Indian Economy Only IAS

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CONTENTS
1. Economics: An Introduction................................ 1-9 3. Public Finance..................................................... 17-22

Economics: An Introduction......................................1 Components of Budget.............................................. 17
Varients of Consensus..................................................2 Fiscal Consolidation................................................... 18
Sectors of the Economy................................................3 Types of Deficits........................................................... 18
On Basis of Activities.....................................................3 Types of Budget............................................................ 19
On Basis of Work Conditions, Monetary Policy Vis-A-Vis Fiscal Policy............. 19
Terms & Organsation-Nal Setup...............................3 Deficit Financing.......................................................... 19
On Basis of Asset Ownership.....................................4
Fiscal Consolidation................................................... 20
Economic Growth vs Economic Development.....5
Expenditure Management Commission
Central Statistical Organization (CSO)..................5 (EMC)................................................................................ 20
Measures of Economic Growth.................................5 Fiscal Responsibility and Budget
Pro-Cyclical and Counter-Cyclical Management (FRBM) Act, 2003............................ 21
Economic Policy..............................................................6
Government Debt........................................................ 21
Methods of National Income Calculation.............7
Crowding out Effect.................................................... 21
New GDP Series 2011-12............................................7
N.K. Singh Committee/FRBM Review�� 21
Difference between GNP and GDP...........................7
Terminologies............................................................... 22
Difference between GDP and GVA...........................8
Purchasing Power Parity (PPP)................................8 4. Inflation................................................................. 23-32
Gross National Happiness (GNH) ...........................8 Types of Inflation......................................................... 23
Concepts Related to Cost and Price........................8 Based on Causes........................................................... 23
Cost vs Price......................................................................8 Based on Speed............................................................ 24
NI vs NDI vs PI.................................................................8
Key Terms and Terminologies............................... 24
Types of Incomes............................................................9
Inflationary and Deflationary GAP�� 25
Growth Rate & GDP Deflator.....................................9
Cobweb Phenomenon................................................ 25
Real GDP vs Nominal GDP�� 9
Inflation Indices: WPI vs CPI Vs IIP�� 26
Difference Between GDP Deflator and CPI .........9
Producer Price Index (PPI) vs
2. Planning in India................................................ 10-16 Wholesale Price Index (WPI)................................. 27
Consumer Price Index (CPI) VSP
Origin and Expansion of Planning........................ 10
Roducer Price Index (PPI)....................................... 27
Types of Planning ....................................................... 10
Effect of Increasing Inflation.................................. 27
Early Phases of Planning in India ........................ 11
Base Effect and Inflation........................................... 27
Planning Commission................................................ 11
Inflation Targeting...................................................... 28
Economic Planning in India.................................... 12
Monetary Policy Committee (MPC)..................... 28
Twenty Point Programme (TPP).......................... 13
Measures to Combat Inflation................................ 28
Member of Parliament Local Area
Development Scheme (Mplads)............................ 13 Correlation between Inflation,
Multi-Level Planning.................................................. 14 Fiscal Policy and Monetary Policy........................ 29
Central Sector Schemes and Fiscal Stimulus.............................................................. 29
Centrally Sponsored Schemes................................ 14 Urjit Patel Committee on
Niti Aayog (National Institution Monetary Policy Reforms......................................... 29
for Transforming India)............................................ 15 Business Cycle............................................................... 29
Guiding Principles of Niti Aayog........................... 16 Terminologies with Respect to Recession........ 30
Niti Aayog Viz-A-Viz Planning Commission..... 16 Nowcasts by RBI.......................................................... 30
iv
Types of Economic Recovery.................................. 30 Functions of RBI........................................................... 50
Reports & Index........................................................... 31 RBI Initiatives................................................................ 50
Transfer of Funds By RBI to
5. Taxation................................................................. 33-42
Central Government................................................... 51
Tax to GDP Ratio.......................................................... 33 Deposit Insurance and Credit Guarantee
Tax: Incidence, Impact, Shifting, Base................. 33 Corporation (DICGC).................................................. 51
Features of A Good Taxation System................... 33 Types of Banks.............................................................. 51
Taxpayer’s Charter...................................................... 34 Regional Rural Banks (RRB)�� 51
Methods of Taxation................................................... 34 Co-Operative Banks�� 52
Taxpayer’s Charter�� 34 Cooperative Banks Viz-A-Viz
Types of Taxes............................................................... 35 Commercial Banks�� 52
Types of Direct Tax..................................................... 35 Differentiated Banks�� 52
Dividend Distribution Tax (DDT)......................... 35 Development Banks.................................................... 53
Minimum Alternate Tax (MAT).............................. 35 Lead Bank Scheme...................................................... 53
Direct Tax Code (DTC)............................................... 35 Banking Reform Commitees................................... 54
Tax on Companies....................................................... 35 Priority Sector Lending (PSL)................................ 54
Tax on Financial Transactions............................... 36 Banking Terminologies............................................. 55
Long Term Capital Gains (LTCG) Ease Banking Reforms Index.................................. 55
Tax on Equity................................................................. 36 Non-Banking Financial Institutions (NBFI)..... 55
Types of Indirect Taxes�� 36 Basel Norms................................................................... 57
Goods and Services Tax (GST)................................ 36 Banking Sector Reforms........................................... 57
GST Composition Scheme........................................ 37 Consolidation of PSBC�� 57
GST Organisations....................................................... 38 Mission Indradhanush�� 57
Laffer Curve�� 40 National Financial Reporting Authority
Important Financial Institutions�� 40 (NFRA)............................................................................. 58
Goods and Services Tax Council�� 38 Insolvency And Bankruptcy Code........................ 58
Steps Taken to Reduce Tax Avoidance Non-Performing Assets (NPA)............................... 59
in India............................................................................. 41 Special Mention Accounts (SMA)-2014............. 59
Taxation Related Terms and Terminologies�� 41 Other Classification of Loan Accounts�� 59
6. Banking Sector.................................................... 43-63 Twin Balance Sheet (TBS) Problem..................... 59
Measures for NPA Resolution�� 59
Money............................................................................... 43
Nidhi, Chit Funds and Ponzi Schemes................. 60
Legal Tender.................................................................. 43
Automated Teller Machine (ATM)........................ 61
Demand and Supply of Money............................... 44
Digital Payments.......................................................... 61
Money Creation............................................................ 44
Npci Operated System............................................... 61
Velocity of Money Circulation................................ 44
Crypto-Currency in India......................................... 62
Terminologies............................................................... 44
Other Banking Related Terms................................ 63
Monetary Policy........................................................... 45
Quantitative Tools....................................................... 45 7. Indian Insurance Market................................. 64-70
Difference Between CRR and SLR ....................... 46 Banking Sector vs Insurance Sector�� 64
Qualitative Tools.......................................................... 46 Types of Insurance Policy........................................ 64
Monetary Policy Stances.......................................... 46 Life Insurance................................................................ 65
Unconventional Monetary Policy Tools............. 46 General Insurance....................................................... 65
Other Associated Terms............................................ 47 Nationalization of Insurance Business............... 65
Financial Repression�� 48 Insurance Providers................................................... 65
Evolution of Banking in India�� 48 Domestic Systematically Important
Reserve Bank of India (RBI)................................... 48 Insurer (D-SII).............................................................. 66
Income and Expenditure of RBI�� 49 International Financial Services
Assets And Liabilities of RBI�� 49 Centres Authority (IFSCA)....................................... 66
v
Micro Insurance........................................................... 67 Important Terminology............................................ 82
Health Insurance.......................................................... 67 Institutions with Respect to
Third Party Insurance............................................... 67 Securities Market......................................................... 83
Pension............................................................................. 67 9. External Sector of India.................................... 85-95
Insurance Schemes..................................................... 68
Forex Reserves.............................................................. 85
Insurance Penetration and Density..................... 69
Net International Investment
Insurance Reforms...................................................... 69
Position (NIIP).............................................................. 85
Insurance Sector Regulators................................... 69
Remittances Into India.............................................. 85
Amendments In Insurance Sector........................ 69
Exchange Rate............................................................... 86
8. Financial and Security Market....................... 71-84 Various Exchange rates mechanism.................... 86
Money Market............................................................... 71 Nominal Effective Exchange Rate
Instruments of Money Market............................... 71 (NEER) VS Real Effective Exchange Rate
(REER).............................................................................. 86
Terms Associated With Money Market.............. 72
Capital Markets............................................................ 72 Currency Convertibility............................................ 86
Primary Vis-A-Vis Secondary Market................. 72 Capital Account Convertibility: Advantages
and Disadvantages...................................................... 87
Different Types of Capital........................................ 73
Foreign Exchange Market........................................ 87
Instruments of Capital Market............................... 73
Impact of Revaluation/Appreciation
Money Market Vis-A-Vis Capital Market............ 74
Vis-A-Vis Devaluation/Depreciation................... 88
Forward Contract Vis-À-Vis Future Contract... 74
Balance of Payment (BOP)....................................... 88
Varients of Bonds........................................................ 74
Factors Influencing Current
Other Bonds................................................................... 75 Account Deficit (CAD)............................................... 89
Terminologies............................................................... 76 Trade Balance................................................................ 89
Indian Capital Market................................................ 76 Rodtep Scheme............................................................. 89
Angel Investors Vis-A-Vis Venture Capitalist....77 External Debt................................................................ 89
State Development Loans (SDL)........................... 77 Important Terminology............................................ 89
Exchange Traded Funds (ETF).............................. 77 Economic Integration and
External Commercial Borrowings........................ 78 Trade Agreements...................................................... 90
Security Market in India........................................... 78 Trade Agreement ........................................................ 90
Schemes and Lending Facilities At IMF.............. 91
Difference Between Debt and Equity.....................78
Terms Related to WTO.............................................. 91
Issuers in the Indian Security Market........................78
Other Important Terminologies............................ 92
Stock Exchange............................................................. 78
Other Foreign Investment Methods.................... 92
Role of Stock Exchanges........................................... 79
Foreign Currency Borrowings (FCB)
Major Stock Exchanges............................................. 79 and Associated Risk.................................................... 92
International Stock Exchange................................ 79 Market-Place Model Vs Inventory Model ......... 93
Commodity Exchanges.............................................. 79 Government Initiatives to Promote Trade....... 93
Major Exchanges.......................................................... 79 New Foreign Trade Policy (NFT)
Other Exchanges.......................................................... 79 2021-2026...................................................................... 94
Strategic Disinvestment............................................ 80 10. Poverty and Unemployment.........................96-101
Investment Funds........................................................ 80
Poverty............................................................................. 96
Reit and Invit................................................................. 80 Poverty Line................................................................... 96
Depository Receipts................................................... 80 Poverty Statistics According to Census 2011.....96
Types of Depository Receipts................................. 81 Committees on Poverty............................................. 96
Types of Foreign Investments................................ 81 Multidimensional Poverty....................................... 97
Foreign Direct Investment (FDI)........................... 82 Global Multidimensional Poverty
Credit Default Swap.................................................... 82 Index (MPI) 2020........................................................ 97
vi
National Multidimensional Poverty 12. Industry and Infrastructure.......................116-130
Index (N-MPI)............................................................... 97 Based on Raw Materials........................................ 116
Terminologies Related to Poverty........................ 98 Based on Size.............................................................. 116
Socio Economic And Caste Census Based on Ownership............................................... 116
(SECC)............................................................................... 99
Union Budget 2022.................................................. 117
Unemployment............................................................. 99
Index of Industrial Production (IIP)................. 119
Types of Unemployment in India......................... 99
Difference B/W PMI and IIP................................ 119
Key Employment and Unemployment
Important Industrial Locations.......................... 119
Indicators..................................................................... 100
Strategic and Critical Minerals............................ 119
Terminologies Related to Unemployment.... 100
District Mineral Foundation (DMF).................. 120
Government Schemes & Policies to Tackle
Unemployment & Poverty.................................... 101 Strategic Crude Oil Reserves............................... 120
Economic Reforms of 1991.................................. 120
11. Agriculture.......................................................102-115 Industrial Policy Resolution................................ 121
Introduction��102 Disinvestment ........................................................... 122
Agriculture: Economic Types of Public Sector Enterprises (PSE)...... 123
Survey- 2022-23....................................................... 102 Financial Model......................................................... 123
Agriculture: Union Budget 2023-24 Avoid.... 103 Special Economic Zones (SEZ)............................ 124
Terminologies Related��104 National Investment &
Cropping Seasons..................................................... 104 Manufacturing Zones (NIMZ).............................. 124
Major Crops and Producing States.................... 104 Difference Between Nimz and SEZ.................... 124
Farming Systems....................................................... 104 Production Linked Incentive
Agriculture Inputs.................................................... 105 (PLI) Scheme.............................................................. 125
Irrigation...................................................................... 105 Industrial Corridors................................................ 125
Fertiliser/Plant Nutrient....................................... 105 Related Schemes and Initiatives........................ 126
Neem Coated Urea (NCU)..................................... 106 National Infrastructure Pipeline (NIP)........... 127
Market Development Assistance
National Logistics Efficiency and
(MDA) Policy............................................................... 106
Advancement Predictability and Safety Act
Finance/ Credit......................................................... 107 (NLEAPS)..................................................................... 127
Seeds.............................................................................. 107 Msme (Micro, Small, and Medium
Food Distribution..................................................... 107 Enterprises)................................................................ 127
Agriculture Market.................................................. 108 Intellectual Property Rights (IPR).................... 127
Sugarcane Pricing..................................................... 109 Fourth Industrial Revolution
Agriculture and Income Support Schemes.... 109 (IR 4.0).......................................................................... 128
Committees Related to Patent Prosecution Highway (PPH)
Agriculture.................................................................. 110 Programme.................................................................. 128
Other Agriculture Related Institutions........... 110 Reports.......................................................................... 129
Contract Farming...................................................... 110
Organic Farming....................................................... 111 13. Service Sector in India.................................131-134
Government Initiatives to Promote Composition of Service Sector............................ 131
Organic Farming....................................................... 111 Spread of Service Sector........................................ 131
Zero Budget Natural Farming (ZBNF)...................111 Services: Source of Strength............................... 131
Four Components of ZBNF��111 Service Sector Performance................................. 132
Major Agreements And Concepts National Investment and Infrastructure
Under WTO................................................................. 111 Fund (NIIF)................................................................. 132
Agreement on Agriculture (AoA)��112
Purchasing Managers Index (PMI).................... 133
Rainbow Revolution in Agriculture.................. 113
Logistics Performance Index (LPI)................... 133
Animal Husbandry................................................... 113
Logistics Ease Across Different
Land Reforms............................................................. 114 States (Leads) Report (Index) 2021................. 133
Land Reforms............................................................. 115 Champion Services Sector (CSS)........................ 133
vii
Wto and Services...................................................... 134 Gender Social Norms Index (GSNI)................... 139
Government Schemes & Initiatives................... 134 Climate Change And Environment:
14. Human Development and Sustainable Preparing To Face The Future-
Development...................................................135-139 Economic Survey 2022-23................................... 139
Human Development.............................................. 135 15. Important Concepts

Approaches to Human Development............... 135 in Economy......................................................140-141
Undp Human Development Environmental Kuznets Curve............................ 141
Report (HDR)............................................................. 135 Phillips Curve............................................................. 141
Undp Human Development Index (HDI)........ 135 Laffer Curve................................................................. 141
Gender Development Index (GDI)..................... 136 Beveridge Curve, or UV Curve............................. 141
Difference Between GII, GGG, GPI...................... 137
World Happiness Report....................................... 137 16. Important Indices and Reports.................142-143
World Bank- Human Capital Project................ 137 World Economic Forum (WEF).......................... 142
World Bank- Human Capital Index................... 137
17. Economic Survey and
Human Capital Index, 2020.................................. 138
Union Budget..................................................144-149
Sustainable Development..................................... 138
Sustainable Development Goals Economic Survey 2022-23................................... 144
(SDGS) 2030............................................................... 138 Major Highlights of the Economic
SDG Index- Niti Aayog............................................. 139 Survey 2022-23......................................................... 145
Paris Agreement (COP 21).................................... 139 Union Budget 2023-24........................................... 146
viii
1 Economics: An Introduction
ECONOMICS: AN INTRODUCTION
z The term economics originated from the greek word
oironomia meaning household management.
z In 1776, Adam Smith, father of modern Economic,
published wealth of Nations, where he defined
Economics as an enquiry into nature and causes of
wealth of Nations.
z It is a social science that studies the production,
distribution, and consumption of goods and services.
Economics:- A discipline studying economic behaviour

of human beings with theory of markets, employment
price, inflation.
Economy:- An area of production, consumption &

distribution of goods and services with management of
resources.
Macroeconomics
z Branch of Economics concerned with large scale
economic factors as fiscal policy, monetary policy,
national productivity.
z Concentrates on the behavior of the economy as a
whole.
Example: Employment, national income, poverty, etc.
Microeconomics
z Study of individuals, households & firms behaviour in
decision making & allocation of resources.
Example: Demand, supply, pricing, Production &

Consumption.
VARIENTS OF CONSENSUS
Washington Consensus
z Originally for the Latin American Countries.
z Objective: To address the real problems occurring in
Latin America.
US economist John Williamson coined the term.

z Set of neoliberal economic prescriptions made by
IMF, World Bank, and U.S. Treasury to developing
countries that faced economic crises.
z Recommended: Structural reforms that increased
the role of market forces in exchange for immediate
financial help.
z Criticism: Washington Consensus was used to impose
Traditional Economy harsh conditions that were unhelpful for economic
z It uses the barter system and has no concept of recovery.
currency or money. Believe only in producing z Counter argument: Although not perfect, it was
according to the needs, no market surplus. favourable to long-term economic growth in
developing economies.
Market Economy
z No involvement or interference from the government Beijing Consensus
or any regulatory power. z Propounded by Joshua Cooper Remo.
z Functions on the principle of laissez faire. z Chinese Model of economic development based
z Determined by the participants of the economy and upon policies of Deng Xiaoping since 1976.
the laws of demand and supply. z An alternative to the Washington Consensus also
Invisible Hands of the market by Adam Smith called as anti-Washington Consensus view for the
growth of developing countries.
Example: USA, Hong Kong, etc.
3 Major Pillars
Nehruvian Socialism: Coexistence of private and public 1. Constant experimentation and innovation;
sector 2. Peaceful distributive growth with gradual reforms;
Gandhian Economics: Set of ideas that Gandhi 3. Self-determination and inclusion of selective foreign
propounded for economic management and distribution. ideas.
Keynesian Economics: It believes in the liberal Santiago Consensus

economic principles. z Alternative to the Washington Consensus.
z By the then World Bank group President James
D. Wolfensohn (in Santiago) for the developing
countries.
z Inclusive growth: Core idea of this model is inclusion
which should not be only economic but social too.
z This is a socio-economic development model and is
bound to have its local characteristics.
India Adopted it in 2002.
2 Udaan 300+ Indian Economy

SECTORS OF THE ECONOMY
ON BASIS OF ACTIVITIES Quaternary Sector (Knowledge Sector)

z This sector deals with knowledge or intellectual
Primary Sector (Agriculture and Allied pursuits including research and development (R&D),
Activities) business, consulting services, and education.
z It enables entrepreneurs to innovate and improve
z Includes all industries that are engaged in the
the quality of services offered in the economy.
extraction of natural resources or the production
of raw materials. Quinary Activities (Top Decision-Makers)
Example: Farming, fishing, mining, extraction of oil and z This sector focuses on the creation, re-arrangement
gas, etc. and interpretation of new and existing ideas; data
interpretation and the use and evaluation of new
z People engaged
technologies.
Red-collar workers (outdoor nature of work)
Example: Highly paid skills of senior business executives,
Secondary Sector (Manufacturing) government officials, etc.
z Industries that are concerned with the manufacturing z Referred to as gold collar professions.
of usable products or finished goods. Uses the produce
of the primary sector as its raw materials. ON BASIS OF WORK CONDITIONS,
All manufacturing, processing & censtruction activities
z
included.
TERMS AND ORGANISATIONAL SETUP
Further Division Organized Sector
z In this sector, terms and conditions of employment
1. Heavy industry (steel, chemical, automotive)
are regular and as per rules and regulations passed
2. Light industry (food, apparel, cosmetics). by the Government cor private enterprises (assured
z People engaged work, fixed hours and social security).
Blue collar workers
Example: Hospitals, Schools, etc.
Tertiary (Services)
Unorganized Sector
z It describes all industries that provide services to
other Sectors (Primary + Secondary Sector) or final z These sectors are generally not governed by the
consumers. rules and regulations that are laid down by the
Government regarding the condition of employment.
Example: Retail sector, Tourism, Banking, medical and z It is characterized by small and fragmented
health care services, etc. units which are mostly outside the control of the
z People engaged government.
White collar workers z Sector is marked by low wages, no provision for
overtime, paid leave, holidays, leave due to sickness,
Pink-collar jobs traditionally considered to be women’s no job security, etc.
work.
z The unorganized sector uses mainly labour intensive
and uses indigenous technology.
Example: babysitter, florist, day care worker, nurses etc.
Economics: An Introduction 3
Unorganized sector adds more than 60% to the z Governments raises revenue through taxes, cess, etc.
national income while the contribution of the organized to meet expenses on the services rendered by it.
sector is almost half of that depending on the industry.
Private Sector
z The ownership of assets and delivery of services is in
Gig Economy (based on short term contracts or
the hands of private individuals or companies.
freelance work), as emerging sector can be regarded
under unorganised Economy. z Activities are guided by the motive to earn profits.
Consumers need to pay for the services.
ON BASIS OF ASSET OWNERSHIP PPP (Public Private Partnership)

z PPP involves collaboration between a government
Public Sector agency and a private-sector company to finance, build,
z Government owns most of the assets and is concerned and operate projects, such as public transportation
with providing various governmental services. networks, parks, convention centers, etc.

ECONOMIC GROWTH VS ECONOMIC DEVELOPMENT
Economic Growth Economic Development
z Increase in the production of goods and services z Economic Growth leads to improvement in the general
welfare of people
z Quantitative in nature z Qualitative in nature.
z Uni-dimensional - Incrsase in outpur z Multi-dimensional - Structural development.
z Indicators: Real GDP, Real Per Capita Income etc. z Indicators: Human Development Index, Physical
quality of life index etc.
Evaluation of National Income Rao (1931-32)

1867- 68 z First estimate of National Income 1948-49 z GoI estimated the National Income for the first
Dadabhai Naoroji for 1867- 68; time in 1948-49
z Book Poverty and Un- British rule in Ministry of Commerce
India.
1931-32 z First scientific estimate made by Prof. 1949 z National Income Committee was set up in
V.K.R.V. 1949 (Chairman – Dr P C Mahalanobis)
CENTRAL STATISTICAL ORGANIZATION Activities Undertaken by CSO

z Human Development Statistics;
(CSO) z Gender Statistics;
z It coordinates the statistical activities in the country z Conduct of Annual Survey of Industries;
and evolves statistical standards (NSO estimates z National Income Accounting;
National Income). z Compilation of Index of Industrial Production;
z CSO revised a new series of national accounts with z Compilation Consumer Price Indices for Urban Non-
the 2011-12 base year for computing the size of Manual Employees.
economic growth.
National Statistical Commission was established in
z Includes data on unorganized manufacturing and 2006, based on Rangarajan Commission to oversee
services. statistical works in India.
z Government has decided to merge the NSSO with the
CSO under MoSPI. MEASURES OF ECONOMIC GROWTH
Order dated 23rd May 2019 has cleared formation of an National Income
overarching body - National Statistical Office (NSO) z The aggregate money value of all incomes earned by
through merger of the NSSO and CSO. individuals and enterprises.
z It is the sum total of Rent (income from land), wages z High GCF
(earned by workers labours), profits (earned by higher rate of savings in the economy. It requires
entrepreneurs) & Interest (earned on Capital) N.I. = for high rate of production, capital formation,
(Totla consumption Expenditure) + I (Total Investment changes in production techniques.
Expenditure) + G (Total Govt. Expenditure) + (X
z GCF
(Export) - M (Import).
Capital formation in the public sector + private
Gross Investment sector + household sector.

z Part of the final output that comprises capital goods. Component Under Domestic Territory
Net Investment z Political frontiers including its territorial waters of
z Gross investment – Depreciation the country
z Military Establishment of the country abroad
Depreciation z Embassies and Consulates
z Reduction from gross investment to accommodate z Ships/Aircrafts/Fishing Vessels/Oil Rigs belonging
wear and tear of capital. to the residents of the country
Gross Domestic Product Net Factor Income
z Total monetary/market value of all the finished z Domestic factor income: Sum of factor incomes
goods and services produced within a country’s (rent + wages + interest + profits) generated within
territory in a specific time period. the domestic country. It includes incomes earned by
residents as well as non-residents/foreigners working
Accounting Year
in India.
z 1st of April to 31st of March (next year) z Income from Abroad: Indian go abroad to work and
z Current base year for GDP is 2011-12. earn wages, salaries, profits, and rents.
z NFIFA (Net Factor Income from Abroad): Factor
Nominal GDP income received by the residents of india working
z Measures a country’s GDP using current prices, abroad MINUS the factor income paid to the foreign
without adjusting for inflation. residents for working in india.
Real GDP Per Capita Income (PCI)
z The calculation of Production of final goods and z PCI measures the average income earned per person
services valued at the base year prices (exclusive of in a given area, in a specified year.
inflation).
z Calculated: By dividing the area’s total income by its
GDP at Market Prices total population.
Calculation of GDP at the actually transacted prices.
z
National Income Accounting
z Includes the indirect taxes levied & subsidies provided.
z It is the book-keeping system to measures the
GDP at Factor Cost economic activity in the national economy as a whole.
z Calculation of GDP at the actual cost of production Significance Policy Formulation, Effective Decision
of goods and services and not the sale Making, International comparisons, Indicates the
z Doesn’t include indirect taxes. performance of the economy, To find out structural
z Includes subsidies provided for the production. changes in the economy.
Gross Value Added (GVA) PRO-CYCLICAL AND COUNTER-

Economic productivity metric that measures the
z
contribution of a corporate subsidiary, company or
CYCLICAL ECONOMIC POLICY
municipality to an economy, producer, sector or region.
Pro-Cyclical Economic Policy
GVA = GDP + subsidies on products - taxes on products z Any economic quantity that is positively correlated
with the overall state of the economy is said to be pro-
Gross Capital Formation (GCF) cyclical.
z Percentage of the investment made each year out of z It deepens recessions and amplifies expansions,
the total GDP is called GCF. thereby increasing fluctuations in the business cycle.

GDP is an example of a pro-cyclical economic indicator.
Counter-Cyclical Policies
z Any economic quantity that is negatively correlated
with the overall state of the economy is said to be
countercyclical.
Unemployment is an example of a countercyclical

variable.
METHODS OF NATIONAL INCOME

CALCULATION
Expenditure Method
Production (Value Added) Method z GDP is calculated by the sum of consumer spending
z Estimated by adding the value added by all the firms. + investment + government purchases + net exports.
GDP = C + I + G + X -M
C = Consumption of final goods and services, I = Investments,
G = Government Purchases, X = Export & M = Imports
z GVA
picture of economy from the producers’ side or
supply side
z GDP
picture from the consumers/demand side
perspective.
Income Method NEW GDP SERIES 2011-12

z GDP is calculated by the sum of income of all the z Base Year Change: 2004-05 : 2011-12
factors of production i.e., wages, interest earned, profit z Change in GDP calculation : using market prices rather
earned, etc. than factor costs.
z Income approach: All economic expenditures should z Adopted the international practice of valuing industry-
equal the total income generated by the production of wise estimates as Gross Value Added (GVA) at basic
all economic goods and services. prices.
DIFFERENCE BETWEEN GNP AND GDP

Basis GDP GNP
Meaning z Value of all final goods and services produced z Value of all finished goods and services
in the domestic territory in a specific time owned by a country’s residents over a
period. period of time.
z Note: From April 2018, RBI decided to use
GDP instead of GVA to measure the economic
activities.
Method of z Consumer spending + Government spending + z GDP + NR (Net receipts from abroad or
Calculation Investments + Net exports inflows from abroad) – NP (Net payment
outflow to foreign assets)
Produced z Produced in India by an Indian or foreign z Only those goods and services produced
By Whom? national by Indians whether in India or abroad.
Net Factor Income z Exclusion of Net Factor Income Abroad. z GNP includes Net Factor Income Abroad
From Abroad
Intermediate z Intermediate goods and services are not z No intermediate goods and services
Goods included to avoid double counting. should be included in GNP.
Application z To see the strength of country’s local economy z To see how the nationals of a country
are doing economically
DIFFERENCE BETWEEN GDP AND GVA

GDP GVA
It is the sum of private consumption, gross investment It provides the rupee value for the amount of goods and
in the economy, government investment, government services produced in an economy after deducting the
spending and net foreign trade (difference b/w exports cost of inputs and raw materials that have gone into the
and imports). production of those goods and services.
Parameters to attain: (i) Higher real per capita

PURCHASING POWER PARITY (PPP) z
income (ii) Good governance (iii) Environmental
z The Economic size of the countries across the world protection (iv) Cultural promotion
can be compared either in terms of Nominal GDP or
Purchasing Power Parity (PPP). CONCEPTS RELATED TO COST AND
z Comparison using Nominal GDP: The Countries PRICE
across the world measure their GDP size in terms
of their own currencies. This makes cross country Market Cost
comparison difficult. z The total cost associated with delivering goods
z Hence, in order to compare the GDP size of the or services to customers, includes expenses of
countries, we need a common currency. transferring title of goods to a customer, storing goods
z Therefore, the GDP size of the countries are converted in warehouses pending delivery, etc.
into dollars using the average exchange rates.
Factory Price
GROSS NATIONAL HAPPINESS (GNH) z The prices charged by producers to wholesalers and
retailers : eventually passed on to the end customer,
z Bhutan developed a new concept of assessing changes in factory prices, also known as producer prices,
development in the early 1970s i.e. GNH. can be a leading indicator of consumer price inflation.
z Without rejecting the idea of human development
propounded by UNDP, the kingdom has been officially Ex-factory Price
following the targets set by the GNH. Bhutan has been z Applied to a price at the factory, and does not include
following the GNH since 1972. any other charges, such as delivery or subsequent taxes.
COST VS PRICE
Cost Price
Total amount of expenditure incurred by the business on The amount that is charged by the business based on
material, labor, sales, etc. in production. supply and demand from its customers for providing their
goods and services to the customer.
NI VS NDI VS PI
National Income (NI) National Disposable Income (NDI) Personal Income (PI)
National Income = The Net Gives an idea : maximum amount Individual’s/households total earnings
National Product at factor cost of goods and services the domestic (wages + investment enterprises + other
economy has at its disposal. ventures)
NI = NNP at market prices NDI = NNP + Other Current Transfers PI = NI – Undistributed profits – Net interest
(Indirect taxes – Subsidies) Or NI from rest of the world (remittances, payments made by households – Corporate
at Factor Cost = NNP at Market gift, donations etc.) tax + Transfer payments to the households
Cost – Indirect Taxes + Subsidies from the government and firms (oldage
pensions, un-employment compensation)

TYPES OF INCOMES Production subsidy
Encourages suppliers to increase the output of a
Personal Disposable Income (PDI) particular product by partially offsetting the production
z After deducting the usual spending, the income that costs or losses.
is available to the households that they can spend as Export subsidy
they wish.
Support from the government for products that are
Personal Disposable Income (PDI) = PI – Personal tax exported, as a means of assisting the country’s BoPs.
payments – Non-tax payments (such as fines etc) Import subsidy
Real Income (RI) Support from the government for products that are
imported. An import subsidy further reduces the price
z Income of individuals or nations after adjusting for
to consumers for imported goods.
inflation. Calculated by dividing nominal income by
the price level.
z More useful indicator of well-being since it measures
GROWTH RATE & GDP DEFLATOR
the amount of goods and services that can be purchased Growth Rate (%) = [GDP (Present year – Last Year) / Last
with the income. Year] × 100
Nominal Income (NI) z The growth rate may be appearing high, only because
of inflation in the prices and quantitatively the
z One’s income in actual currency terms is unadjusted
production may not have improved.
for inflation. Inflation is calculated as the change in the
CPI year-on-year. z To remove the inflation impact on growth rate, a base
year is selected, and the current prices are converted
z Nominal income will always be more than real income.
to constant prices.
Subsidies z GDP Deflator: Measure of inflation calculated as the
z A Government incentive in the form of financial aid ratio of GDP at current prices to GDP at constant prices.
or support extended to an economic sector (business,
or individual) generally with the aim of promoting
economic and social policy.
Variants of Subsidies z Reported by the Ministry of Statistics and

Programme Implementation (MoSPI).
Direct (cash grants, interest-free loans) and indirect
z It shows the extent to which the increase in GDP has
(tax breaks, insurance, low-interest loans, accelerated
happened on account of higher prices rather than
depreciation, rent rebates).
increase in output.
REAL GDP vs NOMINAL GDP

Real GDP: Current year production of goods and services valued at base year prices. Real GDP is corrected for inflation.
Nominal GDP: current year production of final goods and services. It is not corrected for inflation.
DIFFERENCE BETWEEN GDP DEFLATOR AND CPI

GDP Deflator CPI
It measures the prices of all goods and services produced. CPI measures the prices of only the goods and services
bought by consumers.
It includes only those goods produced domestically. Whether produced domestically or internationally it
affects the CPI as it is bought by the consumers.
It allows the basket of goods to change over time as the CPI is computed using a fixed basket of goods.
composition of GDP changes.
v v v
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2 Planning in India
(DVC) in India (1948) and Volta River Project in

ORIGIN AND EXPANSION OF PLANNING Ghana (1966), etc.
z Planning is a method of achieving faster economic
progress. It has been tried by different countries at National Planning
different times and at different levels. z The official experiment in the area of national planning
is rooted in the Bolshevik Revolution of Russia
Regional Planning (1917) • Soviet Union.
z USA started the first regional planning after the z The nature and scope of Soviet planning (called the
Tennessee Valley Authority (TVA) was set up in Gosplan) will have its direct or indirect bearing on all
1916 for a large-scale rehabilitation in south-eastern those countries which went for economic planning, be
USA covering parts of 7 states. it state or capitalist or mixed economies.
z US experience of regional planning became such z India hade direct influence of Soviet planning on its
a success in realizing its well-defined goals that it planning process in post Independence years with the
emerged as a role model and an object of inspiration for formation of Planning Commission (1905) & National
the development of the Damodar Valley Corporation Development Council (1952).
TYPES OF PLANNING
Indicative Planning Functional Planning

z It puts forward/ indicates to some broad principles z Under functional planning, there is no need to build
and guidelines to achieve desired objectives. Indicative up a new structure, rather the existing structure is
planning is peculiar to the mixed economy of France. corrected and modified. Functional planning brings
But this is quite different from the type of planning no change in the economic and social set up.
which exists in other mixed economies.
Centralized Planning
In India, it was adopted from 8th FYP (1992-97). z The framing, adopting, executing supervising, and
controlling of the plan is done by central planning
Comprehensive/Imperative Planning authority.
z It refers to centralized planning and implementation z Planning authority determines a targets and priorities.
with the allocation of resources. It is used by socialist It is the duty of the planning authority to bring harmony
countries, where each and every aspect of planning is in the planning process. This type of planning comes
controlled by the state. from the top to the bottom.
Structural Planning Decentralized Planning

z It aims to change and transform the existing z It is multi-level planning in which more than one
structures. In this type of planning the present institutions work for the implementation of the plan.
social and economic structure is changed and a new Under this planning, the responsibility lies with local and
structure emerges. In the developing countries, there regional officials who take economic decisions about the
is a structural planning. plan. This type of planning is from bottom to top.
Perspective Planning Gandhian Plan (1944)
z It refers to the long term planning of 15-20-25 years. z Propounded by Shriman Narayan (principal of
It is implemented by breaking the plan period into Wardha Commercial College)
smaller plans such as 5 years plans. But a perspective z Emphasized economic decentralization and plan laid
plan cannot mean one plan for the complete period.
more emphasis on agriculture.
z India recently adopted perspective Planing with the
z Focus on rural development by developing cottage
formation of NITI Aayog (in 2015).
industries.
EARLY PHASES OF PLANNING IN INDIA People’s Plan (1945)
Visvesvaraya Plan (1934) z By M N Roy (Chairman of the Post-War Reconstruction
Committee of Indian Trade Union)
z Credit of proposing the first blueprint of Indian
planning is given to the popular civil engineer and the z Greatest priority to Agriculture.
ex-Dewan of the Mysore state, M. Visvesvaraya. z Plan was based on Marxist socialism.
In 1934, Sir M. Visvesvaraya had published a book titled z Plan was for 10 years.
Planned Economy in India : presented a constructive z Recommended: Nationalization of all agriculture and
draft of the development of India for the next 10 years. production.
z His ideas of state planning were an exercise in
democratic capitalism (similar to the USA) with Sarvodaya Plan (1950)
emphasis on industrialization, a shift of labor from z By Jaiprakash Narayan.
agricultural to industries, targeting to double the z Inspiration: Gandhian plan + Sarvodaya Idea of
national income in 1 decade. Vinoba Bhave.
z Though there was no follow up by the British z Emphasized on: small + cotton industries +
government on this plan, it aroused an urge for national
agriculture.
planning among the educated citizens of the country.
z Stressed upon: l and reforms + decentralized
The FICCI Proposal (1934) participatory planning
z In 1934, a serious need of national planning was
recommended by the Federation of Indian Chambers Planning Commission (1950)
of Commerce and Industry (FICCI), the leading z Set up by a Cabinet Resolution, extra-constitutional
organization of Indian capitalists. and non-statutory body.
z Its President N.R. Sarkar proclaimed that the days
of undiluted laissez-faire were gone forever and for a First Chairman of the Planning Commission -
backward country like India, a comprehensive plan for Jawaharlal Nehru.
economic development covering the whole gamut of
economic activities was a necessity. PLANNING COMMISSION
National Planning Committee (1938) z Immediately after independence in 1947, the
z Formed by Indian National Congress. Economic Programme Committee (EPC) was
z First initiated by Netaji Subhash Chandra Bose formed by the All India Congress Committee (AICC)
(President of INC, Haripura Session, 1938). with PM Jawaharlal Nehru as its chairman.
z Jawaharlal Nehru was made head of the National z A formal body to formulate and implement Five-Year
Planning Committee. Plans was established on 15th March 1950 with the
z Aim: to release a detailed blueprint of an economic PM as the head.
plan for independent India.
National Development Council
Bombay Plan (1944) z All the plans made by the Planning Commission
z Bombay Plan was the popular title of ‘A Plan of
need to be approved by the National Development
Economic Development for India’, which was
Council which is an extra-constitutional body.
prepared by a cross-section of India’s leading
capitalists - Mr. JRD Tata, GD Birla, Purshottamdas z It was set up on 6th August 1952.
Thakurdas, Lala Shriram, Kasturbhai Lalbhai, AD z In 2015, PM Narendra Modi dissolved the planning
Shroff, Ardeshir Dalal, & John Mathai. commission to replace it with the NITI Aayog which
z Neglected by: political parties + business class. acts as a think tank for development of the nation.
Planning in India 11
Post-independence India adopted planned and a mixed 3 Annual Plans (Plan Holiday) (1966
economy with the state having an active and dominant to 1969)
role in the economy.
z Focus was on Self-reliance.
During this Phase, annual plans were made and
ECONOMIC PLANNING IN INDIA z
equal priority was given to agriculture & its allied
z India adopted a system of five yearly planning to sectors and the industry sector.
address its various socio-economic problems. z Green revolution ushered in this period. (1966-67).
z Idea: To make a list of important problems to be solved
keeping in view the given resources and the capacity Fourth Five Year Plan (1969 to 1974)
to arrange the resources and review after five years. z Growth with stability and progressive achievement
of self-reliance.
Architects of Indian planning: Jawaharlal Nehru, P.C
Mahalanobis, V.R Gadgil, V.K.R.V Rao. Targeted growth rate – 5.7 percent
z Objectives: Economic growth; Increase in
Achieved growth rate of 3.3% (plan failed to achieve
employment; Reduction in inequality of income;
targeted growth rate)
Reduction in poverty; Modernization of the economy;
Ensuring social justice and equality.
Major Events
z For the first 8 Plans: Emphasis was on a growing
public sector with massive investments in basic and Droughts and the Indo-Pak War of 1971–72
heavy industries. (Bangladesh Liberation War)
z Ninth Plan (1997) onwards: emphasis on the public
sector has become less pronounced and the current Fifth Five Year Plan (1974 to 1979)
thinking on planning in the country, in general, is that z Focus on poverty alleviation and self-reliance
it should increasingly be of an indicative nature.
Targeted growth rate – 4.4 percent
First Five-Year Plan (1951-56) Achieved growth rate of 4.8% (plan was successful)
z Based on the Harrod-Domar model.
z This plan was terminated in 1978, with the change in
z Its main focus was on the agricultural development of regime -Janta Party.
the country including irrigation and power projects.
Major Events
Targeted growth rate – 2.1 percent
The plan period was badly disturbed by the draconian
Achieved growth rate of 3.6% (more than its target)
emergency and a change of the government at the
Second Five-Year Plan (1956 to 1961) Centre.
Rapid industrialization with a focus on heavy
z
industries and capital goods
Rolling Plan (1978 to 1980)
z It was based on the P.C. Mahalanobis Model z Annual Plans replacing 5 year plans.
Targeted growth rate – 7.5 percent Sixth Five Year Plan (1980 to 1985)
Achieved growth rate of 4.1% z Objective: Poverty eradication and Employment
generation.
Third Five Year Plan (1961 to 1966) z Famous Slogan: Garibi Hatao
z Also called ‘Gadgil Yojana’/Plan Targeted growth rate – 5.2 percent
z The main target of this plan was to make the economy
Achieved growth rate of 5.7% (plan was successful)
independent and to reach the self-active position
of take-off. Seventh Five Year Plan (1985 to 1990)
z For the first time, it considered the aim of balanced,
z Objectives: Emphasized on rapid food grain
regional development.
production, increased employment creation and
Major Events productivity in general.
z Two wars: one with China in 1961–62 and the other Targeted growth rate – 5%
with Pakistan in 1965–66 along the Gujarat border. Achieved growth rate of 6% (plan was successful)
z Severe drought-led famine in 1965–66 had to be faced.

