unsustainable practices and negative impacts on animal
populations.
Lack of Market Access: Difficulty in accessing markets for selling livestock and
animal products
can discourage farmers from investing in animal rearing.

Government Initiatives:
1.

2.
3.
4.
5.
6.

National Livestock Mission (NLM): The NLM aims to promote sustainable livestock

development by providing financial and technical support for breed improvement,

livestock
healthcare, fodder development, and strengthening of infrastructure.
National Dairy Plan (NDP): The NDP focuses on breed improvement, animal nutrition,
and
providing support to dairy cooperatives and farmers to enhance milk productivity.
Rashtriya Gokul Mission: This initiative focuses on the conservation and
development of
indigenous cattle breeds. It establishes integrated cattle development centers,
semen stations,
and bull mother farms for breed improvement.
Livestock Insurance Scheme: The government provides insurance coverage to livestock
owners
to protect them from losses due to natural calamities or accidents.
Fodder Development Programs: Government initiatives aim to improve the availability
and
quality of feed and fodder for livestock.
Veterinary Services and Animal Healthcare: The government establishes veterinary
hospitals
and mobile veterinary clinics and conducts vaccination and disease control programs
to enhance
animal healthcare.

Committee on Doubling Farmers' Income

The Dalwai Committee, also known as the Committee on Doubling Farmers' Income, was
formed
with the objective of recommending strategies and action plans to double farmers'
income in India. The
committee identified various areas of focus to achieve this goal:
1.

2.

3.

Diversification of Agricultural Activities: The committee emphasized the promotion

of high-

value horticulture, livestock farming, fisheries, and agro-forestry. By

diversifying agricultural
activities, farmers can tap into new income streams and reduce their dependency on
single-crop
farming.
Improving Productivity and Efficiency: Adopting advanced agricultural practices,
mechanization, and the use of modern technologies are crucial to enhancing
productivity and
efficiency in the agricultural sector. These measures can lead to increased yields
and reduced
production costs.
Agri-entrepreneurship and Value Addition: The committee proposed the establishment
of
agri-startups, agro-processing industries, and cold chains to encourage agri-
entrepreneurship and
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4.
5.
6.
7.
8.
9.

value addition. This would help in reducing post-harvest losses and adding value to
agricultural
produce.
Access to Credit and Insurance: Strengthening institutional credit mechanisms and
expanding
the coverage of crop insurance schemes were recommended to provide farmers with
better
financial support and risk mitigation.
Marketing and Market Reforms: Developing efficient agricultural produce markets,
promoting
contract farming, and enabling direct marketing opportunities would help farmers
get better
prices for their produce and reduce their dependency on middlemen.
Irrigation and Water Management: The committee stressed the importance of investing
in
irrigation infrastructure and promoting efficient water management practices.
Access to irrigation
can lead to increased crop yields and better water use efficiency.
Strengthening Research and Extension Services: Enhancing investment in research and
extension services can help in disseminating improved agricultural practices and
technologies to
farmers.
Skill Development and Capacity Building: Providing training and capacity-building
programs
to farmers in technology adoption, farm management, and entrepreneurship can
empower them
to make informed decisions and improve their income.
Institutional Reforms: The committee recommended the establishment of a National
Commission on Agricultural Development and Reforms to facilitate policy planning
and
implementation for the overall growth of the agricultural sector.

Food Processing Industry

Scope and Significance:
1.

2.
3.
4.
5.
6.
7.

Value Addition and Preservation: Food processing extends the shelf life of
agricultural

produce, reducing post-harvest losses and increasing the value of raw materials.
Employment Generation: Food processing creates job opportunities in various stages
of the
value chain, contributing to rural development and economic growth.
Agricultural Growth and Income Enhancement: By creating demand for processed
products,
food processing encourages farmers to focus on high-value crops and diversify their
agricultural
activities, leading to increased income.
Food Security and Nutrition: Food processing enables the production of processed
and
fortified foods, contributing to improved food security and enhanced nutrition.
Export Potential: Processed foods meeting international standards have export
potential,
boosting the agricultural export sector and earning foreign exchange for the
country.
Technology Adoption and Innovation: Food processing industries adopt advanced
technologies, adhere to food safety standards, and implement quality control
measures, driving
innovation and efficiency in the sector.
Rural and Small-Scale Entrepreneurship: Food processing can promote rural
entrepreneurship through the establishment of cottage industries, empowering women
and
reducing migration from rural to urban areas.

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8.

Ancillary Industries and Infrastructure Development: Food processing leads to the

development of ancillary industries such as packaging, cold storage, logistics, and

equipment
manufacturing, boosting overall economic growth.

Location considerations for Food Processing Industries:

1.

2.
3.
4.
5.
6.
7.
8.
9.
10.

Proximity to Raw Materials: Food processing units should be close to the source of
raw

materials, especially for perishable agricultural commodities, to minimize

transportation costs and
ensure freshness.
Access to Markets: Locations near major cities, transportation networks (roads,
railways, ports),
and distribution centers enable efficient supply chain management and timely
delivery of
processed products.
Availability of Utilities and Infrastructure: Access to water, electricity, and
other utilities is
essential for smooth operations of food processing industries.
Skilled Labor Availability: Availability of trained personnel, such as food
technologists, quality
control experts, and processing operators, is crucial for maintaining high-quality
standards.
Government Policies and Incentives: Favorable government policies, tax incentives,
subsidies,
and infrastructure support can attract food processing industries to specific
locations.
Environmental Considerations: Compliance with water availability, waste management
regulations, and proximity to environmentally sensitive areas is vital for
sustainable food
processing practices.
Proximity to Complementary Industries: Being close to packaging suppliers, cold
storage
facilities, and ingredient suppliers facilitates efficient supply chain management.
Climatic Conditions: For specific food processing industries, such as fruit and
vegetable
processing, climatic conditions may play a significant role in location selection.
Regional Agricultural Strengths: Food processing plants may locate in regions with
high
production of specific agricultural commodities that align with their processing
requirements.
Economic Factors: Land and labor costs, taxation, and overall business climate in a
particular
region are important economic factors influencing location decisions for food
processing
industries.

Upstream Requirements for Food Processing Industries:

1.

2.
3.
4.
5.

Raw Materials: Ensuring a reliable and consistent supply of high-quality raw

materials is crucial
for food processing industries to maintain product consistency and meet production
demands.
Supply Chain Management: Efficient supply chain management is essential to ensure a
steady
flow of raw materials from farms and other sources to the processing facilities.
Quality Control: Implementing stringent quality control measures is necessary to
ensure the
freshness, safety, and traceability of raw materials used in food processing.
Research and Development: Continuous research and development efforts are required
to
develop new varieties, improve agricultural practices, and meet the specific
requirements of food
processing industries.
Sustainable Sourcing: Adopting sustainable sourcing practices contributes to the
overall
sustainability of the food processing industry, addressing environmental and social
concerns.

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Downstream Requirements for Food Processing Industries:
1.

2.
3.
4.
5.
6.
7.

Processing Facilities: Well-equipped and state-of-the-art processing facilities,

including

processing plants, mills, canning units, freezing facilities, packaging lines, and
quality control
laboratories, are vital for efficient food processing.
Skilled Workforce: Having a skilled and trained workforce proficient in food
processing
techniques, food safety protocols, and quality control is essential for maintaining
product
standards and ensuring consumer safety.
Product Development and Innovation: Continuous product development and innovation
are
necessary to create new food products, improve existing formulations, and meet
changing
consumer preferences and market trends.
Packaging and Labeling: Appropriate packaging and labeling play a crucial role in
maintaining
product quality, extending shelf life, and ensuring food safety while complying
with packaging
regulations and standards.
Distribution and Logistics: Establishing efficient distribution and logistics
networks, including
transportation, warehousing, and inventory management, is essential for timely
delivery of
processed products to retailers and consumers.
Marketing and Promotion: Effective marketing and promotion strategies are required
to create
awareness, build brand reputation, and reach target consumers through advertising,
branding,
digital marketing, and consumer engagement initiatives.
Compliance with Regulations: Adhering to regulations related to food safety,
labeling,
nutritional content, and packaging is critical to ensuring consumer safety, quality
assurance, and
legal compliance in the food processing industry.

Key Components of Supply Chain Management in the Food Processing Industry:

1.

2.
3.
4.
5.
6.
7.
8.

Supplier Management: Establishing strong relationships with reliable suppliers to

ensure a

consistent and quality supply of raw materials.

Demand Forecasting and Planning: Using historical data, market trends, and customer
demand to optimize production schedules and inventory levels.
Inventory Management: Efficiently managing inventory levels to minimize the risk of
stockouts
and excess inventory.
Quality Control: Implementing regular inspections and testing to ensure product
safety and
compliance with regulations.
Cold Chain Management: Managing temperature-sensitive products to maintain the
quality
and freshness of perishable items like dairy, meats, and fresh produce.
Logistics and Transportation: Ensuring timely delivery and cost-effective
transportation of
finished products to distribution centers and retailers.
Traceability and Recall Management: Implementing systems to track product origin
and
enabling timely recalls in case of quality or safety issues.
Collaboration and Information Sharing: Building strong partnerships and sharing
information among supply chain partners to respond promptly to market changes.
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9.
10.

Continuous Improvement: Constantly seeking ways to reduce costs and enhance

customer
satisfaction through process improvement.
Sustainability and Ethical Practices: Promoting responsible sourcing, reducing
waste, and
ensuring fair trade practices to support sustainability initiatives.

Challenges in Supply Chain Management:

1.

Food Safety and Quality Assurance: Ensuring compliance with regulations and
preventing

2.

Supply Chain Complexity: Managing multiple suppliers, distributors, and retailers

can be

3.

Changing Consumer Preferences and Trends: Adapting to demands for healthier,

sustainable, and convenient food products.
Cost and Price Volatility: Coping with fluctuating costs of raw materials, energy,
and
transportation.
Shelf Life and Waste Management: Maximizing shelf life and reducing food waste to
minimize
losses.
Changing Regulatory Landscape: Staying updated with ever-changing food safety and
labeling regulations, especially for international trade.
Skills Gap and Workforce Development: Training and retaining a skilled workforce
with
expertise in food processing and supply chain management.
Sustainability and Environmental Impact: Balancing production demands with reducing
water usage, energy consumption, and managing waste.
Volatile Agricultural Sector: Navigating challenges related to weather conditions,
crop
failures, and price volatility.
Technological Advancements and Automation: Adopting and integrating technological
advancements in supply chain management, which can be challenging for small and
mediumsized enterprises.

4.
5.
6.
7.
8.
9.
10.

foodborne illnesses.
challenging.

Government Initiatives to Promote Food Processing Industry:

1.
2.
3.
4.

Pradhan Mantri Kisan SAMPADA Yojana: This scheme focuses on creating modern

infrastructure and value chains in the food processing sector. It includes sub-
schemes like Mega
Food Parks Scheme, Integrated Cold Chain and Value Addition Infrastructure,
Infrastructure for
Agro-Processing Clusters, Creation of Backward and Forward Linkages, and Food
Safety and
Quality Assurance Infrastructure.
Make in India: This initiative aims to promote manufacturing and investment in
India, including
the food processing industry, by providing ease of doing business and attracting
investments.
National Mission on Food Processing (NMFP): The mission aims to support the food
processing industry through capacity building, training, research and development,
technology
upgradation, and infrastructure development.
Operation Greens: This initiative aims to stabilize the supply and prices of
perishable agricultural
commodities like fruits and vegetables by establishing food processing units, cold
storage
facilities, and transportation infrastructure.
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5.

6.
7.

Pradhan Mantri Formalization of Micro Food Processing Enterprises (PM FME) Scheme:

This scheme provides financial, technical, and business support to micro food
processing
enterprises, including skill development, access to credit, technology upgradation,
and marketing
assistance.
Agri Export Policy: This policy aims to boost agricultural exports, including
processed food
products, by providing policy support, infrastructure development, and market
access.
Infrastructure Development Fund (IDF): The IDF aims to bridge the gaps in the
supply chain
infrastructure for the food processing industry, facilitating the smooth movement
of agricultural
produce and processed goods.

Land Reforms in India

Land reforms in India have been crucial in addressing historical inequalities in
landownership,
protecting the rights of tenants and marginalized farmers, and promoting
sustainable land management.
Some of the key aspects and successes of land reforms are as follows:

Key Aspects of Land Reforms:

1.

2.
3.
4.
5.

6.

Abolition of Zamindari System: The abolition of the feudal Zamindari system

resulted in the

transfer of ownership rights to actual cultivators, breaking the concentration of

land in the hands
of a few large landowners.
Land Ceiling Laws: The implementation of land ceiling laws imposed limits on the
maximum
area of agricultural land that an individual or family could own. This led to the
redistribution of
surplus land from large landowners to landless and marginalized farmers, promoting
land equity.
Tenancy Reforms: Tenancy reforms aimed to protect the rights of tenants and
sharecroppers. It
provided security of tenure, fair rent regulations, rights to purchase land, and
safeguards against
eviction, empowering tenants and improving their socio-economic status.
Consolidation of Holdings: Land consolidation programs sought to consolidate small
and
fragmented landholdings, making them more viable and enabling better agricultural
practices. It
involved voluntary land exchanges and the reorganization of land parcels.
Joint Forest Management (JFM): Joint Forest Management initiatives involved local
communities in the conservation and management of forests. It addressed conflicts
between
forest conservation and the rights of indigenous communities and fostered
sustainable forest
practices.
Tribal and Indigenous Land Rights: The Scheduled Tribes and Other Traditional
Forest
Dwellers (Recognition of Forest Rights) Act, 2006, provided legal recognition of
ancestral land and
forest resource rights to tribal and indigenous communities, empowering them to
participate in
decision-making.

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Successes of Land Reforms:
1.

2.
3.
4.

Abolition of Zamindari System: The abolition of the Zamindari system resulted in a

significant

redistribution of landownership, breaking the feudal structure and benefiting

millions of small
farmers.
Tenancy Reforms: Tenancy reforms provided security to sharecroppers and tenants,
reducing
their vulnerability and improving agricultural productivity.
Tribal and Indigenous Land Rights: The recognition of forest rights empowered
tribal and
indigenous communities to protect their traditional lands and resources,
safeguarding their
livelihoods and cultural heritage.
Consolidation of Holdings: Land consolidation efforts led to the reorganization of
land parcels,
making agriculture more efficient and reducing land fragmentation.

Challenges and Limitations of Land Reforms:

1.

2.
3.
4.

5.
6.

Incomplete Implementation: Land reform measures may face challenges in their

implementation due to bureaucratic hurdles, legal complexities, and resistance from

influential
landowners. This can lead to delays and incomplete outcomes.
Poor Land Records: Inadequate and outdated land records and ambiguous land titles
can lead
to land disputes and litigation, making it difficult for farmers to establish clear
ownership.
Lack of Access to Credit and Resources: Despite land reforms, small and marginal
farmers
often struggle to access credit and necessary resources to improve their
agricultural practices and
livelihoods.
Emergence of New Forms of Land Concentration: While land reforms aimed to
distribute
land more equitably, the emergence of corporate land acquisitions and large-scale
agribusiness
can lead to new forms of land concentration, raising concerns about equity and the
rights of
marginalized farmers.
Changing Agricultural Scenario: Rapid urbanization, growth of non-agricultural
sectors, and
contract farming have led to shifts in land use patterns. Adapting land reform
policies to address
these evolving dynamics is crucial.
Political Will and Resistance: Land reforms may face resistance from influential
landowners
and vested interests who may not be willing to give up their land or share it with
others.

Government Initiatives to Address Land Reforms:

1.

2.
3.

Digitization of Land Records: The government has initiated the Digital India Land
Records

Modernisation Programme (DILRMP) to digitize land records, establish clear land

titles, facilitate
transactions, and reduce property fraud.
Land Acquisition Act, 2013: The Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation, and Resettlement Act provides a legal framework for
land acquisition,
ensuring fair compensation and rehabilitation of affected individuals and
communities.
Model Agricultural Land Leasing Act, 2016: This model act aims to facilitate
leasing of
agricultural land, improving access to land for landless and marginal farmers and
enabling them
to access loans through institutional credit.
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4.
5.

Model Contract Farming Act, 2018: The model act ensures fair agreements between
farmers

and agribusinesses and protects the interests of small farmers in contract farming
arrangements.
SWAMITVA Scheme: The Survey of villages and mapping with improvised technology in
village
areas scheme aims to map residential land ownership in rural areas using modern
technology like
drones. This helps establish clear property rights and enables access to bank
finance for rural
landowners.

These government initiatives seek to address the challenges of land reforms and
promote equitable
landownership, secure land tenure, and access to resources for farmers, fostering
sustainable and
inclusive agricultural development.

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Previous Years Prelims Questions
1.

Under the Kisan Credit Card scheme, short-term credit support is given to
farmers for which of the following purposes ?

2020

(1) Working capital for maintenance of farm assets harvesters,

(2) Purchase of combine tractors and mini trucks requirements of farm
(3) Consumption households
(4) Post-harvest expenses
(5) Construction of family house and setting up of village cold storage
facility
Select the correct answer using the code given below:
(a) 1, 2 and 5 only
(b) 1, 3 and 4 only
(c) 2,3,4 and 5 only
(d) 1, 2, 3, 4 and 5
2.

In India, which of the following can be considered as public investment in

agriculture?

2020

(1) Fixing Minimum Support Price for agricultural produce of all crops
(2) Computerization of Primary Agricultural Credit Societies
(3) Social Capital development
(4) Free electricity supply to farmers
(5) Waiver of agricultural loans by the banking system
(6) Setting up of cold storage facilities by the governments.
In India, which of the following can be considered as public investment in
agriculture?
Select the correct answer using the code given below:
(a) 1, 2 and 5 only
(b) 1, 3, 4 and 5 only
(c) 2, 3 and 6 only
(d) 1, 2, 3, 4, 5 and 6
3.

Consider the following statements:

2020

(1) In terms of short-term credit delivery to the agriculture sector, District

Central Cooperative Banks (DCCBs) deliver more credit in comparison to
Scheduled Commercial Banks and Regional Rural Banks.
(2) One of the most important functions of DCCBs is to provide funds to
the Primary Agricultural Credit Societies.
Which of the statements given above is/are correct?
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(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
4.

The economic cost of food grains to the Food Corporation of India is

Minimum Support Price and bonus (if any) paid to the farmers plus

2019

(a) transportation cost only

(b) interest cost only
(c) procurement incidentals and distribution cost
(d) procurement incidentals and charges for godowns
5.

Consider the following statements

2018

(1) The quantity of imported edible oils is more than the domestic
production of edible oils in the last five years.
(2) The Government does not impose any customs duty on all the
imported edible oils a special case.
Which of two statements given above is/are correct
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
6.

With reference to pre-packaged items in India, it is mandatory to the

manufacturer to put which of the following information on the main label, as
per the Food Safety and Standards (Packaging and Labelling) Regulations,
2011?
(1) List of ingredients including additives
(2) Nutrition information
(3) Recommendations, if any, made by the medical profession about the
possibility of any allergic reactions
(4) Vegetarian/non-vegetarian
Select the correct answer using the code given below.
(a) 1, 2 and 3
(b) 2, 3 and 4
(c) 1, 2 and 4
(d) 1 and 4 only

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2016
7.

The Fair and Remunerative Price (FRP) of sugarcane is approved by the

2015

(a) Cabinet Committee on Economic Affairs

(b) Commission for Agricultural Costs and Prices
(c) Directorate of Marketing and Inspection, Ministry of Agriculture
(d) Agricultural Produce Market Committee
8.

In India, markets in agricultural products are regulated under the

2015

(a) Essential Commodities Act, 1955

(b) Agricultural Produce Market Committee Act enacted by States
(c) Agricultural Produce (Grading and Marking) Act, 1937
(d) Food Products Order, 1956 and Meat and Food Products Order, 1973
Previous Years Mains Questions
1.

What are the major challenges of Public Distribution System (PDS) in

India? How can it be made effective and transparent ?

2022

2.

Elaborate the scope and significance of the food processing industry

in India.

2022

3.

What are the main bottlenecks in upstream and downstream process

of marketing of agricultural products in India ?

2022

4.

What is Integrated Farming System ? How is it helpful to small and

marginal farmers in India ?

2022

5.

How did land reforms in some parts of the country help to improve
the socio-economic conditions of marginal and small farmers?

2021

6.

How and to what extent would micro-irrigation help in solving India’s

water crisis? (Answer in 150 words)

2021

7.

What are the salient features of National Food Security Act, 2013?
How has the Food Security Bill helped in eliminating hunger and
malnutrition in India? (Answer 250 words)

2021

8.

What are the present challenges before crop diversification? How do

emerging technologies provide an opportunity for crop diversification?

2021

9.

What are the main constraints in transport and marketing of

agricultural produce in India?

2020

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10.

What are the challenges and opportunities of food processing sector

in the country? How can income of the farmers be substantially
increased by encouraging food processing?

2020

11.

What are the major factors responsible for making rice-wheat system
a success? In spite of this success how has this system become bane in
India?

2020

12.

Suggest measures to improve water storage and irrigation system to

make its judicious use under depleting scenario.

2020

13.

How far is the Integrated Farming System (IFS) helpful in sustaining 2019
agricultural production.

14.

Elaborate on the impact of the National Watershed Project in increasing

agricultural production from water-stressed areas.

2019

15.

How has India benefited from the contributions of Sir M. Visvesvaraya

and Dr. M. S. Swaminathan in the fields of water engineering and
agricultural science respectively?

2019

16.

What are the reformative steps taken by the Government to make the
food grain distribution system more effective?

2019

17.

Elaborate on the policy taken by the Government of India to meet the

challenges of the food processing sector.

2019

18.
What do you mean by the Minimum Support Price (MSP)? How will MSP 2018
rescue the farmers from the low-income trap?

19.

Examine the role of supermarkets in supply chain management of fruits,

vegetables, and food items. How do they eliminate the number of
intermediaries?

2018

20.

Assess the role of the National Horticulture Mission (NHM) in boosting

the production, productivity, and income of horticulture farms. How far
has it succeeded in increasing the income of farmers?

2018

21.

How has the emphasis on certain crops brought about changes in

cropping patterns in the recent past? Elaborate the emphasis on millet
production and consumption.

2018

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22.

Explain various types of revolutions, took place in Agriculture after 2017

Independence in India. How these revolutions have helped in poverty
alleviation and food security in India?

23.

What are the reasons for poor acceptance of cost-effective small

processing units? How can the food processing unit be helpful to uplift
the socio-economic status of poor farmers?

2017

24.

What are the major reasons for declining rice and wheat yield in the
cropping system? How crop diversification is helpful to stabilize the yield
of the crop in the system? (Answer in 250 words)

2017

25.

How do subsidies affect the cropping pattern, crop diversity and

economy of farmers? What is the significance of crop insurance,
minimum support price and food processing for small and marginal
farmers?

2017

26.

What is water-use efficiency? Describe the role of micro-irrigation in 2016

increasing water-use efficiency.

27.

Discuss the role of land reforms in agricultural development. Identify the

factors that were responsible for the success of land reforms in India.

2016

28.

Given the vulnerability of Indian agriculture to vagaries of nature, discuss

the need for crop insurance and bring out the salient features of the
Pradhan Mantri Fasal Bima Yojana (PMFBY).

2016

29.

Livestock rearing has a big potential for providing non-farm employment 2015
and income in rural areas. Discuss suggesting suitable examples.

30.

In view of the declining average size of land holdings in India which has
made agriculture non-viable for a majority of farmers, should contract
farming and land leasing be promoted in agriculture? Critically evaluate
the pros and cons.

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2015
31.

There is also a point of view that agriculture produce market committees 2014
(APMCs) set up under the state acts have not only impeded the
development of agriculture but also have been the cause of food
inflation in India. Critically examine.

32.

“In the villages itself, no form of credit organization will be suitable

except the cooperative society.” – All Indian rural credit survey. Discuss
this statement in the background of agriculture finance in India. What
constraints and challenges do financial institutions supply agricultural
finances? How can technology be used to better reach and serve rural
clients?

33.

Food Security Bill is expected to eliminate hunger and malnutrition in 2013

India. Critically discuss various apprehensions in its effective
implementation along with the concerns it has generated in WTO.

34.

What are the different types of agriculture subsidies given to farmers at

the national and at state levels? Critically analyse the agricultural subsidy
regime with reference to the distortions created by it.

2013

35.

India needs to strengthen measures to promote the pink revolution in

the food industry for ensuring better nutrition and health. Critically
elucidate the statement.

2013

36.

Establish relationships between land reforms, agricultural productivity

and elimination of poverty in the Indian economy. Discuss the difficulties
in designing and implementation of agriculture – friendly land reforms in
India.

2013

Answers
1.

2.

3.

B
4.

5.

6.

7.

8.

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2014
14. Industry

Say hello! |

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Contents
Historical Evolution of the Manufacturing Sector in
India ................................................................. 285
Pre-independence
Era: ..............................................................................
..................................... 285
Post-independence
Industrialization: ................................................................
............................ 285
Liberalization and Economic Reforms in the
1990s: ...................................................................... 285
Industrial sector's contribution to India's
Economy...........................................................................
286
High-frequency indicators to track the growth momentum of the industrial
sector ........................ 286
Government Policies and Initiatives to Support
Manufacturing........................................................ 287
Challenges Faced by the Manufacturing Sector in
India .................................................................... 288
Opportunities for the Manufacturing
Sector: ...........................................................................
......... 289
Key sub-sectors in India’s Industrial
Sector ............................................................................
............ 290
Micro, Small and Medium Enterprises
(MSMEs)............................................................................
290
Challenges: .......................................................................
.......................................................... 290
Government
Initiatives: ......................................................................
........................................ 291
Examples:..........................................................................
.......................................................... 291
Electronics
Industry ..........................................................................
.............................................. 291
Challenges: .......................................................................
.......................................................... 291
Government
Initiatives: ......................................................................
........................................ 291
Examples:..........................................................................
.......................................................... 291
Coal
Industry...........................................................................
........................................................ 292
Challenges: .......................................................................
.......................................................... 292
Government
Initiatives: ......................................................................
........................................ 292
Examples:..........................................................................
.......................................................... 292
Steel
Industry...........................................................................
....................................................... 292
Challenges: .......................................................................
.......................................................... 292
Government
Initiatives: ......................................................................
........................................ 292
Examples:..........................................................................
.......................................................... 293
Textile
Industry ..........................................................................
..................................................... 293
Challenges: .......................................................................
.......................................................... 293
Government
Initiatives: ......................................................................
........................................ 293
Examples:..........................................................................
.......................................................... 293
Pharmaceuticals
Industry ..........................................................................
..................................... 294
Challenges: .......................................................................
.......................................................... 294
Government
Initiatives: ......................................................................
........................................ 294
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Examples:..........................................................................
.......................................................... 294
Automobile
Industry...........................................................................
............................................ 294
Challenges: .......................................................................
.......................................................... 294
Government
Initiatives: ......................................................................
........................................ 294
Examples:..........................................................................
.......................................................... 295
Telecommunications
Industry ..........................................................................
.............................. 295
Challenges: .......................................................................
.......................................................... 295
Government
Initiatives: ......................................................................
........................................ 295
Examples:..........................................................................
.......................................................... 295
Previous Years Prelims
Questions .........................................................................
............................. 296
Previous Years Mains
Questions .........................................................................
............................... 297

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Chapter 14
Industry
The industrial sector, also known as the manufacturing sector is involved in the
production of goods,
such as machinery, chemicals, textiles, and automobiles. It also includes
industries that provide
infrastructure, like power and transportation.

Historical Evolution of the Manufacturing Sector in India

Pre-independence Era:

Prior to India's independence in 1947, the manufacturing sector was predominantly

centered
around traditional industries, such as textiles, handicrafts, and agro-processing.
Industrialization was
limited, and the country largely relied on agriculture for its economic sustenance.

Post-independence Industrialization:

After independence, India adopted a planned economy model, and industrialization

became a key
focus of the government's development strategy. The introduction of five-year plans
aimed to
accelerate industrial growth and reduce dependency on imports. The public sector
played a dominant
role in manufacturing, with the establishment of large-scale industries in steel,
heavy machinery, and
capital goods.

The Second Five-Year Plan (1956-1961) witnessed the establishment of the Indian
Institutes of
Technology (IITs) and the Indian Institutes of Management (IIMs), which contributed
to a skilled
workforce in the engineering and management fields.

Liberalization and Economic Reforms in the 1990s:

In response to a balance of payments crisis in the early 1990s, India initiated a

series of economic
reforms in 1991 to liberalize its economy. The manufacturing sector witnessed
significant changes
during this period. Key reforms included:
1.
2.
3.
4.

285

Reduction of industrial licensing and delicensing of various industries, allowing

for increased
private sector participation and foreign direct investment (FDI).
Introduction of foreign trade reforms to encourage exports and boost
competitiveness.
Dismantling of import controls and tariff reductions to promote import competition
and
efficiency.
Creation of Special Economic Zones (SEZs) to attract foreign investment and boost
manufacturing exports.
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Industrial sector's contribution to India's Economy
According to the World Bank, in 2020, the industrial sector accounted for around
26% of India's
GDP. That means that roughly a quarter of the value of all goods and services
produced in India comes
from the industrial sector.
According to the Ministry of Statistics and Programme Implementation, the
industrial sector
employed around 28% of India's workforce in 2019.

High-frequency indicators to track the growth momentum of the industrial sector

High-Frequency
Indicator

Definition

PMI
Manufacturing

A monthly survey-based
index that measures the
level of confidence of
purchasing managers in
the manufacturing
sector

IIP

A monthly index that

tracks the production of
different industries in
India

Index of Core
Industries
Bank Credit to
Industry
FDI in
Manufacturing

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A monthly index that

tracks the performance
of key industries that
make up the core of the
industrial sector in India
The loans given by
banks to industries for
their operations and
expansion
The investment made by
foreign companies in
the manufacturing
sector of India

@Ketanomy
Calculation
The index is calculated based on surveys of
purchasing managers who report changes
in key factors like new orders, production,
employment, supplier deliveries, and
inventories. The PMI value is derived from
a weighted average of these components.
A score above 50 indicates expansion,
while below 50 indicates contraction.
IIP is calculated using the Laspeyres
formula, which compares the current
period's industrial production with a base
period. The index represents the
percentage change in production volume
for a basket of industrial products over
time.
Refinery Products Industry: 28.04%
Electricity Industry: 19.85%
Steel Industry: 17.92%
Coal Industry: 10.33%
Crude Oil Industry: 8.98%
Natural Gas Industry: 6.88%
Cement Industry: 5.37%
Fertilizers Industry: 2.63%
Government Policies and Initiatives to Support Manufacturing
1. Make in India: Launched in 2014, the Make in India campaign is one of the
flagship initiatives to
promote manufacturing and transform India into a global manufacturing hub. The
campaign aims to
attract both domestic and foreign investment in various industries by offering a
favorable business
environment, easing regulatory norms, and providing incentives for manufacturing
activities.
2. National Manufacturing Policy (NMP): The NMP provides a comprehensive roadmap
for the
growth and development of the manufacturing sector. It focuses on enhancing the
sector's contribution
to GDP, increasing employment opportunities, and promoting sustainable
manufacturing practices. The
policy emphasizes the need for skill development, technology upgradation, and
efficient infrastructure.
3. Special Economic Zones (SEZs): SEZs are designated geographical areas that offer
various tax

incentives, customs benefits, and simplified regulatory procedures to attract

foreign direct investment
and promote exports. SEZs have played a significant role in boosting manufacturing
exports and creating
employment opportunities.

4. Industrial Corridors: The government has identified and developed industrial

corridors, such as
the Delhi-Mumbai Industrial Corridor (DMIC) and Chennai-Bengaluru Industrial
Corridor (CBIC). These
corridors aim to create industrial clusters with state-of-the-art infrastructure,
better connectivity, and
investor-friendly policies.
5. Goods and Services Tax (GST): The introduction of the GST in 2017 brought about
significant
tax reforms and streamlined the indirect taxation system. The unified tax regime
has reduced tax
complexities and improved the ease of doing business, benefiting the manufacturing
sector.
6. Intellectual Property Rights (IPR) Policy: India has formulated a National IPR
Policy to
promote innovation and protect intellectual property. The policy aims to foster an
environment
conducive to research, development, and technology transfer in the manufacturing
sector.
7. Technology Upgradation Fund Scheme (TUFS): TUFS provides financial support to
textile

and jute industries for the modernization of machinery and technology upgradation.
The scheme aims
to enhance productivity, quality, and cost-competitiveness in these industries.

8. Export Promotion Schemes: Various export promotion schemes, such as the

Merchandise
Exports from India Scheme (MEIS) and the Service Exports from India Scheme (SEIS),
provide incentives
to manufacturers for promoting exports and expanding their global footprint.
9. Investment Facilitation: The government has set up single-window clearance
mechanisms and
investment promotion agencies at the central and state levels to facilitate
investment in the
manufacturing sector. These agencies help investors with necessary approvals and
clearances, thus
reducing bureaucratic hurdles.
10. Ease of Doing Business Reforms: The Indian government has undertaken
significant reforms
to improve the ease of doing business in the country. These reforms include
simplifying business
registration processes, reducing compliance burdens, streamlining tax procedures,
and enabling faster
dispute resolution. The World Bank's "Doing Business" report has recognized India's
efforts, leading to
improved rankings in the ease of doing business index.
11. Production-Linked Incentive (PLI) Schemes: The government has introduced PLI
schemes in
specific sectors to encourage domestic manufacturing and enhance India's
competitiveness in global
markets. Under these schemes, manufacturers receive incentives based on their
incremental production
and investment.
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12. Atmanirbhar Bharat Abhiyan: The Atmanirbhar Bharat Abhiyan (Self-Reliant India
Campaign)
was launched in 2020 to promote self-reliance and reduce dependency on imports. It
encourages
domestic manufacturing, R&D, and innovation in key sectors to make India self-
sufficient and globally
competitive.
13. National Capital Goods Policy: The National Capital Goods Policy aims to
enhance the
competitiveness of India's capital goods sector and strengthen the manufacturing
ecosystem. It focuses
on increasing domestic production, exports, and technology upgradation in the
capital goods industry.
14. Pradhan Mantri Mudra Yojana (PMMY): PMMY provides financial assistance to small
and
micro-enterprises, including those in the manufacturing sector, by offering
collateral-free loans. This
initiative helps in promoting entrepreneurship and supporting small-scale
manufacturing units.
15. Start-up India: The Start-up India initiative fosters a conducive ecosystem for
startups,

including those in the manufacturing sector. It provides various benefits such as

tax incentives, selfcertification compliance, and access to funding and mentorship
to promote entrepreneurship and
innovation.

16. PM Gati Shakti - National Master Plan: PM Gati Shakti is a transformative

infrastructure
development initiative launched by the Government of India. It aims to create a
unified and integrated
multimodal logistics network across the country. The National Master Plan under PM
Gati Shakti focuses
on enhancing transportation connectivity, including roads, railways, ports, and
airports, to facilitate
efficient movement of goods and reduce logistics costs for the manufacturing
sector.
Challenges Faced by the Manufacturing Sector in India
1. Infrastructure Deficiency: Inadequate and outdated infrastructure, including
transportation,
logistics, and power supply, pose significant challenges for manufacturers. Poor
roads, congested ports,
and unreliable power supply lead to increased production costs, delays in delivery,
and hamper overall
efficiency.
2. Skilled Labor Shortages: The manufacturing sector in India grapples with a
shortage of skilled

and trained labor. The disparity between the demand for skilled workers and the
availability of suitable
talent creates challenges in adopting advanced manufacturing technologies and
hampers productivity.

3. Labor Reforms: The rigid labor laws in India have been a longstanding challenge
for the
manufacturing sector. The existing labor laws often hinder flexibility in hiring,
firing, and labor
deployment, making it difficult for companies to adjust their workforce according
to changing market
conditions and demand fluctuations. The complex labor regulations also discourage
businesses from
scaling up their operations and investing in labor-intensive industries.
4. Complex Regulatory Environment: Manufacturers face complex and time-consuming
regulatory procedures, including licensing, permits, and compliance requirements.
This bureaucratic
burden increases administrative costs and delays business operations.
5. Access to Finance: Small and Medium-sized Enterprises (SMEs) in the
manufacturing sector
often encounter challenges in accessing affordable credit and working capital. High
interest rates and
stringent lending norms limit their growth and expansion opportunities.
6. Low R&D and Innovation: The level of research and development (R&D) expenditure
in the

manufacturing sector remains relatively low compared to global standards. Lack of

innovation and
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technology adoption hinders the industry's ability to produce high-value products
and compete in
international markets.

7. Global Competition: Indian manufacturers face intense competition from other

countries,
particularly from low-cost manufacturing hubs like China. Price competitiveness
becomes challenging
due to economies of scale and lower production costs in competitor countries.
8. Inefficient Supply Chain Management: Inefficient supply chain management results
in
inventory management challenges, increased lead times, and higher costs.
Manufacturers often struggle
to optimize supply chain processes, affecting their ability to meet market demands
efficiently.
9. Import Dependency: India's manufacturing sector still depends on imports for
certain critical

raw materials, components, and machinery. This reliance on foreign supplies makes
the industry
vulnerable to fluctuations in global markets and exchange rate volatility. Eg.
Electronics Industry

10. Environmental Regulations: Stricter environmental regulations and compliance

requirements
impact manufacturing processes and necessitate additional investments in
environment-friendly
technologies and waste management systems.
11. Lack of Industry-Academia Collaboration: Limited collaboration between industry
and
academia hampers innovation and technology transfer in the manufacturing sector.
Bridging this gap is
essential to foster R&D, skill development, and technology upgradation.
Opportunities for the Manufacturing Sector:
Rising Domestic Demand and Demographic Dividend:
•
•

India's large and growing population presents a significant domestic market for
manufactured
goods. The rising middle-class population and increasing disposable income drive
demand for
consumer durables, electronics, automobiles, and other products.
The country's young and aspiring workforce offers a demographic dividend, providing
a skilled
labor pool for the manufacturing sector and supporting overall economic growth.

Leveraging Technology for Industry 4.0:

•

Industry 4.0, characterized by automation, data exchange, and IoT integration,

offers immense
opportunities for the manufacturing sector. Adoption of advanced technologies
enhances
productivity, quality, and efficiency in manufacturing processes.
India can become a leader in technology-driven manufacturing and leverage its IT
expertise to
drive innovation and digital transformation in industries.

Focus on Sustainable and Green Manufacturing:

•
•

The increasing global emphasis on sustainability and environmental responsibility

presents an
opportunity for Indian manufacturers to adopt eco-friendly practices and green
technologies.
By producing environmentally conscious products and adopting sustainable
manufacturing
processes, Indian companies can gain a competitive edge and appeal to eco-conscious
consumers
globally.

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Export Potential and Market Diversification:
•

India's manufacturing sector has significant export potential, particularly in

sectors like
pharmaceuticals, textiles, engineering goods, and automotive components.
Diversifying export markets reduces reliance on specific regions and enhances the
sector's
resilience to global economic fluctuations.

Government Initiatives and Incentives:

•

The Government of India's initiatives like Make in India, Production-Linked

Incentive (PLI) schemes,
and Atmanirbhar Bharat Campaign provide incentives and support to promote domestic
manufacturing and attract foreign investments.
These initiatives create an enabling environment for manufacturers, facilitating
technology
adoption, R&D, and innovation.

Infrastructure Development:
•

Investment in infrastructure development, such as transportation networks,

logistics hubs, and
industrial corridors, can improve supply chain efficiency and reduce manufacturing
costs.
Access to modern infrastructure enhances connectivity and accessibility to markets,
attracting
more investment in the manufacturing sector.

Shift in Global Supply Chains:

•
•

The COVID-19 pandemic and geopolitical tensions have led to a reevaluation of

global supply
chains. Many companies are exploring alternative manufacturing destinations like
India to reduce
dependency on a single country or region.
This presents an opportunity for India to attract investments and enhance its role
in global supply
chains.

By capitalizing on these opportunities, the Indian manufacturing sector can

position itself as a major
player in the global market, drive economic growth, create jobs, and contribute
significantly to India's
journey towards becoming globally competitive economy.

Key sub-sectors in India’s Industrial Sector

Micro, Small and Medium Enterprises (MSMEs)
The Micro, Small, and Medium Enterprises (MSMEs) sector includes a wide range of
businesses, such
as small manufacturers, service providers, and artisans. MSMEs play a crucial role
in the Indian economy
by contributing to employment generation and economic growth.

Challenges:
1.
2.
3.
4.

Limited access to finance and credit

Difficulty in adopting new technology and innovation
Lack of skilled labor and training programs
Regulatory compliance and bureaucratic hurdles

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Government Initiatives:

1. The government has launched several initiatives to support MSMEs, such as the
Prime Minister's
Employment Generation Programme (PMEGP) and the Credit Guarantee Fund Trust for
Micro
and Small Enterprises (CGTMSE).
2. The government has also introduced measures to promote innovation and
entrepreneurship,
such as the Startup India initiative and the Atmanirbhar Bharat Abhiyan.
3. The government has simplified regulatory compliance for MSMEs by introducing a
singlewindow system for approvals and registrations.

Examples:
•
•

Chumbak, a Bangalore-based company, is a successful MSME that designs and

manufactures
quirky lifestyle products such as bags, wallets, and home decor items. Chumbak has
expanded
rapidly in recent years, with over 70 stores across India and a strong online
presence.
Fabindia, another well-known MSME, is a retail chain that specializes in
handcrafted products
such as clothing, accessories, and home furnishings. Fabindia works closely with
artisans and
weavers in rural areas, providing them with a platform to showcase their products
and earn a
livelihood.

Electronics Industry

The electronics industry in India is involved in the manufacturing and production

of electronic
products, such as smartphones, laptops, televisions, and more. It is a rapidly
growing industry in India,
with many global and domestic companies investing in the country.

Challenges:
1.
2.
3.
4.

Lack of a strong supply chain ecosystem

Limited availability of skilled labor and technical expertise
High import dependence for raw materials and components
Intense competition from other Asian countries such as China and Taiwan

Government Initiatives:

1. The government has launched several initiatives to promote electronics

manufacturing in India,
such as the Make in India campaign and the National Policy on Electronics.
2. The government has also established special economic zones (SEZs) and industrial
parks to
attract foreign investment and promote manufacturing.
3. The government has implemented measures to improve the availability of skilled
labor, such as
the Skill India initiative and the Pradhan Mantri Kaushal Vikas Yojana.

Examples:
•
•

Foxconn, a Taiwanese multinational electronics contract manufacturer, has set up a

manufacturing facility in India to produce smartphones for companies such as Apple
and Xiaomi.
Samsung, the South Korean electronics giant, has a large manufacturing presence in
India, with
factories producing smartphones, televisions, and home appliances.

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Coal Industry

The coal industry plays a crucial role in the country's energy mix. India is the
third-largest producer
of coal in the world, and the coal industry provides employment to millions of
people across the
country.

Challenges:

1. Limited availability of high-quality coal reserves in certain regions

2. Environmental concerns related to coal mining and usage, such as air pollution
and greenhouse
gas emissions
3. Increasing competition from renewable energy sources like solar and wind power
4. Technological challenges in the exploration and extraction of coal

Government Initiatives:

1. The government has launched several initiatives to improve the efficiency and
sustainability of
the coal industry, such as the Coal Mitra portal, which facilitates the transfer of
coal reserves
from one company to another, and the Ujjwal Discom Assurance Yojana, which aims to
ensure
the financial viability of power distribution companies.
2. The government has also introduced measures to promote the use of clean coal
technologies
and reduce emissions, such as the National Clean Energy Fund and the Clean Energy
Cess.
3. The government is also investing in research and development to improve the
exploration and
extraction of coal, such as the development of new mining technologies and the use
of artificial
intelligence and big data analytics.

