Economics Prelims Notes Gen
Economics Prelims Notes Gen
Savings India
Household Savings - largest portion (59%)
Most in form of physical assets, followed by financial assets and gold
GDP
GCF = GFCF (machinery+equipment+building+cultivated biological
resources+Intellectual Property) + Valuable Metals + Change in stock/inventory
GFCF = 30% roughly
ICOR = Change in Capital/Change in Output
Higher ICOR means lower Productivity
Investment = Production Of Capital Goods
5 Year Plans
1st (1951-56)
Harrod Domar Model
Agriculture
Successful
2nd (1956-61)
Mahalanobis Plan
Agri given lower priority
Heavy & basic industries
Industrial Policy, 1956 - socialistic pattern of society
3rd (1961-66)
Felt that India has entered "Take-off stage" => aim was to make india self
reliant + Self generating economy
Agri given priority
Failure => 2 wars
Later, focus on defence development
Annual Plans (1966-69) - PLAN HOLIDAY
Due to Agri crisis + inflationary recession + rupee devaluation
Green Revolution
Paved way for 4th plan
4th (1969-74)
Growth with stability + Progressive achievement of self reliance
DIFFERENTIATED BANKS
Aka niche banks
Mooted by Nachiket Mor Comm, 2014 for financial inclusion
Eg-> payment banks, RRBs, Small Finance Banks, Local Area Banks, Wholesale and
long-term finance banks etc
Payment Banks
Can accept Demand Deposits (NBFCs CANNOT). No credit lending
NBFCs cannot accept demand deposits (can accept time deposits like FD)
Functions -
Provide small savings/current accounts below ₹1L
Distribution of MFs, insurance products
Payments/financial services
States can only issue SDLs (T-bills, CMBs & Dated Securities => by Central govt)
SDLs => counted in SLR
Dated Securities - have tenor of 1-40yrs
MONEY MARKET INSTRUMENTS - highly liquid short-term financial assets traded (<1 year).
Characteristics - liquidity, Safety, Discount Pricing
Treasury Bills (T-Bills)
Safest money market instrument
Short term liquidity instrument - upto 364 days. Govt issues bonds when it
needs long term money (eg 5 yrs)
Credit to Consolidated Fund of India (NOT Public Account)
Issued by Central govt to FIs
Issued by RBI on behalf of Govt
Bought at discount price from face value (i.e. NO interest payment)
Central Govt issues - State Govt issues - only bonds (aka State
TBs and Bonds Development Loans - SDLs) => counted in SLR
3 types of TBs -
14 day (intermediate TBs) - discontinued
14 day (Auctionable TBs) - discontinued
91 day
182 day
364 day
Dated Securities - long term instrument issued by govt (to
public or FIs) for borrowing, having interest payment - %
of face value and interest paid at regular intervals.
Tenor can be upto 30 years (unlike T-bills, which are
bought at discount from face value)
Certificate Of Deposits
After Treasury Bills, it is the lowest risk category investment option issued
by commercial banks (excluding RRBs and LABs) and selected FIs
Different from FD -
Commercial Bill
Bonds issued by firm to another against a credit transaction
Can be discounted by banks
Aka "Bills of exchange"
CAPITAL MARKET INSTRUMENTS - long term securities => Equity market & Debt market -
equity shares, bonds, preference shares, debentures etc
More riskier than money market (since less liquid and long maturity)
Primary market
Budget Receipts
In descending order -
Borrowings & Other liabilities
Corporate Income Tax
GST
Personal Income Tax
Center
Excise Duty - on mfg goods (not on services)
Production based tax (not destination) -> i.e. as good moves out
from industrial region, excise duty is paid whether or not it is
sold
But even after VAT -> Problems -> Since still Center is also levying excise and customs duty
(at production stage) & VAT by states(levied at destination stage) => Cascading effect =>
So GST was brought to harmonise
EASE Index
"Enhanced Access and Service Excellence" - measures performance of each PSB
Prepared by IBA and BCG
Released by MoFinance
Report notes
Strengthening of bank-loan recovery process -: success of IBC
Sugarcane
FRP recc by CACP => approved by CCEA => recc to State Govts by
MoConsumerAffairs
Sugar mills have to purchase sugarcane from farmers at FRP/SAP as per ECA,
1955
SAP (State Advised Price) => announced by State govt -> usually more than
FRP
Decentralised Procurement
Procurement at MSP to central govt stock through state agencies, not FCI
Helps cover more farmers under MSP
Improves PDS efficiency
Provides varieties of food grains more suited to local taste
GDP Deflator
Covers entire range of G&S produced in economy
Available on a quarterly basis (when GDP data released)
Nominal/Real
GDP
Calculated by CSO
PLFS (periodic Labour force survey)
by NSO, MoSPI
India's 1st computer based survey
Launched in 2017
WPI