Two Annual Plans (1990-91 & 1991-92) z The basic objective was to improve the quality of
life of the people, especially of those living below the
z Eighth Plan (1990–95) could not take off due to the
poverty line.
political destablisation of the country, the Fiscal
imbalances and the BOP crisis. Targets under restructured TPP (2006)
Eighth Five Year Plan (1992 to 1997) z Poverty eradication z Power to people
z Rao-Manmohan Model - LPG (Liberalization, z Support to farmers z Labour welfare
Privatization, Globalization) z Food security z Clean drinking water
z Objective: Development of human resources i.e., z Housing for all z Health for all
employment, education, and public health.
z Education for all z Women welfare
z Adoption of Indicative planning in totality
z Child welfare z Youth development
z Narasimha Rao Govt. launched the New Economic
Policies of India. z Improvement of slums z Social security
z Rural roads z Energising of rural
Targeted growth rate – 5.6%
areas
Achieved growth rate of 6.8% (plan was successful)
z Welfare of SC/ST/OBC and minorities
Ninth Five Year Plan (1997 to 2002) z Environment protection and afforestation
z Objective: growth with justice and equity. z Development of backward areas
z It was launched in the 50th year of independence of z IT enabled and e-governance.
India.
Targeted growth rate – 7 percent. Achieved growth rate

MEMBER OF PARLIAMENT LOCAL AREA
of 5.6% percent. DEVELOPMENT SCHEME (MPLADS)
z The MPLADS is the last of the Central Plans and the
Major Events latest to have been launched.
z All round slowdown in the economy led by the z The scheme was launched on December 23, 1993 with
South East Asian Financial Crisis (1996–97) only ₹. 5 lakh given to each MPs.
z Kargil War between India and Pakistan. z In April 2011 the corpus was enhanced to ₹. 5 crore
while announcing the new guidelines for the scheme.
Tenth Five Year Plan (2002 to 2007) z Funds under MPLADS are non-lapsable.
z Objective: To double the Per Capita Income of India in z Objective: The scheme was launched so that the fruits
the next 10 years. of development could directly reach the masses via
their representatives.
Targeted growth rate – 8%.
z For the first time the Plan went to set the Revised Guidelines of MoSPI (May 2014)
‘monitorable targets’ for eleven select indicators of z It provides not only the list of prohibited items
development for the Centre as well as for the states. under the scheme, but also that of permissible items.
In order to encourage trusts and societies to work
Eleventh Five Year Plan (2007 to 2012) z
for the betterment of tribal people, the ceiling of
z Objective: Faster and inclusive growth. ₹.50 lakh, stipulated for building assets by trusts
and societies in areas occupied by tribals, has been
Twelfth Five Year Plan (2012 to 2017) enhanced to ₹.75 lakh.
z Objective: Faster, Sustainable and More Inclusive z To promote cooperative movement and rural
Growth. development, the Cooperative Societies have also
Growth rate target - 9%. been made eligible under the MPLAD Scheme.
z The abandoned or suspended MPLAD work to be
TWENTY POINT PROGRAMME (TPP) completed by the states.
z Natural and man-made calamities can also be
z The programme was launched in July 1975.
allocated funds under it.
Programme was conceived for coordinated and
intensive monitoring of a number of schemes z Now, the funds can be allocated by a Madhya Pradesh
implemented by the Central and the State Governments. outside of Constituency/State/UTs, too.
z It can converge with the other approved Central Third Strata: District-Level Planning
(MGNREGA) and State Government schemes. z By late 1960s all the districts of the states were having
z Funds from local bodies can be pooled with their own plans with their respective District Planning
MPLADS works. Boards with the respective District Magistrate being
z Public and community contribution is made the de-facto chairman.
permissible in the scheme.
z One MP–One Idea, an annual competition for best
Fourth Strata: Block-Level Planning
innovation in solving local problems. z As a part of the district-level planning the block level
planning came up which had the District Planning
Recent Developments Boards as their nodal body.
z Recently, the Union Cabinet has approved the Fifth Strata: Local Level Planning
restoration of MPLADS funds for the remaining part
z By early 1980s, plans were being implemented at the
of Financial Year 2021-22 till 2025-26. However,
local level via the blocks with District Planning Boards
the MPs will get ₹. 2 crore instead of the annual
approved Rs. 5 crore. (DPBs) as the nodal agency.
z It will be co-terminus with the period of the 15th z Due to socio-economic differentiations among the
Finance Commission. population, local-level planning in India developed
with its three variants: Village-Level Planning; Hill
Recommendation of Works Area Planning; Tribal Area Planning.
z The Lok Sabha Members can recommend works in
their respective constituencies. CENTRAL SECTOR SCHEMES AND
z The elected members of the Rajya Sabha can CENTRALLY SPONSORED SCHEMES
recommend works anywhere in the state from which
they are elected. Central Sector Schemes
z Nominated members of the Lok Sabha and Rajya z 100 percent funded by the Union Government with
Sabha may select works for implementation anywhere
states functioning as implementing agencies.
in the country.
z These schemes are mainly formulated on subjects
MULTI-LEVEL PLANNING from the Union List.
z In addition, the Central ministries also implement
z In late 1950s and early 1960s, the states demanded some schemes directly in the states/UTs, which
the right to plan at the state level. are called Central Sector Schemes, but resources
z By mid-1960s, the states were given the power to plan under these schemes are not generally transferred
by the Centre, advising them that they should promote to states.
planning at the lower levels of the administrative
strata. Centrally Sponsored Schemes
District level planning: Through the municipalities
z A certain percentage of the funding is borne by
and corporations in the urban areas
the Centre and the states in fixed ratios and the
Block level planning: Through panchayats and
implementation is done by the state governments.
the tribal boards.
z CSSs are formulated in subjects from the State List to
z By early 1980s, India was a country of multilevel
encourage states to prioritize in areas that require
planning (MLP).
more attention.
First Strata: Centre-Level Planning
z At this level three types of Central Plans had evolved Central Plan Assistance
over the years z Financial assistance provided by the GoI to support
the Five Year Plans, the Twenty-Point Programme State’s Five-Year Plans is called Central Plan.
and the MPLADS. z Assistance (CPA) or Central Assistance (CA).
Second Strata: State-Level Planning Components
z By 1960s, the states were planning at the state level
with their respective planning bodies, the state z Normal Central Assistance (NCA): The distribution
Planning Boards with the respective CMs being their of the NCA is formula based (Gadgil-Mukherjee
de-facto Chairman. Formula) and is untied.

z Additional Central Assistance (ACA): This is z To provide advice and encourage partnerships
provided for implementation of externally aided between key stakeholders.
projects (EAPs), and for which presently there is no z To create a knowledge, innovation and entrepreneurial
ceiling. support system.
z Special Central Assistance (SCA): This is provided z To offer a platform for resolution of inter-sectoral and
for special projects and programmes, e.g., Western inter-departmental issues.
Ghats Development Programmye, Border Areas z To undertake other activities as may be necessary
Development Programme, etc. in order to further the execution of the national
development agenda.
NITI AAYOG (NATIONAL INSTITUTION
Composition
FOR TRANSFORMING INDIA) z Chairperson: Prime Minister of India as the
z Government scrapped the Planning commission Chairperson.
substituting it by NITI Aayog in 2015. z Governing Council comprising the Chief Ministers of
z Extra constitutional Body formed via resolution of the all the States and Lt. Governors of Union Territories.
Union Cabinet z Regional Councils: formed to address specific issues
z Premier policy Think Tank of Government of India and contingencies impacting more than one state or
to Foster spirit of Cooperative and competitive a region.
federalism. Chaired by the Chairperson of the NITI Aayog or
z Bottom Up approach his nominee.
Formed for a specified tenure.
Based On 7 Pillar of Governance
z Convened by Prime Minister and comprise the Chief
1. Pro-people: it fulfills the aspirations of society as Ministers of States and Lt. Governors of UTs in the
well as individuals region.
2. Pro-activity: in anticipation of and response to z Experts, specialists and practitioners with relevant
citizen needs domain knowledge as special invitees nominated by
3. Participation: involvement of citizenry the Prime Minister.
4. Empowering: citizens especially women in all
aspects NITI Aayog Hubs
5. Inclusion of all: irrespective of caste, creed, and z Team India Hub - acts as an interface between States
gender and Centre.
6. Equality: Providing equal opportunity to all z Knowledge and Innovation Hub - builds the think-
especially youth tank acumen of NITI Aayog.
7. Transparency: Making government visible and Initiatives by NITI Aayog
responsive
z 15-year road map
z NITI Aayog aims to achieve SDG and to enhance z 7-year vision, strategy and action plan
cooperative federalism by fostering the involvement
z Digital India and Atal Innovation Mission etc.
of State Governments of India in the economic policy-
making process using a bottom-up approach. Relevance
Objectives of NITI Aayog z Cooperative federalism; Competitive Federalism;
Greater Accountability; Think tank of innovative ideas;
z To foster cooperative federalism. Convergence for resolution.
z To develop meahanisms to formulate credible plans at z NITI Aayog is the nodal Institution for the
the village level. implementation of SDG in India.
z To ensure, that the interests of national security are
incorporated in economic strategy and policy. Indexes/Reports/Programme
z To pay special attention to the sections of our society z SDG India Index
that may be at risk of not benefitting adequately from z Composite Water Management Index
economic progress.
z Atal Innovation Mission
z To actively monitor and evaluate the implementation
z SATH programme
of programmes.
z Aspirational District Programme
z To focus on technologies up-gradation and capacity
building. z School Education Quality Index
z District Hospital Index Demographic Dividend
z Health Index 2019 - (Healthy states, progressive z Harness our greatest asset, the people of India: by
India) focusing on their development, through education and
skilling, and their empowerment, through productive
GUIDING PRINCIPLES OF NITI AAYOG livelihood opportunities.
People’s Participation
Antodaya z Transform the developmental process into a people-
z Prioritize service and uplift of the poor, marginalized driven one, making an awakened and participative
and downtrodden, as enunciated in Pandit Dindayal citizenry (including the NRI community) the driver of
Upadhyay’s idea of Antodaya. good governance.
z Development is incomplete and meaningless, if it does
not reach the farthest individual. Governance
z Nurture an open, transparent, accountable, pro-active
Inclusion and purposeful style of governance, transitioning
z Empower vulnerable and marginalized sections, focus from Outcome.
redressing identity-based inequalities of all kinds
gender, region, religion, caste or class. Sustainability
z Maintain sustainability at the core of our planning
Village and development process, building on our ancient
z Integrate our villages into the development process. tradition of respect for the environment.
NITI AAYOG VIZ-A-VIZ PLANNING COMMISSION

NITI Aayog Planning Commission
It serves as an advisory Think Tank. It served as an extra-constitutional body.
It draws membership from a wider expertise. It had limited expertise.
It serves in the spirit of Cooperative Federalism as states States participated as spectators in annual plan meetings.
are equal partners.
Secretaries to be known as CEO appointed by Prime- Secretaries were appointed through the usual process.
Minister.
It focuses upon the Bottom-Up approach of Planning. It followed a Top-Down approach.
It does not possess a mandate to impose policies. Imposed policies on states and tied allocation of funds with
projects it approved.
It does not have powers to allocate funds, which are vested It had powers to allocate funds to ministries and state
in the Finance Minister. governments.
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3 Public Finance
Public Finance z It refers to the management of a country’s revenue,

z Study of government revenue & expenditure that at expenditures & debt loans through various govt &
includes public debt, financial administration & fiscal quasi govt. institutions.
policy of the economy.
z Some recent reforms related to budget: Budget

ANNUAL FINANCIAL STATEMENT is preponed to 1st Feb; Railway budget merged with
(BUDGET): ART. 112 general budget; Plan and non-plan expenditure
The term Budget is nowhere mentioned in the removed.
Constitution.Budget is referred to as the Annual z Presented in terms of: Consolidated Fund of India,
Financial Statement (AFS) in the constitution under Contingency Fund of India, Public Account of India.
Art. 112.
z Budget is a statement of the Govt. estimated COMPONENTS OF BUDGET
receipts and expenditure in a FY starting from April
1 and ending on 31 March.
Receipts
z AFS Contains Appropriation Bill (Expenditure Side)
and Finance Bill (Receipts). z Revenue Receipts
z Revenue Account: Receipts and expenditure that Tax Revenue: Tax collected by the government in
relate to the current financial year only (revenue the form of direct and indirect tax.
budget) Non-Tax Revenue: Profits and dividends from
z Capital Account: Concern with the assets and PSU’s, grants received by government, fiscal and
liabilities of the government(capital budget).
general services, interest on loan forwarded by
Rail Budget was separated from the General Budget government, fees, penalties, fines etc.
on teh recommendations of the Acworth Committee z Non- Revenue/Capital Account Receipts
in 1924. However, it was merged again with the Union They are loans taken by the government which
Budget 2017. possesses financial liability on the government.
Expenditure ERD = Revenue Deficit - Grants for creation of capital
z Revenue Expenditure: Broadly, any expenditure assets
which does not lead to any creation of assets
Union Budget 2021-22: Fiscal deficit is targeted at 6.8%
or reduction in liability is treated as revenue of GDP in 2021-22.
expenditure. E.g. salaries of government employees,
z Union Budget 2022-23: Fiscal deficit in 2022-23
interest payment on loans taken by the government,
estimated at 6.4% of GDP.
pensions, subsidies, grants, rural development,
education and health services, etc. Primary Deficit
z Purpose: not to build up any capital asset, but to z Primary Deficit indicates the borrowing requirements
ensure normal functioning of government machinery. of the government, excluding interest.
It is recurring in nature and incurred regularly.
z It is the amount by which the total expenditure of a
z Capital Expenditure: An expenditure which either government exceeds the total income.
creates an asset (e.g. school building) or reduces
z Note that the primary deficit does not include the
liability (e.g. repayment of loan) is called capital
interest payments made.
expenditure. Repayment of loan is also capital
expenditure because it reduces liability. It is non- Primary Deficit = Fiscal Deficit (Total expenditure –
recurring in nature. Total income of the government) – Interest payments (of
previous borrowings)
FISCAL CONSOLIDATION
Off Budget Financing
z Fiscal consolidation is a process where the
z Expenditure that’s not funded through the budget.
government’s fiscal health is getting improved and
is indicated by reduced fiscal deficit. Budget Deficit
z Improved tax revenue realization and better aligned z A budget deficit occurs when expenses exceed revenue
expenditure are the components of fiscal consolidation and indicate the financial health of a country.
as the fiscal deficit reaches at a manageable level.
z The government generally uses the term budget deficit
when referring to spending rather than businesses or
TYPES OF DEFICITS individuals. Accrued deficits form national debt.
z Deficit: A deficit occurs when expenses exceed
revenues, imports exceed exports, or liabilities exceed
Zero Primary Deficit
assets. z When the primary deficit is zero, the fiscal deficit
becomes equal to the interest payment.
Fiscal Deficit = Gov exp - Gov receipts (excluding borrowings) z This means that the government has resorted to
z Difference between total revenue and total expenditure borrowings just to pay off the interest payments.
of the government is termed as fiscal deficit. It is Further, nothing is added to the existing loan.
an indication of the total borrowings needed by
the government. While calculating total revenue, Monetized Deficit
borrowings are not included. z Monetized Deficit is the extent to which the RBI helps
the central government in its borrowing programme.
Fiscal Deficit (FD) = Budget deficit + Borrowings z In other words, a monetized deficit means the increase
in the net RBI credit to the central government, such
Revenue Deficit that the monetary needs of the government could be
z It is the difference between the Revenue Receipts met easily.
(RR) and the Revenue Expenditure (RE).
GOLDEN RULE OF BUDGET
Revenue deficit (RD) = RR – RE
z Guidelines for the operation of fiscal policy,
Effective Revenue Deficit (ERD) especially in countries who use high borrowing to
run the budget.
z Signifies that amount of capital receipts that are
being used for actual consumption expenditure of the z Over the economic cycle, Govt. should borrow only
Government. to invest and not to fund current spending (current
expenditure means day to day running expenses).
z The concept of effective revenue deficit had been
suggested by the Rangarajan Committee on Public z In layman’s terms: the government should borrow to
Expenditure finance investment that benefits future generations.

TYPES OF BUDGET Gender Budgeting
z It is not an accounting exercise but an ongoing process
Balanced Budget of keeping a gender perspective in policy/ programme
formulation, its implementation and review.
z The government may spend an amount equal to the
revenue it collects. Zero Based Budgeting
Surplus Budget z All expenses are evaluated each time a budget is made
and expenses must be justified for each new period
z If the expected government revenues exceed the
estimated government expenditure in a financial year. Sunset Budgeting
Deficit Budget z Schemes are announced with a deadline, designed to
self-destruct within a prescribed time.
z If the estimated government expenditure exceeds the
expected government revenue in a financial year. Incremental Budgeting
Outcome Budget z It takes last year’s actual figures and adds or subtracts
a percentage to obtain the current year’s budget.
z It is a budget that converts outlays into outcomes by
planning the expenditure, fixing appropriate targets, Value Proposition Budgeting
quantifying deliverables in each scheme and bringing
z Value proposition budgeting is really a mindset about
to the knowledge of all, the outcomes for each scheme/
making sure that everything that is included in the
programme under various ministries.
budget delivers value for the business.
MONETARY POLICY VIS-A-VIS FISCAL POLICY

Parameters Monetary Policy Fiscal Policy
Definition It is a financial tool that is used by the central It is a financial tool that is used by the central
banks in regulating the flow of money and the Govt. in managing tax revenues and policies
interest rates in an economy. related to expenditure for the benefit of the
economy.
Managed By Central Bank of an economy Ministry of Finance of an economy.
Measures It measures the interest rates applicable for It measures the capital expenditure and taxes of
lending money in the economy. an economy.
Focus Area Stability of an economy. Growth of an economy.
Impact on Exchange rates improve when there is higher It has no impact on the exchange rates.
Exchange rates interest rates.
Targets Monetary policy targets inflation in an economy. Fiscal policy does not have any specific target.
Impact Monetary policy has an impact on the borrowing Fiscal policy has an impact on the budget deficit.
in an economy.
Expansionary Fiscal Policy z Reduction in government spending or a reduction in

z It seeks to increase economic activity by putting more the rate of monetary expansion by a central bank or
money into market. raising taxes by the government.
z Adopted in response to contractions in the business Neutral Fiscal Policy
cycle and prevent economic recessions.
z Government spending is equal to the Tax revenue.
z Lowering of taxes and increased government spending.
Contractionary Fiscal Policy DEFICIT FINANCING

z It seeks to decrease economic activity by taking out Meaning: Generating funds to finance the deficit
money from the market. which results from excess expenditure over revenue.
z It is designed to combat rising inflation.
Public Finance 19
Vijay Kelkar Committee presented a roadmap for fiscal
consolidation.
Strengthening of government finances and includes the

following:
z Revenue side: Rationalization of tax exemptions;
Improving efficiency of tax collections; Tax stability;
etc.
z Expenditure side: Cutting out non-essential
and unproductive activities; Rationalizing
subsidies; Reduce time and cost overruns;
etc.
Monetisation of Deficit
z When RBI buys government securities directly from Steps Taken For Fiscal Consolidation
the primary market to fund government’s expenses. z Implementation of the FRBM ACT,2003, GST,
z In simple terms, monetization of the deficit means Insolvency and Bankruptcy Bill.
printing more money. z Better targeting of Government subsidies through
z This is resorted to only when the government cannot Direct Benefit Transfer.
borrow from the market (Banks and other Financial z Through improving tax collections by better
Institutions like LIC). compliance mechanisms, increasing the tax base
z The money printed by the RBI is called high powered and Tax to GDP ratio of the country.
money or reserve money or monetary base. z The government pegged disinvestment target for
z Direct Monetisation 2020-21 at ₹ 1.20 lakh crore etc.
RBI directly funds the Central government’s deficit
against government bonds or securities. EXPENDITURE MANAGEMENT
This allowed the government to technically print
equivalent amounts of currency to meet its budget
COMMISSION (EMC)
deficit. z In 2014, the GoI constituted an Expenditure
This practice was stopped over its inflationary Management Commission (EMC) through a
impact and in favour of fiscal prudence. Resolution.
SBI has recommended direct monetisation as z First Chairman: Dr. Bimal Jalan.
a possible way of funding the Centre’s deficit z Commission has one full time, one part time and one
at lower rates, without increasing inflation and ex-officio members other than Chairman (Cabinet
affecting debt sustainability. rank).
Indirect Monetisation z The EMC will look into various aspects of
RBI does it through Open Market Operations expenditure reforms to be undertaken by the
(OMOs) and/ or purchases bonds in the secondary government and other issues concerning Public
market. Expenditure Management that will enable the
government to reduce and manage its fiscal deficit
Ways and Means Advances at more sustainable levels.
z WMA are temporary loan facilities provided by RBI to
the governments of both Centre and States to enable it National Institute for Public Finance and Policy
to meet temporary mismatches between revenue and
z It is an autonomous body founded in 1976. It is
expenditure.
registered under the Societies Registration Act,
z The rate of interest is the same as the repo rate. 1860.
z The tenure is 3 months. z One of the major mandates of the institute is to
assist the Central, State and Local governments
FISCAL CONSOLIDATION in formulating and reforming public policies by
z It is the process for reducing the fiscal deficit of the providing an analytical base, research, policy
country. advocacy etc.

FISCAL RESPONSIBILITY AND BUDGET GOVERNMENT DEBT
MANAGEMENT (FRBM) ACT, 2003 z Broadly classified as debt contracted against the
Consolidated Fund of India (defined as Public Debt)
and liabilities in the Public Account, called Other
Liabilities.
z Government debt as a percent of GDP is used by
investors to measure a country’s ability to make
future payments on its debt. It affects borrowing cost
and government bond yields.
z Debt To GDP Ratio: Debt-GDP ratio is an important
indicator of medium and long-term sustainability of
any country. It indicates how likely the country can
pay off its debt.
z Fiscal Responsibility and Budget Management Public Debt

(FRBM) Act, 2003 was passed to establish financial z Debt contracted against the Consolidated Fund of
discipline in the economy, improve the management India.
of public funds and reduce fiscal deficit.
Objectives of FRBM, Act

z To introduce transparent fiscal management
systems in the country.
z To introduce a more equitable and manageable
distribution of the country’s debts over the years.
z To aim for financial stability for India in the long run.
z The act was expected to give necessary flexibility to
the RBI for managing inflation in India.
z The Act made it mandatory for the government to place Rupee Debt
the following along with the Union Budget documents z Refers to that part of India’s total external debt
in Parliament annually: denominated in Rupees.
Medium Term Fiscal Policy Statement
Other Liabilities
Macroeconomic Framework Statement
z Include liabilities on account of Provident Funds,
Fiscal Policy Strategy Statement.
Reserve Funds Deposits, Other Accounts, etc
z The FRBM rules mandate four fiscal indicators
to be projected in the medium-term fiscal policy CROWDING OUT EFFECT
statement:
z When governments borrow, they compete with
1. Revenue deficit as a percentage of GDP
everybody else in the economy who wants to borrow
2. Fiscal deficit as a percentage of GDP. the limited amount of savings available.
3. Tax revenue as a percentage of GDP. z It causes a decrease in the quantity of funds that is available
4. Total outstanding liabilities as a percentage of to meet the investment needs of the private sector.
GDP. z As a result of this competition, the real interest rate
increases and private investment decreases. This
The latest provisions of the FRBM Act
phenomenon is called crowding out.
To limit the fiscal deficit to 3% of the GDP by March 31,
2021, and the debt of the central government to 40% of N.K. SINGH COMMITTEE/ FRBM REVIEW
the GDP by 2024-25.
z It proposed to replace the FRBM Act, 2003 with a Debt
Management and Fiscal Responsibility Bill, 2017.
NK Singh committee (set up in 2016)
z Escape Clause was introduced.
recommendations
The government should target a fiscal deficit of 3% of Escape Clause
the GDP in years up to March 31, 2020 cut it to 2.8% in z It refers to the situation under which the central
2020-21 and to 2.5% by 2023. government can deviate from the fiscal deficit
Public Finance 21
target-for up to 0.5 % GDP, from the stipulated fiscal National security, war, National Calamity, Collapse
deficit target during special circumstances. of Agriculture, Structural Reforms.
z GOI used an escape clause this year as COVID 19 was Decline in real output growth of a quarter by at
declared as national calamity. least three percentage points below the average of
z Under Section 4(2) of the Act, the Centre can exceed the previous four quarters.
the annual fiscal deficit target citing certain grounds:
TERMINOLOGIES
Fiscal Drag Off Budget Financing
Situation where inflation pushes income into a higher Expenditure that’s not funded through the budget.
tax bracket. The result is increase in income taxes but no Sovereign Debt Crisis
increase in real purchasing power
It describes the difficulties that a nation faces to service the
Fiscal Neutrality loans it takes from the foreign sources in foreign currency.
When the net effect of taxation and public spending is Economic Stimulus
neutral
Government measures to encourage private sector
Pump-Priming economic activity by engaging in targeted, expansionary
Generally, during a recessionary period, through monetary or fiscal policy based on Keynesian economics.
government spending and interest rate and tax reductions Fiscal Stimulus
in an attempt to revive economy during recession
When the government takes certain measures for
Twin Deficit lowering taxes or increases its spending in a bid to revive
Worsening of both Current Account deficit and Fiscal the economy.
deficit simultaneously in the economy. Monetary Stimulus
Fiscal Cliff It involves cutting interest rates to stimulate the economy.
The fiscal cliff refers to a combination of expiring tax cuts Lower interest rate will reduce the cost of borrowing,
and across-the-board government spending cuts hence more borrowing will take place.
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4 Inflation
z It is the rise in prices of goods and services within a z The opposite and rare fall in the price index of this
particular economy wherein, the purchasing power basket of items is called deflation.
of consumers decreases, and the value of the cash
holdings erode. In India, the Ministry of Statistics and Programme
Implementation (MoSPI) is the nodal agency for
z Inflation measures the average price change in a
measuring unflation.
basket of commodities and services over time.
In India, both WPI and CPI are used to measure z Causes

inflation. When aggregate demand in an economy outpaces
aggregate supply.
z In India, inflation is primarily measured by two main
Deficit financing by the government and fiscal
indices: WPI and CPI.
stimulus.
TYPES OF INFLATION Depreciation of rupee and Increase in Forex
reserve.
Lower interest rates: causes a rise in consumer
spending and higher investment.
Rising real wages.
E.g. Union’s bargaining for higher wage rates.
Cost Push Inflation

z When prices increase due to the rising cost of inputs
like wage increase, high transport price, unavailability
of raw materials.
z With an increase in prices, the output level of the
BASED ON CAUSES economy also falls.
Demand Pull Inflation Monetary Inflation

z Too much money chasing too few goods z RBI printing more and more money (deficit financing)
z Overall output of the economy does not fall in this case. can cause inflation. Monetary inflation is a sustained
increase in the money supply of a country (or currency Walking Inflation (2-10%)
area). z When inflation is in single digits – more than 3/4%
Built in Inflation less than 10%.
z Central Banks will be increasingly concerned.
z Firms pass the higher labor costs on to their customers
as higher prices. z Chronic Inflation : If creeping inflation continues to
in crease for a longer period of time.
z It becomes a vicious cycle of higher price-higher labor
cost-higher price. Running Inflation (10-20%)
Headline Inflation z When inflation starts to rise at a significant rate.
z Total inflation in the economy, includes inflation in a z It is usually defined as a rate between 10% and 20%
basket of goods that includes commodities like food a year.
and energy.
Galloping Inflation (20%-1000%)
z Headline inflation may not present an accurate
z This is an inflation rate of between 20% up to 1000%.
picture of an economy’s inflationary trend since
sector-specific inflationary spikes are unlikely to persist. z At this rapid rate of price increases, inflation is a
serious problem and will be challenging to bring
Core Inflation under control.
Change in the costs of goods and services but this
z
excludes primary articles, food, etc. because of
Hyper-Inflation
volatility/short term fluctuations. z Inflation rising at a very fast rate, can lead to a total
collapse of the currency and economic crisis.
z Core Inflation is a reflection of a Headline inflation may
not present an accurate picture of an economy’s E.g. Germany in the 1920s, Zimbabwe in the 2000s, and
inflationary trend since sector-specific inflationary Venezuela in the 2010s
spikes are unlikely to persist.
Core Inflation : Headline Inflation (Primary + fuel + food KEY TERMS AND TERMINOLOGIES
manufacturing industries).
Skewflation
Profit Induced Inflation z It is the skewed rise in the price of some items while
z If the producers, due to their monopoly position, tend remaining item prices remain the same. E.g. Seasonal
to mark-up their profit margin, it will lead to profit- rise in the price of onions.
induced inflation.
Stagflation
Structural Inflation z The situation of rising prices along with falling
z Due to the weak structure of the institutions and growth and employment. Inflation accompanied by an
markets in the economies, mostly the developing and economic recession.
low-income ones. z A combination of Inflation and unemployment (usually
E.g. Artificial shortage of foods/ goods due to hoarding in the time of Recession).
and Poor agriculture produce due to poor monsoons,
inadequate irrigation facilities etc.
Disinflation
z Reduction in the rate of inflation.
BASED ON SPEED E.g. Fall in the inflation rate from 8% to 6%.
Creeping Inflation (1-4%) Deflation

z When the rate of inflation slowly increases over time. z General fall in the level of prices.
z For example, the inflation rate rises from 2% to 3%,
to 4% a year. Depression
z Economic depression is a sustained, long-term
Creeping and walking Inflation, clubbed together are downturn in economic activity.
called moderate Inflation
Reflation
z Reflation is the act of stimulating the economy after a
period of economic slowdown or contraction.

z Also called structural inflation, it occurs when supply z Overemployment. z Underemployment.
falls drastically and the demand remains at the same
level. z Excess of Aggregate z Lack of aggregate
demand. demand.
Inflation Gap Actual GDP - Potential GDP z Need for restrictive z Need for more
z Excess of government spending above national income. fiscal and monetary expansionary fiscal
policies • lesser and monetary Policies
Deflationary Gap government spending, • More government
z Shortfall in total spending over national income. more taxes and higher spending, less taxes,
interest rates. lower interest rates.
Bottleneck Inflation
z It creates excess demand in the economy as the supply COBWEB PHENOMENON
fails to match, raising the prices.
z Explains large scale fluctuations in the prices of pulses
Inflation Tax in the Indian Market.
z Due to price rise, wages increase, as wage increases z If prices were higher in the previous year, more farmers
taxes on this increase, generates more revenue for would sow pulses in the current year leading to its
the government. over-production and subsequent decline in the prices.
Inflation Premium z The lower prices in the current year disincentive the
z Bonus brought by inflation to borrowers. Real farmers from growing crops in the next cropping
interest rate (nominal IR adjusted to inflation) << season, leading to underproduction and subsequent
Nominal interest rate (charged on lending). increase in the prices.
Inflation Spiral GDP Deflator and Implicit Price Deflator
z Wage-price spiral i.e. when wages press prices up z It is a comprehensive measure of inflation.
and prices pull wages down. GDP price deflator = (nominal GDP • real GDP) x 100
Full Employment z It covers the entire range of goods and services
z A situation where all the resources in the economy produced in the economy.
are fully employed and its operating at the maximum z Reflects the extent to which the increase in the gross
potential domestic product has happened on account of higher
prices rather than an increase in output.
INFLATIONARY AND DEFLATIONARY GAP Phillips Curve
Inflationary Gap Deflationary Gap
z Inverse rela tionship between
z When Aggregate z When Aggregate unemployment and inflation.
Demand exceeds the Demand is lower than z Accordingly, as levels of
Aggregate Supply at the Aggregate Supply at the unemployment decrease,
full employment level. full employment level inflation increases.
Inflation 25
INFLATION INDICES: WPI VS CPI VS IIP
Wholesale Price Index (WPI) Consumer Price Index (CPI) Index of Industrial Production (IIP)
z Base Year: 2011-12 z Base Year: 2011-12 z Base Year: 2011-12
z Measures the average change z Measures the change in the retail z Measures the growth rates in
for bulk sale before the retail price in the prices of commodities of different industry groups of the
level. goods and services with reference to economy. It is a key economic
z Most widely used inflation a base year. indicator of the manufacturing
indicator. z RBI has adopted CPI Combined sector of the economy.
(Rural +Urban) as its key measure of z Index of 8 core industries are:
inflation. Refinery Products > Electricity >
z Covers only goods z Both goods and services Steel > Coal > Crude Oil > Natural
Gas > Cement> Fertilizers.
z These 8 industries command
40.27% weight in the overall IIP.
weight in the overall IIP.
z Manufactured products (64%) z Food and Beverage 45.86 z Different Sectors
> Primary Articles (23%) > z Miscellaneous 28.32 z Manufacturing (77.63%) > Mining
Fuel and Power (13%) z Housing 10.07 (14.37%) > Electricity (7.9%)
z Fuel and light 6.84
z Clothing and Footwear 6.53
z Pan, tobacco and intoxicants 2.38
z Published by Office of Economic z CPI for Industrial Workers (IW) by the z The IIP index is computed
Adviser (OEA), Ministry of Ministry of Labor and Employment and published by the Central
Commerce and Industry (MoLE). The base year for CPI (IW) is Statistical Organization (CSO)
changed from 2001 to 2016 on a monthly basis.
z CPI for Agricultural Laborer (AL) by
the MoLE.
z CPI for Agricultural Workers (CPI-AL)
and Rural workers (CPI-RL) base
year is 1986-87.
z CPI for Rural Laborer (RL): by the
Ministry of Labor and Employment.
z CPI (Rural/Urban/Combined):
by National Statistics Office (NSO),
MoSPI.
Producer Price Index Fisher Index

z Producer Price Index (PPI) measures the average z American Economist Irving Fisher.
change in the price of goods and services either as they
z The Fisher Index is a CPI used to measure the
leave the place of production, called output PPI or as
they enter the production process, called input PPI. increase in prices of goods and services over a
z PPI estimates the change in average prices that a period of time and is calculated as the geometric
producer receives. mean of the Laspeyres Index and the Paasche
Price Index.
Paasche Index
z By German economist Hermann Paasche - Tells Service Price Index
about what today’s basket of commodities would have z Published by the Office of Economic Advisor under
cost @ base year. the Ministry for Commerce and Industry.
Laspeyre Index z Measures separately inflation in services such as
z By German economist Etienne Laspeyres, used for Railways, Postal, Banking, Aviation, Insurance,
calculation of WPI, CPI, IIP. Telecom etc.