Examples:
•

Coal India Limited is the largest coal mining company in India and operates several
mines across
the country. It produces around 83% of the country's coal output and employs over
300,000
people.

Steel Industry

The steel industry plays a critical role in the growth and development of the
Indian economy. It
includes the production of iron and steel products, which are used in various
industries, such as
construction, automotive, and infrastructure.

Challenges:
1.
2.
3.
4.
High dependence on imported raw materials, such as coking coal and iron ore
Intense competition from low-cost steel producers in other countries
Environmental concerns related to emissions and waste disposal
Fluctuations in demand and prices due to global economic conditions

Government Initiatives:

1. The government has launched several initiatives to support the growth and
development of the
steel industry, such as the National Steel Policy and the Make in India campaign.
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2. The government has also implemented measures to reduce dependence on imported
raw
materials and encourage domestic production, such as the auction of mineral
resources and the
introduction of the Steel Scrap Recycling Policy.
3. The government has also provided financial and technical assistance to steel
companies for
modernization and capacity expansion, such as the Steel Development Fund and the
Technology
Upgradation Fund Scheme.

Examples:
•

Tata Steel, one of the leading steel producers in India, has several plants and
facilities across the
country. Its flagship plant in Jamshedpur, Jharkhand is one of the largest and most
advanced
steel plants in the world.
Steel Authority of India Limited (SAIL), another major player in the Indian steel
industry, has
several integrated steel plants and is involved in the production of a wide range
of steel
products, including long and flat products.

Textile Industry

The textile industry includes the production of various textiles, such as cotton,
silk, wool, and
synthetic fibers, as well as the manufacturing of apparel, home textiles, and
technical textiles.

Challenges:
1.
2.
3.
4.

Competition from other countries like Bangladesh with lower labor costs
High cost of raw materials, such as cotton and silk
Lack of modernization and technological advancements in certain regions
Environmental concerns related to water usage and pollution

Government Initiatives:

1. The government has launched several initiatives to promote the textile industry,
such as the
Technology Upgradation Fund Scheme (TUFS) and the Integrated Skill Development
Scheme
(ISDS).
2. The Make in India campaign also focuses on promoting the textile industry by
attracting foreign
investment and facilitating ease of doing business.
3. The government has also implemented measures to address environmental concerns,
such as
the Zero Liquid Discharge (ZLD) policy for textile dyeing and printing units.
Examples:
•
•

The city of Surat in Gujarat is known as the "Textile City of India" and is one of
the largest
centers for textile production and manufacturing in the country.
The traditional textile art of handloom weaving is still practiced in certain
regions of India, such
as Varanasi and Kanchipuram. These handloom textiles are renowned for their
intricate designs
and high-quality craftsmanship.

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Pharmaceuticals Industry

The pharmaceuticals industry is involved in the production and distribution of

drugs, medicines, and
other healthcare products. India is known as the "Pharmacy of the World" due to its
large and growing
pharmaceuticals industry.

Challenges:
1.
2.
3.
4.

Increasing competition from other countries

High costs of research and development for new drugs
Complex regulatory environment and intellectual property issues
Dependence on imports of raw materials and active pharmaceutical ingredients (APIs)

Government Initiatives:

1. The government has launched several initiatives to promote the growth and
development of the
pharmaceuticals industry, such as the Pharmaceutical Promotion Development Scheme
(PPDS)
and the Make in India campaign.
2. The government has also established the National Pharmaceutical Pricing
Authority (NPPA) to
regulate drug prices and ensure affordable healthcare for all.
3. The government has also taken steps to boost domestic production of APIs and
reduce
dependence on imports, such as the Production Linked Incentive (PLI) scheme for the
pharmaceuticals industry.

Examples:
•

The Serum Institute of India, based in Pune, is the world's largest vaccine
manufacturer by
volume. It produces vaccines for a wide range of diseases, including COVID-19, and
exports
them to countries around the world.
The company Cipla, based in Mumbai, is one of the leading pharmaceutical companies
in India.
It produces a wide range of drugs and medicines, including treatments for cancer,
HIV/AIDS, and
respiratory illnesses.

Automobile Industry

The automobile industry includes the manufacturing and sale of automobiles such as
cars, trucks,
buses, motorcycles, and more. It is a significant contributor to India's economy,
providing employment
to millions of people and generating significant revenue.

Challenges:
1.
2.
3.
4.

High competition among domestic and international players

Fluctuations in demand due to economic factors and changes in consumer preferences
Rising raw material costs and inflation
Environmental concerns and pressure to adopt cleaner technologies

Government Initiatives:

1. The government has implemented several initiatives to support the automobile

industry, such
as the Automotive Mission Plan and the National Electric Mobility Mission Plan.
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2. The government has also announced incentives and tax breaks for manufacturers
who invest in
clean energy technologies and electric vehicles.
3. The introduction of the Goods and Services Tax (GST) has streamlined the tax
system and
reduced the overall tax burden on the industry.

Examples:
•

Tata Motors is one of the leading automobile manufacturers in India, producing a

wide range of
vehicles such as cars, trucks, and buses. Its Nano car, marketed as the world's
cheapest car, was
launched in 2008 and aimed at providing affordable transportation to the masses.
Maruti Suzuki is another prominent automobile manufacturer in India, known for its
popular
compact cars such as the Swift and the Alto. It has a strong presence in the Indian
market and
has expanded its operations to other countries in the region.

Telecommunications Industry

The telecommunications industry includes businesses involved in the production and

distribution of
telecommunications equipment and services, such as mobile phones, internet
services, and cable TV.

Challenges:
1.
2.
3.
4.

High competition among telecom service providers

The need for constant innovation to keep up with rapidly evolving technology
Difficulty in providing reliable and affordable services in rural and remote areas
Regulatory challenges, such as spectrum allocation and licensing issues

Government Initiatives:

1. The government has launched several initiatives to promote the growth and
development of the
telecom industry, such as the Digital India campaign and the National Optical Fibre
Network
project.
2. The Telecom Regulatory Authority of India (TRAI) has implemented measures to
promote fair
competition and ensure quality services for consumers, such as the Telecom Consumer
Protection Regulations.
3. The government has also taken steps to address the issue of connectivity in
rural areas, such as
the BharatNet project, which aims to provide broadband connectivity to all gram
panchayats
(village councils) in the country.

Examples:
•
•

Reliance Jio, a subsidiary of Reliance Industries, is a major player in the Indian

telecom market. It
offers affordable 4G data plans and has disrupted the industry with its aggressive
pricing
strategies.
Bharti Airtel, another leading telecom service provider in India, has a wide range
of services,
including mobile, broadband, and digital TV. It has a strong presence in both urban
and rural
areas of the country.

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Previous Years Prelims Questions
1.

Recently, India’s first ‘National Investment and Manufacturing Zone’ was 2016
proposed to be set up in
(a) Andhra Pradesh
(b) Gujarat
(c) Maharashtra
(d) Uttar Pradesh

2.

On which of the following can you find the Bureau of Energy Efficiency Star 2016
Label?
(1) Ceiling fans
(2) Electric geysers
(3) Tubular fluorescent lamps
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3

3.

In the ‘Index of Eight Core Industries’, which one of the following is given the
2015
highest weight?
(a) Coal production
(b) Electricity generation
(c) Fertilizer production
(d) Steel production

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Previous Years Mains Questions
1.

Account for the failure of the manufacturing sector in achieving the goal of
labour-intensive exports rather than capital-intensive exports. Suggest
measures for more labour-intensive rather than capital-intensive exports.

2017

2.

“Industrial growth rate has lagged behind in the overall growth of GrossDomestic-
Product(GDP) in the post-reform period” Give reasons. How far
the recent changes is Industrial Policy are capable of increasing the
industrial growth rate?

2017

3.

“Success of ‘Make in India’ programme depends on the success of ‘Skill

India’ programme and radical labour reforms.” Discuss with logical
arguments.

2015

4.

There is a clear acknowledgement that Special Economic Zones (SEZs) are a

tool of industrial development, manufacturing and exports. Recognizing
this potential, the whole instrumentality of SEZs requires augmentation.
Discuss the issues plaguing the success of SEZs with respect to taxation,
governing laws and administration.

2015

Answers
1.

3.

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D
15. Infrastructure

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Contents
Physical
Infrastructure.....................................................................
................................................... 301
Road...............................................................................
................................................................. 301
Challenges: .......................................................................
.......................................................... 301
Government
reforms/initiatives: ..............................................................
................................. 301
Examples:..........................................................................
.......................................................... 301
Railways ..........................................................................
................................................................ 302
Challenges: .......................................................................
.......................................................... 302
Government
reforms/initiatives: ..............................................................
................................. 302
Civil
Aviation ..........................................................................
......................................................... 302
Challenges: .......................................................................
.......................................................... 302
Government
reforms/initiatives: ..............................................................
................................. 303
Ports .............................................................................
.................................................................. 303
Challenges: .......................................................................
.......................................................... 303
Government
reforms/initiatives: ..............................................................
................................. 303
Inland Water
Transport .........................................................................
......................................... 304
Challenges: .......................................................................
.......................................................... 304
Government
reforms/initiatives: ..............................................................
................................. 304
Electricity .......................................................................
................................................................. 304
Challenges: .......................................................................
.......................................................... 305
Government
reforms/initiatives: ..............................................................
................................. 305
Digital
Infrastructure ....................................................................
...................................................... 305
Telecommunications ................................................................
...................................................... 305
Challenges: .......................................................................
.......................................................... 305
Government
reforms/initiatives: ..............................................................
................................. 306
Examples:..........................................................................
.......................................................... 306
Digital Public
Infrastructure.....................................................................
....................................... 306
Challenges: .......................................................................
.......................................................... 306
Government
Reforms/Initiatives:...............................................................
................................ 306
Key Government
Initiatives .......................................................................
......................................... 307
National Infrastructure Pipeline
(NIP) .............................................................................
............... 307
Public-Private Partnership
(PPP) .............................................................................
....................... 307
Benefits of
PPP: ..............................................................................
............................................ 307
Types of
PPP: ..............................................................................
................................................ 307
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Factors to be considered while designing a
PPP: ....................................................................... 309
Examples of successful PPP Projects in
India .............................................................................
309
Criticism of
PPP:...............................................................................
........................................... 310
Infrastructure Development of Urban and Rural
Areas: ................................................................ 310
Previous Years Mains
Questions .........................................................................
............................... 312

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Chapter 15
Infrastructure
The Indian economy has grown to become the fifth largest globally, and its
infrastructure has played
a critical role in accelerating this progress. Quality infrastructure is essential
for sustaining economic
growth and increasing productivity and efficiency. Additionally, infrastructure
development has a
significant impact on poverty reduction and supports rural and agricultural
development.

Physical Infrastructure
Road

The road infrastructure includes the construction, maintenance, and operation of

highways,
expressways, and other major roads throughout the country. India has the second-
largest road network
in the world, spanning over 5.5 million kilometers.

Challenges:

1. Lack of adequate funding: Financing for road projects is a major challenge, as

the government
often struggles to secure the necessary funds for construction and maintenance.
2. Poor road conditions: Many of India's roads are in poor condition, leading to
safety concerns
and difficulties for vehicles to travel on them.
3. Congestion: Traffic congestion is a major issue on many of India's roads,
leading to increased
travel time and reduced efficiency for transport of goods and people.

Government reforms/initiatives:

1. Bharatmala Project: This is a government initiative to improve the quality of

national highways
in India, including the construction of new highways and the improvement of
existing ones.
2. Pradhan Mantri Gram Sadak Yojana (PMGSY): This scheme is aimed at improving
rural road
connectivity in India, by providing funds for the construction and maintenance of
rural roads.
3. Toll-Operate-Transfer (TOT) model: The government has introduced this model to
monetize the
road assets built using public funds. Under this model, the private sector can take
over the
operation and maintenance of public highways for a period of time, after which they
are
transferred back to the government.

Examples:

Some examples of major road infrastructure projects in India include:

•

The Golden Quadrilateral: This is a network of highways connecting the major cities
of Delhi,
Mumbai, Chennai, and Kolkata, covering a total distance of 5,846 kilometers.
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•
•

The Yamuna Expressway: This is a 165-kilometer-long six-lane expressway that

connects Noida
to Agra, reducing travel time between the two cities from over four hours to around
two hours.
The Mumbai-Pune Expressway: This is a six-lane expressway connecting Mumbai and
Pune,
reducing travel time between the two cities from around six hours to around three
hours.

Railways

The Indian Railways is one of the largest railway networks in the world, covering
around 68,000
kilometers of track and transporting more than 23 million passengers daily. It is a
crucial part of India's
transportation system, connecting people and goods across the country.

Challenges:

1. Capacity: One of the biggest challenges for the Indian Railways is capacity, as
it struggles to keep
up with the increasing demand for transportation. Many trains run over capacity,
leading to
discomfort for passengers.
2. Safety: Another challenge is safety, as the rail network is often prone to
accidents, especially
during the monsoon season when tracks get flooded, and landslides occur.
Additionally, the
outdated infrastructure and equipment pose safety risks to passengers.
3. Modernization: The Indian Railways has been slow to modernize, with many of its
systems and
processes remaining outdated. This makes it difficult to provide quality service to
passengers,
and also affects the ability to increase capacity.

Government reforms/initiatives:

1. Modernization: The government has launched several initiatives to modernize the

Indian
Railways, including the introduction of high-speed trains, such as the Vande Bharat
Express, and
the implementation of new technologies like the Train Collision Avoidance System
(TCAS).
2. Safety: To address the safety concerns, the government has initiated several
measures,
including the elimination of unmanned level crossings, the installation of CCTV
cameras in trains
and stations, and the introduction of the Emergency Medical Services (EMS) system
in trains.
3. Investment: The government has also increased its investment in the Indian
Railways, with a
focus on upgrading infrastructure, improving passenger amenities, and increasing
capacity. For
example, the Dedicated Freight Corridor (DFC) project, which aims to increase the
speed and
volume of freight transportation.
Civil Aviation

The civil aviation sector in India includes airports, airlines, and other related
services that are
responsible for transporting passengers and goods within the country and
internationally.

Challenges:

1. Infrastructure: India faces challenges in terms of infrastructure development,

particularly with
regards to airport capacity and maintenance.
2. Competition: The aviation industry in India is highly competitive, with both
domestic and
international airlines vying for market share.
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3. Rising fuel costs: As the cost of aviation fuel continues to rise, airlines are
facing increasing
pressure to keep ticket prices low while still remaining profitable.
4. Regulatory challenges: The aviation industry is heavily regulated, and airlines
must comply with
a range of safety and security standards.

Government reforms/initiatives:

1. Regional Connectivity Scheme: The Indian government has launched a scheme to

improve
regional connectivity by subsidizing airlines to operate on underserved routes.
2. UDAN: UDAN, or the Ude Desh Ka Aam Nagrik scheme, is aimed at making air travel
affordable
and accessible for all Indians. The scheme includes measures such as capping
airfares on
regional routes and providing financial incentives for airlines to operate on these
routes.
3. Privatization of airports: The Indian government has been privatizing airports
across the country,
with the aim of improving efficiency and service quality.
4. Open skies policy: The Indian government has implemented an open skies policy,
which allows
foreign airlines to operate more freely in the Indian market. This has led to
increased
competition and lower ticket prices for consumers.

Ports

Ports play a vital role in the country's economic growth. These are facilities
where ships can dock to
load and unload cargo. India has a long coastline of over 7,500 kilometers, and the
country's ports
handle more than 90% of its international trade by volume and 70% by value.

Challenges:

1. Insufficient capacity and outdated technology are some of the significant

challenges faced by
Indian ports. As a result, they often face congestion, leading to delays in cargo
movement.
2. The lack of adequate hinterland connectivity and inadequate last-mile
connectivity to ports
creates a bottleneck in the overall logistics chain.
3. High turnaround times and the lack of modern facilities, such as container
terminals, hinder the
efficient handling of cargo at ports.
4. Issues related to land acquisition, environmental clearances, and security
concerns pose
challenges to the development of new ports and port-led projects.

Government reforms/initiatives:

1. The Sagarmala Program was launched by the government to develop India's ports
and maritime
sector by improving port infrastructure, connectivity, and logistics to reduce
logistics cost and
time.
2. The government has also allowed 100% FDI in the port sector to attract
investments and
develop new ports.
3. The Ministry of Shipping has undertaken several initiatives to promote the use
of digital
technology in the port sector to enhance efficiency and transparency.

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4. The government has also taken steps to improve the ease of doing business in the
port sector by
reducing the number of documents required for import and export, simplifying
customs
procedures, and reducing cargo dwell time at ports.
For example, the Jawaharlal Nehru Port Trust (JNPT) in Mumbai is one of the largest
container ports
in India. It handles more than half of the country's container traffic. The JNPT
has undertaken several
initiatives to enhance its capacity and efficiency, such as the construction of a
new container terminal
and the implementation of a Direct Port Delivery system to reduce cargo dwell time.

Inland Water Transport

Inland water transport (IWT) refers to the movement of goods and people via rivers,
canals, and
other inland waterways. In India, Inland Water Transport plays a crucial role in
connecting various
regions and promoting trade and commerce.
•
•
•

India has an extensive network of inland waterways, including five major rivers:
the Ganga,
Brahmaputra, Godavari, Krishna, and Mahanadi.
The total length of navigable inland waterways in India is around 20,000 km, which
includes rivers,
canals, backwaters, and creeks.
Inland water transport is primarily used for transporting bulk goods such as coal,
iron ore, food
grains, fertilizers, and petroleum products.

Challenges:

1. Inadequate infrastructure and lack of modernization have been major challenges

for the IWT sector
in India.
2. The low depth of many waterways and inadequate dredging make it difficult for
larger vessels to
operate.
3. Limited access to funding and lack of private sector participation have also
hampered the growth of
the sector.

Government reforms/initiatives:

1. The Jal Marg Vikas Project (JMVP) is a major initiative aimed at developing the
National Waterway-1
(NW-1) on the Ganga River, which spans 1,390 km from Haldia in West Bengal to
Varanasi in Uttar
Pradesh. The project includes the construction of new multi-modal terminals,
modernization of
existing infrastructure, and dredging of the river to make it navigable for larger
vessels.
2. The government has also introduced several policy measures to promote private
sector participation
in the IWT sector, including the granting of infrastructure status to the sector,
allowing for 100% FDI
under the automatic route, and providing tax incentives to private players.
3. The National Waterway Act, 2016, which declared 111 waterways as national
waterways, is another
major initiative aimed at promoting IWT in India.

Electricity

Electricity plays a vital role in powering the nation's homes, industries, and
economy. Electricity is
generated through various sources such as coal, natural gas, hydro, wind, and solar
power plants. The
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electricity generated is then transmitted and distributed through a network of
power lines,
transformers, and substations to reach consumers in homes and businesses.

Challenges:

1. Inadequate power supply in many parts of the country, leading to frequent power
cuts and load
shedding.
2. High transmission and distribution losses due to outdated infrastructure and
theft.
3. Uneven distribution of power supply, with rural areas often facing power
shortages and poor quality
of electricity.
4. Dependence on non-renewable sources of energy such as coal, leading to
environmental concerns
and carbon emissions.
5. Lack of investment in renewable energy sources such as solar and wind power.

Government reforms/initiatives:

1. The government has launched the "Power for All" initiative with the aim of
providing electricity
access to all households in the country by 2022.
2. Various schemes have been launched to promote renewable energy such as the
National Solar
Mission, which aims to achieve 100 GW of solar power capacity by 2022.
3. The government has also introduced measures to improve the efficiency of the
power sector such as
Ujwal DISCOM Assurance Yojana (UDAY), which aims to improve the financial health of
distribution
companies (DISCOMs) by reducing their losses and improving operational
efficiencies.
4. Smart grid technologies are being implemented to improve the efficiency and
reliability of the
power system.
5. Initiatives are being taken to promote energy conservation and demand-side
management through
schemes like the Energy Conservation Building Code (ECBC) and the Perform, Achieve
and Trade
(PAT) scheme.

Digital Infrastructure
Telecommunications

Telecommunications enables communication over long distances through the use of

various
technologies like phones, internet, and other wireless communication methods. This
industry is crucial
to modern society, as it allows people to stay connected and access information
from anywhere in the
world. In India, the telecommunications sector has seen rapid growth in recent
years, with the
government taking various initiatives to improve connectivity across the country.

Challenges:

1. High competition: There are several players in the market, leading to intense
competition among
telecom operators.
2. Infrastructure: Despite the growth in recent years, there is still a need for
more infrastructure
development to reach remote areas of the country.
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3. Digital divide: The digital divide in India is a major challenge, as many people
in rural areas still do
not have access to basic telecommunications services.

Government reforms/initiatives:

1. National Optical Fiber Network (NOFN): This initiative aims to provide high-
speed broadband
connectivity to all gram panchayats (village councils) in India.
2. BharatNet: This project aims to connect all villages in India with high-speed
broadband.
3. Spectrum auction: The government has held spectrum auctions to allocate radio
frequencies to
telecom operators, thereby enabling them to provide better services to customers.
4. Digital India: This initiative aims to transform India into a digitally
empowered society and
knowledge economy by providing universal access to digital services.

Examples:

Some of the major players in the Indian telecommunications market include Reliance
Jio, Bharti
Airtel, Vodafone Idea, and BSNL. These companies offer a range of services,
including mobile,
broadband, and enterprise solutions. With the help of government initiatives, the
sector has seen rapid
growth in recent years, with more and more people gaining access to high-speed
internet and other
communication services. For example, Reliance Jio disrupted the market by offering
free calls and data,
leading to a price war among telecom operators and making data more affordable for
the average
Indian.

Digital Public Infrastructure

Digital public infrastructure refers to a range of digital services, platforms, and

tools that are used to
provide citizens with access to various government services and information. These
include platforms
for online payments, e-governance portals, digital identity systems, and more.

Challenges:

1. Lack of access to technology and infrastructure in some parts of the country,

particularly in rural
areas.
2. Cybersecurity concerns, including the risk of data breaches and identity theft.
3. Limited awareness and understanding of digital services among some citizens,
particularly those
who are older or less tech-savvy.

Government Reforms/Initiatives:

1. The government's Digital India initiative aims to transform India into a

digitally empowered society
and knowledge economy. This includes initiatives to improve digital infrastructure
and connectivity,
promote digital literacy, and develop e-governance systems.
2. The Aadhaar digital identity system, launched in 2009, provides citizens with a
unique 12-digit
identification number that can be used to access a range of government services and
benefits.
3. The Unified Payments Interface (UPI) system, launched in 2016, allows citizens
to make instant and
secure digital payments from their bank accounts using their mobile phones.
4. The National Knowledge Network (NKN) is a high-speed network that connects
academic and
research institutions across India, providing them with access to digital resources
and tools.
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Key Government Initiatives
National Infrastructure Pipeline (NIP)

The National Infrastructure Pipeline (NIP) is a significant initiative by the

Indian government aimed
at improving the country's overall quality of life and driving economic growth. It
focuses on providing
world-class infrastructure across the nation to support India's aspiration of
becoming a $5 trillion
economy by the financial year 2025. The NIP encompasses both economic and social
infrastructure
projects, and its main objectives are to attract domestic and foreign direct
investments and enhance
project preparations.

Public-Private Partnership (PPP)

Public-Private Partnership (PPP) is a collaborative arrangement between the

government and
private sector entities to develop and operate infrastructure projects. In PPPs,
the private sector brings
in investments, technology, and expertise, while the government provides regulatory
support and
access to public resources. PPPs are used to address funding constraints,
accelerate project
implementation, and enhance efficiency in delivering public services.

Benefits of PPP:

1. Efficient Project Execution: PPPs leverage the private sector's expertise in

project management
and execution, leading to faster and more efficient implementation of
infrastructure projects.
2. Risk Sharing: Risks related to design, construction, and operations are shared
between the
government and private partners, reducing the burden on public finances.
3. Innovation and Technology: Private sector involvement often brings innovative
technologies and
practices, enhancing the quality and sustainability of infrastructure.
4. Access to Capital: PPPs attract private investments, bridging the funding gap
and reducing the
burden on government budgets.
5. Quality Service Delivery: PPPs promote better service delivery as private
entities are incentivized
to meet performance targets and ensure customer satisfaction.

Types of PPP:
PPP Model

BOT (BuildOperate-Transfer)

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Explanation

Private entity designs, builds, and operates the infrastructure for a

specific period, after which it transfers ownership to the government. The
private partner generates revenue during the concession period. This
model is suitable for revenue-generating projects like toll roads and

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bridges.

BOOT (Build-OwnOperate-Transfer)

Similar to BOT, but the private entity owns the infrastructure during
the concession period, and the transfer to the government happens later.
BOOT is applicable for projects with a long-term revenue stream, such as
power plants and water supply systems.

BOLT (Build-OwnLease-Transfer)

The private entity owns and operates the infrastructure, leasing it to

the government for a specified period. Ownership transfers to the
government at the end of the lease term. This model is used for projects
with a shorter concession period and assured revenue streams.

DBFOT (DesignBuild-FinanceOperate-Transfer)

The private partner is responsible for designing, building, financing,

and operating the infrastructure for a specific period before transferring it
to the government. DBFOT is suitable for projects where the private
partner is involved in the complete lifecycle of the project.

BOT Annuity

In this model, the private partner builds and operates the

infrastructure and receives annuity payments from the government over
the concession period. The ownership transfers to the government at the
end of the concession period. BOT Annuity is commonly used in road and
highway projects.

Lease Contract
Model

The private entity constructs the infrastructure and leases it to the

government for an agreed period. The government pays lease rentals to
the private partner for the use of the infrastructure. Ownership remains
with the private partner during the lease period.

EPC (Engineering,
Procurement, and

The private entity is responsible for the engineering, procurement, and

construction of the infrastructure. After completion, ownership is
transferred to the government, and the private partner is not involved in

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Construction) Model

operation and maintenance. EPC is common for one-time capital projects.

HAM (Hybrid
Annuity Model)

HAM is a variation of BOT Annuity, where the government and private

partner share the project cost in a predetermined ratio. The government
pays the private partner in the form of annuities over the concession
period. This model is used to reduce the financial burden on the private
partner.

Factors to be considered while designing a PPP:

1. Project Viability and Bankability: The project's feasibility and financial

viability are crucial
considerations. A thorough assessment of revenue streams, cost projections, and
potential risks is
necessary to attract private investment.
2. Risk Allocation: Proper allocation of risks between the public and private
partners is vital for the
success of a PPP. Identifying and mitigating risks related to design, construction,
operation, and revenue
generation is essential.
3. Regulatory and Policy Framework: A stable and supportive regulatory environment
is
essential for attracting private investors. Clear policies, transparent bidding
processes, and a robust legal
framework contribute to the success of PPP projects.
4. Value for Money (VFM): The project's VFM analysis compares the cost of
delivering the project
through PPP with the traditional public procurement method. A thorough VFM
assessment ensures that
the PPP offers an optimal solution in terms of cost and quality.
5. Stakeholder Engagement: Involvement of all relevant stakeholders, including
local
communities, civil society, and government agencies, are crucial for the smooth
implementation and
sustainability of PPP projects.

Examples of successful PPP Projects in India

1. Delhi Metro: One of the most notable PPP projects in India is the Delhi Metro,
which has been a
significant success in providing efficient and reliable public transportation in
the capital city. The
partnership between the Delhi Metro Rail Corporation (DMRC) and private companies
has resulted in
the development of a modern and extensive metro network.
2. Indira Gandhi International Airport, Delhi: The modernization and expansion of
the Delhi
airport through a PPP model have been a success story. GMR-led consortium partnered
with the
Airports Authority of India (AAI) to develop the airport into one of the busiest
and most well-equipped
airports in the country.
3. Mumbai-Pune Expressway: The Mumbai-Pune Expressway is India's first six-lane
concrete highspeed expressway, connecting Mumbai and Pune. It was developed under
the PPP model and has
significantly reduced travel time between the two cities.

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Criticism of PPP:

1. Cost Overruns and Delays: PPP projects are sometimes criticized for cost
overruns and delays in
implementation. Private partners may face financial difficulties or underestimate
project complexities,
leading to project delays and increased costs.
2. Lack of Transparency: Critics argue that some PPP contracts lack transparency in
terms of
project details, financial arrangements, and risk-sharing. This opacity can raise
concerns about potential
conflicts of interest and mismanagement.
3. Imbalanced Risk Allocation: In some cases, the risk allocation between the
public and private
partners is perceived as unfair, putting an undue burden on the government or
taxpayers.
4. Profit Motive vs. Public Interest: Critics contend that private partners may
prioritize profit
motives over public interest, leading to higher user fees, reduced service quality,
or reluctance to take
on unprofitable projects.
5. Limited Accountability: PPPs may face challenges in terms of accountability and
oversight. The
private partner's contractual obligations and performance may be difficult to
enforce, especially if there
are no proper mechanisms for addressing non-compliance.
6. Shifting Liability to the Future: PPPs can involve long-term concession
agreements,
transferring the responsibility of maintaining and operating the infrastructure to
future generations. This
may lead to deferred liabilities for the government and result in significant
financial burdens for future
administrations.
7. Political and Regulatory Risks: Changes in government policies, regulations, or
political
priorities during the project's concession period can create uncertainties and
impact the profitability of
private partners.

Infrastructure Development of Urban and Rural Areas:

1. Smart Cities Mission: The Smart Cities Mission aims to develop 100 cities across
India as "smart
cities" by integrating technology and infrastructure to enhance urban living. The
mission focuses on
areas such as efficient urban mobility, improved public services, sustainable
energy solutions, and
enhanced citizen engagement. It seeks to create vibrant and livable urban spaces
with better
connectivity and amenities.
2. Rurban Mission: Shyama Prasad Mukherji Rurban Mission focuses on developing
rural areas
with urban amenities and services while retaining the essence of rural life. The
mission aims to create
"Rurban" clusters, which are rural areas that have the economic activities and
quality of life of urban
areas while preserving their rural character. It seeks to bridge the rural-urban
divide and promote
sustainable and inclusive development.
3. AMRUT (Atal Mission for Rejuvenation and Urban Transformation): AMRUT aims to
improve the infrastructure in cities and towns, focusing on areas such as water
supply, sewerage, urban
transport, and green spaces. The mission emphasizes the provision of basic
amenities to urban areas
and promotes sustainable urban development.
4. Pradhan Mantri Awas Yojana (PMAY): PMAY is a flagship scheme that aims to
provide
affordable housing to all by 2022. It focuses on constructing houses for the
economically weaker
sections, low-income groups, and middle-income groups in both urban and rural
areas. The scheme also
supports the development of necessary infrastructure and facilities in housing
colonies.

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5. Rural Infrastructure Development Fund (RIDF): RIDF is a fund created by the
National Bank
for Agriculture and Rural Development (NABARD) to support rural infrastructure
development projects
in areas such as irrigation, roads, bridges, and rural electrification.

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Previous Years Mains Questions
1.

Do you think India will meet 50 percent of its energy needs from renewable 2022
energy by 2030? Justify your answer. How will the shift of subsidies from
fossil fuels to renewables help achieve the above objective? Explain.

2.

Why is Public Private Partnership (PPP) required in infrastructural projects? 2022

Examine the role of PPP model in the redevelopment of Railway Stations in
India.

3.

Explain the meaning of investment in an economy in terms of capital

formation. Discuss the factors to be considered while designing a
concession agreement between a public entity and a private entity.

2020

4.

Examine the developments of Airports in India through Joint Ventures

under the Public-Private Partnership(PPP) model. What are the challenges
faced by the authorities in this regard?

2017

5.

What are ‘Smart Cities’? Examine their relevance for urban development in
India. Will it increase rural-urban differences? Give arguments for ’Smart
Villages’ in the light of PURA and RURBAN Mission.

2016

6.

Explain how private-public partnership agreements, in longer gestation

infrastructure projects, can transfer unsuitable liabilities to the future.
What arrangements need to be put in place to ensure that successive
generations’ capacities are not compromised?

2014

7.

Write a note on India’s green energy corridor to alleviate the problem of

conventional energy.

2013

8.

Adoption of the PPP model for infrastructure development of the country

has not been free of criticism. Critically discuss the pros and cons of the
model.
2013

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16. Service

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Contents
Historical evolution of the service sector in
India: ............................................................................
. 316
Pre-Independence
Era: ..............................................................................
..................................... 316
Post-Independence
Era: ..............................................................................
................................... 316
Economic Reforms and Liberalization
(1990s): ..........................................................................
.... 316
Services-Led Growth (2000s-
Present): .........................................................................
.................. 316
Digital Revolution and Service
Innovation: .......................................................................
............. 317
Contribution of Service Sector to India’s
Economy ...........................................................................
. 317
High-frequency indicators to track the growth momentum of India's services
sector: .................... 317
Government policies and initiatives to promote the service
sector .................................................. 318
Services Exports from India Scheme
(SEIS): ...........................................................................
........ 318
Make in
India: ............................................................................
..................................................... 318
Start-up India and Stand-up
India: ............................................................................
..................... 318
Digital
India:.............................................................................
....................................................... 318
Skill
India:.............................................................................
........................................................... 319
Smart
Cities: ...........................................................................
........................................................ 319
Ease of Doing
Business: .........................................................................
......................................... 319
International Agreements and Trade
Promotion: ........................................................................
.. 319
Challenges faced by the service sector in
India:.............................................................................
.... 319
Opportunities for the service sector in
India: ............................................................................
........ 320
Key sub-sectors in India’s Services
Sector ............................................................................
.............. 320
Tourism and Hotel
industry ..........................................................................
.................................. 320
Challenges: .......................................................................
.......................................................... 320
Government
Initiatives: ......................................................................
........................................ 321
Real
Estate ............................................................................
.......................................................... 321
Challenges: .......................................................................
.......................................................... 321
Government
Initiatives: ......................................................................
........................................ 321
IT-BPM
industry ..........................................................................
.................................................... 321
Challenges: .......................................................................
.......................................................... 322
Government
Initiatives: ......................................................................
........................................ 322
E-
commerce...........................................................................
......................................................... 322
Challenges: .......................................................................
.......................................................... 322
Government
Initiatives: ......................................................................
........................................ 323
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Digital Financial
Services ..........................................................................
...................................... 323
Challenges: .......................................................................
.......................................................... 323
Government
Initiatives: ......................................................................
........................................ 323
Space
Sector ............................................................................
....................................................... 323
Challenges: .......................................................................
.......................................................... 324
Government
Initiatives: ......................................................................
........................................ 324
Examples:..........................................................................
.......................................................... 324
Shipping and Port
Services ..........................................................................
................................... 324
Challenges: .......................................................................
.......................................................... 324
Government
Initiatives: ......................................................................
........................................ 325
Examples:..........................................................................
.......................................................... 325
Banking and Financial
Services ..........................................................................
............................. 325
Challenges: .......................................................................
.......................................................... 325
Government
initiatives: ......................................................................
........................................ 326
Previous Years Prelims
Questions .........................................................................
............................. 327
Previous Years Mains
Questions .........................................................................
............................... 327

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Chapter 16
Service
The service sector of the economy refers to those parts of the economy that are
involved in the
production and distribution of services rather than tangible goods. This sector
includes a wide variety of
businesses, such as restaurants, banks, healthcare providers, entertainment
companies, transportation
services, and many others.

Historical evolution of the service sector in India:

Pre-Independence Era:

Prior to India's independence in 1947, the economy was primarily agrarian. Limited
services existed,
mainly consisting of traditional services like retail, trade, and transportation.

Post-Independence Era:

After independence, India adopted a planned economy model, emphasizing

industrialization and the
public sector's role in economic development. The service sector initially played a
secondary role in the
economy. Basic services like banking, insurance, and government services began to
develop during this
period. The early stage of service sector development was driven by state-owned
enterprises and public
sector entities.

Economic Reforms and Liberalization (1990s):

The liberalization policies allowed foreign direct investment (FDI) in various

service sectors, which
facilitated the entry of multinational companies. The Information Technology (IT)
and Information
Technology Enabled Services (ITeS) industry saw significant growth during this
period, becoming a major
contributor to the services sector. The banking and financial services sector also
experienced significant
reforms, including the entry of private banks and the establishment of the
Securities and Exchange
Board of India (SEBI).

Services-Led Growth (2000s-Present):

In the 21st century, India experienced robust services-led economic growth, with
the service sector
becoming the largest contributor to GDP.
• The IT and ITeS industry, along with business process outsourcing (BPO) services,
witnessed
exponential growth, leading to the rise of India as a global outsourcing hub.
• The healthcare, education, and hospitality sectors also expanded rapidly to meet
the growing
demands of a rising middle class.
• E-commerce emerged as a disruptive force, transforming the retail and logistics
landscape.

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•
•

India's tourism industry flourished, attracting both domestic and international

travelers,
contributing significantly to the services sector's growth.
The government focused on skill development and encouraged entrepreneurship to
further
boost the services sector.

Digital Revolution and Service Innovation:

•

The digital revolution in the 21st century further accelerated the growth of the
service sector in
India.
Technological advancements, such as mobile internet and smartphone penetration,
enabled the
rapid expansion of digital services, including e-commerce, fintech, and online
entertainment
platforms.
Online service delivery and digital payment systems witnessed widespread adoption,
promoting
financial inclusion and access to services for a larger population.

Contribution of Service Sector to India’s Economy

According to the World Bank, the service sector contributes around 54% of India's
gross domestic
product (GDP).
According to the National Statistical Office of India, the service sector employed
around 34% of
India's workforce in 2019-20.

High-frequency indicators to track the growth momentum of India's services sector:

HighFrequency
Indicator

Definition

Interpretation

An index that measures the health of an

A reading above 50 indicates
economy's services sector based on survey
expansion, while below 50 indicates
Services responses from purchasing managers from various
contraction. A higher reading
service industries, which asks them about the level
PMI
suggests that the services sector is
of activity in their industry, such as new orders,
growing.
employment, and production.
Bank
Credit
Services
Sector

A higher bank credit to the

services sector indicates that banks
to
The amount of money that banks lend to the
are confident about the sector's
services sector
growth prospects and are willing to
lend more money to it.

World
Services
Trade

An increase in world services

The exchange of services between different trade can indicate a growing demand
for India's services sector, which can
countries
translate into higher growth.

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HighFrequency
Indicator
FDI
Services

Definition

Interpretation

An increase in FDI in the services

sector can indicate that foreign
in
Foreign investment in India's services sector,
investors are bullish about the
either in the form of equity or debt
sector's growth prospects, which can
lead to more investment and growth.

Government policies and initiatives to promote the service sector

Services Exports from India Scheme (SEIS):
•
•

SEIS provides financial incentives to service exporters to promote trade in

services. It offers
exporters rewards in the form of duty credit scrips based on their foreign exchange
earnings.
The scheme supports various service sectors, including IT/ITeS, financial services,
logistics,
healthcare, and tourism.

Make in India:
•

The 'Make in India' initiative aims to boost manufacturing and promote India as a
global
manufacturing hub. However, the services sector is also critical for the success of
this program, as
services provide essential inputs to the manufacturing process.
The initiative identifies thrust areas in both manufacturing and services sectors,
encouraging
growth and investment in these sectors.

Start-up India and Stand-up India:

•

'Start-up India' and 'Stand-up India' initiatives aim to promote entrepreneurship

and innovation in
the country, fostering the growth of start-ups across various service sectors.
The initiatives provide various benefits and incentives to start-ups, such as tax
exemptions, easier
regulatory compliance, access to funding, and incubation support.

Digital India:
•
'Digital India' aims to transform India into a digitally empowered society. It
encourages the use of
technology and digital platforms to enhance service delivery and improve access to
digital services
across various sectors.

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Skill India:

The 'Skill India' initiative focuses on skill development and vocational training
to create a skilled
workforce in various service sectors, meeting industry demands and enhancing
employability.

Smart Cities:

The Smart Cities Mission aims to develop modern and sustainable cities that provide
efficient and
quality services to residents. It involves technology-driven initiatives and
services to improve urban
living.

Ease of Doing Business:

The government has taken several measures to improve the ease of doing business in
India,
simplifying regulatory processes, reducing bureaucratic hurdles, and facilitating a
conducive
business environment for service providers.

International Agreements and Trade Promotion:

•

The government negotiates and signs international trade agreements to enhance

market access
for Indian service providers in foreign countries. These agreements aim to promote
trade in
services and create opportunities for service exporters.
India participates in international fairs and exhibitions to showcase its service
capabilities and
attract foreign investments and collaborations.

Challenges faced by the service sector in India:

1. Infrastructure Deficiencies: Inadequate and outdated infrastructure, including
transportation
networks, ports, and communication facilities, can lead to delays, inefficiencies,
and higher operational
costs for service providers.
2. Skills Mismatch and Talent Retention: There may be a disconnect between the
skills possessed
by the workforce and the skills required by the rapidly evolving service sectors.
Additionally, retaining
skilled talent in the face of competition can be a challenge.
3. Regulatory and Bureaucratic Hurdles: Complex and cumbersome regulatory
processes, along
with bureaucratic inefficiencies, can hinder ease of doing business and pose
challenges for service
providers, especially for start-ups and small businesses.
4. Financing Constraints: Access to adequate financing can be a challenge for
service providers,
especially for small and medium-sized enterprises (SMEs), leading to limited growth
opportunities and
expansion.
5. Security Concerns: The service sector, particularly IT and financial services,
faces cybersecurity
risks, data breaches, and other security concerns that can undermine customer trust
and confidence.
6. Policy and Taxation Issues: Inconsistent policies, changes in regulations, and
complex tax
structures can create uncertainty and affect business planning and investment
decisions in the service
sector.

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Opportunities for the service sector in India:
1. Growing Domestic Market: India's large and rapidly growing population presents a
vast
domestic market for various services, including healthcare, education, financial
services, retail, and
entertainment.
2. Rising Middle Class and Urbanization: The expanding middle-class population and
increasing
urbanization are leading to greater consumer spending on various services, creating
opportunities for
retail, hospitality, healthcare, and entertainment sectors.
3. Digital Transformation: The increasing adoption of digital technologies and
internet
penetration is driving the demand for digital services, such as e-commerce,
fintech, IT/ITeS, and digital
entertainment.
4. IT and IT-Enabled Services (ITeS): India's strong presence in the IT and ITeS
sector provides
opportunities for software development, business process outsourcing, and IT
consulting services for
global clients.
5. Healthcare and Pharmaceuticals: The healthcare sector offers opportunities for
medical
services, diagnostic centers, telemedicine, medical tourism, and pharmaceutical
research and
manufacturing.
6. Education and Training: The growing demand for quality education and skill
development
presents opportunities for educational institutions, vocational training centers,
and e-learning platforms.
7. Financial Services: India's banking and financial services sector has
significant potential for
growth, including digital banking, insurance, asset management, and financial
inclusion initiatives.
8. Tourism and Hospitality: India's diverse cultural heritage and natural
attractions offer
opportunities for tourism and hospitality services, including hotels, tour
operators, and travel agencies.
9. Start-up Ecosystem: The government's initiatives to promote entrepreneurship and
start-ups
create opportunities for innovative service providers in various sectors, including
technology,
healthcare, and logistics.
10. Skill Development and Human Capital: India's young and growing population
provides a
skilled workforce for various service industries, attracting global companies
seeking cost-effective talent.
Key sub-sectors in India’s Services Sector
Tourism and Hotel industry

The tourism and hotel industry in India is an important sub-sector of the service
sector, which
includes a wide range of businesses, such as hotels, resorts, tour operators,
travel agencies, restaurants,
and more.

Challenges:

1. Limited infrastructure and facilities in certain regions

2. Seasonal fluctuations in demand due to weather and holidays
3. Safety concerns for tourists in certain areas

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Government Initiatives:

1. The government has launched several initiatives to promote tourism and improve
infrastructure, such as the Swadesh Darshan scheme and the Incredible India
campaign.
2. The Ministry of Tourism has also established the Incredible India Tourist
Helpline, which
provides 24/7 assistance to tourists in multiple languages.
3. The government has also implemented measures to improve safety and security for
tourists,
such as the introduction of Tourist Police and the adoption of the e-Visa system
for easier and
faster visa processing.