Calculates price changes at the point of bulk transactions and may include some
taxes and distribution costs
WPI calculated with 2011-12 base year doesn't include taxes in order to remove
impact of fiscal policy => present WPI ~ PPI (as practised globally)
Covers commodities of 3 major groups -
Primary Articles
Fuel and Power
Manufactured Goods
Curves
PHILIPS CURVE - inflation and unemployment have stable and inverse relationship -
fails in long run in stagflation (high unemployment + high inflation) => vertical
line
Impossible Trinity - Impossible to have all 3 of the following at the same time -
DEMAND FOR MONEY - affected by level of income, interest rates, inflation, uncertainty
about future. 3 motives -
Speculative Demand for Money
Money as a store of wealth => investment. i.e. when money holding is
perceived to be less risky than lending or investing it. For Eg. When
stock market crash seems imminent
Demand for highly liquid financial assets => not dictated by real transactions
such as trade
Eg. If current interest rates are high => encourages bond holding but
discourage money holding => because high opportunity cost of holding
money in terms of interest forgone
Transactions Demand
Involve exchange of money
As GDP (income) rises => transaction demand for money also rises
Precautionary Demand
Demand for money as a precaution against an uncertain future that may
require immediate payment
Velocity Of Money -
Number of times money changes hands during a unit period
Higher velocity => higher will be the total nominal value of transactions in the
economy
SLR Default
ECB -
Can be in rupee, dollar, or any other freely convertible foreign currency
RBI has eased norms for ECB => to address liquidity conditions in economy
Hedging norms eased => mandatory hedging coverage reduced from 100%
to 70%
Masala Bonds
Rupee denominated offshore bonds => funds raised from overseas market
Currency risk is on foreign investor => since Conversion of such bonds happens at
market rate on the date of settlement of transactions (NOT predecided
exchange rate)
RBI mandates -
Any Indian bank or corporate is eligible to issue masala bonds
Money raised through this cannot be used for real estate activities (except -
dev of township or affordable housing)
Can't be used for investing in capital markets (eg. Purchase of land - NO)
Minimum Maturity-
Upto $50Mn - 3 years
> $50Mn - 5 yrs
Can be issued only in a country that is member of FATF and whose securities
market regulator is a member of International Organisation Of
Securities Commission
Kerala became first state to issue Masala Bonds - to rebuild after floods of 2019
Maharaja Bond => Rupee denominated onshore bond
Depository Receipts
Financial instrument (securities) issued by a company in a foreign jurisdiction
Negotiable security that can be traded on stock exchange
Issuers can raise funds outside their country
Depository Receipt => issued abroad which can be bought by foreign investor
Indian Depository Receipt (IDR) => Rupee denominated -> enables Foreign
companies (NOT Indian company) to raise funds from Indian securities market
ADR/GDR => Dollar denominated => Allows Indian Company to raise funds from
Foreign security market
Eg. ADR (American DR - if issued in US on the basis of securities of Indian company),
GDR (global DR)
Difference btw REER and NEER due to domestic inflation of India relative to other 36
countries (major trading partners of India)
Indradhanush 2.0
Comprehensive plan to recapitalise PSBs
₹70,000cr by govt
₹1.1Lcr to be raised from markets
Inverted Duty Structure
Import duty on finished goods is low compared to import duty on raw materials
Industry wants the govt to remove this anomaly
Beggar-thy-Neighbour Policy
Policy through which country attempts to remedy its economic problems by means
that tend to worsen the economic problems of other countries
ECA for Onions => Bangladesh onion woes
Pareto Efficiency
Economic situation when the circumstances of one individual cannot be made
better without making situation of other individual worse
Takes place when resources are most optimally used
Paradox of Thrift
Individuals try to save more during recession => fall in demand => more recession
Codex Alimentarius Commission (CAC)
International food standards body
Jointly by WHO & FAO => to protect consumer health and ensure fair practices in
free trade
India => became member in 1964
Eco-Mark
Voluntary labelling service by BIS (MoConsumerAffairs) - for quickly identifying
envt-friendly products
EXIM Bank
Wholly owned by GoI – Export-Import Bank of India Act, 1981
Extends LOCs to overseas financial institutions, regional dev banks, sovereign govts
and other entities overseas.