Food Price Index Baltic Dry Index
z Published by FAO. z Published by London based Baltic Exchange.
z FPI tracks the international prices of the most z Provides an assessment of the price of moving the
commonly traded food commodities. major raw materials by sea.
z Commodity Covered: Meat, Dairy, Cereals, Vegetable z Takes into account the freight rates for bulk
oil and Sugar. commodities such as coal, iron ore and grain.
PRODUCER PRICE INDEX (PPI) VS WHOLESALE PRICE INDEX (WPI)

Wholesale Price Index (WPI) Producer Price Index (PPI)
z WPI captures the price changes at the point of bulk z PPI measures the average change in prices received by
transactions and may include some taxes levied the producer and excludes indirect taxes.
and distribution costs up to the stage of wholesale
transactions.
z Weight of an item in WPI is based on net traded value z PPI weights are derived from Supply
z Multiple counting bias inherent in WPI z PPI removes the multiple counting bias
z WPI does not cover services z PPI includes services
z It is published by the office of Economic Advisor, z PPI is measured monthly and is released in a report by
Ministry of Commerce and Industry. the Bureau of Labor Statistics
CONSUMER PRICE INDEX (CPI)VSP RODUCER PRICE INDEX (PPI)

Consumer Price Index (CPI) Producer Price Index (PPI)
z CPI measures the change in average prices that a z PPI estimates the change in average prices that a
consumer pays producer receives.
z Weights of items in CPI are derived from Consumer z PPI is calculated on the basis of Supply.
Expenditure Surveys
EFFECT OF INCREASING INFLATION

Benefits Disadvantages
z It lowers the interest rate z Lenders suffer as real purchasing power declines
z Debtors benefit. z Fixed income people like pensioners and salaried
people suffer.
Uncertainty in the economy so less investment
z Currency depreciates z Imports suffer as they become costlier due to
depreciation of the currency
z Exports benefit majorly due to the depreciation of the z Real wages decrease.
currency
z People in business gain profits. z Purchasing power of Rupee declines.
z Savings, investment, and employment rise in the short z Fall in real value of savings.
term.
z Nominal wage increases. z Decline in competitiveness.
BASE EFFECT AND INFLATION

z The base effect relates to inflation in the corresponding period of the previous year, if the inflation rate was too low in
the corresponding period of the previous year, even a smaller rise in the Price Index will give a high rate of inflation.
Inflation 27
z Aim: maintaining price stability, while keeping in
mind the objective of growth.
z Objective: to bring transparency and accountability in
deciding monetary policy.
z Determines the policy interest rate required to achieve
the inflation target.
z Committee comprises: Six members where RBI
Governor acts as an ex-officio chairman + 3 members
are from RBI + 3 selected by government.
z Inflation target is to be set once every five year by
the Government of India, in consultation with the RBI.
z The MPC is required to meet at least four times in
a year.
z The quorum for the meeting of the MPC is four
members.
z Each member of the MPC has one vote, and in the
event of an equality of votes, the Governor has a
casting vote.
z Once every six months, the Reserve Bank is required
to publish a document called the Monetary Policy
Report to explain the sources of inflation and the
forecasts of inflation for 6-18 months a head.
z Current inflation target is pegged at 4% with (+/-)
2% tolerance.
MEASURES TO COMBAT INFLATION
INFLATION TARGETING
z It is a monetary policy where the central bank sets
a specific inflation rate as its goal and adjusts its
monetary policy to achieve that rate.
z The RBI and Government of India signed a Monetary
Policy Framework Agreement in 2015. Monetary Policy Measures
z Inflation targeting indicates the primacy of price z Increase of the Bank rate.
stability as the key objective of monetary policy. z Make borrowing costly by increasing interest rates.
z RBI would aim to contain consumer price inflation z Increasing tendency to save.
within 6 % and within 4% with a band of (+/-) 2%. z Controlling the credit-creation.
z Conducting open market operations
MONETARY POLICY COMMITTEE (MPC) z Increasing the Repo Rate, Bank Rate, CRR, SLR and
z Created in 2016, MPC is a statutory and other policy rates.
institutionalized framework under the RBI Act, Fiscal Policy Measures
1934.
z Reducing the private spending by increasing taxes
z Urijit Patel Committeefirst proposed the idea
for the formation of a five-member Monetary Policy z Reducing the government spending
Committee. z Bringing more people under tax coverage

z Introducing new taxes and cess activity
Saving and investment
Other Measures
z Price control by government as a short-term measure. Income distribution

z Import controls imposed by the government. Allocation of resources.
z Restricting the wage increase by companies. Difference Between Fiscal and Monetary
Policy
z Fiscal policy deals with taxation and government
spending and is often administered by a government
department; while monetary policy deals with the
money supply, interest rates and is often administered
by a country’s central bank.
z Both fiscal and monetary policies influence a country’s
economic performance.
FISCAL STIMULUS
z In economics, stimulus refers to attempts to use
monetary or fiscal policy (or stabilization policy in
general) to stimulate the economy.
z Stimulus can also refer to monetary policies like
lowering interest rates and quantitative easing.
z A stimulus is sometimes colloquially referred to as
priming the pump or pump priming.
URJIT PATEL COMMITTEE ON

MONETARY POLICY REFORMS
CORRELATION BETWEEN INFLATION, z The committee suggested that inflation should
FISCAL POLICY AND MONETARY be the nominal anchor for the monetary policy
framework.
POLICY z The nominal anchor or the target for inflation should
z Inflation is controlled by the Govt. through Fiscal be set at 4 percent with a band of (+/-) 2 percent
policy and RBI through Monetary policy. around it.
z Monetary Policy Decision making should be vested
Monetary Policy in a Monetary Policy Committee (MPC) that should
z The mechanism/tool used by the monetary authority be headed by the Governor.
of a country, generally the central/federal bank to
IMPORTANT COMMITTEES RELATED TO INFLATION
control the money supply in the economy in order to
& THEIR RECOMMENDATIONS
maintain price stability and achieve high economic
growth. z B N Goldar Committee: Developing PPI for India
z In India, central monetary authority is the RBI which z Ramesh Chand Committee (NITI Aayog):
maintain the price stability in the economy. Roadmap for switch over from WPI to PPI
z Urjit Patel Committee: Recommended Monetary
Fiscal Policy Policy Committee
z Fiscal policy is the use of government revenue z Mahendra Dev Verman Committee: Linking
collection (taxes or tax cuts) and expenditure MGNREGA to CPI-RL
(spending) to influence a country’s economy.
z Changes in the level and composition of taxation and BUSINESS CYCLE
government spending can affect macroeconomic z The business cycle describes the rise and fall in
variables, including: production output of goods and services in an economy
Aggregate demand and the level of economic (in real GDP or GDP adjusted for inflation.
Inflation 29
Recovery Recessionary Phase
z A severe and prolonged downturn in economic activity. z When the overall output of goods and services typically
An extreme recession that lasts 3+ years or leads to a measured by the GDP decreases from one quarter (or
decline in real GDP of at least 10%. month) to another.
Example : The Great Depression of 1930. Recovery Measures: Tax breaks, Interest cuts, Increase
z Upturn in aggregate demand in turn leads to increase in wages etc.
in production level and new investments. Inflation
increases Business Cycle
Unemployment decreases (Phillips Curve) z Expansionary phase + Recessionary phase
Boom
z Accelerated and prolonged increase in the demand
Technical Recession
exceeds sustainable production, faces structural z When real GDP has declined for at least two
problems, demand and supply disequilibrium. consecutive quarters in order to get around
the empirical technicalities associated with the
Economic Recession recession.
z Period of general economic decline
drop in the stock market + increase in India entered a Technical Recession in the first half of
unemployment + decline in the housing market, 2020-21 for the first time in its history (RBI Nowcasts
etc. bulletin, Nov 2020)
Double-Dip-Economic Slowdown NOWCASTS BY RBI
z A recession followed by a short-lived Recovery and
followed by another recession. z Nowcast in economics means the prediction of the
present or the very near future of the state of the
z A situation in which GDP growth slows but does not
economy.
decline.
z Began with the first issue of the Bulletin in
TERMINOLOGIES WITH RESPECT TO January 1947, but interrupted during the period
RECESSION 1995 to date.
z RBI, in its latest monthly bulletin, has dedicated a
Expansionary Phase chapter on the State of the economy.
z When the overall output of goods and services typically z The idea is to provide a monthly snapshot of some
measured by the GDP increases from one quarter (or of the key indicators of India’s economic health.
month) to another.
TYPES OF ECONOMIC RECOVERY

Z- Shaped Effect: Middle section of the W can represent a significant
z Most-optimistic scenario in bear market rally or a recovery that was stifled by an
which the economy quickly rises additional economic crisis.
after an economic crash.
J-Shaped
Effect: Lasts for a small period z Unrealistic scenario, in which
wherein more than people’s growth rises sharply from the
incomes, it is their ability to spend lows much higher than the trend-
is restricted. line and stays there.
V-Shaped K-Shaped
z The economy quickly recoups z Somewhere b/w a “V” and
lost ground and gets back to the “L”, depending on type of
normal growth trend-line. employment.
Effect: Incomes and jobs are Effect: Allows workers at the top
not permanently lost, and the to prosper while sending working
economic growth recovers class American into further debt
sharply and returns to the path
it was following before the L-Shaped
disruption. z The worst-case scenario, in
which growth after falling,
U-Shaped
stagnates at lowlevels and
z In which the economy, after does not recover for a long,
falling, struggles and muddles long time.
around a low growth rate
for some time, before rising Effect: Shows that there
gradually to usual levels. is a permanent loss to the
economy’s ability to produce.
Effect: Several jobs are lost and
z L-shaped recoveries occured following an economic
people fall upon their savings.
recession characterised by a more-or-less steep
W-Shaped (Double Dip) decline in economy.
z A dangerous creature, growth
falls and rises, but falls again
before recovering yet again, thus
forming a W-like chart.
REPORTS & INDEX

Global Economic Prospects (World Bank) Global Financial Stability Report (IMF)
z Issued twice a year – January and June. z Twice in a year - April and October.
z Current estimates show that 60 million people could be z Global: As per Global Consumer Survey in 2020, 99
pushed into extreme poverty in 2020. % of its respondents responded that they did trade
World Development Report (World Bank) in cryptocurrencies.
z India has seen a massive spurt in crypto users of late.
z Steepest declines in poverty are witnessed among those
countries that became an integral part of the Global Financial Stability Report (RBI)
Value Chain (GVC). E.g. Bangladesh, China and Vietnam z Issued twice a year
World Economic Outlook (IMF) z Gross Non-Performing Asset (GNPA) ratio  India’s
z Published twice a year in the months of April and October. Scheduled Commercial Banks (SCBs) may climb by
the end of 2021-22 to as much as 11.2% under a
severe stress scenario, from 7.48% in March 2021.
Inflation 31
z There is an increasing inequality among nations, with World 0Investment Report (UNCTAD)
divergence in economic prospects across countries. z Focuses on trends in Foreign Direct Investment
z Aggregate output (FDI).
Advanced economy - expected to regain its pre- z Global FDI flows are forecast to decrease by up
pandemic trend path in 2022 and exceed it by 0.9% to 40% in 2020, from their 2019 value of $1.54
in 2024. trillion.
Emerging market and developing economy Trade and Development Report (UNCTAD)
(excluding China) - expected to remain 5.5% below
the pre-pandemic forecast in 2024. z In 2022, UNCTAD expects global growth to slow to
3.6%, leaving world income still 3.7% below where
its pre-pandemic trend would have put it.
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5 Taxation
z Taxation is a term for when an authority, mostly a

EVOLUTION OF TAXATION IN INDIA
government, imposes a financial obligation on its
citizens/ residents/corporations/companies etc. Year Committee Impact
z It is a way of Income redistribution. 1991-93 Chelliah The tax reforms
z Swaran Singh Committee recommended Duty to Pay Committee began with
taxes to be added in the Fundamental Duty - Art. Chelliah committee
51A. However, this was not included. So, Duty to Pay recommendations for
taxes is not a Fundamental Duty. reforming India’s tax
system
CANONS OF TAXATION BY ADAM SMITH 1986 JHA Committee VAT introduced.
Equality Tax should be equal and proportionate Recommended the
to income. transforming of Union
Economy Raising taxes while incurring least excise duties into a
amount of expenses. modified value added
tax (MODVAT)
Certainty Dates, slabs, percentages should be
definite and told in advance. 2002 Vijay Kelkar Abolition of wealth tax.
Committee Abolish Minimum
Convenience In terms of understanding the tax
structure, computing, filing and paying Alternative Task,
of taxes. 2003 Kelkar Task Force Fiscal Responsibility
and Budget
TAX TO GDP RATIO Management (FRBM).
Recommended GST
z The size of a country’s tax resources in relation to its
GDP. 2015 Asim Das State Level VAT was
z High Tax to GDP: Financial position of the country Committee introduced
is good. It reduces a government’s dependence on 2014-16 — Govt. Introduced
borrowings. Tax buoyancy is strong. 122nd Constitutional
z Low Tax to GDP : Constrains the government to spend Amendment Bill 2014
and puts pressure on the government to meet its fiscal in 16th Lok Sabha.
deficit targets. Ultimately, it was
passed & became
TAX: INCIDENCE, IMPACT, SHIFTING, 101st Constitutional
BASE Amendment Act,
2016 - introduction
z Tax Incidence: It is the one who actually pays tax. True of GST.
burden of a tax is given by incidence and not impact.
z Tax Impact: It is the entity on whom tax is imposed. FEATURES OF A GOOD TAXATION
The entity has the legal responsibility to pay taxes.
z Tax Shifting: When incidence of a tax differs from the SYSTEM
impact of the tax.
z Tax base: Volume of goods and services on which tax
Fairness
is imposed. z Both in terms of Horizontal Equity and Vertical Equity.
z Horizontal Equity: When individuals in identical or Transparent
similar situations pay identical or similar taxes. z The individual assessment of taxes, the total collection,
z Vertical Equity: When people in higher tax brackets the amount spent on public goods using those
people pay more taxes. resources etc. should be in a transparent manner.
Efficiency TAXPAYER’S CHARTER

z Should be able to raise resources via taxes with least
z Finance Minister had proposed to introduce the
amount of difficulty to the taxpayers.
Taxpayers Charter in the Union Budget 2020-21.
z Raise revenue with less cost.
z Taxpayers Charter: highlights the roles and
Simplicity responsibilities of Citizens and Tax authorities,
obligations of the taxpayers and provides a mechanism
z In terms of understanding the tax structure, computing,
for Grievance redressal.
filing and paying of taxes.
z Significance: This would reduce the compliance
z This will increase tax compliance among the masses,
burden, enhance trust between the taxpayers and tax
in turn increase the revenue resource of government.
authorities, reduce litigations and thus Promote good
Flexible Governance Practices.
z Countries already adopted Taxpayers Charter: USA,
z Should be able to change according to the needs of the
Canada and Australia.
time.
low-income earners than from high-income

METHODS OF TAXATION earners. It is in opposition to a progressive
tax, which takes a larger percentage from
high-income earners.
E.g. Sales Tax.
Proportional Taxation
z The same percentage tax is levied on everyone
regardless of income.
Retrospective Taxation
Progressive Taxation z It allows a country to pass a rule on taxing certain
z Based on the taxpayer’s ability to pay. High income products, items or services and deals and charge
earners will pay more tax than low-income earners.
companies from time behind the date on which the
E.g. Income tax. law is passed. Countries use this route to correct any
anomalies in their taxation policies that have, in the
Regressive Taxation past, allowed companies to take advantage of such
z A regressive tax is a tax applied uniformly, loopholes.
taking a larger Percentage of income from

TYPES OF TAXES MINIMUM ALTERNATE TAX (MAT)
Direct Tax z MAT is calculated at 18.5% on the book profit (the
profit shown in the profit and loss account) or at
z Direct tax is a type of tax where the incidence and
the usual corporate rates, and whichever is higher is
impact of taxation fall on the same entity.
payable as tax.
Incidence = Impact. e.g.- Income Tax, wealth Tax
z All companies in India, whether domestic or foreign,
Corporation Tax.
fall under this provision. MAT was later extended to
cover non-corporate entities as well.
TYPES OF DIRECT TAX
Direct Taxes Union Govt. State Govt.
DIRECT TAX CODE (DTC)
On Income z Corporation z Agriculture tax z The Task Force, initially headed by former CBDT
Tax (6.81 in ₹ z Land Revenue, Member (Legislation) Arbind Modi and later on
lakh crores) by Akhilesh Ranjan, was constituted in November
z Minimum 2017 in order to review the Income-tax Act and to
Alternative draft a new Direct Tax Law.
Tax (MAT) z Objective: Bringing more certainty to taxation
z Dividend of personal and corporate income and capital
Distribution gains, and at bringing the gist of numerous judicial
tax, Capital pronouncements made since 1961, when the current
Gains tax. tax law came into force, in one place for easy reference.
z Securities
Recommendations
Transaction
Tax, z Change in personal income tax slabs
On Assets z Commodities z Stamp/ z Roadmap of corporate tax rate cut to 25% for
Transaction Registration companies
Tax duty. z Provisions to reduce compliance burden by
z Property tax in simplification of procedures and litigation
urban areas. management.
z Also suggested some changes in Dividend
On z Fringe Benefit
istribution Tax and Minimum Alternate Tax.
Expenditure Tax,
Gift Tax
z
TAX ON COMPANIES
Indirect Tax
z Incidence and impact of taxation does not fall on Google Tax/Equalization Levy/ GAFA Tax
the same entity. Taxes that can be shifted from one z To tax India revenue of foreign firms with no permanent
individual to another like sales tax, entertainment tax, establishments in India.
excise duty. z With the intention of taxing the digital transactions -the
Incidence ≠ Impact. e.g. - Sales Tax, Custom duty income accruing to foreign e-commerce companies
excise duty GST. from India.
z GAFA Tax: France has taxed major companies –
DIVIDEND DISTRIBUTION TAX (DDT) Google, Amazon, Facebook, Apple.
DDT is a tax levied on dividends distributed
z
by companies out of their profits among their
Minimum Alternative Tax (MAT)
shareholders. z To facilitate the taxation of zero tax companies- the
z Removed from Union Budget 2020-21. companies which show zero or negligible income to
avoid tax, despite showing hefty book profits.
z Instead of companies paying DDT on the dividend
they give out, the dividend income will now be added z They are liable to pay a certain per cent of their book
to the taxable income of the recipient, and taxed at the profit.
applicable rate. z All companies in India, whether domestic or foreign,
fall under this.
Taxation 35
Angel Tax z Capital gains taxes are only triggered when an asset is
z It is the income tax payable by start-ups on capital realized, not while it is held by an investor.
raised via the issue of shares. z Normally if an asset is held for less than 36 months,
z To make sure that the money coming in was genuine any gain arising from selling it is treated as a Short-
and to minimise fraud. Term Capital Gain (STCG) and taxed in your hands.
z Dividend Distribution Tax (DDT) z It becomes a Long-Term Capital Gain (LTCG) if the
z It is a tax levied on dividends that a company pays to asset is held for 36 months or more.
its shareholders out of its profits. z In case of shares and mutual funds, a holding period of
12 months or more qualifies as long-term.
TAX ON FINANCIAL TRANSACTIONS
TYPES OF INDIRECT TAXES
Securities Transaction Tax Ad Valorem It is based on the value of the transaction
z Tax levied at the time of purchase and sale of securities Tax or the property. E.g. VAT.
listed on stock exchanges.
VAT VAT is an indirect tax having a multi-point
Capital Gains Tax (CGT) tax collection- imposed and collected at
different points of value addition chain.
z Any profit or gain that arises from the sale of a capital
It has no cascading effect.
asset is a Capital Gain and tax has to be paid on that,
called the Capital Gains Tax. It can be short-term or Excise Tax On goods produced or manufactured in
long-term. the country.
Customs On goods imported and exported out of
Commodities Transaction Tax Duty the country.
z Applicable for those dealing in trading of commodities.
Professional Profession tax is the tax levied and
Tobin Tax/Robinhood Tax tax collected by the state governments in
India. It is an indirect tax.
z Taxing short term currency market transactions to
combat market volatility.
GOODS AND SERVICES TAX (GST)
LONG TERM CAPITAL GAINS (LTCG) Definition
TAX ON EQUITY z It is a comprehensive tax levied on the manufacture,
sale, and consumption of goods and services.
z A capital gains tax is a tax levied on capital gains,
profits an investor realizes when he sells a capital Introduced by the 101st Constitutional Amendment Act,
asset for a price that is higher than the purchase price. on the lines of One Nation One Tax.
Powers
z Parliament and the state legislatures have concurrent powers to implement GST.

Reverse Charge
z The receiver becomes liable to pay the tax, i.e., the
chargeability gets reversed.
Mechanism
z Self-invoicing is to be done when you have purchased
from an unregistered supplier and such purchase of
goods or services falls under reverse charge.
E-Way Bill System

Merged Taxes z It is an electronic way bill for movement of goods
which can be generated on the e-Way Bill Portal
z Central Value Added Tax, Additional Customs Duty,
Special Additional Duty of Customs, Central Sales Tax, z Objective
Service Tax, State VAT (Sales tax). Facilitate faster movement of goods.
Improve the turnaround time of vehicles.

Tax Slabs - 5%, 12%, 18% and 28%.
It helps track intra-state as well as inter-state
3-Tiers Of GST movements of goods of value exceeding ₹ 50,000,

for sales beyond 10 km in the Goods and Services
1. Centre levies the Central GST (CGST) Tax (GST) regime.
2. State levies State GST (SGST)
3. Centre levies Integrated GST (IGST) on transactions Commodities Outside GST
z Alcohol for human consumption,
IGST z Petroleum products,
z When the commodity is produced in one state and is z Electricity, The supply of goods to the SEZ,
traded to another state (interstate trade).
z Supply of goods that come under zero rate
z In this case, the share of SGST should go to the
z Fresh vegetables, fresh milk, cereal, meat etc.
consuming state (as the GST is a destination-based
tax). z Raw materials.
GST Compensation Cess Lottery, Gambling and Betting are also taxable under
z It was introduced as relief for States for the loss of the Goods and Services Tax (GST) Act, 2017
revenues arising from the implementation of GST.
z As per the GST Act, states are guaranteed
GST COMPOSITION SCHEME
compensation for any revenue shortfall below 14% z It is an option available to a registered taxpayer.
growth (base year 2015-16) for the first five years z Small taxpayers can get rid of tedious GST formalities
ending 2022. and pay GST at a fixed rate of turnover.
z GST compensation is paid using funds specifically z Limit: Any taxpayer whose turnover is less than ₹. 1.5
collected as compensation cess- is levied on crore. In case of North-Eastern states and Himachal
products considered to be sin or luxury goods. Pradesh, the limit is now ₹ 75 lakh.
Input Tax Credit (ITC) LAWS ENABLED TO IMPLEMENT GST
z It is a mechanism to avoid cascading of taxes. z Central GST Act, 2017
z It means at the time of paying tax on output, one can z Integrated GST Act, 2017
reduce the tax one has already paid on inputs and just
z GST (Compensation to States) Act, 2017
pay the balance amount.
z Union Territory GST Act, 2017
z Cross utilisation of input tax credit is available
z GST 101st Constitutional Amendment Act, 2016
Taxation 37
GOODS AND SERVICES TAX COUNCIL
Introduced By z 101st Constitutional Union z Chairperson- Union Finance
Amendment Act, 2016 Representations Minister.
Article z 279A z Minister of State for Revenue
(Central Government) will be
Body z Constitutional Body
a member
Appointment z Constituted by Presidential z 1/3rd voting share
order.
State z The Minister of Finance
Functions z Makes recommendations Representations from each State or Minister
to the Union and State nominated by the States will
Government on issues related be its member including Delhi
to GST and Puducherry.
z Key decision-making body z 2/3rd voting share
that will take all important
z Members of the Council from
decisions (tax rate, tax
the states have to choose 1
exemption, the due date
amongst themselves to be
of forms, tax laws, and tax
the Vice chairperson of the
deadlines)
council. They can also decide
Decision z Majority of 3/4th members. his term
Quorum z 1/2 of the total number of
members of the council
ADVANTAGES OF GST
Union Government State Overall economy
z Increase tax compliance z Expansion of the tax base z Reduce corruption
z Create a unified common market z Increase Compliance z Bring about certainty
z Discourage Tax evasion z Enhance investment z Poverty Reduction
z Streamlining of Taxation z Improve the investment Scenario z Boost Secondary Sector
GST ORGANISATIONS z It is a non-profit, government organization.

z It will manage the entire IT system of the GST portal
National Anti-Profiteering Authority
(NAPA) z 100% shares are owned by the Centre and State
government.
z Under Central Goods and Services Tax Act, 2017.
z Institutional mechanism to check the unfair profit-making GSTN Network
activities by the trading community and to ensure that the z It will establish a uniform interface for the taxpayer
benefits of the GST are passed on to the consumers.
by creating a common and shared IT infrastructure
z NAPA is headed by a senior officer of the level of a between the Centre and States.
Secretary to the Government of India and shall have
four technical members from the Centre and/or the GSTN handle: Invoices Various returns; Registrations;
States. Payments & Refunds.

SURCHARGE VIS-A-VIS CESS
Parameter Surcharge Cess
Meaning It is an additional charge on tax. It is imposed over and above the tax for a specific
predetermined purpose. Not a permanent source
of revenue, discontinued when the purpose of
levying it is fulfilled. E.g. Swachh Bharat Cess.
When is it Income level above a certain threshold Payment of tax
Imposed?
Fund The revenue from the surcharge is kept under The revenue from cess is not kept under the
the Consolidated Fund of India. Consolidated Fund of India.
Sharing Not to be shared with states Not to be shared with States
Levied It is levied for extra services or to defray the cost It can be levied on both indirect and direct taxes.
of increased commodity pricing.
DISTRIBUTION OF TAX REVENUES

Article Levy Collection Appropriation Various Taxes
268 Centre States States Stamp duties on shares, cheque, promissory notes, insurance
etc.
269 Centre Centre States Taxes on interstate trade and commerce. Revenues do not
form part of the consolidated fund of India.
270 Centre Centre Shared between All taxes in the union list –income tax(other than agricultural
Centre and states income), corporate tax, etc.
271 Centre Centre Centre Surcharge on taxes under Art 268, 269, 270.
NA State State State Sales tax, excise duty on liquor and Narcotics, octroi,
professional tax (max of ₹ 2500 – limit kept by constitution)
FINANCE COMMISSION
Constitutional Provision z Article 280, Part - XII
Appointment z By Presidential order.
Composition z Chairman + 4 other members.
Qualification z Determined by Parliament
Tenure z Constituted by the president of India every fifth year or at such earlier time as he
considers necessary.
Other Facts z Recommendations are advisory in nature.
z Balancing wheel of fiscal federalism.
Taxation 39
15TH FINANCE COMMISSION Demographic Performance
Chairman: N K Singh z Population data of 2011, to reward efforts made by
states in controlling their population.
Key Recommendations :
z States with a lower fertility ratio will be scored higher
z Vertical Devolution on this criterion.
The share of states in the centre’s taxes is
recommended to be decreased to 41%. LAFFER CURVE
1% less than 14th commission (42%), that
1% is to provide for the newly formed Union z The Laffer Curve is
Territories of J&K and Ladakh from the resources a theory formalized
of the central government. by supply-side
economist Arthur
z Horizontal Devolution: The criteria and the
Laffer to show
weights assigned for horizontal devolution are:
the relationship
Population – 15%
between tax rates
Area – 15%
and the amount
Forest & Ecology – 10% of tax revenue
Income Distance – 45% collected by governments.
Tax and Fiscal Efforts – 2.5% z The curve is used to illustrate the relationship between
Demographic Performance – 12.5% Government tax revenue and tax rates.
Recommendation to create a non-lapsable pool for the IMPORTANT FINANCIAL INSTITUTIONS

defence and internal security sector under the Public
Accounts of India. Organisation for Economic Cooperation
14 Finance 15 Finance
and Development (OECD)
Criteria Commision Commision z Established : 1961
(2015-2020) (2020-2021) z Aim: to stimulate economic progress and world trade.
Income Distance 50.0 45.0 z Most OECD members are high-income economies with
a very high Human Development Index.
Population 1971 17.5 -
z Headquarters: Paris, France; Total Members: 36.
Population 2011 10.0 15.0
z India is not a member, but a key economic partner.
Area 15.0 15.0
Forest Cover 7.5 - Reports and Indices by OECD
Forest and Ecology - 10.0 z Government at a Glance 2017 report
Demographic - 12.5 z International Migration Outlook
Performance z OECD Better Life Index
Tax Effort - 2.5
Enforcement Directorate (ED)
Total 100 100
z Task of enforcing – Foreign Exchange Management
Income Distance Act, 1999 (FEMA) and Prevention of Money Laundering
Act, 2002 (PMLA).
z It is the distance of the state’s income from the state
with the highest income. z It also processes cases of fugitive/ fugitives from India
under Fugitive Economic Offenders Act, 2018.
z States with a lower per capita income would be given a
higher share to maintain equity among states. Financial Intelligence Unit (FIU)
Tax Effort z The central national agency responsible for receiving,
z This criterion has been used to reward states with processing, analysing and disseminating information
higher tax collection efficiency. relating to suspect financial transactions, money
laundering and related crimes.
z It has been computed as the ratio of the average per
capita own tax revenue and the average per capita z FIU-IND is an independent body reporting directly to
state GDP during the 3 year period between 2016-17 the Economic Intelligence Council (EIC) headed by
and 2018-19. the Finance Minister.

Central Board of Indirect Taxes and Customs to low or no-tax locations where there is little or no
economic activity.
and Central Board of Direct Taxes (CBIC)
z OECD and G20 countries along with developing
z Both are a part of the Department of Revenue under
countries that participated in the development
the Ministry of Finance created under the Central
of the BEPS Package are establishing a modern
Boards of Revenue Act, 1963.
international tax framework under which profits are
z The Central Board of Excise and Customs (CBEC)
taxed where economic activity and value creation
was renamed as the Central Board of Indirect Taxes
occur.
and Customs (CBIC) in 2018 after the roll out of the
Goods and Services Tax (GST). Multilateral Convention To Implement
CBIC deals with the tasks of formulation of policy
z
concerning levy and collection of Customs, Central
Measures To Prevent BEPS
Excise duties, Central Goods & Services Tax and z It is an outcome of the OECD/G20 BEPS Project.
Integrated GST, prevention of smuggling. z India has ratified BEPS- Multilateral Convention.
z CBDT provides inputs for policy and planning of
direct taxes in India and is also responsible for the Prevention of Money Laundering Act,2002
administration of direct tax laws through the Income z To combat money laundering in India.
Tax Department. z Under this, the Enforcement Directorate is empowered
to conduct a Money Laundering investigation.
Parthasarathi Shome Committee/Tax Administrative
Reforms Commission (TARC): proposal to merge the Vivaad Se Vishwas Scheme, 2020
Central Board of Direct Taxes (CBDT) and Central
Board of Indirect Taxes and Customs (CBIC). z It is an amnesty scheme that offers a complete waiver
on interest and penalty to the taxpayers who pay their
pending taxes by March 31.
STEPS TAKEN TO REDUCE TAX
AVOIDANCE IN INDIA Sabka Vishwas Scheme, 2019
z Sabka Vishwas is a legacy dispute resolution scheme
Double Taxation Avoidance Agreement to free the large number of small taxpayers of their
(DTAA) pending disputes with the tax administration.
z The Tax Treaty is a bilateral economic agreement
between two nations. TAXATION RELATED TERMS AND
z Aim: To avoid or eliminate double taxation of the same TERMINOLOGIES
income in two countries.
India has DTAA with countries like Australia, Canada,

Cascading Effect
Germany, Mauritius, Singapore, UAE, the UK and US. z It is a tax on tax. It makes the tax rate much higher than
the original rate.
Advanced Pricing Agreements (APA)
z It is a contract, usually for multiple years, between Tax Buoyancy
a taxpayer and at least one tax authority specifying z It measures the responsiveness of tax mobilisation to
the pricing method that the taxpayer will apply to its economic growth/GDP.
related company transactions
z APAs gives certainty to taxpayers, reduce disputes,
Tax Elasticity
and avoid tax avoidance. z Percentage change in tax revenue with respect to
change in tax rate and extension of coverage.
General Anti Avoidance Rules (GAAR)
z GAAR usually consists of a set of broad rules which Tax Expenditure/Revenue Forgone
are based on general principles to check the potential z It is the opportunity cost of taxing at concessional
avoidance of the tax in general. rates like giving exemptions,deductions, rebates, etc.
z The government set up a panel under Parthasarathy to the taxpayers.
Shome to review the proposals with regards to GAAR.
Pigouvian Tax
Base Erosion and Profit Shifting (BEPS) z It is the tax on companies that create negative
z BEPS refers to tax planning strategies that exploit gaps externalities and adverse effects on the society. e.g.-
and mismatches in tax rules to artificially shift profits carbon emissions tax or a tax on plastic bags.
Taxation 41
Tax Mitigation/ Tax Planning Helps in
z It refers to financial planning for tax efficiency. It is Implementation of Goods and Services Tax.
not illegal or unethical. It is representative of Financial Extension of the Indian Customs Single Window
Prudence. Interface for Facilitating Trade (SWIFT).
Tax Avoidance Round Tripping

z It is the use of legal methods to minimize the amount z Money that leaves the country through various
of income tax owed by an individual or a business channels and makes its way back into the country
by claiming as many deductions and credits as are often as foreign investment.
allowable. z This mostly involves black money and is allegedly
often used for stock price manipulation.
Tax Evasion
z It is an illegal activity in which a person/entity Shell Companies
deliberately avoids paying a true tax liability. z These are typically corporate entities which do not
have any active business operations or significant
Tax Inversion assets in their possession.
z Form of tax avoidance where a firm bases its z The government views them with suspicion as some of
headquarters in a low tax country while keeping its them could be used for money laundering, tax evasion
material operations in the high tax countries. and other illegal activities.
Black Money Advanced Pricing Agreement

z Funds earned through illegal activity or the income z It is an agreement between tax authority and MNC on
concealed from the tax authorities. the appropriate transfer pricing methodology for a
certain period of time. Under this, the transfer price is
Money Laundering fixed based on the Arm’s length principle.
z It is an illegal process of making large amounts of z This principle states that the transfer price must be
money generated by a criminal activity, such as drug closer to the price at which goods and services are
trafficking or terrorist funding, appear to have come transacted between two unrelated entities.
from a legitimate source.
Tax Compliance
Tax Haven z Tax Compliance is the degree to which a taxpayer
z It is an offshore country that offers little or no tax complies (or fails to comply) with the tax rules of his
liability. Eg- Cayman-islands, Panama, islands, or her country, for example by declaring income, filing
Singapore etc. a return, and paying tax due in a timely manner.
Hawala Grandfather Clause

z It is an informal way of money transfer. Where z A grandfather clause (or grandfather policy or
money is given to an agent who debits it in account grandfathering) is a provision in which an old rule
of the beneficiary in the destined country/currency by continues to apply to some existing situations while a
charging certain commission Money transfer without new rule will apply to all future cases.
money movement. z Those exempt from the new rule are said to have
grandfather rights or acquired rights, or to have been
Tax Terrorism grandfathered in.
z Undue exercise of power by tax authorities to levy
taxes using legal or extralegal means. Fiscal Drag
z Fiscal drag is a concept where inflation and earnings
Transfer Pricing growth may push more tax payers into higher tax
z Is the setting of the price for goods and services brackets. Therefore, fiscal drag has the effect of raising
sold between controlled/ related legal entities to be government tax revenue without explicitly raising tax
situated in different countries within an enterprise. rates.
Project Saksham Fiscal Cliff

z It is a New Indirect Tax Network of the Central Board z The point at which tax cuts would expire, and spending
of Excise and Customs (CBEC). cuts would be triggered.
v v v
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6 Banking Sector
payment. (Coins of ₹ 1 and above can be used as legal

MONEY tender for dues up to ₹ 1000 Coinage Act, 2011)
z Money is any object that is generally accepted as z Every bank note issued by Reserve Bank of India
payment for goods and services and repayment of unless withdrawn from circulation, shall be legal
debts. tender at any place in India in payment or on account
for the amount expressed therein.
z Cannot be refused by any citizen of the country for
settlement of any kind of transaction.
z Legal tender can be either limited or unlimited.
z In India, while the coins are limited legal tender, the
Commodity Money currency notes are unlimited legal tender.
z Naturally scarce precious metals, conch shells, barley
beads, etc.
z Derives its value from the intrinsic value of the
commodity.
Fiduciary Money
z Money which gets accepted due to mutual trust
between the parties.
z Examples: Demand drafts and Cheques.
Fiat Money
z Money which does not have any intrinsic value of its
own (Currency and Coins). RBI
z Generally declared as Legal tender for all transactions z Only authority to print Currency Notes under RBI
within a country. Act, 1934.
z Security Printing and Minting Corporation of India z Can print notes of different denominations from ₹ 2 to
Ltd. (SPMCIL) – Nasik and Dewas up to ₹ 10,000.
z Bharatiya Reserve Bank Note Mudran Private Ltd. z All banknotes issued by RBI are backed by assets such
(BRBNMPL)– Mysuru and Salboni as gold, Government Securities and Foreign Currency
Assets, as defined in Section 33 of RBI Act, 1934.
LEGAL TENDER Government
z Legal Tender is a coin or a banknote that is legally z Issue One-Rupee Notes and Coins. Coins can be
tenderable for discharge of debt or obligation. issued up to the denomination of ₹ 1000 under The
z The coins issued by Government of India under Section Coinage Act, 2011.
6 of The Coinage Act, 2011, shall be legal tender in
When Reserve money increases, Broad money will
DEMAND AND SUPPLY OF MONEY z
also increase.
Demand Example
z People desire to hold money for 3 objectives/motives
If the money multiplier is 6, it means that It signifies
(Liquidity Preference Theory of Keynes)
that for every unit of money kept as cash reserves,
Transaction Motive: to carry out transactions. banks are able to create 6 units of money.
Speculative Motive: when holding money is
perceived to be less risky than lending the money VELOCITY OF MONEY CIRCULATION
or investing.
z It is a measurement of the average rate at which money
Precautionary Motive: to meet the unforeseen
is exchanged in an economy during a given time period.
circumstances in future. E.g. a car accident, home
repairs etc. Velocity of Money = GDP / Money Supply.
z It usually rises with a rise in GDP and inflation.
Supply z The velocity of Money is high in the following case -
z It refers to the amount of money in circulation at a In Developing countries, Low Income people, High
given point in the economy. Financial Inclusion, During Boom or Growth period.
z The measures of money supply in India are classified
into following categories M1, M2, M3 and M4 along TERMINOLOGIES
with M0.
Reserve Money (M0): Currency in circulation + Currency Deposit Ratio (CDR)
Bankers Deposits with the RBI + Other deposits z It is the ratio of money held by the public in currency
with the RBI. to that they hold in bank deposits. (CDR = CU/DD)
High - Powered Money: The total liability of the Reserve Deposit Ratio
monetary authority of the country, RBI, is called the z Reserve Deposit Ratio (RDR) is the proportion of the
monetary base or high-powered money. total deposits commercial banks keep as reserves.
Narrow Money: M1 is called narrow money as it z Reserve money consists of: vault cash in banks and
is highly liquid and banks cannot run their lending deposits of commercial banks with RBI. It includes the
programmes with this money. SLR and CRR.
M1 = Currency with the Public + Demand Deposits z Banks use this reserve to meet the demand for cash by
with the Banking System + ‘Other’ deposits with account holders.
the RBI.
M2 = M1 + Savings deposits of post office savings Liquidity Coverage Ratio
banks z LCR is the requirement whereby banks must hold an
Broad Money (M3) = M1 + Time deposits with amount of high-quality liquid assets, enough to fund
the banking system. It is also known as Aggregate cash outflows for 30 days.
Monetary Resources. It is the stock of total money.
Liquidity Trap
M4 = M3 + All deposits with post office savings
banks. z When an expansionary monetary policy becomes
ineffective.
Liquidity in descending order is - M1>M2>M3>M4 z Due to prevailing depressed demand and production
levels individuals prefer storing their money instead
MONEY CREATION of spending.
Fractional Banking System Paradox of Thrift

z Only a fraction of bank deposits is backed by actual z When individuals try to save more during an economic
cash on hand and available for withdrawal and in the recession, which essentially leads to a fall in aggregate
process creating money. demand and hence in economic growth.
z Popularized by John Maynard Keynes.
Money Multiplier
z It measures the amount of money the banks are able to Monetary Policy Corridor
create in the form of deposits with every unit of money z The MSF rate and reverse repo rate determine the
it keeps as reserves. corridor for the daily movement in the weighted
z It is Broad money (M3) ÷ Reserve Money (M0). average call money rate.

government securities with matching or higher tenure
MONETARY POLICY as the collateral.
z LTRO scheme will be in addition to the existing
Liquidity Adjustment Facility (LAF) and the
Marginal Standing Facility (MSF) operations
Cash Reserve Ratio (CRR)

z CRR is decided by RBI’s Monetary Policy Committee.
z Banks are required to maintain with the Reserve
Banka certain percent of its Net Demand and Time
Liabilities (NDTL) as specified by RBI.
z It is the policy under which RBI uses monetary
z Banks do not get any interest on the money that is with
instruments (interest rate and other instruments)
the RBI under the CRR requirements.
under the RBI Act, 1934, to influence money supply in
the economy to achieve certain macroeconomic goals. Liquidity Adjustment Facility (LAF)
z Objectives
z LAF allows commercial banks and primary dealers to
Accelerating economic growth.
borrow money through repurchasing agreements or
Price stability repos/reverse repos.
Exchange rate stabilization z It is used to aid banks in adjusting the daily fluctuations
Balancing savings and investment. in liquidity.
Employment generation. z It allows banks to park their excess money with the
RBI in case of excess liquidity or to avail liquidity from
Urjit Patel committee 2014 on inflation targeting the RBI at the time of deficit on an overnight basis
z Inflation target: 4% +/- 2% against the collateral of government securities.
z Nominal anchors should be defined in terms of
headline inflation. Open Market Operations (OMO)
z Setting up Monetary Policy Committee (covered in z It is the purchase and sale of securities by the RBI.
Inflation).
Monetary RBI Action In Effect in the
Policy OMO Economy
QUANTITATIVE TOOLS
Expansionary Buys Injects Money In
z These tools help in channelizing the volume of credit
Contractionary Sells Removes Money Out
towards the economy. The aim is to control the economic
indicators like inflation, money circulation etc. Marginal Standing Facility (MSF)
Bank Rate z It is a penal rate at which scheduled banks can borrow
money from the RBI over and above what they can
z Minimum rate at which the RBI provides loan to
borrow from the RBI under the LAF window.
commercial banks.
z It is always fixed at a higher rate than the Repo rate.
Repo Rate z Aims to reduce volatility in the overnight lending rates
z Rate at which the RBI lends to the commercial in the interbank market.
banks to manage short term needs of liquidity with
an agreement to repurchase the same government Statutory Liquidity Ratio (SLR)
securities at a predetermined date and rate is called z SLR is that % of the deposits which the banks have
Repo Rate. to hold with themselves in highly liquid government
securities.
Reverse Repo Rate z To ensure that banks don’t lend away all their funds
z Interest rate at which the Reserve Bank absorbs liquidity, and always have enough liquidity.
on an overnight basis, from banks against the collateral
of eligible government securities under the LAF. Current Monetary Policy Rates
z It is lower than repo rate. Repo Rate 4%
Reverse Repo Rate 3.35%
Long Term Repo Operations (LTRO)
Bank Rate 4.25%
z It is a tool under which the RBI provides 1–3-year
money to banks at the prevailing repo rate, accepting Marginal Standing Facility 4.25%
Banking Sector 45
DIFFERENCE BETWEEN CRR AND SLR
Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR)
z Banks are required to maintain with the Reserve Bank a z SLR is that percentage of the deposits which the banks
certain percent of its Total Demand and Time liabilities. have to hold with themselves.
z CRR is maintained only in cash form. z SLR can be maintained in the form of Gold, Cash and
z No interest is earned on the CRR. other securities approved by RBI.
z Helps regulate the liquidity in the economy. z Interest is earned on SLR.
z It is calculated on the banks Total Demand and Time z Helps regulate the Credit facility in the economy.
liabilities. z It is calculated on banks Net Demand and Time
z The range of permissible CRR is between 3 and 15 per Liabilities.
cent. z SLR has an upper limit of 40% and a lower limit of 23%.
Policy rates would move in either direction.

QUALITATIVE TOOLS z
z This policy is adopted when the inflation rate is stable.

z These measures help in controlling the distribution
and direction of the loans to different sectors of the Calibrated Tightening
economy. z It means the RBI would either keep the rates constant
or increase the rates.
Margin Requirements
z Policy rates either remainunchanged or increase. No
z Difference between the current value of the security
decrease.
offered for a loan (called collateral) and the value of
loan granted. z This policy is adopted when there are concerns of a
z Higher the Margin, Lesser will be the loan granted. higher rate of inflation.
z Example, If the RBI feels that more credit should be
allocated to priority sectors, then it will reduce the UNCONVENTIONAL MONETARY
margin. POLICY TOOLS
Credit Rationing Zero Interest Rate Policy (ZIRP)
z The Central Bank fixes a limit on the credit amount z A zero-interest rate policy (ZIRP) is when a central
to be granted by each commercial bank. Helps in bank sets its target short-term interest rate at or close
lowering banks credit exposure to unwanted sectors.
to 0%.
Moral Suasion z The goal is to spur economic activity by encouraging
z Issue Directives, meetings, Persuasion and pressure, low-cost borrowing and greater access to cheap credit
Inspections and frequent follow ups. by firms and individuals.
z Because nominal interest rates are bound by zero,
Direct Action some economists warn that a ZIRP can have negative
z Impose fines, ban non-cooperating banks, refuse consequences such as creating a liquidity trap.
rediscounting of their bills, refuse credit supply.
It was followed in the USA from 2008 in the wake of the
MONETARY POLICY STANCES financial crisis.
Accommodative Stance Negative Interest Rate Policy (NIRP)

z It means RBI may reduce the policy rates to increase z A negative interest rate policy (NIRP) occurs when a
the money supply in the economy. central bank sets its target nominal interest rate at less
z Policy rates normally decrease. than zero percent.
z This policy is adopted when there is a slowdown in z This extraordinary monetary policy tool is used
the economy. to strongly encourage borrowing, spending, and
investment rather than hoarding cash, which will lose
Neutral Stance value to negative deposit rates.
z It means RBI would have the flexibility to either
increase or decrease the policy rates by taking into This policy was followed in developed economies such
account the macro economic conditions. as Japan, Denmark, Sweden, Switzerland etc.