Real Estate

The real estate sector refers to the buying, selling, renting, and leasing of
properties such as land,
buildings, and homes.

Challenges:
1.
2.
3.
4.
5.

Lack of transparency and accountability in the sector

High cost of borrowing and limited access to financing
Delayed regulatory approvals and complicated land acquisition processes
Inadequate infrastructure such as transportation and utilities
Lack of skilled labor and workforce training

Government Initiatives:

1. Real Estate (Regulation and Development) Act (RERA) - This act aims to regulate
the real
estate sector and improve transparency by requiring developers to register their
projects and
provide timely updates to buyers.
2. Pradhan Mantri Awas Yojana (PMAY) - This scheme aims to provide affordable
housing to all
and offers subsidies and incentives for developers and buyers.
3. Smart City Mission - This mission aims to develop 100 smart cities across India
with modern
infrastructure and amenities to attract investment and spur economic growth.
4. Real Estate Investment Trusts (REITs) - This allows investors to invest in
income-generating
real estate assets and provides an alternative source of funding for developers.
5. Digital India - This initiative aims to improve digital infrastructure and
connectivity, which can
help the real estate sub-sector by enabling online transactions, reducing
paperwork, and
improving communication.

IT-BPM industry

The IT-BPM industry is a key sub-sector of India's service sector that includes
information
technology (IT) services, business process management (BPM), and software
development. This industry
plays a significant role in India's economy and has been a major contributor to the
country's growth in
recent years.

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Challenges:
1.
2.
3.
4.

Competition from other countries like China, the Philippines, and Vietnam
Rising costs of skilled labor and infrastructure
Regulatory issues and policy uncertainty in some markets
The need to adapt to new technologies and changing customer preferences

Government Initiatives:

1. Digital India: A program aimed at promoting the use of technology and digital
infrastructure in
the country.
2. Skill India: A program to train and upskill the Indian workforce, including
those working in the
IT-BPM industry.
3. Make in India: A program to promote manufacturing and investment in India,
including in the
IT-BPM sector.
4. Startup India: A program aimed at promoting entrepreneurship and startups in
India.
The IT-BPM industry has played a major role in India's economic growth and
development.
1.

2.
3.

Tata Consultancy Services (TCS): A multinational IT services company based in

Mumbai, India.
TCS is one of the largest employers in the IT-BPM sector and has a presence in over
46
countries.
Infosys: A global leader in IT and BPM services based in Bangalore, India. Infosys
has a
presence in over 50 countries and employs over 270,000 people.
Wipro: A multinational IT services company based in Bangalore, India. Wipro
provides services
in areas such as IT consulting, software development, and business process
outsourcing. It has
a presence in over 50 countries and employs over 185,000 people.

E-commerce

E-commerce involves buying and selling goods and services over the internet. It has
become
increasingly popular in recent years due to the convenience and accessibility it
provides to consumers
and businesses alike. E-commerce in India can take many forms, including online
marketplaces, social
media platforms, and individual websites.

Challenges:

1. Infrastructure: The lack of reliable internet connectivity and logistics

infrastructure can make it
difficult for e-commerce companies to deliver goods and services to customers in a
timely and
efficient manner.
2. Payment methods: Many consumers in India still prefer to pay for goods and
services in cash,
which can make it difficult for e-commerce companies to facilitate transactions
online.
3. Competition: The e-commerce market in India is highly competitive, with many
domestic and
international players vying for market share. This can make it difficult for
smaller companies to
compete and succeed.
4. Regulatory environment: E-commerce in India is subject to a complex regulatory
environment
that can make it difficult for companies to operate and expand.
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Government Initiatives:

1. Digital India: The Digital India program aims to transform India into a
digitally empowered
society and economy by improving internet connectivity and digital infrastructure.
2. Startup India: The Startup India program aims to promote entrepreneurship and
innovation in
India by providing support and incentives to startups, including those in the e-
commerce sector.
3. National E-Commerce Policy: The government is currently working on a national e-
commerce
policy that aims to create a regulatory framework that is conducive to the growth
of ecommerce in India.
4. FDI in e-commerce: The government has allowed 100% FDI in e-commerce
marketplaces, which
has helped to attract investment and promote competition in the sector.

Digital Financial Services

Digital financial services refer to financial services that are delivered through
digital channels, such
as mobile apps, internet banking, and digital wallets. In India, digital financial
services have been
growing rapidly in recent years, driven by factors such as the rise of smartphones,
increasing internet
penetration, and the government's push towards a cashless economy.

Challenges:

1. Lack of digital infrastructure in rural areas: Many people in rural areas do not
have access to the
internet or smartphones, which can limit their ability to use digital financial
services.
2. Low levels of financial literacy: Some people may not understand how to use
digital financial
services or may be hesitant to use them due to security concerns.
3. Cybersecurity risks: Digital financial services are vulnerable to cyber attacks,
which can put
customers' personal and financial information at risk.

Government Initiatives:

1. Digital India: The Digital India initiative aims to provide digital

infrastructure and services to all
citizens, including those in rural areas.
2. Jan Dhan Yojana: This scheme aims to promote financial inclusion by providing
bank accounts
to all households in India, with a focus on those in rural areas. This has helped
to increase the
adoption of digital financial services among previously unbanked populations.
3. UPI and BHIM: The Unified Payments Interface (UPI) and Bharat Interface for
Money (BHIM)
are digital payment systems that allow users to transfer money between bank
accounts using
their mobile phones.
4. Cybersecurity initiatives: The government has also taken steps to improve
cybersecurity, such
as launching the Cyber Swachhta Kendra to provide free antivirus software to
citizens and
setting up a National Cyber Coordination Centre to monitor cyber threats.

Space Sector

The Indian Space Research Organisation (ISRO) is the primary agency responsible for
space
exploration, satellite technology, and other related activities. The space sector
plays an important role in
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various industries, including telecommunications, navigation, agriculture, defense,
and disaster
management.

Challenges:
1.
2.
3.
4.

Limited funding and resources for space exploration and research

Intense competition from other countries in the space industry
Complex regulatory environment and bureaucratic procedures
Technological advancements and innovation require significant investments

Government Initiatives:

1. The establishment of the Indian National Space Promotion and Authorization

Centre (IN-SPACe)
to provide a one-stop-shop for all space-related activities, including licensing,
clearances, and
authorizations.
2. The launch of the Space Technology Incubation Centres (S-TIC) program to support
startups and
entrepreneurs in the space sector by providing funding, mentorship, and access to
resources
and facilities.
3. The government's "Make in India" initiative aims to encourage domestic
manufacturing and
production of space-related technologies and equipment, to reduce dependence on
foreign
imports and strengthen the country's self-reliance in this sector.

Examples:
-

India's Mars Orbiter Mission, launched in 2013, was a major achievement for the
country's
space sector, making it the first nation in the world to successfully enter Mars'
orbit on its first
attempt.
The Indian Regional Navigation Satellite System (IRNSS), also known as NavIC, is a
navigation
system developed by ISRO that provides accurate positioning and timing services to
users in
India and the surrounding regions, supporting various applications such as
transportation,
disaster management, and location-based services.
ISRO's commercial arm, Antrix Corporation, has signed agreements with various
international
clients to provide satellite launch services, including the launch of 104
satellites in a single
mission in 2017, setting a new world record.

Shipping and Port Services

Shipping and port services involve the transportation of goods and people by sea,
as well as the
management and operation of ports that facilitate such transportation. The shipping
and port industry is
an important contributor to India's economy, as it enables international trade,
creates employment
opportunities, and generates revenue.

Challenges:

1. Infrastructure: One of the major challenges faced by the shipping and port
industry in India is
the lack of adequate infrastructure, including ports, terminals, and transportation
networks,
which can lead to delays and inefficiencies in the system.
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2. Competition: The shipping and port industry is highly competitive, with many
players vying for
market share. This can lead to price wars and reduced profitability for some
businesses.
3. Technology: The industry is also facing challenges related to the adoption of
new technologies,
such as automation, digitalization, and blockchain, which can improve efficiency
and reduce
costs.

Government Initiatives:

1. Sagarmala: The Indian government has launched the Sagarmala initiative to

modernize the
country's ports and shipping infrastructure. The initiative aims to develop new
ports, improve
existing ones, and create a seamless transportation network that connects ports to
the
hinterland.
2. National Maritime Development Program: The government has also launched the
National
Maritime Development Program to promote the development of the shipping and port
industry.
The program provides financial support for infrastructure projects, technology
adoption, and
skill development.
3. Ease of Doing Business: The government has taken steps to improve the ease of
doing business
in the shipping and port industry. This includes simplifying regulatory processes,
reducing
paperwork, and introducing digital initiatives such as e-billing and e-payment
systems.

Examples:

- The Mundra Port in Gujarat is one of the largest ports in India, handling over
200 million tonnes of
cargo annually. The port is operated by the Adani Group, which has invested heavily
in developing its
infrastructure and facilities.
- The Maersk Line, a Danish shipping company, is one of the leading players in the
Indian shipping
industry. The company operates over 20 vessels in India and has a significant
presence in the country's
major ports.
- The Cochin Shipyard in Kerala is a government-owned shipbuilding and repair
facility that has built
over 200 vessels for domestic and international customers. The shipyard has
recently launched a new
facility to manufacture LNG carriers, which is expected to boost its revenue and
competitiveness.

Banking and Financial Services

The Banking and Financial Services sector includes various services related to
banking, such as
deposit-taking, lending, and investment, as well as insurance and other financial
services. This subsector is a critical part of the Indian economy, as it
facilitates economic growth by providing businesses
and individuals with access to capital and financial services.

Challenges:

1. Non-performing assets: This refers to loans that are not being repaid by
borrowers, which can
create financial difficulties for banks and other financial institutions.
2. Lack of financial inclusion: Many people in India, particularly those in rural
areas, do not have
access to basic financial services like banking and insurance.

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3. Cybersecurity risks: As financial transactions increasingly move online, there
is a growing risk of
cyber attacks that could compromise the security of financial systems.

Government initiatives:

1. Pradhan Mantri Jan Dhan Yojana: This initiative aims to promote financial
inclusion by
providing every household in India with a bank account.
2. Digital India: This initiative seeks to promote the use of technology in various
sectors, including
banking and financial services, to improve efficiency and reduce costs.
3. Insolvency and Bankruptcy Code: This law provides a framework for the timely
resolution of
non-performing assets and helps to strengthen the financial system by promoting
accountability
and transparency.

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Previous Years Prelims Questions
1.

With reference to foreign-owned e-commerce firms operating in India, which of

the following statements is/are correct?

2022

1. They can sell their own goods in addition to offering their platforms as
market-places.
2. The degree to which they can own big sellers on their platforms is
limited.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Previous Years Mains Questions

1.

National urban transport policy emphasizes on moving people instead of

moving vehicles. Discuss critically the success of various strategies of the
government in this regard.

Answers
1.

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2014
17. External Sector

Say hello! |

@Ketanomy
Contents
Balance of
Payments ..........................................................................
................................................ 331
Components of Balance of
Payments ..........................................................................
.................. 331
Current
Account ...........................................................................
.................................................. 332
Current Account
Balance ...........................................................................
................................. 333
Capital
Account............................................................................
................................................... 333
Capital Account
Balance ...........................................................................
.................................. 335
Balance of Payments Equilibrium and
Disequilibrium ....................................................................
... 335
Measures to Correct BOP
Surplus: ..........................................................................
....................... 336
Measures to Correct BOP
Deficit:...........................................................................
........................ 336
Foreign Exchange
Reserve ...........................................................................
....................................... 336
Components of Forex
Reserves ..........................................................................
............................ 337
Foreign
Currencies.........................................................................
............................................. 337
Gold ..............................................................................
.............................................................. 337
Special Drawing Rights
(SDRs) ............................................................................
........................ 338
Reserves Tranche Position
(RTP) .............................................................................
................... 338
Exchange
Rate ..............................................................................
...................................................... 339
Types of Foreign Exchange
Rates .............................................................................
.......................... 339
Fixed exchange rate
system ............................................................................
............................... 339
Flexible Exchange Rate
System ............................................................................
.......................... 340
Managed Floating Exchange
Rate ..............................................................................
.................... 341
Other types of Exchange Rate
System ............................................................................
............... 342
Devaluation/Revaluation vs
Depreciation/Appreciation: ........................................................
...... 342
Pros of Currency
Devaluation: ......................................................................
.............................. 343
Cons of Currency
Devaluation: ......................................................................
............................. 343
J-
Curve .............................................................................
............................................................... 343
NEER &
REER...............................................................................
........................................................ 344
NEER (Nominal Effective Exchange
Rate): ............................................................................
.......... 344
REER (Real Effective Exchange
Rate): ............................................................................
................. 345
Purchasing Power Parity (PPP) exchange
rate ..............................................................................
..... 345
Foreign Direct Investment
(FDI) .............................................................................
............................ 345
Instruments through which FDI is received in
India: ...................................................................... 346
FDI has had a significant impact on various sectors of the
economy: ........................................... 346
Foreign Direct Investment (FDI) vs Foreign Portfolio Investment
(FPI): ............................................ 348
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Foreign Portfolio Investment
(FPI) .............................................................................
........................ 349
American Depositary Receipts
(ADRs):............................................................................
............... 349
Global Depositary Receipts
(GDRs): ...........................................................................
.................... 349
Masala
Bonds: ............................................................................
.................................................... 350
Capital
Flight ............................................................................
........................................................... 350
Steps by the Government to Prevent Capital
Flight: .................................................................. 350
Credit Rating
Agencies...........................................................................
............................................. 351
Currency
Convertibility ....................................................................
................................................... 352
Current Account
Convertibility:....................................................................
.................................. 352
Capital Account
Convertibility: ...................................................................
.................................... 352
Type of trade
agreements: .......................................................................
.......................................... 353
Preferential Trade Agreement
(PTA): ............................................................................
................. 353
Free Trade Agreement
(FTA): ............................................................................
............................. 353
Comprehensive Economic Cooperation Agreement (CECA) / Comprehensive Economic
Partnership
Agreement
(CEPA): ...........................................................................
.................................................... 353
Customs
Union: ............................................................................
.................................................. 353
Common
Market: ...........................................................................
................................................ 353
Economic
Union: ............................................................................
................................................ 354
Foreign Trade Policy
2023 ..............................................................................
.................................... 354
Previous Years Prelims
Questions .........................................................................
............................. 356
Previous Years Mains
Questions .........................................................................
............................... 364

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Chapter 17
External Sector
In an increasingly interconnected world, the external sector plays a pivotal role
in shaping the
economic fortunes of nations. The flow of goods, services, and capital across
international borders has
become a defining feature of our globalized economy. As economies become more
integrated,
understanding the dynamics and implications of the external sector is essential for
policymakers,
businesses, and individuals alike.

Balance of Payments
The Balance of Payments (BoP) is a systematic record of all economic transactions
between a
country and the rest of the world during a specified time period, typically a
financial year. The BOP
follows the double entry bookkeeping system, ensuring that every transaction is
recorded as both a
credit and a debit entry, thereby maintaining balance.
The balance of payments is divided into two main components: the current account
and the capital
account.

Components of Balance of Payments

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Balance of
Payment
Current
Account
Visibles

Invisibles

Capital
Account

Trade in
Goods

FDI

Trade in
Services

Portfolio
Investment

Income
Flows

Bilateral
Loans

Transfers

Multilateral
Loans
ECBs
Bank
Accounts
Buy & sale of
assets

Current Account

Current account refers to the flow of current transactions or regular economic

activities that occur
within a specific period, such as a year. It primarily focuses on the exchange of
goods, services, income,
and transfers between a country and the rest of the world. These transactions are
considered part of the
ongoing, day-to-day economic interactions that contribute to a country's current
economic
performance. The term "current" highlights the timeliness and relevance of these
transactions to the
country's current economic situation.
The current account is divided into two main components: the visible account (trade
in goods) and
the invisible account (trade in services, income, transfers).
Let's break down the components of the current account.

1. Trade in Goods: This component includes exports and imports of physical goods.
When India
sells goods like machinery, textiles, or automobiles to other countries, it counts
as an export. On the
other hand, when India buys goods like oil, electronics, or food products from
abroad, it counts as an
import. The difference between the value of exports and imports is known as the
trade balance. If India
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exports more goods than it imports, it will have a trade surplus. Conversely, if
India imports more goods
than it exports, it will have a trade deficit, which implies more money flowing out
of the country.
Inflow: India exports automobiles worth $1 million to a foreign country.
Outflow: India imports machinery worth $2 million from a foreign country.
2. Trade in Services: This component includes services like tourism,
transportation, software
exports, and financial services. When people from other countries visit India as
tourists or when Indian
software companies provide services to clients abroad, it adds to the export of
services. Conversely,
when Indians travel abroad or when foreign companies provide services in India, it
adds to the import of
services.
Inflow: A foreign company pays ₹50 lakh to an Indian software company for software
development
services.
Outflow: An Indian citizen pays $10,000 to a foreign tourism agency for a vacation
package.
3. Income Flows: This component accounts for the income earned by Indians from
their
investments abroad and income earned by foreigners from their investments in India.
It includes factors
such as interest, dividends, profits, and wages. For instance, if an Indian company
has investments in a
foreign country and earns profits or dividends from those investments, it adds to
India's income from
abroad. Conversely, if foreign companies or individuals earn income from their
investments in India, it
adds to India's income payable to foreigners.
Inflow: An Indian software company receives $1 million in royalty payments from a
foreign company
for the use of its patented technology.
Outflow: Foreign investors receive dividends of ₹50 lakh from their investments in
Indian
companies.
4. Transfers: This component includes unilateral transfers of money between India
and other
countries. It comprises remittances from Indians working abroad, foreign aid
received, and grants or
donations. For instance, if an Indian working in the United States sends money back
home to support
their family, it adds to the transfer inflows. Conversely, if India provides
financial aid to another country
or contributes to international organizations, it adds to the transfer outflows.
Inflow: Indian workers abroad send $2 million in remittances back to their families
in India.
Outflow: An Indian resident donates ₹10 lakh to a charitable organization in a
foreign country.

Current Account Balance

Current Account Balance = (Trade in Goods) + (Trade in Services) + (Income Flows) +

(Transfers)

If the total value of exports, income, and transfers exceeds the total value of
imports, India will have
a current account surplus. Conversely, if the total value of imports, income, and
transfers exceeds the
total value of exports, India will have a current account deficit.

Capital Account

On the other hand, Capital account refers to the flow of capital or financial
transactions involving
changes in ownership of financial assets and liabilities. It encompasses various
types of investments,
including foreign direct investment (FDI), portfolio investment, loans, and debt
transactions. The capital
account captures the movement of capital across borders, indicating changes in the
ownership of
financial resources and the acquisition or disposal of assets. The term "capital"
emphasizes the financial
nature of these transactions and the impact they have on a country's overall
capital stock and wealth.
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Let's explore the capital account in detail:
1. Foreign Direct Investment (FDI):

FDI refers to investments made by foreign entities in the domestic economy. It

involves the
acquisition of a substantial ownership stake in a company or the establishment of
new ventures. FDI can
be both inbound (foreign investments in India) and outbound (Indian investments in
foreign countries).
Inflow: A multinational corporation based in the United States establishes a
manufacturing plant in
India. They invest $10 million in setting up the plant and become a majority
shareholder in the Indian
company.
Outflow: An Indian company expands its operations overseas by acquiring a
pharmaceutical
company in Germany for €20 million.
2. Portfolio Investment:

Portfolio investment involves the purchase and sale of financial assets, such as
stocks, bonds, and
mutual funds, in foreign markets. Unlike FDI, portfolio investment does not entail
direct control or
ownership of the invested entity.
Inflow: A Foreign investor buys $1,000 worth of shares in a company listed on the
Bombay Stock
Exchange.
Outflow: An Indian investor buys $5,000 worth of shares in a technology company
listed on the New
York Stock Exchange.
3. Bilateral Loans:

Bilateral loans are funds borrowed by one country from another country on a
government-togovernment basis. These loans are often provided for specific
purposes, such as infrastructure
development, economic reforms, or social projects.
Inflow: The Indian government secures a $100 million loan from the government of
Japan to finance
the construction of a high-speed railway project.
Outflow: The Indian government provides a $50 million loan to a neighboring country
for disaster
relief and reconstruction efforts.
4. Multilateral Loans:

Multilateral loans are funds borrowed by a country from international financial

institutions such as
the World Bank, International Monetary Fund (IMF), or regional development banks.
These loans are
often extended to countries facing economic challenges or to support development
initiatives.
Inflow: India receives a $500 million loan from the World Bank to improve access to
clean water and
sanitation in rural areas.
Outflow: The Indian government contributes $200 million to a regional development
bank to
support infrastructure projects in other member countries.
5. External Commercial Borrowings (ECBs):

ECBs refer to loans taken by domestic entities from foreign lenders. These loans
can be either in the
form of bank loans or bond issuances and are utilized for various purposes, such as
infrastructure
development or business expansion.
Inflow: An Indian company secures a $5 million loan from a foreign bank to fund the
construction of
a new factory.
Outflow: An Indian bank gives a $5 million loan to a foreign company to construct a
production unit.
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6. Bank Accounts:

Bank accounts held by non-residents are also recorded in the capital account. These
accounts can be
in the form of Non-Resident External (NRE) accounts, Non-Resident Ordinary (NRO)
accounts, or Foreign
Currency Non-Resident (FCNR) accounts.
Inflow: An NRI (Non-Resident Indian) transfers $10,000 from their foreign bank
account to an NRE
account in India.
Outflow: An Indian resident deposits ₹5 lakh in a foreign currency account
maintained in a bank
located overseas.
7. Buy and Sale of Assets:

The purchase and sale of physical assets, such as real estate, land, and natural
resources, between
residents and non-residents are recorded in the capital account.
Inflow: A foreign investor purchases a commercial property in India for ₹2 crore.
Outflow: An Indian investor purchases a piece of real estate in a foreign country
for $1 million.

Capital Account Balance

The capital account balance represents the net difference between the credit and
debit entries in
the capital account. It measures the overall flow of capital into and out of a
country over a specific
period.
If the credit entries in the capital account exceed the debit entries, the capital
account balance will
be positive, indicating a net inflow of capital.
Conversely, if the debit entries exceed the credit entries, the capital account
balance will be
negative, indicating a net outflow of capital.

Balance of Payments Equilibrium and Disequilibrium

BOP
Condition

Description

The BOP is in equilibrium when the sum of the current account balance and capital
account balance is zero. This indicates that a country's total payments for imports
and
BOP
other international transactions are equal to its total receipts from exports and
other
Equilibrium inflows.

BOP
Surplus

A BOP surplus occurs when the sum of the current account balance and capital
account balance is positive. This indicates that a country is receiving more funds
from its
international transactions than it is paying out. A surplus often implies an
accumulation of
foreign assets and claims on other countries.
BOP
Deficit

A BOP deficit occurs when the sum of the current account balance and capital
account
balance is negative. This indicates that a country is paying out more funds in its
international transactions than it is receiving. A deficit often implies a reliance
on external
borrowing or the sale of domestic assets to finance the shortfall.

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Measures to Correct BOP Surplus:
•

•
•

Encourage domestic consumption: Promote policies that stimulate domestic spending

and
investment to reduce reliance on external demand.
Boost imports: Implement measures to liberalize imports and remove trade barriers,
making
foreign goods more accessible to domestic consumers.
Fiscal policy adjustments: Implement fiscal measures such as reducing government
spending or
adjusting tax policies to stimulate domestic demand and reduce the surplus.

Measures to Correct BOP Deficit:

•

•
•
•
•
•

Promote exports: Develop export-oriented strategies by identifying competitive

advantages,
investing in productive sectors, and providing support to domestic exporters.
Import substitution: Encourage the production of goods that can replace imported
products,
reducing the reliance on foreign goods and narrowing the trade deficit.
Enhance competitiveness: Implement policies to improve the efficiency and
competitiveness of
domestic industries, such as investing in technology, research, and development.
Fiscal consolidation: Adopt measures to control government spending, reduce fiscal
deficits,
and manage public debt, which can help stabilize the overall economy.
Attract foreign capital: Encourage foreign direct investment to boost capital
inflows, which can
help finance the deficit and support economic growth.
Exchange rate adjustments: May consider adjusting the exchange rate to make exports
more
competitive and imports relatively more expensive, aiming to rebalance trade flows.

Foreign Exchange Reserve

Foreign exchange reserves, also known as forex reserves, are the foreign currencies
and other assets
held by a country's central bank. These reserves serve as a financial buffer and
are crucial for ensuring
stability in international trade and managing economic risks.
1. BOP Surplus:

When a country has a BOP surplus, it means that the inflows of foreign currency
into the country
exceed the outflows.
In the case of a BOP surplus, the country's central bank may choose to increase its
foreign
exchange reserves. It does so by buying the excess foreign currency entering the
country's economy.
These additional reserves serve as a cushion to stabilize the country's currency
exchange rate and can be
used to pay for imports, service foreign debt, or address any future balance of
payment deficits.

2. BOP Deficit:

Conversely, a BOP deficit occurs when the outflows of foreign currency from a
country exceed the
inflows.
When a country experiences a BOP deficit, its foreign exchange reserves may
decline. To cover the
deficit, the central bank may need to utilize its foreign exchange reserves by
selling foreign currency in
exchange for the domestic currency. This intervention aims to support the domestic
currency's value,
prevent excessive depreciation, and ensure stability in international trade and
financial transactions.
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If a BOP deficit persists and foreign exchange reserves deplete significantly, it
can lead to
economic challenges, including a currency crisis, reduced import capacity, and
difficulties in meeting
external obligations. In such cases, countries may seek external assistance,
implement policy
adjustments, or take measures to address the underlying issues causing the deficit.
A country's ability to
finance its imports using its foreign exchange reserves is known as Import cover.
Overall, foreign exchange reserves play a crucial role in managing the effects of
BOP deficits or
surpluses. They provide a buffer to mitigate potential imbalances, maintain
currency stability, and
support the overall economic well-being of a country.

Components of Forex Reserves

Foreign Currencies

Foreign currencies represent the holdings of different currencies, such as the US

dollar, euro, yen
and renminbi by the central bank.

Accumulation of Foreign Currencies: Central banks accumulate foreign currencies in

various ways:

Trade Surpluses: For example, if India exports software services to Europe and
receives euros in
return, the Reserve Bank of India (RBI) may acquire those euros to build up its
foreign currency
reserves.
Capital Inflows: When foreign investors invest in a country, they often bring in
foreign currencies.
The central bank may then acquire and hold these currencies as part of the foreign
exchange
reserves.
International Borrowings: When a country borrows funds from international
institutions or
issues bonds in foreign markets, it receives foreign currencies as the loan
proceeds. These
currencies can be added to the reserves.

•
•

Role of Foreign Currencies:

Foreign currencies serve several purposes within a country's foreign exchange

reserves:
Exchange Rate Stability: Having a sufficient reserve of foreign currencies allows a
central bank to
intervene in the foreign exchange market. By buying or selling foreign currencies,
the central bank
can influence the value of its domestic currency and maintain stability in the
exchange rate.
International Trade & External Obligations: Foreign currencies can be used to
conduct
international trade or fulfill external obligations, such as repaying foreign debt
or meeting import
payments. For instance, if India needs to import oil from Saudi Arabia, it can use
its foreign
currencies to purchase the necessary Saudi riyals.
Confidence and Credibility: Holding an adequate amount of foreign currencies
enhances a
country's credibility and reassures international investors and trading partners.
It demonstrates
the country's ability to honor its financial commitments and strengthens its
standing in global
financial markets.

Gold

Gold refers to the physical metal in the form of gold bars or coins that a
country's central bank holds
as part of its reserve assets. Gold has been considered a valuable asset throughout
history, and central
banks hold it for several reasons:
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Store of Value: Gold is seen as a reliable store of value over time. Its physical
nature and limited supply
make it resistant to inflation and currency fluctuations.

International Acceptance: Gold is universally accepted as a form of payment and is

traded on global
markets. If a country faces a shortage of foreign currency, it can sell gold to
obtain the needed funds.

Confidence and Stability: Gold holdings can boost confidence in a country's

monetary system. It signals
that the central bank has a tangible and highly valued asset, which can enhance
trust in the currency and
contribute to financial stability.
Crisis Hedge: During times of economic uncertainty or financial crises, gold often
retains its value or
even appreciates. Central banks hold gold as a hedge against adverse events,
providing a cushion to
weather economic storms.
If RBI acquires additional foreign currency through various means, such as exports,
investments, or
borrowing, it may choose to diversify its reserves by purchasing gold. This
purchase could be from
international markets or domestic sources. The RBI would then store the physical
gold securely in its
vaults.

In times of need, such as during a balance of payments crisis or to meet external

obligations, the RBI
has the option to sell a portion of its gold holdings. This sale would generate
foreign currency that can
be used to stabilize the currency, support imports, or repay international debt.

Special Drawing Rights (SDRs)

SDRs are a type of international reserve asset created and allocated by the
International Monetary
Fund (IMF). They serve as a supplement to the foreign exchange reserves held by
member countries,
including India. SDRs are not a physical currency but rather a form of accounting
entry used in
international transactions between central banks and the IMF.
The value of SDRs is based on a basket of major international currencies, including
the US dollar,
euro, Chinese yuan, Japanese yen, and British pound. The IMF periodically reviews
the currency
composition and weightings of this basket to ensure it reflects the global economic
landscape.
Let's say India has been allocated SDRs worth $5 billion by the IMF. These SDRs
represent India's
claim on the IMF and can be used to obtain foreign currencies from other countries
participating in SDR
transactions.
For instance, if India faces a sudden shortage of foreign currency due to increased
import payments,
it can utilize its SDR holdings. India could exchange its SDRs with another
country, receiving a foreign
currency, such as euros, in return. This transaction helps maintain liquidity and
ensures India can
continue to engage in international trade and meet its financial obligations.
Furthermore, SDRs also serve as a unit of account for international organizations
and can be used in
certain financial transactions among central banks and governments.

Reserves Tranche Position (RTP)

The Reserves Tranche Position refers to a country's quota or share in the

International Monetary
Fund (IMF). Each member country has a specific quota based on its economic size,
and this quota
determines its financial and voting rights within the IMF.
To illustrate this concept, let's take the example of India's Reserves Tranche
Position:
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Imagine that India's quota in the IMF is set at $10 billion. This means that India
has the right to
access up to $10 billion from the IMF whenever it faces a balance of payments
crisis or requires
additional foreign exchange reserves.
Now, it's important to note that the Reserves Tranche Position is not an actual
stock of foreign
exchange reserves held by the country. Instead, it represents a country's potential
claim on the IMF's
resources. So, if India encounters a severe economic situation, it can approach the
IMF and request
financial assistance up to the limit of its Reserves Tranche Position.
However, it's worth mentioning that utilizing the Reserves Tranche Position comes
with certain
conditions set by the IMF. These conditions typically involve implementing specific
economic and
structural reforms to address the underlying issues that led to the balance of
payments problem.

Exchange Rate
Foreign Exchange Rate refers to the rate at which one currency can be exchanged for
another
currency. It is important for international trade and transactions.
For instance, if someone from India wants to travel to the United States, they need
to convert their
Indian Rupees into US Dollars at the prevailing exchange rate. Similarly, if a
business in India wants to
import goods from Japan, they would need to convert their Indian Rupees into
Japanese Yen.
The foreign exchange rate is determined by the foreign exchange market, where
currencies are
bought and sold. The rates fluctuate constantly due to various factors, including
supply and demand,
economic conditions, interest rates, political events, and market sentiment.
Governments and central banks may also intervene in the foreign exchange market to
influence
exchange rates through various measures, such as buying or selling currencies,
implementing monetary
policies, or imposing capital controls.

Types of Foreign Exchange Rates

The three types of exchange rates are:

Fixed exchange rate system

The fixed exchange rate system involves the government setting a specific value for
its currency in
relation to another currency or a fixed standard like gold. The main goal is to
maintain stability in foreign
trade and capital flows. To achieve this, the government or central bank intervenes
in the foreign
exchange market, buying or selling foreign currency to maintain the fixed exchange
rate.
Under a fixed exchange rate system, the government needs to hold substantial
reserves of foreign
currencies to ensure it can intervene effectively. This system is also known as the
pegged exchange rate
system because one currency's value is tied to another currency. The fixed value of
a currency in terms
of another currency or gold is called the parity value.
In the past, two significant methods were used for fixed exchange rates:
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1. Gold Standard System (1870-1914): Countries defined the value of their
currencies in terms of
gold. Each currency had a fixed value based on its gold content. Exchange rates
were determined by
comparing the gold value of different currencies. For example, if 1 UK Pound
equaled 5 grams of gold
and 1 US Dollar equaled 2 grams of gold, the exchange rate would be £1 = $2.5.
2. Bretton Woods System (1944-1971): This system replaced the gold standard and
introduced the
US Dollar as the primary reserve currency. Countries fixed their currencies to the
US Dollar, which was
pegged to gold at a fixed price. The value of a currency was indirectly tied to
gold through its fixed
exchange rate with the US Dollar. The International Monetary Fund (IMF) played a
central role in
overseeing this system.
The fixed exchange rate system underwent significant changes and eventually gave
way to flexible
exchange rates in 1971. Flexible exchange rates allow the currency's value to
fluctuate freely based on
market forces. This system provides more flexibility but also introduces potential
exchange rate
volatility.
Merits of Fixed Exchange Rate System:

It ensures stability in the exchange rate. Thus it helps in promoting foreign

trade.

It helps the government to control inflation in the economy.

It stops speculating in the foreign exchange market.

It promotes capital movements in the domestic country as there are no uncertainties

about foreign
rates.

It helps in preventing capital outflow.

Demerits of Fixed Exchange Rate System:

•

It requires high reserves of gold. Thus it hinders the movement of capital or

foreign exchange.

It may result in the undervaluation or overvaluation of the currency.

•
It discourages the objective of having free markets.

The country which follows this system may find it difficult to tackle depression or
recession.

Flexible Exchange Rate System

The flexible exchange rate system, also known as the floating rate or free exchange
rate system, is
characterized by the exchange rate being determined by the forces of supply and
demand in the foreign
exchange market. Under this system, the government does not intervene in setting or
maintaining the
exchange rate.
The rate at which the demand for a foreign currency equals its supply is known as
the equilibrium
rate, par rate, or normal rate of foreign exchange.
The flexibility of the exchange rate allows it to fluctuate freely based on market
conditions, such as
changes in economic factors, interest rates, inflation rates, and investor
sentiment. This system allows for
a more market-driven determination of exchange rates.

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One advantage of the flexible exchange rate system is that it can help absorb
economic shocks and
adjust to changing economic conditions. For example, if a country's economy
experiences an increase in
exports, the demand for its currency may rise, causing an appreciation in the
exchange rate.
However, flexible exchange rates can also lead to increased volatility and
uncertainty in the currency
market. Exchange rate fluctuations can affect import and export prices, inflation,
and the
competitiveness of domestic industries.
Merits of Flexible Exchange Rate System
•

With the flexible exchange rate system, there is no need for the government to hold
any reserve.

It eliminates the problem of overvaluation or undervaluation of the currency.

It also enhances efficiency in the allocation of resources.

Demerits of the Flexible Exchange Rate System

•

It encourages speculation in the economy.

There is no stability in the economy as the exchange rate keeps on fluctuating as

per demand and
supply.

Under this, coordination of macro policies becomes inconvenient.

Managed Floating Exchange Rate

A managed floating exchange rate system is a combination of fixed and flexible

exchange rate
systems, also known as a hybrid system. In this system, the exchange rate is
primarily determined by
market forces but is stabilized by the central bank in cases of significant
appreciation or depreciation of
the domestic currency. India follows a managed floating exchange rate system.
Under a managed floating exchange rate system the central bank maintains reserves
of foreign
exchange to support the targeted exchange rate and ensure stability.
When a country deliberately manipulates the exchange rate by not adhering to the
rules and
regulations, it is known as dirty floating. However, under a managed floating
system, the central bank
follows proper regulations and guidelines to influence the exchange rate.
To illustrate how a managed floating exchange rate works, let's consider an
example.
o
o
o

India adopts a managed floating exchange rate system, and the RBI wants to maintain
the
exchange rate at $1 = ₹80.
The RBI sets a small fluctuation range, let's say from 78 to 82, within which no
intervention is
required.
If the value of the Indian rupee starts declining below 78 due to excess demand,
the RBI
intervenes by increasing the supply of rupees. It achieves this by selling rupees
for dollars and
acquiring more dollars.
On the other hand, if there is an excess supply of Indian rupees, causing the value
to increase
above 82, the RBI intervenes by increasing the demand for rupees. It does so by
exchanging
dollars for rupees and reducing its holdings of dollars.
Through these interventions, the RBI aims to maintain the exchange rate within the
targeted
range and stabilize the currency.
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The managed floating exchange rate system provides a balance between market-driven
exchange
rates and the need for stability in the domestic economy.

Other types of Exchange Rate System

Over the time period, because of the different changes in the global economic
events, the exchange
rate systems have evolved. Besides, fixed, flexible, and managed floating exchange
rate systems, the
other types of exchange rate systems are:

1. Adjustable Peg System: An exchange rate system in which the member countries fix
the exchange
rate of their currencies against one specific currency is known as Adjustable Peg
System. This
exchange rate is fixed for a specific time period. However, in some cases, the
currency can be
repegged even before the expiry of the fixed time period. The currency can be
repegged at a lower
rate; i.e., devaluation, or at a higher rate; i.e., revaluation of currency.
2. Wider Band System: An exchange rate system in which the member country can
change its
currency’s exchange value within a range of 10 percent is known as Wider Band
System. It means that
the country is allowed to devalue or revalue its currency by 10 percent to
facilitate the adjustments in
the Balance of Payments. For example, if a country has a surplus in its Balance of
Payments account,
then its currency can be appreciated by maximum of 10% from its parity value to
correct the
disequilibrium.
3. Crawling Peg System: An exchange rate system which lies between the floating
system and
adjustable peg system is known as Crawling Peg System. In this system, a country
can specify the
parity value for its currency and permits a small variation around that parity
value. This rate of parity
is adjusted regularly based on the requirements of the International Reserve of the
country and
changes in its money supply and prices.

Devaluation/Revaluation vs Depreciation/Appreciation:
Basis

Devaluation/Revaluation

Depreciation/Appreciation

Devaluation/Revaluation includes
reduction/increase in the value of
domestic currency in terms of foreign
currencies by the government under a
fixed exchange rate system.

Depreciation/Appreciation refers to the

decrease/increase in the value of
domestic currency in terms of foreign
currencies under a flexible exchange rate
system.

Exchange
Rate System

Fixed exchange rate system.

Flexible exchange rate system.

Occurrence

It occurs due to the government.

Meaning

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It occurs due to market forces of

demand and supply.
Pros of Currency Devaluation:
•

•
•
•

Boosts Export Competitiveness: Devaluation makes a country's exports relatively

cheaper in
international markets, which can increase demand for its goods and services. This
can lead to
higher export volumes and potentially stimulate economic growth.
Increases Tourism: Devaluation can make a country a more affordable destination for
international tourists, as their currencies can buy more local currency.
Reduces Trade Deficit: Devaluation can help reduce a country's trade deficit by
making imports
more expensive.
Helps Domestic Industries: Expensive imports encourage consumers to choose locally
produced
goods, boosting domestic industries and employment.

Cons of Currency Devaluation:

•
•
•
•

Increases Import Costs: This can lead to inflationary pressures and higher costs
for consumers
and businesses that rely on imports.
Capital Flight and Investor Uncertainty: Currency devaluation can lead to capital
flight, where
investors move their funds out of the country to avoid potential losses. This can
result in
instability in financial markets and reduced foreign investment.
Debt Burden Increases: If a country has significant external debt denominated in
foreign
currencies, devaluation can increase the burden of debt repayment. More domestic
currency is
needed to pay off the debt, which can strain the government's finances.
Negative Impact on International Reputation: Frequent or excessive devaluations may
undermine a country's credibility and international reputation. It can raise
concerns among
investors and affect foreign trade relations.

J-Curve

The J-curve is a concept commonly used in economics to describe the pattern of a

country's trade
balance following a currency devaluation/depreciation. It suggests that in the
short term, after a
depreciation of a country's currency, its trade balance may worsen before
improving.
This is because there is usually a time lag between the currency depreciation and
the response of
foreign buyers to take advantage of the cheaper exports. Meanwhile, the cost of
imports, such as raw
materials and foreign goods, becomes more expensive due to the weakened rupee.
The combination of higher import costs and a delayed response from export markets
often results in
a temporary worsening of trade balance immediately after the currency depreciation.
This is the "dip" in
the J-curve. It creates a pattern that resembles the letter "J" when graphed.

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However, as time passes, the effects of the currency depreciation begin to take
hold. The increased
competitiveness of exports gradually leads to higher demand from foreign buyers.
Simultaneously, the
higher cost of imports encourages domestic industries to switch to domestically
produced alternatives
or find ways to become more self-sufficient. These adjustments eventually help
improve trade balance,
leading to a recovery and an upward swing in the J-curve.
It's important to note that the J-curve effect may not always occur or be
immediate. The time it
takes for a country's trade balance to improve after a currency depreciation
depends on various factors,
such as the elasticity of demand for its exports and imports, the competitiveness
of its industries, and
the overall state of the global economy.

NEER & REER

NEER (Nominal Effective Exchange Rate):

NEER represents the average value of a country's currency relative to a basket of

other currencies. It
provides an overview of the currency's overall performance against multiple trading
partners. NEER is
calculated using the following steps:

Step 1: Select a basket of currencies: The RBI determines a basket of currencies

that are significant
trading partners of India. At present RBI calculates NEER/REER using a 6-currency
basket and a 40currency basket.
Step 2: Assign weights to each currency: The RBI assigns weights to each currency
based on their
importance in India's international trade.
Step 3: Calculate the bilateral exchange rates: The RBI collects exchange rate data
between the Indian
rupee and the currencies in the chosen basket. It then calculates the bilateral
exchange rates for each
currency.
Step 4: Compute the NEER index: The NEER index is calculated by taking a weighted
average of the
bilateral exchange rates.
The NEER index provides an indication of the competitiveness of a country's
currency in the
international market. If the NEER index appreciates, it means the country's
currency is strengthening
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against the basket of currencies. Conversely, if the NEER index depreciates, it
means the country's
currency is weakening against the basket.

REER (Real Effective Exchange Rate):

REER is a measure that considers not only nominal exchange rates but also the
relative price levels
between countries. It adjusts the NEER for inflation differentials to provide a
more accurate assessment
of a country's international competitiveness. The RBI calculates the REER using the
following steps:

Step 1: Compute the NEER index as explained earlier.

Step 2: Adjust for relative price levels: The RBI takes into account the inflation
differential between India
and its trading partners. It adjusts the NEER index based on the price levels to
calculate the REER.
Currently, RBI takes the base year as 2015-16 to calculate inflation.
The REER provides insights into whether a country's currency is overvalued or
undervalued in
relation to its trading partners, considering both exchange rate movements and
inflation differentials.
Both NEER and REER are valuable tools for policymakers and analysts to assess a
country's exchange
rate dynamics, monitor competitiveness, and make informed decisions regarding
monetary and trade
policies. The RBI regularly calculates and monitors these indices to gauge the
performance of the Indian
rupee in the global context.