Facilitates 2 way tech transfer by financing import technology into India, and
investment abroad by Indian companies for setting up joint ventures or
undertaking overseas operations.
India recently extended $75 mn LOC via EXIM bank for solar parks in Cuba
National Economic Census
Complete count of all establishments located in geog boundary of India
By MoSPI (7th edition in 2019), first in 1977 (not at regular intervals)
Conducted under Collection of Statistics Act, 2008
All households/establishments engaged in agri (excluding crop production and
plantations) as well as non-agri economic activities including construction
(except public admin, defense)
For 7th census, MoSPI partnered with CSC e-governance services => an SPV under
MeitY as implementing agency => for the first time entire census was conducted
on digital platform by using app
CSC - under MeITY
Municipal Bonds
Marketable debt instruments issued by ULBs => to on-lend towards project
implementation by ULB
Regulated by SEBI
Bangalore Municipal Corp => 1st ULB to issue in 1997
Pension Fund Regulatory and Development Authority (PFRDA)
Interim PFRDA estb in 2003 - through govt resolution
Later made statutory body by PFRD Act, 2013
Regulates NPS and other pension schemes subscribes by employees of pvt and
public sector
NPS
Under MoFinance
Govt sponsored pension scheme launched in 2004, for govt employees => In 2009 -
opened for all
Eligible -
All citizens (Resident or NRI) & OCIs till the age of 65 years
All new Central govt & central autonomous body employees (joining after
2004) except Armed forces
All employees of state govt and bodies joining after date of notification by
state govts
Any other govt employee
All citizens - pvt employees, unorganized workers
NRIs/OCIs with bank accounts in India
OCIs now equivalent to NRIs in NPS scheme -> both can invest in
NPS-Tier 1 accounts
Govt will NOT CONTRIBUTE anything
Funds managed by PFRDA
Employees' State Insurance Scheme
Under MoLabour
Social Security + Health Insurance => Insurance against sickness, death, disability
etc => provide medical care
TOURISM
India ranked 22nd in world in terms of international tourist arrivals in 2018 =>
1.24% of world's international tourists
Top 5 international tourist arrival states - TN, MH, UP, Delhi Raj
Top 5 domestic tourist arrival states - TN, UP, Karnataka, Andhra, MH
Most Foreign tourists from Bangladesh (20%) in last 2 years
Medical Tourism
India => 18% of global medical tourism market
MoTourism => recognized it as niche tourism
E-tourist visa for medical tourism
National Medical and Wellness Tourism Board under MoTourism
Hindustan Urvarak and Rasayan Limited (HURL)
Joint venture of Coal India Ltd + NTPC + IOCL
Revival of 3 sick urea units
Will establish state of the art envt friendly and energy efficient natural gas based
new fertiliser complexes
FOREX, EXCHANGE RATE misc fundae
If interest rate (interest on Govt bonds) higher => international investment
banks/funds/MNCs will buy bonds more => demand currency more => currency
appreciates
But, with higher interest rate, domestically people will borrow less from banks =>
lower consumer spending
FPI inflow => More dollars in Indian economy => so less value of dollars =>
rupee appreciates
DPIIT (Dept of Promotion of Industry and Internal Trade)
New name of DIPP
Under MoCommerce&Industry
Functions -
Formulation of industrial policy
Monitoring industrial growth
Formulation and regulation of FDI policy
Formulation of IPR policies
Coordinate with UN Industrial Development Org
Administers Laws => Explosives Act, 1884 ; Salt Cess Act, 1953; The Patent
Act, 1970; The Boilers Act, 1923,;GI Act, 1999; Inflammable Substances
Act, 1952 etc
IPR related laws, Quality Council of India, Trademarks, Copyrights etc
Invaluable Treasures and Incredible India -> tagline for branding of GIs
FDI
Misery Index
Misery Index = unemployment rate + inflation rate => shows extent of Stagflation
Dwarf Firms
Firms that are both -
Small (less than 100 workers), &
Older than 10 years
Account for half of all organised mfg by number
But small share in net value added and employment
D-SIB
Banks whose assets > 2% of GDP
RBI declares banks designated as D-SIBs annually
Assessment methodology for assessing and Identifying D-SIBS will be reviewed
atleast once in 3 years
SBI, HDFC, ICICI
15th FC-
Reccs of FC implemented by Dept of Expenditure, MoFinance
Chairman – NK Singh
Divisible Pool excludes -