Helicopter Money Net Demand and Time Liabilities (NDTL)
z American economist Milton Friedman coined this z It is the difference between the sum of demand and
term. time liabilities (deposits) of a bank (with the public
z It is an unconventional monetary policy tool aimed at or the other bank) and the deposits in the form of
bringing a flagging economy back on track. assets held by the other banks.
It injects cash into an economy as if it was thrown out
z
of a helicopter.
Government Securities (G-Sec)
z It is a tradable instrument issued by the central
z Helicopter money refers to increasing a nation’s
government or state governments.
money supply through more spending, tax cuts, or
boosting money supply. z Short term G-secs (with original maturities of less
than one year) are called Treasury Bills.
z Some of the stimulus measures taken by different
federal banks in response to the Covid-19 crisis z Long term G-secs (with original maturities of more
resemble the concept of helicopter drop money. than one year) or long term are called Government
Bonds or Dated Securities.
OTHER ASSOCIATED TERMS z Treasury Bills are not issued by State Governments
while Government Bonds or Dated securities are
Market Stabilization Scheme (MSS) issues both by State and Central Governments.
MSS securities are issued to suck out excess liquidity
z
from the market through issue of securities like
Gross Capital Formation
treasury bills, dated securities etc. on behalf of the z Refers to the aggregate of gross additions to fixed
government. assets (that is fixed capital formation) plus change in
stocks during the counting period.
z The amount raised under the MSS is maintained with
the RBI. Cheque Truncation System (CTS)
Base Rate z It is an online image-based cheque clearing system
undertaken by the RBI for faster clearing of cheque.
z It is the minimum rate set by the Reserve Bank of
India below which banks are not allowed to lend to its z It eliminates the associated cost of movement of
customers. physical cheque.
z The main components of base rate system are: Hawkish
Cost of funds (interest rates offered by banks on
z When a central bank wants to guard against excessive
deposits)
inflation, thereby increasing interest rates.
Cost of maintaining CRR.
Profit margin. Dovish

Operating expenses to run the bank. z Opposite of hawkish, interest rates are reduced to fuel
It does not consider repo rate in their calculations. growth.
Marginal Cost of Funds Based Lending Benchmark Prime Lending Rate (BPLR)
Rates (MCLR) z The rate at which commercial banks can lend to
customers who are most credit worthy.
z It replaced Base rate to determine the lending rates for
commercial banks. Inflation Targeting
z It is the minimum interest rate that a bank can lend at. z A central bank has an explicit target inflation rate
z It is a tenor - linked internal benchmark, meaning the range. Government and RBI agree on convergence
rate is determined internally by the bank depending between fiscal and monetary policies.
on the period left for the repayment of a loan.
z MCLR is closely linked to the actual deposit rates and Operation Twist
is calculated based on four components: z It is the special Open Market Operations (OMOs)
Marginal cost of funds carried out by the RBI.
Tenor premium z Under this RBI carries out simultaneous sale and
Operating costs purchase of G-Secs to influence the yield rates on the
Negative carry on account of cash reserve ratio
G-Secs.
Banking Sector 47
z The RBI sells short-term G-Secs to the Banks and financial institutions and collects money. The same money would
then be used by the RBI to buy long term G-Secs.
FINANCIAL REPRESSION
Meaning z It describes measures by which government channel funds from the private sector to themselves as
a form of debt reduction.
Impact on z It results in the government being able to borrow at extremely low interest rates, obtaining low-cost
Economy funding for government expenditures.
z This action also results in savers earning rates less than the rate of inflation and is therefore repressive.
Features z Caps on ceiling on interest rates.
z Government ownership and control of domestic banks and financial institutions.
z Creation or maintenance of a captive domestic market for government debt.
z Restrictions on entry to financial industry.
z Directing credit to certain industries.
z Banks are Financial Intermediaries between India has 12 Public sector banks, 21 private banks 45
borrowers and lenders. It accepts deposits from the Foreign Banks (as of 27 November 2020).
public and lends money to businesses and consumers. z RBI is the central authority that manages all India’s
Its primary liabilities are deposits and primary assets banking pperations.
are loans and bonds.
EVOLUTION OF BANKING IN INDIA
z Bank of Hindustan was the first bank to be z Post Independence, GOI passed Banking Companies
established in 1770 at Calcutta. Act, 1949 empowering RBI as a supervisor &
z East India Company established 3 banks in regulatory Bank.
Presidency towns: Bank of Bengal (1806), Bank of z Imperial Bank of India was nationalised in 1955
Bombay (1840) and Bank of, Madras (1843). and renamed State Bank of India followed by the
z First Commercial Bank of India was Awadh formation of it’s 7 associate banks in 1959.
Commercial Bank (1881). z In 1969, Government nationalised 14 private banks
z Punjab National Bank (established at Lahore in followed by nationalisation of 6 more banks in 1980.
1895), currently operational. z India’s first all women bank - Bhartiya Mahila Bank
z The 3 Presidency Banks were amalgamated in 1921 was established in Mumbai on 19th November, 2013.
to form Imperial Bank of India, that remained a z State Banks (Repeal & Amendment) Act, 2018 led
quasi Central Bank till the establishment of RBI in to the merger of SBI associate banks along with
1935 under RBI Act, 1934. Bhartiya Mahila Bank with SBI wef April 1, 2017.
RESERVE BANK OF INDIA (RBI)

z Before RBI: Functions of a central bank were Governor of RBI
performed by the Imperial Bank of India. z Appointment: Appointed after the proposal made
z RBI was set up on the recommendations of Hilton by the Financial Sector Regulatory Appointments
Young Committee in April, 1935 with the enactment Search Committee (FSRASC), headed by the Cabinet
of RBI Act, 1934, making it a statutory body. Secretary.
z Similarly, SBI is also a statutory body deriving its z Term: According to Section 8 (4) of the RBI Act,
legality from SBI Act 1955. the Governor and Deputy Governors shall hold office
z Post-independence: the government passed Reserve for such term not exceeding 3 years as the Central
Bank (Transfer to Public Ownership) Act, 1948 and Government may fix when appointing them.
took over RBI from private shareholders after paying z Re-Appointment: They are eligible for re-appointment
appropriate compensation. z Qualification: The RBI Act does not provide for any
z Nationalization of RBI took place in 1949 and from specific qualification for the governor.
January 1, 1949, RBI started working as a government z Removal: The governor can be removed by the central
owned bank. government.
z It is the supreme monetary and banking authority in
the country and controls the banking system in India. Minimum Reserve System of RBI
z It is called the Reserve Bank as it keeps the reserves z With a minimum value of government-held gold of
of all commercial banks. ₹.200 crores (₹.115 cr rupee should be in the form
of Gold or gold bullion and rest ₹.85 cr should be in
First Indian Governor of RBI was CD Deshmukh.
the form of foreign currencies) and the remaining is
backed by the government securities issued and held
by RBI.
Subsidiaries of RBI
z Deposit Insurance and Credit Guarantee Corporation
(DICGC)
z Bharatiya Reserve Bank Note Mudran Private
Limited (BRBNMPL)
z Reserve Bank Information Technology Private Ltd.
(ReBIT)
z Indian Financial Technology and Allied Services
(IFTAS)
INCOME AND EXPENDITURE OF RBI

Income Expenditure
z Returns from foreign currency assets z Printing of currency
z Interest on rupee-denominated government bonds z Staff expenditure
z Interest on overnight lending to commercial z Commission given to commercial banks
z Management commission on handling the borrowings z Commission to primary dealers
z of banks central and state governments.
ASSETS AND LIABILITIES OF RBI

Assets Liabilities
z Foreign currency assets z Currency held by Public
z Bill purchases and discounts
z Collaterals by commercial banks z Vault cash held by commercial banks
z Loan and advances z Government securities
z Rupee securities z Other liabilities
z Gold coin bullion
Banking Sector 49
FUNCTIONS OF RBI Banker to Banks
z It maintains banking accounts of all scheduled banks.
Monetary Authority It also acts as a lender of last resort by providing funds
z Formulates, implements and monitors the monetary to banks.
policy.
Banker to Government
z Maintaining price stability while keeping in mind the
z It performs merchant banking functions for the central
objective of growth.
and the state governments.
Regulator and Supervisor of the Financial z It is entrusted to the central govt. ‘s money, remittances,
System exchange and manages its public debt as well.
z Prescribes broad parameters of banking operations RBI INITIATIVES
within which the country’s banking and financial
system functions. RBI RECENT Retail Direct Scheme
z Regulation and supervision of banks under Banking z The Scheme is aimed at enhancing access to the
Regulation Act 1949. government securities market for retail investors.
z Regulation and supervision of non-banking financial z It offers them a new avenue for directly investing in the
companies. securities issued by the Centre and the state governments.
z Protecting depositors’ interest z Investors will be able to easily open and maintain their
government securities account online with the RBI,
Manager of Foreign Exchanges free of cost.
z Manages the Foreign Exchange Management Act, z The scheme offers a portal avenue to invest in
1999. central government securities, treasury bills, state
z It facilitates external trade and payment development loans and Sovereign Gold Bonds (SGBs).
z Promote development and maintenance of foreign z The scheme places India in a list of select few countries
exchange market in India. offering such a facility.
z Acts as custodian of Foreign Reserves.
Integrated Ombudsman Scheme
Issuer of Currency z It is aimed at further improving the grievance redress
z RBI has the sole right to issue currency notes in India. mechanism for resolving customer complaints against
z Besides exchanges and destroys currency and coins entities regulated by the central bank.
not fit for circulation. z The central theme of the scheme is based on One Nation-
z To give the public an adequate quantity of supplies of One Ombudsman with one portal, one email and one
currency notes and coins and in good quality. address for the customers to lodge their complaints.
z RBI has decided to integrate the three ombudsman
Developmental Role schemes into one and simplified the scheme by
z Performs a wide range of promotional functions covering all complaints involving deficiency in service
to support national objectives such as making by centralizing the receipt and initial processing of
institutional arrangements for rural or agricultural complaints to enhance process efficiency.
finance. z RB-IOS will do away with the jurisdictional limitations
as well as limited grounds for complaints.
Financial Inclusion z RBI will provide a single reference point for the
z The Reserve Bank has selected a bank led model for customers to submit documents, track status of
financial inclusion in India. complaints filed and provide feedback.
z RBI has undertaken a series of policy measures. Eg. z The central bank’s alternate grievance redress
Basic Savings Bank Deposit Account (BSBDA), JAM mechanism currently comprises three ombudsman
Trinity, etc. schemes:
Use of Technology 1. The Banking Ombudsman Scheme (BOS),

launched in 1995,
z Devices such as ATMs, hand held devices to identify
user accounts through a card and biometric identifier, 2. The Ombudsman Scheme for Non-Banking
Deposit taking machines and Internet banking and Financial Companies (OS-NBFC), 2018.
Mobile banking facility to provide the banking services 3. The Ombudsman Scheme for Digital
to all sections of society with more ease. Transactions (OSDT), 2019.

z Deposit Insurance Cover: ₹ 5 Lakh.
PUBLICATIONS OF RBI z Banks Covered: Commercial banks, Regional rural
z Report on Trend and Progress of Banking in India- banks, Local Area Banks (LABs) and Cooperative
Annually banks
z Financial stability report- Half yearly z Deposits Covered: All deposits such as savings, fixed,
z Monetary policy report- Half yearly current, recurring, etc.
z Report on foreign exchange reserves- Half yearly z Deposits not Covered:
z Bi-monthly Policy Statement Deposits of foreign Governments.
z Industrial Outlook Survey of the Manufacturing Deposits of Central/State Governments.
Sector (Quarterly) Inter-bank deposits.
z Consumer Confidence Survey (Quarterly) Deposits of the State Land Development Banks
z Report on Financial Review with the State co-operative bank.
TRANSFER OF FUNDS BY RBI TO TYPES OF BANKS

CENTRAL GOVERNMENT
Scheduled Bank
z Reason for paying dividend: Section 47 of the RBI Act z Listed in the 2nd schedule of the Reserve Bank of India
states that profits made by the RBI from its operations Act, 1934. E.g. Canara Bank.
has to be given to the Centre in the form of Dividend.
z SBs are eligible for loans from the Reserve Bank of
z Recent Development: It is argued that RBI has
India at bank rate.
become the most capitalized central bank in the world
and has been stocking surplus capital over what is z Required to deposit CRR with RBI.
actually required to face contingency situations. z Types:1. Commercial Banks 2. Cooperative Banks
Example Non – Scheduled Banks

Central banks across the world have a surplus capital to z Not listed in the 2nd schedule of the RBI act, 1934.
the tune of 10- 14% of their total assets, RBI 26.8% of z Depends on RBI discretion
its total assets as reserves. z Can maintain CRR with themselves, not with RBI
z Many co-operative banks are non - scheduled
Various Committee Recommendations
Usha Thorat Committee (2004) Commercial Banks
z RBI should maintain 18% of its total assets as z Public Sector Banks- more than 50% is held by the
reserves. government
z Private Sector Banks-most of the capital is in private
Malegam Committee (2014)
hands.
z Should transfer all entire net profits annually to RBI.
z Foreign Banks
Bimal Jalan Committee (2019)
z Economic Capital: Capital that the RBI requires to REGIONAL RURAL BANKS (RRB)
hold as a counter against unforeseen risks or events
z RRBs are financial institutions which ensure
or losses in the future is called the Economic Capital
and is defined under Economic Capital Framework. adequate credit for agriculture and other rural
sectors.
z Transfer Policy: The Committee has stated that
the surplus distribution policy must take into the z They were setup in 1975 on recommendations of the
account the total realized equity. Only if realized Narasimham Working Group (1975), and after the
equity is above its requirement (6.5 per cent to legislations of the Regional Rural Banks Act, 1976 the
5.5 per cent), the entire net income should be statutory backup was given.
transferable to the Government.
Each RRB is owned by three entities with their respective
DEPOSIT INSURANCE AND CREDIT shares as follows:
Central Government • 50%
GUARANTEE CORPORATION (DICGC) z
z State government • 15%

z DICGC is established under the DICGC Act 1961, is
one of the wholly owned subsidiaries of the RBI. z Sponsor bank • 35%
Banking Sector 51
z Under dual control of the Registrar of Cooperative
RESIDEX
Societies and RBI.
z NHB RESIDEX, India’s first official housing price index,
z The board of members are elected with each member
was an initiative of the National Housing Bank (NHB).
having one vote.
z The scope has been widened under NHB RESIDEX
brand, to include housing price indices (HPI), land z Cooperative banks are the primary financers of
price indices (LPI) and building materials price agricultural activities, some small- scale industries
indices (BMPI), and also housing rental index (HRI). and self-employed workers.
Banking Service Index z These banks are cooperative credit institutions that
are registered under the Cooperative Societies Act
z By RBI; Base year is 2011.
1912. These banks work according to the cooperative
z It measures the inflation in the fees charged by the
principles of mutual assistance.
banks for NEFT/ RTGS/ card transactions/ mobile
banking etc. z Co-operative banks have a three-tier structure:
1. Primary Credit Societies-PCSs (agriculture or
CO-OPERATIVE BANKS urban).
z A Co-operative bank belongs to its members, who are 2. District Central Co-Operative Banks- DCCBs.
at the same time the owners and the customers of 3. State Co-Operative Banks-SCBs (at the apex
their bank. level).
COOPERATIVE BANKS VIZ-A-VIZ COMMERCIAL BANKS
Cooperative Banks Commercial Banks
z sCo-operative Societies are governed by the z Commercial banks are joint stock companies that
Co-operative societies Act, 1904. governed by the Banking Regulation Act, 1949.
z Generally, provide short, medium- and long-term z Generally, provide short medium- and long-term
finance to agriculture and allied sectors. finance, to trade, commerce and industry.
z Lend finance to their members only, shareholders z Lend to anyone who is willing to borrow and satisfies
borrow from a co-operative bank. conditions of the bank.
z Operate on a relatively small scale. z Operations are on a large scale.
z Scope of activities of a corporate bank is limited to z Commercial banks offer a wide range of financia
providing different types of loans to their members. assistance and financial services.
z Cooperative banks operate as a federal structure in z Commercial banks have the structure of a joint stock
India. company.
z Co-operative Barks are subject to the supervision of z Commercial Banks come directly under the Supervision
the state governments, NABARD and the RBI. of the Reserve Bank of India.
DIFFERENTIATED BANKS
Payments Bank Small Finance Bank
z Payments Bank are based on Usha Thorat Committee z Small Finance Banks are established on
recommendations. recommendations of Nachiket Mor Committee.
z Can accept deposits, but only up to ₹. 1 lakh per z Allowed to take deposits of any amount.
individual customer. z Can lend but the focus will be on small lending.
z Can’t lend in any form. z Can finance small business, small and marginal
z Can open small savings accounts. farmers,
z Can provide remittance services. z MSME, unorganized sector entities.
z Allowed to issue ATM /debit cards. z Can provide remittances as well as credit cards.
z Not allowed to issue credit cards. z Allowed to issue ATM or debit cards.
z Can distribute products like mutual funds, insurance, z Has to ensure that 50% of loan portfolio constitutes
third party loans. z advances of upto ₹. 25 lakhs.
z Payments banks can apply for conversion into small z Can distribute financial products like mutual funds,
finance banks (SFBs) after five years of operation. insurance, pension etc.

Enterprise (MSME) sector as well as for coordination
DEVELOPMENT BANKS of functions of institutions engaged in similar activities.
Industrial Finance Corporation of India z Schemes like Pradhan Mantri MUDRA Yojana, credit
linked capital subsidy scheme are implemented by it.
z IFCI was the first specialized financial institution
set up in 1948 to provide long term finance to large Export-Import Bank of India (EXIM Bank)
industries in India, under the Industrial Finance
z It is a wholly owned Govt. of India entity established
Corporation Act of 1948.
in 1982.
National Bank for Agriculture & Rural z Aim- financing, facilitating and promoting foreign
trade of India
Development (NABARD)
z NABARD is an apex development financial institution National Housing Bank (NHB)
in India to provide finance for agriculture and rural z Created in 1988 under National Housing Bank Act
development. (1987).
Established in 1982 on the recommendations of B. z It regulates and re-finances social housing programs
Sivaraman Committee. and other activities like research etc.
Statutory body under Parliamentary act - NABARD Act, Local Area Banks
1981.
z Introduced in India in the year 1996 based on
z Headquarters is located in Mumbai. Budget-1996 by the then Finance Minister, Dr.
z NABARD is fully owned by the Government of India. Manmohan Singh.
The authorized share capital is about ₹.30,000 crore. z Unlike RRBs, they’re not set up by Union or State
z Responsible for the development of the small governments or by any special act of the parliament,
industries, cottage industries, and any other such but by private entities, simply applying to RBI under
village or rural projects. Banking Regulation Act.
z NABARD operates Rural Infra. Development fund z Each Local Area bank is registered as a public limited
(RIDF) from PSL shortfalls from SCBs. company under the Companies Act, 1956. However, they
z NABARD is also known for its SHG Bank Linkage are licensed under the Banking Regulation Act, 1949.
Programme (1992) which encourages India’s banks z Earning profit is the main objective of Local Area Banks
to lend to SHGs. z They are Non-Sch. Banks - CRR, SLR, PSL applicable.
z Functions
Undertakes monitoring and evaluation of projects LEAD BANK SCHEME
refinanced by it.
Regulates the cooperative banks and the RRBs. Introduction
Refinances the financial institutions which finance z The Lead Bank Scheme, introduced towards the end of
the rural sector. 1969, envisages assignment of lead roles to individual
Provides training facilities to the institutions
banks (both in public sector and private sector) for the
working in the field of rural upliftment. districts allotted to them.
z On the recommendation of the Gadgil Study Group
Refinance Facility by NABARD is Available To and Banker’s Committee, the Scheme was introduced
z State co-operative agriculture and rural development by RBI.
banks (SCARDBs),
Objectives
z State co-operative banks (SCBs),
z To identify those regions which are unbanked and
z Regional rural banks (RRBs),
underbanked in districts and also to evaluate their
z Commercial banks (CBs) and physiographic, agro climatic end Socio-economic
z Other financial institutions approved by RBI. conditions through economic survey.
z To help in removing regional imbalances through
Small Industries Development Bank of appropriate credit deployment.
India (SIDBI) z To extend banking facilities to unbanked areas.
z SIDBI is a statutory body set up on 2nd April 1990
under an Act of Indian Parliament, acts as the Principal Advantages
Financial Institution for Promotion, Financing and z The scheme spread the availability of banking facilities
Development of the Micro, Small and Medium all over the country.
Banking Sector 53
z Lead bank Inter link the Commercial and Cooperative z Enhancement of the business correspondent model
banks. was suggested in order to make banking services
z It helps in more effective Branch Expansion. available in all villages having a population of above
z Better relationship between Govt. and Banks. 2,000, and relaxation in KYC (know your customer)
norms for small value accounts.
z Integration of credit activities of banks.
z Bottlenecks in the development of a District can be PRIORITY SECTOR LENDING (PSL)
located and removed.
z Lead Bank Scheme assist in implementation of the Concept & Meaning
District Plan. z RBI mandates banks to lend a certain portion of their
funds to specified sectors: agriculture, Micro, Small
Disadvantages
and Medium Enterprises (MSMEs), export credit,
z Confusion regarding the concept of Lead Bank education, etc.
especially for opening branches
z Challenges in allotment of Districts. Objective
z Lack of coordination between district planning z To ensure adequate institutional credit to reach
authorities and banking institutions operating in a vulnerable sectors of the economy, which otherwise
district on one side and between NABARD and the may not be attractive for banks from the profitability
Lead Bank on the other. point of view.
z Lead bank did not consider the role of co-operatives,
which are an important source of institutional finance. RBI Guidelines for PSL for Scheduled
z Shift in policies, complexities in operations and issues Commercial Banks
shifting to financial inclusion. z 40% of the total net bank credit should go to a priority
z Duplication of efforts in credit plan preparation. sector advance.
z Absence of checks and balances. z 10% of the priority sector advances or 10% of the
total net bank credit, whichever is higher should go to
BANKING REFORM COMMITEES the weaker section.
z 18% of the total net bank credit should go to
Prof. D R Gadgil Committee agricultural advances. Within the 18 % target for
z Banks should provide integrated banking facilities in agriculture, a target of 8 percent of Adjusted Net
unbanked areas. Bank Credit (ANBC) or Credit Equivalent Amount
z Adoption of ‘Area Based Approach’ – in unbanked of Off-Balance Sheet Exposure, whichever is higher
areas –each bank should adopt an area. is prescribed for Small and Marginal Farmers, to be
achieved in a phased manner.
z Help Agriculture & Supplemental Security Income
(SSI). z 5% of ANBC or Credit Equivalent Amount of Off-
Balance Sheet Exposure, whichever is higher should
z ‘District’ is identified as the smallest geographical unit
go to Micro enterprises.
for the scheme.
Shri F. K. F. Nariman Committee Priority Sector Lending Certificates (PSLCs)

z Raghuram Rajan Committee (2009) on Financial
z In order to enable the public sector banks to discharge
Sector Reforms had recommended introduction of
their social responsibilities, each bank should
PSLCs.
concentrate on certain districts where it should act as
a ‘Lead Bank’. z It is a mechanism to enable banks to achieve the priority
sector lending target and sub-targets by purchase of
Usha Thorat Committee these instruments in the event of a shortfall.
z The scope of the scheme needs to be enhanced. z This also incentivizes surplus banks as it allows them
z A sharp focus on facilitating financial inclusion rather to sell their excess achievement over targets thereby
than going for a mere review of the government enhancing lending to the categories under priority
sponsored credit schemes was suggested. sector.
z LBS should be continued to accelerate financial Revised PSL Guidelines Include Following
inclusion in the unbanked areas of the country.
Categories
z The role of Private sector banks in LBS action plans,
particularly in areas of their presence must be z Start-ups (up to 50 crore).
extended. z Loans for setting up Compressed Biogas (CBG) plants.

z Loans to farmers for installation of solar power plants. z Tenure- 8 years, (early redemption is allowed after
z Higher credit limits up to ₹ 5 crore for FPOs that the fifth year from issuance)
market their produce at a predetermined price.
SOVEREIGN GREEN BONDS (UNION BUDGET 2022)
BANKING TERMINOLOGIES
z Will be issued for mobilizing resources for green
Provision Coverage Ratio infrastructure.
z The key ratio in analysing asset quality of the bank is z The proceeds will be deployed in public sector
between the total provision balances of the bank as on projects which help in reducing the carbon intensity
a particular date to gross NPAs. It is a measure that of the economy.
indicates the extent to which the bank has provided
for the weaker part of its loan portfolio. EASE BANKING REFORMS INDEX
z A high ratio suggests that further provisions to be made z The Index measures performance of each PSB on 120+
by the bank in the coming years would be relatively objective metrics.
low as the provision coverage is high (if gross non-
z Fully transparent scoring methodology, which enables
performing assets do not rise at a faster rate).
banks to identify their strengths as well as areas for
Net Non-Performing Assets = Gross NPAs – Provisions. improvement.
z The goal is to continue driving change by encouraging
Liquidity Coverage Ratio (LCR) healthy competition among PSBs.
z Liquidity coverage ratio (LCR) is a clause of Basel EASE 1.0: The EASE 1.0 report showed significant
III norms (of the Basel based Bank for International improvement in PSB performance in the resolution
Settlement) which aims at prudential regulation of the of NPAs transparently.
banking sector. EASE 2.0: EASE 2.0 builds on the foundation
z Under it, banks are supposed to maintain enough of EASE 1.0 and introduces new reform Action
short-term liquidity (their needs for the next 30 days) Points across six themes to make reforms journey
so that they can survive acute financial stress if such irreversible, strengthen processes and systems,
situations arise in the economy. and drive outcomes.
Currency Deposit Ratio Six themes of EASE 2.0: Responsible Banking,
Customer Responsiveness, Credit Off-take, PSBs as
z A ratio of money held by the public in currency to that
Udyami Mitra (SIDBI portal for credit management
of money held in bank deposits.
of MSMEs), Financial Inclusion and Digitalisation;
Inter-Creditor Agreement and Governance and Human Resources.
z The agreement is part of the proposed Project Sashakt. EASE 3.0: A comprehensive agenda for smart,
tech-enabled banking has been adopted for FY
Sashakt plan is approved by the government to address 2020-21, under which PSBs have initiated the
the problem of resolving bad loans. eShishu Mudra (app based lending for instant
z The objective is to use this ICA for faster facilitation of sanction of working capital up to ₹. 50,000) for
resolution of stressed assets. straight-through processing of loans to micro-
z It is aimed at the resolution of loan accounts with a enterprises.
size of ₹. 50 crore and above that are under the control
of a group of lenders. NON-BANKING FINANCIAL
Sovereign Gold Bonds INSTITUTIONS (NBFI)
z Introduced in 2015. Meaning
z Aim-To help reduce India’s over dependence on z A Non-Banking Financial Company (NBFC) is a
gold imports. company registered under the Companies Act, 1956.
z Can be sold to-Resident India entities, Individuals,
HUFs, trust, universities and charitable Regulators
institutions. z Insurance Companies - IRDA,
z Can be held in demat form, z Merchant Banks - SEBI,
z The interests on the bonds are taxable, the capital z Micro Finance Institutions - State Government, RBI
gains at the time of redemption are exempt from tax. and NABARD
Banking Sector 55
Engages in Features
z Business of loans and advances, acquisition of shares/ z NBFC cannot accept demand deposits;
stocks/bonds/debentures/securities, insurance z Cannot issue cheque drawn on itself;
business, chit business but does not include any z Deposit insurance facility of DICGC is not available to
institution whose principal business is that of depositors of NBFCs;
agriculture activity, industrial activity etc.
z Norm of Public Sector Lending does not apply to
Excludes NBFCs;
z Any institution whose principal business is that of: z Cash Reserve Requirement also does not apply to
Agriculture Activity, Industrial Activity, Purchase or NBFCs;
Sale of any goods (other than securities), Providing z Regulated by multiple regulators.
any services and sale/purchase/construction of
Immovable Property.
Systemically Important NBFC

z NBFCs whose asset size is of ₹. 500 cr or more are considered as systemically important NBFCs.
z E.g.: Power Finance Corporation Limited (PFCL), Rural Electrification Corporation Limited (RECL), IL&FS, etc.
NBFCS VIS-A-VIS BANK

NBFCs BANK
z Provide banking services to people without holding a z It is a government authorized financial intermediary,
Bank license. providing banking services to the public.
z Regulated under Companies Act 2013. z Regulated under Banking Regulation Act 1949.
z Cannot accept Demand Deposit. z Demand Deposit can be accepted.
z Foreign investment allowed up to 100%. z Foreign investment allowed up to 74% for private
sector banks.
z Payment and Settlement are not the part of the system. z Payment and Settlement are the integral part of the
system.
z Maintenance of Reserve Ratios not required. z Maintenance of Reserve Ratios are mandatory.
z Deposit insurance facility not available. z Deposit insurance facility available
z NBFC does not create credit. z Banks create credit
z Transaction services cannot be provided by NBFC.
SHADOW BANKING z Their main business is acquisition of shares and

z It is a set of activities or institutions that operate securities with certain conditions.
partially outside the traditional commercial banks.
P K Mohanty Committee
z They are not fully regulated by the RBI.
z Head: RBI Central Board Director P K Mohanty.
z They are not under Banking Regulations Act, 1950
z To review the present licensing guidelines and
Segments of Shadow Banking regulations relating to ownership and control in Indian
z Housing finance companies (HFC) • E.g. Dewan private sector banks and suggest appropriate norms.
Housing Finance Limited z To examine and review the eligibility criteria for
z Liquid Debt Mutual Funds (LDMF) • invest client individuals/ entities to apply for banking licenses.
money into short term debt instruments like T-Bills z To study the current regulations on holding of
z Retail NBFCs • E.g. Gold Loan Companies, Asset financial subsidiaries through non-operative financial
Finance Companies holding companies (NOFHC) and suggest the manner
of migrating all banks to a uniform regulation in the
Core Investment Company matter.
z Specialized Non-Banking Financial Companies (NBFCs). z To examine the norms for promoter shareholding at
z A Core Investment Company registered with the RBI the initial/licensing stage and subsequently, along
has an asset size of above ₹ 100 crore. with the timelines for dilution of the shareholding.

Tier 2 capital is considered less reliable than Tier
BASEL NORMS z
1 capital because it is more difficult to accurately
z The Basel Accords are 3 series of banking regulations calculate and more difficult to liquidate
(Basel I, II, and III) set by the Basel Committee on
Bank Supervision (BCBS). BANKING SECTOR REFORMS
z Presently the Indian banking system follows Basel II
norms. Consolidation of The Public Sector Banks
z Under Basel III, a bank’s tier 1 and tier 2 assets must z Narasimham committee (1991 and 1998): suggested
be at least 10.5% of its risk - weighted assets. merger of strong banks both in the public & private
sector.
Tier 1 z Verma committee: viewed consolidation will lead to
z It is the primary funding source of the bank. pooling of strengths and lead to overall reduction in
z Tier 1 capital consists of shareholders’ equity and cost of operations.
retained earnings. z Financial performance of selected merged banks is
analyzed and interpreted based on
Tier 2
CAMEL parameters: Capital adequacy (C) + Assets quality
z Tier 2 capital includes revaluation reserves, hybrid
(A) + Management Efficiency (M) + Earning Quality (E) +
capital instruments and subordinated term debt,
Liquidity (L)
general loan - loss reserves, and undisclosed reserves.
CONSOLIDATION OF PSBC
Advantages Disadvantages
z Increased efficiency of banks z Bad Loans of the Associate bank can drag down the good
z Better Monitoring bank’s performance.
z Better Capital Adequacy of the Consolidated Banks. z Larger Banks are more vulnerable to economic crisis
z Merger helps reduce Cost of operation. z Difficult to manage people and different attitudes
z Merger destroys the idea of Decentralization
z Helps improve the professionalism and competency z Many Bank Branches have been closed after mergers -
of banks affects financial inclusion.
MISSION INDRADHANUSH
z 7 pronged approach to resolve issues faced by PSBs and improve their overall performance by ABCDEFG.
z PJ Nayak Committee on Banking sector reforms recommended many of the measures.
A Appointment In order to check the excessive concentration of power and smooth functioning
of the banks - Induction of talent from the Private Sector into the public banks,
separation of the posts of Chief Executive Officer and the Managing Director.
B Bank Board Bureau The appointments Board of the Public Sector Banks would be replaced by the
Bank Boards Bureau (BBB).
The BBB separates the functioning of the PSBs from the government by acting as
a middleman.
C Capitalisation Due to the high NPAs and the need to meet the provisions of the Basel III norms,
capitalization of banks by inducing Rs. 70000 crores were planned.
D De - Stressing PSBs and strengthening risk control measures and NPAs disclosure.
E Employment Providing greater flexibility and autonomy to PSBs in hiring manpower.
F Framework of Accountability Assessment of the banks through measuring the key performance indicators
(KPI)
G Governance Reforms Gyan Sangam, a conclave of PSBs and financial institutions. Bank Board Bureau
for transparent and meritorious appointments in PSBs.
Banking Sector 57
z For reorganization and insolvency resolution
NATIONAL FINANCIAL REPORTING of corporate persons, partnership firms and
AUTHORITY (NFRA) individuals.
z Minimum default of Rs 1 crore is needed to trigger
Introduction IBC. (In March this year, the government raised the
z NFRA is an independent regulator to oversee the threshold for invoking insolvency under the IBC to Rs
auditing profession and accounting standards in India 1 crore from Rs 1 lakh).
under Companies Act 2013. z Time bound process - 180 days, some cases 270 days
z It came into existence in October 2018. maximum.
No Deadlock - if resolution is not done, assets are to
Background z
be sold to pay debtors.
z After the Satyam scam in 2009, the Standing Committee
z It is not applicable for Willful Defaulters.
on Finance proposed the concept of the National
Financial Reporting Authority (NFRA) for the first z IBC proposes a new institutional set - up comprising
time in its 21st report. following four critical pillars:
z Section 132 of the Companies Act, 2013 then gave 1. The National Company Law Tribunal (NCLT) as
the regulatory framework for its composition and the adjudicating authority.
constitution. 2. Insolvency professionals (IPs) to manage the
insolvency and bankruptcy cases.
Composition
z The Companies Act requires the NFRA to have a 3. Information utilities (IUs) to reduce information
chairperson who will be appointed by the Central asymmetries.
Government and a maximum of 15 members. 4.
Insolvency and Bankruptcy Board of India
(IBBI), a regulator.
Functions
z Recommend accounting and auditing policies and Insolvency
standards to be adopted by companies for approval by z Insolvency is a state where the liabilities of an
the Central Government; individual or an organization exceeds its asset and
z Monitor and enforce compliance with accounting that entity is unable to raise enough cash to meet
standards and auditing standards; its obligations or debts as they become due for
z Oversee the quality of service of the professions payment.
associated with ensuring compliance with such
standards and suggest measures for improvement in Bankruptcy
the quality of service; z When an individual is unable to pay off his liabilities
z Perform such other functions and duties as may be and debts then he generally files for bankruptcy. Here
necessary or incidental to the aforesaid functions and he/she asks for help from the government to pay off
duties. his debts to his creditors.
Powers
z It can probe listed companies and those unlisted public
companies having paid-up capital of no less than Rs 500
crore or annual turnover of no less than Rs 1,000 crore.
z It can investigate professional misconduct committed
by members of the Institute of Chartered 1.
Reorganization Bankruptcy: Usually people
Accountants of India (ICAI) for prescribed classes of tend to restructure the repayment plans
body corporate or persons. to pay them easily under reorganization
bankruptcy.
INSOLVENCY AND BANKRUPTCY CODE 2. Liquidation Bankruptcy: the debtor tends to sell
off certain of their assets to pay off their debts for
z To tackle the Chakravyuh Challenge (Economic
their creditors.
Survey 2015 - 16) - the exit problem in India.

NON - PERFORMING ASSETS (NPA) SPECIAL MENTION ACCOUNTS
z NPA is a loan/advance for which the principal or interest
(SMA)- 2014
payment remainS overdue for a period of 90 days. z SMA are those accounts that show symptoms of bad
z For Agricultural loans, the NPA is if the loan instalment/ asset quality in the first 90 days itself.
interest is not paid for: z The identification is an effort for early stress discovery
1. Short duration crop loan: 2 crop seasons of bank loans.
z The Special Mention Accounts are usually categorized
2. Long Duration Crops: 1 Crop season from the due
in terms of duration as follows:
date.
SMA Classification Basis For Classification
Standard Accounts Loan where principal and interest payment are made timely.
SMA - NF Non - Financial (NF) signs of stress.
SMA 0 Loan principal or interest is unpaid for 0 - 30 days from its due date.
SMA 1 Loan principal or interest is unpaid for 31 - 60 days
SMA 2 Unpaid for 61–90 days
NPA Unpaid for more than 90 days.
OTHER CLASSIFICATION OF LOAN ACCOUNTS

Classification Basis for Classification
Substandard Asset Account remains as an NPA for 12 or more months.
Doubtful Asset Account remains as a substandard asset for 12 months or more.
Loss Asset Loan loss has been identified by the bank or RBI, but the amount has not been written off wholly.
Loan Write Off Loan is written off from the asset side of the bank balance sheet. Just an accounting exercise.
Restructured Loan When the principal or interest or tenure terms are modified to enable the borrower to pay the loan.
Stressed Asset NPA + loans written off + restructured loans = stressed assets.
TWIN BALANCE SHEET (TBS) PROBLEM Overleveraged companies
z The Economic Survey of 2015-16 recognised a key Debt accumulation on companies is very high and thus
issue called ‘the twin balance sheet’ problem. they are unable to pay interest payments on loans.
z The balance sheets of both public sector banks Bad-loan-encumbered-banks
(PSBs) and some corporate houses private entities Non-Performing Assets (NPA) of the banks is 9% for
are in bad condition i.e. overleveraged and distressed the total banking system of India. It is as high as 12.1%
private companies and the rising NPAs in Public Sector for Public Sector Banks. As companies fail to pay back
Bank balance sheets. principal or interest, banks are also in trouble.
z India has been fighting with its twin balance sheet
(TBS) problem since the global financial crisis. MEASURES FOR NPA RESOLUTION
z It is important because it is discouraging private
investment in the country and hence growth in all sectors. 3R Framework for Revitalizing Stressed Assets
Banking Sector 59
1. Rectification: Conducting Asset Quality Review (AQR) z It is not applicable to unsecured creditors.
z Not applicable on Farm Loans.
2. Restructuring: Strategic Debt Restructuring,
Scheme for Sustainable Structuring of Stressed Debt Recovery Tribunal (DRT)
Assets (S4A), Joint Lenders Forum.
z Lenders can recover their dues by approaching a DRT
3. Recovery: SARFAESI Act, 2002 and Insolvency and and get a recovery certificate.
Bankruptcy Code, 2016 z It allows lenders to take possession of properties of
borrowers anywhere in the country and sell them to
Reserve Bank of India (RBI) has set up a committee
recover dues.
headed by K.V. Kamath on restructuring of loans
impacted by the Covid-19 pandemic. z Appeals against orders passed by DRTs lie before
Debts Recovery Appellate Tribunal (DRAT).
Sustainable Structuring of Stressed Assets z It can go beyond the Civil procedure Code.
(S4A)
e-Bkray Portal
z It is an optional framework for the resolution of largely
z It was launched to enable online auction by banks
stressed accounts and a tool for financial restructuring.
of attached assets transparently and cleanly for the
z Process: bank hires an independent agency to improved realization of value.
evaluate how much of the stressed asset is sustainable
z It has property search features and contains
and how much is unsustainable - it will convert
navigational links to all PSBs e - auction sites.
the unsustainable debt into equity - no change of
ownership of the company, unlike in strategic debt z e-Bkray contains photographs and videos of the
restructuring - helps in financial restructuring. properties uploaded on the platform.
Bad Banks Capital Adequacy Ratio

z A bad bank is a set up to buy the bad loans and other z CAR/Capital to Risk Weighted Assets Ratio (CRAR) is
illiquid holdings of another financial institution and the ratio of a bank’s capital to its risk.
do the loan restructuring and absorb losses. z The higher the CRAR of a bank the better capitalized
z Economic Survey 2016 - 17suggested Public Sector it is.
Asset Rehabilitation Agency (PARA) to resolve the
twin problems of ‘balance sheet syndrome’ (of the NIDHI, CHIT FUNDS AND PONZI
banks as well as the corporate sector), SCHEMES
z PARA is a proposed Bad Bank that will buy bad loans
from public sector banks. Nidhi
z Nidhis are included in the definition of NBFCs.
Prompt Corrective Action (PCA) z They are companies registered under the Companies
z The PCA framework considers banks as risky if they Act, 1956 and are regulated by the Ministry of
fall below certain norms on three parameters i.e. Corporate Affairs.
capital ratios, asset quality and profitability.
z Created for cultivating the habit of thrift and savings
z Certain restrictions such as halting branch expansion amongst its members.
and stopping dividend payment, restrictions in branch
z It receives deposits from, and lends to its members
expansion, higher provisions etc are put in place.
only, for their mutual benefit.
Asset Reconstruction Companies (ARC) z It works on the principle of mutual benefits that are
regulated by the Ministry of Corporate Affairs.
z Narasimham Committee (1998) recommended setting
up an ARC. Chit Funds
z It is a specialized financial institution that buys the NPAs
z It is a type of savings scheme where a specified number
or bad assets from banks and financial institutions so
of subscribers contribute payments in installments
that the latter can clean up their balance sheets.
over a defined period.
SARFAESI Act, 2002 z It is covered in the Concurrent List
z It provides the legal basis for the setting up ARCs in z RBI does not regulate the chit fund business and SEBI
India to tackle wilful defaulters. Act specifically excludes chit funds.
z Under this, a lender can take possession of the property z Chit fund business is regulated under the Central Chit
or mortgaged assets after giving the borrower a 60 - Funds Act, 1982 and the rules framed under this Act
day notice. by the various state governments for this purpose.