Purchasing Power Parity (PPP) exchange rate

The purchasing power parity (PPP) exchange rate is a way to compare the relative
value of
currencies between different countries. It takes into account the differences in
prices of goods and
services across countries and tries to measure the purchasing power of each
currency in terms of a
common basket of goods. In simpler terms, it means that if you convert the currency
of one country into
another, the amount you get should enable you to buy the same basket of goods and
services in both
countries.
Now, let's consider an example using India and the United States to understand PPP
exchange rate.
Suppose we compare the price of a hypothetical basket of goods that represents a
typical set of goods
and services that people consume in both countries. Let's assume the price of this
basket of goods is $20
in the United States and ₹1000 in India. This gives us a PPP exchange rate of 1 USD
= 50 INR.
The PPP exchange rate serves as a benchmark to compare the purchasing power between
countries,
but it may not always reflect the actual exchange rate in the foreign exchange
market.
For example, let's say the actual exchange rate in the foreign exchange market is 1
USD = 80 INR. In
this case, the Indian rupee would be considered undervalued.
Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) refers to the investment made by individuals,
companies, or entities
from one country into another country, with the intention of establishing a lasting
interest and control
in the business operations of the foreign country.
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Instruments through which FDI is received in India:
1.

2.

3.

4.

5.

Equity Investments: Foreign investors buy shares or stakes in Indian companies.

This provides
them ownership and control over a portion of the company's assets and operations.
For example,
a multinational company from the United States may invest in an Indian tech startup
by
purchasing a significant portion of its shares.
Joint Ventures: Indian company and foreign company come together to form a new
entity or
collaborate on a specific project. This allows for sharing of resources,
technology, expertise, and
risks. For instance, a Japanese automaker may form a joint venture with an Indian
automobile
manufacturer to produce cars specifically for the Indian market.
Mergers and Acquisitions (M&A): Foreign Company acquires or merges with an existing
Indian
company. This enables the foreign entity to gain control over the Indian company's
assets, market
share, and customer base. For example, a British pharmaceutical company may acquire
an Indian
pharmaceutical company to expand its presence in the Indian market.
Greenfield Investments: Greenfield investments involve setting up new businesses or
establishing new production facilities in India. Foreign investors build new
infrastructure,
factories, or offices from scratch. An example would be a Chinese electronics
manufacturer
establishing a new production plant in India to cater to the growing demand for
smartphones.
Financial Investments: FDI can also flow into India through financial instruments
such as foreign
portfolio investments (FPI) and foreign institutional investments (FII). These
involve investing in
financial markets, including stocks, bonds, and other securities. Foreign investors
may purchase
shares of Indian companies listed on stock exchanges or invest in government
securities.

FDI has had a significant impact on various sectors of the economy:

Manufacturing Sector: Many multinational companies have set up production units or

invested in
existing Indian companies. This has led to the transfer of technology, improved
infrastructure, and
increased job opportunities. For instance, the automobile sector has witnessed
substantial FDI, resulting
in the establishment of manufacturing plants by companies like Suzuki, Hyundai, and
Honda.
Information Technology (IT) Sector: Many global technology companies have
established their
presence in India by setting up development centers or outsourcing operations. This
has contributed to
the growth of the IT sector, increased exports, and the creation of high-skilled
job opportunities.
Companies like IBM, Microsoft, and Oracle have made significant investments in
India, leading to the
development of IT hubs like Bengaluru and Hyderabad.
Retail Sector: FDI has had a mixed impact on India's retail sector. In 2012, the
Indian government
allowed FDI in multi-brand retail, permitting foreign retailers to establish stores
in collaboration with
Indian partners. This has brought in investment, modern retail practices, and
improved supply chains.
However, it has also raised concerns about the impact on small traders and
traditional mom-and-pop
stores.
Banking and Finance Sector: International banks and financial institutions have
invested in Indian
banks or set up their subsidiaries. This has led to increased capital inflows,
improved access to financial
services, and the introduction of new products and technologies. Examples include
Citibank, Standard
Chartered, and HSBC, which have established a significant presence in India.
Telecommunications Sector: FDI has revolutionized India's telecommunications
sector. With the
liberalization of the industry, foreign telecom companies have invested in network
infrastructure,
leading to improved connectivity and lower tariffs. Companies like Vodafone, Bharti
Airtel, and Idea
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(now merged with Vodafone) have made substantial FDI investments, driving the
growth of mobile and
internet services across the country.
Renewable Energy Sector: Foreign investors have shown interest in solar and wind
energy projects,
contributing to India's goal of increasing the share of renewable energy in its
overall energy mix. FDI has
brought in capital, expertise, and technology, facilitating the development of
renewable energy
infrastructure and reducing dependency on fossil fuels.
Defense Sector: Foreign Direct Investment (FDI) in India's defense sector has
significant impacts,
including technology transfer and collaboration with foreign defense companies such
as Lockheed
Martin, Boeing, and Dassault Aviation. These collaborations bring advanced
technologies, enhance
indigenous defense capabilities, and facilitate the development of advanced defense
systems.
Additionally, FDI boosts domestic manufacturing through initiatives like the joint
venture between Tata
Advanced Systems and Lockheed Martin for manufacturing F-21 fighter jets in India,
while also
supporting research and development efforts through partnerships like that between
Saab and the
Indian Institute of Technology-Madras. FDI in defense creates employment
opportunities, fosters skill
development, and enhances India's export potential by facilitating collaborations
and access to global
markets.
While India has signed many Memoranda of Understanding (MoUs) to attract FDI, there
are still
some challenges that hinder its smooth inflow:
1.
2.
3.
4.

5.
6.

Bureaucracy and Regulatory Complexity: Bureaucratic red tape and complex regulatory
procedures in India can delay investment projects and increase operational costs.
Infrastructure Deficiencies: Insufficient transport, logistics, and power
infrastructure can hamper
the smooth functioning of businesses.
Complex Tax Structure: This complexity can create uncertainty for foreign
investors.
Inconsistent Policy Environment: Foreign investors value a stable and predictable
policy
environment. However, India has witnessed frequent changes in policies and
regulations, leading
to uncertainty. For example, changes in regulations related to land acquisition,
environmental
clearances, or foreign ownership limits in certain sectors can disrupt investment
plans and create
doubts among investors.
Legal and Judicial Challenges: Lengthy legal proceedings and complex dispute
resolution
processes can lead to delays in resolving business-related conflicts. This can
discourage foreign
investors who prefer a transparent and efficient legal framework.
Cultural and Language Barriers: India's cultural diversity and language variations
can pose
challenges for foreign investors. Understanding and adapting to local customs,
languages, and
business practices can be a daunting task, especially for companies with limited
experience in the
Indian market. Building effective communication channels and local networks becomes
crucial to
navigate these challenges.

Remedial steps taken by Government of India to overcome these challenges:

1.

2.

Streamlining Bureaucracy and Regulatory Processes: The government has made efforts
to
simplify bureaucratic procedures and streamline regulatory processes to attract
more FDI.
Initiatives like "Make in India" and "Ease of Doing Business" aim to reduce red
tape and provide a
conducive environment for foreign investors. For instance, the introduction of
online portals and
single-window clearance mechanisms has made it easier for investors to obtain
permits, licenses,
and clearances.
Infrastructure Development: Government has focused on improving physical and
digital
infrastructure across the country. Investments have been made in areas such as
roads, railways,

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3.

4.

5.

6.

airports, ports, and power supply. For example, the development of dedicated
freight corridors,
expansion of port capacities, and initiatives like BharatNet for rural broadband
connectivity are
aimed at enhancing logistics and communication infrastructure, making it more
attractive for
foreign investors.
Tax Reforms and Stability: Introduction of the Goods and Services Tax (GST) aimed
to simplify
the tax system by replacing multiple indirect taxes with a single unified tax. This
reform reduces
tax complexities and promotes ease of doing business for foreign investors.
Additionally, efforts
have been made to bring stability and predictability to the tax regime by reducing
retrospective
taxation and providing clarity on tax regulations.
Policy Consistency and Transparency: The government has recognized the importance
of policy
consistency and transparency in attracting FDI. For instance, the introduction of
the National
Investment and Manufacturing Zones (NIMZs) and the Special Economic Zones (SEZs)
provides a
clear policy framework and incentives for investment. The government has also set
up dedicated
investment promotion agencies, such as Invest India, to facilitate and guide
foreign investors
through the investment process.
Legal and Judicial Reforms: Initiatives like the Commercial Courts Act and the
establishment of
specialized commercial courts aim to expedite the resolution of commercial
disputes.
Additionally, the Insolvency and Bankruptcy Code (IBC) provides a time-bound and
efficient
framework for resolving insolvency issues, which instills confidence in foreign
investors regarding
the protection of their investments.
Skill Development and Capacity Building: To address the challenges posed by
cultural and
language barriers, the government has focused on skill development and capacity
building
initiatives. Programs like "Skill India" aim to enhance the employability of the
workforce and
provide training in language skills, cultural sensitivities, and business
practices. These efforts
enable a better understanding and collaboration between foreign investors and the
local
workforce.

Foreign Direct Investment (FDI) vs Foreign Portfolio Investment (FPI):

Aspect
Foreign Direct Investment (FDI)

Foreign Portfolio Investment (FPI)

Definition

Investment in financial assets such as

Investment made by a foreign entity in
stocks, bonds, mutual funds, and other
a business or project with a lasting
securities.
interest.

Purpose

Establishing long-term presence and

control over operations.

Control

High level of control and management

Limited or no control over underlying
over operations.
assets or companies.

Investment
Horizon

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Portfolio diversification and short-term

capital gains.

Short to medium-term investment

horizon.
Aspect

Foreign Direct Investment (FDI)

Foreign Portfolio Investment (FPI)

Investor's
Interest

Active involvement in the

management and decision-making
process.

Volatility

Less volatile as it focuses on long-term

Relatively more volatile due to shortstability and gradual returns.
term trading and market fluctuations.

Examples

A foreign company establishing a

subsidiary
in India to set up a manufacturing
plant.

Passive involvement with limited or no

involvement in management.

Foreign individuals or institutions

investing in Indian stocks or bonds.

Foreign Portfolio Investment (FPI)

FPI refers to investments made by foreign individuals, non-resident Indians (NRIs),
or foreign
institutional investors (FIIs) in the financial assets of a country. These
financial assets can include stocks,
bonds, mutual funds, and other securities. FPI investors typically aim to diversify
their investment
portfolio and seek short to medium-term capital gains.
FPI can be made in India through various instruments available in Indian Financial
Markets. These
include equities, debt instruments such as government bonds and corporate bonds,
mutual funds that
invest in Indian securities, derivatives like futures and options traded on Indian
exchanges, and
exchange-traded funds (ETFs) that track specific indices or sectors in the Indian
market.
FPI can also be made in India through instruments available in overseas markets
such as American
Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), Masala Bonds.

American Depositary Receipts (ADRs): ADRs are negotiable certificates issued by a

US bank
that represent a specific number of shares in a foreign company. They are traded on
US stock
exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ, and provide a
way for foreign
companies to raise funds and attract international investors without having to list
their shares directly
on the US exchange. For example, an Indian tech company can issue ADRs that are
traded on the NYSE,
allowing American investors to buy and sell shares in the company without needing
to navigate foreign
exchanges.
Global Depositary Receipts (GDRs): GDRs operate similarly to ADRs, but they are
issued in

markets outside of the United States, such as European exchanges like the London
Stock Exchange or
Asian exchanges like the Hong Kong Stock Exchange. Like ADRs, GDRs represent shares
of a foreign
company, giving international investors the opportunity to trade these shares on
various international
exchanges. For instance, an Indian energy company could issue GDRs on the London
Stock Exchange,
enabling European investors to access and trade the company's shares without
directly engaging with
Indian markets.

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Masala Bonds: Masala Bonds are rupee-denominated bonds issued by Indian entities in
overseas
markets, allowing foreign investors to invest in Indian companies or projects. They
provide a way for
Indian businesses to raise capital from international investors. For instance, an
Indian infrastructure
company might issue Masala Bonds on the Singapore Stock Exchange, enabling
investors around the
world to lend money to the company in Indian rupees and earn returns in the same
currency.
It's important for FPIs to comply with the guidelines and regulations set by
regulatory authorities
such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of
India (RBI) when
investing through both Indian and foreign exchanges.

Capital Flight
Capital flight refers to the large-scale outflow of capital or financial assets
from a country. Capital
flight is often triggered by factors such as political instability, economic
crises, high inflation, currency
devaluation, or adverse government policies.
Capital flight can have several negative effects on an economy:
•
•
•
•

Reduced Investment: With capital flight, the country experiences a decline in

domestic and foreign
investment.
Currency Depreciation: As investors sell local currency assets to move their funds
elsewhere, the
demand for the domestic currency decreases, leading to currency depreciation.
Financial Instability: Capital flight can strain the banking sector as depositors
withdraw their funds,
potentially leading to liquidity shortages and banking crises.
Economic Downturn: The combination of reduced investment, currency depreciation,
and financial
instability can lead to an overall economic downturn, characterized by lower GDP
growth, higher
unemployment, and a decline in consumer and business confidence.

Steps by the Government to Prevent Capital Flight:

•
•
•

Macroeconomic Stability: Maintaining stable fiscal and monetary policies is crucial

to instill
confidence in investors.
Political Stability: The government can work towards a transparent and predictable
regulatory
environment, establish the rule of law, and ensure policy consistency to produce a
favorable
investment climate.
Capital Controls: Governments may impose capital controls to restrict the outflow
of capital.
These controls can include limits on foreign exchange transactions, restrictions on
repatriation of
funds, or temporary bans on capital transfers. However, such measures need to be
carefully
implemented to avoid negative repercussions and potential distortions in the
financial system.
Investor Protection: Strengthening investor protection measures and enforcing
stringent
regulations can enhance investor confidence. This can include transparent dispute
resolution
mechanisms, strong legal frameworks, and safeguards against expropriation or unfair
treatment
of investments.
Economic Reforms: Implementing structural reforms that enhance competitiveness,
improve the
business environment, and attract investments can help prevent capital flight.
These reforms may
involve simplifying regulatory procedures, reducing bureaucracy, and promoting ease
of doing
business.

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It's important to note that each country's situation is unique, and the
effectiveness of measures to
prevent capital flight can vary. Governments need to carefully assess the
underlying causes of capital
flight and tailor their policies accordingly to address the specific challenges
faced by their economy.

Credit Rating Agencies

Credit rating agencies play a crucial role in the financial markets by providing
assessments of the
creditworthiness of companies, governments, and other entities that issue debt
instruments. For
example, if a company issues bonds, Credit rating agencies would assess its
creditworthiness and assign
a rating based on its analysis. Investors can use this rating to determine the risk
associated with
investing in those bonds.
These credit rating agencies use a similar rating scale to evaluate credit risk,
typically ranging from
AAA (highest credit quality) to D (default). Credit rating agencies employ a
variety of quantitative and
qualitative factors to assess creditworthiness. They analyze financial statements,
industry trends, cash
flow patterns, debt levels, management quality, and other relevant factors.
In India, there are several credit rating agencies that evaluate and assign ratings
to borrowers.
Credit Rating
Agency

Description

Ownership

Ratings

CRISIL is a leading credit rating

agency in India that provides credit
CRISIL (Credit ratings and research services for
Rating Information corporates, banks, financial
Services of India
institutions, and government
Limited)
entities.

Majority owned by
Standard & Poor's Global
Inc. (Global Credit rating
agency) and listed on stock
exchanges.

AAA, AA, A,
BBB, BB, B, C, D

ICRA
(Investment
Information and
Credit Rating
Agency)
Subsidiary of Moody's
Investors Service (Global
Credit rating agency).

AAA, AA, A,
BBB, BB, B, C, D

CARE (Credit
CARE credit ratings and research
Majority owned by
Analysis and
services for corporates, banks, and financial institutions and
Research Limited) government bodies.
listed on stock exchanges.

AAA, AA, A,
BBB, BB, B, C, D

ICRA offers credit ratings,

grading, and research services for
various entities and debt
instruments.

Ind-Ra (India
Ratings and
Research)

Ind-Ra offers credit ratings and

research services for different
sectors and debt instruments in
India.

Subsidiary of Fitch
Ratings(Global Credit rating
AAA, AA, A,
agency)
BBB, BB, B, C, D

Brickwork
Ratings

Brickwork Ratings specializes in

providing credit ratings for
corporates, small and medium
enterprises (SMEs), and
infrastructure projects.

BWR AAA,
BWR AA, BWR A,
BWR BBB, BWR
BB, BWR B, BWR
C, BWR D

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Independent.
In India, credit rating agencies are regulated by the Securities and Exchange Board
of India (SEBI).
SEBI is the primary regulatory authority for the securities market in India and
oversees the functioning
and operations of credit rating agencies to ensure transparency, reliability, and
adherence to regulatory
guidelines.

Currency Convertibility
Currency convertibility refers to the ease with which a country's currency can be
exchanged into
another currency or used for international transactions. It can be classified into
two types: current
account convertibility and capital account convertibility.

Current Account Convertibility:

Current account convertibility means that a country's residents can freely convert
their domestic
currency for international trade in goods and services. It allows individuals and
businesses to make
payments for imports, receive payments for exports, and conduct transactions
related to travel, tourism,
and remittances.
In India, there is full current account convertibility since the early 1990s.
Individuals and
businesses can freely engage in international trade, send and receive money for
services like tourism,
education, medical expenses, and remittances.
However, certain restrictions or regulations may exist to ensure financial
stability and prevent
illegal activities. For example, the Reserve Bank of India (RBI) monitors and
regulates cross-border
transfers to manage the balance of payments and safeguard against money laundering.

Capital Account Convertibility:

Capital account convertibility refers to the ability to freely move capital in and
out of a country for
investment purposes. It involves the unrestricted convertibility of financial
assets like stocks, bonds, and
real estate. Capital account convertibility allows investors to buy or sell these
assets in domestic or
foreign markets without significant restrictions.
In India, there is partial capital account convertibility. While there have been
gradual reforms to
liberalize capital flows, there are still some restrictions in place to manage
risks and maintain financial
stability. The RBI oversees these regulations to prevent excessive volatility in
the financial markets and
protect the country from sudden capital outflows.
For example, India imposes limits on foreign investment in certain sectors, such as
defense,
telecommunications, and retail. These limits ensure that foreign capital flows are
regulated and aligned
with national priorities. Additionally, the RBI may implement measures to control
speculative capital
flows that could potentially destabilize the economy.
It's important to note that currency convertibility is a balancing act for any
country. While
liberalizing convertibility can attract foreign investment and promote economic
growth, it also exposes
the economy to risks such as currency depreciation, capital flight, and financial
instability. Hence,
policymakers carefully evaluate the pace and extent of convertibility reforms based
on the country's
economic conditions and long-term goals.
India has made significant progress in opening up its economy and moving towards
greater
convertibility over the years. However, the process continues to be gradual and
cautious to ensure a
stable transition and mitigate any potential risks to the Indian economy.
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Type of trade agreements:
Preferential Trade Agreement (PTA):

A Preferential Trade Agreement is an agreement between two or more countries that

grants
preferential treatment to certain products or services by reducing tariffs or other
trade barriers. In a
PTA, a positive list approach is used, meaning specific products or services are
identified for preferential
treatment.
Example: India has a Preferential Trade Agreement with Afghanistan.

Free Trade Agreement (FTA):

A Free Trade Agreement is a comprehensive agreement between two or more countries

to
eliminate or reduce trade barriers, including tariffs, quotas, and non-tariff
barriers, on most goods and
services. In an FTA, a negative list approach is often used, meaning the agreement
applies to all
products and services except those explicitly listed as exceptions.
Example: India has negotiated Free Trade Agreements with several countries and
trading blocs. One
notable example is the India-Sri Lanka Free Trade Agreement.

Comprehensive Economic Cooperation Agreement (CECA) / Comprehensive Economic

Partnership Agreement (CEPA):

CECA/CEPA are more extensive form of trade agreement that covers not only trade in
goods and
services but also various aspects of economic cooperation. CECA/CEPA agreements
address regulatory
issues, trade facilitation, customs cooperation, investment, intellectual property,
and other areas. They
aim to deepen economic ties and promote a broader range of economic cooperation
between the
participating countries. CEPA is more comprehensive than CECA.
Example: India has signed Comprehensive Economic Cooperation Agreements with
countries like
Singapore and Malaysia.
India has signed Comprehensive Economic Partnership Agreements with countries like
South Korea
and Japan.

Customs Union:

A Customs Union is an agreement between countries to establish a common external

tariff (CET) on
imports from non-member countries. Member countries also eliminate internal trade
barriers among
themselves. The goal is to create a unified trade policy toward non-members and
promote economic
integration among the participating countries.
Example: South American customs union MERCOSUR

Common Market:

A Common Market goes beyond a customs union by allowing for the free movement of
goods,
services, capital, and labor among member countries. It establishes a unified
economic space and
promotes deeper integration. In addition to eliminating trade barriers, a common
market often involves
harmonization of regulations and standards to facilitate seamless trade.
Example: The European Union (EU) is a prime example of a common market.

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Economic Union:

An Economic Union represents the highest level of integration among countries. It

combines the
features of a common market and a customs union while coordinating economic
policies, such as
monetary policy and fiscal policy, among member countries. Economic Union members
often share a
common currency and work towards economic convergence.
Example: The European Union (EU) is also an example of an economic union.

Foreign Trade Policy 2023

Target: The FTP 2023 sets a target of $2 trillion in exports of goods and services
by 2030. This means
that the government aims to increase the value of India's exports to contribute
significantly to the
country's economic growth and global trade.
Approach:

1.

2.

3.

4.

Incentive to Remission: The policy shifts from providing upfront incentives to a

remission and
entitlement-based regime. Instead of providing financial incentives, exporters will
receive benefits
through the reduction or cancellation of duties or taxes on their exports.
Export Promotion through Collaboration: The policy emphasizes collaboration among
exporters,
state governments, district administrations, and Indian missions to promote
exports. This
collaboration aims to create a supportive ecosystem for exporters and enhance their
global
competitiveness.
Ease of Doing Business: The FTP 2023 focuses on reducing transaction costs and
simplifying
export processes. This will be achieved through process re-engineering and
automation, where
automated IT systems will be implemented for various approvals, making it easier
for exporters,
especially Micro, Small, and Medium Enterprises (MSMEs), to access export benefits.
Emerging Areas: The policy addresses emerging areas in trade, such as e-commerce,
developing
districts as export hubs, and streamlining export control policies. It recognizes
the importance of
these areas in promoting exports and enhancing India's competitiveness in the
global market.

Major Features:
1.

2.

3.
4.

Process Re-Engineering and Automation: The FTP 2023 focuses on export promotion and
development through the implementation of automated IT systems. These systems will
streamline various approval processes, reducing paperwork and time delays. This
will benefit
exporters, especially MSMEs, by making it easier for them to access export benefits
and
participate in international trade.
Towns of Export Excellence: The policy designates four new towns (Faridabad,
Mirzapur,
Moradabad, and Varanasi) as "Towns of Export Excellence." These towns will receive
priority
access to export promotion funds under the Market Access Initiative (MAI) scheme.
This
designation aims to boost exports of specific products like handlooms, handicrafts,
and carpets,
contributing to the growth of these sectors and generating employment
opportunities.
Recognition of Exporters: Exporter firms will be recognized based on their export
performance.
They will receive a "status" such as 2-star, 4-star, or 5-star ratings. Recognized
exporters will be
encouraged to provide training and skills development to interested individuals,
contributing to
the development of a skilled manpower pool capable of servicing a $5 trillion
economy.
Promoting Export from Districts: The FTP 2023 aims to promote exports at the
district level
through partnerships with state governments. The initiative called "Districts as
Export Hubs (DEH)"

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5.

6.

7.

8.

9.

10.

11.

seeks to accelerate the development of grassroots trade ecosystems. District-

specific export
action plans will be prepared to identify and promote locally available products
and services,
fostering economic growth at the district level.
Streamlining SCOMET Policy: The policy places emphasis on strengthening the export
control
regime, particularly regarding "Special Chemicals, Organisms, Materials, Equipment,
and
Technologies" (SCOMET) items. This will involve aligning the policy with
international treaties and
agreements to ensure compliance and promote responsible trade in dual-use items
that have
potential civilian and military applications.
Facilitating E-Commerce Exports: The FTP 2023 outlines the intent and roadmap for
establishing
e-commerce hubs and improving related elements such as payment reconciliation,
bookkeeping,
returns policy, and export entitlements. This will create a conducive environment
for Indian
exporters to tap into the potential of e-commerce exports, expand their global
reach, and
leverage digital platforms for trade.
Facilitation under the EPCG Scheme: The Export Promotion of Capital Goods (EPCG)
Scheme
allows the import of capital goods at zero customs duty for export production. The
FTP 2023
further rationalizes this scheme, making it more streamlined and beneficial for
exporters.
Additional schemes like the Prime Minister's Manufactured Imports and Trading
Houses (PM
MITRA) scheme have been added to claim benefits under the Common Service Provider
scheme.
Green Technology Products: The policy includes specific green technology products
such as
Battery Electric Vehicles, Vertical Farming equipment, Wastewater Treatment and
Recycling
systems, Rainwater harvesting systems, and Green Hydrogen. These products will be
eligible for
reduced Export Obligation requirements under the EPCG Scheme. This aims to promote
domestic
manufacturing, encourage investment in capital goods, and contribute to sustainable
development.
Facilitation under the Advance Authorization Scheme: The Advance Authorization
Scheme
(AAS) provides duty-free import of raw materials for manufacturing export items. In
the FTP 2023,
the scheme has been extended to the export of the Apparel and Clothing sector. This
extension
aims to promote domestic manufacturing, encourage investment in the textile sector,
and boost
exports of apparel and clothing items.
Merchanting Trade: Merchanting trade involves the shipment of goods from one
foreign country
to another foreign country without touching Indian ports, with the involvement of
an Indian
intermediary. The FTP 2023 enables merchanting trade of restricted and prohibited
items under
the export policy. This will allow Indian entrepreneurs to convert financial
centers like GIFT City
into major merchanting hubs, similar to Dubai, Singapore, and Hong Kong,
facilitating
international trade and boosting India's role as a global trading hub.
Amnesty Scheme: The policy introduces a special one-time Amnesty Scheme to address
default
on Export Obligations. Exporters who have been unable to meet their obligations
under the EPCG
and Advance Authorization schemes can regularize their cases by paying all customs
duties that
were exempted in proportion to their unfulfilled export obligations. The interest
payable under
this scheme is capped at 100% of the exempted duties. This scheme aims to reduce
litigation,
foster trust-based relationships, and provide relief to exporters burdened by high
duty and
interest costs.

These features of the FTP 2023 collectively aim to enhance India's export
competitiveness, promote
sustainable trade, simplify export processes, leverage emerging areas like e-
commerce, and provide
support to various sectors for their growth and development in the global market.

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Previous Years Prelims Questions
1.

With reference to the Indian economy, consider the following statements:

2022

1. An increase in Nominal Effective Exchange Rate (NEER) indicates the

appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an
improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other
countries is likely to cause an increasing divergence between NEER
and REER.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
2.

Which one of the following situations best reflects “Indirect Transfers” often
talked about in media recently with reference to India?

2022

(a) An Indian company investing in a foreign enterprise and paying taxes

to the foreign country on the profits arising out of its investment
(b) A foreign company investing in India and paying taxes to the country
of its base on the profits arising out of its investment
(c) An Indian company purchases tangible assets in a foreign country and
sells such assets after their value increases and transfers the proceeds to India
(d) A foreign company transfers shares and such shares derive their
substantial value from assets located in India
3.

Consider the following statements:

1. Tight monetary policy of US Federal Reserve could lead to capital
flight.
2. Capital flight may increase the interest cost of firms with existing
External Commercial Borrowings (ECBs).
3. Devaluation of domestic currency decreases the currency risk

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2022
associated with ECBS.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

4.

Consider the following statements:

2022

1. In India, credit rating agencies are regulated by Reserve Bank of India.

2. The rating agency popularly known as ICRA is a public limited
company.
3. Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

5.

Consider the following:

2021

1. Foreign currency convertible bonds

2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
a) 1, 2 and 3
b) 3 only
c) 2 and 4
d) 1 and 4
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6.

Consider the following statements:

2021

The effect of the devaluation of a currency is that it necessarily

1. Improves the competitiveness of the domestic exports in the foreign
markets
2. Increase the foreign value of the domestic currency
3. Improves the trade balance
Which of the above statements is/are
a) 1 only
b) 1 and 2
c) 3 only
d) 2 and 3

7.

With reference to the international trade of India at present, which of the

following statements is/are correct?

2020

(1) India’s merchandise exports are less than its merchandise imports.
(2) India’s imports of iron and steel, chemicals, fertilisers and machinery
have decreased in recent years.
(3) India’s exports of services are more than its imports of services.
(4) India suffers from an overall trade/current account deficit.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 4 only
(c) 3 only
(d) 1, 3 and 4 only

8.

358

If another global financial crisis happens in the near future, which of the
following actions/policies are most likely to give some immunity to India?

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2020
(1) Not depending on short-term foreign borrowings
(2) Opening up to more foreign banks
(3) Maintaining full capital account convertibility
Select the correct answer using the code given below :
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3

9.

Which one of the following is not the most likely measure the
Government/RBI takes to stop the slide of Indian rupee?

2019

(a) Curbing imports of non-essential goods and promoting exports

(b) Encouraging Indian borrowers to issue rupee-denominated Masala
Bonds
(c) Easing conditions relating to external commercial borrowing
(d) Following an expansionary monetary policy

10.

Consider the following statements

(1) Purchasing Power Parity (PPP) exchange rates are calculated by
comparing the prices of the same basket of goods and services in different
countries.
(2) In terms of PPP dollars, India is the sixth-largest economy in the world.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only

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2019
(c) Both 1 and 2
(d) Neither 1 nor 2

11.

In the context of India, which of the following factors is/are contributors to

reducing the risk of a currency crisis?

2019

(1) The foreign currency earnings of India’s IT sector

(2) Increasing the government expenditure
(3) Remittances from Indians abroad
Select the correct answer using the code given below.
(a) 1 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3

12.

Consider the following statements:

2019

(1) Most of India’s external debt is owed by governmental entities.

(2) All of India’s external debt is denominated in US dollars.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

13.

360

The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in
the context of
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2016
(a) mining operation by multinational companies in resource-rich but
backward areas
(b) curbing of the tax evasion by multinational companies
(c) exploitation of genetic resources of a country by multinational
companies
(d) lack of consideration of environmental costs in the planning and
implementation of developmental projects

14.

With reference to `IFC Masala Bonds’, sometimes seen in the news, which of
the statements given below is/are correct?

2016

(1) The International Finance Corporation, which offers these bonds, is an

arm of the World Bank.
(2) They are the rupee-denominated bonds and are a source of debt
financing for the public and private sector.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

15.

Which of the following best describes the term ‘import cover’, sometimes
seen in the news?
(a) It is the ratio of value of imports to the Gross Domestic Product of a
country
(b) It is the total value of imports of a country in a year
(c) It is the ratio between the value of exports and that of imports
between two countries
(d) It is the number of months of imports that could be paid for by a

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2016
country’s international reserves

16.

The problem of international liquidity is related to the non-availability of

2015

(a) goods and services

(b) gold and silver
(c) dollars and other hard currencies
(d) exportable surplus

17.

Convertibility of rupee implies

2015

(a) being able to convert rupee notes into gold

(b) allowing the value of the rupee to be fixed by market forces
(c) freely permitting the conversion of rupee to other currencies and vice
versa
(d) developing an international market for currencies in India

18.

With reference to Balance of Payments, which of the following

constitutes/constitute the Current Account?
(1) Balance of trade
(2) Foreign assets
(3) Balance of invisibles
(4) Special Drawing Rights
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3
(c) 1 and 3

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2014
(d) 1, 2 and 4

19.

The balance of payments of a country is a systematic record of

2013

(a) all import and transactions of a during a given period normally a year
(b) goods exported from a country during a year
(c) economic transaction between the government of one country to
another
(d) capital movements from one country to another

20.

Which of the following constitute Capital Account?

2013

(1) Foreign Loans

(2) Foreign Direct Investment
(3) Private Remittances
(4) Portfolio Investment
Select the correct answer using the codes given below.
(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 2, 3 and 4
(d) 1, 3 and 4

21.

Which one of the following groups of items is included in India’s foreignexchange

reserves?
(a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from
foreign countries
(b) Foreign-currency assets, gold holdings of the RBI and SDRs

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2013
(c) Foreign-currency assets, loans from the World Bank and SDRs
(d) Foreign-currency assets, gold holdings of the RBI and loans from the
World Bank

Previous Years Mains Questions

1.

How would the recent phenomena of protectionism and currency

manipulations in world trade effect macroeconomic stability of India?

2018

2.

How globalization has led to the reduction of employment in the formal

sector of the Indian economy? Is increased informalization detrimental to the
development of the country?

2016

3.

Justify the need for FDI for the development of the Indian economy. Why is
there a gap between MOUs signed and actual FDIs? Suggest remedial steps to
be taken for increasing actual FDIs in India.

2016

4.

The craze for gold in Indians has led to a surge in import of gold in recent
years and put pressure on the balance of payments and external value of the
rupee. In view of this, examine the merits of the Gold Monetization Scheme.

2015

5.

Foreign direct investment in the defence sector is now said to be liberalized.

What influence this is expected to have on Indian defence and economy in the
short and long-run?

2014

6.

Discuss the impact of FDI entry into the Multi-trade retail sector on supply
chain management in the commodity trade pattern of the economy.

2013

7.

Though India allowed Foreign Direct Investment (FDI) in what is called multibrand
retail through the joint venture route in September 2012, the FDI, even
after a year, has not picked up. Discuss the reasons.

2013
Answers
1.

2.

3.

4.

5.

6.

7.

Cancelled by UPSC

8.

9.

10.

11.

12.

13.

14.

15.
D

16.

17.

18.

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19.

21.

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@Ketanomy

B
18. International Economic Organisations

Say hello! |

@Ketanomy
Contents
Important
Institutions ......................................................................
.................................................. 369
Bretton Woods
Institutions ......................................................................
...................................... 369
International Monetary Fund
(IMF) .............................................................................
...................... 369
Objectives: .......................................................................
............................................................... 370
IMF Governance
Structure .........................................................................
.................................... 370
IMF
Quota..............................................................................
......................................................... 371
Special Drawing Rights
(SDR)..............................................................................
............................ 371
IMF
Financing .........................................................................
........................................................ 372
Criticism: ........................................................................
................................................................. 372
IMF
Reforms ...........................................................................
........................................................ 373
World Bank
Group .............................................................................
................................................. 373
1.

International Bank for Reconstruction and Development

(IBRD):.................................... 373

2.

International Development Association

(IDA) .................................................................. 374

3.

International Finance Corporation

(IFC) ...........................................................................
374

4.

Multilateral Investment Guarantee Agency

(MIGA) ......................................................... 374

5.

International Centre for Settlement of Investment Disputes

(ICSID) ............................... 374

Criticism: ........................................................................
................................................................. 374
Reforms in the World
Bank: .............................................................................
.............................. 375
Difference between IMF and World
Bank ..............................................................................
............ 375
World Trade Organisation
(WTO)..............................................................................
......................... 376
Objectives of
WTO ...............................................................................
........................................... 376
Structure of
WTO................................................................................
............................................ 377
Principles of the
WTO: ..............................................................................
...................................... 377
WTO
Agreements ........................................................................
................................................... 378
Agreement on
Agriculture .......................................................................
....................................... 378
Impact of the WTO Agreement on Agriculture in
India ............................................................. 378
General Agreement on Trade in Services
(GATS) ...........................................................................
379
Important aspects of
GATS: .............................................................................
........................... 379
Trade-Related Investment Measures
(TRIMS) ...........................................................................
.... 380
Controversy around
TRIMS .............................................................................
........................... 380
Trade-Related Aspects of Intellectual Property Rights
(TRIPS) ...................................................... 380
Sanitary and Phytosanitary Measures Agreement (SPS
Agreement)............................................. 381
Agreement on Subsidies and Countervailing Measures (SCM
Agreement) ................................... 382
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G-
20 ................................................................................
.................................................................... 382
Origin ............................................................................
.................................................................. 383
Members ...........................................................................
............................................................. 383
Works of
G20 ...............................................................................
................................................... 383
Structure and
Functioning .......................................................................
....................................... 383
G20 Cooperation
Areas .............................................................................
..................................... 383
Issues Addressed by
G20 ...............................................................................
................................. 384
India's Priorities in G20
Summits............................................................................
........................ 384
Achievements ......................................................................
........................................................... 384
Challenges ........................................................................
.............................................................. 385
Significance ......................................................................
............................................................... 385
G-
7 .................................................................................
..................................................................... 385
Financial Action Task Force
(FATF) ............................................................................
......................... 386
Asian Development
Bank ..............................................................................
..................................... 387
New Development
Bank ..............................................................................
....................................... 388
Asian Infrastructure Investment Bank
(AIIB) ............................................................................
.......... 389
Organization of the Petroleum Exporting Countries
(OPEC) .............................................................. 390
Organisation for Economic Co-operation and Development
(OECD) ................................................ 391
South Asian Association for Regional Cooperation
(SAARC) .............................................................. 392
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation
(BIMSTEC) ........... 392
Association of Southeast Asian Nations
(ASEAN) ...........................................................................
.... 393
Bank for International Settlements
(BIS)..............................................................................
.............. 394
World Economic
Forum .............................................................................
......................................... 395
Previous Years Prelims
Questions .........................................................................
............................. 396
Previous Years Mains
Questions .........................................................................
............................... 399

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Chapter 18
International Economic
Organisations
International economic organizations are entities formed by countries to promote
international
trade, investment, and economic development. The role of international economic
organizations has
become increasingly important in today's interconnected world, where the flow of
goods, services, and
capital across borders has become more prevalent. Overall, international economic
organizations play a
critical role in shaping the global economic landscape and promoting international
cooperation, making
them a vital component of the global governance system.

Important Institutions
Bretton Woods Institutions

The Bretton Woods Institutions are two international organizations that were
established in 1944 at
the United Nations Monetary and Financial Conference held in Bretton Woods, New
Hampshire, USA.
The main objective of the Bretton Woods Institutions was to promote international
economic
cooperation and help rebuild the global economy after the devastation of World War
II.
The two institutions are:
1. International Monetary Fund (IMF) - The IMF was created to oversee the
international
monetary system and help member countries maintain stable exchange rates and
balance of
payments.
2. World Bank - The World Bank was established to provide long-term financing for
reconstruction
and development projects in member countries.

India is a founding member of both the IMF and World Bank and has received
significant financial
assistance from these institutions over the years. For example, during the 1991
balance of payments
crisis, India received a loan from the IMF to help stabilize its economy. The World
Bank has also
provided financing for various projects in India, including the construction of the
Mumbai-Pune
Expressway and the Jawaharlal Nehru National Urban Renewal Mission (now AMRUT).

International Monetary Fund (IMF)

The IMF is a multilateral organization with the aim of promoting international
economic cooperation
and facilitating international trade.
Established
Membership
369

1944
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Headquarters
Publications

Washington, D.C., United States

1. World Economic Outlook (biannual) 2. Global Financial Stability Report 3.
Fiscal Monitor

Objectives:
1.
2.
3.
4.

Promoting International Monetary Cooperation: The IMF aims to promote international

monetary cooperation by facilitating exchange rate stability and providing
resources to member
countries experiencing balance of payments difficulties.
Facilitating International Trade: The IMF seeks to facilitate international trade
by promoting the
stability of the international monetary system and ensuring the smooth functioning
of the
international payments system.
Promoting Economic Growth: The IMF provides policy advice and technical assistance
to
member countries to help them achieve sustainable economic growth and reduce
poverty.
Providing Financial Assistance: The IMF provides financial assistance to member
countries
facing balance of payments difficulties, helping them to address short-term
liquidity problems and
avoid financial crises.

IMF Governance Structure

1. Board of Governors: The highest decision-making body of the IMF. Each of the
IMF's 190
member countries appoints a governor, typically the finance minister or central
bank governor.
2. Executive Board: Responsible for conducting the day-to-day business of the IMF.
It is composed
of 24 Executive Directors, who are appointed or elected by member countries or by
groups of
countries.
3. Managing Director: The head of the IMF staff and Chair of the Executive Board.
The Managing
Director is appointed by the Executive Board for a renewable term of five years.
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4. IMF Staff: Thousands of employees from all over the world work at the IMF. Their
responsibilities are divided among departments that handle economic research,
fiscal affairs,
monetary and capital markets, and many others.
5. International Monetary and Financial Committee (IMFC): The IMFC, comprising
finance
ministers and central bank governors, is the primary advisory body of the IMF Board
of
Governors and deliberates on the principal policy issues facing the IMF. The
Committee has 24
members, reflecting the composition of the IMF Executive Board. Each member country
or
group of countries that elects an Executive Director also appoints a member of the
Committee.
6. Development Committee (DC): A joint committee with the World Bank, advising on
critical
development issues and on financial resources required to promote economic
development in
developing countries.

IMF Quota

The IMF has member countries from around the world, and each member country has a
quota and a
corresponding voting power in the organization.
The quota represents the financial contribution made by each member country to the
IMF. This
contribution determines the amount of resources that the IMF has at its disposal to
provide loans to
member countries and help stabilize the global financial system. Quotas are
determined based on a
country's economic size, openness to international trade, and other factors.
For example, a larger economy like the United States would have a larger quota than
a smaller
economy like Bhutan. As of 2021, the United States has the largest quota in the
IMF, with around 16.5%.
Voting power, on the other hand, determines a member country's influence in the
decision-making
process of the IMF. The number of votes that a member country has is based on their
quota, with larger
quotas resulting in more voting power.
For example, the United States has the highest voting power in the IMF, with around
16.5% of the
total voting power.
It is important to note that decisions made by the IMF require a supermajority of
85% of the total
voting power. This means that any decision made by the IMF must have the support of
the majority of
member countries, including those with smaller quotas and voting power.

Special Drawing Rights (SDR)

SDR is a type of international reserve asset created by the International Monetary

Fund (IMF) to
supplement the existing official reserves of member countries. SDRs are not a
currency but rather a
synthetic currency that represents a basket of currencies of the IMF member
countries, including the US
dollar, Euro, Japanese yen, British pound sterling, and the Chinese renminbi.
The value of SDRs is determined daily by the IMF based on the market exchange rates
of the
currencies included in the basket. Member countries can hold SDRs as part of their
foreign exchange
reserves and use them to settle international transactions or repay their
obligations to the IMF.
SDRs are created and allocated to member countries based on their IMF quotas, which
are
determined by the size of their economies and their role in the international
trading system. The
allocation of SDRs is typically done in response to a global economic crisis or a
significant imbalance in
the international monetary system. The most recent allocation of SDRs was done in
August 2021, when
the IMF allocated $650 billion in SDRs to its member countries to help them cope
with the economic
impact of the COVID-19 pandemic.
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One of the benefits of SDRs is that they provide member countries with a stable and
diversified form
of international reserve assets that can be used to supplement their foreign
exchange reserves. SDRs
can also be used to settle international transactions and are widely accepted by
the international
financial community. For example, if a country needs to pay for imports, it can use
its SDR holdings to
purchase the required foreign currency.

IMF Financing

IMF financing refers to the financial assistance provided by the International

Monetary Fund (IMF)
to member countries facing balance of payments difficulties.
IMF financing is typically provided through loan programs that are designed to help
countries
overcome their balance of payments difficulties. These loans come with certain
conditions, also known
as conditionality, that the recipient country must meet to qualify for the loan.
These conditions are
designed to address the underlying economic issues that led to the balance of
payments difficulties and
to ensure that the country can achieve sustainable economic growth.
There are several types of IMF financing, including:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Stand-By Arrangement (SBA): Short-term support for emerging and advanced economies.
Standby Credit Facility (SCF): Similar to SBA, designed for low-income countries.
Extended Fund Facility (EFF): Long-term support for structural issues in emerging
and advanced
economies.
Extended Credit Facility (ECF): Equivalent to EFF for low-income countries.
Rapid Financing Instrument (RFI): Rapid assistance for urgent balance of payments
needs.
Rapid Credit Facility (RCF): Rapid assistance for crises in low-income countries.
Flexible Credit Line (FCL): Short-term renewable credit line for strong policy
countries.
Precautionary and Liquidity Line (PLL): For countries with sound frameworks but
remaining
issues.
Catastrophe Containment and Relief Trust (CCRT): Provides grants for debt relief
during
disasters.
Policy Support Instrument (PSI): IMF advice without financial assistance for low-
income
countries.