Cost of collecting taxes
Cess & surcharge (including GST compensation cess)
Tax revenue of UTs
Transfer from National Calamity Contingency Fund (NCCD) & NDRF
Tenure increased to 6 years. For 2020-21 => report in Feb. For 2021-26 => report in
oct 2020
Enforcement Directorate
Multidisciplinary organisation mandated with the task of enforcing the provisions of
-
FEMA, 1999
Prevention of Money Laundering Act, 2002
Under administrative control of Department of Revenue, MoFinance
Google Tax/Equalization Levy
Under Finance Act, 2016 - 6% for B2B transactions
Under Finance Act, 2020 - new eq levy 2% on revenue of e-commerce operators
(who sold > ₹2cr of goods & services) & who don't have tangible presence in
India(B2C)
Foreign firm won't get tax credit in its home country for equalisation levy
paid in India => since that income won't be subjected to income tax
Will apply to payments for online ads made by Indian business entities to non-
residents (such as Google, Yahoo, Twitter, FB) where aggregate payment in a
financial year to a non-resident exceeds ₹1L => charged @ 6%
India became first country to impose equalisation levy -> aka Google Tax
Imposed on Revenue (NOT profit - as estimating profit for Amazon will be hard)
BEPS
India ratified Multilateral Convention to Implement Tax Treaty Related measures
to prevent base erosion and profit shifting (MLI) by OECD/G-20
Tax Information Exchange Agreement (TIEA)
India notified TIEA with Marshall Islands
TIEAs are non-binding agreements
Tax transparency & sharing of info twice a year
Can undertake tax examination in other country
Central Repository of Information on Large Credits (CRILC)
Set up by RBI in 2014-15 => to collect, store and disseminate credit data to lenders
=> for early recognition of financial distress
Buyback Tax
GoI proposed to tax buyback of shares by companies at 20%
Buyback - scheme by which company repurchases certain amount of its outstanding
shares => companies avoided paying DDT because of this
Capital Gains Tax
Direct tax that applies on sales of all assets if a profit has been made => i.e. tax on
gains one gets by selling assets
2 types -
Short Term Capital Gain - if asset sold within 36 months of owning it
Long Term Capital Gain - if sold after 36 months
BOP
Current Account - short term transactions
MSMEs
Definition changed under Atmanirbhar package -
30% of GDP & 45% of total 25% Employment Only 8% MSMEs get formal
exports credit
Public Procurement Policy for MSMEs
Portals
MSME Samadhaan - delayed payment portal
MSME Sambandh - public procurement
MSME Sampark - connecting jobseekers and recruiters
Udyam Sakhi - for women entrepreneurs
Udyam Mitra - by SIDBI to provide improved accessibiity of credit to MSMEs
India Inclusive Innovation Fund
RTGS (real time gross settlement) - real time transfer => primarily for large transactions (min
₹2L) -> not 24x7 system
NPCI (National Payments Corporation of India)
Founded in 2008, registered under Companies Act, 2013, established by RBI and
IBA under provisions of Payment and Settlement Systems Act, 2007
Owned by consoritum of major banks
Services ->
IMPS (immediate mobile payment system) - real time instant inter-bank
transfer system managed by NPCI => available 24*7
BBPS(Bharat Bill Payment System) - RBI conceptualised system driven by
NPCI => one-stop payment platform for all bills -
Covers repetitive payments of bills
payment online or Cash also
No convenience fee for online transaction
NACH (national automated clearing house) - web based platform for
interbank, high volume, electronic transaction for
banks/FIs/corporates/govt
Digital Payment Modes
Liquidity Trap
RBI wants to increase money supply in case of recession => But fails to lower
interest rate as they are already almost zero
Makes monetary policy ineffective
Low interest rates but People still hold on to their cash (savings deposits in banks)
=> spend less
Bilateral Netting
2 counterparties in a financial contract determine a single net payment obligation
that is due from one party to another => i.e. payables and receiveables are
netted off
Introduced in budget 2020
Bilateral netting not allowed in india as of now => however multilateral netting is
allowed (parties can offset claims against each other through a central
counterparty)
FDI in Retail
DAIRY SECTOR
India ranks 1st in milk production since 1998 (20% of world production)
Largest bovine population