Ponzi Schemes NPCI - National Payment Corporation of
z These schemes promise high returns with little or no India
risk. z NPCI, an umbrella organization for operating retail
z The Ponzi scheme generates returns for older investors payments and settlement systems in India.
by acquiring new investors. example - Sarada Scam. z Initiative of RBI and Indian Banks’ Association (IBA)
under the provisions of the Payment and Settlement
AUTOMATED TELLER MACHINE (ATM) Systems Act, 2007, for creating a robust Payment &
z ATM enables withdrawal of cash and checking of Settlement Infrastructure in India.
balance without going to branch z Not for Profit Company under the provisions of
z The ATM network operates on NPCI - National Section 25 of Companies Act 1956 (now Section 8 of
Financial Switch. Companies Act, 2013).
National Financial Switch (NFS) is the largest
z
network of shared Automated Teller Machines (ATMs)
NPCI OPERATED SYSTEM
in India facilitating interoperable cash withdrawal,
BHIM-UPI
card to card funds transfer and interoperable cash
deposit transactions etc. z BHIM is based on Unified Payment Interface (UPI) to
facilitate e-payments directly through banks.
z It is interoperable with other UPI applications, and
bank accounts.
z Also caters to the Peer to Peer collect request which
can be scheduled and paid as per requirement and
Bank ATMs convenience.
z Owned, managed and installed by banks.
Aadhaar Enabled Payment System (AePS)
Brown label ATMs z It allows people to carry out financial transactions on
z Owned by banks and banks outsourced the ATM a Micro-ATM by furnishing just their Aadhaar number
operations to a third party (a nonbanking firm). and verifying it with the help of their fingerprint/iris
scan.
z The concerned banks only handle part of the process
that is cash handling and back - end server National Electronic Toll Collection (NETC)
connectivity.
z It helps in electronic toll collection at toll plazas using
z They carry logo of the bank which outsources their
FASTag.
service
White label ATMs National Automated Clearing House (NACH)

z It is a service offered by NPCI to banks which aims at
z Owned and operated by a third party (a non - banking
facilitating interbank high volume, low value debit/
firm).
credit transactions, which are repetitive and electronic
z They do not bear the logo of the banks they serve (that in nature.
is why such a name).
z In place, they carry the logo of the firm which owns Immediate Payment Service (IMPS)
them. z It offers an instant 247‫ ׳‬interbank electronic fund
transfer service through mobile phones.
DIGITAL PAYMENTS
Bharat Bill Payment System (BBPS)
Ratan Watal Committee Recommendations z Function as entities facilitating collection of repetitive
for Digital Payments payments for everyday utility services, such as,
electricity, water, gas, telephone and Direct-to-
z Greater use of Aadhaar and mobile numbers for Home (DTH).
making digital payments as easy as cash.
z Inter-operable payments between bank and non - Rupay
banks as well as within non - banks. z The name, derived from the words Rupee and
z Proposed to make digital payment regulation Payment, emphasizes that it is India’s very own
independent from the RBI. initiative for card payments.
z It is an indigenously developed Payment System.
Banking Sector 61
z It supports the issuance of debit, credit and prepaid z Market volatility: Their speculative nature also
cards by banks in India makes them highly volatile. For instance, the value of
Bitcoin fell from USD 20,000 in December 2017 to
CRYPTO-CURRENCY IN INDIA USD 3,800 in November 2018.
z Risk in security: A user loses access to their
Meaning/Definition cryptocurrency if they lose their private key (unlike
z A cryptocurrency is a digital asset designed to work traditional digital banking accounts, this password
as a medium of exchange wherein individual coin cannot be reset).
ownership records are stored in a ledger existing in a z Malware threats: In some cases, these private keys are
form of a computerized database. stored by technical service providers (cryptocurrency
exchanges or wallets), which are prone to malware or
Eg. Bitcoin, Etherium, Ripple, Litecoin, etc.
hacking.
Function z Money laundering: Cryptocurrencies are more
vulnerable to criminal activities and money laundering.
z They run on a distributed public ledger called
They provide greater anonymity than other payment
Blockchain
methods since the public keys engaging in a transaction
z It uses strong cryptography to secure transaction cannot be directly linked to an individual.
records, to control the creation of additional coins, and z Regulatory bypass: A central bank cannot regulate
to verify the transfer of coin ownership. the supply of cryptocurrencies in the economy. This
z It typically does not exist in physical form (like could pose a risk to the financial stability of the country
paper money) and is typically not issued by a central if their use becomes widespread.
authority.
z Cryptocurrencies typically use decentralized control Dinesh Sharma Committee
as opposed to centralized digital currency and central Recommended total ban on cryptocurrencies
banking systems.
India and Cryptocurrency
z 2009: First cryptocurrency, Bitcoin launched in
2009 by Satoshi Nakamoto.
z 2018: RBI banned banks and other regulated
entities from supporting crypto transactions.
z 2019: Inter-ministerial committee recommended
banning all private cryptocurrencies.
z 2020: SC struck down the ban on the trading of
cryptocurrency as unconstitutional.
Significance of Cryptocurrencies
z 2021: Cryptocurrency and Regulation of Official
z Checks Corruption: As blocks run on a peer-to-peer Digital Currency Bill, 2021 introduced.
network, it helps keep corruption in check by tracking
Under this, a plan to ban private digital currencies
the flow of funds and transactions. favors RBI backed currency.
z Time Effective: Cryptocurrencies can help save money A 3 to 6 month exit period prior to banning the
and substantial time for the remitter and the receiver, trading, mining and issuing of cryptos.
as it is conducted entirely on the Internet, runs on a
mechanism that involves very less transaction fees RBI and Digital Currency
and is almost instantaneous. z RBI exploring DLT (Distributed Ledger Technology)
z Cost Effective: Intermediaries such as banks, credit based Central Bank Digital Currency.
card and payment gateways draw almost 3% from the z Under DLT, details are recorded in multiple places at
total global economic output of over $100 trillion, the same time.
as fees for their services. Integrating blockchain into
E.g. Blockchain is just one type of distributed ledger.
these sectors could result in hundreds of billions of
z Central Bank Digital Currency (CBDC): It will be a
dollars in savings.
legal tender.
Concerns Over Cryptocurrencies z Can be converted/exchanged at par with similarly
denominated cash.
z Sovereign guarantee: Cryptocurrencies pose risks to
consumers. They do not have any sovereign guarantee z Union Budget 2022: Introduction of Digital Rupee
and hence are not a legal tender. (CBDC) by the Reserve Bank of India starting 2022-23.

z Any income from transfer of any virtual digital asset to
Recent Development
be taxed at the rate of 30 per cent.
z The Union Government is said to be considering a z No deduction in respect of any expenditure or
proposal to tax cryptocurrency transactions in the allowance to be allowed while computing such income
country. except cost of acquisition.
z The move would bring cryptocurrency trading, z Loss from transfer of virtual digital asset cannot be set
which has till date happened outside the ambit of off against any other income.
the law, into the formal economy.
z To capture the transaction details, TDS to be
Taxation of Virtual Digital Assets (Union provided on payment made in relation to transfer of
virtual digital asset at the rate of 1 per cent of such
Budget 2022) consideration above a monetary threshold.
z Specific tax regime for virtual digital assets introduced. z Gift of virtual digital asset also to be taxed in the hands
of the recipient.
OTHER BANKING RELATED TERMS

Letter of Undertaking/Letter of Comfort Bail In
z It is a form of bank guarantee under which a bank z It is the bank’s own deposits that are used to rescue
can allow its customer to raise money from another the bank or reduce its liabilities.
Indian bank’s foreign branch in the form of a short-
term credit. Bail Out
z Involves the rescue of a financial institution by external
Nostro Account parties, typically governments using taxpayer’s money.
z Maintained by Indian banks in foreign countries where
they have operations for facilitating easy clearing of Willful Defaulters
their transactions. z A wilful defaulter is an entity or a person that has not
paid the loan back despite the ability to repay it.
Vostro Account
z The account maintained by foreign banks in India with Demand Liabilities of a Bank (CASA)
their corresponding banks is called vostro accounts. z Current Account, Savings Account, Demand Draft
z Overdue balance in Fixed Deposits
SWIFT System
z Unclaimed deposits
z Society for Worldwide Interbank Financial
Telecommunication Core Banking Solutions (CBS): eKuber
z It is a messaging network used by banks to securely z It is the process which is completed in a centralized
send and receive information, such as money transfer environment i.e. under which the information relating
instructions. to the customer’s account (i.e. financial dealings,
profession, income, family members etc.) is stored in
Serious Fraud Investigation Office (SFIO) the Central Server of the bank instead of the branch
z Based on the recommendation of Naresh Chandra server.
Committee on corporate governance
z SFIO is a fraud investigating agency in India under the Selective Credit Control
Ministry of Corporate Affairs z Selective credit control refers to a qualitative method
z Investigates white - collar crimes of credit control by the central bank.
z The method aims, unlike general or quantitative
Time Liabilities of a Bank (FDRD) methods, at the regulation of credit taken for specific
z Fixed deposits, Cumulative/ recurring deposits, Staff purposes or branches of economic activity.
security deposit etc. z It aims at encouraging good credit, i.e., development
z Banks are legally not required to pay customers credit while at the same time discouraging bad credit,
before maturity but may pay after deducting penalty/ i.e., speculative credit.
interest.
v v v
Banking Sector 63
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7 Indian Insurance Market
z Insurance is listed in the Union list in the Seventh 4. Causa Proxima - Direct loss link
Schedule of the Constitution of India.
5. Insurable interest
z It is a form of hedging and risk management system
against uncertain losses. BRIEF HISTORY OF INSURANCE IN INDIA
z Insurance refers to a legal contract by which an 1818 Life Insurance Business came to India with
individual/firm/entity receives protection from the establishment of Oriental Life Insurance
financial loss/any other kind of damage. company in India
z Principles of Insurance are: 1912 Indian Life Assurance Company Act was the
first statutory measure to regulate life business.
1. Uberrima fides - Good faith, hide nothing
1956 Nationalization of Life Insurance sector and
2. Indemnity - Only real and actual loss, not LIC came into existenceJ
imaginary 1993 Malhotra committee for insurance sector reforms.
3. Subrogation - Insurer can recover from negligent 2000 The Indian Government liberalized the insurance
third parties sector and opened it up for the private sector.
BANKING SECTOR VS INSURANCE SECTOR

Basis Banking Sector Insurance Sector
Regulator z RBI z IRDAI
1948-49 z Nationalization of RBI
1955-56 z Nationalization of SBI z Nationalization of LIC and LIC came into existence
Reforms in z Narasimham committee I (1991) and II (1998) z Malhotra Committee (1993)
1990s z Privatization and liberalization of banking z Private insurance companies were allowed
sector. z FDI was liberalized.
Safeguards z CRR, SLR, BASEL z Several Investment restrictions.
Financial z Priority Sector Lending (PSL) norms, 25% z Rural & Social Obligation Norms – e.g. every year “
Inclusion branches in unbanked rural areas z specified” number of policies must be
z sold in rural areas, PH/backward etc.
TYPES OF INSURANCE POLICY

LIFE INSURANCE INSURANCE PROVIDERS
Endowment Insurance Life Insurance Corporation (LIC)
z An endowment policy pays a lump sum on its maturity z Founded: 1956; Nationalised by Life Insurance
or on death. Corporation Act, 1956
z Motto: Yogakshemam Vahamyaham (I carry what
Whole Life Insurance you require - Bhagwad Gita).
z Provides coverage for the life of the insured.
z In addition to paying a death benefit, whole life
insurance also contains a savings component in which
cash value may accumulate.
z It is a long-term policy compared to an endowment
policy.
z Highest market share in the life insurance segment in
Term Insurance India.
z Provides coverage for a specified period. It is short z The biggest investor for: G-SEC & equities of PSUs.
policy with low premium e.g., PM Jeevan Jyoti Bima z Holds a 51% stake in IDBI bank thus making it the
Yojana only insurer in India to own a bank.
Unit Linked Insurance Recent Developments: GoI has started the process to
z It is a product that combines insurance coverage and launch the Initial Public Offer (IPO) of LIC, indicating
investment exposure. step towards privatisation.
General Insurance Corporation of India (GIC)

GENERAL INSURANCE
z General Insurance Sector, nationalized in 1971.
z It covers every Insurance plan Except life insurance z GIC Formed: 1972; Started operation in January, 1973.
plan. z It is state owned.
Name Particulars z GIC is the only reinsurer in India.
Personal Medical insurance, accident,
Insurance policies property and vehicle insurance Four Holding Companies (Till March, 2002)
Rural Insurance Protection against natural and 1. National Insurance Company Ltd. Kolkata (HQ)
policies climatic disasters for agriculture 2. New India Assurance Company Ltd. Mumbai (HQ)
and rural businesses 3.
Oriental Fire and Insurance Company Ltd. Delhi (HQ)
Industrial Coverage for projects, 4. United India Insurance Company Ltd. Chennai (HQ)
Insurance policies construction, contracts, fire,
equipment loss, theft, etc.
Major Reforms
Commercial Protection against loss and damage
1. November 2000: the GIC was notified as the Indian
Insurance policies of property during transportation,
Reinsurer.
transactions, marine insurance
etc. 2. March 2002: GIC was withdrawn from holding
company status of the four publicsector general
NATIONALIZATION OF INSURANCE insurance companies. Now they are directly owned
by the GoI.
BUSINESS
z In 1972, Government of India passed of the General A reinsurer is a company that provides financial
Insurance Business (Nationalisation) Act. protection to insurance companies.
z With this Act, the Government took control of all the
private insurance companies of India and created 4
companies.
Indian Insurance Market 65

Deposit Insurance and Credit Guarantee z To protect exporters against losses due to non-
payment of export dues by overseas buyers due to
Corporation (DICGC) political and/ or commercial risks.
z Deposit insurance means providing insurance
Nirvik Scheme of ECGC
protection to the depositor’s money by receiving
a premium. z To give a boost to export lending and insurance
z The premium paid by the insured banks to the DICGC cover for export credit.
is not to be passed on to depositors. z Insurance will cover up to 90% of the principal and
interest.
z DICGC was established under RBI for deposit
z Will include both pre and post-shipment credit.
insurance.
z The banks shall pay a premium to ECGC monthly on
z DICGC cover is now Rs. 5 lakh, earlier it was Rs. 1 lakh. the principal and interest as the cover is offered for
z It does not deal directly with depositors but through both.
an official liquidator.
National Export Insurance Account (NEIA)
DICGC excludes z NEIA is a fund set up with an approved corpus of
Rs. 2000 Crore.
z Deposits of foreign governments.
z To facilitate medium and long-term exports, which are
z Deposits of central/state governments. not covered by ECGC.
z Inter-bank deposits. z It is maintained and operated by a Public Trust set
z Deposits of the state land development banks with up jointly by the Department of Commerce and
the state co-operative bank. ECGC.
Any amount due on account of any deposit received
z
outside India.
DOMESTIC SYSTEMATICALLY
z Any amount specifically exempted by the DICGC IMPORTANT INSURER (D-SII)
with previous approval of RBI z D-SIIs are perceived as insurers that are Too Big or
Too important to Fail (TBTF).
Agriculture Insurance Company of India
z They refer to insurers of such size, market importance
Limited (AICIL) and domestic and global interconnectedness whose
z Established: In 2002 under the Companies Act 1956. distress or failure would cause a significant dislocation
in the domestic financial system.
z Objective: To serve the needs of farmers better and to
move towards a sustainable actuarial regime. Requirements for D-SIIs
z It is a government owned Crop Insurance Company. z The three public sector insurers have been asked
to raise the level of corporate governance.
Majority shares owned
z Identify all relevant risks and promote a sound risk
GIC (35 percent) and NABARD (30 percent) + four public management culture.
sector general insurance companies own 8.75 per cent z The D-SIIs will also be subjected to enhanced
each. regulatory supervision of the IRDAI.
z Largest crop insurer in the world in terms of the z The LIC, General Insurance Corporation of India
number of farmers. and the New India AssuranceCo. have been identified
z Different Crop Insurance schemes provided as D-SIIs for 2020-21 by insurance regulator, IRDAI.
by AICIL: Pradhan Mantri Fasal Bima Yojana z The IRDAI would identify D-SIIs on an annual basis.
(subsumed NAIS and the Modified NAIS), restructured INTERNATIONAL FINANCIAL SERVICES
weather-based Crop Insurance Scheme.
CENTRES AUTHORITY (IFSCA)
Export Credit Guarantee Corporation of z The first IFSC in India has been set up at the Gujarat
India (ECGCI) International Finance Tec-City (GIFT City) in
Gandhinagar.
z The ECGC Limited is a company wholly owned by
the Government and is controlled by the Ministry z Objective: to regulate financial services such as
securities, deposits or contracts of insurance, financial
of Commerce.
services, and financial institutions.
z It provides export credit insurance support to z It will consist of nine members, appointed by the
Indian exporters to facilitate exports from the country. central government.

z Provided by non-life insurance companies on vehicles.
Members
Chairperson; A member each from the RBI, SEBI, IRDAI z Covers the risk of other than the two parties (i.e.
and PFRDA; Two members from the Ministry of Finance. the car and the owner, in case of a car) involved in an
In addition, two other members will be appointed on the insurance policy.
recommendation of a Selection Committee. z This insurance is also known as act only cover.
z Term: All members of the IFSC Authority have a term
of three years, subject to reappointment.
MICRO INSURANCE
z IRDAI Micro-insurance Regulations, 2005 defines
micro-insurance as:
A general or life insurance policy with a sum
Public Liability Insurance Act, 1991
assured of Rs 50,000 or less. z Public liability insurance policy covers a policy holder
It is targeted towards low-income households or to from claims from third parties for death or injury or
individuals with little savings. property damage caused by hazardous substances
Micro-insurance business is done through the handled in a factory.
intermediaries: Non-Government Organisations, z The compensation payable is irrespective of the
Micro-Finance Institution, Self-Help Groups etc. company’s neglect.
HEALTH INSURANCE z The victims who are exposed to hazardous substances

used by an industry may file a claim with the Collector
z IRDAI has been taking a number of proactive steps as within 5 years of the accident.
part of the initiatives for the spread of health insurance.
z Set up a National Health Insurance Working Group Maximum compensation of Rs 25,000, in addition to a
in 2003 as platform for the various stakeholders in maximum of Rs. 12,500 as reimbursement for medical
the health insurance industry to work together and expenses.
suggest solutions on various relevant issues in the
sector. PENSION
z IRDAI and the supporting insurance industry worked z It is a regular payment made by the state to people
upon standardising certain key terminology used in of or above the official retirement age and to some
health insurance documents. widows and disabled people.
z The General Insurance Council, comprising all
non-life insurers, evolved a consensus on a uniform
definition of pre-existing diseases and its exclusion
Employee Provident Fund Organisation
wording. (EPFO)
z It is a statutory organization with the Ministry of
October, 2011: portability in health insurance has been
started. Labour and Employment as its nodal ministry.
Focus Areas
THIRD PARTY INSURANCE z Provident Fund
z The Motor Vehicles Act, 1988: any motorized vehicle z Deposit Linked Insurance
operated on public roads should be insured against z Pension
third party liability.
z Motor Vehicle Amendment Act, 2019: Mandatory Universal Account Number (UAN)
for all new two wheelers to have a five-year third-
z UAN is a 12-digit long unique identification number
party insurance and cars and commercial vehicles to
assigned by the EPFO.
have a three-year third-party insurance.
z Both the employer and employee are assigned this
z Under the law, this liability is unlimited in the case of number (one each), so that they can contribute to the
death or injury, and hence, it is mandatory to purchase EPF account.
a Motor Third Party Liability Policy (TP Policy). z It remains unchanged even after switching jobs.

Labour Identification Number (LIN) z Access in empanelled hospitals both private and
z A unique identification number issued to employers. government.
z Shram Suvidha, under the Ministry of Labor, is the Beneficiary identification through socio economic
unified portal developed to issue LINs and manage our caste census, 2011 data.
inspections and submission of returns.
Pradhan Mantri Vaya-Vandana Yojana
INSURANCE SCHEMES z It is a Pension Scheme exclusively for the senior
citizens aged 60 years and above.
Pradhan Mantri Jeevan Jyoti Bima Yojana
who can join by 1 March 2023.
(PMJJBY) z
z LIC operates the scheme.

z It is a life insurance scheme.
z Investment of minimum Rs1.5 lakhs to maximum
z NRIs are eligible but payment to be done in rupee only.
Rs 15 lakhs.
z It offers a renewable one-year term life cover of
Rupees 2 Lakh. The scheme is exempted from GST.
z Age group is 18 to 50 years. z At the end of the policy term of 10 years, Purchase
z Covers death due to any reason. price along with final pension installment shall be
z Premium of Rs. 330/- per annum per subscriber. payable.
z This is on self-subscription basis and involves no z Loan upto 75% of Purchase Price shall be allowed
Government contribution. after 3 policy.
z Doesn’t cover Hospitalization cost.
z The scheme also allows for premature exit with a
Pradhan Mantri Suraksha Bima Yojana refund of 98% of the Purchase Price.
(PMSBY) z On death of the pensioner during the policy term of
10 years, the Purchase Price shall be paid to the
z It is an accident insurance scheme (General
beneficiary.
insurance).
z NRIs eligible but payment to be done in rupee only. Pradhan Mantri Fasal Bima Yojana (PMFBY)
z It offers a renewable one-year accidental death cum
z It provides comprehensive crop insurance cover
disability cover of-
against non-preventable natural risks at an affordable
Rs. 2 Lakh for accidental death or total permanent
rate to farmers.
disability and
Rs. 1 Lakh in case of permanent partial disability.
z Uniform maximum premium of only 2%, 1.5% and
z Age group is 18 to 70 years. 5% of the sum insured to be paid by farmers for all
Kharif crops, Rabi crops and commercial/horticultural
z Covers accidental death cum disability.
crops.
z Suicide, alcohol, drugs related death will not be eligible.
z Premium of Rs. 12/- per annum per subscriber. PMFBY 2.0
z This is on self-subscription basis and involves no
z Enrolment under the Scheme to be made voluntary
Government contribution.
for all farmers.
z Doesn’t cover Hospitalization cost.
z Central Subsidy is to be limited for premium rates
PM Jan Arogya Yojana (PMJAY) upto 30% for un-irrigated areas/crops and 25%
z It is a component of Ayushmann Bharat announced for irrigated areas/crops.
in Budget 2018. z Central Share in Premium Subsidy to be increased
to 90% for North Eastern States from the existing
z It has subsumed Rashtriya Swasthya Bima Yojana
sharing pattern of 50:50.
and Senior Citizen Health Insurance Scheme.
z Cashless and paperless z Single event coverageinsurance can be taken. E.g.,
fire only.
z Covers pre and post hospitalisation and medicine
z Government allotted a district/area to an Insurance
expenses.
company for minimum 3 years. In case of
z Pre-existing diseases are covered.
extraordinary performance by the company, then
z A free insurance cover upto Rs 5 lakh per family more years may be granted.
per year for secondary and tertiary hospitalisation. z Flexibility to States/UTs to implement the
z Imposes no limit on family size or age of family scheme.
members.

INSURANCE PENETRATION AND z Pass an award within 3 months after receiving a
complaint.
DENSITY z Insurance companies are required to honor the
z Growth in the insurance sector is internationally awards passed by an Insurance Ombudsman
measured based on the standard of insurance within 3 months.
penetration. z If the policy holder (customer) is not satisfied with
z Insurance penetration: the ratio of premium the award of the Ombudsman he can approach
underwritten in a given year to the Gross Domestic Consumer Forums and Courts of law for redressal
Product (GDP). of his grievances.
z Insurance density: the ratio of premium underwritten z Selection of Ombudsman
in a given year to total population (measured in US Drawn from Insurance Industry, Civil Services and
dollars for convenience of comparison). Judicial Services.
z The Indian insurance business: remained under- Committee comprising of Chairman of IRDA,
developed with low levels of insurance penetration. Chairman of LIC, Chairman of GIC and a
representative of the Central Government select
INSURANCE REFORMS the Insurance Ombudsman.
z Malhotra Committee (Insurance Reforms Committee) Appointed for a term of three years or till the
was set up in April 1993 under the chairmanship of incumbent attains the age of sixty-five years,
the ex-RBI Governor R. N. Malhotra. whichever is earlier.
z Recommendations Re-appointment is not permitted.
The LIC functioning should be decentralized.
The private sector companies should be allowed to Pension Fund Regulatory and Development
enter the insurance sector. Authority (PFRDA)
No company should be allowed to deal both in the z It is a statutory body.
life insurance business and the general insurance z 6 members: One Chairman (5 yrs or 65 yrs) and 5
business through a single entity. members (5 yrs or 62 yrs).
Setting up an independent regulatory body for the
z They are eligible for re-appointment.
Insurance sector on the lines of SEBI.
z It has Powers of civil court.
INSURANCE SECTOR REGULATORS Functions
Insurance Regulatory Development z Implement National Pension System (NPS), select
its fund-managers.
Authority of India (IRDAI)
z Regulate all public and private pension funds
z IRDAI is a statutory autonomous body set up by the IRDA except EPFO, Seaman, Coal miners, Assam tea
Act, 1999, established after the recommendations of plantations related pension schemes as they’ve
Malhotra Committee report of 1994. their separate acts/ mechanisms.
z It has the responsibility to regulate and control the z Prescribe liquidity, auditing, investment norms for
Insurance sector in India. Pension funds.
z IRDAI is a member of the Financial Stability and
Development Council. AMENDMENTS IN INSURANCE SECTOR
z Securities Appellate Tribunal (SAT) is a statutory
body established under the SEBI Act, 1992 to hear and Insurance Laws (Amendment) Act, 2015
dispose of appeals against orders passed by the IRDAI. z Paved the way for major reform related amendments
Insurance Ombudsman in the Insurance Act, 1938, the General Insurance
Business (Nationalization) Act, 1972 and the
z Set up by GOI in 1998. Insurance Regulatory and Development Authority
z There are twelve Ombudsman across the country. (IRDA) Act, 1999.
Functions z Provides greater powers to the IRDAI.
z FDI increased to 49 per cent (from 26 per cent) with
z Receive and consider complaints in respect of
the safeguard of Indian ownership and control.
insurance from any person who has any problem
against an insurer. z The public sector general insurance companies (four)
allowed to raise capital.

z Enable the interests of consumers. z The Bill increases the limit on foreign investment
z The Act defines health insurance business inclusive in an Indian
of travel and personal accident cover. z insurance company from 49% to 74%, and removes
z Promoting Reinsurance Business in India. restrictions on ownership and control.
z Robust Appellate Process. z While control will go to foreign companies, the
majority of directors and key management persons
Insurance Amendment Bill, 2021
will be resident Indians who will be covered by law
z The Bill amends the Insurance Act, 1938 to of the land.
increase the maximum foreign investment allowed
in an Indian insurance company.
v v v

8 Financial and Security Market
z Meaning & Concept: Financial market brings buyers

and sellers together to trade in financial assets such INSTRUMENTS OF MONEY MARKET
as stocks, bonds, commodities, derivatives and
currencies. Call Money/Term Money Market/Notice
z Objective: To set prices for global trade, raise capital, Money
and transfer liquidity and risk
z Call Money: also referred to as the money at call. It
&ŝŶĂŶĐŝĂůDĂƌŬĞƚ deals with very short-term funds, and is demanded
extremely short durations from a few hours to 1 day.
DŽŶĞǇDĂƌŬĞƚ ĂƉŝƚĂůDĂƌŬĞƚ z Notice Money: for borrowing and lending operations
of 2 to 14 days.
Term Money: Lending and borrowing of funds beyond
MONEY MARKET z
14 days.
z Money market refers to a section of the financial
market where financial instruments with high Treasury Bills
liquidity and short-term maturities are traded. z Government Securities (G-Sec) issued by RBI on
z It deals with borrowing and lending of short term behalf of the central government to meet its fiscal
credit/loan generally with a time period of less than
deficits.
or equal to 1 year.
z Presently issued in three tenors, namely, 91-day,
Organized Money Market 182-day and 364-day.
RBI Commercial Development Bank z Treasury bills are zero coupon securities and pay no
Banks IDBI
interest. Instead, they are issued at a discountand
IFCI ICICI NABARD redeemed at the face value at maturity.
LIC GIC UTI etc.
dƌĞĂƐƵƌǇŝůůƐ
Unorganized Money Market
Indigenous banks Money lenders KƌĚŝŶĂƌǇZĞŐƵůĂƌ ĚŚŽĐdƌĞĂƐƵƌǇ
Chits and Nidhis Co-operative Sector dƌĞĂƐƵƌǇŝůůƐ ŝůůƐ
Functions of Money Market

Commercial Bills
z It provides facilities for allocation of short term
z It refers to the bill of exchange which is used to finance
funds through money market instruments.
the short-term working capital requirements of
z It helps the government to meet its deficits through any business.
non inflationary financial sources such as treasury bills.
z These are negotiable and self-liquidating financial
z It makes available suffficient finance to the trade instruments, in which the seller is the drawer while
and industry. the buyer is the drawee.
z It insure an equilibrium between the demand and
supply of money and short term funds. Cash Management Bills (CMB)
z It promotes economic growth. z CMBs are issued by the GOI in consultation with the
z It provides a mechanism for Reserve Bank of India RBI to meet its short-term cash requirements.
(RBI) to implement monetary policy. z The maturity period of these bills is less than 91 days.
Certificates of Deposits (CD) Discount and Finance House of India (DFHI)
z Certificate of Deposit (CD) is an agreement between z Established: by RBI in 1988.
the depositor and the bank where a predetermined z Objective: It is to facilitate the smoothening of short-
amount of money is fixed for a specific time period. term liquidity imbalances by developing an active
z It is issued in dematerialized (De-mat) form. money market and integrating various segments of
the money market.
z When it matures, the principal amount along with the
interest earned is available for withdrawal. z DFHI plays important role in developing an active
secondary market in Money Market Instruments.
Commercial Papers (CP)
z CP is a short-term debt instrument issued by
TERMS ASSOCIATED WITH
companies to raise funds generally for a time period MONEY MARKET
up to one year.
z It is an unsecured money market instrument issued Waterfall Approach
in the form of a Promissory Note (P-Note) and was z For the valuation of money market and debt securities.
introduced in India in 1990.
z Minimum maturity period of commercial paper is for Money Market Mutual Funds (MMMF)
7 days and a maximum of 1 year. z Short-run liquid investments which invest in high-
quality money market instruments such as Treasury
Inter-Corporate Deposit Market Bills (T-Bills), Repurchase Agreements (Repos),
z It is an unsecured loan extended by one corporation Commercial Papers and Certificate of Deposits. An
open-ended mutual fund.
to another.
Repo Market CAPITAL MARKETS

z The repo rate/ repurchase rate is the rate at which z It refers to the market for funds with a maturity of
RBI lends money to banks, when banks face shortage 1 year or more.
of funds. These are short-term, usually overnight
ĂƉŝƚĂůDĂƌŬĞƚ
borrowings.
Reverse Repo Market WƌŝŵĂƌǇDĂƌŬĞƚ ^ĞĐŽŶĚĂƌǇDĂƌŬĞƚ

z Opposite of repo rate is reverse repo rate. It is the rate
at which RBI borrows funds from other banks for Primary Market
the short term.
z Part of the capital market that deals with the issuance
Ways and Means Advances (WMA) and sale of equity backed securities to investors
directly by the issuer.
z Borrowing by the Govt. from the RBI to meettemporary
cash flow mismatches. Secondary Market
z Reserve Bank makes advances to Govt to tide over z Where investors buy and sell securities they already own.
temporary mismatches in the cash flowsof their
receipts and payments. Significance: Growth of savings, Efficient allocation
z Such advances are defined by the Act as ‘advances of investment resources and Better utilization of the
repayable in each case not later than three months existing resources.
from the date of the making of the advance.
PRIMARY VIS-A-VIS SECONDARY MARKET

Primary Market Secondary Market
z Issuers raise capital by issuing securities to investors z It facilitates trade in already-issued securities only.
for the first time.
z Creates financial assets. z Makes the assets marketable.
z Securities are sold by the company directly or through z Company is not involved at all. Ownership of existing
an intermediary. securities is exchanged between investors.

z Promotes capital formation directly-as the flow of z Promotes capital formation indirectly by enhancing
funds is directly from savers to investors. the liquidity of the shares.
z Only buying of securities takes place here, securities z Both buying and selling takes place here.
can’t be sold here.
z Prices are decided and determined by the company z Prices are determined by the demand and supply of
the security.
z There is no fixed geographical location. z Located at specific places.
DIFFERENT TYPES OF CAPITAL Bond

z A loan that is secured by a specific physical asset.
Authorized Capital Bonds have lower interest rates compared to
z It is the maximum number of shares a company is debentures.
legally allowed to issue. z Masala bonds: Issued by Indian entities outside India
but denominated in Indian Rupees.
Issued Capital Term was used by International Finance
z Shares that have actually been issued by the company
Corporation (IFC), arm of World Bank.
to the shareholders.
Subscribed Capital Derivatives

z A portion of the authorized capital that potential z A financial security with a value that is derived from,
shareholders have agreed to purchase from the an underlying asset or group of assets.
company’s treasury. z Common underlying assets: stocks, bonds,
commodities, currencies, interest rates and market
Paid-up Capital indexes. It can either be traded Over-The-Counter
z Portion of the subscribed capital for which the
(OTC) or on an exchange.
company has received payment from the subscribers.
Types of Derivatives
INSTRUMENTS OF CAPITAL MARKET
Agreement between two parties for the
Futures purchase and delivery of an asset at an
Shares/Equity agreed upon price at a future date.
z Units of ownership interest in a corporation or
financial asset that provide for an equal distribution in Non-standardized contract between two
any profits, if any are declared, in the form of dividends. parties to buy or to sell an asset at a specified
Forward
future time at a price agreed upon today,
dǇƉĞƐŽĨ^ŚĂƌĞƐͬƋƵŝƚǇ making it a type of derivative instrument.
Another common type of derivative that is
ŽŵŵŽŶ^ŚĂƌĞƐ WƌĞĨĞƌƌĞĚ^ŚĂƌĞƐ
Swaps often used to swap one kind of cash flow with
z Stock: the capital raised by a corporation through the another.
sale of shares
The buyer is not obligated to exercise the
Debentures option, while the option seller is obligated to
z A type of debt instrument that is not secured by either buy or sell the underlying asset if the
physical assets or collateral, backed only by the Options buyer chooses to exercise the contract. Types
general creditworthiness and reputation of the → Call Option (gives the holder the right to
issuer. buy a stock) and Put Option (gives the holder
the right to sell a stock).
Types of Debentures
Warrant Longer dated options (>1 year).
Convertible: Bonds that can convert into equity shares
of the issuing corporation after a specific period of time. Long-Term Equity Anticipation Securities.
Non-Convertible:Regular debentures that cannot be LEAPS These are options having a maturity of up to
converted into equity of the issuing corporation. three years.
Financial and Security Market 73

MONEY MARKET VIS-A-VIS CAPITAL MARKET
Money Market
Money markets are used by government and corporate entities as a means for borrowing and lending in the short term,
usually for assets being held for up to a year.
Capital Market
Capital markets are more frequently used for long-term assets, which are those with maturities of greater than one
year. Capital markets include the equity (stock) market and debt bond) market.
FORWARD CONTRACT VIS-À-VIS FUTURE CONTRACT

Forward Contract Future Contract
In this, the buyer agrees to buy the underlying asset at It obligates the buyer to purchase an asset or the seller
a future date on a price agreed upon today. to sell an asset at a predetermined future date and
price
Risk of Default No risk of default.
Customized contract Standard contract
Not traded in the exchange Traded in the exchange
Low liquidity High liquidity
Physical or cash settlement Only cash
Unregulated Regulated
VARIENTS OF BONDS Inflation Indexed Bonds

z Debt market securities offered by the government
Fixed Interest Bonds to protect the savings from inflation and offer
z Debt instruments which get consistent coupon rates positive real rates of returns. The principal and
throughout their tenure irrespective of alterations interest are linked to WPI/ CPI.
in market conditions.
Negative Yield Bonds
Floating Interest Bonds z Debt instruments that pay the investor a maturity
z These bonds incur coupon rates which are subject to amount lower than the purchase price of the bond.
market fluctuations and elastic within their tenures. z They attract investments during uncertain times as
investors look to protect their capital from significant
Perpetual Bonds/Consol Bonds erosion.
z Issuers do not have to return the principal amount
to the purchaser.
Special Zero-Coupon Recapitalization Bonds
z This investment type does not have any maturity z These are special types of bonds issued by the
period, and customers benefit from steady interest Central government specifically to a particular
payments for perpetuity. institution.
z Only those banks, whosoever is specified, can invest in
Zero Coupon Bonds them, nobody else.
z Sold on discount and repurchased at face value, z It is not tradable, nor transferable.
rendering a profit at maturity. It pays no interest as z It is limited only to a specific bank, and it is for a
such. specified period.
z It is zero coupon, issued at par and will be paid at the
Bearer Bonds end of the specified period.
z A bearer bond is a fixed-income security that is owned z The issuance of these special bonds will not affect
by the holder, or bearer, rather than by a registered the fiscal deficit while at the same time provide much
owner. needed equity capital to the bank.