IMF financing has been used by many countries over the years, including India. For
example, in
1991, India faced a balance of payments crisis, and the government sought
assistance from the IMF. The
IMF provided a loan of $2.2 billion to India, which helped the country to stabilize
its economy and
implement economic reforms that ultimately led to sustained economic growth.

Criticism:
1.

2.

Conditionality: One of the main criticisms of the IMF is its conditionality

attached to its loans.
When a country borrows money from the IMF, it has to agree to certain conditions,
including
economic reforms, austerity measures, and sometimes privatization. These conditions
can be
quite strict and can cause significant social and economic disruptions, especially
in developing
countries. Critics argue that the IMF's conditionality policies often prioritize
the interests of the
lenders over those of the borrowers.
Focus on macroeconomic stability over development: The IMF's primary mandate is to
promote
macroeconomic stability, which is essential for economic growth and development.
However,
some critics argue that the IMF's focus on macroeconomic stability often comes at
the expense of

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3.

4.

social and human development. They argue that the IMF's policies can exacerbate
poverty and
inequality, particularly in developing countries.
Voting power and representation: The IMF's decision-making process is based on a
weighted
voting system, where developed countries have a larger say in decisions than
developing
countries. Critics argue that this system is unfair and undemocratic and that it
perpetuates the
power imbalance between developed and developing countries.
Lack of transparency and accountability: The IMF has been criticized for its lack
of transparency
and accountability in its decision-making processes. Critics argue that the
organization's policies
are often made behind closed doors, without adequate consultation with affected
communities
or civil society organizations.

IMF Reforms

The IMF has been undergoing reforms to adapt to the changing global economic
landscape and
improve its effectiveness in achieving its mandate.
1.

2.
3.

4.

Governance Reforms: The governance structure of the IMF was reformed to give
emerging
market and developing countries a greater say in the decision-making process. The
reforms
increased the voting power of developing countries and established a more
representative
Executive Board.
Quota Reforms: The quota system of the IMF was reformed to reflect the changing
economic
realities of the world. The reforms increased the quotas of emerging market and
developing
countries, giving them a greater voice in the decision-making process.
Financial Reforms: The IMF's financial resources were increased through the
expansion of the
New Arrangements to Borrow (NAB) and the creation of the Bilateral Borrowing
Agreements
(BBAs). These reforms aimed to ensure that the IMF has sufficient resources to
respond to
financial crises.
Lending Reforms: The IMF's lending toolkit was reformed to provide more flexible
and tailored
lending programs to member countries. This includes the creation of the Flexible
Credit Line (FCL),
which provides countries with access to IMF resources without the need for policy
conditionality.
These reforms have helped to modernize the IMF and make it more effective in
promoting global
economic stability. By increasing the voice and participation of emerging market
and developing
countries, the IMF is better able to reflect the diversity of the global economic
landscape and provide
more effective policy advice and financial assistance to its members.
For example, the IMF reforms allowed for a more significant role for China and
other emerging
markets in the decision-making process. This increased representation of developing
countries has
helped to improve the legitimacy and effectiveness of the IMF in promoting global
economic stability.

World Bank Group

The World Bank Group is an international organization with the primary objective of
promoting
economic development in its member countries. It comprises five different
institutions, each with a
specific focus:
1.

International Bank for Reconstruction and Development (IBRD): This institution

provides loans, guarantees, and other financial assistance to middle-income and

creditworthy
low-income countries. These loans are typically used to finance infrastructure
projects like roads,
bridges, and energy projects.
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2.
3.

4.

5.

International Development Association (IDA): This institution provides low-interest

loans
and grants to the world's poorest countries. The loans and grants provided by the
IDA are typically
used to finance projects in areas like education, healthcare, and agriculture.
International Finance Corporation (IFC): This institution provides loans, equity,
and other
financial assistance to private sector companies in developing countries. The IFC's
primary
objective is to promote private sector development and entrepreneurship in
developing
countries.
Multilateral Investment Guarantee Agency (MIGA): This institution provides
political risk
insurance and credit enhancement guarantees to investors and lenders in developing
countries.
The aim of MIGA is to encourage foreign direct investment in developing countries
by reducing
the risk associated with such investments.
International Centre for Settlement of Investment Disputes (ICSID): This
institution
provides a forum for the settlement of investment disputes between foreign
investors and host
countries. India is not a member of ICSID.

All these institutions are collectively known as the World Bank Group, however,
IBRD and IDA are the
two arms which constitute the World Bank.

Established 1944
Membership 189 countries
Headquarters Washington, D.C., United States
1. World Development Report 2. Global Economic Prospects 4. Poverty and
Publications
Shared Prosperity Report
Criticism:
1.

2.

3.

Conditionality: One of the main criticisms of the World Bank is its practice of
attaching conditions
to its loans. These conditions often require the borrower country to implement
specific economic
policies, such as privatization or deregulation, as a condition for receiving the
loan. Critics argue
that these conditions may not be in the best interest of the borrower country and
may lead to
negative social and environmental impacts.
Governance: The governance structure of the World Bank has also been criticized for
being
undemocratic and lacking transparency. While the bank is supposed to represent the
interests of
all member countries, the majority of the voting power is held by developed
countries, which may
not always align with the interests of developing countries.
Environmental and Social Impacts: The World Bank's projects have been criticized
for their
environmental and social impacts. In some cases, projects have led to
deforestation, displacement

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4.

of indigenous peoples, and destruction of cultural heritage sites. Critics argue

that the bank
should prioritize environmental and social safeguards to ensure that its projects
do not harm local
communities or the environment.
Anti-Poverty Strategies: While the World Bank's primary goal is poverty reduction,
its approach
to achieving this goal has been criticized for being too focused on economic growth
rather than
social development. Critics argue that the bank should adopt a more comprehensive
approach to
poverty reduction that addresses social and economic inequalities.

Reforms in the World Bank:

1.

2.

3.

4.

5.

Focus on Poverty Reduction: The World Bank has shifted its focus from providing
loans for
infrastructure projects to promoting poverty reduction and social development. This
has led to
the creation of initiatives like the Poverty Reduction Strategy Papers (PRSPs) and
the Global
Partnership for Education, which aim to support education and health programs in
developing
countries.
Decentralization: The World Bank has also undergone a process of decentralization,
with the
establishment of regional offices in various parts of the world. This has helped to
increase the
bank's presence in developing countries and improve its understanding of local
contexts and
needs.
Results-Based Lending: The World Bank has also shifted towards results-based
lending, which
links disbursements to the achievement of specific development outcomes. This
approach
ensures that loans are used effectively and efficiently, and that they contribute
to positive
development outcomes.
Environmental and Social Safeguards: The World Bank has introduced environmental
and social
safeguards to ensure that its projects do not have negative impacts on the
environment or local
communities. These safeguards require borrowers to conduct environmental and social
impact
assessments and consult with local communities before undertaking any projects.
Governance Reforms: The World Bank has also undergone governance reforms to
increase
transparency and accountability. This includes the introduction of the Independent
Evaluation
Group (IEG), which assesses the bank's performance and effectiveness, and the
Inspection Panel,
which provides an independent forum for affected communities to raise concerns
about the
bank's projects.

Difference between IMF and World Bank

BASIS FOR
COMPARISON
Meaning
Focus on
Organizational
Structure

IMF

WORLD BANK

An international organization
maintaining the global monetary
system
Economic Stability
single organization

A global organization established to finance and

advice the developing nations, in order to make
them economically developed
Economic Growth
It has two major institutions, namely
International Bank for Reconstruction and
Development (IBRD) and the International
Development Association (IDA).
Facilitates lending
To lessen poverty and promote the long term

Operations
Objective

Provides assistance
To deal with all the issues

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related to the financial sector
and macroeconomics.

development of the economy.

World Trade Organisation (WTO)

The World Trade Organization (WTO) is an international organization that oversees
and regulates
global trade among its member countries. The organization was established in 1995,
succeeding the
General Agreement on Tariffs and Trade (GATT), which was created in 1948.
The primary objective of the WTO is to promote free and fair trade among its member
countries,
which currently 164. It does this by providing a platform for member countries to
negotiate and enforce
trade agreements, resolve trade disputes, and monitor trade policies and practices.
The WTO also
provides technical assistance and training to help developing countries participate
effectively in the
global trading system.
Established 1995
Membership 164 member states
Headquarters Geneva, Switzerland
Publications World Trade Report

Objectives of WTO
1.

2.

3.

4.

5.

Promoting free trade: The WTO's primary objective is to promote free and fair trade
among its
member countries. Free trade refers to the unrestricted flow of goods and services
between
countries without any barriers or restrictions. By promoting free trade, the WTO
aims to increase
economic growth and create employment opportunities in member countries.
Ensuring fair competition: The WTO aims to ensure that international trade is
conducted in a fair
and transparent manner. It seeks to prevent unfair trade practices like dumping,
subsidies, and
other forms of protectionism that can harm the interests of other countries. For
example, if a
country sells its products below the cost of production, it is considered as
'dumping', which can be
harmful to domestic producers in importing countries.
Providing a platform for negotiations: The WTO provides a platform for member
countries to
negotiate trade agreements, exchange information, and resolve disputes related to
international
trade. This helps to reduce trade tensions and improve economic cooperation among
member
countries.
Promoting economic development: The WTO aims to promote economic development and
reduce poverty in developing countries by providing them with access to global
markets. The
organization provides technical assistance and training to developing countries to
help them build
their capacity to participate in international trade.
Ensuring environmental protection: The WTO recognizes the importance of
environmental
protection and sustainable development in international trade. It seeks to ensure
that trade
policies are not harmful to the environment and that they promote sustainable
development
practices.

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Structure of WTO

Principles of the WTO:

1.

2.
3.
4.
5.
6.
7.

Most-favored-nation (MFN) principle: This principle requires member countries to

treat all
other members equally in terms of trade. This means that any advantage or
concession granted to
one member country must also be granted to all other member countries.
National treatment: This principle requires member countries to treat foreign goods
and services
no less favorably than their own goods and services once they have entered their
markets. In
other words, imported goods and services should not be subject to discriminatory
treatment.
Prohibition on quantitative restrictions: The WTO prohibits the use of quantitative
restrictions,
such as quotas and import/export bans, on trade in goods, except in certain
circumstances, such
as for reasons of public health or national security.
Transparency: The WTO requires member countries to be transparent in their trade
policies and
practices, by notifying other members of any new measures that may affect trade,
and by
providing information on their trade policies and regulations.
Non-discrimination: The WTO aims to promote non-discrimination in trade by ensuring
that
member countries do not engage in discriminatory practices that favor their own
goods and
services over those of other countries.
Gradual liberalization of trade: The WTO promotes the gradual liberalization of
trade by
reducing trade barriers over time, through negotiated agreements among its members.
Special and differential treatment for developing countries: The WTO provides
special and
differential treatment for developing countries, recognizing that they may need
more time and
support to implement WTO agreements and to fully participate in international
trade.

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WTO Agreements

Agreement on Agriculture

The WTO Agreement on Agriculture is an international agreement that was signed in

1994 as part of
the Uruguay Round of multilateral trade negotiations. It aims to reform trade in
agricultural goods,
reduce trade barriers, and improve the global food security situation.
The WTO Agreement on Agriculture has three main pillars:

1.
2.

3.

Market Access: This refers to the ability of countries to sell their agricultural
products to other
countries without facing any restrictions or unfair trade practices. This pillar
aims to reduce tariffs
and other barriers to trade in agricultural goods.
Domestic Support: This refers to the subsidies and other forms of financial
assistance that
governments provide to their own farmers. This pillar aims to limit the amount of
subsidies that
governments can provide to their farmers, in order to prevent unfair competition
and distortion
of trade.
Export Competition: This refers to the practices of exporting countries that may
have a negative
impact on the agricultural markets of importing countries. This pillar aims to
regulate and limit
practices such as export subsidies and dumping, which can harm the economies of
developing
countries.

The WTO Agreement on Agriculture classifies subsidies provided by governments to

their farmers
into three boxes:
1.
2.
3.

Green Box: This includes subsidies that are considered minimally trade-distorting,
such as those
aimed at environmental protection, research and development, and food security.
Blue Box: This includes subsidies that are more trade-distorting, but are subject
to specific
conditions. These subsidies must be linked to production-limiting programs, and
must not provide
support to specific products beyond certain levels.
Amber Box: This includes subsidies that are considered the most trade-distorting,
such as price
supports and input subsidies. These subsidies are subject to reduction commitments
under the
WTO Agreement on Agriculture.

Impact of the WTO Agreement on Agriculture in India

India is a major agricultural producer and exporter, but it is also a developing
country that relies
heavily on agriculture for its economy and food security. The agreement has had
both positive and
negative impacts on India.
On the positive side, the agreement has helped India increase its agricultural
exports by reducing
trade barriers in other countries. This has benefited Indian farmers and
agribusinesses, and has
contributed to the country's economic growth.
However, the agreement has also had negative impacts on India. The domestic support
and export
competition pillars of the agreement have put pressure on India to reduce its
agricultural subsidies,
which has been difficult for the country to do. This has led to concerns about the
ability of Indian
farmers to compete with heavily subsidized farmers in other countries.
Additionally, the classification of subsidies into the three boxes has been a
contentious issue for
India. The country has argued that many of its subsidies fall into the green box,
but other countries have
argued that they belong in the more trade-distorting blue or amber boxes. This has
led to disputes and
negotiations at the WTO.
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Peace Clause

The Peace Clause is a temporary provision that was introduced in 2013 as part of
the Bali Package of
trade negotiations. It provides developing countries with protection from legal
action if their agricultural
subsidies exceed the limits set out in the WTO Agreement on Agriculture.
In essence, the Peace Clause allows developing countries to continue providing
subsidies to their
farmers beyond the limits set out in the agreement, as long as they meet certain
conditions. These
conditions include ensuring that the subsidies do not harm the trade interests of
other countries, and
that the subsidies are aimed at addressing food security concerns.
However, the Peace Clause is only a temporary provision, and it is set to expire in
2023. This means
that India and other developing countries will need to negotiate new rules around
agricultural subsidies
in the coming years, which could be challenging given the complexity of the issue
and the differing
interests of different countries.

General Agreement on Trade in Services (GATS)

GATS is an agreement between countries to liberalize trade in services. It was

established in 1995 as
a part of the World Trade Organization (WTO) and aims to promote the expansion of
trade in services
between member countries.

Important aspects of GATS:

Scope: GATS covers four modes of supply of services, which include

1. Cross-border supply: This mode of supply involves the delivery of a service from
one country to
another without the service provider physically moving across the border. For
instance, an
Indian IT firm may provide software development services to a client in the United
States over
the internet.
2. Consumption abroad: This mode of supply occurs when a service consumer travels
to another
country and consumes a service there. For instance, a Chinese student studying in
an Australian
university would be considered as a consumer of education services in Australia.
3. Commercial presence: This mode of supply involves the establishment of a
commercial
presence, such as a branch office or subsidiary, in another country to provide
services. For
instance, a Japanese bank may establish a branch office in India to offer banking
services to
customers.
4. Presence of natural persons: This mode of supply involves the movement of
service providers
across borders to provide services. For instance, an Australian architect may
travel to India to
provide architectural services for a construction project.

National treatment: This aspect of GATS requires that foreign service providers be
treated no less
favorably than domestic providers in a member country. This means that foreign
service providers
should have the same access to markets and be subject to the same regulations as
domestic providers.

For example, if a foreign bank wants to provide banking services in India, it

should be treated the
same as domestic banks in terms of regulatory requirements and market access.

Most-favored-nation treatment: This aspect of GATS requires that a member country

treat all other
member countries equally in terms of trade in services. This means that a country
cannot discriminate
against another member country by providing more favorable treatment to a third
country.
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For example, if India gives a particular benefit to the United States in the trade
of a particular
service, it must also provide the same benefit to all other GATS member countries.

Transparency: This aspect of GATS requires that member countries provide

information on their
services regulations and practices, including measures that affect trade in
services, to ensure that other
member countries are aware of them.
For example, if India introduces new regulations affecting the provision of
telecommunications
services, it must notify other member countries and provide them with an
opportunity to comment.

Flexibility: GATS allows member countries to maintain measures that restrict trade
in services for
certain reasons, such as protecting public health or national security.

For example, India may restrict the import of certain medical services in order to
protect public
health.

Trade-Related Investment Measures (TRIMS)

TRIMS are policies implemented by governments to regulate foreign investment.

There are several types of TRIMS, including:

Performance requirements: These require foreign investors to meet certain

conditions to receive
benefits from the host government, such as tax breaks or subsidies. For example, a
government may
require that a foreign company invests a certain amount of money in the local
economy, hires a certain
percentage of local workers, or uses local suppliers.
Local content requirements: These require foreign investors to use a certain
percentage of local
materials or products in their operations. For example, a government may require
that a car
manufacturer use a certain percentage of locally sourced parts in their production
process.
Trade balancing requirements: These policies require foreign investors to balance
their imports and
exports, either by limiting imports or by increasing exports. For example, a
government may require that
a foreign company import a certain amount of goods in order to be allowed to export
products from
their local operation.

Controversy around TRIMS

The use of TRIMS has been controversial, with some arguing that they restrict
foreign investment
and violate free trade principles. Critics argue that TRIMS can create barriers to
entry for foreign
investors and lead to inefficient allocation of resources. However, others argue
that TRIMS can help
developing countries by encouraging foreign investors to contribute to the local
economy and transfer
technology and skills to the host country.
Trade-Related Aspects of Intellectual Property Rights (TRIPS)

TRIPS is an agreement established by the World Trade Organization (WTO) that sets
out minimum
standards for the protection of intellectual property rights (IPRs) among its
member countries.
The agreement covers a wide range of intellectual property rights, including
patents, trademarks,
copyrights, and trade secrets. Its main objective is to promote innovation and
creativity by providing a
legal framework for the protection and enforcement of IPRs.
Here are some important aspects of TRIPS:
1.

Patent protection: TRIPS requires member countries to provide patent protection for
all
inventions, including pharmaceuticals, for a minimum of 20 years from the date of
filing. This

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2.

3.

means that a company that invents a new drug can prevent others from making, using,
or selling
the drug for a certain period of time, which helps to incentivize innovation.
For example, if a pharmaceutical company in India invents a new drug to treat a
particular
disease, they can apply for a patent and prevent other companies from copying their
invention for
20 years. This gives the company a chance to recoup their investment and make a
profit from
their invention.
Copyright protection: TRIPS requires member countries to provide copyright
protection for a
minimum of 50 years from the death of the author. This means that the creator of a
literary or
artistic work, such as a book or a painting, has exclusive rights to their work for
a certain period of
time.
For example, if an Indian author writes a book, they can prevent others from
copying or
distributing their book for 50 years after their death. This gives the author and
their heirs an
opportunity to earn a living from their creative work.
Enforcement mechanisms: TRIPS requires member countries to provide effective
enforcement
mechanisms for IPRs, including civil and criminal remedies. This means that if
someone infringes
on an IPR, such as by copying a patented invention or distributing copyrighted
material without
permission, the owner of the IPR can take legal action to stop the infringement and
seek
damages.
For example, if an Indian company copies a patented invention belonging to a
foreign company,
the foreign company can sue the Indian company for patent infringement and seek
damages. The
Indian court can then order the Indian company to stop infringing on the patent and
pay
compensation to the foreign company.

Sanitary and Phytosanitary Measures Agreement (SPS Agreement)

The SPS Agreement is a treaty that was created by the World Trade Organization
(WTO) to regulate
the use of sanitary and phytosanitary measures in international trade. Sanitary
measures are measures
designed to protect human and animal health, while phytosanitary measures are
measures designed to
protect plant health.
The main goal of the SPS Agreement is to ensure that these measures are applied in
a way that is
not arbitrary or discriminatory, and that they are not used as a way to unfairly
restrict trade between
countries.
Now, let's take a closer look at some of the important aspects of the SPS
Agreement:
1.

2.

3.

Non-discrimination: The SPS Agreement requires that countries apply their sanitary
and
phytosanitary measures in a non-discriminatory manner. This means that countries
cannot use
these measures as a way to favor their own domestic producers over foreign
producers.
For example, if a country requires all imported chicken to be tested for certain
diseases, it cannot
exempt its own domestic chicken from the same requirements. This ensures that all
producers are
subject to the same standards, regardless of where they are located.
Scientific justification: The SPS Agreement requires that countries base their
sanitary and
phytosanitary measures on scientific evidence. This means that measures cannot be
arbitrarily
imposed, and must be based on sound science.
For example, if a country bans the import of a certain fruit because it believes
that the fruit is
harmful to human health, it must provide scientific evidence to support this claim.
Equivalence: The SPS Agreement recognizes that different countries may have
different sanitary
and phytosanitary measures, but requires that these measures be equivalent. This
means that a
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country's measures must achieve the same level of protection as the measures of
another
country.
For example, if one country requires imported chicken to be tested for certain
diseases, while
another country requires imported chicken to be raised in a certain way to prevent
the spread of
those diseases, the two measures must be considered equivalent in terms of their
ability to
protect human health.
Transparency: The SPS Agreement requires that countries be transparent in their use
of sanitary
and phytosanitary measures. This means that countries must notify the WTO of any
new
measures they intend to implement, and provide information on the scientific basis
for those
measures.
For example, if a country intends to ban the import of a certain type of seafood,
it must notify the
WTO of this intention and provide scientific evidence to support the ban.

4.

Agreement on Subsidies and Countervailing Measures (SCM Agreement)

The SCM Agreement is a treaty under the World Trade Organization (WTO) that
regulates the use of
subsidies and countervailing measures in international trade. Its important aspects
include:

1.

Prohibition of certain subsidies: The SCM Agreement prohibits certain types of

subsidies that
are considered trade-distorting, such as subsidies that are contingent on the use
of domestic over
imported goods, and export subsidies that directly encourage the export of goods.
Regulation of subsidies that may cause trade distortion: The agreement also
regulates other
types of subsidies that may cause trade distortion. For example, subsidies that are
specific to
certain enterprises, industries, or regions can give them an unfair advantage over
their
competitors, and can distort trade flows. The agreement limits the use of such
subsidies, and
requires WTO members to notify and provide information about their subsidy
programs.
Provisions for countervailing measures: The agreement allows WTO members to take
countervailing measures against subsidies that cause adverse effects to their
domestic industries.
The member countries are allowed to impose countervailing duties, which are
additional tariffs,
on the subsidized imports. The purpose of the countervailing duties is to offset
the price
advantage created by the subsidies and to restore fair competition.

2.

3.
In summary, the SCM Agreement is an important treaty that aims to promote fair
competition and
prevent trade distortion by regulating the use of subsidies and countervailing
measures in international
trade.

G-20
The G20 is an informal organization comprising 19 countries and the European Union,
representing over
two-thirds of the worldwide population, 85% of global GDP, 80% of global
investment, and over 75% of
global commerce.
Established 1999
Membership 19 countries and the European Union
Headquarters No fixed headquarters
Publications The G20 Monitor
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Origin

The Asian Financial Crisis in 1997 led to the first meeting with finance ministers
and central bank leaders
in 1999. In 2008, another financial crisis made people realize that world leaders
needed to work
together. So, it was decided that G20 leaders would meet once a year.
Also, the finance ministers and central bank leaders from the G20 countries meet
twice a year to get
ready for these big meetings. These smaller meetings happen at the same time as
meetings for the
World Bank and the International Monetary Fund.

Members

The G20 consists of Argentina, Australia, Brazil, Canada, China, France, Germany,
India, Indonesia, Italy,
Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United
Kingdom, the United
States, and the European Union.
Spain isn't officially a member of the G20, it is invited as a permanent non-member
invitee.

Works of G20

The work of the G20 is divided into two main parts:

1. The "finance track" involves meetings of finance ministers, central bank
governors, and their
deputies from the G20 countries. They meet several times a year to talk about
money-related issues
and financial rules.
2. The "Sherpa track" deals with wider topics like politics, fighting corruption,
development, and
energy.
Each G20 country has a representative, called a Sherpa, who does the planning and
other tasks for their
country's leader.

Structure and Functioning

•

•
•
•
•

Every year, a different country takes on the role of G20 President. This is done in
a way that ensures
all regions are represented over time.
The 19 countries are split into five groups, each with no more than four countries.
Each group gets a
turn to have one of its countries be the president.
For example, India is in a group with Russia, South Africa, and Turkey. The G20
doesn't have a
permanent office or headquarters.
Instead, the G20 President is responsible for organizing the G20's plans and
responding to global
economic events.
There's also a system called "TROIKA". This is where the current G20 President
works with the
country that was President last year and the country that will be President next
year. This helps
keep the G20's plans consistent and well-organized.

G20 Cooperation Areas

The G20 gets help and advice from several international organizations. These
include:
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1. The Financial Stability Board (FSB), which looks after financial stability. It
was set up by G20
leaders after the global financial crisis.
2. The International Labour Organisation (ILO).
3. The International Monetary Fund (IMF).
4. The Organisation for Economic Co-operation and Development (OECD).
5. The United Nations (UN).
6. The World Bank.
7. The World Trade Organisation (WTO).
The G20 also meets with non-governmental organizations regularly.
Throughout the year, different groups from business (B20), civil society (C20),
labor (L20), think tanks
(T20), and youth (Y20) organize important events. The results of these events are
used to help G20
leaders make decisions.

Issues Addressed by G20

The G20 focuses on a broad agenda of global issues; while issues related to the
global economy
dominate the agenda, other items have become more prominent in recent years, such
as:
1. Financial market
2. Tax and fiscal policy
3. Trade
4. Agriculture
5. Employment
6. Energy
7. Fight against corruption
8. Women's advancement in the workplace
9. Sustainable Development Agenda 2030
10. Climate Change
11. Global Health
12. Anti-terrorism
13. Inclusive entrepreneurship

India's Priorities in G20 Summits

•
•
•
•
•
•

Investigating tax evasion to fight corruption.

Choking terror funds.
Cutting the Remittances Cost.
Market access for key drugs.
Reforms in the World Trade Organisation to enhance its functioning.
The Paris Agreement's "full implementation".

Achievements

1. Flexibility: With only 20 members, the G20 can make quick decisions and adapt to
changes.
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2. Inclusivity: Each year, the G20 invites other countries, international
organizations, and civil
society groups to join. This helps them get a wider range of views on global issues
and build
agreement on how to deal with them.
3. Coordinated action: The G20 has helped strengthen the rules for the world's
financial system,
including better cooperation between countries.
4. Crisis response: During the 2008 financial crisis, the G20 quickly provided
emergency money.
5. Financial oversight: The G20 works to improve how national financial
institutions are
monitored, to encourage changes in international financial institutions.
6. Tax reforms: The G20 and the OECD have driven changes to the international tax
system,
including the Base Erosion and Profit Shifting (BEPS) project and the
implementation of tax
transparency standards.
7. Better communication: The G20 brings together the world's most developed and
developing
countries to discuss how to make decisions in a way that everyone can agree on.

Challenges

1. No Enforcement Mechanism: The G20 can share information, set goals, and take
action
together. But unless all members agree, they can't enforce any of this. The only
pressure to
follow through comes from peer review and public responsibility.
2. No Legal Bind: The decisions made by the G20 aren't legally binding. They come
from
discussions and agreements that lead to declarations, but these declarations can't
be legally
enforced. The G20 is more of an advisory or consultative group with 20 members.

Significance

1. It brings together the world's strongest economies, both developed and

developing, to talk
about international economic and financial stability.
2. The G20 helps create an environment that supports global growth and development
that
includes everyone.
3. The G20's work to provide financial stability, promote growth, and prevent and
handle crises is
very important in helping less developed countries find opportunities and solve
problems.

G-7
Established
Membership
Headquarters
Publications

1975
Canada, France, Germany, Italy, Japan, United Kingdom, United States, and the
European Union
No formal headquarters. The presidency rotates annually among member
countries
The G7 does not have regular publications

Origin: The G7 was formed following the 1973 oil crisis, when the finance ministers
of France, West

Germany, the US, the UK, and Japan met informally. In 1975, the French President
expanded the group
to include heads of state for further talks on the global oil crisis.
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Membership: The G7 consists of seven industrialized democracies: the UK, Canada,
France, Germany,
Italy, Japan, and the US. Canada joined the group in 1976. The European Union has
been a full member
since 1981. Russia was a member from 1997 to 2014, during which the group was known
as the G8.
Russia was removed from G8 in response to its annexation of Crimea.
Aim: The G7 aims to provide a forum for the world's leading industrialized nations
to discuss and
coordinate on key global issues, including economic governance, international
security, and energy
policy. The group's decisions, while not legally binding, can significantly
influence global trends and
policies.

Criticism: Critics argue that the G7 is outdated and unrepresentative of the

world's largest economies,
particularly as it excludes emerging powers like China, India, and Brazil. Others
criticize the lack of
enforcement mechanisms for the group's decisions. The G7 has also been criticized
for its focus on the
interests of industrialized nations, potentially neglecting the needs and
perspectives of developing
countries.

Financial Action Task Force (FATF)

Established
Membership
Headquarters
Publications

1989
39 members (37 member jurisdictions and 2 regional organizations)
Paris, France
Grey and Black Lists

Origin: The Financial Action Task Force (FATF) was established in 1989 by the G7
Summit in Paris to

combat the growing problem of money laundering. The mandate of the FATF was
expanded in 2001 to
include efforts to combat terrorist financing.

Membership: The FATF is an inter-governmental body with 39 members, including 37

member

jurisdictions and 2 regional organizations (the European Commission and the Gulf
Cooperation Council).
Membership is based on an assessment of the applicant's commitment to the FATF's
objectives and
standards.

Aim: The main objectives of the FATF are to set standards and promote effective
implementation of

legal, regulatory, and operational measures for combating money laundering,

terrorist financing, and
other related threats to the integrity of the international financial system.
Blacklist and Greylist: The FATF maintains two types of lists to identify countries
that have

deficiencies in their anti-money laundering and counter-terrorist financing

regimes:

1. Blacklist: Also known as the "Call for Action" list, it includes countries that
the FATF calls on its
members to apply counter-measures to protect the international financial system
from the
ongoing and substantial money laundering and terrorist financing risks emanating
from the
countries on the list.

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2. Greylist: Also known as the "Other Monitored Jurisdictions" list, it includes
countries that have
committed to address identified deficiencies in their regimes to combat money
laundering and
terrorist financing. While these countries are not subject to the FATF's call for
action, they are
subject to increased monitoring.

Achievements:
1. Development of Recommendations: The FATF has developed a series of
Recommendations
that are recognized as the international standard for combating money laundering
and the
financing of terrorism and proliferation of weapons of mass destruction.
2. Increased Compliance: The FATF monitors countries to ensure they implement the
FATF
Recommendations effectively and holds countries accountable that do not comply.
3. Enhanced Global Cooperation: The FATF has fostered international cooperation
among its
members and beyond, promoting a coordinated global response to threats to the
integrity of
the financial system.

Criticism: The FATF has been criticized for its "blacklist" and "greylist"
approach, which some argue can

disproportionately affect poor and developing countries. Critics also argue that
the FATF's focus on
regulation and enforcement can overlook the root causes of illicit financial flows.
Furthermore, some
critics argue that the FATF's decision-making process lacks transparency and
accountability.

Asian Development Bank

Established
Membership
Headquarters
Publications

1966
68 members (49 from Asia and Pacific). United States: 15.56%, Japan: 15.56%,
China: 6.47%, India: 6.36%
Mandaluyong, Philippines
Asian Development Outlook

The Asian Development Bank (ADB) is an international financial institution that

aims to foster
economic growth, reduce poverty, and improve living standards in the Asia-Pacific
region. ADB has 68
member countries, including India, and works closely with governments, businesses,
and communities
to promote sustainable and inclusive development.

Focus areas:
1. Infrastructure development: ADB supports the development of infrastructure
projects such as
transportation, energy, and water supply systems. These projects help improve
connectivity, boost
economic activities, and enhance the quality of life for people in the region.
2. Poverty reduction and social development: ADB aims to reduce poverty and promote
social
development by investing in initiatives that improve education, healthcare, and
social protection
systems.
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3. Climate change and environmental sustainability: It supports projects that
promote clean
energy, sustainable natural resource management, and climate resilience to mitigate
the impacts of
climate change and protect the environment.
4. Regional cooperation and integration: ADB encourages regional cooperation and
integration
among its member countries. It supports initiatives that promote trade, investment,
and economic
cooperation within the region to foster inclusive and sustainable development.

Major Criticisms:
1. Governance and Accountability: ADB has faced criticism for its governance and
accountability practices. Some argue that decision-making processes within the bank
lack
transparency and participation from affected communities. Critics suggest that ADB
should
improve its governance mechanisms to ensure better accountability.
2. Social and Environmental Impacts: Critics claim that some ADB-funded projects
have had
negative social and environmental impacts. They argue that in the pursuit of
economic
development, the bank should prioritize people's rights, environmental
sustainability, and
community engagement. ADB has made efforts to address these concerns but still
faces
challenges in ensuring sustainable development outcomes.

Projects in India:
Dedicated Freight Corridor Project: ADB has provided financial assistance for the
construction of
dedicated freight corridors in India. These corridors aim to improve the efficiency
of freight
transportation, reduce logistics costs, and boost trade and economic activities.

New Development Bank

Established
Membership
Headquarters

2014
Brazil, Russia, India, China, South Africa (BRICS). Each member has one vote
Shanghai, China

The New Development Bank (NDB), also known as the BRICS Development Bank, is a
multilateral
development bank established by the BRICS countries (Brazil, Russia, India, China,
and South Africa) in
2014. It was created with the aim of mobilizing resources for infrastructure and
sustainable
development projects in emerging economies.

Focus Areas:
1. Infrastructure Financing: The NDB focuses on providing financial assistance for
infrastructure
development projects such as roads, railways, ports, airports, and renewable energy
projects. By
investing in infrastructure, the NDB aims to promote economic growth and enhance
connectivity among
member countries.
2. Sustainable Development: The bank supports projects that promote sustainable
development
and address environmental challenges. This includes funding for renewable energy
initiatives, waste
management systems, and water conservation projects.
3. Technological Innovation: The NDB encourages innovation and technology transfer
among
member countries. It promotes investments in research and development,
technological infrastructure,
and digital initiatives that can drive economic growth and foster collaboration.
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Major Criticisms:
1. Governance and Decision-Making: Some critics argue that decision-making within
the NDB is
dominated by the larger BRICS countries, particularly China. They suggest that
smaller member
countries may have limited influence over the bank's operations and project
selection.
2. Sustainability Standards: Critics have raised concerns about the NDB's
environmental and social
standards. They argue that the bank should enforce stricter guidelines to ensure
that funded projects
adhere to sustainable practices and do not harm local communities or the
environment.

Projects in India:
1. Renewable Energy: The NDB provided funding to a solar power project in
Rajasthan, India. This
initiative aims to expand the use of clean energy sources and reduce greenhouse gas
emissions.
2. Transport Infrastructure: The bank approved a loan for the Mumbai Metro Rail
Project, which
aims to enhance the city's transportation system and reduce congestion. This
project will contribute to
improving connectivity and promoting economic development in the region.
3. Water Management: The NDB is supporting a project in Madhya Pradesh, India,
focused on
improving water supply and sanitation facilities. This initiative aims to enhance
access to clean water
and sanitation services for local communities, thereby improving their quality of
life.

Asian Infrastructure Investment Bank (AIIB)

The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank
that was
established in 2016. The bank was created to provide funding for infrastructure
projects in Asia and to
support sustainable economic development in the region.
Established
Membership
Headquarters

16 January 2016
103 approved members. China (26.06%), India (7.62%), Russia (6.01%)
Beijing, China

Focus Areas: The AIIB finances a wide range of infrastructure projects, including
transportation,
energy, telecommunications, and water supply. The bank's focus is on sustainable
infrastructure
development, with an emphasis on projects that support climate change mitigation
and adaptation.

Issues:
1. Competition: The establishment of AIIB has led to competition with existing
development banks like the
World Bank and the Asian Development Bank.

2. Governance: Some critics have raised concerns about the transparency and
accountability of the AIIB's
operations and decision-making processes.

3. Environmental and social standards: There have been concerns about the AIIB's
environmental and
social standards, and whether the bank is doing enough to ensure that its
investments are sustainable
and socially responsible.

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Projects in India:
The AIIB has funded the construction of a new metro line in Mumbai, India, which
will improve the city's
transportation infrastructure and reduce traffic congestion.
Overall, the AIIB has become an important player in infrastructure development in
Asia, with a focus
on sustainable and climate-friendly projects.

Organization of the Petroleum Exporting Countries (OPEC)

Established
Membership
Headquarters
Publications

1960
13 countries: Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya,
Nigeria, the Republic of the Congo, Saudi Arabia, the United Arab Emirates, and
Venezuela
Vienna, Austria
World Oil Outlook

Focus area:
OPEC's primary focus is on coordinating and stabilizing the global oil market,
particularly in terms of
oil production and prices. OPEC achieves its goals through regular meetings where
member countries
discuss and decide on production quotas, export levels, and pricing strategies.

Example:
•
•

When global oil prices are too low, OPEC may agree to reduce oil production to
decrease the supply
in the market. This reduction in supply can help increase prices, benefiting the
member countries
economically.
Conversely, if prices are too high and threaten to decrease oil demand, OPEC may
decide to increase
production to ensure an adequate supply while potentially stabilizing prices.

Major criticism:
•
•
•

OPEC has faced criticism over the years for its market control and pricing
strategies, with some
arguing that it manipulates prices for its own benefit.
Critics claim that OPEC's actions can create artificial shortages or surpluses,
leading to price volatility
and economic uncertainty in oil-importing countries.
The organization has also been accused of using its collective power to influence
political dynamics
and exert undue pressure on non-OPEC oil producers.

India's Perspective:
•
•
•

India, as one of the largest importers of oil, has expressed concerns about the
impact of OPEC's
decisions on its economy.
India has advocated for stable and predictable oil prices that reflect market
fundamentals, without
excessive interference from OPEC or any other external factors.
It advocates for a fair balance between the interests of oil producers and
consumers.
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Organisation for Economic Co-operation and Development (OECD)
Established
Membership
Headquarters

1961
38 countries
Paris, France

Origin: The Organisation for Economic Co-operation and Development (OECD) was
established in 1961,
evolving from the Organisation for European Economic Co-operation (OEEC), which was
created in 1948
to administer the Marshall Plan for the reconstruction of Europe after World War
II.
Aim: The OECD aims to promote policies that improve the economic and social well-
being of people

around the world. It provides a forum for governments to work together to share
experiences and seek
solutions to common problems.

Achievements:
1. Economic Surveys and Reviews: The OECD conducts regular reviews of its member
countries'
economies and selected non-member economies, providing detailed economic analysis
and policy
recommendations. These surveys are highly regarded and influence policy-making in
member
countries.
2. Development of Standards: The OECD has developed internationally agreed
standards in a range of
areas, such as taxation, corporate governance, and public sector transparency. For
example, its work
on Base Erosion and Profit Shifting (BEPS) has been instrumental in combating tax
avoidance
strategies that exploit gaps and mismatches in tax rules.
3. Data Collection and Analysis: The OECD collects and analyzes a vast amount of
data, which helps
policymakers, researchers, and the public understand global trends and compare
policy experiences.
4. Promotion of Sustainable Development: The OECD has been a strong advocate for
sustainable
development, providing analysis and policy recommendations on how to achieve
economic growth
and development in a sustainable way.

Criticism: Critics argue that the OECD is a club of rich countries and its
standards and policies may not

always be suitable for or take into account the needs of developing countries. It
has also been criticized
for a lack of transparency and for being influenced by member countries with
stronger economies.

India's Perspective:
•
•
•

India is not a member of the OECD, but it has been an active participant in OECD
activities and has
had an Enhanced Engagement program with the OECD since 2007.
India sees the OECD as an important platform to learn from the experiences of
developed
economies. It also uses its engagement with the OECD to showcase its own economic
developments
and policy reforms.
However, India has also expressed concerns about certain OECD standards, such as
those related to
taxation, arguing that they do not always take into account the needs of developing
countries.
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South Asian Association for Regional Cooperation (SAARC)
Established
Membership
Headquarters

1985
8 countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan,
Sri Lanka
Kathmandu, Nepal

SAARC is an intergovernmental organization formed in 1985 with the goal of

promoting regional
cooperation among South Asian countries.

Focus areas:
•
•

SAARC aims to enhance cooperation in various areas, including trade, investment,

agriculture,
energy, transportation, tourism, and cultural exchanges.
SAARC promotes economic integration, poverty alleviation, and socio-cultural
development in the
region.

Major criticisms:
•
•

SAARC has faced criticism for its slow progress in achieving its objectives. The
organization has often
been hindered by political tensions and conflicts among member countries.
Some critics argue that SAARC has not been successful in addressing key regional
issues such as
terrorism, border disputes, and regional security challenges.

India's Perspective:
•
•
•
•

India sees SAARC as an important platform for fostering regional cooperation and
integration.
It believes that economic collaboration among South Asian countries can lead to
shared prosperity
and development in the region.
India has been actively involved in various initiatives under SAARC, such as the
South Asian Free
Trade Agreement (SAFTA), which aims to boost regional trade.
However, India's participation in SAARC has been affected by its strained relations
with Pakistan,
which has hindered progress and cooperation within the organization.

Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation

(BIMSTEC)
Established
Membership
Headquarters
1997
7 countries (Bangladesh, India, Myanmar, Sri Lanka, Thailand, Nepal, Bhutan)
Dhaka, Bangladesh

Focus Areas:
The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation
(BIMSTEC) is an
international organization involving a group of countries in South Asia and
Southeast Asia. The BIMSTEC
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member states—Bangladesh, India, Myanmar, Sri Lanka, Thailand, Nepal, and Bhutan—
are among the
countries dependent on the Bay of Bengal.
Fourteen priority sectors of cooperation have been identified and several BIMSTEC
centers have been
established to focus on those sectors. The sectors are as follows: Trade &
Investment, Transport &
Communication, Energy, Tourism, Technology, Fisheries, Agriculture, Public Health,
Poverty Alleviation,
Counter-Terrorism & Transnational Crime, Environment & Disaster Management,
Cultural Cooperation,
People-to-People Contact, and Climate Change.

Major Criticism:
BIMSTEC has been criticized for its slow progress due to lack of political will,
inadequate resources, and
overlapping membership with other regional bodies. There is also criticism that
BIMSTEC is being used
by India as a tool to bypass Pakistan in regional integration efforts, which could
potentially lead to
geopolitical tensions.

India's Perspective:
India sees BIMSTEC as a bridge between South Asia and Southeast Asia. It provides
India with an
opportunity to advance its 'Act East' policy and to integrate more closely with the
economies of
Southeast and East Asia. India has been actively promoting BIMSTEC as a viable
alternative to SAARC
(South Asian Association for Regional Cooperation), which has been hampered by
India-Pakistan
tensions.

Association of Southeast Asian Nations (ASEAN)

Established
Membership
Headquarters

1967
10 countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam
Jakarta, Indonesia

ASEAN is a regional organization comprising ten member countries in Southeast Asia.

Background:
ASEAN was established in 1967 with the signing of the ASEAN Declaration or Bangkok
Declaration.

