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Economics Short Notes JE

The document provides an overview of key economic concepts including GDP, GNP, inflation, taxation, and fiscal policy. It outlines the definitions, types, methods of calculation, and implications of these concepts, as well as a historical perspective on India's Five-Year Plans and economic reforms. Additionally, it explains the Goods and Services Tax (GST) and its impact on the economy.

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0% found this document useful (0 votes)
15 views17 pages

Economics Short Notes JE

The document provides an overview of key economic concepts including GDP, GNP, inflation, taxation, and fiscal policy. It outlines the definitions, types, methods of calculation, and implications of these concepts, as well as a historical perspective on India's Five-Year Plans and economic reforms. Additionally, it explains the Goods and Services Tax (GST) and its impact on the economy.

Uploaded by

Ashish V
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1

Engineering Wallah Non-Tech AE/JE


Subject: Economics
Introduction to Economics Gross Domestic Product (GDP)
Definition of Economics GDP is the total value of all final goods and services
Economics is the study of how individuals, businesses, and produced within a country's borders in a given period.
governments allocate limited resources to satisfy unlimited
wants. Types of GDP:
Nominal GDP: Measured at current market prices
Types of Economics: (includes inflation).
Microeconomics: Deals with individual units like Real GDP: Adjusted for inflation (measured at constant
households and firms. prices).
Macroeconomics: Deals with the economy as a whole GDP at Factor Cost: Excludes taxes, includes subsidies.
(inflation, GDP, etc.). GDP at Market Price: Includes taxes, excludes subsidies.
Methods of Calculating GDP:
Basic Economic Terms Production Method (Value Added Method):
Scarcity: Limited resources vs. unlimited wants. GDP = Sum of value added by all sectors.
Opportunity Cost: The next best alternative forgone when Income Method:
making a choice. GDP = Rent + Wages + Interest + Profit.
Goods & Services: Tangible (goods) and intangible Expenditure Method:
(services) products. GDP = Consumption + Investment + Government Spending
+ (Exports - Imports).
Economic Sectors:
Primary Sector: Agriculture, fishing, forestry. Gross National Product (GNP)
Secondary Sector: Manufacturing, industry. Definition of GNP
Tertiary Sector: Services like banking, IT, healthcare. GNP = GDP + Net Factor Income from Abroad (NFIA).
NFIA = (Income from abroad - Income paid to foreigners).
Factor Cost & Market Price
Factor Cost (FC) Formula:
The cost of production, including wages, rent, interest, and GNP = GDP + Net Income from Abroad
profit.
It does not include taxes or subsidies. Net National Product (NNP)
Used in GDP at Factor Cost calculation. NNP (Net National Product)
NNP = GNP - Depreciation
Market Price (MP) Depreciation is the loss of value of capital goods due to wear
The price at which goods and services are sold in the and tear.
market.
Includes taxes and excludes subsidies. National Income (NI)
Used in GDP at Market Price calculation. NI = NNP at Factor Cost
Formula: It represents the actual earnings of the country’s residents.
GDP at Factor Cost = GDP at Market Price - (Indirect Taxes
- Subsidies)
2

Personal Income (PI) 5. Indicative Planning


PI = NI - Corporate Taxes - Retained Profits + Transfer Five-Year Plans of India (1951-2017)
Payments. 1st Five-Year Plan (1951-56)
Transfer Payments = Pensions, subsidies, etc. Focus: Agriculture & Irrigation (due to post-independence
food crisis).
Disposable Income (DI) Model Used: Harrod-Domar Model.
DI = Personal Income - Direct Taxes. Key Achievements:
It is the money available for spending and saving. Community Development Programme (1952) launched.
Bhakra Nangal & Hirakud Dams constructed.
Planned Economic development Food grain production increased.
Planned economic development refers to a systematic and
strategic approach where the government sets specific 2nd Five-Year Plan (1956-61)
economic goals and policies to achieve sustainable growth. Focus: Industrialization & Heavy Industries.
In India, planning was formally introduced in 1951 with the Model Used: Mahalanobis Model (emphasis on capital
First Five-Year Plan. goods industries).

Objectives of Planned Economic Development Key Achievements:


Rapid Economic Growth: Increase GDP and industrial Steel Plants in Bhilai, Durgapur, Rourkela set up.
output. Atomic Energy Commission formed (1958).
Poverty Alleviation: Reduce unemployment and Focus on public sector enterprises (PSUs).
inequality. Failure: Led to inflation and high fiscal deficit.
Balanced Regional Growth: Develop backward regions.
Self-Reliance: Reduce dependence on foreign aid. 3rd Five-Year Plan (1961-66)
Social Justice: Promote equitable distribution of resources. Focus: Self-Sufficiency in Food Production & Industrial
Modernization: Develop technology, education, and Growth.
infrastructure.
Key Achievements:
Types of Economic Planning Emphasis on agriculture & fertilizers.
1. Perspective Planning Panchayati Raj System strengthened.
Long-term plans (15-20 years) with broad goals. Failure:
Indo-China War (1962) & Indo-Pak War (1965) disrupted
2. Five-Year Plans (FYPs) the economy.
Medium-term plans (5 years) focusing on specific economic Severe drought (1965-66) led to food crisis.
targets. Result: Plan failed, leading to Annual Plans (1966-69).
Introduced by the Planning Commission in 1951.
4th Five-Year Plan (1969-74)
3. Annual Plans Focus: Growth with Stability & Self-Reliance.
Short-term plans (1 year) used when Five-Year Plans were Key Achievements:
not implemented (e.g., 1966-69). Green Revolution (1967-68) led to increased wheat
production.
4. Rolling Plans Focus on Family Planning Programmes.
No fixed duration; plans are revised annually (introduced in Failure: High inflation due to oil price hike in 1973.
1978 by Janta Government).
3

5th Five-Year Plan (1974-79) Key Achievements:


Focus: Removal of Poverty (Garibi Hatao) & Employment GDP growth of 7.6% achieved.
Generation. Rural Employment schemes introduced.
Key Achievements:
Rolling Plan introduced by Janta Govt. in 1978 (Replaced 11th Five-Year Plan (2007-12)
5th Plan). Focus: Inclusive Growth & Human Development.
National Rural Employment Programme (NREP) launched. Key Achievements:
Failure: The plan was terminated early by the Janta Party MNREGA (Mahatma Gandhi National Rural Employment
government. Guarantee Act) expanded.