Dairy Processing and Infrastructure Development Fund (DIDF) Scheme
Central Sector Scheme under NABARD
interest subvention (subsidy on loans) @2.5%
Repayment period till 2030-31
Intensify Quality Milk Programme
TELECOM SECTOR
India is 2nd largest telecom market
TEXTILE SECTOR
Harmonized System (HS Code) for Khadi
HS Code is a 6-digit ID code by World Customs Org
MoCI allocates HS code - (8 digit code in India - extra 2 digits for more
detailed classification)
Separate HS code for Khadi => will boost Khadi exports
National Technical Textile Mission
Approved by CCEA
Will be operational under MoTextiles => 4 components in 4 years
Aims to position country as global leader in technical textiles (market size of
$40Bn by 2024)
Currently $16Bn (6% of global $250Bn technical textiles market)
Technical textiles are functional fabrics having application across various
industries
12 segments - Agrotech, Meditechc, Buildtech, Mobiltech (seatbelts, airbags
etc.), Clothtech, Oekotechc, Geotech, Packtech, Hometech, Protechc,
Indutech, Sportech
Project SU.RE
By textile ministy + Clothing Mfg Association of India (CMAI) etc
Indian apparel industry's largest commitment to move towards sustainable
Fashion
L2Pro
GNP
GNP = GDP + NFIA (net Factor income from abroad)
GNP is both a quantitaive & qualitative concept - since it also accounts for quality of
human resources of citizens
India's GNP is always lesser than GDP => since Indians abroad generate less income
compared to foreigners operating in India
GNP measured from April 1 to March 31
Bottleneck Inflation
When supply falls drastically, and demand remains at same level
Financial Sector Regulatory Appointments Search Committee (FSRASC)
Created on the recc of Financial Sector Legislative Reforms Commission, 2011
For Reccommending names of chairpersons and members of Financial Sector
Regulatory Bodies (including Governor and Deputy Governor of RBI)
Headed by - Cabinet Secretary
FSRASC reccs candidate (even those names which haven't applied) => sends it to
Appointments Committee of Cabinet (headed by PM)
Surcharge
Discussed in Art 270 & 271
An increase in any of the taxes or duties => i.e. Tax on Tax
Whole proceedings of surcharge form part of Consolidated Fund of India
Surcharge cannot ordinarily be imposed over and above GST
Unlike Cess => no need to stipulate purpose at time of levy => Union can utilize
whichever way it deems fit
Credit Rationing
BANKING COMMITTEES
Poverty Lines
Dandekar & Rath Committee, 1970-71 - used calories only (assumed health,
education provided by State)
Alagh Committee, 1978-79 - used calories only
Lakdawala Committee, 1993-94 - used calories only
Tendulkar Committee, 2009
Only calorific value used for food expenditure
First to use non-food expenditure like Health, Education, Clothing
Still used for Official Poverty estimation
C. Rangarajan Committee, 2014 =>
Used Calorie+Protein+fat
Non food items such as Health, rent, clothing, education, transport
Economic Integration Types
PTA (preferential trade agreement) - tariff reduction in some goods
FTA - PTA with tariff abolition on most goods
India FTAs with 10 countrie-
SL
Afg
Bhutan
Nepal
Thailand
Singapore
Malaysia
South Korea
Japan
Chile (only country outside Asia)
3 regional FTAs with -
SAFTA, 2004
India-ASEAN Agreement, 2010
MERCOSUR (Brazil, Argentina, Paraguay, Uruguay, Venezuela-
suspended since 2016)
Customs Union - FTA with common external tariff for non-members
Common Market - Customs Union where Free movt of labour & capital
Economic & Monetary Union - common market where members coordinate
macro-economic & exchange rate policies
Samarth Udyog Bharat 4.0
By MoHeavyIndustry&PublicEnterprises
Industry 4.0 initiative => 4th industrial revolution
Investment Models
BOT
Developer constructs road => collects toll
No Govt payment to developer
BOT Annuity
Developer constructs road => operates for few years => transfers
back to govt
Govt starts payment to developer after launch of commercial
operations of project
EPC
Cost is completely borne by govt => govt invites bids for engg
knowledge from players
Raw material + construction costs etc => by govt
Pvt sector participation minimum (only engg)
HAM
BOT Annuity + EPC
Govt:Pvt = 40:60
Govt => 40% project cost in first 5 years through annual
payments (annuity)
Remaining payment made on basis of assets created and
performance of developer
Developer responsible for construction, NOT maintenance
Insurance