Uday Bonds E.g. Women Livelihood Bonds issued by World
z To reduce the debt burden of the DISCOMs wherein Bank, UN Women and SIDBI; Utkrisht Impact
the states would take over some percentage of their Bond launched by USAID to reduce IMR and MMR
Debt obligations of the DISCOMs. in Rajasthan.
z In return, the DISCOMs are required to implement
Sovereign Gold Bonds
structural reforms in order to improve their
z Government securities denominated in grams of
financial viability.
gold.
z The government issue UDAY bonds to banks and z Investors pay the issue price in cash and the bonds will
other financial institutions to raise money to pay off be redeemed in cash on maturity.
the banks. z Introduced to reduce gold imports. It can be used as
collateral for loans.
Maharaja Bonds z Eligibility: Only resident Indian entities, including
z Rupee-denominated bonds issued by International individuals, HUFs, trusts, universities and charitable
Finance Corporation (IFC) in India’s domestic institutions.
market.
Green Bonds
Muni Bonds z Proceeds of such Bonds are exclusively used for
z Municipal bonds (Muni Bonds) are the bonds financing green projects such as renewable energy
projects, climate change, reducing fossil fuel emissions etc.
issued by Urban Local Bodies (ULB) to raise money
for the development of various capital-intensive First Green Bond Issued by European Investment
infrastructure projects. Bank in 2007 - Climate Awareness Bond.
z In India: Indian Railway Finance Corporation Ltd
E.g. Bengaluru Municipal Corporation issued
(IRFC) has established a Green Bond Framework for
municipal bonds for the first time.
fund raising to finance the Dedicated Freight Corridor
project and electrification of the railways.
Elephant Bonds
z Proposed by Surjit Bhalla Committee. Panda Bonds
z People declaring undisclosed foreign income will be z Yuan-denominated bond issued in the Chinese
required to invest at least 50% in the Elephant Bonds mainland market by an overseas entity.
to be used for financing Infrastructure. z International Finance Corporation (IFC) and Asian
Development Bank (ADB) issued Panda Bonds in 2005.
Impact Bonds
z Innovative way of financing development. Uridashi Masala Bonds
z Unsecured bonds to raise funds towards a project z Special type of Masala Bonds issued in Japan bought
with a social impact or development impact. by Japanese retail investors.
OTHER BONDS
Issuer Borrowing From In Currency Called As

Non-Chinese China Renminbi Panda Bonds
Non- Australian Australian Australian Dollar Kangaroo Bonds
Non-Indian India Rupee Maharaja Bonds
Indian or Non-Indian on Outside India Rupee Masala Bonds
Behalf of Indians

TERMINOLOGIES Angel Investors
z An affluent individual who provides capital for a
Bond Yields business start-up usually in exchange for convertible
debt or ownership of equity.
z The yield of a bond is the effective rate of return that
it earns. But the rate of return is not fixed, it changes Collective Investment Schemes (CIS)
with the price of the bond.
z An arrangement which pools funds from investors
to pool their money for investment in particular
Yield Curve asset.
z A yield curve is a graphical representation of yields z Regulated by SEBI
for bonds (with an equal credit rating) over different
time horizons. Social Venture Fund
z National Innovation Council and the Ministry of MSME,
Yield Inversion Curve launched the India Inclusive Innovation Fund (IIIF),
z An inverted yield curve represents a situation in an impact investment fund that will invest in ventures
which long-term debt instruments have lower catering to the country’s poor.
yields than short-term debt instruments of the z `500-crore fund, registered under market regulator
same credit quality. SEBI’s Alternative Investment Fund regulations as a
z Sometimes referred to as the Negative Yield Curve. Category –I venture capital fund.
INDIAN CAPITAL MARKET Alternative Investment Funds (AIF)

z SEBI (Alternative Investment Funds) Regulations,
Merchant Banks 2012 → AIFs as any privately pooled investment
z Manages and underwrites new issues, provides fund, (whether from Indian or foreign sources), in the
consultancy and corporate advisory services for form of a trust or a company or a body corporate or a
raising funds and other financial aspects. Limited Liability Partnership (LLP).
Hedge Funds AIF are classified as under by SEBI
z Financial partnerships that use pooled funds and
Category I
employ different strategies to earn active returns
for their investors. AIF which invests in areas Govt. considers economically
and socially viable like Venture capital funds (Including
Mutual Funds Angel Funds), Social Venture Funds, Infrastructure funds.
z A type of financial vehicle made up of a pool of SEBI norms are lighter.
money collected from many investors to invest in Category II
securities - stocks, bonds, money market instruments,
Private equity funds or debt funds.
and other assets.
z Regulated by SEBI. Category III
z Types of Mutual Funds AIF such as hedge funds or funds which trade with a
Open Ended Fund: These funds buy and sell units view to make short term returns and take excessive risk.
on a continuous basis and, hence, allow investors SEBI norms are much stricter.
to enter and exit as per their convenience.
Close-Ended Funds: usually issue units to
Participatory Notes (P-Note)
investors only once, when they launch an offer, z Instruments used by foreign investors not registered
called New Fund Offer. as FPIs to invest in the Indian stock market.
Exchange-Traded Funds (ETFs): ETFs are a mix z Not issued in India rather these are issued by FPI
of open-ended and close-ended schemes. registered in India to foreign investors.
z Due to the anonymity of the investor, FPIs are
Venture Capital considered unsafe.
z A type of private equity, a form of financing that
is provided by firms or funds to small, early-stage, Sovereign Wealth Fund
emerging firms that are deemed to have high z Fund set up by the governmentto invest its forex
growth potential, or which have demonstrated high surplus in financial instruments like bonds, stocks,
growth. gold, etc.

National InfrastructureAnd Investment Venture Capitalist
Fund (NIIF) z It is a private equity investor that provides capital
z Only sovereign wealth fund set up by India. to companies exhibiting high growth potential in
z 49% is owned by the Indian Government and the exchange for an equity stake.
remaining is owned by domestic and foreign investors. z This could be funding startup ventures or
z It is primarily set up to support infrastructure financing. supporting mall companies that wish to expand
but do not have access to equities markets.
Liquid Alternative Investments z Venture capitalists are interested in the profit of
Funds which operate similarly to hedge funds but are the company rather than in the person unlike angel
regulated similarly to mutual funds are available and investors.
known as liquid alternative investments. z Venture capitalists are willing to risk investing in
such companies because they can earn a massive
ESG (Environment, Social and Governance)
return on their investments if these companies are
Funds a success.
z It is a kind of mutual fund. Its investing is used
synonymously with sustainable investing or socially STATE DEVELOPMENT LOANS (SDL)
responsible investing.
z While selecting a stock for investment, the ESG z State Governments also raise loans from the market
fund shortlists companies that score high on which are called SDLs. SDLs are dated securities issued
environment, social responsibility and corporate through normal auction similar to the auctions conducted
governance, and then looks into financial factors. for dated securities issued by the Central Government.
z Regulated by: Securities and Exchange Board of India z Interest is serviced at half-yearly intervals and
(SEBI). the principal is repaid on the maturity date. SDLs
z Launched by State Bank of India - SBI Magnum issued by the State Governments also qualify for SLR.
Equity ESG Fund. z They are also eligible as collaterals for borrowing
through market repo as well as borrowing by eligible
VIX Index entities from the RBI under the LAF.
z VIX Index has a strong negative correlation with
Nifty. EXCHANGE TRADED FUNDS (ETF)
z Every time the VIX Index falls, Nifty rises and when
VIX Index rises, Nifty is bound to fall. z Fund that is created by pooling together assets
and then dividing this accumulated asset into
z NSE measures the degree of volatility in the Nifty over
individual units that are traded on the stock exchange.
the next 30 days through VIX Index.
z The value of the ETF comes from the value of the
ANGEL INVESTORS VIS-A-VIS VENTURE underlying assets- shares of stock, bond, gold, etc.
z ETFs are a mix of open-ended and close-ended
AVOID CAPITALIST schemes.
z Popular ETFs
Angel Investors
Gold ETFs
z It is an investor who provides financial backing to
z The company issuing the gold ETFs invests its money in
entrepreneurs for starting their business.
physical Gold and converts its investment in different
z Usually found among an entrepreneur’s family and units of paper-based ETF.
friends but they may be from outside also.
z Hence, buying 10 units of an ETF is akin to buying 10
z The capital they provide can be a one-time injection
gms of gold.
of seed money or ongoing support to carry the
company through difficult times - in exchange they Bharat Bond ETF
may like owning shares in the business or provide
capital as loan. z Debt-based ETF made by pooling bonds issued by
z Usually investing in the person rather than the Central Public Sector Enterprises.
viability of the business. z First corporate bond ETF of India.
z Other than investable capital, these investors z It will invest in AAA-rated PSE bonds.
provide technical advice. Minimum investment: `1000;
z Focused on helping the business succeed, rather Maximum investment for retail investors:
than reaping a huge profit from their investment. `2 Lakh; Maturity Period: 3 year and 10 year.

Security market is a component of the wider
EXTERNAL COMMERCIAL BORROWINGS z
financial market where securities can be bought
z Loans in India made by non-resident lenders in and sold on the basis of demand and supply.
foreign currency to Indian borrowers.
Primary functions of the securities market:
z They are used widely in India to facilitate access to
foreign money by Indian corporations and PSUs. z To enable the flow of capital from those that have it
z Regulated by: Ministry of Finance and RBI to those that need it.
ZŽƵƚĞƐ z To help in transfer of resources from those with idle

resources to others who have a productive need for
ƵƚŽŵĂƚŝĐZŽƵƚĞƐ ƉƉƌŽǀĂůZŽƵƚĞ them.
z To provide channels for enhancing savings and
investment in the economy.
SECURITY MARKET IN INDIA
z Securities are financial instruments issued to raise funds
via issue of bonds, debentures, mutual funds etc.
DIFFERENCE BETWEEN DEBT AND EQUITY

Basis Debt Equity
Meaning Invest in loans. E.g. - Bonds, debentures. Invest in shares of the company.eg-shares.
Ownership No, they are creditors of the company. Yes, they have an ownership interest.
Risk Low risk High risk
Return Type Pay Interest Share Dividends.
Nature Of Return Fixed and Regular Irregular (based on company performance)
Market Debt market Capital market
Claim During Liquidation First Claim Last Claim
Tax Benefit Interest is tax deductible Dividends are not tax deductible.
Capital Gains Tax CGT is levied on the sale of equity Repayment of loans doesn’t attract CGT.
Convertibility Debt can be converted into equity. Equity can’t be converted into debt.
Attractive In slowdown period In boom period.
ISSUERS IN THE INDIAN SECURITY Ways to raise capital in the primary market
MARKET Public Issue
Open for all Indian citizens, the most broad-based
z Issuers are organizations that raise money by issuing
method of raising capital and the most prestigious.
securities. They issue securities based on their need,
their ability to service the securities. Rights Issue
Raising capital from the existing shareholders of a
Some of the common issuers in the
company - preferential kind of issue restricted to a
Indian Securities Markets are:
certain category of the public only.
z Mutual Funds
Private Placement
z Central and State Government
z Local Government and Municipalities When a company issues financial security such as
shares and convertible securities to a particular group
z Financial Institutions and Banks
of investors (not more than 49 in number) it is known as
z Public Sector Companies private placement.
Two Types:
STOCK EXCHANGE z
1. Preferential Allotment: a listed company issues

z A physically existing institutionalized set-up where security to a select group of entities, which may be
instruments of security stock market (shares, bonds,
institutions or promoters, at a particular price.
debentures, securities, etc.) are traded. E.g. BSE, NSE.

2. Qualified Institutional Placement: A listed
INTERNATIONAL STOCK EXCHANGE
company can issue equity shares, fully and partly
convertible debentures, or any security (other than z India’s first international stock exchange, opened
warrants) that is convertible to equity shares. in 2017 at Gujarat.
ROLE OF STOCK EXCHANGES COMMODITY EXCHANGES

z Established in 2003, based in Mumbai.
z Providing Liquidity and Marketability for the securities
which are traded. z Commodities traded: metal, bullion, agro-
commodities, energy etc.
z Responsible for evaluation of stock prices- based on
z Regulated: Forward Market Commission (Ministry of
demand and supply of stock.
Consumer affairs), later merged with SEBI in 2015.
z Safeguards investors- There is a proper checks and
balance in the exchange. MAJOR EXCHANGES
z Contributes to Economic Growth.
z Acts as a barometer for a country’s economy. National Commodity and Derivatives
z Broader range of investment avenues.
Exchange Limited (NCDEX)
z Providing Scope for Speculation within the provisions z NCDEX is an online commodity exchange, dealing
of law. primarily in agricultural commodities in India under
the regulatory authority of the SEBI.
MAJOR STOCK EXCHANGES
NCDEX- AGRIDEX
National Stock Exchange (NSE) z India’s first tradable agricultural commodities future
index.
z NSE is the biggest stock exchange in India established
z It tracks the performance of the 10 commodities
in 1992. traded on the NCDEX platform.
z The benchmark index for the NSE is the Nifty. z It will facilitate in hedging their commodity risk.
z NSE’s Nifty comprises of 50 companies.
Multi Commodity Exchange (MCX)
Bombay Stock Exchange (BSE) z It is an online platform wherein commodities like gold,
z Asia’s first stock exchange established in 1875. silver, lead, copper, zinc, crude oil, etc. are traded.
z Earlier a regional stock exchange, nationalised in z It is the largest commodity futures exchange in India.
2002. z Forward Markets Commission (FMC) was the
z Biggest in India, it accounts for almost 75% of total regulator of MCX till 2015 after which FMC was
merged with SEBI.
stocks traded in India and is the fifth largest in the
world(market capitalization).
OTHER EXCHANGES
z Computed by the Statistics Department of the BSE
hence called the BSE. National Index (BSENI).
Over the Counter Exchange of India Ltd (OTCEI)
Four indices connected with the BSE z Set up in 1989, commenced trading only in 1992.
1. Sensex: The sensitive index (i.e., Sensex) is a z India’s first fully computerized stock exchange.
30 stocks index of the BSE. z Objective: to overcome problems such as lack of
transparency and delays in settlements and also to
2. BSE-200: This is a 200-stock share index of the BSE allow stock market exposure to comparatively smaller
3. BSE-500: In mid-1999, the BSE came up with a companies.
500-stock index representing major industries z Trading in this exchange takes place via market-
including information technology. makers and commission is fixed.
4. National Index: An index of 100 stocks being Interconnected Stock Exchange of India (ISE)
quoted nationwide (Bombay, Delhi, Kolkata, etc.) was z Set up in 1998.
developed to give broader/wider representation of z Single floor of India’s 15 Regional Stock Exchanges
the stock market since the Sensex consists of only (RSEs).
30 stocks. z It is a web-based exchange.

Indo Next Worldwide SMEs
z Launched in 2005 jointly and medium the BSE and the
z AIM (Alternative Investment Market) in UK,
FISE.
z TSX Ventures in Canada,
z Better known as the BSE Indo Next.
z GEM (Growth Enterprise’s Market) in Hong Kong,
z To promote liquidity to the stocks of the small and
z MOTHERS (Market of the High-Growth and Emerging
medium enterprises (SMEs). Stocks) in Japan,
z Also, an effort to rejuvenate the Regional Stock z Catalist in Singapore
Exchanges (RSEs). z Chinext in China
z RSEs will be able to use the BSE network online—the
Webex. STRATEGIC DISINVESTMENT
SME Exchanges z Disinvestment is a mechanism by which the
z Dedicated for trading the shares of small and medium government sheds its ownership in a company.
scale enterprises (SMEs). z Shedding of ownership by the government
below 51%.
z The concept originated from the difficulties faced by
SMEs to get listed in the main exchanges. z Transfer of management control to a strategic partner
(mostly private sector).
z BSE has named its SME platform as BSESME, while
z Government identifies a strategic partner (mostly
NSE has named it as Emerge.
private sector) and transfers the management control
and sheds 51% of its ownership.
INVESTMENT FUNDS
Real Estate Investment Trust (REITS)/
Basis Mutual Funds
Infrastructure Investment Trust (INVIT)
Meaning A mutual fund is an asset management It is like a mutual fund, which enables direct investment
company that brings together money from of small amounts of money in infrastructure/real
many people and invests it in stocks, bonds or estate to earn a small portion of the income as return.
other assets.
Investment In Securities of listed entities Real estate property or infrastructure project.
Stock Securities Income generating projects.
Period Continuous buying and selling, relatively short Investments for a long period of time say 10-15 years.
period.
Exit Can be redeemed anytime, easy exit. On closure of scheme can be sold at stock exchange at
quoted value.
REIT AND INVIT

REITs InVITs
z Real Estate investment Trust. z Infrastructure counterpart of ReITs. Similar to mutual
z Similar to mutual fund, investors hold units of ReITs funds to invest in the infrastructure sector.
that are traded in the stock market. z Regulated by: SEBI
z Regulated by: SEBI
DEPOSITORY RECEIPTS
z Depository Receipts are negotiable financial instruments issued by a company in a foreign jurisdiction.
z It is a mechanism for raising funds by tapping foreign investors who otherwise may not be able to participate in
the domestic market.

TYPES OF DEPOSITORY RECEIPTS
Global Depository Indian Depository American Depository
Parameters
Receipt (GDR) Receipt(IDR) Receipt (ADR)
Negotiability GDR is negotiable all over the IDR is negotiable only within An American depositary receipt
world. India. (ADR) is a certificate issued
by a U.S. bank that represents
shares in foreign stock. ADRs
are denominated in U.S. dollars
Issued in European countries India America
Purpose Helps companies to acquire To help the foreign companies to ADRs represent an easy, liquid
resources all over the world. acquire the resources of India. way for U.S. investors to own
foreign stocks.
Listed in A GDR is listed in LSE An IDR will be listed in NSE. ADR is listed on American stock
exchanges.
Application GDR will be applied by The Indian companies will not The companies located in foreign
companies all over the world apply for Indian Depository countries can get registered on
including India. Receipts. the American Stock Exchange.
TYPES OF FOREIGN INVESTMENTS

Foreign Direct Investment Foreign Portfolio Foreign Investors (FII)
Basis
(FDI) Investor(FPI) Institutional
z FPI is an investment by
z FDI is when a company non- residents in Indian z When a foreign company
takes controlling securities like shares, buys equity in a company
Meaning
ownership in a business government bonds, etc. through the stock
entity in another country. z FPI is more liquid and market.
less risky than FDI.
Where do they invest? z Invests in physical assets z Invests in financial assets z Invests in financial assets
z Active ownership is z FPI consists of passive z No control of the
Ownership
there in FDI ownership. company.
z Brings long term capital,
Nature knowledge, skills & z Brings short term capital z Brings short term capital
technology
z To increase enterprise
capacity or productivity z To increase capital z To increase capital
Aim
or change management availability availability
control
Where do they flow? z In primary market z In secondary market z In secondary market
z Does not tend to be
Scope of speculation z Tends to be speculative z Tends to be speculative
speculative
Entry and exit z Relatively difficult z Relatively easy z Easy
What are they eligible
z Profits of the company z Capital gains z Capital gains
for?
z In the capital account
z In the capital account of z In the capital account of
Reflected in of Balance of Payment
BOP BOP
(BOP)

z The existing portfolio investor class → Foreign
FOREIGN DIRECT INVESTMENT (FDI) Institutional Investor (FII) and Qualified Foreign
z FDI not allowed in: Investor (QFI) registered with SEBI shall be subsumed
Retail Trading (except single brand product under it.
retailing)
Atomic Energy;
CREDIT DEFAULT SWAP
Lottery Gambling and Betting including casinos z CDS is a credit derivativethat can be used to
etc.; transfer credit risk from the investor exposed to the
Chit fund; risk (called protection buyer) to an investor willing to
Nidhi Company; take risk (called protection seller).
Agriculture and Plantations (Other than Tea Protection Buyers
Plantations);
z Hedge their credit exposure by making periodic
Real estate/construction of farm houses;
payments to the protection seller.
Manufacturing of Cigars/tobacco.
z Participate in credit risk without owning the asset.
Foreign investment was introduced in 1991 under
Foreign Exchange Management Act (FEMA). Protection Sellers
z There are two routes for FDI z Transfer risk without transferring the underlying
asset.
1. Automatic route: FDI is allowed without prior
approval by Government/ RBI z Diversify his/her portfolio.
2. Government route: with Government approval
IMPORTANT TERMINOLOGY
z Investment is permitted through government
route only in the following cases:
Initial Public Offers (IPO)
An entity situated in a country which shares a land
border with India. z Process by which a company issues shares for the first
time to raise money.
Where the owner of investment into India is
situated in or is a citizen of any such country. Offer for Sale (OFS)
Any transfer of ownership of any FDI in an entity in
z Enables promoters of a company to sell their shares;
India leading in beneficial ownership falling within
No new issuance of shares.
the purview of the above restrictions.
z The Foreign Investment Facilitation Portal (FIFP), Rights Issue
administered by the Department for Promotion of
z Only the existing shareholders of the company would
Industry and Internal Trade (DPIIT) Under Ministry
have the right to buy the shares.
of Commerce facilitates the single window clearance
of applications which are through approval route. Private Placement
Qualified Foreign Investor z Raise capital from certain selected investors only.
z QFI is an individual, group or association which is Blue-Chip Companies

a resident in a foreign country, making portfolio
z Large and well-recognised companies with a long
investment in India.
history of sound financial performance
z The QFI should compliant with the Financial Action
Task Force standard and should be a signatory to the Bullish and Bearish Market
International Organization of Securities Commission.
z Bullish Market: denotes the healthy performance of
Registered Foreign Portfolio Investor the share market in which the shareholders are able
to make profits.
z In March 2014, the RBI simplified foreign portfolio
investment norms by putting in place an easier z Bearish Market: poor performance of the capital
registration process and operating framework with market.
an aim to attract inflows.
z The portfolio investor registered in accordance with
Circuit Breaker
the SEBI guidelines shall be called Registered Foreign z A measure to stem the steep fall or a sharp rise in the
Portfolio Investor (RFPI). price of a security/stock or the index as a whole.

Retail Investor z Functions: quasi-legislative, quasi-judicial and quasi-
z An investor whose subscription to securities if of value executive.
less than 2 lakh. z Regulate: Stock exchange, approve Mutual Funds,
Register FIIs, etc.
Gilt-Edge Securities
FATF
z Bond issued by the government which carries less risk.
z Founded: 1989.
Market Capitalization z An intergovernmental organization, initiative of the
G7.
z Price per share multiplied by the total number of
shares outstanding. z Objective: to combat money laundering.
z FATF Secretariat: OECD headquarters in Paris.
Brokers z FATF has two list:
z Registered member of a stock exchange who buys 1. Grey List: Countries that are considered safe
or sells shares/securities on his client’s behalf and haven for supporting terror funding and money
charges a commission on the gross value of the deal - laundering. EX: Pakistan
such brokers are also known as commission brokers.
2. Black List: Countries known as Non-Cooperative
Jobber Countries or Territories (NCCTs) are put here.
z A jobber is a broker’s broker or one who specializes These countries support terror funding and money
in specific securities catering to the needs of other laundering activities. Eg. Iran, North Korea
brokers.
Sustainable Stock Exchange
Scrip Share z Provide a unique, high-level platform to explore
z A share given to the existing shareholders without any how the world’s exchanges can work together with
charge—also known as bonus share. investors, regulators and companies to create more
sustainable capital markets.
Kerb Dealings Social Stock Exchange
z The transactions of stocks which take place outside
z An electronic fundraising platform that allows
the stock exchanges—unofficially and take place after
investors to buy shares in a social enterprise that has
the normal trading hours.
been vetted by the exchange.
Penny Stocks z Social enterprises: revenue-generating business
whose primary objective is to achieve a social
z The share which remains low-priced at a stock
objective.E.g. providing healthcare or clean energy.
exchange for a comparatively longer period.
India Energy Index
Badla z Digital trading platform that will allow buyers and
z When the buyers want postponement of the sellers of natural gas to trade both in the spot market
transaction—in Western world called contango. and in the forward market.
Undhabadla Pension Fund Regulatory and Development

z When the sellers want postponement of the Authority (PFRDA)
transaction—also known as the reverse badla or z Established: 2003 by the Indian Government.
backwardation. z Pension Fund regulatory is a pension related
authority authorized by the Finance Ministry, and
INSTITUTIONS WITH RESPECT TO it helps in promoting income security of old age by
SECURITIES MARKET regulating and also developing pension funds.
SEBI Insurance Regulatory and Development

z Regulator for the securities market in India. Authority of India (IRDAI)
z Established: 1988 and given statutory powers on 30 z Formed by an IRDA Act 1999(amended in 2002) to
January 1992 through the SEBI Act, 1992. incorporate some emerging requirements.

z National agency of the GOI and regulator of all Secretary of Finance, DEA, Revenue Secretary etc.
private sector insurance business and public sector Chief Economic Adviser
insurance business in India.
z Issuesguidelines for various insurance companies. Financial Stability Board
Financial Stability and Development z Brainchild of G20. FSB promotes international
financial stability by coordinating national financial
Council (FSDC) authorities and international standard-setting bodies.
z It is a non-statutory apex council under the Ministry
of Finance. International Organization of Securities
z The Raghuram Rajan committee (2008) on
financial sector reforms proposed the creation of Commissions (IOSCO)
FSDC. z An international body that brings together the world’s
z Composition: It is chaired by the finance minister. securities regulators.
z Members are z IOSCO develops, implements and promotes adherence
Chairperson of IBBI to internationally recognized standards for securities
Heads of all Financial Sector Regulators - RBI, SEBI, regulation.
PFRDA & IRDA z It works with the G20 and the Financial Stability
Minister of State for the Department of Economic
Board (FSB) on regulatory reform globally.
Affairs
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EXTENDED GUIDANCE

9 External Sector of India
z Meaning/Definition: All economic activities of an

economy which take place in foreign currency fall in NET INTERNATIONAL INVESTMENT
the external sector such as balance of payment, export, POSITION (NIIP)
import, foreign investment, external debt, current
account, capital account, exchange rates etc. z NIIP measures the total stock
of external financial assets and
FOREX RESERVES liabilities. Assets owned by
z Foreign exchange reserves are assets denominated residents in other countries -
in a foreign currency that are held on reserve by a Assets owned by non-residents
central bank. These may include foreign currencies, within India.
bonds, treasury bills and other government Meaning z Expressed both in absolute
securities. value as well as % of GDP.
z India is the 6th largest Forign Exchange Reserve z The higher the ratio of NIIP
holder in the world (Economic Survey 2022-23) to GDP, the more vulnerable
an economy becomes to the
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developments in international
ĂŶŬ ^ƉĞĐŝĂů &ŽƌĞŝŐŶ 'ŽǀĞƌŶŵĞŶƚ
markets
ĞƉŽƐƚŝƚƐ ƌĂǁŝŶŐ ƵƌƌĞŶĐǇ ^ĞĐƵƌŝƚŝĞƐ Assets for z Residents from India owning
ZŝŐŚƚƐ;^ZƐͿ ƐƐĞƚƐ;&Ϳ Indian Economy assets in other countries
'ŽůĚ ZĞƐĞƌǀĞdƌĂŶĐŚĞ Liabilities for z Residents from other countries
WŽƐŝƚŝŽŶ;ZdWͿ Indian Economy owning assets in India
z RBI’s Forex Reserves (by December 2022) → $ 562.85 z Indian residents own more
billion Positive NIIP assets abroad as compared to
assets owned by non-residents.
RBI’s Forex Exchange Reserves (Feb. 17, 2023) z Indian residents own less assets
z Total Reserves = 46,49,018 crores/561,267 million Negative NIIP abroad as compared to assets
USD owned by non-residents.
z Foreign Currency Assets = 41,09,014 crore/496,072
million USD REMITTANCES INTO INDIA
z Gold = 346376 crore/ 41817 million USD
z Migration and Development Brief (World Bank):
z SDRs = 151307 crore/ 41817 million USD
India has become the world’s largest recipient of
z Reserve Position IMF = 42321/5111 Remittances, receiving USD 87 billion (a gain of 4.6 %
from previous year) in 2021.
SDR
z India is followed by China, Mexico, the Philippines,
z SDR is an international reserve asset, created by the
IMF in 1969. and Egypt are top remittance recipients.
z United States being the biggest source, accounting
Value of the SDR is based on a basket of five
for over 20% of all Remittances.
currencies: Dollar, Euro, Renminbi, Yen and
Pound Sterling. z India is the largest recipient of remittances in the
z It is neither a currency nor a claim on the IMF. Rather, world receiving US $ loobn in 2022 (Economic Survey
it is a potential claim on the freely usable currencies of 2022-23). As on Dec. 2022, Forex Reserves Stood
IMF members. US 563 bn $
Conditions: Structural reforms in the economy put by
EXCHANGE RATE z
the body.
z Exchange rate is Price at which one currency is z It is the first agreement of its kind.
converted into or exchanged for another currency.
India had signed EFF agreement with the IMF in
VARIOUS EXCHANGE RATES the financial year 1981-82.
MECHANISM Sovereign Wealth Fund

z It is the fund of foreign currency that is meant to be
Fixed Exchange Rate invested in global assets like, shares, bonds, energy
z Complete intervention of Authority (government assets etc.
or central bank) in determination of the currency z It diversifies the income, and secures external
exchange rate. accounts.
Floating Exchange Rate CURRENCY CONVERTIBILITY

z Market forces (demand and supply) determine the
value of currency z Currency convertibility is the ease with which the
currency of a country can be freely converted into any
z No role of authority
other foreign currency or gold at market determined
Managed Floating Rate exchange rate.
z Exchange rate is largely determined by market forces. Partial Convertibility
z In crisis, central banks may intervene to stabilize the z Portion allowed by the government which can be
exchange rate converted into foreign currency with least restrictions.
z India has been operating on a managed floating Also known as Dual exchange system.
exchange rate regime since march 1993.
Union Budget for 1992-93, introduced it on
Pegged Float Exchange Rate current account under Liberalized Exchange
z A currency is pegged to international hard currency. Rate Management System (LERMS)
z Presently partial convertibility still operational on
NOMINAL EFFECTIVE EXCHANGE capital account.
India has adopted partial Rupee convertibility on
RATE (NEER) VS REAL EFFECTIVE z
Capital Account.
EXCHANGE RATE (REER) Restrictions on FDI: Prohibited sectors; Sectoral
Cap; Government’s Approval in certain sectors.
NEER Restrictions on FPI: Individual and Aggregate FPI
z Weighted average of bilateral nominal exchange Limit, FPI Limit in G-Secs and Corporate Bonds etc.
rates of the home currency in terms of foreign External Commercial Borrowings: RBI sets
currencies. annual limits.
z It is the exchange rate of one currency against a
basket of currencies, weighted according to trade Full Convertibility
z Freedom to convert domestic currency into any
with each country (not adjusted for inflation).
foreign currency and vice-versa without any
REER regulatory intervention.
z Weighted average of nominal exchange rates, z Dual exchange rate system got automatically abolished
adjusted for inflation. and LERMS was now based upon the open market
exchange.
z It is calculated on the basis of NEER.
z Captures inflation differentials between country and In 1994, the GOI declared full convertibility of
its major trading partners and reflects the degree of Rupee on Current account.
external competitiveness. z Current Account transactions: Imports, Exports,
Remittances, Gifts, Donations, etc.
Extended Fund Facility (EFF)
z It is a service provided by the IMF to its member Tarapore Committee I (1997) and II (2006)
countries which authorizes them to raisze any amount z Constituted by the RBI for suggesting a roadmap on
of foreign exchange from it to fulfil their BoP crisis full convertibility of Rupee on Capital Account.

z Committee defined CAC: as the freedom to convert
local financial assets with foreign financial assets and CAPITAL ACCOUNT CONVERTIBILITY:
vice-versa at market determined rates of exchange ADVANTAGES AND DISADVANTAGES
and mentioned the following as its benefits:
Availability of large funds to supplement domestic
resources and thereby promote economic growth Advantages
Improved access to international financial markets z Availability of large funds → improved access to
and reduction in cost of capital international financial markets.
Incentive for Indians to acquire and hold z Reduction in cost of capital.
international securities and assets z Incentive for Indians to acquire and hold international
Improvement of the financial system in the context securities and assets.
of global competition z Greater financial competitiveness.
Help Indian corporates to use External commercial
Liberalised Exchange Rate Management z
borrowing routes without RBI or Govt approval.
System (LERMS) z Indian residents can hold and transact foreign
z Operationalized since 1993. currency denominated deposits with Indian banks.
z India delinked its currency from the fixed currency z Greater financial competitiveness.
system and moved into the era of floating exchange- z Increase in FII/FPI flow.
rate system under it.
Disadvantages
z Market determined exchange rates being higher than officially fixed exchange rates → raise import prices and cause
cost-push inflation.
z Improper management of CAC can lead to currency depreciation and affect trade and capital flows.
z Advantages are short lived as per studies, also International financial institutions are skeptical about CAC post-2008
crisis.
z Speculative activity can lead to capital flight from the country. E.g. South East Asian economies during 1997-98.
z Imposing control would become difficult in a globalized environment once CAC is introduced.
FOREIGN EXCHANGE MARKET

z Marketplace where international foreign currencies are sold and purchased simultaneously is known as the foreign
exchange market or forex market.
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Revaluation Devaluation Appreciation Depreciation

z Government or the z Government or the z Value of its currency is determined by the market
central bank central bank forces of demand and supply
z Value of its currency z Value of its currency
z Happens when Supply z Happens when Supply
increases. decreases.
of currency decreases of currency increases
z Associated with fixed exchange rate regime z Associated with floating exchange regime
External Sector of India 87

IMPACT OF REVALUATION/APPRECIATIONVIS-A-VIS DEVALUATION/DEPRECIATION
Revaluation/Appreciation Devaluation/Depreciation
z Exports become expensive. z Exports become cheaper
z Imports become cheaper. z Imports become expensive
z Value of the remittances decreases z Increase in aggregate demand
z Overall Inflation decreases z Increase in inflation
BALANCE OF PAYMENT (BOP) z Negative Balance/Trade Deficit: When imports are

greater than its export.
z A systematic record of all economic transactions
between the residents of one country with the Balance of Trade: Difference between the monetary
residents of the other country in a financial year. value of a nation's exports and imports over a certain
time period.
It consists of balance of trade, balance of current
account and capital account. z BoP divides transactions in two accounts: (1) Current
z Positive Balance/Trade Surplus: When a country account and (2) Capital account
exports more than its imports.
Current Account Capital Account

Meaning z Records imports and exports of visible and z Shows capital expenditure and income for
invisibles country
z Short term implication transactions z Long term implication transactions
z Covers only earnings and spending. z Only includes borrowings and lending by a
z Excludes any borrowings and lending. country
Components z Visible trade (Export and Import of goods - z Direct Investment (FDI)
Merchandise transactions) z Portfolio Investment (FPI)
z Invisible trade (Export and Import of z Loans / External commercial borrowing (ECB)
services) z Non-resident’s investment in Bank, Insurance,
z Unilateral transactions Pension schemes.
z RBI’s foreign exchange reserve
Deficit z If the value of the goods and services z When more money is flowing out of a country
imported exceeds the value of those to acquire assets and rights abroad
exported.
z Current Account deficit = Trade gap
(export – import) + Net current transfers
(foreign aid) + Net factor income (Interest,
Dividend)
Surplus z If the value of the goods and services z Money is flowing into the country, but these
exported exceeds the value of those inflows reflect changes in the ownership of
imported. national assets by way of sale or borrowing.
Convertibility z Current account convertibility relates to z Capital account convertibility refers to a

the removal of restrictions on payments liberalization of a country’s capital transactions
relating to the international exchange of such as loans and investment.
goals, services and factor incomes.
Current status z Allowed Full convertibility z Only Partial convertibility

FACTORS INFLUENCING CURRENT TRADE BALANCE
ACCOUNT DEFICIT (CAD) z Monetary difference of the total export and import of an
economy in one financial year is called trade balance.
z Exchange rate (overvalued exchange rate would cause
a large deficit). Top exports from Top Imports to
z Level of consumer spending (economic growth) and India India
hence import spending. z USA z China
z Capital flows to finance the deficit in the long term. z UAE z USA
z Saving rates: influencing level of import spending. z China z UAE
z Relative inflation/competitiveness. z Hong Kong z Saudi Arabia
z Singapore
Top Export Products Top Import Products

z Petroleum products z Petroleum products
z Pearls, precious and semi-Precious stones z Mineral fuels including oil
z Drug formulations, biological z Gems, precious metals
z Gold and other precious metal jewellery z Machinery including computers, Organic, Electrical
z Iron and steel machinery
z Pharmaceuticals products.
RoDTEP SCHEME Types of external debts

z Under the RoDTEP, various Central and State duties, z Short term debt: Maturity period 1 year or less
taxes, and levies imposed on input products, among z Long term debt: Maturity period more than 1 year
others, would be refunded to exporters. z Sovereign debt: Bonds issued by the national
government in any foreign currency to generate
z It has succeeded the Merchandise Exports from
funds to meet its financial expenses
India Scheme (MEIS) as the latter was not compliant
z At end-June 2021, RBI put India’s external debt at US$
to WTO (World Trade Organisation) regulations.
571.3 billion.
Benefits
z The scheme will be India’s biggest, and only export
IMPORTANT TERMINOLOGY
promotion scheme.
Hard Currency
z It is expected to significantly impact India’s
z Any globally traded currency which has global demand,
competitiveness, trade flows and export numbers over
high liquidity (adequate supply) and stable (does not
the next 5-10 years.
fluctuate)
z India’s mission mode endeavours to achieve the
$400 billion in exports this year (2021-22) will be E.g. US Dollar, The Euro
supported by this scheme.
Soft Currency
z It will make the Indian exporters more cost-
z It is just the opposite of Hard currency.
competitive and create a level playing field for them in
the international market. E.g., Indian Rupee is the Soft currency in the
Indian Forex market.
EXTERNAL DEBT
Hot Currency
z Part of a country's debt which has been borrowed z It is the term for the Forex market and is the temporary
from foreign creditors which includes private name for any Hard currency.
commercial banks, international financial institutions z If any Hard currency is exiting any economy at a fast
such as the World Bank, International Monetary pace for the time, the Hard currency is said to be hot
Fund (IMF), and sovereign governments. currency.

Heated Currency z Advantages
z Domestic currency which is under pressure (heat) of Increases the combined economic productivity of
depreciation due to any hard currency’s high tendency the countries – easier access of goods and services
of exiting the economy. It increases competitiveness.
z Also known as currency under Heat or under Economic integration can broaden markets, boost
Hammering. employment, and spur political cooperation
Regions may agree to economic integration to
E.g. In the case of SE Asian crisis (1997), the US
better serve their citizens.
Dollar became hot.
Political cooperation among countries can improve
Cheap Currency because of stronger economic ties, which can help
z When a government starts re-purchasing its bonds resolve conflicts peacefully and lead to greater
stability.
before their maturities and at full maturity prices,
there is an increase in supply of money which is called
cheap money.
TRADE AGREEMENT
z A trade agreement is a contract/agreement/pact
Dear Currency between two or more nations that outlines how they
z It is just the opposite of cheap money. will work together to ensure mutual benefit in the field
z Government issues bonds, the flow of money increases of trade and investment.
from public to the government hence supply of money
in the market decreases, which is dear currency.
Preferential Trade Agreement (PTA)
z It is a trading bloc that gives preferential access to
Beggar Thy Neighbour Policy certain products from the participating countries.
z Term used for a set of policies that a country enacts z Done by reducing tariffs but not by abolishing
to address its economic woes that, in turn, actually them completely.
worsen the economic problems of other countries. z It requires the lowest level of commitment to reducing
z The term comes from the policy's impact, as it makes trade barriers.
a beggar out of neighboring countries. E.g. Mercosur preferential trade agreement, Asia
pacific trade agreement
Weak Currency
z Cheapens the rate of a country's export, making them Generalized System of Preferences (GSP)
more attractive to international buyers. z GSP is a preferential scheme granted by
industrialized nations to developing countries.
Currency War z It involves reduced Most Favoured Nations (MFN)
z Takes place when countries seek to devalue their Tariffs or duty-free entry of eligible products exported
currency to gain a competitive advantage. by beneficiary countries to the markets of donor
countries.
Currency Manipulator z Recently the US government has withdrawn its GSP
z This is a label given by the US government to countries benefits to India.
it feels are engaging in unfair currency practices
by deliberately devaluing their currency against the Free Trade Agreement (FTA)
dollar. z It is a trade bloc which eliminates tariffs, import
quotas, and preferences on most (if not all) goods
z Recently, the United States placed 11 countries,
and services traded between member countries.
including India in the Currency Practices Monitoring
List (Currency Manipulators Watch List). E.g. SAFTA (South Asian PTA to FTA), ASEAN FTA
Comprehensive Economic Cooperation

ECONOMIC INTEGRATION AND TRADE
Agreement (CECA)/Comprehensive Economic
AGREEMENTS Partnership Agreement (CEPA)
z Meaning: Economic integration refers to trade z When the countries go beyond FTA and agree for
unification between different states by the partial or a greater degree of economic integration which
full abolishing of customs tariffs on trade taking place extends to capital and human resources, and to expand
within the borders of each state. trade and investment, it would result in CECA or CEPA.

z CEPA has a bit wider scope than CECA. While CECA z Established to provide assistance to countries:
come first with elimination of tariffs, CEPA comes later Experiencing serious payments imbalances
including trade in services and investments. because of structural impediments.
E.g. India: CEPA with Japan and CECA with Singapore. Characterized by slow growth and an inherently
weak balance of payments position.
Customs Union
z An agreement between member countries of a custom Trade Integration Mechanism
union remove trade barriers among themselves z Allows the IMF to provide loans under one of its
and adopt common external trade barriers. facilities to a developing country whose balance of
E.g. Gulf Cooperation Council (GCC), East African payments is suffering because of multilateral trade
Community (EAC). liberalization.
Common Market India and IMF

z Type of a custom union in which members remove z India joined the IMF in 1945, as one of the original
internal trade barriers, adopt common policies, founding members
allow members to move resources among themselves
z IMF credit helped India in response to emerging BOP
freely.
problems on 2 occasions:
Economic Union 1. In 1981-82, India borrowed SDR 3.9 billion
z It is a type of a trade block which is composed of a 2. In 1991-93, India borrowed a total 2.2 billion under
common market with a customs union. 2 stands by arrangements, and in 1991 it borrowed
z Members eliminate trade barriers among themselves, SDR 1.4 billion under Compensatory Financing
adopt common external barriers, allow free import
Facility.
and export of resources, adopt a set of economic
policies, and use one currency.
TERMS RELATED TO WTO
E.g. European union
Most Favored Nation (MFN)

SCHEMES AND LENDING FACILITIES z It is a treatment accorded to a trade partner to
AT IMF ensure non-discriminatory trade between two
countries vis-a-vis other trade partners.
Stand-By Arrangement (SBA) z It is the first clause in the General Agreement on
z Helps countries in economic crisis to overcome the Tariffs and Trade (GATT).
Balance of Payment (BoP) problems.
z Under WTO rules, a member country cannot
Flexible Credit Line (FCL) discriminate between its trade partners.
z For countries with very strong track records of policy z If a special status is granted to a trade partner, it must
implementation. be extended to all members of the WTO.
z No ongoing conditions and no caps on the size of the
credit line.
Countervailing Duties (CVD)
z CVDs are trade import tariffs imposed to nullify the
Precautionary and Liquidity Line (PLL) adverse effects of subsidies.
z PLL provides financing to meet actual or potential z They are imposed only under WTO rules and are
balance of payments needs of countries with sound also called anti-subsidy duties.
policies.
z Serve as insurance and help resolve crises. Anti-Dumping Duty
z Imposed to rectify the situation arising out of the
Extended Fund Facility (EFF)
dumping of goods and its trade distortive effect.
z It is a service provided by the IMF to its member
z According to global trade norms, including the WTO
countries which authorizes them to raise any amount
regime, a country is allowed to impose tariffs on such
of foreign exchange from it to fulfill their BoP crisis,
but on the conditions of structural reforms in the dumped products to provide a level-playing field to
economy. domestic manufacturers.