6th Five-Year Plan (1980-85) Education & Health Sectors improved.


Focus: Technology, Productivity & Poverty Removal.
Key Achievements: 12th Five-Year Plan (2012-17)
IT and Telecom sector development began. Focus: Faster, Sustainable, and More Inclusive Growth.
Self-sufficiency in food grains achieved. Key Achievements:
Emphasis on infrastructure, education, & energy.
7th Five-Year Plan (1985-90) Targeted 8% growth but achieved only 7%.
Focus: Modernization & Increase in Productivity.
Key Achievements: End of Five-Year Plans & Introduction of NITI Aayog
Growth in exports and manufacturing. (2015)
Expansion of higher education & research. Planning Commission was abolished in 2014.
Failure: Economic crisis due to high fiscal deficit. NITI Aayog (2015) replaced Five-Year Plans with a long-
Economic Crisis & Liberalization (1991 Reforms) term development agenda
Due to high fiscal deficit and foreign exchange crisis, India
adopted Liberalization, Privatization, and Globalization Inflation
(LPG reforms) in 1991. What is Inflation?
Planning shifted towards market-oriented growth. Inflation refers to the sustained increase in the general price
level of goods and services over a period of time.
8th Five-Year Plan (1992-97) It reduces the purchasing power of money, meaning that the
Focus: Economic Reforms & Privatization. same amount of money buys fewer goods and services.
Key Achievements:
New Economic Policy (1991) introduced. Types of Inflation
End of License Raj & Foreign Direct Investment (FDI) 1. Based on Rate of Increase
encouraged. Creeping Inflation: Slow and steady rise in prices (1-3% per
year).
9th Five-Year Plan (1997-2002) Walking Inflation: Moderate increase in prices (3-10% per
Focus: Growth with Equity & Social Justice. year).
Key Achievements: Running Inflation: Rapid increase in prices (above 10% per
Poverty Reduction & Infrastructure Development. year).
Fiscal deficit reduced. Hyperinflation: Extremely high and uncontrollable inflation
(above 50% per month).
10th Five-Year Plan (2002-07)
Focus: Faster Economic Growth (Target: 8%).
4

2. Based on Causes Causes of Inflation


Demand-Pull Inflation: Occurs when demand for goods and Increase in demand due to rising incomes and government
services exceeds supply. spending.
Causes: Increase in consumer spending, government Supply-side constraints such as poor agricultural output,
expenditure, or investment. fuel shortages, or global disruptions.
Cost-Push Inflation: Occurs when the cost of production Increase in production costs like higher wages, raw material
rises, leading to higher prices. costs, or taxation.
Causes: Increase in wages, raw material costs, fuel prices, Monetary expansion due to excess money supply in the
and taxation. economy.
Built-In Inflation: Happens when businesses increase wages Imported inflation due to rising international prices of crude
to match inflation, leading to a cycle of rising wages and oil and raw materials.
prices.
Effects of Inflation
3. Based on Control Level Positive Effects
Headline Inflation: Measures the total inflation including Encourages production and economic growth.
food and fuel prices. Reduces the real burden of debt.
Core Inflation: Excludes food and fuel prices to provide a Negative Effects
stable measure of inflation. Reduces purchasing power and savings.
Increases cost of living, especially for fixed-income groups.
Measurement of Inflation in India Creates uncertainty in business and investment.
Inflation is measured using price indices: May lead to currency depreciation.

1. Wholesale Price Index (WPI) Control Measures for Inflation


Measures price changes at the wholesale level. Monetary Policy (RBI):
Does not include services, only goods. Increasing interest rates to reduce money supply.
Published by the Office of Economic Adviser, Ministry of Open Market Operations (OMO): Selling government
Commerce & Industry. securities to absorb excess money.
Increase in Cash Reserve Ratio (CRR) and Statutory
2. Consumer Price Index (CPI) Liquidity Ratio (SLR) to limit lending by banks.
Measures price changes at the retail level, affecting
consumers directly. Fiscal Policy (Government):
Includes food, fuel, clothing, housing, and services. Reducing government expenditure.
Published by the National Statistical Office (NSO), Increasing taxes to reduce disposable income.
Ministry of Statistics and Programme Implementation. Subsidizing essential goods to control price rise.

Types of CPI in India: Supply-Side Measures:


CPI for Industrial Workers (CPI-IW) Increasing agricultural and industrial production.
CPI for Agricultural Labourers (CPI-AL) Reducing import duties to increase supply.
CPI for Rural Labourers (CPI-RL) Inflation is a key economic indicator affecting growth,
CPI (Urban + Rural) – Used as the official inflation measure employment, and stability.
by the RBI. RBI and the government use monetary and fiscal policies to
control inflation.
5