Focus areas:
•

Economic Integration:
o ASEAN aims to promote economic cooperation and integration among its member
countries.
o It has implemented the ASEAN Economic Community (AEC) initiative, which aims to
create a
single market and production base within the region.
o This includes the free flow of goods, services, investments, and skilled labor,
as well as the
reduction of trade barriers and harmonization of economic policies.
Political and Security Cooperation:
o ASEAN works towards maintaining peace, stability, and security in the region.
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It fosters dialogue, promotes conflict resolution, and encourages cooperation among
member
countries in dealing with political and security issues.
o ASEAN also engages in collaborations with external partners on security matters.
Socio-Cultural Cooperation:
o ASEAN aims to strengthen cultural ties and promote social development in the
region.
o It encourages collaboration in various fields, such as education, tourism, human
rights, and
public health.
o ASEAN organizes events and activities to promote cultural exchange and mutual
understanding
among member countries.

India's point of view:

•
•
•

India has been actively engaging with ASEAN as part of its "Act East" policy,
emphasizing closer ties
with Southeast Asia.
India sees ASEAN as a key partner in promoting economic cooperation, cultural
exchange, and
regional stability.
India has been working towards enhancing trade and investment relations with ASEAN
countries,
including negotiating free trade agreements and participating in ASEAN-led forums
such as the East
Asia Summit.

Bank for International Settlements (BIS)

Established
Membership
Headquarters

1930
63 member central banks
Basel, Switzerland

Origin: The Bank for International Settlements (BIS) was established in 1930. It
was initially created to
manage German reparations payments mandated by the 1919 Treaty of Versailles. Over
time, its role
has evolved to serve as a bank for central banks and a forum for monetary
cooperation.
Membership: The BIS has 63 member central banks, representing countries from around
the world that
together account for about 95% of world GDP.
Aim: The main goal of the BIS is to promote monetary and financial stability around
the world. It does

this by serving as a bank for central banks, providing a forum for policy dialogue,
conducting research,
and providing banking services to central banks and international organizations.
Achievements:
1. Financial Stability: The BIS has played a key role in promoting financial
stability, providing a
platform for central banks to exchange information and collaborate on financial and
monetary
matters.
2. Basel Accords: The BIS has been instrumental in the development of the Basel
Accords, which
provide recommendations on banking laws and regulations to enhance financial
stability.
3. Research and Statistics: The BIS produces and shares high-quality research and
statistics on
economic and financial matters, helping to inform policy decisions.
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Criticism: The BIS has been criticized for its lack of transparency and
accountability, as it is not
accountable to any national government. Some critics also argue that the BIS's
policy recommendations,
particularly those related to fiscal austerity and financial deregulation, can
contribute to economic
inequality and instability.
World Economic Forum
Established
Membership
Headquarters
Publications
Annual Meeting
in Davos

1971
World's largest corporations, political leaders, selected intellectuals, and
journalists
Cologny, Switzerland
WEF produces a series of reports including the Global Competitiveness
Report, Global Risks Report, Global Gender Gap Report, and others
The WEF's annual meeting in Davos, Switzerland, is a major event where
global leaders from various sectors come together to discuss and shape
global, regional, and industry agendas.

Origin: The World Economic Forum (WEF) was founded in 1971 by Klaus Schwab, a
German economist
and engineer. It was initially named the European Management Forum and was designed
to connect
European business leaders to their counterparts in the United States.

Membership: The WEF is composed of the world's largest corporations, political

leaders, select
intellectuals, and journalists. Membership is stratified according to the level of
engagement with forum
activities, with the highest level of membership requiring an invitation and annual
fees of CHF 600,000
(approximately USD 620,000).

Aim: The WEF aims to improve the state of the world by engaging business,
political, academic, and
other leaders of society to shape global, regional, and industry agendas. It serves
as a platform for
leaders from all sectors of society to come together and discuss issues of global
concern.

Criticism: Critics argue that the WEF is a gathering of wealthy individuals and
corporations that are

primarily interested in promoting free trade and globalization, often at the

expense of developing
economies and the environment. It has also been criticized for its high costs and
for being an exclusive
club for the world's elite.

India's Perspective: India has been an active participant in the WEF. It sees the
forum as a platform to

showcase its economic potential, attract foreign investment, and engage with global
leaders on issues of
mutual interest. Indian leaders, including Prime Minister, have attended the annual
meeting in Davos to
present India's growth story and its role in the global economy.

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Previous Years Prelims Questions
1.

“Rapid Financing Instrument” and “Rapid Credit Facility” are related to

the provisions of lending by which of the following:
a.
b.
c.
d.

2.

2022

Asian Development Bank

International Monetary Fund
United Nations Environment Programme Finance Initiative
World Bank

With reference to the “G20 Common Framework”, consider the following

statements:

2022

1. It is an initiative endorsed by the G20 together with the Paris Club.

2. It is an initiative to support Low Income Countries with
unsustainable debt.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

3.

With reference to Trade-Related Investment Measures (TRIMS), which of

the following statements is/are correct?
(1) Quantitative restrictions on imports by foreign investors are
prohibited.
(2) They apply to investment measures related to trade in both goods
and services.
(3) They are not concerned with the regulation of foreign investment.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only

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2020
(c) 1 and 3 only
(d) 1, 2 and 3
4.

India’s ranking in the ‘Ease of Doing Business Index’ is sometimes seen in

the news. Which of the following has declared that ranking?

2016

(a) Organization for Economic Cooperation and Development (OECD)

(b) World Economic Forum
(c) World Bank
(d) World Trade Organization (WTO)
5.

‘Global Financial Stability Report’ is prepared by the

2016

(a) European Central Bank

(b) International Monetary Fund
(c) International Bank for Reconstruction and Development
(d) Organization for Economic Cooperation and Development
6.

The term ‘Regional Comprehensive Economic Partnership’ often appears

in the news in the context of the affairs of a group of countries known as

2016

(a) G20
(b) ASEAN
(c) SCO
(d) SAARC
7.

‘European Stability Mechanism’, sometimes seen in the news, is an

(a) agency created by EU to deal with the impact of millions of
refugees arriving from Middle East

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2016
(b) agency of EU that provides financial assistance to eurozone
countries
(c) agency of EU to deal with all the bilateral and multilateral
agreements on trade

8.

(d) agency of EU to deal with the conflicts arising among the member
countries
Recently, which one of the following currencies has been proposed to be
added to the basket of the IMF’s SDR?

2016

(a) Rouble
(b) Rand
(c) Indian Rupee
(d) Renminbi
9.

With reference to the International Monetary and Financial Committee

(IMFC), consider the following statements :

2016

(1) IMFC discusses matters of concern affecting the global economy

and advises the International Monetary Fund (IMF) on the direction of its
work.
(2) The World Bank participates as an observer in IMFC’s meetings.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
10. Which one of the following issues the ‘Global Economic Prospects’ report

periodically?
(a) The Asian Development Bank
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2015
(b) The European Bank for Reconstruction and Development
(c) The US Federal Reserve Bank
(d) The World Bank
11. Which of the following organizations brings out the publication known as

2014

‘World Economic Outlook’?

(a) The International Monetary Fund
(b) The United Nations Development Programme
(c) The World Economic Forum
(d) The World Bank

Previous Years Mains Questions

1.

The China Pakistan Economic Corridor (CPEC) is viewed as a cardinal

subset of China’s larger ‘One Belt One Road’ initiative. Give a brief
description of CPEC and enumerate the reasons why India has distanced
itself from the same.

Answers

1.

2.

3.

4.

5.

6.

7.

8.

9.

C
10.

11.

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2018
19. Planning in India

Say hello! |

@Ketanomy
Contents
Significance of Planning in Economic
Development: ......................................................................
... 403
Historical
Context: ..........................................................................
.................................................... 403
Early efforts towards economic planning in
India ..........................................................................
403
Dadabhai Naoroji and the Quest for Economic
Justice .............................................................. 403
M. Visvesvaraya and the Call for National
Planning ................................................................... 404
Influence of Soviet Planning (1928) and Great
Depression: ...................................................... 404
Congress Resolution and Provincial Autonomy (1935-
1937): .................................................... 404
National Planning Committee (NPC,
1938): ............................................................................
... 404
The Bombay Plan and Industrialization
(1944) ..........................................................................
404
People's
Plan...............................................................................
................................................ 404
Sarvodaya Plan and the Gandhian
Vision ............................................................................
....... 404
Brief overview of India's economic challenges post-
independence .................................................. 404
Establishment of the Planning
Commission ........................................................................
............... 405
Five Year
plans .............................................................................
....................................................... 405
First Five-Year Plan (1951-
1956) .............................................................................
....................... 405
Second Five-Year Plan (1956 -
1961) .............................................................................
................. 406
Third Five-Year Plan (1961 -
1966) .............................................................................
.................... 406
Plan holidays (1966-
1969) .............................................................................
................................ 406
Fourth Five-Year Plan (1969 -
1974) .............................................................................
.................. 406
Fifth Five-Year Plan (1974 -
1978) .............................................................................
..................... 407
Rolling Plan (1978-
1980) .............................................................................
................................... 407
Sixth Five-Year Plan (1980 -
1985) .............................................................................
..................... 408
Seventh Five-Year Plan (1985 -
1990)..............................................................................
............... 408
Annual Plans (1990-91 & 1991-
92)................................................................................
................. 408
Eighth Five-Year Plan (1992 -
1997) .............................................................................
.................. 409
Ninth Five-Year Plan (1997 -
2002)..............................................................................
................... 409
Tenth Five-Year Plan (2002 -
2007) .............................................................................
................... 409
Eleventh Five-Year Plan (2007 -
2012)..............................................................................
.............. 410
Twelfth Five-Year Plan (2012 -
2017) .............................................................................
................ 410
India's shift towards market-oriented reforms in the
1990s ............................................................. 410
India's economic situation in the early
1990s: ............................................................................
... 410
Overview of liberalization, privatization, and globalization
policies.................................................. 410
Liberalization: ...................................................................
.............................................................. 411
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Privatization:.....................................................................
.............................................................. 411
Globalization:.....................................................................
............................................................. 411
Outcomes of LPG
Reforms ...........................................................................
...................................... 411
Unintended outcomes of the LPG
reforms: ..........................................................................
......... 412
Premature Deindustrialization and Growth of Services in
India ........................................................ 413
Criticisms of the Planning
Commission: .......................................................................
...................... 414
Formation of NITI Aayog (National Institution for Transforming
India):............................................ 414
Structure of NITI
Aayog: ............................................................................
..................................... 415
Features of NITI
Aayog: ............................................................................
...................................... 415
Comparison of Planning Commission and NITI
Aayog ....................................................................... 416
Achievements of NITI
Aayog: ............................................................................
................................. 416
Previous Years Prelims
Questions .........................................................................
............................. 418
Previous Years Mains
Questions .........................................................................
............................... 420

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Chapter 19
Planning in India
Planning refers to the process of setting goals, formulating strategies, and making
decisions to
achieve desired outcomes. In the context of economics, planning plays a crucial
role in the overall
development of a country's economy. It involves the systematic organization and
allocation of resources
to achieve economic objectives.

Significance of Planning in Economic Development:

1.
2.
3.
4.

Resource Allocation: It ensures that resources are utilized in the most productive
and equitable
manner, leading to overall economic development.
Economic Stability: It enables governments to implement policies that reduce
economic volatility
and ensure sustainable growth.
Industrialization and Diversification: Planning facilitates the industrialization
and diversification
of the economy, thereby increasing resilience and long-term growth prospects.
Social Development: Planning considers social objectives alongside economic goals.
It focuses on
improving education, healthcare, infrastructure, and social welfare to enhance the
well-being and
living standards of the population.

Historical Context:
Pre-independence economic scenario: India was under British colonial rule, and the
economy
was primarily designed to serve British interests rather than promote indigenous
industrial
development.
The absence of comprehensive planning meant that economic policies and development
efforts
were not coordinated, leading to inefficiencies and disparities in growth across
regions.

Early efforts towards economic planning in India

Dadabhai Naoroji and the Quest for Economic Justice

Dadabhai Naoroji, known as the "Grand Old Man of India," played a pivotal role in
addressing
economic justice during the late 19th century. His book, "Poverty and Un-British
Rule in India,"
published in 1901, shed light on the drain of wealth and economic exploitation
faced by Indians under
British rule. Naoroji's work laid the foundation for recognizing the need for
economic planning to
alleviate poverty and uplift the nation.

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M. Visvesvaraya and the Call for National Planning

M. Visvesvaraya, an accomplished engineer and statesman, advocated for planned

development
during his tenure as the Diwan of Mysore from 1912 to 1918. His implementation of
development
initiatives in Mysore showcased the effectiveness of systematic planning. In 1934,
he formulated a ten
year plan for economic development of the country in his book “Planned Economy for
India”.

Influence of Soviet Planning (1928) and Great Depression:

The Soviet Union's successful planning experiment in 1928 attracted global

attention. The Great
Depression of the 1930s affected most countries except the USSR. Indian leaders
recognized the
potential of planned development after observing the USSR's success.

Congress Resolution and Provincial Autonomy (1935-1937):

The Government of India Act 1935 introduced provincial autonomy, leading to

Congress forming
governments in eight provinces. The Congress Working Committee suggested an
interprovincial
committee to address urgent national reconstruction and social planning issues.

National Planning Committee (NPC, 1938):

Congress President Subhash Chandra Bose initiated the NPC. Jawaharlal Nehru led the
committee,
which studied various aspects of India's economy. NPC laid the foundation for
coordinated economic
planning in India.

The Bombay Plan and Industrialization (1944)

In 1944, influential industrialists including JRD Tata, GD Birla, Purshottamdas

Thakurdas and others
proposed the Bombay Plan as a comprehensive strategy for economic development. The
plan focused
on industrialization, infrastructure development, and social welfare measures. It
advocated for a mixed
economy, with collaboration between the private sector and state intervention.

People's Plan

People’s plan was drafted by MN Roy. This plan was for ten years period and gave
greatest priority
to Agriculture. Nationalization of all agriculture and production was the main
feature of this plan. This
plan was based on Marxist socialism.

Sarvodaya Plan and the Gandhian Vision

Inspired by Mahatma Gandhi's and Vinoba Bhave’s principles, J.P. Narayan championed
the
Sarvodaya Plan. The plan emphasized non-violence, self-reliance, and equitable
distribution of wealth.
Cooperative farming and self sufficiency were central to the Sarvodaya Plan's
vision for economic
development.
These early endeavors laid the foundation for subsequent Five-Year Plans and
continue to shape
India's economic policies, reflecting the nation's journey towards inclusive and
sustainable
development.

Brief overview of India's economic challenges post-independence

After gaining independence in 1947, India faced several immediate economic
challenges.
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1.
2.
3.

4.
5.

At the time of independence, India was grappling with widespread poverty and low
levels of
economic development. The poverty rate was alarmingly high, with around 70% of the
population
living below the poverty line.
The Indian economy was predominantly agrarian, with the majority of the population
engaged in
agriculture. However, agricultural productivity was low due to outdated farming
techniques, lack
of irrigation facilities, and fragmented landholdings.
Infrastructure, including transportation, power, and communication networks, was
underdeveloped and inadequate. Limited road and rail connectivity hindered trade
and economic
growth. Access to electricity was limited, with a significant portion of the
population lacking
reliable power supply.
India's industrial sector was underdeveloped, with limited capital and outdated
technology. The
industrial sector's contribution to GDP was relatively low, at around 8% in 1950.
The country relied heavily on imports for essential goods, including machinery and
capital goods.
Limited foreign exchange earnings from exports put pressure on the balance of
payments, leading
to trade deficits and a constant struggle to stabilize the currency.

Establishment of the Planning Commission

In the early years after India gained independence, the need for systematic
economic planning was
recognized to drive the nation's development and address the challenges inherited
from colonial rule.
This led to the establishment of the Planning Commission in 1950, which played a
crucial role in
formulating and implementing Five-Year Plans.
The Planning Commission, under the chairmanship of the Prime Minister, was
responsible for
coordinating and guiding the process of economic planning at the national level.
Its primary objective
was to promote balanced and sustainable economic growth, equitable resource
allocation, and social
justice.

Five Year plans

First Five-Year Plan (1951-1956)

The First Five-Year Plan marked the beginning of India's planned economic
development. Led by
Prime Minister Jawaharlal Nehru, this plan aimed to lay the foundation for rapid
industrialization and
promote agricultural growth.
The First Plan drew inspiration from the Harrod-Domar model, which emphasized the
importance of
investment in driving economic growth. However, it incorporated modifications to
suit India's specific
needs and challenges.
Primary focuses of the First Five-Year Plan was agricultural development. The First
Plan exceeded its
growth target, achieving a growth rate of 3.6%, surpassing the initial target of
2.1%. One notable
outcome of the First Five-Year Plan was the establishment of five Indian Institutes
of Technology (IITs) in
Kharagpur, Mumbai, Chennai, Kanpur, and Delhi.

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Second Five-Year Plan (1956 - 1961)

The Second Five-Year Plan under the leadership of Jawaharlal Nehru, aimed to
further propel India's
economic development. This plan was based on the P.C. Mahalanobis Model, which
emphasized
industrialization as a means to achieve rapid growth.
The primary focus of the Second Five-Year Plan was on industrial development. It
aimed reduce
dependence on imports. The plan emphasized the establishment of heavy industries,
such as steel,
chemicals, and machinery.
While the plan set a target growth rate of 4.5%, it fell short and achieved a
growth rate of 4.27%. It
also faced criticism from experts who argued that the plan's emphasis on heavy
industries came at the
expense of agriculture and other crucial sectors. The shortcomings of the Second
Five-Year Plan became
evident in 1957 when India faced a payment crisis.
Despite these challenges and criticisms, the Second Five-Year Plan did witness
progress in certain
areas. It saw the establishment of various public sector enterprises, investment in
infrastructure
development, and the initiation of important projects such as the Bhakra-Nangal
Dam.

Third Five-Year Plan (1961 - 1966)

The Third Five-Year Plan, also known as the 'Gadgil Yojna,' after D.R. Gadgil, the
Deputy Chairman of
the Planning Commission at that time.
The main objective of the Third Five-Year Plan was to achieve economic self-
sufficiency. However,
the execution of this plan faced significant challenges due to external factors.
During the plan period,
India was involved in two wars—the Sino-India war of 1962 and the Indo-Pakistani
war of 1965. These
conflicts strained the economy, shifting the focus towards the defense industry,
the Indian Army, and
stabilizing prices due to inflationary pressures.
Unfortunately, the Third Five-Year Plan did not meet its intended targets. The plan
faced setbacks
primarily due to the impact of the wars and drought conditions in certain regions.
The target growth
rate was set at 5.6%, but the achieved growth rate was only 2.4%.

Plan holidays (1966- 1969)

During the period from 1966 to 1969, the Indian government declared a series of
annual plans
known as "Plan Holidays." These plan holidays were introduced as a response to the
failure of the Third
Five-Year Plan, primarily due to the Indo-Pakistani war and the Sino-India war.
The focus was placed on addressing the immediate economic challenges faced by the
country. The
annual plans during the plan holidays gave equal importance to both agriculture and
its allied sectors, as
well as the industrial sector. In an effort to bolster the country's exports, the
government decided to
devalue the Indian rupee. Devaluation made Indian goods more competitive in
international markets by
lowering their prices relative to other currencies.
The plan holidays were a departure from the conventional long-term planning
approach, reflecting
the need for flexibility and adaptability during a period of economic instability
and geopolitical tensions.

Fourth Five-Year Plan (1969 - 1974)

The Fourth Five-Year Plan under the leadership of Prime Minister Indira Gandhi,
aimed to achieve
two main objectives: sustainable growth with stability and progressive self-
reliance.

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During this plan period, several significant developments took place. One notable
action was the
nationalization of 14 major Indian banks, which aimed to strengthen the banking
sector and promote
financial inclusivity. Additionally, the Green Revolution was initiated to increase
agricultural productivity
and address food shortages. The period also witnessed the Indo-Pakistani War of
1971 and the
Bangladesh Liberation War.
Another important focus of the Fourth Five-Year Plan was the implementation of
family planning
programs. The government aimed to control population growth and promote
reproductive health and
family welfare.
However, despite these efforts, the Fourth Five-Year Plan did not achieve its
targets. The plan's
growth rate fell short, reaching only 3.3% instead of the intended 5.7%. The Indo-
Pakistani War of 1971
and the Bangladesh Liberation War strained the economy, diverting resources and
attention away from
developmental goals. Additionally, other economic factors such as rising oil
prices, inflation, and internal
political instability also posed challenges to the plan's implementation.

Fifth Five-Year Plan (1974 - 1978)

The Fifth Five-Year Plan aimed to address various socio-economic challenges and
promote inclusive
growth in India.
During this plan period, one of the primary objectives was the eradication of
poverty, as reflected in
the slogan "Garibi Hatao" (Remove Poverty). Efforts were made to uplift
marginalized sections of society
through targeted policies and programs.
Employment generation and social justice were also significant priorities during
the Fifth Five-Year
Plan. The government launched the Twenty-point Program in 1975, which aimed to
address various
socio-economic issues such as unemployment, housing, education, and healthcare. The
Minimum Needs
Programme (MNP) was introduced to provide essential services and infrastructure in
rural areas. India
went through the “Emergency” period from 1975 to 1976.
Despite challenges such as the global oil crisis and economic instability, the
Fifth Five-Year Plan
achieved relative success. It surpassed its growth target, achieving a growth rate
of 4.8% compared to
the intended 4.4%. However, the Fifth Five-Year Plan was terminated prematurely in
1978 by the newly
elected government led by Morarji Desai.

Rolling Plan (1978-1980)

The Rolling Plan was introduced as an interim planning approach after the
termination of the Fifth
Five-Year Plan, with the intention of providing flexibility and adaptability to
India's economic planning
process.
Under the Rolling Plan, three types of plans were introduced. Firstly, there was
the plan for the
current year, which focused on the annual budget and short-term goals. Secondly,
there was a plan for a
fixed number of years, ranging from 3 to 5 years, which aimed to address medium-
term objectives.
Lastly, a perspective plan for long-term goals, spanning 10, 15, or 20 years, was
also formulated.
The Rolling Plan offered certain advantages over the conventional Five-Year Plans.
It allowed for the
adjustment of targets and the flexibility to respond to changing economic
conditions. Projects,
allocations, and policies could be revised annually based on the prevailing
circumstances, which was
seen as a positive aspect of the plan.
However, the Rolling Plan also had its drawbacks. The frequent amendments to
targets and plans
could create difficulties in achieving the desired outcomes and lead to instability
in the Indian economy.
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Due to these concerns and the need for a more structured and comprehensive approach
to
planning, the Rolling Plan was rejected by the Indian National Congress in 1980.
Instead, a new Sixth
Five-Year Plan was introduced to provide a more cohesive and focused framework for
economic
development.

Sixth Five-Year Plan (1980 - 1985)

The Sixth Five-Year Plan under the leadership of Prime Minister Indira Gandhi,
aimed to foster
economic liberalization, eradicate poverty, and achieve technological self-reliance
in India.
It recognized the importance of capital investment and infrastructure development
as drivers of
economic progress.

One of the key targets of the Sixth Five-Year Plan was to achieve a growth rate of
5.2%. However,
the plan surpassed this target and achieved a growth rate of 5.7%.
During the Sixth Five-Year Plan, efforts were made to promote industrialization,
enhance agricultural
productivity, and invest in key sectors such as energy, infrastructure, and
education. The plan also
focused on improving healthcare services, expanding access to education, and
strengthening social
welfare programs.
The Sixth Five-Year Plan marked a significant step towards economic liberalization
and self-reliance

Seventh Five-Year Plan (1985 - 1990)

The Seventh Five-Year Plan under the leadership of Prime Minister Rajiv Gandhi,
focused on
achieving self-sufficiency in the Indian economy, generating productive employment
opportunities, and
upgrading technology.
The plan placed significant emphasis on accelerating food grain production to meet
the growing
demands of the population.
Another key objective of the Seventh Five-Year Plan was to increase employment
opportunities and
raise productivity. Efforts were made to promote labor-intensive industries and
enhance skill
development programs to meet the demand for skilled manpower.
The plan also marked a shift in the approach towards the private sector, giving it
priority over the
public sector for the first time. This change aimed to foster entrepreneurship,
attract investments, and
stimulate economic growth through private enterprise.
Despite economic challenges and social unrest during this period, the Seventh Five-
Year Plan
achieved remarkable success. It exceeded its growth target of 5.0% and recorded a
growth rate of 6%.

Annual Plans (1990-91 & 1991-92)

Due to the volatile political situation at the center, the Eighth Five-Year Plan
could not be
implemented as scheduled. Instead, two annual plans were formulated to address the
economic
challenges and ensure some degree of continuity in planning.
These annual plans aimed to address immediate economic concerns and mitigate the
impact of the
delay in implementing the Eighth Five-Year Plan.

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Eighth Five-Year Plan (1992 - 1997)

The Eighth Five-Year Plan under the leadership of Prime Minister V. Narasimha Rao,
aimed to
prioritize the development of human resources, including employment, education, and
public health.
During this plan period, the government launched the New Economic Policy of India,
which aimed to
liberalize and reform the Indian economy. The policy introduced measures such as
deregulation,
privatization, and liberalized foreign investment to stimulate economic growth and
attract global
participation.
The Eighth Five-Year Plan witnessed several notable economic outcomes. Rapid
economic growth
was achieved, with the highest annual growth rate recorded thus far at 6.8%. The
plan also saw
improvements in trade and current account deficits.
One remarkable aspect of the Eighth Five-Year Plan was the decline in the share of
public sector
investment, which accounted for about 34% of total investment. This reflected the
emphasis on
encouraging private sector participation and reducing the government's role in the
economy.

Ninth Five-Year Plan (1997 - 2002)

The Ninth Five-Year Plan under the leadership of Prime Minister Atal Bihari
Vajpayee, had the main
objective of achieving "Growth with Social Justice and Equality." It was launched
in commemoration of
India's 50th year of independence.
Despite its ambitious goals, the Ninth Five-Year Plan fell short of its growth
target of 6.5%. It
achieved a growth rate of 5.6%, which was lower than anticipated. Several factors
contributed to this
outcome, including the impact of global economic fluctuations and domestic
challenges such as policy
implementation issues, infrastructure bottlenecks, and regional disparities.
Although the plan did not meet its growth target, it still made significant
contributions in various
sectors. The Ninth Five-Year Plan witnessed the launch of key policy initiatives
such as the National
Highway Development Program, the Pradhan Mantri Gram Sadak Yojana (PMGSY) for rural
road
connectivity, and the Sarva Shiksha Abhiyan (Education for All) program.

Tenth Five-Year Plan (2002 - 2007)

The Tenth Five-Year Plan was implemented under the leadership of both Prime
Ministers Atal Bihari
Vajpayee and Manmohan Singh. The primary objective of this plan was to double
India's per capita
income within a decade, with the goal of reducing the poverty ratio to 15% by 2012.
Despite the ambitious targets, the Tenth Five-Year Plan fell slightly short of its
growth target. It
achieved a growth rate of 7.6%, which, although substantial, was slightly below the
intended 8.0%.
Various factors contributed to this outcome, including global economic
uncertainties and domestic
policy challenges.
The plan prioritized infrastructure development, with a particular focus on roads,
railways, power
generation, and telecommunication networks. Additionally, the plan emphasized the
importance of
inclusive growth and social welfare programs. Initiatives such as the Mahatma
Gandhi National Rural
Employment Guarantee Act (MGNREGA) were launched to provide employment
opportunities to rural
households and alleviate poverty.

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Eleventh Five-Year Plan (2007 - 2012)

The Eleventh Five-Year Plan under the leadership of Prime Minister Manmohan Singh,
focused on
the theme of "rapid and more inclusive growth." The plan was prepared by economist
C. Rangarajan and
aimed to address the challenges of poverty, unemployment, and regional disparities
while achieving a
high and sustainable growth rate.
Despite the global economic slowdown and other challenges, the Eleventh Five-Year
Plan achieved a
commendable growth rate of 8%. While it fell slightly short of the targeted 9%
growth, it still marked a
significant achievement given the prevailing economic conditions.

Twelfth Five-Year Plan (2012 - 2017)

The Twelfth Five Year Plan aimed to achieve "Faster, More Inclusive, and
Sustainable Growth" for
the country. The key focus areas of the plan included economic development, poverty
reduction, social
inclusion, and environmental sustainability.

India's shift towards market-oriented reforms in the 1990s

India's economic situation in the early 1990s:

Slow Economic Growth: India's economy was growing at a sluggish pace, averaging
around 3-4%

per year in the 1980s. The traditional socialist economic model had led to
inefficiencies, low
productivity, and a lack of competitiveness, hindering the country's growth
potential.

Fiscal Imbalance: High government spending, coupled with subsidies and welfare
programs,
resulted in a strain on public finances and a crowding out of private investment.
Inefficient Public Sector: The public sector, which played a dominant role in
various industries,

suffered from inefficiencies, overstaffing, and lack of accountability. State-owned

enterprises faced
financial losses, low productivity, and were unable to keep pace with global
competition.
The immediate reasons that compelled India to undertake market-oriented reforms in
the 1990s:
1. Balance of Payments Crisis: India was facing a severe shortage of foreign
exchange reserves,
which threatened the country's ability to meet its international payment
obligations.

2. Liberalization Wave: The global economic landscape was witnessing a wave of

liberalization and
globalization, with countries opening up their economies and embracing market-
oriented policies. India
recognized the need to align itself with these global trends to tap into
international markets and attract
foreign capital.
3. External Pressure: International financial institutions, such as the
International Monetary Fund
(IMF) and the World Bank, exerted pressure on India to undertake structural reforms
as a condition for
financial assistance and loans. This external pressure acted as a catalyst for
India to initiate marketoriented reforms.

Overview of liberalization, privatization, and globalization policies

In the early 1990s, India introduced a set of policies known as liberalization,
privatization, and
globalization (LPG) to transform its economy and integrate with the global market.
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Liberalization:
1.
2.

3.
4.
5.

Reduction of import tariffs: India gradually lowered import duties to promote

international
trade and open up the domestic market. For example, the average import duty was
reduced from
around 85% in the early 1990s to around 30% by the mid-1990s.
Foreign direct investment (FDI) liberalization: Restrictions on foreign investment
were relaxed,
allowing greater foreign participation in key sectors. For instance, sectors like
telecommunications, automobiles, and insurance were opened up to FDI, leading to
the entry of
international companies and increased investments.
Liberalization of the banking sector: Private and foreign banks were permitted to
operate in
India, breaking the monopoly of public sector banks. This led to increased
competition and
improved banking services.
Interest rate liberalization: The government moved towards market-determined
interest rates,
allowing banks to set their own lending and deposit rates.
Capital market reforms: The Securities and Exchange Board of India (SEBI) was
established to
regulate and develop the capital market. Measures such as the introduction of
electronic trading
and the liberalization of foreign institutional investments (FIIs) were
implemented.

Privatization:
1.

2.

Disinvestment of public sector enterprises: The government began selling off its
stake in stateowned enterprises to reduce the role of the public sector and
encourage private investment. For
example, companies like Maruti Udyog (automobiles) and Bharat Aluminium Company
(BALCO)
were partially or fully privatized.
Deregulation of industries: Licensing requirements and regulations were eased or
abolished to
foster competition and promote entrepreneurship. Industries like
telecommunications, aviation,
and banking witnessed significant deregulation, allowing for increased private
sector
participation.

Globalization:
1.

2.

Current account convertibility: India gradually relaxed restrictions on the

convertibility of the
rupee for current account transactions, facilitating international trade and
capital flows.
Reduction of import licensing: Import licensing requirements were simplified,
reducing
bureaucratic hurdles and facilitating imports.

Outcomes of LPG Reforms

1.
2.

3.

Economic Growth: The LPG reforms played a significant role in driving India's
economic growth.
The average GDP growth rate increased from around 4% in the pre-reform era to over
7% in the
post-reform period.
Foreign Direct Investment (FDI): The LPG reforms attracted substantial foreign
direct
investment into India. This infusion of foreign capital helped modernize industries
and fostered
technological advancements, such as in the automotive sector where global
automobile
companies set up manufacturing plants in India.
Technological Advancements: The LPG reforms facilitated the transfer of technology
and knowhow to Indian firms. For instance, the information technology sector
experienced remarkable
growth, with Indian companies becoming major players in global IT services.
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4.

5.
6.
7.
8.
9.

10.

11.

Industrial and Sectoral Transformation: The LPG reforms led to a transformation of

industries
and sectors. The delicensing and privatization of industries resulted in increased
competition and
efficiency. One notable example is the telecom sector, where privatization and
competition led to
a significant expansion in mobile phone usage and affordable connectivity for
millions of Indians.
Global Integration: The LPG reforms opened up the Indian economy to global markets.
India
became an active participant in international trade, and its merchandise exports
grew from $18.1
billion in 1991 to $345.6 billion in 2020.
Rise of Indian Multinational Companies: The LPG reforms empowered Indian companies
to
expand globally. Some Indian companies, such as Tata Group, Infosys, and Reliance
Industries,
emerged as multinational corporations with operations and investments in multiple
countries.
Employment Generation: The LPG reforms led to increased job opportunities across
sectors. For
instance, the IT and business process management (BPM) industry employed over 4.4
million
professionals in 2020.
Improved Infrastructure: The LPG reforms brought investments in infrastructure
development.
For example, the Golden Quadrilateral project, initiated in 1999, improved road
connectivity
across major cities in India.
Consumer Choices and Quality: Liberalization and increased competition resulted in
a wider
range of choices and improved quality of goods and services for consumers. For
instance, the
availability of affordable smartphones and internet connectivity has brought
digital services and
e-commerce within reach of millions of Indians, transforming the way they access
information,
make purchases, and conduct business.
Entrepreneurship and Innovation: The LPG reforms fostered a culture of
entrepreneurship and
innovation in India. The startup ecosystem witnessed significant growth, with India
ranking third
globally in terms of the number of startups. Startups such as Flipkart, Ola, and
Paytm have
disrupted traditional sectors and introduced innovative business models.
Poverty Reduction: The sustained economic growth resulting from the LPG reforms has
had
positive impacts on poverty reduction.

Unintended outcomes of the LPG reforms:

1.

2.

3.

4.
5.

Income Inequality: While the reforms led to overall economic growth, the benefits
were not
equally distributed among all segments of society. The gap between the rich and the
poor
widened, leading to increased income disparities.
Regional Disparities: The LPG reforms had a varying impact on different regions of
India. Some
regions, particularly urban areas and states with better infrastructure and
education, experienced
faster growth and development. However, rural areas and economically disadvantaged
regions
faced challenges in adapting to the new economic environment, resulting in regional
disparities.
Job Displacements: The reforms, particularly in sectors like agriculture and
manufacturing, led to
job displacements and restructuring. As industries became more competitive, some
traditional
sectors faced challenges, and workers in these sectors were affected by layoffs or
shifts in
employment patterns.
Environmental Concerns: The increased industrial activity, urbanization, and
consumption
patterns resulted in environmental degradation, including pollution, deforestation,
and resource
depletion.
Social Impact: The LPG reforms brought changes in social structures and norms.
Traditional
sectors and small-scale industries faced challenges in adapting to the new
competitive
environment, leading to social disruptions. Additionally, the increased influence
of consumerism
and market-driven values had an impact on social and cultural aspects of Indian
society.

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6.

7.

8.

Vulnerability to Global Economic Fluctuations: The increased integration of the

Indian
economy with the global market made it more susceptible to global economic
fluctuations. The
2008 global financial crisis and subsequent global recessions had spill-over
effects on the Indian
economy, leading to slower growth rates and increased vulnerabilities.
Financial Sector Risks: The liberalization of the financial sector brought
opportunities but also
exposed the economy to financial risks. Instances of financial fraud, market
volatility, and banking
sector vulnerabilities emerged, highlighting the need for effective regulatory
mechanisms and risk
management practices.
Loss of Government Control: As a consequence of privatization, the government lost
control
over certain key sectors and industries which raised concerns related to national
security and
public welfare.

Premature Deindustrialization and Growth of Services in India

Premature Deindustrialization: Premature deindustrialization refers to the decline
of the industrial
sector before reaching its full potential. It is characterized by decreased
industrial sector contribution to
GDP, employment, and growth rate.
Causes of Premature Deindustrialization:
1.

2.
3.
4.
5.

Lack of Infrastructure Investment: Poor infrastructure hampers effective industrial

operations
and slows growth.
High Cost of Doing Business: High taxes, bureaucratic hurdles, and energy costs
deter industrial
growth.
Limited Access to Credit: Difficulty in accessing credit hinders investment in new
technologies
and expansion.
Protectionism: Protectionist policies hinder competition and innovation, limiting
industrial
growth.
Low Labor Productivity: Lower labor productivity compared to other countries
affects
competitiveness.

Reasons for Growth of Services:

1.
2.
3.
4.

Skilled Labor Force: India's educated and fluent in English skilled workforce fuels
service sector
growth, especially in IT and BPO.
Low Capital Requirement: Services require less capital investment compared to heavy
industries.
Economic Liberalization (1991): Liberalization policies attracted foreign
investment, boosting
service sector growth.
Government Support: Pro-service policies, tax incentives, subsidies, and
infrastructure
investment aided growth in Service sector.

Can India Become Developed Without Strong Industry?

While India's service sector has propelled growth, a strong industrial base remains
crucial.
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Benefits of Strong Industrial Base:

1.
2.
3.
4.
5.

Employment Generation: Industry creates more jobs, especially for less-skilled

workers.
Diversified Economy: A mix of agriculture, industry, and services ensures economic
stability.
Technological Innovation: Industrialization fosters innovation, research, and
development.
Export Competitiveness: Industrial products contribute significantly to exports,
boosting foreign
exchange earnings.
Balanced Regional Development: Industrialization reduces urban-rural disparities
and promotes
inclusive growth.

India's premature deindustrialization and rapid service sector growth reflect a

complex economic
landscape. While service sector growth is valuable, a balanced and diversified
economy with a strong
industrial base is essential for sustainable and holistic development. A renewed
emphasis on the
manufacturing through programmes like ‘Make in India’ will serve to correct this
anomaly.

Criticisms of the Planning Commission:

1.

2.
3.

4.
5.

Lack of constitutional mandate: The Planning Commission operated as an extra-

constitutional
body, meaning it was not established or mandated by the Constitution of India. This
led to
criticism regarding its legitimacy and authority to make decisions and allocate
resources.
Lack of accountability and transparency: The Planning Commission was criticized for
its opaque
functioning and lack of accountability to the public.
One-size-fits-all approach: The Commission was accused of following a uniform
planning
approach that did not take into account the specific needs and challenges of
different states and
regions.
Inefficient allocation of resources: The Commission's centralized planning approach
was
criticized for leading to inefficient allocation of resources.
Slow decision-making: The Commission was often criticized for its slow decision-
making
process, which hampered the implementation of development projects.
The decision to abolish the Planning Commission was made by the Indian government
in 2014,
recognizing the need for a more modern and effective institution to address the
country's
developmental challenges.

Formation of NITI Aayog (National Institution for Transforming India):

NITI Aayog was established on January 1, 2015, as a replacement for the Planning
Commission. It
was aimed at fostering cooperative federalism and transforming India into a
dynamic, knowledge-based,
and inclusive society.

Shift in approach: NITI Aayog adopted a more decentralized and participatory

approach to
planning and policy-making, promoting the involvement of states, experts, and
stakeholders. It aimed to
promote the concept of "Team India" by involving all levels of government in the
decision-making
process.
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Structure of NITI Aayog:

1. Chairperson: The Prime Minister of India serves as the chairperson of NITI

Aayog.

2. Vice-Chairperson: NITI Aayog also has a vice-chairperson, who is appointed by

the Prime
Minister.

3. Governing Council: NITI Aayog also has a Governing Council, which serves as the
apex body of
the institution. It includes the Prime Minister as the Chairperson, Chief Ministers
of all states
and union territories, Lieutenant Governors of union territories, and other members
as deemed
necessary.
4. Full-time Members: The Aayog has a maximum of five full-time members, who are
appointed
by the Prime Minister based on their expertise and experience in different sectors.
These
members are responsible for guiding and advising the Aayog on its policies and
initiatives.
5. Ex-officio Members: The Aayog also includes certain ex-officio members, who are
appointed
due to their official positions in the government. These members include the
Ministers of
Finance, Agriculture, Home Affairs, and Human Resource Development.
6. Special Invitees: NITI Aayog may invite experts, specialists, and
representatives from the
private sector, civil society organizations, and international organizations to
participate in its
meetings and deliberations. These special invitees provide valuable input and
guidance to the
Aayog.
7. Regional Councils: NITI Aayog also includes five regional councils, each
representing a
geographical region of India - North, South, East, West, and Northeast. The Chief
Ministers of
the respective states in each region serve as members of their respective councils,
along with
Union Ministers and other officials.

Features of NITI Aayog:

1.

Team India Hub: NITI Aayog operates the Team India Hub, which acts as a platform
for
collaboration between central ministries and state governments.
2.
Knowledge and Innovation Hubs: NITI Aayog establishes Knowledge and Innovation Hubs
in
various domains to facilitate research, innovation, and knowledge exchange. These
hubs serve as
centers of excellence, bringing together experts, academia, and industry to
generate new ideas
and drive policy innovation.
3.
Three Key Documents:
a. 3-Year Action Agenda: NITI Aayog prepares a 3-Year Action Agenda, which outlines
specific
policy priorities, targets, and initiatives to be achieved within a three-year
timeframe. It
provides a roadmap for short-term actions and policy implementation.
b. 7-Year Medium-Term Strategy Paper: The Aayog formulates a 7-Year Medium-Term
Strategy Paper, which sets medium-term goals, policy directions, and strategies for
achieving sustainable and inclusive growth.
c. 15-Year Vision Document: NITI Aayog develops a 15-Year Vision Document, which
provides
a long-term vision for India's development. It outlines aspirations, challenges,
and strategies
to transform India into a prosperous, inclusive, and sustainable society.
3. Cooperative Federalism: NITI Aayog recognizes the importance of states as active
partners in
India's development and fosters collaboration, dialogue, and coordination between
the central
government and states.
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4. Bottom-Up Approach: NITI Aayog encourages a bottom-up approach to planning and
development.
It emphasizes the participation of local communities, grassroots organizations, and
civil society in
identifying and addressing developmental challenges at the grassroots level.

Comparison of Planning Commission and NITI Aayog

Planning Commission
Established in
abolished in 2014

NITI Aayog

1950

and

Centralized
planning
allocation of resources

and

Top-down approach

Established in 2015
Policy think tank, coordination, and advisory body
Bottom-up approach with a focus on cooperative federalism

Centralized decision-making by
Collaborative decision-making involving central and state
the Commission
governments and other stakeholders
One-size-fits-all approach

Tailored approach to address specific state needs and

challenges

Lack of transparency and public

Emphasizes transparency and accountability through public
accountability
participation and consultations

Achievements of NITI Aayog:

1.

2.

3.

4.

5.

Sustainable Development Goals (SDGs): NITI Aayog played a pivotal role in aligning
India's
development agenda with the United Nations' Sustainable Development Goals. It led
the
formulation of India's National Indicator Framework and facilitated the monitoring
and
implementation of the SDGs at the national and state levels.
Atal Innovation Mission (AIM): NITI Aayog launched the Atal Innovation Mission to
foster
innovation and entrepreneurship among India's youth. Under AIM, initiatives like
Atal Tinkering
Labs, Atal Incubation Centers, and Atal Community Innovation Centers were
established,
promoting a culture of innovation and creating a supportive ecosystem for startups.
Aspirational Districts Program: NITI Aayog initiated the Aspirational Districts
Program to drive
the development of India's most disadvantaged districts. Through targeted
interventions,
capacity building, and strategic partnerships, the program aims to uplift these
districts and bridge
the developmental gaps.
Strategic Planning: NITI Aayog has introduced long-term vision documents, medium-
term
strategy papers, and three-year action agendas to guide India's development
trajectory. These
documents provide a comprehensive roadmap and strategic direction for policy
formulation,
resource allocation, and program implementation.
Cooperative Federalism: NITI Aayog has fostered a spirit of cooperative federalism
by actively
engaging with state governments and involving them in the decision-making process.
It has
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6.