Peace Clause
OTHER FOREIGN INVESTMENT
z High subsidies are seen to be distorting global trade.
The peace clause protects a developing country’s food METHODS
procurement programmes against action from WTO
members in case subsidy ceilings are breached. Bilateral Investment Treaty (BIT)
z Treaties between two countries aimed at protecting
Example investments made by investors of both countries.
The peace clause protects India’s food procurement z Treaties impose conditions on the regulatory behavior
programmes against action from WTO members in of the host state and limit interference with the rights
case the subsidy ceilings – 10 percent of the value of the foreign investor.
of food production in the case of India and other
developing countries – are breached. Participatory Notes
z P-Notes, or PNs, are financial instruments required by
Debt Service Ratio investors or hedge funds to invest in Indian securities
z The ratio of its debt service payments (principal + without having to register with the SEBI.
interest) to its export earnings.
ADR (American Depository Receipts) and
z A country's international finances are healthier
GDR (Global Depository Receipts)
when this ratio is low. For most countries the ratio is
z Commonly used by the Indian companies to raise
between 0 and 20%.
funds from the foreign capital market.
ADR is traded on US stock exchanges.
OTHER IMPORTANT TERMINOLOGIES
GDR is traded on European stock exchanges.
Place of Effective Management (PoEM) FOREIGN CURRENCY BORROWINGS

Rules (FCB) AND ASSOCIATED RISK
z Aim: ensuring sufficient economic activity takes place
in a particular country and determining a foreign External Commercial Borrowings (ECB)
company’s residential status. z It is basically a loan availed by an Indian entity
z Helps to assess if companies are setting up shell from a non-resident lender.
subsidiaries abroad to evade taxes. z They are used widely in India to facilitate access
z It means a place where key management and to foreign money by Indian corporations and PSUs
commercial decisions that are necessary for the (public sector undertakings).
conduct of the business of an entity as a whole are, in z Most of these loans are provided by foreign
substance, made. commercial banks and other institutions.
z In the post reform period, ECBs have emerged a major
Base Erosion and Profit Shifting (BEPS) form of foreign capital like FDI and FII
z Multilateral Convention is an outcome of the OECD/
Regulator
G20 Project to tackle Base Erosion and Profit
Shifting (the “BEPS Project) z The DEA (Department of Economic Affairs), Ministry
of Finance, along with Reserve Bank of India,
z Tackles tax planning strategies that exploit gaps and monitors and regulates ECB guidelines and policies.
mismatches in tax rules to artificially shift profits to
low or no-tax locations. Advantages of ECB
z India has recently ratified the multilateral convention z ECBs provide an opportunity to borrow large volumes
to implement tax treaty related measures. of funds.
z The funds are available for a relatively long term.
Tax Haven z Interest rates are also lower compared to domestic
z Tax havens are the countries that have lower tax funds.
rates, provide secrecy and anonymity to the account z It provides access to international markets for the
holders and do not share tax information with other borrowers and gives good exposure to opportunities
countries. globally.

z Corporate can raise ECBs from internationally
recognised sources such as banks, export credit MARKET-PLACE MODEL VS INVENTORY
agencies, international capital markets etc. MODEL
z It is a way of raising capital without giving away any
control, as debt holders don't have voting rights, etc. Market Place Model
z Due to rising NPAs there is low credit offtake from
banks. So ECBs serve the financial needs of the z Marketplace model of e-commerce means
companies. providing an information technology platform by
an e-commerce entity on a digital and electronic
Disadvantages of ECB network to act as a facilitator between buyer and
seller.
z The growing importance of ECBs in the composition
z Marketplaces are platforms that enable a
of external debt is a cause of concern for the Indian
large, fragmented base of buyers and sellers to
economy.
discover prices and transact with one another in
z Availability of funds at a cheaper rate may bring in a lax an environment that is efficient, transparent and
attitude on the company’s side resulting in excessive trusted.
borrowing.
z Amazon and Flipkart in India have a marketplace
z This eventually results in higher debt on the balance model.
sheet which may affect many financial ratios adversely.
z Higher debt on the company’s balance sheet is usually Inventory Model
viewed negatively by the rating agencies.
z Inventory model of e-commerce means an
z Since the repayment of the principal and the interest
ecommerce activity where inventory of goods and
needs to be made in foreign currency, it exposes the
services is owned by e-commerce entities and is sold
company to interest and currency fluctuations. to the consumers directly.
z Companies may have to incur hedging costs or assume z The main feature of the inventory model is that
exchange rate risk which if goes against may end up the customer buys the product from the ecommerce
negative for the borrowers. firm. He manages an inventory (stock of products),
interfaces with customers, runs logistics and is
Sahoo Committee involved in every aspect of the business.
z Set up in 2013, under the chairmanship of Dr. M. S. z Alibaba of China is following the inventory model.
Sahoo.
z Objective: to develop a framework for access to GOVERNMENT INITIATIVES TO
domestic and overseas capital markets. PROMOTE TRADE
ECB Liberalised by RBI
z Recently, the ECB norms were liberalised by the RBI Nirvik (Niryat Rin Vikas Yojana) Scheme
by April 2020 the related policy framework was as z Introduced by Credit Guarantee Corporation of
given below: India
z All eligible borrowers to raise up to US$ 750 million z It is Export Credit Insurance Scheme (ECIS).
per financial year under the automatic route (with z To enhance loan availability and ease the lending
sector-wise limits being abolished). process.
z The list of eligible borrowers enlarged all entities
eligible to receive FDI, port trusts, units in SEZs, SIDBI, Services Exports from India Scheme (SEIS)
Exim Bank and registered microfinance entities. z To promote exports in services
z Public sector oil marketing companies can borrow z Rewards (duty credit scrips) to exports of services.
upto US$ 10 billion for working capital purposes with z Scrips are transferable and can be used to pay certain
a minimum average maturity period of 3 years under central duties & taxes.
the automatic route without mandatory hedging.
Special Economic Zone (SEZ)
z Manufacturing companies allowed upto US$ 50 million
of ECB per year with the maturity of 1 year. z Created by SEZ Act 2005
z Aim: develop expert hubs to promote growth and
z In case of ECB being raised from a foreign equity
development
holder the maturity period will be 5 years.

z Can be set up by either central or state government or Export Promotion Capital Goods (EPCG)
even by private sector
z Objective: to facilitate the import of capital goods for
z India had set up Asia’s first ‘Export Processing Zone’ producing quality goods and services and enhance
(EPZ) in Kandla in 1965 itself.
India’s competitiveness.
z Recent steps (till March 2020) taken by the Government
z Criteria: To apply for an EPCG scheme, an IEC is
to strengthen SEZs in the country are:
required
Minimum Land Area requirement reduced to
50 per cent for multi-product and sector-specific z EPCG manufacturing Scheme allows import of capital
SEZs. goods for pre-production, production and post-
production at Zero customs duty.
A new agro-based food processing sector has
been introduced
Electronic Import Exporter Code (IEC)
Dual use of facilities like Social and Commercial
infrastructure by SEZs and non-SEZs entities has z Import exporter code is an export permit that is
been allowed in order to make SEZ operations mandatory for carrying out exports and imports from/
more viable. to another country.
Sectoral broad-banding has been introduced to z DGFT has facilitated the online filing of the IEC
encompass similar and related areas under the application.
same sector.
‘SEZ India’ mobile app launched to help the SEZs Electronic Bank Certificate (eBRC)
to track their transactions. z Enables DGFT to capture essential details of the
realization of export proceeds directly from the banks
Trade Infrastructure for Export Scheme via secured electronic mode.
z Objective: To address the export infrastructure gaps
z This paves the way for the implementation of various
in the country.
export promotion schemes without any physical
z Provides financial assistance in the form of grant-in-
interface with the stakeholders.
aid to Central/State Government owned agencies for
setting up or for up-gradation of export infrastructure.
Other Recent Initiatives
Agriculture Export Policy 2018 z E-Filing & E-payment
z To double agricultural exports from present z 24 × 7 customs clearance
US$ 30 Billion to US$ 60 Billion by 2022. z Paperless environment
z Strive to double India’s share in world Agri exports. z Single window for customs
z Scheme focus is on agriculture export-oriented z Angel tax reforms
production, export promotion, better farmer
realization. z Training: Through Niryat bandhu Scheme and many
others
Export Credit Guarantee Corporation of
z Niryat Bandhu: Reach out to the new and potential
India (1957) exporters and mentor them.
z Objective: To promote exports from the country by
providing credit risk insurance and related services NEW FOREIGN TRADE POLICY (NFT)
for exports.
z Wholly owned by the Ministry of Commerce and 2021-2026
Industry
Introduction
Duty-Free Import Authorization (DFIA)
z Come into effect from 1st April 2021 for a period of
z Duty-free import of inputs, fuel, oil, energy sources, a
five years.
catalyst which is required for the production of export
goods is allowed.
Objectives
z The importer is required to meet certain export
obligations w.r.t. the finished goods. z To make India a leader in the area of international
trade and channelize the synergies gained through
z The minimum value addition of 20% is mandatory to
be required to be achieved. merchandise and services exports for growth and
employment.
z This scheme is mainly used for imports of raw sugar to
be used in producing an export product. z To make India a USD 5 Trillion economy.

Significance Expectations
z The District Export Hubs Initiative will form an z WTO-compliant tax incentives
important component of the new Foreign Trade z Easy credit access
Policy. z Infrastructure upgrade
z Less subsidy, more support
z The Department of Commerce through the Regional
z Tax breaks
Authorities of DGFT has engaged with State/UT
z Digitization and e-commerce
Governments to take forward this initiative in the
z Export awareness
districts and enable its implementation in a phased
z Import wish list
manner.
  

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ONLY IAS TOPPERS
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UTKARSH DWIVEDI YAKSH CHAUDHARY HARKEERAT SINGH YASHARTH SHEKHAR C.Y. KUMAR REDDY VISHAL
AIR-05 AIR-06 AIR-10 AIR-12 AIR-15 AIR-39
UPSC CSE 2021 UPSC CSE 2021 UPSC CSE 2021 UPSC CSE 2021 UPSC CSE 2021
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ABHIJEET TANMAY KALE GEETIKA UTSAV PANDEY MRIDUL ANURADHA

NIDHI GOYAL GARIMA NAGPAL SAKSHI KUMARI AKASH JOSHI PRATIBHA SHWETA BHARTI

10 Poverty and Unemployment
z In urban areas, the poverty rate fell 9.8 percentage

POVERTY points to 13.7 percent from 37.2 per cent, while in
rural areas 16.3 percentage points to 25.7 percent
Meaning from 42 percent.
z Poverty is a social phenomenon in which there is
deprivation of basic human needs.
COMMITTEES ON POVERTY
z United Nations (UN): Poverty entails more than the
lack of income and productive resources to ensure
sustainable livelihoods. It includes hunger and Alagh Committee (1979)
malnutrition, limited access to education and other z First to come up with an official poverty line, based on
basic services, etc. calorie intake.
Constitutional/Other Provisions to Tackle 2100 calories in Urban areas, 2400 calories in rural
Poverty areas.
z Fundamental Rights: Article 16; Article 17; Article 21 Lakdawala Committee (1993)
and Article 24.
z This committee defined the poverty line on the basis
z DPSP: Article 39; Article 39 (a); Article 41; Article 42
and Article 45. of household per capita consumption expenditure.
z SDG: Goal 1 i.e. to end poverty in all its forms, z The committee used CPI-IL (Consumer Price Index
everywhere. for Industrial Laborers) and CPI- AL (Consumer Price
Index for Agricultural Laborers) for estimation of the
POVERTY LINE poverty line.
Till as recently as 2011, the official poverty lines
Meaning were based entirely on the recommendations of
z The conventional approach to measuring poverty is to the Lakdawala Committee of 1993.
specify a minimum expenditure (or income) required
z Recommendations
to purchase a basket of goods and services necessary
Consumption expenditure should be calculated
to satisfy basic human needs and this minimum
expenditure is called the poverty line. based on calorie consumption as earlier.
State specific poverty lines should be constructed
World Bank Definition and these should be updated using the CPI-IW in
z A person is extremely poor if she is living on less urban areas and CPI-AL in rural areas.
than 1.90 international dollars a day, (updated in Discontinuation of scaling of poverty estimates
2015) which are adjusted for inflation as well as price based on National Accounts Statistics.
differences between countries.
Tendulkar Committee (2009)
POVERTY STATISTICS ACCORDING TO z Committee headed by Suresh Tendulkar.
CENSUS 2011 z Changed calorie-based estimation to expenditure
z The proportion of people living Below Poverty Line based.
(BPL) has come down from 37.2 per cent in 2004- z Introduce a new term Poverty Line Basket (PLB)
05 to 21.9 per cent in 2011-12 — a decline of 15.3 which is the basket of all goods selected to determine
percentage points poverty.
z Consumption quantity is fixed the same for both MPI and SDG
rural and urban people but price differs. Daily per z Since the adoption of the 2030 Agenda, UNDP
capita expenditure for Rural- `27, Daily per capita has closely aligned the MPI with the Sustainable
expenditure for Urban- `33. Development Goals (SDGs).
Estimated that 21.5% of the Indian population
was poor. Global Scenario
z 1.3 billion people are still living in multidimensional
Rangarajan Committee poverty.
z Adopted the calorie-based approach which was z The report highlighted 65 out of 75 countries studied
used in the past. significantly reduced their multidimensional poverty
z Monthly consumption expenditure per person or levels between 2000 and 2019.
per household as a tool, Daily per capita expenditure
for Rural- `33 and Daily per capita expenditure for Indian Scenario
Urban- `47 z India lifted as many as 270 million people out of
multidimensional poverty between 2005-06 and
Overall poverty: 29.5 Percent (in the year 2011-12)
2015-16.
Rural: 30.9 Percent (in the year 2011-12)
Urban: 26.4 Percent (in the year 2011-12) Neighborhood Scenario
z In China, 70 million people left multidimensional
MULTIDIMENSIONAL POVERTY poverty between 2010 and 2014, while in Bangladesh,
z Introduction: Poverty is often defined by one- the numbers declined by 19 million between 2014
dimensional measures usually based on income. But no and 2019.
single indicator can capture the multiple dimensions
of poverty.
Impact of Covid-19
z Multidimensional poverty includes: poor health, z Covid-19 is having a profound impact on the
lack of education, inadequate living standards, development landscape. The study finds that on
disempowerment, poor quality of work, the threat of average, poverty levels will be set back 3 to 10 years
violence, and living in areas that are environmentally due to Covid-19.
hazardous, among others.
z Factors incorporated: A multidimensional measure Sustainable Development Goals
of poverty can incorporate a range of indicators that z The index emphasizes on measuring and monitoring
capture the complexity of this phenomena. progress under the goals to reach zero poverty by
2030-Goal 1 of the SDGs.
GLOBAL MULTIDIMENSIONAL POVERTY
INDEX (MPI) 2020 NATIONAL MULTIDIMENSIONAL
POVERTY INDEX (N-MPI)
Introduction
z It is released by the United Nations Development Published By
Programme (UNDP) and the Oxford Poverty & z NITI Aayog
Human Development Initiative (OPHI).
Methodologies
Dimensions
z This baseline report of India’s first-ever national
z MPI uses three dimensions and ten indicators
MPI measure is based on the reference period
which are:
of 2015-16 of the National Family Health Survey
1. Education: Years of schooling and child enrollment (NFHS)- 4.
(1/6 weightage each, total 2/6);
z It uses the globally accepted and robust methodology
2. Health: Child mortality and nutrition (1/6 weightage developed by the Oxford Poverty and Human
each, total 2/6); Development Initiative (OPHI) and the United
3. Standard of living: Electricity, flooring, drinking Nations Development Programme (UNDP).
water, sanitation, cooking fuel and assets (1/18 z It captures multiple and simultaneous deprivations
weightage each, total 2/6) faced by households.
Poverty and Unemployment 97

Parameters z While the number of poor people indicates the spread
z NMPI is calculated using 12 indicators — nutrition, of poverty, PGR indicates the depth.
child and adolescent mortality, antenatal care, years of
schooling, school attendance, cooking fuel, sanitation,
Poverty Trap
drinking water, electricity, housing, assets and bank z A situation where an unemployed getting
account, unemployment allowance is not encouraged to seek
work/employment because his/her after-tax earnings
z They have been grouped under three dimensions
namely, health, education and standard of living. as employed is less than the benefits as unemployed,
also known as the unemployment trap.
Key Findings
z 51.91% of the population in Bihar is poor, followed
Poverty Line Basket
by Jharkhand (42.16%), Uttar Pradesh (37.79%), z The basket of goods and services necessary to satisfy
Madhya Pradesh (36.65%) and Meghalaya (32.67%). basic human needs is the Poverty Line Basket (PLB).
Kerala registered lowest population poverty
z
Below Poverty Level (BPL)
levels (0.71%), followed by Puducherry (1.72%),
z GoI has set this economic standard so it can identify
Lakshadweep (1.82%), Goa (3.76%) and Sikkim
the lower income people of the community who need
(3.82%).
urgent assistance from the government.
z Less than 10% of the population are poor include
Tamil Nadu (4.89%), Andaman & Nicobar Islands z It has placed a limit on income.
(4.30%), Delhi (4.79%), Punjab (5.59%), Himachal z Individuals whose earnings fall below the threshold
Pradesh (7.62%) and Mizoram (9.8%). are listed as BPL.
Palma Ratio
TERMINOLOGIES RELATED TO
z The Palma ratio is a measure of inequality.
POVERTY z It is the ratio of the richest 10% of the population’s
share of gross national income (GNI) divided by the
Absolute Poverty poorest 40% ‘s share.
z Absolute poverty is a condition where household z It measures inequality similar to the Gini coefficient.
income is below a necessary level to maintain
basic living standards (food, shelter, housing). Kuznets Curve
z This condition makes it possible to compare between z In economics, a Kuznets curve graphs the hypothesis
different countries and also over time.
that as an economy develops, market forces first
Relative Poverty increase and then decrease economic inequality.
z Relative poverty is a condition where household /ŶĚƵƐƚƌŝĂů
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income is a certain percentage below median WƌĞͲŝŶĚƵƐƚƌŝĂů
ƚƵƌŶŝŶŐƉŽŝŶƚ ;ƐĞƌǀŝĐĞƐĞĐƚŽƌ
ďĂƐĞĚĞĐŽŶŽŵǇͿ
income. ĞĐŽŶŽŵŝĞƐ
z For example, the threshold for relative poverty could

be set at 50% of median incomes (or 60%).
Poverty Headcount Ratio 'WƉĞƌĂƉŝƚĂ;ĞĐŽŶŐƌŽǁƚŚͿ

z The World Bank’s International Poverty Line (IPL)
stands at a person living daily on US$1.90 (PPP The hypothesis was first advanced by economist
exchange rate). Simon Kuznets in the 1950s and ‘60s.
z So, a person who spends less than an absolute amount
US$1.90 a day is considered below IPL line → Gini Coefficient
classified as poor.
z An inequality indicator in an economy.
Poverty Gap Ratio z The coefficient varies from zero to one.
z The Poverty Gap Ratio is the gap by which mean z A zero Gini coefficient indicates a situation of perfect
consumption of the poor below poverty line falls equality (i.e., every household earning the same level
short of the poverty line. of income) while a one signifies a situation of absolute
z It indicates the depth of poverty; the more the PGR, the inequality (i.e., a single household earning the entire
worse is the condition of the poor. income in an economy).

Lorenz Curve National Sample Survey Organization (NSSO)
z A graph showing the degree of inequality in income
z It defines employment and unemployment on the
and wealth in a given population or an economy.
following activity statuses of an individual:
z It is a rigorous way to measure income inequality.
Working (engaged in an economic activity) i.e.
‘Employed’.
ϭϬϬй
ƵŵƵůĂƚŝǀĞ ƐŚĂƌĞ ŽĨ ŝŶĐŽŵĞ
Ϭ Ϳ
Seeking or available for work i.e. ‘Unemployed’.
;ϰϱ
ƚǇ
ƵĂů ŝ Neither seeking nor available for work.
ĞĂƌŶĞĚ
ĨĞ
Ƌ ǀĞ
Ƶƌ
ĞŽ ǌ
>ŝŶ
>Ž ƌĞŶ z The first two constitute the labor force and
unemployment rate is the percent of the labor force
ϭϬϬй
that is without work.
ƵŵƵůĂƚŝǀĞƐŚĂƌĞŽĨƉĞŽƉůĞĨƌŽŵůŽǁĞƐƚƚŽ
ŚŝŐŚĞƐƚŝŶĐŽŵĞ
Unemployment rate = (Unemployed Workers / Total
labor force) × 100
SOCIO ECONOMIC AND CASTE CENSUS
(SECC) TYPES OF UNEMPLOYMENT IN INDIA
z To estimate the BPL population, SECC followed a
three-step process: Cyclical Unemployment
1. Automatic exclusion z It is a result of the business cycle, where
2. Automatic inclusion unemployment rises during recessions and declines
3. Neither automatically included nor automatically with economic growth.
excluded
z Cyclical unemployment figures in India are negligible.
7 Criteria used in SECC z It is a phenomenon that is mostly found in capitalist
z Households with only one room , with no solid economies.
walls and roof
z Households with no adult male aged 15-59. Technological Unemployment
z Female headed households z It is the loss of jobs due to changes in technology.
z Households with differently abled members
z Households with no able bodied members Disguised Unemployment
z SC/ST households with no literate members z It is a phenomenon wherein more people are
above the age of 25years employed than actually needed.
z Landless households deriving major income
z It is primarily traced in the agricultural and the
from manual labour.
z Findings: it was found that the percentage of people unorganized sectors of India.
below the poverty line in 2011-12 was 30.95 percent
in rural areas and 26.4 percent in urban areas. Seasonal Unemployment
z It is an unemployment that occurs during certain
UNEMPLOYMENT seasons of the year.
z Agricultural laborers in India rarely have work
Meaning
throughout the year.
z Unemployment is a phenomenon that occurs when a
person who is capable of working and is actively
searching for work is unable to find work.
Structural Unemployment
z It is often used as a measure of the health of the z It is a category of unemployment arising from
economy. the mismatch between the jobs available in the
market and the skills of the available workers in
Measure
the market.
z The most frequent measure of unemployment is
the unemployment rate, which is the number of z Many people in India do not get jobs due to lack of
unemployed people divided by the number of people requisite skills and due to poor education level, it
in the labor force. becomes difficult to train them.

Frictional Unemployment survey is known as the current weekly status (CWS)
z The Frictional Unemployment also called as Search of the person.
Unemployment, refers to the time lag between the
jobs when an individual is searching for a new job or TERMINOLOGIES RELATED TO
is switching between the jobs.
UNEMPLOYMENT
z In other words, an employee requires time for
searching a new job or shifting from the existing to
a new job, this inevitable time delay causes frictional
Labor Force
unemployment. z Persons who are either working (employed) or
seeking or available for work (unemployed) during
z It is often considered as voluntary unemployment
the reference period together constitute the labor
because it is not caused due to the shortage of jobs,
force.
but in fact, the workers themselves quit their jobs in
search of better opportunities. Unemployment Trap
z It is a situation when unemployment benefits
KEY EMPLOYMENT AND discourage the unemployed from going to work.
UNEMPLOYMENT INDICATORS z People find the opportunity cost of going to work too
high when one can simply enjoy the benefits by doing
Labor Force Participation Rate nothing.
z It is the percentage of persons in the labor force z An unemployment trap arises when the opportunity
(i.e., working or seeking or available for work) in the cost of going to work is higher than the income
population. received, discouraging people from returning to work
and being productive.
Worker Population Ratio (WPR)
z It is the percentage of employed persons in the Work Force
population
z All people in the age group of 15-59 years.
Proportion Unemployed (PU) z Work force > labor force
It is the percentage of persons unemployed in the
z
Employment Rate
population
z Ratio of employed person to population (15 to 59
Unemployment Rate years)
It is defined as the percentage of persons unemployed
z
Employment Elasticity
among the persons in the labor force.
z Percentage changes in employment induced by
Activity Status - Usual Status changes in GDP, which captures responsiveness of the
labor market.
z Activity status: Determined on the basis of the
activities pursued by the person during the specified Employment Intensity
reference period. z Extent to which growth creates employment.
z Usual Status: When the activity status is determined
on the basis of the reference period of the last 365 Income Inequality
days preceding the date of survey, it is known as the z Income inequality is the unequal distribution of
usual activity status of the person. household income or individual income across the
various participants in an economy.
Activity Status - Current Weekly Status z The simplest way to understand inequality is by
(CWS) analysing it through the categorisation of population
z The activity status determined on the basis of a into quintiles (fifth) from poorest to richest along
with reporting the proportions of income held by
reference period of last 7 days preceding the date of
them.

ĂƵƐĞƐŽĨ/ŶĞƋƵĂůŝƚǇ
&ĂŝůƵƌĞŽĨ>ĂďŽƵƌŝŶƚĞŶƐŝǀĞ >ĂĐŬŽĨƐŬŝůů ŵĞƌŐĞŶĐĞŽĨDƵůƚŝEĂƚŝŽŶĂůŽƌƉŽƌĂƚŝŽŶΖƐ :ŽďůĞƐƐŐƌŽǁƚŚ

ŵĂŶƵĨĂĐƚƵƌŝŶŐƵŶŝƚƐ ĚĞǀĞůŽƉŵĞŶƚ ǁŝĚĞŶŝŶŐƚŚĞƐŬŝůůĞĚƵŶƐŬŝůůĞĚĚŝǀŝĚĞ ŝŶ/ŶĚŝĂ
&ĂŝůƵƌĞƚŽĚĞǀĞůŽƉǆƉŽƌƚ ^ŽĐŝĂůŝŶƐƚŝƚƵƚŝŽŶƐŝŶZƵƌĂů ZĞŐŝŽŶĂůĂŶĚ hƌďĂŶƌŝŵĞƐƐƵĐŚĂƐŚƵŵĂŶ

ŽƌŝĞŶƚĞĚŝŶĚƵƐƚƌŝĞƐǁŝƚŚ ĂƌĞĂƐĂŶĚƚŚĞŝƌƌŝŐŝĚ /ŶƚĞƌƐƚĂƚĞ ƚƌĂĨĨŝĐŬŝŶŐ͕ƐĞǆƵĂůĂƐƐĂƵůƚ͕ĐŚŝůĚ
ŚĞĂǀǇƌĞůŝĂŶĐĞŽŶŝŵƉŽƌƚƐ ŚŝĞƌĂƌĐŚŝĂůƐƚƌƵĐƚƵƌĞ ŝŶĞƋƵĂůŝƚŝĞƐ ůĂďŽƵƌĞƚĐ͘
GOVERNMENT SCHEMES & POLICIES TO TACKLE UNEMPLOYMENT & POVERTY

z Training of Rural Youth for self Employment (1987) z PM Garib Kalyan Yojana
z Deendayal Antyodaya Yojana - National Rural z PM SVA Nidhi
Livelihood Mission (2011) z National Career Service (2015)
z National Urban Livelihood Mission (2013) z Skill India Mission.
z Mahatma Gandhi National Rural Employment z PM Kaushal Vikas Yojana (2015)
Guarantee Act (2005). z Start UP India/Stand up India (2016)
  

11 Agriculture
INTRODUCTION z Findings: The percentage of female operational

holdings in the country has increased from about
z Agriculture → Primary Activity. 13% percent during 2010-11 to around 14% during
z Includes: raising crops, animal husbandry, 2015-16.
agroforestry and pisciculture.
Agriculture is a State subject. AGRICULTURE: ECONOMIC
z Section 10 (1) of the Income Tax Act, 1961: Mandates SURVEY- 2022-23
any income generated from any agricultural activities z Performance of the agriculture and allied sector has
are exempted from being taxed by the Government
been buoyant over the past several years, much of which
as it is not counted as a part of an individual’s total
is on account of the measures taken by the government
income.
to augment crop and livestock productivity, ensure
United Nations Decade of Family Farming (2019- certainty of returns to the farmers through price
2028) was launched by the Food and Agriculture support, promote crop diversification, improve market
Organization (FAO) and the International Fund infrastructure through the impetus provided for the
for Agricultural Development (IFAD). setting up of farmer-producer organisations and
promotion of investment in infrastructure facilities
Targets through the Agriculture Infrastructure Fund.
z Ashok Dalwai Committee: Doubling farmer’s income z Private investment in agriculture increases to 9.3% in
by the year 2022. 2020-21.
z Agriculture export policy: increase the agriculture z MSP for all mandated crops fixed at 1.5 times of all
export to over US$ 60 billion by 2022.
India weighted average cost of production since 2018.
Ranking of India z Institutional Credit to the Agricultural Sector
z Third largest consumer of edible oil; Top States: continued to grow to 18.6 lakh crore in 2021-22
Gujarat (Groundnut), UP (Mustard), MP (Soybean). z Foodgrains production in India saw sustained increase
z Fourth largest oilseed-producing country. and stood at 315.7 million tonnes in 2021-22.
z Second largest fish producer in the world in 2018-19. z Free foodgrains to about 81.4 crore beneficiaries
z First in milk production since 1998; 20 % of world under the National Food Security Act for one year from
milk production → Largest bovine population in the January 1, 2023.
world. z About 11.3 crore farmers were covered under the
Scheme in its April-July 2022-23 payment cycle.
Agriculture Census z `13,681 crores sanctioned for Post-Harvest Support
z Conducted: Department of Agriculture, Cooperation and Community Farms under the Agriculture
and farmers welfare. Interval of every 5 year. Infrastructure Fund.
z Collect data on structural aspects of farm holdings. z Online, Competitive, Transparent Bidding System
Operational Holding is a basic statistical unit of data with 1.74 crore farmers and 2.39 lakh traders put in
collection. place under the National Agriculture Market (e-NAM)
z Operational Holding: All land which is used wholly Scheme.
or partly for agricultural production and is operated as z Organic Farming being promoted through Farmer
one technical unit by one person alone or with others Producer Organisations (FPO) under the Paramparagat
without regard to the title, legal form, size or location. Krishi Vikas Yojana (PKVY).
z First Census in 1970-71; Last Census (10th Census) z India stands at the forefront to promote millets
was conducted in 2015-16. through the International Year of Millets initiative.
z Capacity Enhancement: In order to build capacity of
Allied Sectors
the farmers and ensure due credit for the huge service
Animal husbandry, dairying and fisheries are steadily of the farmers:
emerging to be high growth sectors and major drivers of
z Efforts are being augmented to bring India at the
overall growth in agriculture sector.
forefront of popularising Shree Anna (Millets) for
ensuring food security and welfare of farmers.
Food Processing
z As India is the largest producer and second largest
z Government facilitates various measures exporter of millets, progressive steps are being taken
of infrastructure development, subsidized to make India A global hub for Shree Anna (Millets)
transportation and support for formalization of to enhance profitability for farmers growing Shree
micro food enterprises.
Anna (Millets). Ahead of the International Year of
z India runs one of the largest food management Millets, 2023 Indian Institute of Millet Research
programmes in the world. (IIMR), Hyderabad would be supported as a Centre
of Excellence for sharing the technology and best
Food Security Network practices at international level
Government has further extended the coverage of food z Over the next 3 years, government is set to facilitate
security network through schemes like PM Gareeb 1 crore farmers for adopting Natural Farming 10,000
Kalyan Yojana (PMGKY). bio input resource centres are to be established for
pesticide and fertilizer manufacturing for creating
AGRICULTURE: UNION BUDGET national-level distributed micro-fertilizer and
2023-24AVOID pesticide manufacturing network
z The storage capacity is set to be decentralised for
z Agriculture and allied sectors are set to see direct capital
farmers to realise remunerative prices and higher
and resource investments from the centre. Further,
there is a conspicuous intent to upscale and channelise profitability
the efforts of the state and union territories (UT) z Aggregation and Sustainability: In order to ensure,
for a more directional approach. This was witnessed sustainability and to bring local communities at the
through the following initiatives proposed during the forefront of development: To boost production of high
Budget 2023: value horticulture crops, Centre is preparing to launch
a ¹ 2,200-crore Atmanirbhar clean plant program to
Financial Enablement enhance availability of disease free quality planting
z Agriculture Accelerator Fund is to be set up to encourage material Public private partnerships as a collaboration
Agriculture start-ups by young entrepreneurs in between farmers, industry and state shall be
rural areas. This will ensure providing for innovative established for boosting the productivity of long staple
and affordable solutions for farmers and modern cotton Mangrove Initiative for Shoreline Habitats &
technologies for productivity and profitability Tangible Incomes’ (MISHTI) is a new scheme designed
enhancement for promoting mangrove preservation and plantation
z The Agricultural Credit Target is destined to be along the coastline
increased to INR 20 lakh Crores with a focus on z The centre shall incentivise states and UTs for
fisheries, animal husbandry and dairying. To ensure promoting alternative fertilisers through PM Program
this, a new sub scheme of PM Matsya Sampada Yojana for Restoration, Awareness, nourishment (PM
with an outlay of INR 6000 crores is to be introduced PRANAM) of Mother Earth
for value chain efficiency
z As a step ahead towards a Cooperation based Economic
Upscaling the Digital Ecosystem Development Model (Sahakar Se Samriddhi),
z Digital Public infrastructure for Agriculture to be built government is formulating a new National Cooperation
as an open source interoperable public good to augment Policy for modernizing the cooperatives and building
access to credit, insurance, market intelligence and their competitiveness
support for growth of Agri-tech industries and start-ups z At the behest of 2030 agenda for sustainable
z An outlay of INR 2,516 Crore has been approved for development, Amrit Darohar scheme is to be
computerisation of 63,000 Primary Agriculture Credit implemented over the next three years for sustained
Societies for business diversification and improving biological diversity and to encourage the optimal use
operational efficiency of wetlands.
Agriculture 103
TERMINOLOGIES RELATED TO CROPPING
MAJOR CROPS AND PRODUCING
Cropping Intensity STATES
z Number of crops cultivated in a piece of land per
annum is the cropping intensity. Top 3 Largest Producing States
Crop
(Descending Order)
Cropping Pattern
Rice West Bengal, Uttar Pradesh, Punjab
z Different crops grown in an area at a particular point
of time are called cropping patterns. Wheat Uttar Pradesh, Punjab, Madhya Pradesh
z Factors: climate (temperature, rainfall, wind etc.), Maize Karnataka, Madhya Pradesh, Bihar
soil, support price, value, demand market, labor Nutri Cereals Rajasthan, Karnataka, Madhya Pradesh
availability, historical setting, etc.
Pulses Rajasthan, Madhya Pradesh, Uttar
Multiple Cropping Pradesh
z Growing more than two crops in a piece of land in a Groundnut Gujarat, Rajasthan, Tamil Nadu
year in orderly succession
Sugarcane Uttar Pradesh, Maharashtra, Karnataka
Inter Cropping
Cotton Maharashtra, Gujarat, Telangana
z Growing two or more crops simultaneously with distinct
Jute West Bengal, Bihar, Assam
row arrangement on the same field at same time.
Mixed Cropping Pokkali Rice Varietie
z Also known as polyculture, inter-cropping is a type of z In News: Recently, Farmers in West Bengal are
agriculture that involves planting two or more plants trying to introduce Pokkali Rice variety from Kerala.
simultaneously in the same field, interdigitating the
z Features: Pokkali is a unique saline tolerant rice
crops.
variety that is cultivated in an organic way in the
Strip Cropping waterlogged coastal regions of Alappuzha, Thrissur
z In this, crops are cultivated in alternate strips which and Ernakulam districts of Kerala.
are parallel to each other on the same piece of land. z Season: June to early November when the salinity
z It is used when a slope is too steep or when there level of the water in the fields is low.
is no alternative method of preventing soil erosion. z GI Recognition: The uniqueness of the rice has
Contour Bunding brought it the GI tag and is the subject of continuing
research.
z It is the farming practice of ploughing/planting
across a slope following its elevation contour
lines, that create a water break which reduces the FARMING SYSTEMS
formation of rills and gullies during times of heavy
water run-off; which is a major cause of soil erosion. Wetland Farming
Soils flooded or irrigated: lake, pond or canal and land
CROPPING SEASONS z
is always in submerged condition.
Kharif
z Cropping season: from July to October during the Dry Land Farming
South-West Monsoon. z Practice of crop production entirely depending upon
z Crops: Rice, maize, sorghum, pearl millet/bajra,
rainfall; moisture conserved in the soil.
finger millet/ragi (cereals), arhar (pulses), soybean,
groundnut (oilseeds), cotton etc.
Rain Fed Farming
Rabi z Crop production in areas where rainfall is, more than
z Cropping season: from October to March during the
North-East Monsoon. 750 mm (i.e. assured rainfall areas).
z Crops: wheat, barley, oats (cereals), chickpea/gram
(pulses), linseed, mustard (oilseeds) etc. Mixed Farming
Zaid z System of farming on a particular farm which includes
z Cropping season: from March to June. crop production, raising livestock, poultry, fisheries,
z Crops: Seasonal fruits and vegetables. beekeeping etc.