Taxation IGST (Integrated GST): Collected on inter-state


Taxation is the process by which the government collects transactions and imports.
revenue from individuals and businesses to fund public Customs Duty: Levied on imported and exported goods.
services and development projects. Excise Duty: (Merged with GST) Previously levied on the
Taxes are compulsory payments and do not provide direct manufacturing of goods.
benefits to taxpayers. Stamp Duty: Charged on property transactions and legal
documents.
Types of Taxes
Taxes are broadly classified into Direct Taxes and Indirect Taxation Policies in India
Taxes. 1. Progressive Taxation
1. Direct Taxes Higher income = Higher tax rate.
Levied directly on individuals and businesses and cannot be Example: Income Tax slabs in India.
shifted to others.
Collected by the Central Board of Direct Taxes (CBDT) 2. Regressive Taxation
under the Ministry of Finance. Same tax rate for all, affecting lower-income groups more.
Example: GST on essential and luxury goods.
Examples of Direct Taxes
Income Tax: Charged on the earnings of individuals and 3. Proportional Taxation
businesses. Flat tax rate for all income levels.
Corporate Tax: Paid by companies on their profits. Example: Corporate tax rate for firms.
Capital Gains Tax: Levied on profits from the sale of assets
like property and shares. Tax Structure in India
Wealth Tax: (Abolished in 2015) Previously imposed on 1. Central Taxes
individuals with high net worth. Collected by the Central Government.
Gift Tax: Levied on gifts exceeding a certain limit. Examples: Income Tax, Corporate Tax, CGST, Customs
Securities Transaction Tax (STT): Charged on stock market Duty.
transactions.
2. Indirect Taxes 2. State Taxes
Levied on goods and services and passed on to consumers. Collected by State Governments.
Collected by the Central Board of Indirect Taxes and Examples: SGST, State Excise Duty, Stamp Duty,
Customs (CBIC). Professional Tax.

Examples of Indirect Taxes 3. Local Taxes


Goods and Services Tax (GST): Collected by Municipalities and Local Bodies.
Introduced on 1st July 2017 to replace multiple indirect Examples: Property Tax, Water Tax, Toll Tax.
taxes.
A destination-based tax levied at each stage of production Tax Evasion vs. Tax Avoidance
and consumption. Tax Evasion: Illegal practice of not paying taxes (e.g.,
Types of GST: hiding income).
CGST (Central GST): Collected by the central Tax Avoidance: Legal method of reducing tax liability
government. through loopholes.
SGST (State GST): Collected by state governments.
6

What is the Goods and Services Tax (GST) Fiscal Policy


About: GST is a value-added tax applied to goods and What is Fiscal Policy
services for domestic consumption. Fiscal Policy refers to the government's use of taxation,
It is an indirect tax i.e., while consumers pay the GST, it is public spending, and borrowing to influence the economy.
collected and remitted to the government by the businesses It is managed by the Ministry of Finance, Government of
selling the goods and services. India.
Legislative Basis: The 101st Amendment Act, 2016 The main goal is to achieve economic stability, growth, and
established the GST system by introducing a single indirect control inflation.
tax regime for the entire country by subsuming various
taxes. Objectives of Fiscal Policy
Central taxes subsumed under GST are Economic Growth: Boosting GDP and industrial
Central Excise Duty, Additional Excise Duties, Service development.
Tax, etc. Price Stability: Controlling inflation and deflation.
State taxes subsumed under GST are State VAT (Value Employment Generation: Creating jobs through
Added Tax), Central Sales Tax, Luxury Tax, etc. government spending.
Reducing Income Inequality: Progressive taxation and
Main Features: welfare schemes.
Supply Side: GST applies to the supply of goods and Infrastructure Development: Investing in roads, railways,
services, unlike the old tax on manufacturing, sale, or and power.
provision. Balanced Regional Growth: Promoting development in
Destination-Based Taxation: GST follows destination- backward areas.
based consumption taxation, unlike the origin-based
system. Instruments of Fiscal Policy
1. Government Revenue (Taxation and Non-Tax
Dual GST: Both the Centre (CGST) and States (SGST) Revenue)
levy tax on a common base. Tax Revenue: Income from direct taxes (Income Tax,
Imports of goods or services are treated as inter-state Corporate Tax) and indirect taxes (GST, Customs Duty).
supplies and are subject to Integrated Goods & Services Tax Non-Tax Revenue: Earnings from dividends of public
(IGST) along with applicable customs duties. sector units (PSUs), fees, fines, and interest on loans.
GST Council: CGST, SGST, and IGST rates are mutually 2. Government Expenditure
decided by the Centre and States, based on the GST Revenue Expenditure: Day-to-day expenses like salaries,
Council's recommendations. pensions, and subsidies.
Capital Expenditure: Investment in infrastructure, defense,
Multiple Rates: GST is levied at five rates i.e., 0% (nil- and public assets.
rated), 5%, 12%, 18%, and 28%, with item classifications 3. Deficit Financing (Borrowing and Public Debt)
determined by the GST Council. When expenditure exceeds revenue, the government
borrows from domestic (RBI, banks) and external (IMF,
GST Council: Article 279A establishes the GST Council, World Bank) sources.
headed by the Union Finance Minister and comprising state-
nominated ministers. Types of Fiscal Policy
The Centre holds 1/3rd voting power, while states have 1. Expansionary Fiscal Policy
Used during recessions or slow growth to boost the
2/3rd, with decisions made by a 3/4th majority.
economy.
7