7.

facilitated collaborative platforms and interactions among states, enabling the

sharing of best
practices, knowledge exchange, and coordination on development initiatives.
International Engagements: NITI Aayog has played a proactive role in engaging with
international organizations, think tanks, and countries. It has facilitated
partnerships,
collaborations, and knowledge-sharing to draw global best practices, innovative
solutions, and
expertise to address India's developmental challenges.
Digital Transformation: NITI Aayog has been at the forefront of driving digital
transformation in
India. It has advocated for digital governance, promoted digital literacy, and
supported initiatives
such as Digital India, Digital Payments, and Digital Health, ensuring the inclusion
of technology in
various sectors to enhance efficiency and service delivery.

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Previous Years Prelims Questions
1.

With reference to the Indian economy after the 1991 economic liberalization,
consider the following statements :

2020

(1) Worker productivity (Rs per worker at 2004-05 prices) increased in

urban areas while it decreased in rural areas.
(2) The percentage share of rural areas in the workforce steadily
increased.
(3) In rural areas, the growth in the non-farm economy increased.
(4) The growth rate in rural employment decreased.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 and 4 only
(c) 3 only
(d) 1, 2 and 4 only
2.

With reference to India’s Five-Year Plans, which of the following statements

is/are correct?
(1) From the Second Five-Year Plan, there was a determined thrust
towards substitution of basic and capital good industries.
(2) The Fourth Five-Year Plan adopted the objective of correcting the
earlier trend of increased concentration of wealth and economic power.
(3) In the Fifth Five-Year Plan, for the first time, the financial sector was
included as an integral part of the Plan.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 only
(c) 3 only

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2019
(d) 1, 2 and 3
3.

With reference to ‘National Investment and Infrastructure Fund’, which of the

following statements is/are correct?

2017

(1) It is an organ of NITI Aayog.

(2) It has a corpus of Rs. 4, 00,000 crore at present.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
4.

With reference to ‘Financial Stability and Development Council’, consider the

following statements :

2016

(1) It is an organ of NITI Aayog.

(2)It is headed by the Union Finance Minister.
(3) It monitors macroprudential supervision of the economy.
Which of the statements given above is/are correct?
(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3
5.

The main objective of the 12th Five-Year Plan is

(a) inclusive growth and poverty reductions

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2014
(b) inclusive and sustainable growth
(c) sustainable and inclusive growth to reduce unemployment
(d) faster, sustainable and more inclusive growth.

Previous Years Mains Questions

1.

How are the principles followed by NITI Aayog different from those followed
by the erstwhile planning commission in India?
2.
Normally countries shift from agriculture to industry and then later to
services, but India shifted directly from agriculture to services. What are the
reasons for the huge growth of services vis-a-vis the industry in the country?
Can India become a developed country without a strong industrial base?
3.
Examine the impact of liberalization on companies owned by Indians. Are
they competing with the MNCs satisfactorily? Discuss.
Answers
1.
B
2.
A
3.
D
4.
C
5.
D

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2018
2014

2013
20. Unemployment

Say hello! |

@Ketanomy
Contents
Terms related to
Unemployment ......................................................................
................................. 423
Working age
population ........................................................................
......................................... 423
Labour
Force .............................................................................
...................................................... 423
Labour Force Participation
Rate ..............................................................................
....................... 423
Unemployment
Rate ..............................................................................
........................................ 423
Types of
Unemployment ......................................................................
.............................................. 424
Disguised
Unemployment ......................................................................
........................................ 424
Structural
Unemployment ......................................................................
........................................ 424
Seasonal
unemployment ......................................................................
.......................................... 425
Technological
Unemployment ......................................................................
................................. 425
Cyclical
Unemployment ......................................................................
............................................ 426
Frictional
Unemployment.......................................................................
........................................ 426
Voluntary
Unemployment ......................................................................
........................................ 427
Underemployment ...................................................................
...................................................... 427
Keynesian
Unemployment ......................................................................
....................................... 427
Measurement of
Unemployment.......................................................................
................................ 428
Elasticity of
Employment ........................................................................
............................................ 429
Causes of Unemployment in
India .............................................................................
........................ 429
Impact of
Unemployment ......................................................................
............................................ 430
Government Initiatives to control
unemployment ......................................................................
...... 430
Previous Years Prelims
Questions .........................................................................
............................. 431

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Chapter 20
Unemployment
Unemployment is a term used to describe the situation where people who are willing
and able to
work are unable to find jobs.

Terms related to Unemployment

Working age population

The working age population refers to the portion of a country's population capable
of participating
in the labor force. This typically includes individuals between the ages of 15-59.

Labour Force

The labour force includes all individuals who are currently employed or unemployed
but looking for
work.

People who are not working and not looking for work (such as retirees, students, or
those who have
given up on finding a job) are not part of the labour force.
The labour force can be broken down by demographic factors: Economists often study
the labour
force by breaking it down into subgroups based on demographic factors such as age,
gender, education
level, and occupation. This can help us understand how different groups are faring
in the job market and
identify areas where there may be barriers to employment.

Labour Force Participation Rate

The labor force participation rate is the percentage of people who are either
working or actively
seeking work out of the total population of working-age individuals.
LFPR = (Labour Force / Total number of people in the working-age population) x 100%
So, for example, if there are 50 people employed and 10 people actively seeking
work out of a total
working-age population of 100 people, the labor force participation rate would be:
(50 + 10) / 100 x 100% = 60%
The labor force participation rate is an important economic indicator because it
provides insight into
the health of the labor market. A high labor force participation rate can indicate
a strong labor market,
with many opportunities for employment. On the other hand, a low labor force
participation rate can
indicate a weak labor market, with fewer job opportunities.

Unemployment Rate

Unemployment rate is a measure of the percentage of the total labor force in an

economy that is
currently unemployed and actively seeking employment.
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Unemployment Rate = (Number of Unemployed / Labor Force) x 100
Let's break down this formula with the previous example. If there are 50 people
employed and 10
people actively seeking work out of a total working-age population of 100 people,
the unemployment
rate would be:
Labor force = Number of employed + Number of unemployed = 60
Now we can plug in the numbers and calculate the unemployment rate:
Unemployment rate = (10 / 60) x 100% = 16.67%

Types of Unemployment
Disguised Unemployment

Disguised unemployment is a type of unemployment that occurs when people appear to

be
employed but are actually not contributing to the economy in a meaningful way. In
other words, there
are more people working in a particular sector than is actually necessary for the
amount of work that
needs to be done.
Here's an example to help illustrate this concept. Let's say that there is a small
farm that requires 4
people to work it efficiently. However, due to a lack of job opportunities in the
area, 8 people are
working on the farm. While the extra 4 people may appear to be employed, they are
not actually
contributing to the productivity of the farm, since the work could be done with
fewer people.
Disguised unemployment is often found in agricultural economies, where there may be
a lack of
alternative employment opportunities. It can also occur in other sectors of the
economy, such as
construction or manufacturing.

Disguised unemployment can be measured using a concept called the "Marginal Product
of
Labor" (MPL). The MPL is the additional output that is produced when one additional
unit of labor is

added to the production process. When the MPL is low or zero, it suggests that
there may be disguised
unemployment in the sector.
MPL = change in output / change in labor input
If the MPL is low or zero, it suggests that adding additional labor to the
production process is not
resulting in much additional output. This could indicate that there are too many
workers in the sector,
and some of them are not actually contributing to the economy.

Structural Unemployment

Structural unemployment is a type of unemployment that occurs when there is a

mismatch between
the skills and abilities of workers and the jobs that are available in the economy.
In other words, it's
when people are unemployed because their skills are not in demand in the job
market.

One common example of structural unemployment is when a particular industry or

sector of the
economy experiences a decline and jobs in that area become less in demand. For
example, the rise of
automation and technology has led to job losses in industries such as
manufacturing, where machines
and robots can perform tasks that were previously done by human workers. This can
result in structural
unemployment for workers who have skills and experience in those industries but may
not have the
necessary skills to transition to new jobs in other sectors of the economy.
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Another example of structural unemployment is when there is a lack of education and
training
opportunities available for workers to acquire the skills needed for jobs that are
in demand. This can be
especially true for workers in rural or economically disadvantaged areas, where
there may be limited
access to education and training programs.
By helping workers to develop new skills and transition to new job opportunities,
we can reduce the
incidence of structural unemployment and promote more inclusive economic growth.

Seasonal unemployment

Seasonal unemployment refers to a type of unemployment that occurs due to seasonal

fluctuations
in demand for labor. This means that during certain times of the year, there is
more demand for workers
in certain industries, and during other times of the year, there is less demand. As
a result, workers may
be unemployed during the off-seasons when there is not enough work available.
One common example of seasonal unemployment is in the agricultural industry. During
planting and
harvesting seasons, there is a lot of demand for workers to help with the planting,
harvesting, and
processing of crops. However, during the off-seasons, there is not as much work
available in this
industry, and workers may be unemployed.
Another example of seasonal unemployment is in the tourism industry. In many
tourist destinations,
there is a peak season when there are a lot of visitors and a lot of demand for
workers in the hospitality
and service sectors. However, during the off-seasons, there are fewer visitors and
less demand for
workers, which can lead to unemployment.
In some cases, seasonal unemployment can also lead to a reduction in wages for
workers, as there is
more competition for the available jobs during peak seasons.
Governments may try to address seasonal unemployment through policies such as job
training
programs or by supporting industries that can provide year-round employment. In
some cases,
governments may also provide unemployment benefits or other forms of support to
workers who are
unemployed during the off-seasons.

Technological Unemployment

Technological unemployment is a term that refers to the loss of jobs that occurs as
a result of
advancements in technology. When machines and automation become more efficient and
capable than
human workers, it can lead to a decrease in demand for human labor and result in
unemployment.
One example of technological unemployment is the replacement of human workers with
robots in
factories.
Another example of technological unemployment is the rise of self-driving cars.
While this
technology is still being developed, it has the potential to greatly reduce the
need for human drivers in
industries such as transportation and logistics. If self-driving cars become
widespread, it could lead to
significant job losses for drivers and other workers in related industries.
It's worth noting that technological unemployment is not a new phenomenon.
Throughout history,
technological advancements have often led to job losses in certain industries, but
they have also created
new job opportunities in others. For example, the rise of the internet and e-
commerce has led to the
creation of new jobs in fields such as web development and online marketing.
However, some economists and researchers have expressed concern that the current
wave of
automation and artificial intelligence could lead to a greater and more widespread
impact on
employment than in the past. As technology continues to advance, it's important for
policymakers and
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society as a whole to consider the potential impacts on employment and work to
develop solutions to
help workers adapt to these changes.

Cyclical Unemployment

Cyclical unemployment is a type of unemployment that occurs as a result of changes

in the overall
economy. Specifically, cyclical unemployment is caused by a downturn in the
business cycle, which leads
to a decrease in demand for goods and services, and therefore a decrease in demand
for workers.
When the economy is in a downturn or recession, companies may cut back on
production and lay off
workers in order to save costs. As a result, many workers who were previously
employed may find
themselves without a job.
For example, during the global financial crisis of 2008, many companies in the
United States and
around the world were forced to lay off workers in order to stay afloat. This led
to a significant increase
in the number of people who were unemployed.
Cyclical unemployment is usually temporary and tends to decrease as the economy
recovers and
demand for goods and services increases. However, it can have significant negative
effects on
individuals and the overall economy in the short term, as people may struggle to
pay bills or may be
unable to find work.
Policymakers may use fiscal or monetary policy to try to combat cyclical
unemployment during times
of economic downturn. For example, the government may increase spending on
infrastructure projects
to create jobs, or the central bank may lower interest rates to stimulate borrowing
and spending.

Frictional Unemployment

Frictional unemployment is a type of unemployment that occurs when workers are

between jobs. It
happens when people are in the process of looking for a new job or transitioning
from one job to
another.
It's called "frictional" unemployment because it's a natural part of the labor
market, and it occurs
because of the time and effort it takes for workers and employers to find each
other and match the right
skills to the right job openings. In other words, there is some "friction" or delay
in the process of job
matching.
For example, let's say that someone quits their job as a software developer to look
for a job as a
data analyst. During the time they're searching for a new job, they would be
considered frictionally
unemployed. They're not unemployed because they lack the skills or qualifications
to work, but because
they're in between jobs.
Another example of frictional unemployment could be someone who just graduated from
college
and is actively searching for their first job. They may face a period of
unemployment while they search
for a job that matches their skills and qualifications.
It's important to note that frictional unemployment is generally considered to be a
temporary and
short-term phenomenon. In fact, some level of frictional unemployment is actually
seen as a good thing
because it can help to facilitate better job matches and more efficient use of
labor resources in the
economy.

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Voluntary Unemployment

Voluntary unemployment refers to a situation where a person chooses not to work,

even though
there are job opportunities available. This can occur for a variety of reasons,
such as personal
preferences, family responsibilities, or the pursuit of further education or
training.
For example, let's say that a recent college graduate is offered a job with a
starting salary that is
below their expectations. The graduate may choose not to take the job and instead
continue searching
for a higher paying opportunity, even though they are capable of doing the job they
were offered. This is
an example of voluntary unemployment, as the individual has made a conscious
decision not to work,
despite the presence of job opportunities.
Another example of voluntary unemployment could be someone who decides to take time
off work
to care for a sick family member. While there may be job opportunities available,
the individual has
chosen not to work in order to take care of their family member.
In some cases, voluntary unemployment can be beneficial for the individual and
society. For
example, if someone chooses to pursue further education or training, it may lead to
increased skills and
higher wages in the future, which can ultimately benefit the economy as a whole.

Underemployment

Underemployment refers to a situation where a person is employed but not in a job

that fully
utilizes their skills, abilities, and education. In other words, they may be
working, but they are not able
to work as many hours as they would like, or they are working in a job that does
not pay as well or
provide the same level of job security as they could otherwise have.
An example of underemployment would be a person who holds a degree in engineering
but is
working as a cashier at a retail store. They are employed, but they are not using
their education and
skills to their fullest potential, and they may be earning less than they would in
a job that better matches
their qualifications.
Underemployment can have a number of negative effects on both individuals and the
economy as a
whole. For individuals, it can result in lower wages, fewer benefits, and reduced
job satisfaction. It can
also lead to increased stress, depression, and other mental health issues.
From an economic perspective, underemployment can result in a loss of productivity
and economic
growth. When people are not able to work to their full potential, it can slow down
the overall growth of
the economy and make it harder for businesses to expand and create new jobs.

Keynesian Unemployment

Keynesian unemployment is a type of unemployment that is caused by a lack of

aggregate demand
in the economy. To understand this, we first need to understand the basic
principles of Keynesian
economics.

As per, John Maynard Keynes, well known economist, the economy is not always self-
correcting and
can sometimes get stuck in a state of recession or depression. In his view,
government intervention is
necessary to stimulate the economy and help it recover from these downturns.
One of the ways Keynes thought the government could intervene was by increasing
aggregate
demand. Aggregate demand refers to the total amount of goods and services that
consumers,
businesses, and the government are willing to buy at a given price level. When
aggregate demand is low,
businesses may not have enough customers to justify hiring new workers, which can
lead to
unemployment.
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Keynesian unemployment occurs when the economy is in a recession or depression, and
there is not
enough aggregate demand to keep people employed. In this situation, the government
can step in and
use various policy tools to increase aggregate demand and stimulate economic
growth.
For example, the government might increase spending on infrastructure projects or
provide tax
incentives to businesses to encourage investment. By doing so, they can create more
demand for goods
and services, which in turn can lead to more hiring and lower unemployment.
Another way to increase aggregate demand is by lowering interest rates, which can
make borrowing
cheaper and encourage consumers and businesses to spend more. This can also help
stimulate
economic activity and reduce unemployment.

Measurement of Unemployment
In India, the National Sample Survey Office (NSSO), which is part of the Ministry
of Statistics and
Programme Implementation (MoSPI), is responsible for conducting surveys to measure
unemployment.
There are several approaches to measuring unemployment, and the NSSO uses three
main
approaches:
1. Usual Status Approach: This approach estimates only those persons as unemployed
who had
no gainful work for a major time during the 365 days preceding the date of the
survey. This
approach provides a measure of long-term unemployment.
2. Weekly Status Approach: This approach considers only those persons as unemployed
who did
not have gainful work even for an hour on any day of the week preceding the date of
the survey.
This approach provides a measure of short-term unemployment.
3. Daily Status Approach: This approach measures the unemployment status of a
person for
each day in a reference week. A person who has no gainful work even for 1 hour in a
day is
described as unemployed for that day. This approach provides a more detailed
picture of
unemployment patterns over time.
The Periodic Labour Force Survey (PLFS) is a comprehensive survey of employment and
unemployment conducted by the National Sample Survey Office (NSSO).
The PLFS collects data on a wide range of labor market indicators, including
employment,
unemployment, and labor force participation rates. It also provides detailed
information on the
demographic characteristics of the labor force, such as age, sex, education, and
occupation.
The survey is conducted using a stratified random sampling method, and covers both
rural and
urban areas. The sample size is large enough to provide reliable estimates at the
national, state, and
district levels.
The PLFS has become an important source of data for policymakers, researchers, and
analysts
interested in understanding the dynamics of the labor market in India. It provides
up-to-date
information on key labor market indicators, and helps to identify trends and
patterns that can inform
policy decisions related to employment, training, and social protection.

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Elasticity of Employment
The elasticity of employment refers to the responsiveness of employment to changes
in economic
growth, as measured by the growth rate of GDP.
Elasticity of Employment = % change in employment / % change in GDP
If the elasticity of employment is greater than 1, employment is said to be
elastic, which means that
employment growth is more responsive to changes in economic growth. Conversely, if
the elasticity of
employment is less than 1, employment is said to be inelastic, which means that
employment growth is
less responsive to changes in economic growth.
A situation where the GDP is increasing, but employment is not increasing at the
same rate, is
known as jobless growth. Jobless growth occurs when the economy experiences growth
without
generating enough new jobs to keep pace with the growth in the labor force. This
can happen due to a
variety of factors, such as technological advancements that replace human labor,
changes in the
structure of the economy, or policy issues that discourage job creation.

Causes of Unemployment in India

Unemployment is a major issue in India, and there are a number of different factors
that contribute
to it. Here are some of the main causes of unemployment in India:
1. Lack of education and skills: Many people in India do not have the necessary
education or
skills to qualify for available job opportunities. This can be due to a lack of
access to education,
or to an education system that does not adequately prepare students for the
workforce. For
example, in rural areas of India, many young people do not have access to quality
education,
which can make it difficult for them to find good jobs later on.
2. Population growth: India has a very large population, which means that there are
more
people competing for a limited number of jobs. This can make it difficult for
people to find
employment, especially in sectors where job growth is not keeping up with
population growth.
3. Slow economic growth: When the economy is growing slowly, there are fewer new
jobs
being created, which can lead to higher levels of unemployment. This can happen for
a variety
of reasons, such as government policies that discourage investment or slow down
economic
growth, or external factors like global economic downturns that affect the Indian
economy.
4. Agriculture sector: Agriculture is a major sector in India, and it employs a
large number of
people. However, the sector is often characterized by low wages and unstable
employment,
which can contribute to unemployment. Additionally, many people who work in
agriculture do
not have access to alternative employment opportunities, which can make it
difficult for them
to transition to other sectors.
5. Demographic trends: India has a young population, with a large number of people
entering
the workforce each year. While this can be a positive thing in terms of providing a
large pool of
potential workers, it can also contribute to higher levels of unemployment if job
growth does
not keep up with population growth.

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Impact of Unemployment
1. Economic impact: Unemployment can have a negative impact on the economy as a
whole.
When people are unemployed, they have less money to spend, which can lead to a
decrease in
demand for goods and services. This can cause businesses to slow down or even shut
down,
leading to more job losses. It can also lead to a decrease in tax revenues for the
government,
which can impact public services and infrastructure.
2. Social impact: Unemployment can also have a significant social impact. People
who are
unemployed may experience stress and anxiety due to financial instability, which
can impact
their mental and physical health. It can also lead to social issues such as
poverty, homelessness,
and crime. Additionally, long-term unemployment can lead to a loss of skills and
self-confidence,
making it even harder to find employment in the future.
3. Political impact: High levels of unemployment can have political ramifications
as well. In some
cases, it can lead to social unrest and political instability. Politicians may be
pressured to take
action to address the issue, such as creating new jobs or implementing policies to
support those
who are unemployed.

Government Initiatives to control unemployment

1. Fiscal policy: This refers to the government's use of taxes and spending to
influence the
economy. One way to control unemployment through fiscal policy is through
government
spending on public projects and infrastructure, which can create jobs and stimulate
economic
growth. For example, the Indian government has launched various infrastructure
projects, such
as building highways, ports, and airports, to create jobs and promote economic
development.
2. Monetary policy: This refers to the central bank's control over the supply of
money and credit
in the economy. One way to control unemployment through monetary policy is through
interest
rate adjustments, which can influence borrowing and spending. For example, if the
central bank
lowers interest rates, it can encourage businesses to invest more, which can create
jobs and
reduce unemployment.
3. Training and education programs: Governments can also invest in training and
education
programs to help workers develop the skills they need to find and keep jobs. For
example, the
Indian government has launched various initiatives to provide vocational training
and skill
development programs to unemployed youth, such as the Pradhan Mantri Kaushal Vikas
Yojana.
4. Job creation programs: Governments can also directly create jobs through various
programs
and initiatives. For example, the Indian government has launched the Mahatma Gandhi
National
Rural Employment Guarantee Act (MNREGA), which provides employment to individuals
through public works programs.
5. Entrepreneurship promotion: Governments can also promote entrepreneurship and
selfemployment as a way to create jobs and reduce unemployment. For example, the
Indian
government has launched the Startup India initiative, which provides funding,
mentoring, and
other support to entrepreneurs to help them start and grow their businesses.

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Previous Years Prelims Questions
1.

Disguised unemployment generally means

(a) large number of people remain unemployed
(b) alternative employment is not available
(c) marginal productivity of labour is zero

Answers
1.

(d) productivity of workers is low

D

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2013
21. Human Resource Development

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Contents
Importance of HRD for Economic Growth and
Development:........................................................... 435
Demographic
Dividend ..........................................................................
............................................. 435
Key Components of Demographic
Dividend: .........................................................................
........ 436
Utilizing the Demographic
Dividend:..........................................................................
.................... 436
Challenges and
Considerations: ...................................................................
.................................. 436
Informal Sector in
India .............................................................................
......................................... 437
Characteristics of the Informal
Sector:............................................................................
............... 437
Challenges and
Concerns: .........................................................................
..................................... 437
Government
Initiatives: ......................................................................
............................................ 437
Labor Migration in
India .............................................................................
........................................ 438
Types of Labor
Migration: ........................................................................
...................................... 438
Causes of Labor
Migration: ........................................................................
.................................... 438
Impact on Human Resource
Development: ......................................................................
............. 438
Challenges and
Concerns: .........................................................................
..................................... 439
Government
Initiatives: ......................................................................
............................................ 439
Gender
Disparity..........................................................................
....................................................... 439
Education and Gender
Disparity: ........................................................................
........................... 439
Employment and Gender
Disparity: ........................................................................
....................... 439
Social Participation and Gender
Disparity: ........................................................................
............. 440
Causes of Gender
Disparity: ........................................................................
................................... 440
Impact of Gender
Disparity: ........................................................................
................................... 440
Government
Initiatives: ......................................................................
............................................ 440
Health and Human Resource
Development .......................................................................
................ 440
Healthcare Challenges in
India: ............................................................................
.......................... 441
Government
Initiatives: ......................................................................
............................................ 441
Impact of Health on Human Resource
Development: ...................................................................
441
Challenges: .......................................................................
.............................................................. 441
Ageing Population and Its Implications on Human Resource
Development ..................................... 442
Factors Contributing to an Ageing
Population: .......................................................................
....... 442
Challenges Posed by an Ageing
Population:........................................................................
........... 442
Way
forward: ..........................................................................
........................................................ 442
The Knowledge
Economy ...........................................................................
........................................ 442
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Key Features of the Knowledge
Economy: ..........................................................................
........... 443
Challenges: .......................................................................
.............................................................. 443
Government
Initiatives: ......................................................................
............................................ 443
Entrepreneurship ..................................................................
............................................................. 443
Key Aspects of
Entrepreneurship: .................................................................
................................. 443
Government Initiatives to Promote
Entrepreneurship: .................................................................
444
Various Government initiatives for Human Resource Development in
India .................................... 444
Literacy
missions ..........................................................................
.................................................. 444
Higher education
initiatives .......................................................................
.................................... 444
Skill development
initiatives: ......................................................................
................................... 444
Capacity building
initiatives:.......................................................................
.................................... 445
Previous Years Prelims
Questions .........................................................................
............................. 446
Previous Years Mains
Questions .........................................................................
............................... 446

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Chapter 21
Human Resource Development
Human Resource Development (HRD) refers to enhancing the skills, knowledge,
capabilities, and overall
potential of individuals within a society or organization.
HRD involves:
1. Education: Formal and informal learning processes that equip individuals with
academic knowledge
and cognitive skills.
2. Training: Skill-specific programs that enhance practical abilities for
specialized tasks.
3. Skill Development: Fostering technical, vocational, and soft skills to address
industry demands.
4. Capacity Building: Developing leadership, managerial, and problem-solving
competencies.
5. Lifelong Learning: Continual development throughout one's career to adapt to
changing
environments.

Importance of HRD for Economic Growth and Development:

1. Enhanced Workforce Productivity: A skilled workforce can efficiently utilize
resources, innovate,
and improve operational efficiency, thereby boosting economic productivity.
2. Competitive Advantage: Nations with a highly skilled workforce gain a
competitive edge in the
global market. It enhances a country's ability to offer specialized services,
attract foreign
investments, and engage in high-value industries.
3. Poverty Reduction and Social Inclusion: HRD creates better employment
opportunities and higher
income potential, reducing poverty and improving living standards. It promotes
social inclusion by
providing equal access to education and skill development, empowering marginalized
groups.
4. Demographic Dividend Utilization: HRD maximizes the potential benefits of a
youthful population
by equipping them with skills that match labor market demands.
5. Reduction of Unemployment and Underemployment: A better-skilled workforce is
more
adaptable to changing job requirements.
6. Sectoral and Regional Development: It reduces migration from rural to urban
areas by creating
opportunities at the local level.
7. Sustainable Development: It ensures that growth benefits all sections of society
and contributes to
long-term stability.

Demographic Dividend
Demographic dividend refers to the economic advantage that a country can
potentially gain from having
a large and youthful working-age population compared to the dependent and elderly
population. It
occurs when the proportion of the population in the working-age group (typically 15
to 64 years) is
larger than the dependent population (children and elderly), leading to a potential
boost in economic
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growth and development. This phenomenon is a result of declining birth rates and
mortality rates within
a population.

Key Components of Demographic Dividend:

1. Youthful Population: This results from lower birth rates, improved healthcare,
and reduced child
mortality.
2. Labor Force Participation: A larger working-age population can help increase the
overall labor
force participation rate.
3. Economic Growth Potential: More people in the workforce can lead to increased
production,
innovation, and consumption.
4. Savings and Investments: A demographic dividend offers an opportunity for
increased savings and
investments, as the working-age population can save a significant portion of their
income.
5. Human Capital Development: Countries with a demographic dividend should invest
in education,
skill development, and training to ensure that the youth entering the workforce are
equipped with
the necessary skills to drive economic growth.

Utilizing the Demographic Dividend:

To harness the benefits of the demographic dividend, governments and policymakers

need to
implement strategies that promote economic growth and human development. Key
strategies include:
1. Quality Education: Investing in education and vocational training to ensure that
the youth are
equipped with relevant skills for the job market. This enhances human capital and
employability.
2. Healthcare Services: Ensuring accessible and quality healthcare services to
reduce mortality rates,
leading to a healthier and more productive workforce.
3. Job Creation: Promoting policies that encourage job creation, entrepreneurship,
and investment in
various sectors of the economy.
4. Women Empowerment: Promoting gender equality and women's participation in the
workforce
can enhance the demographic dividend by increasing the labor force participation
rate.
5. Infrastructure Development: Developing infrastructure such as transportation,
communication,
and energy systems can facilitate economic activities and attract investments.
6. Social Security and Pension Schemes: Implementing social safety nets and pension
schemes to
support the elderly population can mitigate potential challenges that arise as the
demographic
structure changes over time.

Challenges and Considerations:

1. Dependency Ratio: While demographic dividend offers opportunities, it also comes

with challenges.
If not managed properly, a sudden increase in the dependent elderly population can
strain social
welfare systems.
2. Mismatched Skills: The education and training system must align with the needs
of the job market
to avoid a situation where a large youth population does not find suitable
employment
opportunities.
3. Urbanization: As the youth population migrates to urban areas for better
opportunities, proper
urban planning and infrastructure development are essential to prevent overcrowding
and
inadequate living conditions.
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4. Policy Coordination: Effective coordination between various sectors such as
education, health,
labor, and finance is crucial to fully utilize the demographic dividend.
In conclusion, the demographic dividend presents a unique opportunity for countries
to accelerate
economic growth and development. However, realizing these benefits requires careful
planning,
investment in human capital, and implementation of appropriate policies to ensure
that the youth
population can contribute effectively to the economy and society as a whole.

Informal Sector in India

The informal sector, often referred to as the unorganized sector, encompasses
economic activities that
are not regulated or protected by formal labor laws, lack official recognition, and
operate outside of
traditional bureaucratic structures. It is a significant component of many
developing economies,
including India.

Characteristics of the Informal Sector:

1. Limited Legal Recognition: Informal sector jobs are often not protected by
formal contracts or
labor laws, leaving workers vulnerable to exploitation.
2. Low Skill Requirement: Many jobs in the informal sector require basic skills and
minimal training.
These jobs are easily accessible to those with limited education.
3. Lack of Social Security: Workers in the informal sector typically lack access to
social security
benefits such as healthcare, pension, and insurance.
4. Low Productivity and Income: Due to the lack of access to resources, technology,
and markets,
informal sector workers often earn lower wages compared to their formal sector
counterparts.

Challenges and Concerns:

1. Exploitation and Vulnerability: Informal sector workers often face exploitation,

low wages, and
poor working conditions due to the lack of legal protection and bargaining power.
2. Lack of Social Security: Absence of social security benefits makes informal
sector workers
susceptible to financial shocks and hardships.
3. Inadequate Skill Upgradation: Limited access to training and skill development
programs can
hinder the growth potential of informal sector workers.
4. Limited Access to Finance: Informal enterprises often struggle to access formal
financial services,
hindering their ability to expand and innovate.
5. Tax Evasion and Informal Economy: The informal sector's unregulated nature can
lead to tax
evasion and reduced government revenue, affecting public welfare programs.

Government Initiatives:

1. Skill Development Programs: The government has launched skill development

initiatives like the
Skill India Mission to enhance the employability of informal sector workers.
2. Social Welfare Schemes: Various welfare programs aim to provide social security
and financial
assistance to informal sector workers and their families.
3. Financial Inclusion: Efforts are being made to increase financial inclusion and
provide credit access
to informal sector entrepreneurs through initiatives like Jan Dhan Yojana.
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4. Micro, Small, and Medium Enterprises (MSME) Support: The government supports
informal
sector enterprises through schemes that provide credit, technology, and market
access.

Labor Migration in India

Labor migration refers to the movement of people from one region or country to
another in search of
better employment opportunities and improved living conditions. In India, labor
migration is a
significant phenomenon with far-reaching implications for both the source and
destination areas. It
plays a crucial role in shaping the human resource development landscape of the
country.

Types of Labor Migration:

Internal Migration: Movement of people within the borders of the same country. This
can be rural-tourban migration, inter-state migration, or movement between
different regions within a state.
International Migration: Movement of people from one country to another for work.
In the Indian
context, this often involves migrating to Gulf countries, Southeast Asia, Europe,
and North America.

Causes of Labor Migration:

1. Employment Opportunities: Lack of sufficient employment opportunities in rural

areas and small
towns compels individuals to migrate in search of better-paying jobs.
2. Wage Disparities: Wage differentials between rural and urban areas or between
countries motivate
people to migrate for higher incomes.
3. Skilled and Unskilled Labor Demand: Both skilled and unskilled labor is in
demand, particularly in
sectors such as construction, agriculture, manufacturing, and services.
4. Poverty and Livelihood: Migrants often come from economically disadvantaged
backgrounds,
seeking to escape poverty and improve their quality of life.
5. Education and Aspirations: Aspirations for better education, lifestyle, and
social mobility drive
individuals to migrate to urban centers or other countries.

Impact on Human Resource Development:

1. Skill Transfer and Development: Labor migration contributes to skill development

as migrants
acquire new skills and knowledge, often transferring them back to their home
regions.
2. Remittances: Migrants send remittances back home, which can contribute to
economic
development, poverty reduction, and improved access to education and healthcare.
3. Urbanization: Migration to urban areas leads to urbanization, with both positive
and negative
consequences for infrastructure, services, and quality of life.
4. Labor Shortages and Surpluses: Migration can result in labor shortages in source
areas and
surpluses in destination areas, affecting local labor markets.
5. Social and Cultural Changes: Migrants' exposure to different cultures and values
can lead to social
changes and influence attitudes toward education, gender roles, and social norms.

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Challenges and Concerns:

1. Exploitation and Vulnerability: Migrants often face exploitation, low wages, and
poor working
conditions due to their vulnerable status.
2. Family Separation: Migration can lead to family separation and disruption of
social ties, impacting
emotional well-being.
3. Informal Employment: Many migrants end up in informal sector jobs, which lack
job security and
social protection.
4. Legal and Social Protection: Migrants may lack legal protection, making them
susceptible to abuse
and human rights violations.

Government Initiatives:

1. Welfare Schemes: Various government schemes aim to provide social security and
healthcare
benefits to migrant workers and their families.
2. Skill Development: Skill development programs are being implemented to enhance
the
employability of migrant workers and improve their access to formal sector jobs.
3. Inter-state Cooperation: Collaborative efforts between states are being promoted
to ensure the
welfare of migrant workers and address challenges related to their mobility.

Gender Disparity
Gender disparity refers to the unequal treatment, opportunities, and outcomes
between individuals of
different genders. Addressing gender disparity is essential for achieving
sustainable and inclusive
development. In India, despite significant progress, gender disparities persist and
continue to hinder
optimal human resource development.

Education and Gender Disparity:

1. Enrollment Disparity: Historically, girls and women have faced lower enrollment
rates in formal
education systems, particularly in rural and marginalized communities.
2. Literacy Gap: A gender-based literacy gap exists, with higher illiteracy rates
among women, limiting
their access to knowledge, skills, and opportunities.
3. Educational Attainment: Even when girls enroll in schools, they often drop out
early due to social,
cultural, and economic factors, leading to lower educational attainment compared to
boys.

Employment and Gender Disparity:

1. Labor Force Participation: Women's participation in the formal labor force is

lower than that of
men, largely due to cultural norms, societal expectations, and lack of suitable
employment
opportunities.
2. Occupational Segregation: Women tend to be concentrated in lower-paying and less
prestigious
occupations, leading to occupational segregation and reduced earning potential.
3. Wage Gap: A significant gender wage gap persists, where women typically earn
less than men for
similar work, contributing to economic inequality.
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4. Unpaid Work: Women often engage in a disproportionate amount of unpaid care
work, including
household chores and caregiving responsibilities, limiting their time for paid
employment and skill
development.

Social Participation and Gender Disparity:

1. Political Representation: Women's representation in political leadership

positions remains low,
limiting their influence in decision-making processes.
2. Access to Resources: Limited access to land, credit, and technology further
exacerbates gender
disparities in income and economic opportunities.
3. Healthcare Disparities: Gender-based healthcare disparities impact women's well-
being and
productivity, particularly in terms of maternal health and nutrition.

Causes of Gender Disparity:

1. Societal Norms: Deep-seated cultural norms and stereotypes perpetuate

traditional gender roles
and limit women's opportunities.
2. Discriminatory Practices: Discrimination against women in education, employment,
and other
spheres reinforces gender disparity.
3. Lack of Empowerment: Limited decision-making power, social mobility, and agency
restrict
women's ability to overcome gender disparities.

Impact of Gender Disparity:

1. Economic Growth: Gender disparity can hinder economic growth by underutilizing a

significant
portion of the workforce and constraining human capital development.
2. Human Capital Development: Gender disparities in education and skill development
limit the
overall potential of human resource development.
3. Inequality: Gender disparity contributes to income and wealth inequality,
affecting social cohesion
and stability.

Government Initiatives:

1. Legal Reforms: Legislative measures such as the Equal Remuneration Act and
Maternity Benefit Act
aim to promote gender equality in the workplace.
2. Skill Development Programs: Initiatives like Skill India aim to provide skill
training to women,
enhancing their employability and income potential.
3. Educational Programs: Programs like Beti Bachao Beti Padhao promote girls'
education and
address gender stereotypes.
4. Women's Empowerment Schemes: Schemes like Mahila Shakti Kendra focus on
empowering
women through skill development, entrepreneurship, and social support.

Health and Human Resource Development

A healthy population is better equipped to participate in education, employment,
and other productive
activities.
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Healthcare Challenges in India:

1. Limited Access: Many rural and marginalized communities have limited access to
quality healthcare
services, leading to health disparities.
2. Undernutrition and Malnutrition: Malnutrition, particularly among children,
remains a significant
concern, affecting physical and cognitive development.
3. Maternal and Child Health: High maternal and infant mortality rates reflect
inadequate maternal
and child healthcare services.
4. Non-Communicable Diseases (NCDs): The prevalence of lifestyle-related diseases
such as diabetes
and hypertension is on the rise, straining the healthcare system.
5. Infectious Diseases: Despite progress, communicable diseases like tuberculosis,
malaria, and
HIV/AIDS continue to affect a substantial portion of the population.

Government Initiatives:

1. National Health Mission: A flagship program aimed at improving healthcare

services in rural and
urban areas, focusing on maternal and child health, immunization, and disease
control.
2. Ayushman Bharat: A health insurance scheme providing financial protection to
vulnerable
populations and promoting access to healthcare services.
3. Swachh Bharat Abhiyan: A sanitation campaign to improve hygiene and reduce the
burden of
waterborne diseases.
4. POSHAN Abhiyan: Aims to reduce malnutrition and stunting among children and
improve the
health and nutritional status of mothers.

Impact of Health on Human Resource Development:

1. Education: Good health facilitates regular school attendance, concentration, and

active
participation in educational activities.
2. Labor Force Participation: Healthy individuals are more likely to participate in
the labor force,
contributing to economic growth.
3. Skill Development: A healthy workforce is better equipped for skill development
and lifelong
learning, enhancing employability.
4. Gender Equality: Improved health reduces gender disparities by enabling women to
participate
more fully in education and employment.

Challenges:

1. Inadequate Healthcare Infrastructure: Insufficient healthcare facilities,

especially in rural areas,
limit access to quality medical services.
2. Healthcare Financing: High out-of-pocket expenses for healthcare can lead to
financial hardships,
particularly for low-income households.
3. Health Literacy: Lack of awareness and health literacy hinder preventive
measures and timely
healthcare seeking.

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Ageing Population and Its Implications on Human Resource Development
An ageing population refers to a demographic shift characterized by an increasing
proportion of elderly
individuals in a society's population structure.

Factors Contributing to an Ageing Population:

•

Declining Fertility Rates: Lower birth rates lead to a reduced proportion of

younger individuals in
the population pyramid.
Increased Life Expectancy: Advances in healthcare, nutrition, and living conditions
have led to
longer lifespans, contributing to the ageing population trend.

Challenges Posed by an Ageing Population:

1. Dependency Ratio: The ratio of working-age individuals to dependents (children

and elderly) may
become imbalanced, straining social support systems.
2. Pension Burden: Sustaining pension systems becomes challenging with a higher
proportion of
retirees relative to active workers.
3. Healthcare Costs: The elderly require more healthcare services, potentially
increasing healthcare
expenditure.

Way forward:

1. Skill Enhancement: As technological advancements and job requirements continue

to evolve, older
individuals may face challenges in keeping up with new skills and demands. Tailored
training
programs can offer them opportunities to upskill or reskill, ensuring they remain
relevant in the job
market.
2. Flexible Retirement Policies: Traditional retirement often entails a sudden exit
from the workforce,
which may lead to a loss of expertise and a sense of purpose for older individuals.
Flexible
retirement policies offer a more gradual and phased transition into retirement,
allowing seniors to
reduce their work hours or take on different roles that leverage their experience.
3. Elderly Care Services: Residential care facilities, community centers, and home-
based care services
can provide older individuals with a safe and comfortable environment where their
physical and
emotional needs are met. This fosters a sense of dignity and well-being among the
elderly,
promoting active ageing and a higher quality of life.
4. Public Health Initiatives: Public health campaigns can raise awareness about the
importance of
regular exercise, balanced nutrition, and screenings for chronic illnesses. Access
to affordable
healthcare services, including geriatric care, can address age-related health
challenges and improve
overall health outcomes. Additionally, community-based wellness programs and social
activities can
help combat loneliness and isolation, enhancing the holistic well-being of older
individuals.

The Knowledge Economy

The knowledge economy is an economic system in which the generation, distribution,
and application of
knowledge and information are central to economic growth and development. In this
type of economy,
knowledge becomes a critical resource, and investments in education, research,
innovation, and
technology play a pivotal role in driving economic progress.
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Key Features of the Knowledge Economy:

1. Intangible Assets: The knowledge economy places a higher value on intangible

assets such as
intellectual property, research and development, and innovative ideas.
2. Human Capital: Human capital, referring to the knowledge, skills, and
capabilities of individuals,
becomes a primary driver of economic success.
3. Innovation: Innovation and creativity are essential for producing new knowledge,
products, and
services, leading to improved productivity and economic growth.
4. Information and Communication Technology (ICT): The use of advanced ICT tools
and platforms
facilitates the rapid dissemination of knowledge and information.
5. Global Connectivity: The knowledge economy is characterized by global
interconnectedness,
enabling the exchange of ideas and expertise across borders.

Challenges:

1. Digital Divide: Ensuring equitable access to education and technology is crucial

to prevent a digital
divide between different segments of society.
2. Changing Skill Requirements: The rapid pace of technological change may render
certain skills
obsolete while creating demand for new skills.
3. Intellectual Property Protection: Strong intellectual property rights are
essential to incentivize
innovation and protect knowledge-based assets.

Government Initiatives:

1. Education Reforms: Policies that emphasize quality education, vocational

training, and digital
literacy are essential for preparing the workforce for the knowledge economy.
2. Research and Development Funding: Government investments in research and
development
institutions foster innovation and knowledge creation.
3. Start-up Support: Entrepreneurship-friendly policies and support for start-ups
encourage
innovation and job creation.
4. Digital Infrastructure: Expanding digital infrastructure and internet access
enhances connectivity
and knowledge dissemination.

Entrepreneurship
Entrepreneurship plays a pivotal role in human resource development by fostering
innovation, economic
growth, and job creation. In India, entrepreneurship has gained increasing
importance as a driver of
economic development and a means to harness the potential of its human resources.

Key Aspects of Entrepreneurship:

1. Innovation: Entrepreneurship often involves innovative ideas, products, or

processes that
contribute to economic advancement and societal progress.
2. Risk-Taking: Entrepreneurs are willing to take calculated risks to bring their
ideas to fruition, driving
economic dynamism.
3. Resource Mobilization: Entrepreneurs secure financial, human, and technological
resources to turn
their ideas into viable businesses.
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4. Value Creation: Successful entrepreneurship leads to the creation of new value
in terms of goods,
services, jobs, and wealth.

