Economics Short Notes JE
Economics Short Notes JE
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.
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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):
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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
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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.
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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
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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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