Involves: Wealth Tax: Previously imposed on high-net-worth


Increase in government spending (on infrastructure, individuals (abolished in 2015).
subsidies). Capital Gains Tax: Charged on profits from the sale of
Decrease in taxes to encourage consumption and assets like property and stocks.
investment. Gift Tax: Levied on gifts received above a certain limit.
Risk: May lead to higher fiscal deficit and inflation.
B. Indirect Taxes
2. Contractionary Fiscal Policy Indirect taxes are imposed on goods and services, and the
Used during high inflation or economic overheating to slow burden is transferred to consumers. Examples include:
down the economy. Goods and Services Tax (GST): A single tax replacing
Involves: multiple indirect taxes, applicable to the supply of goods
Decrease in government spending (reducing subsidies, and services.
cutting salaries). Customs Duty: Charged on imports and exports.
Increase in taxes to reduce demand. Excise Duty: Previously imposed on goods manufactured
Risk: Can reduce economic growth and employment. within the country (merged with GST).
Stamp Duty: Charged on legal documents, property
Recent Fiscal Policy Measures in India transactions, and financial agreements.
Goods and Services Tax (GST) (2017): Simplified
indirect taxation. 2. Non-Tax Revenue
Corporate Tax Cuts (2019): To encourage investment. These revenues come from various sources other than taxes.
Fiscal Stimulus Packages (2020-21): During COVID-19 for A. Fees & Charges
economic recovery. License Fees: Charged for permits such as driving licenses
Privatization & Disinvestment: Reducing government and business operations.
stake in PSUs to raise revenue. User Charges: Fees for utilizing government services like
Increased Capital Expenditure (Budget 2024): Focus on toll roads, passports, and registration fees.
infrastructure and manufacturing.
Fiscal policy plays a vital role in economic development. B. Dividends & Profits
The government needs to balance growth and fiscal Revenue generated from government-owned enterprises
discipline to ensure long-term stability. such as ONGC, LIC, and SBI.
The government earns dividends from its investments in
Sources of Revenue for the Governmen public sector undertakings (PSUs).
The government generates revenue to finance its C. Interest Receipts
expenditures through tax revenue and non-tax revenue. The government earns interest on loans given to states,
public enterprises, and foreign countries.
1. Tax Revenue D. Fines & Penalties
Taxes are compulsory payments imposed by the Revenue from penalties for violations, such as traffic fines,
government. They are of two types: environmental penalties, and legal infractions.
A. Direct Taxes E. Grants & Donations
Direct taxes are levied directly on individuals and The government receives foreign aid from institutions like
businesses and cannot be shifted to others. Examples the World Bank and IMF.
include: The central government also provides grants to state
Income Tax: Levied on individual and corporate earnings. governments.
Corporate Tax: Paid by companies on their profits.
8

F. Spectrum Auctions & Disinvestment Effective Revenue Deficit


The government sells telecom spectrum licenses to private It is the revenue deficit minus capital grants given to states
companies. and local bodies.
Disinvestment: The government sells its stake in public Provides a clearer picture of the actual revenue shortfall by
sector enterprises (e.g., privatization of Air India). excluding productive grants.
Formula: Effective Revenue Deficit = Revenue Deficit -
3. Borrowings & Debt Grants for Capital Expenditure
When tax and non-tax revenue are insufficient, the
government borrows funds through: Monetary Policy
Internal Borrowing: Loans from banks, bonds, and the Monetary Policy refers to the control of money supply and
Reserve Bank of India (RBI). interest rates by the Reserve Bank of India (RBI) to
External Borrowing: Loans from foreign governments and maintain price stability and economic growth.
international institutions like the World Bank and IMF. It influences inflation, credit availability, and economic
stability.
Types of Deficits in Government Budgeting
A deficit occurs when a government's expenditure exceeds Objectives of Monetary Policy
its revenue. Various types of deficits indicate different Price Stability: Controlling inflation and deflation.
aspects of financial management and economic health. Economic Growth: Ensuring stable GDP growth.
Employment Generation: Encouraging businesses to invest
1. Fiscal Deficit and create jobs.
It represents the shortfall between the government's total Exchange Rate Stability: Maintaining a stable rupee value.
expenditure and total revenue (excluding borrowings). Controlling Liquidity: Managing the supply of money in the
A high fiscal deficit indicates increased borrowing, which economy.
can lead to inflation and debt burden.
Formula: Fiscal Deficit = Total Expenditure - Total Types of Monetary Policy
Revenue (excluding borrowings) 1. Expansionary Monetary Policy
Used during economic slowdown or recession to increase
Revenue Deficit money supply and boost demand.
It occurs when the government’s revenue receipts are less
than revenue expenditure. Measures:
Indicates that the government is unable to meet its day-to- Lowering interest rates.
day expenses from its earnings. Reducing CRR and SLR.
Formula: Revenue Deficit = Revenue Expenditure - Increasing money supply through open market operations
Revenue Receipts (OMO).

Primary Deficit 2. Contractionary Monetary Policy


It is the fiscal deficit minus interest payments on previous Used during high inflation to reduce excess money supply
borrowings. and slow down demand.
It indicates how much of the borrowing is used for current
expenses rather than paying off past debts. Measures:
Increasing interest rates.
Formula: Primary Deficit = Fiscal Deficit - Interest Raising CRR and SLR.
Payments Selling government securities in open market operations.
9