Government Initiatives to Promote Entrepreneurship:

1. Startup India: The initiative aims to promote and support startups through
funding, tax benefits,
and mentorship.
2. MUDRA Yojana: Provides financial assistance to micro and small enterprises,
promoting
entrepreneurship at the grassroots level.
3. Atal Innovation Mission: Focuses on fostering innovation and entrepreneurship
among students by
establishing Atal Tinkering Labs.
4. Skill Development Initiatives: Programs like Skill India aim to equip potential
entrepreneurs with
the necessary skills and knowledge.

Various Government initiatives for Human Resource Development in India

Literacy missions

1. Right to Education (RTE) Act: The Right to Education (RTE) Act, enacted in 2009,
is a landmark
legislation aimed at providing free and compulsory education for children aged 6 to
14 years. It is a
fundamental right under Article 21A of the Indian Constitution and seeks to ensure
equitable access
to quality education for all children.
2. Sarva Shiksha Abhiyan (SSA): Sarva Shiksha Abhiyan (SSA) is a flagship program
to achieve the goal
of universal elementary education in India.
3. Digital Saksharta Abhiyan (DISHA): Digital Saksharta Abhiyan (DISHA) is a
program launched to
promote digital literacy and bridge the digital divide in India.

Higher education initiatives

1. Rashtriya Uchchatar Shiksha Abhiyan (RUSA): Rashtriya Uchchatar Shiksha Abhiyan

(RUSA) is a
centrally sponsored scheme to enhance the quality of higher education institutions
and promote
equitable access to higher education across India.
2. Pradhan Mantri Scholarship Scheme: The Pradhan Mantri Scholarship Scheme is a
government
initiative to provide financial assistance and scholarships to meritorious students
pursuing higher
education.
3. Establishment of IITs/IIMs/Other premier higher education Institutes.

Skill development initiatives:

1. Skill India Mission: Launched in 2015, the Skill India Mission aims to create a
skilled workforce by
providing training and enhancing employability across various sectors.
Key Features:
i.

444
Pradhan Mantri Kaushal Vikas Yojana (PMKVY): PMKVY is a flagship scheme under the
Skill India Mission that aims to provide skill training to youth for employability.

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Recognition of Prior Learning (RPL): Assesses and certifies skills acquired through
informal
learning or work experience. RPL validates the skills of workers who may not have
formal
education, improving their employment prospects and earning potential.
iii.
National Skill Development Corporation (NSDC): NSDC is a public-private partnership
organization that coordinates and supports skill development initiatives in India.
iv.
Skill Development Centers: Establishes training centers across the country to
provide skill
training.
2. ITIs/Polytechnics (Industrial Training Institutes/Polytechnic Institutes): ITIs
and polytechnics
are vocational training institutes that offer practical skills and technical
education to students.
3. Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY): DDU-GKY focuses on
rural youth,
providing skill training and wage employment opportunities.
4. National Apprenticeship Promotion Scheme (NAPS): NAPS aims to promote
apprenticeship
training for skill development and job opportunities. Offers financial incentives
to both apprentices
and employers to hire apprentices and provide on-the-job training.
ii.

Capacity building initiatives:

1. Mission Karmayogi: Mission Karmayogi is a capacity-building program for civil

servants in India,
aimed at enhancing their effectiveness, skills, and decision-making capabilities.
2. National Policy on Education (NPE): The National Policy on Education (NPE) is a
comprehensive
framework that guides the development of education in India. It was first
formulated in 1968 and
revised in 1986 and 1992. The latest revision was approved by the Union Cabinet in
2020, marking
the National Education Policy (NEP) 2020.
Key Features:
i.

ii.
iii.
iv.
v.
vi.

445

Holistic Approach: The NEP 2020 adopts a holistic approach to education,

emphasizing
multidisciplinary learning, critical thinking, and skill development.
Early Childhood Care and Education (ECCE): The policy recognizes the importance of
early
childhood education and aims to provide quality ECCE to children aged 3 to 6.
School Education: NEP 2020 focuses on foundational literacy and numeracy, flexible
curriculum frameworks, and reducing the curriculum load.
Higher Education: The policy promotes a multidisciplinary approach, autonomy for
universities, and the establishment of a National Research Foundation (NRF) for
research
funding.
Vocational Education: NEP 2020 integrates vocational education into mainstream
education, promoting skill development and employability.
Teacher Training: The policy emphasizes continuous professional development for
teachers
to enhance their pedagogical skills.

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Previous Years Prelims Questions
1.

2.

Consider the following statements: Human capital formation as a concept is

better explained in terms of a process, which enables
(1) individuals of a country to accumulate more capital.
(2) increasing the knowledge, skill levels and capacities of the people of
the country.
(3) accumulation of tangible wealth.
(4) accumulation of intangible wealth.
Which of the statements given above is/are correct?
(a) 1 and 2
(b) 2 only
(c) 2 and 4
(d) 1, 3 and 4
To obtain full benefits of demographic dividend, what should India do?
(a) Promoting skill development
(b) Introducing more social security schemes
(c) Reducing infant mortality rate
(d) Privatization of higher education

2018

2013

Previous Years Mains Questions

1.
2.
Answers
1.

446

The increase in life expectancy in the country has led to newer health
2022
challenges in the community. What are those challenges and what steps
need to be taken to meet them ?
While we found India’s demographic dividend, we ignore the dropping rates 2014
of employability. What are we missing while doing so? Where will the jobs
that India desperately needs come from? Explain.
C

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2.

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A
Bonus Chapter
Government Institutions

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Contents
Monetary
Authority..........................................................................
.................................................. 450
Reserve Bank of India
(RBI): ............................................................................
............................... 450
Fiscal
Authority .........................................................................
.......................................................... 450
Ministry of
Finance: ..........................................................................
.............................................. 451
Department of Economic Affairs
(DEA): ............................................................................
......... 451
Department of
Revenue: ..........................................................................
.................................. 451
Department of
Expenditure: ......................................................................
................................ 451
Department of Investment and Public Asset Management
(DIPAM): ....................................... 451
Department of Financial Services
(DFS): ............................................................................
........ 451
Department of Public Enterprises
(DPE): ............................................................................
....... 453
Regulatory and Supervisory
Bodies: ...........................................................................
........................ 453
Securities and Exchange Board of India
(SEBI) ............................................................................
... 453
Insurance Regulatory and Development Authority of India
(IRDAI) .............................................. 453
Pension Fund Regulatory and Development Authority
(PFRDA) ................................................... 453
Telecom Regulatory Authority of India
(TRAI).............................................................................
... 454
Central Drugs Standard Control Organization
(CDSCO) ................................................................. 454
Central Pollution Control Board
(CPCB) ............................................................................
............. 454
Food Safety and Standards Authority of India
(FSSAI) ................................................................... 455
Bureau of Indian Standards
(BIS)..............................................................................
...................... 455
Central Electricity Authority
(CEA) .............................................................................
.................... 455
Bureau of Energy Efficiency
(BEE) .............................................................................
..................... 456
National Health Authority
(NHA)..............................................................................
...................... 456
Competition Commission of India
(CCI) .............................................................................
............ 456
Labeling
Requirements ......................................................................
................................................. 457
Trade, Industry, and Investment Promotion
Bodies: .........................................................................
459
Department for Promotion of Industry and Internal Trade
(DPIIT) ............................................... 459
Directorate General of Foreign Trade
(DGFT) ............................................................................
.... 459
Ministry of Corporate
Affairs............................................................................
.............................. 460
Ministry of Micro, Small and Medium Enterprises
(MSME)........................................................... 460
Development and Planning
Agencies: .........................................................................
....................... 461
NITI
Aayog .............................................................................
......................................................... 461
Social Welfare and Labor
Institutions: .....................................................................
.......................... 461
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Statistical and Research
Institutions: .....................................................................
............................ 462
Public Enterprises and State-Owned
Entities: .........................................................................
........... 463
"Maharatna", "Navratna", and
"Miniratna" .......................................................................
................ 464
Maharatna: ........................................................................
............................................................. 464
Navratna: .........................................................................
............................................................... 465
Miniratna: ........................................................................
............................................................... 465
Education and Skill
Development:.......................................................................
............................... 466
Technology and
Communication:.....................................................................
.................................. 467
Agriculture and
Food: .............................................................................
............................................ 469
Tribunals .........................................................................
.................................................................... 471
Previous Years Prelims
Questions .........................................................................
............................. 473

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Bonus Chapter
Government Institutions
India is a large country with a large government. Various institutions deal with
different aspects of
the economy. Reading about government institutions might seem tricky at first.
Don't worry if you don't
remember all of it right away. Each time you read this chapter, it'll make more
sense. No need to
memorize everything - just try to understand the big ideas. Every time you come
back to your economics
studies, give this a quick read. It'll get clearer with time. Happy reading!

Monetary Authority
Reserve Bank of India (RBI):

The Reserve Bank of India is the central bank of the country and serves as the main
monetary authority
in India. We have already covered the roles and functions of RBI in previous
chapters.

Fiscal Authority

Ministry of
Finance
Department of
Economic
Affairs

Department of
Revenue

Department of
Expenditure

Department of
Financial
Services

Central Board
of Direct Taxes
(CBDT)
Central Board
of Indirect
Taxes and
Customs (CBIC)

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Department of
Investment and
Public Asset
Management
(DIPAM)

Department of
Public
Enterprises
Ministry of Finance:

The Ministry of Finance is the apex body responsible for the fiscal policy of the
country. It plays a crucial
role in the overall economic management of the country and ensures that the
financial resources are
mobilized and allocated efficiently.

Department of Economic Affairs (DEA):

The DEA concerns itself with the formulation of economic policies and strategies,
monitoring of
macroeconomic indicators, and the management of the capital market. A principal
responsibility of this
department is the preparation and presentation of the Union Budget to the
parliament.
Functions: It handles issues related to the capital market, manages public debt,
oversees the foreign
exchange management, and supervises economic planning.

Department of Revenue:

This department is responsible for matters relating to all direct and indirect
union taxes and
enforcement of economic laws through two statutory Boards namely, the Central Board
of Direct Taxes
(CBDT) and the Central Board of Indirect Taxes and Customs (CBIC).

Central Board of Direct Taxes (CBDT): It deals with matters related to levying and
collection of

direct taxes. CBDT provides inputs for policy and planning of direct taxes in India
and is also
responsible for the administration of direct tax laws through the Income Tax
Department.

Central Board of Indirect Taxes and Customs (CBIC): It deals with the tasks of
formulation of
policy concerning the levy and collection of indirect taxes like customs and
central excise duties and
Goods & Services Tax (GST).
Department of Expenditure:

This department is the custodian of the government's expenditure policy.

Functions:
• It is tasked with the efficient allocation of the financial resources of the
union government.
• It ensures judicious expenditure management in line with the government's fiscal
strategy.
• It plays a role in implementing the recommendations of both the Finance
Commission and Central
Pay Commission, ensuring that they align with the nation's fiscal goals.

Department of Investment and Public Asset Management (DIPAM):

DIPAM is responsible for the management and disinvestment of the central

government's equity in
public sector undertakings.
Functions:
• It shapes the government's disinvestment policy, ensuring that it aligns with
broader economic
goals.
• It advises on the timing, mode, and quantum of disinvestment, ensuring optimal
returns and
strategic management of public assets.

Department of Financial Services (DFS):

The DFS oversees India's financial institutions.

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Functions:

•
•
•

It ensures the smooth functioning of banks, insurance companies, and pension funds.
It supervises various government initiatives in banking, insurance, and pensions.
It plays a role in overseeing the performance and governance of nationalized banks
and the broader
insurance sector.

This department has ownership over the following central government establishments.
Regulatory Bodies
•
•
•
•

Reserve Bank of India (RBI)

Securities and Exchange Board of India (SEBI)
Insurance Regulatory and Development Authority of India (IRDAI)
Pension Fund Regulatory and Development Authority (PFRDAI)

All India Financial Institutions

•
•
•
•
•

National Bank for Agriculture and Rural Development (NABARD)

National Housing Bank (NHB)
Small Industries Development Bank of India (SIDBI)
Export Import Bank (EXIM Bank)
National Bank for Financing Infrastructure and Development (NaBFID) (Came into
force w.e.f. April,
2021)

Central Public Sector Undertakings

•

•
•

Nationalised Banks: Presently there are 13 nationalised banks in India.

 State Bank of India
 Bank of Baroda
 Union Bank of India
 Punjab National Bank
 Canara Bank
 Punjab & Sind Bank
 Indian Bank
 Bank of Maharashtra
 Bank of India
 Central Bank of India
 Indian Overseas Bank
 UCO Bank
 Jammu & Kashmir Bank
Regional Rural Bank: Presently there are 43 regional rural banks in India (April
2020)
Nationalised Insurance Companies:
 Life Insurance Corporation (LIC)
 General Insurance Corporation of India
 New India Assurance etc.
Nationalised Financial Market Exchanges:
 National Stock Exchange of India
 Bombay Stock Exchange
 Calcutta Stock Exchange etc.
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Department of Public Enterprises (DPE):

The DPE is the nodal department for Central Public Sector Enterprises (CPSEs).
Functions:
• It provides guidelines and policies for the efficient functioning of CPSEs.
• It advises the government on key appointments in CPSEs and formulates overarching
policies for
these enterprises.
• It evaluates the performance of CPSEs, ensuring they align with the nation's
economic and strategic
interests.

Regulatory and Supervisory Bodies:

Ministry
Role

Functions

Ministry
Role

Functions

Ministry
Role

Functions

453

Securities and Exchange Board of India (SEBI)

Ministry of Finance
Regulates the securities market in India.
1. Protects investors
2. Promotes market development
3. Regulates mutual funds, stock brokers, and other intermediaries
4. Oversees mergers and acquisitions
5. Supervises the issuance and listing of securities.

Insurance Regulatory and Development Authority of India (IRDAI)

Ministry of Finance
Regulates and promotes the insurance and re-insurance industries in India.
1. Protects the interests of policyholders.
2. Grants registration to insurers and regulates their operations.
3. Regulates premium rates and terms of insurance.
4. Specifies qualifications, code of conduct, and training for intermediaries and
agents.
5. Regulates investment of funds by insurance companies.
6. Adjudicates disputes between insurers and intermediaries.

Pension Fund Regulatory and Development Authority (PFRDA)

Ministry of Finance
Regulates and promotes the pension sector in India.
1. Establishes, develops, and regulates pension funds.
2. Protects the interests of subscribers.
3. Promotes systematic and sustainable income for the elderly.
4. Formulates policies for the National Pension System (NPS).
5. Ensures the orderly growth of the pension market.

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6. Sets performance benchmarks and standards for pension funds.
7. Resolves grievances of affected parties and takes corrective actions.

Ministry
Role

Functions

Ministry
Role

Functions

Ministry
Role

Functions

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Telecom Regulatory Authority of India (TRAI)

Ministry of Communications
Regulates the telecommunication sector in India.
1. Ensures compliance with telecom policies.
2. Issues licenses to telecom operators.
3. Regulates tariffs for telecommunication services.
4. Ensures transparency and fairness in operations.
5. Protects consumer interests.
6. Promotes competition and reduces barriers to entry.
7. Ensures technological advancements in the telecom sector.
8. Addresses grievances and disputes related to telecom services.

Central Drugs Standard Control Organization (CDSCO)

Ministry of Health and Family Welfare

Regulates the safety, efficacy, and quality of drugs, cosmetics, and medical
devices in
India.
1. Approves drugs and conducts clinical trials.
2. Sets quality standards for drugs, cosmetics, and medical devices.
3. Grants licenses for the manufacture and sale of drugs and cosmetics.
4. Regulates the import and export of drugs and cosmetics.
5. Monitors and evaluates the adverse effects of drugs.
6. Ensures compliance with pharmacovigilance guidelines.
7. Collaborates with other international regulatory agencies.

Central Pollution Control Board (CPCB)

Ministry of Environment, Forest and Climate Change

Regulates and monitors pollution in India.
1. Monitors air and water quality across the country.
2. Sets industrial waste standards.
3. Advises the central government on pollution control policies and strategies.
4. Coordinates actions with state pollution control boards.
5. Provides technical assistance and guidance to state boards.
6. Conducts research and development on pollution control.
7. Organizes and promotes anti-pollution awareness programs.
8. Establishes and reviews standards for the prevention and control of pollution.
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Ministry
Role

Functions

Ministry
Role

Functions

Ministry
Role

Functions

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Food Safety and Standards Authority of India (FSSAI)

Ministry of Health and Family Welfare

Ensures that food products in India are safe and adheres to quality standards.
1. Develops standards for food products.
2. Regulates the manufacture, storage, distribution, sale, and import of food
products.
3. Provides scientific advice and technical support to the central government.
4. Collects data on food contamination and conducts risk assessment.
5. Promotes awareness about food safety and nutrition.
6. Ensures consistent application of food standards across the country.
7. Addresses grievances related to food safety.
8. Licenses and oversees food businesses.

Bureau of Indian Standards (BIS)

Ministry of Consumer Affairs, Food and Public Distribution

National Standards Body of India responsible for standardization, marking, and
quality
certification of goods.
1. Formulates national standards for a wide range of products.
2. Provides certification to products that meet set standards through its
hallmarking
and certification schemes.
3. Tests and calibrates products in its laboratories to ensure quality.
4. Promotes and represents Indian standards on international platforms.
5. Ensures consumer goods, especially those that directly impact health and safety,
meet the necessary standards.
6. Conducts surveillance checks to ensure certified products maintain quality.
7. Handles grievances related to the quality of certified products.
8. Provides registration to manufacturers under the BIS Act.

Central Electricity Authority (CEA)

Ministry of Power
Supervises and advises on matters related to electricity generation, transmission,
distribution, and utilization in India.
1. Formulates technical standards and specifications for the construction of
electrical plants, electric lines, and connectivity to the grid.
2. Advises the government on matters related to the National Electricity Policy and
tariff setting.
3. Coordinates with state electricity boards and utilities.
4. Conducts investigations and studies related to the efficiency of the electricity
system.

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5. Monitors the implementation of power projects.
6. Provides technical and managerial assistance to utilities.
7. Ensures grid stability and promotes the integrated operation of the power
system.
8. Collects and maintains data on electricity generation, transmission, and
distribution.

Ministry
Role

Bureau of Energy Efficiency (BEE)

1.
2.
3.

Functions 4.
5.
6.
7.
8.

Ministry
Role

Functions

Ministry
Role
Functions
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Ministry of Power
Promotes energy efficiency and conservation across various sectors of the economy.
Formulates policies and strategies for reducing energy intensity in the economy.
Develops and promotes energy efficiency standards and labeling for appliances.
Establishes systems and procedures to measure, monitor, and verify energy
efficiency
results in different sectors.
Coordinates with industries and businesses to adopt energy-efficient practices.
Implements the Energy Conservation Building Code (ECBC).
Conducts public awareness campaigns on energy efficiency.
Collaborates with state-level agencies to implement energy-saving measures.
Monitors and evaluates the impact of energy efficiency initiatives.

National Health Authority (NHA)

Ministry of Health and Family Welfare

Implements and manages the government's health insurance schemes, primarily the
Pradhan Mantri Jan Arogya Yojana (PMJAY).
1. Formulates policies and strategies for the effective implementation of PMJAY and
other health insurance schemes.
2. Coordinates with state governments and other stakeholders for scheme rollout.
3. Ensures beneficiaries receive their health entitlements.
4. Develops the technological infrastructure for the seamless operation of the
schemes.
5. Monitors and evaluates the performance of the schemes.
6. Addresses grievances related to the schemes.
7. Promotes awareness about the schemes among the public.
8. Ensures quality and affordability of healthcare services under the schemes.
Competition Commission of India (CCI)

Ministry of Corporate Affairs

Ensures fair competition in India by preventing anti-competitive practices.
1. Prohibits anti-competitive agreements and practices.

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2. Prevents abuse of dominant position by enterprises.
3. Regulates mergers and acquisitions to ensure they don't adversely affect
competition.
4. Conducts investigations into suspected anti-competitive practices.
5. Imposes penalties on entities found violating competition norms.
6. Advocates for competition policies and promotes awareness.
7. Advises the government on competition issues.
8. Engages in research and publishes studies on competition matters.

Labeling Requirements
In India, several regulatory authorities mandate labeling requirements for products
under their purview
to ensure that consumers are well-informed and protected.
Regulatory
Authority

Food Safety and

Standards
Authority of India
(FSSAI)

Bureau of Indian
Standards (BIS)

Central Drugs
Standard Control
Organization
(CDSCO)

457

Under Ministry

Product

Detailed Labeling Requirements

Ministry of Health and

Food Products
Family Welfare

 Product name
 List of ingredients
 Nutritional information
including energy, protein,
carbohydrate, fat, etc.
 Net quantity
 Date of manufacture and
expiry
 Country of origin for imported
food
 FSSAI logo and license number
 Vegetarian/non-vegetarian
 Instructions for use, if
necessary

Ministry of Consumer Various products

Affairs, Food and
(e.g., electronics,
Public Distribution
jewelry)

 BIS hallmark/standard mark

 License number
 Grade of the product, if
applicable
 Country of origin
 Manufacturer's details
including address and name

Ministry of Health and Pharmaceuticals &

Family Welfare
Cosmetics

 Generic name and brand

name
 Name and address of the
manufacturer
 Batch number, manufacturing
date, and expiry date
 Net content

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Regulatory
Authority

Under Ministry

Product

Detailed Labeling Requirements

 Directions for use and
warnings, if any
 List of active and inactive
ingredients

Directorate General
Ministry of Commerce Imported &
of Foreign Trade
and Industry
Exported Goods
(DGFT)

 Country of origin
 Importer/exporter name and
address
 Product description
 Batch or lot number
 Date of manufacture and
expiry, if applicable

Bureau of Energy
Efficiency (BEE)

Energy-efficient
Products

 BEE star label with energy

efficiency rating
 Year of manufacture
 Product's energy consumption
details

Telecom Equipment

 Name and model of the

product
 Manufacturer's name and
address
 Batch or lot number
 Date of manufacture
 Technical specifications

Telecom
Regulatory
Authority of India
(TRAI)

Ministry of Power

Ministry of
Communications
Central Insecticides
Board &
Ministry of Agriculture
Pesticides
Registration
& Farmers Welfare
Committee (CIBRC)

 Brand name
 Chemical composition
 Name and address of the
manufacturer
 Date of manufacture and
expiry
 Directions for use and storage
 Warning labels and first-aid
measures

Textile Committee Ministry of Textiles

Textiles

 Fiber composition
 Care instructions including
washing and drying
 Size
 Country of origin
 Manufacturer's name and
address

Vehicles

 Emission norms compliance

 Safety standards compliance
 Vehicle identification number

Automotive
Ministry of Road
Industry Standards Transport and
(AIS)
Highways
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Regulatory
Authority

Under Ministry

Product

Detailed Labeling Requirements

 Manufacturer's name and
address

Department of
Legal Metrology

Ministry of Consumer
Packaged
Affairs, Food and
Commodities
Public Distribution

 Name and address of the

manufacturer, packer, and
importer
 Common or generic names of
the commodity
 Net quantity in metric units
 Date of manufacture or
packaging
 Maximum retail price
inclusive of all taxes
 Customer care details
including phone and email

Trade, Industry, and Investment Promotion Bodies:

Ministry
Role

Functions

Ministry
Role
Functions

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Department for Promotion of Industry and Internal Trade (DPIIT)

Ministry of Commerce and Industry

Facilitates and promotes the development of industry and internal trade in India.
1. Formulates and implements industrial policy and strategies.
2. Promotes industrial development and investment.
3. Oversees the establishment of Special Economic Zones (SEZs).
4. Facilitates ease of doing business initiatives.
5. Manages foreign direct investment (FDI) policy and promotion.
6. Regulates intellectual property rights - patents, trademarks, industrial
designs,
and geographical indications.
7. Promotes internal trade and consumer welfare.
8. Manages initiatives related to the startup ecosystem in India.
9. Oversees industrial cooperation with other countries.
10. Regulates standards for goods and services.

Directorate General of Foreign Trade (DGFT)

Ministry of Commerce and Industry

Regulates and promotes foreign trade activities in India.

1. Formulates and implements the foreign trade policy of India.
2. Grants licenses for exports and imports.

Government Institutions |

@Ketanomy
Directorate General of Foreign Trade (DGFT)
3.
4.
5.
6.
7.
8.
9.

Role

Functions

Role
Functions

460

Promotes India's exports.

Implements export promotion schemes.
Regulates trade barriers and tariffs.
Facilitates trade through various trade agreements and treaties.
Addresses grievances of exporters and importers.
Publishes various foreign trade-related reports and data.
Coordinates with different trade bodies and organizations for trade-related
matters.

Ministry of Corporate Affairs

Regulates corporate sector affairs in accordance with the law to promote corporate
governance, transparency, and accountability.
1. Supervises the Companies Act, Limited Liability Partnership Act, and other
related
acts and rules.
2. Ensures transparent and efficient corporate regulation in India.
3. Registers companies and LLPs in India.
4. Oversees the functioning of the National Company Law Tribunal (NCLT) and the
Insolvency and Bankruptcy Code.
5. Promotes corporate governance and best practices in the corporate sector.
6. Handles issues related to competition through the Competition Commission of
India (CCI).
7. Ensures corporate compliance through e-Governance initiatives.

Ministry of Micro, Small and Medium Enterprises (MSME)

Promotes the growth and development of micro, small, and medium enterprises in
India.
1.
2.
3.
4.
5.
6.
7.

Formulates policies, programs, and projects to support and assist MSMEs.

Promotes innovation, entrepreneurship, and skill development among MSMEs.
Provides financial assistance, subsidies, and incentives to MSMEs.
Supports technology upgradation and modernization of MSMEs.
Promotes export of MSME products.
Conducts capacity-building programs and workshops for MSME stakeholders.
Addresses grievances and offers advisory services to MSMEs.

Government Institutions |

@Ketanomy
Development and Planning Agencies:
NITI Aayog

We have already covered NITI Aayog in detail.

Social Welfare and Labor Institutions:

Ministry/
Department

Name

Ministry of
Labour and
Employment

Labour
Bureau

Ministry of
Women and
Child
Development

Rashtriya
Mahila Kosh

Anganwadi
Centers
461

Role

Functions

Oversee labor
welfare and
employment in
India.

1. Formulates policies on labor and

employment.
2. Works on wage policies and matters
related to employment.
3. Ensures the welfare of workers and
safeguards their rights.
4. Regulates employment and training.
5. Oversees industrial relations and
disputes.

Ministry of
Labour and
Employment

Statistical
analysis and
research on
labor
economics.
1. Collects and analyzes data on wages,
employment, and industrial relations.
2. Publishes reports and indices like the CPI
for Industrial Workers (CPI-IW) and CPI for
Agricultural Labourers and Rural Labourers
(CPI-AL/RL).
3. Conducts surveys and research on laborrelated matters.

Government
of India

Ensures the
development
and welfare of
women and
children.

1. Formulates policies and programs for

women and children.
2. Promotes and ensures the rights of
women and children.
3. Implements schemes for the welfare of
women and children.

Provides
microfinance
services to
women.

1. Offers credit for livelihood activities and

family needs.
2. Promotes and supports women's Self
Help Groups (SHGs).
3. Provides financial assistance for
women's development.

Provides basic
health care in
Indian villages.

1. Offers health and nutrition education.

2. Provides basic health services and
immunization.
3. Ensures pre-school non-formal
education.

Government
of India

Ministry of
Women and
Child
Development
Ministry of
Women and
Child
Development

Government Institutions |
@Ketanomy
Ministry/
Department

Name

Role

Functions
4. Supplies nutrition-based meals to
children and pregnant women.

Statistical and Research Institutions:

Name

Central
Statistical
Office (CSO)

National
Sample
Survey
Office
(NSSO)

Ministry/Department

Role

Functions

Ministry of Statistics
and Programme
Implementation

Responsible for
coordination of
statistical
activities in India
and evolving &
maintaining
statistical
standards.

1. Compiles and releases national

accounts statistics.
2. Conducts annual surveys of
industries.
3. Provides statistical expertise
and advice to government
departments.

Conducts largescale sample

surveys across
India.

1. Undertakes socio-economic
surveys.
2. Collects data on rural and urban
prices.
3. Provides periodic surveys on
consumer expenditure,
employment, health, and
education.
4. Assists in improving the quality
of statistical data.

Ministry of Statistics
and Programme
Implementation

National Sample Survey Office (NSSO) has been merged with the Central Statistics
Office (CSO) to
form the National Statistical Office (NSO).

Indian
Council of
Agricultural
Research
(ICAR)

462

Ministry of
Agriculture and
Farmers Welfare

Government Institutions |

Conducts
research and
development in
agriculture.

@Ketanomy

1. Coordinates agricultural
research & education.
2. Provides leadership in frontier
areas of science.
3. Develops new technologies to
boost agricultural productivity.
4. Offers financial support to
institutions for agricultural
research.
5. Facilitates research in fisheries,
horticulture, and animal sciences.
6. Provides training in agricultural
sciences.
Public Enterprises and State-Owned Entities:
Name

Ministry/Department

Public Sector
Banks (PSBs)

Public Sector
Undertakings
(PSUs)

Indian
Railways

Various Ministries
depending on the
sector

Ministry of Railways

Food
Corporation
of India (FCI)

463

Ministry of Finance

Ministry of
Consumer Affairs,
Food and Public
Distribution

Government Institutions |

Role

Functions

Provide
banking and
financial
services to the
public.

1. Offer various banking services

like savings, loans, and
investments.
2. Implement governmentsponsored schemes.
3. Support economic development
by providing credit to industries
and agriculture.
4. Promote financial inclusion.

Operate
commercial
activities on
behalf of the
government.

1. Produce goods and services for

the public.
2. Generate revenue for the
government.
3. Implement government policies
in specific sectors.
4. Provide employment and
contribute to economic growth.

Provides rail
transport
services.

1. Operate passenger and freight

trains across India.
2. Maintain and develop railway
infrastructure.
3. Implement projects to enhance
rail connectivity.
4. Promote tourism through luxury
trains.
5. Ensure safety and security of rail
operations.

Ensures food
security in
India.

1. Procures food grains from

farmers at support prices.
2. Stores and maintains buffer
stock of food grains.
3. Distributes food grains through
the public distribution system.
4. Supports price stabilization
measures.
5. Manages government's food
policy.

@Ketanomy
"Maharatna", "Navratna", and "Miniratna"
The terms "Maharatna", "Navratna", and "Miniratna" refer to classifications given
to the top-performing
Public Sector Undertakings (PSUs) in India. These classifications are based on the
performance of these
companies and grant them enhanced autonomy and privileges in decision-making.
Here's a breakdown:

Maharatna:
•
•

Criteria: A company must have an average annual net profit of over Rs. 5,000 crore
in the last 3
years, a net worth of Rs. 15,000 crore, and a turnover of Rs. 25,000 crore in the
last 3 years.
Privileges: These companies have enhanced powers for investment in projects (up to
Rs. 5,000
crore without government approval).
Maharatnas

Bharat Heavy
Electricals Limited
(BHEL)

Ministry/Department

Functions

Design, engineering, construction, testing,

Ministry of Heavy Industries
commissioning, and servicing for a diverse range of
and Public Enterprises
products and services across various industries.

Bharat Petroleum
Ministry of Petroleum and
Corporation Limited
Natural Gas
(BPCL)

Operates refineries in Bina, Kochi, and Mumbai;

downstream oil production.

Coal India Limited

(CIL)

Largest government-owned coal producer; seventh

largest employer in India.

Ministry of Coal

Ministry of Petroleum and

GAIL (India) Limited
Natural Gas

Natural gas, liquid hydrocarbon, LPG transmission,

petrochemical, city gas distribution, renewable
energy, exploration and production, petrochemicals,
GAILTEL, and electricity generation.

Hindustan
Petroleum
Ministry of Petroleum and
Corporation Limited Natural Gas
(HPCL)

Subsidiary of ONGC; downstream oil production.

Indian Oil
Ministry of Petroleum and
Corporation Limited
Natural Gas
(IOCL)

Largest government-owned oil producer; oversees

refining, distribution, and marketing of petroleum
products.

NTPC Limited

Generation and distribution of electricity to State

Electricity Boards in India.

Ministry of Power

Oil and Natural Gas

Ministry of Petroleum and
Corporation Limited
Natural Gas
(ONGC)

Exploration, development, and production of crude

oil and natural gas.

Power Finance
Corporation Ltd.
(PFC)

Financial backbone of the Indian power sector; offers

loans for power projects.

Ministry of Power

Power Grid
Ministry of Power
Corporation of India
464

Government Institutions |

Transmission of bulk power across various states in

India.
@Ketanomy
Maharatnas

Ministry/Department

Functions

Limited
Ministry of Power

Finances and supports power projects throughout

India.

Steel Authority of
Ministry of Steel
India Limited (SAIL)

Largest government-owned steel producer in India.

Oil India Limited

(OIL)

Exploration, development, and production of crude

oil and natural gas; transportation of crude oil and
production of LPG.

REC Limited

Ministry of Petroleum and

Natural Gas

Navratna:
•

•
•

Criteria: A Miniratna Category-1 company, with a score of 60 (out of 100), based on

six parameters
which include net profit, net worth, total manpower cost, total cost of production,
cost of services,
PBDIT (Profit Before Depreciation, Interest, and Taxes), capital employed, etc.
Privileges: These companies have greater autonomy in investment decisions (up to
Rs. 1,000 crore
or 15% of their net worth on a single project without government approval).
Examples: Bharat Electronics Limited, Hindustan Aeronautics Limited, Mahanagar
Telephone Nigam
Limited, National Aluminium Company, NMDC Limited, Oil India Limited, etc.

Miniratna:
•
•
•
•

Criteria: Divided into Category-I and Category-II. Category-I companies have made
profits
continuously for the last three years and have a positive net worth. Category-II
companies have
made a profit for the last year and have a positive net worth.
Privileges: Category-I companies can invest up to Rs. 500 crore or equal to their
net worth,
whichever is lower, without government approval. Category-II companies have lesser
autonomy
compared to Category-I.
Examples of Category-I: Airports Authority of India, Cotton Corporation of India,
Hindustan
Newsprint Limited, etc.
Examples of Category-II: Bharat Pumps & Compressors, Broadcast Engineering
Consultants India,
Central Mine Planning & Design Institute, etc.

Above classifications are meant to incentivize better performance among PSUs and
grant them the
autonomy they need to compete effectively in the market.
Term

Explanation

Average
Annual Net
Profit

The mean profit earned by a company over a specific period, typically a year, after
deducting all expenses, taxes, and costs. It's calculated by summing up the net
profits of
each year and dividing by the number of years.

Net Worth

The total assets minus total liabilities of an individual or a company. It

represents the
ownership interest of shareholders (in case of a corporation) or the value of
assets one
has after paying off liabilities (in case of an individual).

465

Government Institutions |

@Ketanomy
Term

Explanation

Turnover

The total sales generated by a business in a specific period, typically a year.

It's a
measure of a company's operational performance and its ability to generate
sales/revenues.

Education and Skill Development:

Name

Ministry/Department

University Grants
Commission
(UGC)

National Council
of Educational
Research and
Training (NCERT)

Central Board of
Secondary
Education (CBSE)
National Skill
Development
Corporation
(NSDC)

466

Ministry of
Education

Ministry of
Education

Ministry of
Education
Not-for-profit
company under the
Companies Act.
NSDC was set up by
Ministry of Finance
as Public Private
Partnership (PPP)
model. The
Government of India
through Ministry of

Government Institutions |

Role

Functions
Regulates
and
maintains
standards in
higher
education.

1. Provides recognition to
universities in India.
2. Allocates and disburses grants
to universities and colleges.
3. Sets and maintains standards
of teaching, examination, and
research.
4. Advises the government on
university affairs.

Academic
resource
organization.

1. Develops curriculum and

instructional materials.
2. Conducts educational
research.
3. Provides training in
educational research and
teaching.
4. Offers advice and support to
the government on school
education.

National level
board of
education.

1. Conducts public examinations

for Classes 10 and 12.
2. Grants affiliation to schools.
3. Sets and maintains academic
standards.
4. Develops curriculum and
study materials.

Promotes
skill
development.

@Ketanomy

1. Funds and supports skill

training initiatives.
2. Partners with private
institutions for skill training.
3. Sets standards for skill
training.
4. Implements government's skill
development schemes.
Name

Ministry/Department

Role

Functions

Coordinates
skill
development
efforts.

1. Formulates policies for skill

development.
2. Establishes standards and
frameworks.
3. Promotes entrepreneurship.
4. Implements the National Skill
Development Mission.

Coordinates
and
harmonizes
skill
development
efforts.

1. Integrates efforts of various

ministries related to skill
development.
2. Evaluates existing skill
development schemes.
3. Anchors the National Skills
Qualifications Framework
(NSQF).
4. Conducts research on skill
development.

Role

Functions

Oversee the
development and
implementation of
IT and electronic
policies.

1. Formulates
policies related to IT
and electronics.
2. Promotes eGovernance for
empowering
citizens.
3. Encourages the
growth of the IT
industry.
4. Ensures
cybersecurity and
promotes the use of
IT in various sectors.

Skill Development &

Entrepreneurship
(MSDE) holds 49% of
the share capital of
NSDC, while the
private sector has
the balance 51% of
the share capital.

Ministry of Skill
Development
and
Entrepreneurship

National Skill
Development
Agency (NSDA)

Government of India

Autonomous body
under Ministry of
Skill Development
and
Entrepreneurship

Technology and Communication:

Name

Ministry/Department

Ministry of
Electronics and
Information
Technology
467

Government of India

Government Institutions |

@Ketanomy
Name

Ministry/Department

National Informatics
Centre (NIC)

Centre for
Development of
Advanced
Computing (C-DAC)

Ministry of
Electronics and
Information
Technology

Ministry of
Electronics and
Information
Technology

Role

Functions

Provides
technology
support to
governance
services.

1. Develops and
manages
government
websites and online
services.
2. Offers IT support
to central and state
governments.
3. Provides network
backbone for eGovernance.
4. Develops
software solutions
for government
departments.

Advanced
computing and IT
research.

1. Conducts R&D in
IT and electronics.
2. Develops
advanced
computing
solutions.
3. Offers training in
IT and computer
languages.
4. Works on
projects like PARAM
supercomputers.

Indian Computer
Emergency
Response Team
(CERT-In)

Ministry of
Electronics and
Information
Technology

National
cybersecurity
agency.

1. Responds to
cybersecurity
threats.
2. Enhances India's
cybersecurity
capabilities.
3. Issues guidelines
and advisories on
cybersecurity.
4. Coordinates
cybersecurity
efforts nationally.

Unique
Identification
Authority of India
(UIDAI)

Ministry of
Electronics and
Information
Technology

Provides Aadhaar,
a unique
identification for
residents.

1. Manages the
Aadhaar scheme.
2. Ensures security
of Aadhaar data.
3. Provides

468

Government Institutions |

@Ketanomy
Name

Ministry/Department

Role

Functions
authentication
services.
4. Develops the
policy, procedure,
and system for
Aadhaar.

Department of
Telecommunications

Department of Posts

Ministry of
Communications

Ministry of
Communications

Regulates and
develops the
telecommunication
sector.

1. Grants licenses
for telecom
services.
2. Manages
spectrum allocation.
3. Ensures telecom
service quality.
4. Formulates
policies and
standards for
telecom services.

Provides postal
services.

1. Manages the
postal system in
India.
2. Offers mail parcel
services, retail
services, and more.
3. Provides financial
services like savings
accounts, insurance,
and remittance.
4. Promotes ecommerce by
providing logistics
support.
Agriculture and Food:
Name

Ministry/Department

Commission for
Agricultural Costs
and Prices (CACP)
469

Ministry of Agriculture
and Farmers Welfare

Government Institutions |

@Ketanomy

Role

Functions

Advises on price
policy for
agricultural
commodities.

1. Recommends
minimum support
prices (MSP).
2. Reviews cost of
production and
other relevant
factors.
3. Advises on price
Name

Ministry/Department

Role

Functions
stabilization
measures.

National Agricultural
Cooperative
Marketing
Federation of India
Ltd. (NAFED)

National Dairy
Development Board
(NDDB)

Small Farmers AgriBusiness Consortium

(SFAC)

Ministry of
Consumer Affairs,
Food and Public
Distribution
Ministry of Food
Processing Industries
470

Promotes
cooperative
marketing of
agricultural
produce.

1. Procures
agricultural
produce.
2. Helps farmers get
a fair price.
3. Implements
intervention
operations during
price fluctuations.

Develops the dairy

sector.

1. Promotes and
organizes dairy
cooperative
societies.
2. Implements dairy
development
programs.
3. Conducts
research and
training in dairying.

Promotes
agribusiness for
small farmers.

1. Facilitates agribusiness ventures.

2. Links small
farmers to
agricultural value
chains.
3. Provides credit
guarantee to agriventures.

Government of India

Ensures food
security and
protects
consumer rights.

1. Implements the
Public Distribution
System (PDS).
2. Regulates
production, supply,
and distribution of
essential
commodities.
3. Promotes
consumer
awareness and
protection.

Government of India

Promotes the
food processing

1. Formulates and
implements food

Ministry of Agriculture
and Farmers Welfare

Ministry of Fisheries,
Animal Husbandry and
Dairying

Ministry of Agriculture
and Farmers Welfare

Government Institutions |

@Ketanomy
Name

Ministry/Department

Agricultural and
Processed Food
Products Export
Development
Authority (APEDA)

Role

Functions

industry.

processing policies.
2. Promotes
investment in the
food processing
sector.
3. Provides financial
assistance for food
processing activities.

Develops and
promotes the
export of agriproducts.

Ministry of Commerce
and Industry

1. Promotes exports
of agricultural and
processed food
products.
2. Provides financial
assistance and
guidelines.
3. Conducts surveys
and market studies.

Tribunals
Several tribunals have been established to address specific concerns and disputes
related to various
sectors of the economy.
Tribunal

Concerned Area

Primary Role

National Company Law

Tribunal (NCLT)

Company-related
matters

Address company disputes, insolvency, and

bankruptcy cases

National Company Law

Appellate Tribunal (NCLAT)

Appeals from
NCLT

Handle appeals against decisions of NCLT,

including those related to insolvency and
competition matters

Competition Appellate
Tribunal (COMPAT)

Anti-competitive
practices

Handle disputes arising from decisions of the

Competition Commission of India (Now
functions transferred to NCLAT)

Securities Appellate
Tribunal (SAT)

Securities and
capital market

Address appeals against decisions made by

SEBI

Debt Recovery Tribunal

(DRT)

Banking and
finance

Focus on non-performing assets and debt

recovery

Appellate Tribunal for

Electricity (APTEL)

Electricity sector

Resolve disputes related to the electricity

sector

Telecom Disputes
Settlement and Appellate
Tribunal (TDSAT)

Telecom sector

Address grievances and disputes in telecom

471

Government Institutions |
@Ketanomy
Tribunal

Concerned Area

Primary Role

Real Estate Appellate

Tribunal

Real estate

Address appeals against decisions by the Real

Estate Regulatory Authority

National Green Tribunal

(NGT)

Environment

Handle economic matters related to

environmental damage and compensation

Customs, Excise, and

Service Tax Appellate
Tribunal (CESTAT)

Taxation

Deal with disputes related to customs, excise

duties, and service tax

Income Tax Appellate

Tribunal (ITAT)

Income Tax

Address appeals against the decisions of the

Commissioner of Income Tax

472

Government Institutions |

@Ketanomy
Previous Years Prelims Questions
1.

In India, which one of the following is responsible for maintaining price

stability by controlling inflation?

2022

(a) Department of Consumer Affairs

(b) Expenditure Management Commission
(c) Financial Stability and Development Council
2.

(d) Reserve Bank of India

In India, which one of the following compiles information on industrial
disputes, closures, retrenchments and lay-offs in factories employing
workers?
a)
b)
c)
d)

Answers
1.

473

Central Statistics Office

Department for Promotion of Industry and Internal Trade
Labour Bureau
National Technical Manpower Information System
D

Government Institutions |

2.

@Ketanomy

2022
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