Instruments of Monetary Policy


1. Quantitative Tools B. Moral Suasion
Affect the overall money supply in the economy. RBI persuades banks to follow certain monetary policies
A. Bank Rate (e.g., discouraging excessive loans).
The interest rate at which RBI lends money to commercial C. Credit Rationing
banks. RBI limits loan distribution to specific sectors.
Increase in Bank Rate: Reduces borrowing and money Monetary Policy Framework in India
supply (used to control inflation). RBI follows a Flexible Inflation Targeting (FIT) framework
Decrease in Bank Rate: Increases borrowing and money (since 2016).
supply (used to boost growth).
B. Repo Rate (Repurchase Rate) Current Inflation Target: 4% ± 2% (2% to 6%).
The rate at which RBI lends short-term funds to banks. Monetary Policy Committee (MPC):
Increase in Repo Rate: Reduces money supply, controls Sets Repo Rate and other policy rates.
inflation. Consists of 6 members (3 from RBI, 3 appointed by the
Decrease in Repo Rate: Increases money supply, boosts government).
growth. Headed by the RBI Governor.
C. Reverse Repo Rate
The rate at which RBI borrows money from banks. Money Market
Higher Reverse Repo Rate: Encourages banks to park The money market is a short-term financial market where
excess funds with RBI, reducing money supply. short-term borrowing and lending of funds occur, typically
D. Cash Reserve Ratio (CRR) for less than one year.
The percentage of a bank’s total deposits that it must keep It deals with highly liquid instruments like Treasury Bills,
with RBI in cash. commercial papers, repurchase agreements, etc.
Higher CRR: Reduces money supply. Key Players: Commercial banks, the Reserve Bank of India
Lower CRR: Increases money supply. (RBI), and financial institutions.
E. Statutory Liquidity Ratio (SLR)
The percentage of a bank’s total deposits that it must Objectives of the Money Market
maintain in liquid assets like gold, cash, or bonds. Liquidity Management: Facilitate smooth short-term
Used to control credit growth and inflation. borrowing and lending.
F. Open Market Operations (OMO) Control Interest Rates: Influence short-term interest rates
RBI buys or sells government securities in the open market through monetary policy.
to regulate liquidity. Fund Raising: Governments and corporations raise short-
Buying securities: Increases money supply. term funds.
Selling securities: Decreases money supply. Monetary Policy Implementation: RBI uses the money
market to implement monetary policies (e.g., Repo Rate,
2. Qualitative Tools CRR).
Affect specific sectors of the economy. Instruments of the Money Market
A. Marginal Requirement Treasury Bills (T-Bills)
Minimum down payment required for loans. Issued by the Government of India to meet short-term
Higher margin requirement: Restricts loans, reduces funding needs.
inflation. Maturity: 91 days, 182 days, and 364 days.
Lower margin requirement: Encourages borrowing, boosts Sold at a discount and redeemed at face value.
growth. Highly liquid and risk-free.
10

Repurchase Agreements (Repos) Short-term Investment Opportunities: Offers options for


Short-term borrowing arrangement where the borrower investors to park their funds for short durations with low
sells securities with an agreement to buy them back later at risk.
a higher price. Stability in Financial Markets: Acts as a buffer for financial
Maturity: Usually overnight or few days. markets to adjust to unexpected changes.
Used by RBI to manage liquidity in the economy.
Commercial Papers (CPs) Capital Markets
Unsecured, short-term debt instrument issued by Definition: A capital market is a financial market where
corporates, financial institutions, and others. long-term debt (bonds) or equity-backed securities (stocks)
Maturity: 15 days to 1 year. are bought and sold.
Used to raise funds for working capital. Importance: It mobilizes savings and channels them into
Call Money productive investments, thereby playing a key role in
Overnight loan where banks borrow funds from each other economic development.
for one day.
Interest rate: Call money rate. 2. Key Segments of Capital Markets
Used for liquidity management by commercial banks. Primary Market:
Certificate of Deposit (CDs) What it is: The market where new securities are issued for
Time deposits issued by banks and financial institutions. the first time (e.g., during an IPO).
Maturity: 3 months to 1 year. Functions: Helps companies raise fresh capital for
Interest rate is fixed and higher than savings account rates. expansion.
Reverse Repo Rate Process: Pricing methods include fixed pricing and book
The rate at which the RBI borrows money from commercial building.
banks. Secondary Market:
Used to manage inflation by absorbing excess liquidity in The market where previously issued securities are traded
the market. among investors.
Functions of the Money Market Functions: Provides liquidity and continuous price
discovery.
Liquidity Creation: Ensures the availability of short-term Examples: Stock exchanges like the National Stock
funds. Exchange (NSE) and Bombay Stock Exchange (BSE).
Interest Rate Control: Helps in determining short-term
interest rates. 3. Financial Instruments in Capital Markets
Monetary Policy Transmission: Implements monetary Equity Instruments:
policies such as repo and reverse repo rates. Common Stocks: Represent ownership in a company.
Risk Management: Helps investors manage risks associated Preference Shares: Provide a fixed dividend but typically
with short-term financing. have limited voting rights.
Resource Allocation: Efficiently allocates short-term Debt Instruments:
capital to the required sectors. Bonds & Debentures: Long-term instruments used by
Importance of the Money Market corporations or governments to borrow funds.
Supports Monetary Policy: Helps RBI control inflation and Other Instruments:
manage liquidity. Mutual Funds: Investment vehicles that pool money from
Liquidity to Banks and Financial Institutions: Provides many investors to invest in diversified portfolios.
banks with the necessary funds to meet daily obligations.
11

Derivatives: Contracts (such as options and futures) whose Initial Public Offering (IPO): The first sale of a company's
value is derived from an underlying asset (primarily traded shares to the public.
on specialized markets). Market Capitalization: The total value of a company's
outstanding shares.
4. Role and Functions of Capital Markets Liquidity: The ease with which an asset can be converted
Capital Formation: They help in accumulating funds into cash without affecting its price.
required for business expansion and infrastructure Volatility: The degree of variation in trading prices over
development. time.
Liquidity Provision: Investors can quickly buy or sell Book Building: A process of price discovery during an IPO
securities, ensuring that assets are easily convertible into based on investor demand.
cash.
Risk Diversification: Investors can diversify their Public-Private Partnership (PPP)
portfolios across different sectors and instruments. A Public-Private Partnership (PPP) is a long-term
Price Discovery: Active trading in the secondary market contractual arrangement between a government agency and
leads to fair pricing based on market demand and supply. a private sector entity. The private partner is involved in
Economic Growth: By efficiently allocating resources, designing, financing, constructing, operating, and
capital markets contribute to overall economic stability and maintaining a project or service that serves the public.
growth. Purpose: To leverage private sector expertise and capital for
public infrastructure and service delivery, thereby reducing
5. Regulatory Environment in India the fiscal burden on the government.
Securities and Exchange Board of India (SEBI):
The primary regulatory authority ensuring investor 2. Key Features
protection, enforcing market integrity, and overseeing Risk Sharing: Risks (such as construction delays, cost
market intermediaries. overruns, and revenue shortfalls) are allocated between the
SEBI public and private partners based on their ability to manage
Establishment and Evolution: them.
Founded: 1988 as a non-statutory body. Long-Term Contract: PPP agreements usually span
Statutory Powers: Granted in 1992 through the SEBI Act. several years, covering the full life cycle of the project from
Primary Objectives: design to operation.
Investor Protection: Safeguard the interests of investors in Performance-Based: Payments to the private partner are
securities. often tied to performance and service quality, ensuring
Market Development: Promote the development of a fair, accountability.
transparent, and efficient securities market. Financial Leverage: Uses private investment to reduce the
Regulation: Regulate the activities of market immediate fiscal pressure on the government’s budget.
intermediaries such as brokers, mutual funds, and others.
Other Regulators: 3. Common PPP Models
Reserve Bank of India (RBI): Oversees the overall Build-Operate-Transfer (BOT): The private entity builds
monetary framework and banking stability. and operates the facility for a specified period before
Ministry of Finance: Implements fiscal policies and transferring ownership back to the government.
economic reforms that impact the capital markets. Build-Own-Operate (BOO): The private partner builds,
owns, and operates the project indefinitely without
Key Terms and Concepts transferring ownership.
12

Build-Transfer-Operate (BTO): After building the Definition: The proportion of the total population living
project, ownership is immediately transferred to the below the poverty line.
government, while operation is contracted out.
Design-Build-Finance-Operate (DBFO): The private b. Poverty Gap Index (PGI):
entity designs, builds, finances, and operates the project, Definition: Measures the average shortfall of the total
usually with performance incentives. population from the poverty line, expressed as a percentage
Other Variants: Hybrid models may exist depending on of the poverty line.
the project specifics and contractual terms.
C Gini Coefficient:
4. Advantages of PPPs A measure of income or wealth inequality within a
Efficient Project Implementation: Harnesses private population, ranging from 0 (perfect equality) to 1 (perfect
sector efficiency and innovation. inequality).
Improved Quality of Service: Performance-based Post-Independence Estimation of Poverty in India
contracts incentivize higher service standards. Poverty Line Estimation or calculating the number of poor
Risk Mitigation: Properly structured agreements share in India was done by several committees on basis of
risks between public and private sectors. calorific consumption or per capita expenditure.
Fiscal Relief: Reduces the immediate financial burden on
the government while delivering essential infrastructure. VM Dandekar and N Rath
Based on the data from the National Sample Survey (NSS)
5. Challenges and Disadvantages data VM Dandekar and N Rath made a systematic
Complex Contracts: Negotiating and managing detailed, assessment of poverty in 1971. While the previous
long-term contracts can be challenging. estimations had stressed on subsistence living or basic
Risk Allocation Issues: Improper risk-sharing may lead to minimum needs as a criterion for the poverty line, VM
disputes or financial inefficiencies. Dandekar and N Rath suggested that the poverty line’s
Political and Regulatory Risks: Changes in government criteria must be based on the expenditure that would provide
policy or political opposition can impact project viability. 2250 calories per day both in rural and urban areas.
Transparency Concerns: Requires robust oversight to
ensure accountability and prevent misuse of public funds. Alagh Committee (1979)
The Taskforce constituted by the Planning Commission
Poverty under the direction of YK Alagh, constructed a poverty line
Poverty is the condition where individuals lack sufficient for rural and urban areas on the basis of nutritional
resources to meet their basic needs such as food, shelter, requirements and related consumption expenditure. The
healthcare, and education. estimates in the ensuing years would be adjusted taking into
Types of Poverty: account the price level for inflation.
Absolute Poverty: A fixed standard based on the minimum Lakdawala Committee (1993): Task Force chaired by DT
level of income required to secure the essentials of life. Lakdawala, based on the assumption that the basket of
(e.g., living on less than $2.15/day as per World Bank goods and services used to calculate Consumer Price Index-
standards) Industrial Workers (CPI-IW) and Consumer Price Index-
Relative Poverty: Poverty measured in relation to the Agricultural Labourers(CPI-AL) reflect the consumption
economic status of other members of the society; focuses on patterns of the poor, made the following suggestions:
inequality rather than a fixed threshold. Consumption expenditure should be calculated based on
2. Measuring Poverty calorie consumption as earlier.
a. Head Count Ratio (HCR):
13

State specific poverty lines should be constructed and these To review international poverty estimation methods and
should be updated using the CPI-IW in urban areas and CPI- indicate whether based on these, a particular method for
AL in rural areas. empirical poverty estimation can be developed in India.
Discontinuation of scaling of poverty estimates based on To recommend how these estimates of poverty can be
National Accounts Statistics. linked to eligibility and entitlements under the various
schemes of the Government of India.
Tendulkar Committee (2009)
Expert group constituted by the Planning Commission and, INDEXES
chaired by Suresh Tendulkar, was constituted to review There are multiple indexes used to measure poverty,
methodology for poverty estimation and to address the including the Multidimensional Poverty Index (MPI), the
following shortcomings of the previous methods: Human Poverty Index (HPI), and the Multidimensional
Obsolete Consumption Pattern: Consumption patterns were Poverty Measure.
linked to the 1973-74 poverty line baskets (PLBs) of goods Multidimensional Poverty Index (MPI)
and services, whereas there were significant changes in the Measures poverty by looking at deprivations in health,
consumption patterns of the poor since that time, which education, and standard of living
were not reflected in the poverty estimates. The MPI ranges from 0 to 1, with higher values indicating
Inflation Adjustment: There were issues with the higher poverty
adjustment of prices for inflation, both spatially (across The MPI is used to identify who is multidimensionally poor
regions) and temporally (across time). and to show the composition of multidimensional poverty
Health and Education Expenditure: Earlier poverty lines The MPI complements the international $2.15 a day poverty
assumed that health and education would be provided by the rate
state and formulated poverty lines accordingly.
Human Development Index (HDI)
Recommendations The Human Development Index (HDI) is a composite index
Shift from Calorie Consumption based Poverty Estimation: introduced by the United Nations Development Programme
It based its calculations on the consumption of the items like (UNDP) in its Human Development Report (HDR) since
cereal, pulses, milk, edible oil, non-vegetarian items, 1990.
vegetables, fresh fruits, dry fruits, sugar, salt & spices, other It measures three key dimensions of human development:
food, intoxicants, fuel, clothing, footwear, education, Health – Life expectancy at birth
medical (non-institutional and institutional), entertainment, Education – Mean years of schooling & Expected years of
personal & toilet goods. schooling
Standard of Living – Gross National Income (GNI) per
Uniform Poverty line Basket: Unlike Alagh committee capita
(which relied on separate PLB for rural and urban areas),
Tendulkar Committee computed new poverty lines for rural Classification of Countries Based on HDI
and urban areas of each state based on the uniform poverty Countries are categorized into four groups based on their
line basket HDI score:
Rangarajan Committee Committee Very High HDI (≥ 0.800)
The committee was set up in the backdrop of national High HDI (0.700 – 0.799)
outrage over the Planning Commission’s suggested poverty Medium HDI (0.550 – 0.699)
line of ₹22 a day for rural areas. Low HDI (< 0.550)
Objectives
14

In 2024, India was ranked 134th out of 193 countries on the 4 Agreement on Trade-Related Investment Measures
Human Development Index (HDI). This was according to (TRIMS): Regulates investment measures affecting
the 2023-2024 Human Development Report (HDR) trade.
released by the United Nations Development Programme
(UNDP). Decision-Making in WTO
• Ministerial Conference (MC): Highest decision-making
International Monetary Fund body, meets every two years.
The World Trade Organization (WTO) is the only global • General Council: Handles day-to-day operations.
international organization dealing with the rules of trade
between nations. WTO and India
1. Introduction • India is a founding member of WTO and actively
• Established: 1 January 1995 participates in negotiations.
• Headquarters: Geneva, Switzerland • Key Issues for India:
• Predecessor: General Agreement on Tariffs and Trade ◦ Agricultural subsidies: India defends its Minimum
(GATT) (1948-1994) Support Price (MSP) under WTO rules.
• Members: 164 countries (as of 2024) ◦ Intellectual Property Rights (IPR): India supports
• India is a founding member. affordable medicines against TRIPS restrictions.
◦ Developing Country Status: India opposes unfair
2. Objectives of WTO trade restrictions imposed by developed nations.
1 Promote free trade by reducing trade barriers.
2 Ensure fair competition in global markets. World Bank
3 Resolve trade disputes among member nations. • Established: 1944 (Bretton Woods Conference)
4 Enhance economic growth and employment worldwide. • Headquarters: Washington, D.C., USA
5 Assist developing countries in trade policy • Members: 189 countries
implementation. • President (2024): Ajay Banga (India-born)
• Motto: "Working for a World Free of Poverty"
Key Functions of WTO
• Administers WTO agreements and monitors trade Structure of the World Bank Group
policies. The World Bank Group (WBG) consists of five institutions:
• Resolves disputes through the Dispute Settlement 1 International Bank for Reconstruction and Development
Mechanism. (IBRD) – Provides loans to middle-income and
• Provides technical assistance to developing countries. creditworthy low-income countries.
• Conducts trade policy reviews of member nations. 2 International Development Association (IDA) –
Provides concessional (low-interest) loans to the world's
WTO Agreements poorest countries.
1 Agreement on Agriculture (AoA): Reduces trade 3 International Finance Corporation (IFC) – Supports
barriers in agriculture. private sector investment in developing countries.
2 General Agreement on Trade in Services (GATS): 4 Multilateral Investment Guarantee Agency (MIGA) –
Governs international trade in services. Provides political risk insurance to investors.
3 Agreement on Trade-Related Aspects of Intellectual 5 International Centre for Settlement of Investment
Property Rights (TRIPS): Protects patents, copyrights, Disputes (ICSID) – Handles investment disputes
and trademarks. between countries and foreign investors.
15

Objectives of the World Bank 1 Monitors global economy through reports like World
• Poverty reduction and economic development. Economic Outlook (WEO).
• Infrastructure development (roads, power, water, etc.). 2 Provides financial assistance to countries facing balance
• Education and healthcare improvements. of payments crises.
• Providing financial and technical assistance to 3 Offers technical assistance in banking, taxation, and
developing countries. exchange rate policies.
4 Issues Special Drawing Rights (SDRs) as a global
Major World Bank Reports reserve asset.
• World Development Report (WDR) – Annual flagship
report on global economic issues. IMF Reports
• Ease of Doing Business Report (discontinued in 2021). • World Economic Outlook (WEO) – Forecasts global
• Human Capital Index (HCI) – Measures a country's economic trends.
investment in human capital. • Global Financial Stability Report (GFSR) – Assesses
• Global Economic Prospects Report – Provides economic financial risks.
forecasts and trends. • Fiscal Monitor Report – Evaluates fiscal policies of
member countries.
India and the World Bank
• India is a founding member of the World Bank. 5. IMF and India
• Top borrower from the World Bank for infrastructure • India is a founding member of the IMF (joined in 1945).
and social sector projects. • Largest borrower in the 1980s and 1991 during the
• Key World Bank-funded projects in India: economic crisis.
◦ Rural electrification (Deen Dayal Upadhyaya Gram • India’s Quota Share: 2.75% (2024), giving it voting
Jyoti Yojana). power in IMF decisions.
◦ Swachh Bharat Mission (sanitation projects). • IMF-supported India’s 1991 economic liberalization
◦ National Ganga River Basin Project (Clean Ganga reforms.
initiative).
Criticism of IMF
Internation Monetary Fund • Harsh loan conditions (Structural Adjustment
• Established: 1944 (Bretton Woods Conference) Programs).
• Headquarters: Washington, D.C., USA • Western dominance (USA holds the highest voting
• Members: 190 countries power).
• Managing Director (2024): Kristalina Georgieva • Failure to prevent financial crises (2008 Global Crisis).
• Motto: "Fostering global monetary cooperation"
New Development Bank (NDB)
Objectives of IMF • Established: 2015 (BRICS Summit in Ufa, Russia)
• Ensure global financial stability. • Headquarters: Shanghai, China
• Facilitate international trade and economic growth. • Members: 10 countries (Initially 5 BRICS nations; later
• Provide financial assistance to member countries in expanded)
crisis. • Purpose: Finance infrastructure and sustainable
• Monitor global economic policies. development projects in emerging economies.
Founding Members (BRICS Nations)
Functions of IMF 1 Brazil
2 Russia
16

3 India • Provide financial and technical assistance for


4 China development projects.
5 South Africa • Improve infrastructure, education, and healthcare.
• New Members (2021-2023): Bangladesh, UAE, Egypt, • Support poverty reduction and sustainable development.
Uruguay, and Saudi Arabia (pending). Capital Structure
Objectives of NDB • Total Capital: $165 billion (as of 2024)
• Provide financial assistance for sustainable development • Largest Shareholders:
projects. 1 Japan (15.6%)
• Reduce dependence on Western financial institutions 2 United States (15.6%)
like the IMF & World Bank. 3 China (6.4%)
• Promote financial cooperation among emerging 4 India (6.3%)
economies.
Capital Structure Functions of ADB
• Initial Authorized Capital: $100 billion 1 Provides loans and grants to member countries for
development projects.
Key Features of NDB 2 Supports private sector investment in infrastructure.
• Each founding member has equal voting power. 3 Offers technical assistance for policy-making and
• Focuses on green energy, infrastructure, and digital governance.
connectivity projects. 4 Funds climate change and disaster management projects.
• Provides loans in local currencies to reduce dependence
on the US dollar. India and ADB
• India is a founding member and one of the largest
India and NDB borrowers.
• India is a founding member and has received funds for • Key ADB-funded projects in India:
various projects, including: ◦ Metro rail projects (Delhi, Mumbai, Chennai,
◦ Rural Infrastructure Development. Bengaluru).
◦ Renewable Energy Projects. ◦ Rural electrification and renewable energy projects.
◦ Smart Cities Mission. ◦ Smart Cities Mission and road infrastructure
development.
Criticism of NDB Asian Infrastructure Investment Bank
• Limited funding capacity compared to the World Bank. • Established: 2016
• Over-reliance on China’s influence. • Headquarters: Beijing, China
• Slow project approval process. • Members: 109 countries (as of 2024)
• Current President: Jin Liqun (China)
Asian Development Bank (ADB) • Motto: "Infrastructure for Tomorrow"
• Established: 1966
• Headquarters: Mandaluyong, Manila, Philippines Objectives of AIIB
• Members: 68 countries (49 from Asia-Pacific, 19 from • Finance infrastructure projects in Asia and beyond.
outside) • Promote sustainable economic development.
• Current President (2024): Masatsugu Asakawa (Japan) • Reduce the infrastructure gap in developing nations.
• Motto: "Fighting Poverty in Asia and the Pacific" • Support green energy, transport, and connectivity
Objectives of ADB projects.
• Promote economic growth in Asia-Pacific.
17

Capital Structure
• Total Authorized Capital: $100 billion Laffer Curve
• Largest Shareholders: • Shows the relationship between tax rates and tax
1 China (26.6%) revenue.
2 India (7.6%) • Too high or too low tax rates lead to lower revenue.
3 Russia (6.0%) • Suggests an optimal tax rate for maximum revenue.
4 Germany (4.2%)
• China holds the highest voting power (~26%). The Phillips curve
• The Phillips curve states that inflation and
Functions of AIIB unemployment have an inverse relationship. Higher
1 Provides long-term loans and investments for inflation is associated with lower unemployment and
infrastructure projects. vice versa.
2 Supports public and private sector projects. • The Phillips curve was a concept used to guide
3 Promotes regional connectivity through transport macroeconomic policy in the 20th century, but was
networks. called into question by the stagflation of the 1970’s.
4 Finances clean energy and climate change initiatives.
Lorenz Curve
India and AIIB • Represents income distribution and economic
• India is a founding member and the second-largest inequality.
shareholder. • Closer to the diagonal → More equality.
• Largest borrower of AIIB funds ($10+ billion for various
projects). Gini Coefficient
• Key AIIB-funded projects in India: The Gini index or Gini coefficient is a statistical measure of
◦ Rural roads and highway development. distribution developed by the Italian statistician Corrado
◦ Bangalore Metro expansion. Gini in 1912.
◦ Renewable energy (solar and wind power projects). It is often used as a gauge of economic inequality,
measuring income distribution or, less commonly, wealth
Important Curves in Economics distribution among a population.
Engel Curve
It displays how household expenditure on a particular The coefficient ranges from 0 (or 0%) to 1 (or 100%), with
good or service varies with change in household income. 0 representing perfect equality and 1 representing perfect
Kuznets Curve inequality
It shows the relationship between economic growth and
inequality. It is inverted U shaped meaning that as initially
economic growth leads to greater inequality, followed later
by the reduction of inequality.

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