AGRICULTURE INPUTS Other Factors
z Government Policy, Extension Services, Education and
Physical Factors Skilling
z Relief, Climate and Soil z Land: Agriculture is a land based activity. Size and
quality of land has a direct effect on agriculture
Institutional Factors productivity and farmers’ income. Land ownership
z Land Holding, Land Tenure and Land Reforms serves as a social value & security against credit.
Infrastructural Factors z Land Holding: Average landholding size of households
z Irrigation, Power, Transport, Credit, Marketing, has shrunk marginally to 1.1 hectare in 2015-16
Insurance and Storage from 1.16 hectare in 2012-13. 86.21% of India’s
cultivated farmland is held by small and marginal
Technological Factors farmers with less than 2 hectare of land; While those
z Seeds, Fertiliser, Insecticide and Farm Machinery with 10 hectare and more account for just 0.57%.
Income Support
Inputs Distribution Sale Issues
and Pension
z Fertiliser z PDS z APMC z PM Kisan z Crop Residue
z Finance z FCI z E-NAM z PM Kisan Maan and Stubble
z Seeds z Negotiable Ware z MSP Dhan Yojana Burning
house Receipt z Price Deficiency z PM AASHA
Payment
z Operation Greens
IRRIGATION z Har Khet ko Pani

z Per Drop more Crop
z While India accounts for more than 17% of the world
population, we have barely 4% of the world’s water Encourage Traditional Water Storage Systems
resources.
z Jal Mandir (Gujarat)
Quantity of Rice Khatri & Kuhl (Himachal Pradesh)
Country Water (Litres) z
(KG)
z Zabo (Nagaland)
India 1 3,000-5,000
z Eri & Ooranis (Tamil Naidu)
China 1 350
z Dongs (Assam)
z Irrigation water productivity: ratio of the crop
output to the irrigation water applied. z Katas & Bandhas (Odisha & Madhya Pradesh)
Minor Irrigation Up to 2000 hectares of Cultivable

FERTILISER/PLANT NUTRIENT
Schemes Command Areas.
Medium Irrigation 2000 hectare < Cultivable Ideal Nitrogen: Phosphorus: Potassium (NPK) ratio in
Command soil → 4 : 2 : 1, for India it’s 8 : 3 : 1.
Schemes
Areas < 10,000 hectares. Facts about Fertilisers
Major Irrigation Cultivable command Areas >
z Second largest consumer of urea after China.
Schemes 10000
z Second in the production of Nitrogenous fertiliser.
hectares.
z One of eight core industries.
Pradhan Mantri Krishi Sinchai Yojana (2015) z Second biggest subsidy after food.
z Accelerated Irrigation Benefit Programme (AIBP) z Potash is met through imports.
z Watershed Development
z Setup water harvesting structures → check dams, Nala
bund, farm ponds, tanks etc.
Agriculture 105
Urea Nutrient Based Subsidy (NBS)
z Not included in the NBS. z The Scheme was initiated in the year 2010.
z Source of nitrogenous fertilizer. z Implemented by the Department of Fertilizers.
z Urea Subsidy: Central Sector Scheme which includes
z Envisaged linking subsidy to nutrient composition
freight subsidy for movement of urea across the
country. (N, P, K & S) rather than products.
z Diversion of urea to plywood and animal feed makers, z Aim: to discourage farmers from applying too much
smuggled to neighbouring countries like Bangladesh urea containing only nitrogen and increase the
and Nepal - Neem coated urea is one of the solutions. consumption of P&K fertilisers which will result in
z Urea overuse: detrimental to the fiscal health of the balanced fertilisation.
economy, proving detrimental to the soil health of
the country. z Applicable to 22 fertilisers (other than Urea).
NEEM COATED UREA (NCU)
^ůŽǁƌĞůĞĂƐĞŽĨ ŝŵƉƌŽǀĞĚWůĂŶƚ ZĞĚƵĐĞĚ

EĞĞŵĐŽĂƚĞĚ ŶŝƚƌŽŐĞŶŝŶƚŽ ĂďƐŽƌƉƚŝŽŶŽĨ WĞƐƚŝĐŝĚĞ /ŵƉƌŽǀĞĚ
hƌĞĂ ƚŚĞƐŽŝů EŝƚƌŽŐĞŶĨƌŽŵ ŽŶƐƵŵƉƚŝŽŶ zŝĞůĚƐ͘
hƌĞĂ
Introduction Mulching
z Department of Fertilizers (DoF) has made it It is a simple process of covering the bare soil with straw,
mandatory for all the domestic producers to produce wood chips, shredded bark etc. to reduce the water
100% urea as Neem Coated Urea (NCU). evaporation, soil erosion and weed growth.
Benefits
MARKET DEVELOPMENT ASSISTANCE
z Improvement in soil health.
z Reduction in usage of plant protection chemicals.
(MDA) POLICY
z Reduction in pest and disease attack.
Objective
z An increase in yield of paddy, sugarcane, maize,
z To promote the use of alternative fertilisers →
soyabean, Tur/Red Gram.
Atmanirbhar in Fertilisers
z Negligible diversion towards non-agricultural
purposes. Key Points
z Due to slow release of Nitrogen, Nitrogen Use z MDA policy was earlier limited to city compost only.
Efficiency (NUE) of Neem Coated Urea increases z There were demands to expand this policy by
resulting in reduced consumption of NCU as compared incorporating organic waste like Biogas, Green
to normal urea. Manure, organic compost of rural areas, solid/
liquid slurry etc.
Objective of New Urea Policy 2015 z This expansion will fully complement the Swachh
z To maximize indigenous urea production.
Bharat Abhiyan.
z To promote energy efficiency in the urea units.
z To rationalize the subsidy burden on the Government Use of Space Technology in Fertilizer Sector
of India. Department of Fertilisers → a three-year Pilot Study on
“Resource Mapping of Rock Phosphate using Reflectance
Fertigation Spectroscopy and Earth Observations Data” by National
Mixing water-soluble fertilizers in drip system, where Remote Sensing Centre under ISRO, in collaboration
fertilizer is delivered into the root system which reduces with Geological Survey of India (GSI) and the Atomic
wastage of fertilizers. Mineral Directorate (AMD).

FINANCE/ CREDIT SEEDS
z Priority Sector Lending Sectors: Agriculture, z Quality seeds are essential to increase yield; Green
Revolution – HYV (High Yielding Variety) Seeds are used.
Micro, Small and Medium Enterprises, Export Credit,
Education, Housing, Social Infrastructure, Renewable Seed Village
Energy, etc. z A village wherein trained group of farmers are involved
z All scheduled commercial banks and foreign banks in production of seeds of various crops; cater to the
(with a sizable presence in India) are required to set needs of themselves and to the neighbouring villages.
aside 40% of their Adjusted Net Bank Credit (ANDC) India’s Seed Bank
for lending to these sectors. z At Chang La in Ladakh, Jammu and Kashmir.
z Regional rural banks, Co-operative banks and
Svalbard Global Seed Vault (Norway) → world’s largest
Small Finance banks have to allocate 75% of ANBC
seed storage facility situated.
(Adjusted Net Bank Credit) to PSL.
z MSP policy, Kisan Credit Card scheme, PM-KISAN Draft Seed Bill 2019
z Institutions: Cooperatives, NABARD, RRB’s, z Ministry of Agriculture & Farmers’ Welfare → under
Parliament’s consideration.
NABARD z Aims: to regulate the quality of seeds sold and
z Established: NABARD Act of 1981. facilitate the production and supply of these seeds
z Objective: providing and regulating credit to to farmers.
farmers, small- scale industries, cottage and village
industries, handicrafts etc. in rural areas. Seed Replacement Rate (SRR) or
z Refinances the financial institutions: state Seed Replacement Ratio
cooperative agriculture and rural development z Measures how much of the total cropped area was
banks (SCARDBs), state cooperative banks (SCBs), sown with certified seeds in comparison to farm
regional rural banks (RRBs), commercial banks saved seeds.
(CBs) which finances the rural sector. z Higher the Seed Replacement Ratio, higher is
z Promotes: SHG-Bank linkage programme for production as well as productivity.
encouraging banks to lend to SHGs. z India suffers from a dismal seed Replacement Ratio.
EƵĐůĞƵƐ ƌĞĞĚĞƌ &ŽƵŶĚĂƚŝŽŶƐ ZĞŐŝƐƚĞƌĞĚ ĞƌƚŝĨŝĞĚ

^ĞĞĚƐ ^ĞĞĚƐ ^ĞĞĚƐ ^ĞĞĚƐ ^ĞĞĚƐ
Soil Health Card z Secondary nutrient: Sulphur (S); Micronutrients:

z Printed report card; given to all farmers at an Zinc (Zn), Iron (Fe), Copper (Cu), Manganese (Mn),
interval of 2 years; implemented by the Ministry of Boron (B).
Agriculture and Farmers welfare. z Micronutrients: Zinc (Zn), Iron (Fe), Copper (Cu),
z The cost of sampling; testing and reporting → by Manganese (Mn), Boron (B)
the Central Government. z Physical parameters: pH, EC (electrical
z Village level soil testing labs will be setup by youth conductivity), OC (organic carbon)
having education in agriculture, SHGs, FPOs etc.
z It provides two sets of fertiliser recommendations FOOD DISTRIBUTION
for six crops including recommendations of organic
manures and recommendations for additional crops z It is the Supply of food grains and distribution of
on demand. essential commodities to the poor through a network
of Fair Price Shops (FPS) at subsidised prices.
Soil samples are tested with respect to
12 parameters Public Distribution System
z Macronutrients: Nitrogen (N), Phosphorus (P), z Integrated Management of Public Distribution System →
Potassium (K) nation-wide portability of ration card holders under
Agriculture 107
the National Food Security Act, 2013 (NFSA),
through the One Nation-One Ration Card system.
AGRICULTURE MARKET
One Nation, One Ration Card Initiative Agricultural Produce Market Committees
z Making standard format for ration cards. (APMC)
z Enable beneficiaries under NFSA to purchase z Established by the States.
subsidised food grains from any fair price shop in z Aim: to eliminate the incidence of exploitation of the
these states. farmers by the intermediaries; food produce must be
brought to the market; sales are made through auction.
z Ration card holders buy food grains anywhere in the
z As per APMC Act: the sale/purchase of agricultural
country.
commodities in a specified market area; producer-
sellers or traders pay the requisite market fee, user
Negotiable Warehouse Receipts (NWR) charges, levies and commissions for the commission
z Launched: 2011, by the Ministry of Consumer Affairs, agents (arhatias); Charges were levied irrespective of
Food & Public Distribution. whether the sale took place inside APMC premises or
z Objective: Farmers can seek loans from banks against outside it; the charges varies widely across states and
commodities.
the warehouse receipts issued to them against their
storage. E-NAM
z Regulated: Warehousing Development and Regulatory z Launched in 2016.
Authority (WDRA).
z Pan-India electronic trading portal for farm
z Receipts Issued: Warehouses registered with the produce, aims to create a unified national market
WDRA → fully negotiable instrument backed by a for agricultural commodities by integrating existing
Central legislation. APMC markets.
z Benefits: Avoid distress sale of agricultural produce,
allow transfer of ownership of that commodity without Minimum Support Prices (MSP)
having to deliver the physical commodity, enhance z Minimum price set by the Government to protect
banks’ interest in lending in respect of farm goods, farmers from the price volatility of Agri commodities.
Can increase liquidity in the rural areas, Encourage z Recommended by: Commission for Agricultural
scientific warehousing of goods. Costs and Prices (CACP)
z Electronic Negotiable Warehouse Receipt (e-NWR) z Approved by: Cabinet Committee on Economic Affairs
System → launched in 2017. (Headed by PM)
z Benefits: Farmers will not have to worry about losing z Nodal Agency: Food Corporation of India (FCI)
the receipt + Stop multiple bank loans on a single z As per Swaminathan Commission for Agricultural
receipt. Cost and Prices (CACP)- there are three types of
production costs:
Food Corporation of India (FCI) A2: Actual paid out cost
z Nodal agency under Ministry of Consumer Affairs, A2+FL: Actual paid out cost plus imputed value of
Food and Public Distribution → procurement; storage family labour.
and movement of food grains; public distribution;
C2: Comprehensive cost including imputed rent
maintenance of buffer stocks.
and interest on owned land and capital
z It procures food grains
At minimum support price (MSP). z CACP considers both (A2+FL) and C2 costs while
On an open-ended basis.
recommending MSPs.
z Procurement is also done by State Government z C2 costs are used as benchmark reference costs
Agencies and private rice millers on behalf of the (opportunity costs) to see if the MSPs recommended
FCI. by them at least cover these costs in some of the
major producing States.
z The food grains are also disposed of by FCI and State
Governments through sale under Open Market Sales MSP is Declared for
Scheme.
z Cereals (7): Paddy, Wheat, Barley, Jowar, Bajra, Maise
and Ragi
z Pulses (5): Gram, Arhar/ Tur, Moong, Urad and Lentil

z Oilseeds (8): Groundnut, Rapeseed/Mustard, Toria,
Soyabean, Sunflower seed, Sesamum, Safflower seed
SUGARCANE PRICING
and Niger seed z Sugarcane price is fixed by the centre/State, while the
z Copra price of sugar is market determined.
z De-husked coconut
z Raw cotton Fair and Remunerative Price (FRP)
z Raw jute z The minimum price that the sugar mills have to pay
z Sugarcane (Fair and remunerative price) to farmers; fixed by Union government based on
recommendations of CACP; Governed by the statutory
Commission for Agricultural Costs and provisions of the Sugarcane (Control) Order, 1966
Prices (CACP) issued under the Essential Commodities Act (ECA),
z Formed in 1965, it is a statutory body and comes under 1955.
the attached office of the Ministry of Agriculture
and Farmers Welfare. Rangarajan Committee Report
z Recommend: MSPs to incentivize the cultivators z Reorganising the sugarcane industry; alternative to
to adopt modern technology + raise productivity + MSP in Sugar Industry; Assures margins to farmers,
overall grain production. irrespective of whether sugar mills generate a profit
z Submits reports recommending prices for Kharif and or not.
Rabi seasons.
z Besides FRP, some states (Punjab, Haryana,
z Commission: Chairman; Member Secretary; one
Uttarakhand, UP and TN) announce a State Advised
Member (Official) and two Members (Non-Official).
Price → generally higher than the FRP.
z Non-official members: representatives/Associates
with the farming community.
AGRICULTURE AND INCOME SUPPORT SCHEMES

PM-KISAN Vs Kalia Vs Ryuthubandhu
Specification PM-KISAN Scheme Kalia Scheme Rythu Bandhu Scheme
Government Union Government Odisha Telangana
Objective z Income support to z To accelerate agricultural z To break the vicious cycle
farmers for easing prosperity and reduce poverty in of rural indebtedness.
their liquidity needs to the State and also to encourage
facilitate timely access to cultivation and associated
inputs. activities.
Criteria z All the farmers z Small and marginal farmers z All the Farmers
irrespective of farm size. z Landless agricultural households
z Vulnerable agricultural
household
z Sharecroppers
Sharecroppers No Included No
Assistance `6,000 per year to farmers. Annual assistance of `12,500 each `5,000 per acre per Season
Provided (Rabi and Kharif).
Insurance N. A `2 Lakhs N.A.
Support
Interest Free N.A. Loans up to `50,000 @ Not Provided N.A.
Crop Loan 0% interest
Agriculture 109
z Objective: To promote agri-business project
COMMITTEES RELATED TO development in their respective States; Farmer
AGRICULTURE Producer Organizations (FPOs)/Farmer Producer
Companies (FPCs); Implementation of e-NAM
platform.
National Commission on Farmers/ z Important Schemes by SFAC: Equity Grant & Credit
Swaminathan Committee (2004) Guarantee Fund (EGCGF) Scheme; Farmer Producer
z Chairman: Prof. M.S. Swaminathan. Organization (FPO) Scheme; National Agriculture
z Recommended: to fix minimum support prices (MSP) Market (NAM) Scheme, etc.
for crops at levels at least 50 per cent more than the z Kisan Rath App: Ministry of Agriculture → transport
weighted average cost of production. of farm produce during lockdown.
Beekeeping Development Committee APEDA

z Chairman: Bibek Debroy z Statutory body → Ministry of Commerce and Industry.
z Recommended: to recognize honeybees as inputs to z Promotes export of agricultural and processed food
agriculture and considering landless beekeepers as products from India.
farmers. z Entrusted with the responsibility to monitor import of
sugar.
Shanta Kumar Committee (2014)
Recommendations FPOs
z A type of Producer organisation where the members
z Reduce the number of beneficiaries under the Food
are farmers.
Security Act.
z Benefits: better collective strength; access to quality
z Allow private players to procure and store food grains.
input, technology, credit; marketing access through
z Stop bonuses on minimum support price (MSP) economies of scale; realisation of income.
z FCI should involve itself in full-fledged grain z Issues: difficulty in mobilising farmers, proper
procurement only in those states which are poor in management, limited membership, autonomy and
procurement. credit restrictions without offering collateral.
z Abolishing levy rice
z Deregulate fertiliser sector AGMARK
z Outsource of stocking of grains z Certification mark employed on agricultural
z Clear and transparent liquidation policy for buffer products in India, assuring that they conform to a
stock set of standards approved by the Directorate of
Marketing and Inspection under the Ministry of
Ashok Dalwai Committee (2016) Agriculture.
z Objective: Doubling Farmers Income (by 2022) z The present AGMARK standards cover quality
z Recommendations guidelines for 222 different commodities spanning
a variety of pulses, cereals, essential oils, vegetable
Placing agricultural marketing in the concurrent
oils, fruits and vegetables and semi-processed
list.
products like vermicelli.
Greater private participation.
Upgrading the existing rural periodical markets as CONTRACT FARMING
Primary Rural Agricultural Markets for meeting
the rural retail market demand. z Contract farming is based on a pre-harvest agreement
between the buyers and producers.
FPO’s can play a pivotal role in integrating small
and marginal farmers into the agricultural market z It is under the Concurrent List under the 7th
system. Schedule of the Indian constitution.
OTHER AGRICULTURE RELATED Model Contract Farming Act, 2018

z Ensures buying of the entire pre-agreed quantity and
INSTITUTIONS price from the farmers.
z All pre-production; production; post-production
Small Farmer Agri Business Consortium services are under its ambit.
z Autonomous Society promoted by the Ministry of z Bars the transfer of ownership of the farmer’s land to
Agriculture and Farmers Welfare. sponsor companies.

z Contract farming will remain outside the ambit of the z Aims to bring in new technology, apart from affordable
APMC Act of the states/UTs. credit to help small entrepreneurs penetrate new
z Limits of stockholding of agricultural produce will not markets.
be applicable on produce purchased under contract
farming. ZERO BUDGET NATURAL FARMING
(ZBNF)
ORGANIC FARMING
z India ranks 1st in number of organic farmers and The Indian PM told at the United Nations
9th in terms of area under organic farming.
Conference on Desertification (COP-14)
z Sikkim → the first State in the world to become fully
organic in 2016. z India is focusing on Zero-Budget Natural Farming
(ZBNF). ZBNF was also highlighted in budget 2019 in
z The major organic exports → flax seeds, sesame,
the bid to double farmer’s income by 2022.
soybean, tea, medicinal plants, rice and pulses.
z There was an increase of nearly 50% in organic Zero Budget
exports in 2018-19, touching `5151 crore.
z Without using any loan, and without spending any
money on purchase of inputs (seeds, fertilizers).
GOVERNMENT INITIATIVES TO
PROMOTE ORGANIC FARMING Natural Farming
z Natural farming farming without chemicals, using -
Mission Organic Value Chain Development biofertilizers, earthworms, cow dung etc.
z Originally promoted by agriculturist Subhash
for North East Region (MOVCD) Palekar, who developed it in the mid-1990s as an
z Central Sector Scheme, a sub-mission under National alternative to the Green Revolution’s methods that
Mission for Sustainable Agriculture (NMSA). are driven by chemical fertilizers and pesticides and
z Launched: Ministry of Agriculture and Farmers’ intensive irrigation.
Welfare in 2015
z States: Arunachal Pradesh, Assam, Manipur, FOUR COMPONENTS OF ZBNF
Meghalaya, Mizoram, Nagaland, Sikkim and Tripura.
Jeevamrutha
z Aims: to develop certified organic production in a
value chain mode to link growers with consumers and It is a mixture of fresh cow dung and aged cow urine
(both from India’s indigenous cow breed), jaggery, pulse
to support the development of the entire value chain.
flour, water and soil; to be applied on farmland.
Paramparagat Krishi Vikas Yojana (PKVY) Bijamrita
z Launched in 2015 → elaborated component of Soil It is a concoction of neem leaves & pulp, tobacco and
Health Management (SHM) of the major project green chilies prepared for insect and pest management,
National Mission of Sustainable Agriculture (NSA). that can be used to treat seeds.
z Promoted → organic farming through adoption of Acchadana (Mulching)
organic villages by cluster approach and Participatory
It protects topsoil during cultivation and does not
Guarantee System (PGS) certification.
destroy it by tilling.
National Program for Organic Production Whapasa
(NPOP) It is the condition where there are both air molecules
z NPOP grants organic farming certification through and water molecules present in the soil. Thereby helping
a process of third-party certification for export in reducing irrigation requirements.
purposes.
PM Formalization of Micro Food Processing MAJOR AGREEMENTS AND CONCEPTS

UNDER WTO
Enterprises (PM-FME)
z The Ministry of Food Processing Industries (MoFPI) Domestic support: given to the farmers for encouraging
launched the PM FME scheme as a part of ‘Atma agricultural activities- research and development, food
Nirbhar Bharat Abhiyan’. security subsidies.
Agriculture 111
z AOA classifies subsidies in different boxes to regulate the agricultural subsidies through the following mechanisms.
AGREEMENT ON AGRICULTURE (AoA) z They should not relate to (are “decoupled” from)
z To remove trade barriers and to promote transparent current production levels or prices.
market access and integration of global markets. It
stands on following three pillars: Amber Box
z Aggregate Measure of Support (AMS)
Market Access z Those subsidies which are trade distorting and need
Tariffs: Tariffication and Reduction Commitments to be curbed.
Domestic Support
Blue Box
z Green Box
z This is the “amber box with conditions.”
z Blue Box
z Any support that would normally be in the amber box,
z Development Box is placed in the blue box if the support also requires
z Amber Box: (De Minimis and Commitments) farmers to limit production.
Export Competition
z Export Subsidies Agriculture Circumvention: Food
De-Minimis Support
Aid and Export Credit. z Developed countries are allowed to maintain trade
distorting subsidies or ‘Amber box’ subsidies to a level
z Export Subsidies and other methods used to make
of 5% of total value of agricultural output.
exports competitive.
z For developing countries this figure was 10%.
z Least developed countries do not have to make
commitments to reduce tariffs or subsidies.
z The base level of tariff cuts was the bound rate
Special and Differential Treatment Box
before 1st January, 1995 or for unbound tarrifs, z Special concessions to the developing economies
the actual rate charged in September, 1986 when for their agricultural development → subsidies for
the Uruguay Rounds begun. tractors, ploughing machines, pump sets, winnowing
machines etc.
Green Box
z Subsidies which are no or least market distorting. Sanitary and Phyto Sanitary Measures
z Income Support: not product specific and uniformly z Measures for food safety and animal and plant health
available to farmers and crop doesn’t matter. based on scientific terms. They should not be arbitrary
z Subsidies must not distort trade, or at most cause and discriminatory in nature.
minimal distortion
z They have to be government-funded.

RAINBOW REVOLUTION IN AGRICULTURE
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>ĂŶĚŚŽůĚŝŶŐ /ŶƚĞƌŵĞĚŝĂƌŝĞƐ
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ĂĐƋƵŝƐŝƚŝŽŶƐ ůĂŶĚŚŽůĚŝŶŐ dĞŶƵƌĞ ZĞŐƵůĂƚŝŽŶ ZŝŐŚƚ
ͻ /ŶĐƌĞĂƐĞŝŶWƌŽĚƵĐƚŝǀŝƚǇ
ͻ WƌŽŵŽƚŝŽŶŽĨ^ŽĐŝĂů:ƵƐƚŝĐĞ
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ŝŐŝƚĂůŝƐĂƚŝŽŶŽĨ>ĂŶĚZĞĐŽƌĚƐ ĂŶĚZĞŽƌŐĂŶŝƐĂƚŝŽŶŽĨŐƌŝĐƵůƚƵƌĞ
Green Revolution Evergreen Revolution

z First Green Revolution (mid 1960’s to mid 1970’s): z Envisaged by Dr. MS. Swaminathan
to ensure food security as there was severe scarcity of
z Productivity must in creas, but in ways which are
food in the country. environmentally safe, economically viable & socially
z Second Green Revolution (1970’s-1980’s): creating sustainable
sustainable agriculture by leveraging advancements in
technology. Operation Flood (White Revolution)
Bringing Green Revolution in Eastern India z Started by: National Dairy Development Board
(NDDB) in 1970s.
z Flagship programme under Rashtriya Krishi Vikas
z Objective: to create a nationwide milk grid.
Yojana (RKVY).
z Result: India became the largest producer of Milk
z Announced in the Union Budget, 2010-11.
and Milk Products.
z Aim: Address the constraints limiting the productivity z Dr. Verghese Kurien and Gujarat-based co-operation
of “rice-based cropping systems”. Anand Milk Union Limited (AMUL) are associated
z Focus: bringing the 2nd Green Revolution in eastern with white revolution.
region, which has rich water resources.
z Seven States: Assam, Bihar, Chhattisgarh, Jharkhand, ANIMAL HUSBANDRY
Odisha, West Bengal and eastern Uttar Pradesh
z Article 48 (DPSP): requires the State to organise
(Poorvanchal).
animal husbandry on modern and scientific lines,
Blue Revolution- Fisheries preserving and improving breeds, and prohibiting the
slaughter of cows and other cattle.
z Launched: During the seventh five-year plan from
1985 to 1990. z Budget 2020: To eliminate following disease by 2025:
z Pradhan Mantri Matsya Sampada Yojana: to bring Cattle: Foot and Mouth disease, Brucellosis,
all fishermen under the ambit of farmer welfare Sheep and goat: Peste Des Petits Ruminants(PPR)
programs and social security schemes. Use MGNREGA workers to develop fodder farms.
z Aim: to augment fish production to achieve its target
of 15 million tonnes by 2020 under the blue revolution Pashudhan Sanjivani
and raise it thereafter to about 20 million tonnes by z Animal Wellness Programme with emergency
2020 to 2023. helpline.
z Mission Fingerling: facilitate establishment of z Farmers given Nakul Swasthya Patra- An Animal
hatcheries and Fingerling rearing pond to ensure Health card with UID identification number of each
the fish production of fish fingerling, Post Larvae of animal registered in a National Database.
shrimp and crab in the country.
e-PashudhanHaat Portal
White Revolution- Milk z Online portal for connecting farmers with breeders
z Nodal Department: Department of Animal Husbandry of indigenous bovine breeds so they can connect with
and Dairying. each other for bulls, artificial insemination etc.
Agriculture 113
Rashtriya Gokul Mission National Kamdhenu Breeding Centre
z Indigenous bovine breeds - conserve them & increase z For development and conservation of indigenous
their population. breeds in a scientific manner.
E.g. Gir, Sahiwal, Rathi, Deoni, etc. Rashtriya Kamdhenu Aayog 2019
z State govts are given money for establishing Gokul z Ministry: Animal Husbandry & Dairying.
Gram breeding & disease treatment centres.
z Aim: Genetic up-gradation of cow resources + Enhance
cow productivity through research in organic manure,
biogas etc; Cow welfare, cow protection laws.
LAND REFORMS
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>ĂŶĚŚŽůĚŝŶŐ /ŶƚĞƌŵĞĚŝĂƌŝĞƐ
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ĂĐƋƵŝƐŝƚŝŽŶƐ ůĂŶĚŚŽůĚŝŶŐ dĞŶƵƌĞ ZĞŐƵůĂƚŝŽŶ ZŝŐŚƚ
ͻ /ŶĐƌĞĂƐĞŝŶWƌŽĚƵĐƚŝǀŝƚǇ
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Objectives z Appropriate land compensation

z Land leasing
z Removing institutional discrepancies of the agrarian
structure z Contract farming: Farmers (Empowerment and
Protection) Agreement on Price Assurance and Farm
z Issues of socio-economic inequality.
Services Act, 2020 → Repealed
z Increasing agricultural production for solving the
z Consolidation of land holdings
inter-related problems of poverty, malnutrition and
z FDI in agricultural sector - At present, 100%
food insecurity.
foreign direct investment (FDI) is allowed through
First Generation Land Reforms the automatic route into India for the following
agricultural activities:
z Abolition of intermediaries
Floriculture, horticulture, apiculture and
z Tenancy reforms cultivation of vegetables and mushrooms under
z Redistribution of land controlled conditions
z Cooperative farming Development and production of seeds and planting
z Consolidation of land. material
Animal husbandry (including breeding of dogs), fish
Second Generation Land Reforms (Focused farming, aquaculture, under controlled conditions
on Marketing) Services related to agriculture and its allied sectors
z Land records modernization Use of land banks (Odisha) and land Pooling

LAND REFORMS
Advantages
z Equity-now the majority of land in India is enjoyed by a minority of landlords.

z The inverse relationship betweep land size and efficiency- the smaller the land, better will be the productivity and
efficiency.
z Owner-cultivation is more efficient than share-cropping.
z The cumulative effect of abolition of zamindari, tenancy legislation and ceiling legislation, motivated the cultivators
to invest and improve agricultural practices.
Disadvantages
z Results in Fragmentation of land and pockets of inefficiency.

z Evidence suggests land reforms had a negative impact on poverty.
z Land reforms had led to economic decline and food insecurity.
z Extreme peasant indebtedness due to sky-high tax rates.
z Creation of a class of a rich few who mostly exploited the poor peasant.
  
Agriculture 115
12 Industry and Infrastructure
z Industry: An economic activity that is concerned Small Scale Industries

with production of goods, extraction of minerals
z Small scale industries use lesser amounts of capital
or the provision of services. E.g.-Iron and Steel
industry (production of goods), Coal mining industry and technology as compared to large scale industries
(extraction of coal) and tourism industry (service that produce large volumes of products. E.g. - cottage
provider) etc. and household industries.
z Classification Of Industries: Industries can be
It comprises of Micro,
classified on the basis of raw materials, size and
ownership. Small and Medium enterprises
1. Micro-enterprises: the investment limit will be
BASED ON RAW MATERIALS `1 crore and turnover `5 crores.
2. Small enterprises: the investment limit will be
Agro Based Industries `10 crores and the turnover `50 crores.
z Use plant and animal-based products as their raw
3. Medium enterprise: the investment limit will be
materials.
`50 crores and turnover `250 crores.
z Examples- Food processing, vegetable oil, cotton
textile, dairy products and leather industries. Large Scale industries
z Investment of capital is higher and the technology used
Mineral Based Industries is superior in large scale industries e.g. - automobiles
z Primary industries that use mineral ores as their raw and heavy machinery industries.
materials.
z The products of these industries feed other industries. BASED ON OWNERSHIP
z Iron made from iron ore is the product of mineral
based industry. This is used as raw material for the Private Sector
manufacture of a number of other products, such as z Owned and operated by individuals or a group of
heavy machinery etc. individuals.
Marine Based Industries Public Sector

z Use products from the sea and oceans as raw materials. z These are owned and operated by the government,
z Industries processing seafood or manufacturing fish such as Hindustan Aeronautics Limited.
oil are some examples
Joint Sector
Forest Based Industries z Owned and operated by the state and individuals or a
z Forest based industries utilize forest produce as raw group of individuals. E.g. Maruti Udyog Limited
materials.
z The industries associated with forests are pulp and Co-operative Sector Industries
paper, pharmaceuticals, furniture and buildings. z Owned and operated by the producers or suppliers of
raw materials, workers or both.
BASED ON SIZE z Anand Milk Union Limited (AMUL) and Sudha Dairy
z It refers to the amount of capital invested, number of are a success stories of a co-operative venture.
people employed and the volume of production.
z 89,151 projects costing `141.4 lakh crore under
Public Sector
different stages of implementation
Departmental Set up by executive actions, for z 1009 projects worth `5.5 lakh crore completed
specifically
z NIP and Project Monitoring Group (PMG) portal
Undertaking defined functions, subject to linkage to fast-track approvals/ clearances for projects
budgetary, audit and other z National Monetisation Pipeline `9.0 lakh crore is the
controls of government. estimated cumulative investment potential. `0.9 lakh
Statutory Set up by the act of the legislature, crore monetisation target achieved against expected
engaged `0.8 lakh crore in FY22.
Corporations in economic and manufacturing z FY23 target is envisaged to be `1.6 lakh crore
activity. These are separate legal (27 per cent of overall NMP Target)
entities. Financing is not part of
the budget. GatiShakti, Gatishakti
Control Boards They are set up to manage z PM GatiShakti, Gatishakti National Master Plan creates
government projects. comprehensive database for integrated planning and
synchronised implementation across Ministries/
Cooperative Society To support cooperative
Departments.
movement.
z Aims to improve multimodal connectivity and logistics
Industries Require Compulsory Licensing efficiency while addressing the critical gaps for the
seamless movement of people and goods.
z Drugs and pharmaceuticals.
z Hazardous chemicals. Electricity Sector and Renewables
z Gun powder, industrial explosives etc. z As on 30 September 2022, the government has
z Aerospace and defence related electronics. sanctioned the entire target capacity of 40 GW for the
z Alcohol drinks. development of 59 Solar Parks in 16 states.
z Tobacco, cigarette and related products z 17.2 lakh GWh electricity generated during the year
FY22 compared to 15.9 lakh GWh during FY21.
UNION BUDGET 2022 z The total installed power capacity (industries having
demand of 1 Mega Watt (MW) and above) increased
Industry: Steady Recovery from 460.7 GW on 31 March 2021 to 482.2 GW on
z Overall Gross Value Added (GVA) by the Industrial 31 March 2022.
Sector (for the first half of FY 22-23) rose 3.7 %, which
is higher than the average growth of 2.8% achieved in Making Indian Logistics Globally Competitive
the first half of the last decade. z National Logistics Policy envisions to develop a
z Electronics exports rise nearly threefold, from technologically enabled, integrated, cost-efficient,
US $4.4 billion in FY19 to US $11.6 Billion in FY22. resilient, sustainable and trusted logistics ecosystem
z India has become the second-largest mobile phone in the country for accelerated and inclusive growth.
manufacturer globally, with the production of handsets z Rapid increase in National Highways (NHs) /Roads
going up from 6 crore units in FY15 to 29 crore units Construction with 10457 km NHs/roads constructed
in FY21. in FY22 compared to 6061 km in FY16.
z Budget expenditure increased from `1.4 lakh crore in
Physical and Digital Infrastructure FY20 to `2.4 lakh crore in FY23 giving renewed push
z Government’s Vision for Infrastructure Development to Capital expenditure.
z Public Private Partnerships z 2359 Kisan rails transported approximately 7.91 lakh
z In-Principal Approval granted to 56 projects with Total tonnes of perishables, as of October 2022
Project Cost of `57,870.1 crore under the VGF Scheme, z More than one crore air passengers availed the benefit
from 2014-15 to 2022-23. of the UDAN scheme since its inception in 2016.
z IIPDF Scheme with `150 crore outlay from FY 23-25 z Near doubling of capacity of major ports in 8 years.
was notified by the government on 03 November, z Inland Vessels Act 2021 replaced 100-year-old Act to
2022. ensure hassle free movement of Vessels promoting
z National Infrastructure Pipeline Inland Water Transport.
Industry and Infrastructure 117

India’s Digital Public Infrastructure z 400 new generation Vande Bharat Trains to be
z Unified Payment Interface (UPI). manufactured during the next three years.
z UPI-based transactions grew in value (121%) and z 100 PM GatiShakti, Gatishakti Cargo terminals for
volume (115%) terms, between 2019-22, paving the multimodal logistics to be developed during the next
way for its international adoption. three years.
z Telephone and Radio – For Digital Empowermen Parvatmala
z Total telephone subscriber base in India stands at z National Ropeways Development Program,
117.8 crore (as of Sept,22), with 44.3% of subscribers Parvatmala to be taken up on PPP mode.
in rural India.
z Contracts to be awarded in 2022-23 for 8 ropeway
z More than 98% of the total telephone subscribers are projects of 60 Km length.
connected wirelessly.
z Overall tele-density in India stood at 84.8% in March Multimodal Logistics Parks
2022. z Contracts to be awarded through PPP mode in
z 200% increase in rural internet subscriptions between 2022-23 for implementation of Multimodal Logistics
2015 and 2021. Parks at four locations.
z Prasar Bharati (India’s autonomous public service
broadcaster) – broadcasts in 23 languages, 179 Sunrise Opportunities
dialects from 479 stations. Reaches 92 per cent of the Government contribution to be provided for R&D in
area and 99.1 per cent of the total population. Sunrise Opportunities like:
z Artificial Intelligence,
Digital Public Goods
z Geospatial Systems and Drones,
z Achieved low-cost accessibility since the launch of
z Semiconductor and its eco-system,
Aadhaar in 2009.
z Space Economy,
z Under the government schemes, MyScheme, TrEDS,
GEM, e-NAM, UMANG has transformed market place z Genomics and Pharmaceuticals,
and has enabled citizens to access services across z Green Energy
sectors Under Account Aggregator, the consent-based z Clean Mobility Systems.
data sharing framework is currently live across over
110 crore bank accounts. Ease Of Doing Business 2.0
z Open Credit Enablement Network aims towards z Trust based governance.
democratising lending operations while allowing end- z Integration of central and state level systems through
to-end digital loan applications IT bridges.
z National AI portal has published 1520 articles, 262 z Expanding scope of PARIVESH Portal
videos, and 120 government initiatives and is being z Unique Land Parcel.
viewed as viewed as a tool for overcoming the language z Identification Number for IT based management of
barrier e.g. Bhashini. land records.
PM GatiShakti, Gatishakti z Establishing C-PACE to facilitate voluntary winding up
of companies.
z Driven by seven engines: Roads, Railways, Airports,
z End to end online e-Bill System and utilising surety
Ports, Mass Transport, Waterways, and Logistics
bonds in government procurement.
Infrastructure.
z AVCG promotion task force.
z The projects pertaining to these 7 engines in the
National Infrastructure Pipeline will be aligned with z Support to 5G under PLI scheme.
PM Gati Shakti framework. z Opening up defence R&D for industry, startups and
academia.
z National Master Plan aimed at world class modern
infrastructure and logistics synergy. Ease of Living
Railways z Issuance of chip embedded e-Passports
z One Station One Product concept to help local z Modernisation of building byelaws, implementing Town
businesses & supply chains. z Planning Schemes and Transit Oriented Development
z 2000 Km of railway network to be brought under z Establishing Centres of Excellence in urban planning
Kavach, the indigenous world class technology and z Providing a battery swapping policy as an alternative
capacity augmentation in 2022-23. to setting up charging stations in urban areas

Eight Core Sectors Industry Places
z Comprising 40.27% of the weight of items included Iron and Steel z Bhilai, Durgapur, Jamshedpur,
in the Index of Industrial Production (IIP). Industry Rourkela,
z The eight core sector industries in decreasing z Bokaro are spread in 4 states - West
order of their weightage: Refinery Products > Bengal, Jharkhand, Odisha and
Electricity > Steel > Coal > Crude Oil > Natural Gas Chhattisgarh.
> Cement > Fertilizers. z Bhadravati and Vijay Nagar in
Karnataka, Visakhapatnam in
INDEX OF INDUSTRIAL PRODUCTION Andhra Pradesh, Salem in Tamil
Nadu
(IIP)
z Pittsburg, USA
z An index which details out the growth of various Cotton Textile z Coimbatore, Kanpur, Chennai,
Industry Ahmedabad,
sectors in an economy such as mining, electricity
and manufacturing. z Mumbai, Kolkata, Ludhiana,
Puducherry and Panipat
z The all India IIP is a composite indicator that
Information z Silicon Valley, California and
measures the short-term changes in the volume of
Technology Bangalore, Hyderabad in India.
production of a basket of industrial products during
a given period with respect to that in a chosen base Automobile z Tends to locate near the iron and
Industry steel producing centres.
period.
z Mumbai, Chennai, Jamshedpur,
z It is compiled and published monthly by the Central
Jabalpur and Kolkata
Statistical Organisation (CSO) six weeks after the
reference month ends. Fertilizer z Gujarat, Tamil Nadu, Uttar
Industry Pradesh,
Maharashtra, Andhra Pradesh,
DIFFERENCE B/W PMI AND IIP z
Punjab, Kerala.
Cement Andhra Pradesh and Telangana,
Purchasing Managers Index (PMI) z
Industry Rajasthan,
z Published by Nikkei z Madhya Pradesh, Tamil Nadu,
z Does not track the actual Production Gujarat, Maharashtra, Jharkhand,
z Covers only 500 private sector companies Maharashtra, Karnataka etc.
z Covers both Manufacturing and Services
STRATEGIC AND CRITICAL MINERALS
z Less Comprehensive since it covers only private sector
companies z According to a report published by Council on Energy,
z Not used for GDP calculation Environment and Water (CEEW), 12 critical minerals
could play an important role in the success of Make in
Index of Industrial Production (IIP) India programme.
z Critical Minerals: Beryllium, Rhenium, Rare Earths,
z Published by National Statistical Office (NSO)
Germanium, Lithium, Cobalt, Tantalum, Chromium,
z Tracks the actual Production Strontium etc.
z Covers both Private Sector as well as PSUs z Applications: Electric Vehicles, aerospace, Defence,
z Covers only the Manufacturing Sector laptops, medical imaging, nuclear energy and
z More Comprehensive smartphones, etc.
z Used for GDP Calculation to account for the unorganized Critical Minerals in India
sector z India is totally import-dependent for seven out of
12 identified minerals and does not have any
IMPORTANT INDUSTRIAL LOCATIONS declared resources for them, except light rare Earth
(found along with monazite sands) and beryllium.
Factors Affecting Location of Industries: Raw material,
z China is currently a leading global supplier for 6 out
Capital, Energy, Labour, Market, Water, Communication, of the 12 mineral resources identified as critical for
Transport, Land, Power etc. India by 2030.

z Recent Developments z In addition, Oil Marketing Companies (OMCs) in
Preliminary surveys by Atomic Minerals directorate the country have storage facilities for crude oil and
for Exploration and Research (AMD) → presence petroleum products for 64.5 days, thus the current
of 1,600 tonnes of lithium in Mandya district of total national capacity for storage of crude oil and
Karnataka. petroleum products currently is 74 days (on 3 feb
The Geological Survey of India has recently found 2021).
reserves of Vanadium in Arunachal Pradesh.
ECONOMIC REFORMS OF 1991
DISTRICT MINERAL FOUNDATION (DMF)
Background
Rationale
z The year 1991 saw India face an unprecedented
z Work for the interest and benefit of persons and areas
affected by mining related operations. financial crisis, triggered by a major Balance of
Payments situation.
Contributions by Miners z The crisis was converted into a golden opportunity to
z 10% of royalty in respect of mining leases granted reform the country’s economic situation and make-up
on or after 12 January, 2015; and 30% of and introduce fundamental changes in economic
royalty in respect of mining leases granted before policy.
12 January, 2015.
Washington Consensus
Usage of Funds z The term coined by the US economist John
z Utilized under Pradhan Mantri Khanij Kshetra Williamson
Kalyan Yojana (PMKKKY) for the welfare of areas and z Originally for the Latin American countries
people affected by mining related operations. z A set of neoliberal economic prescriptions made
z 60% → High priority areas such as Education, Health by the International Monetary Fund, the World
etc. Bank, and the U.S. Treasury to developing countries
z 40% → Physical infrastructure that faced economic crises.
z It recommended structural reforms that increased
Role of Gram Sabha the role of market forces in exchange for immediate
z In respect of villages affected by mining situated within financial help.
the Schedule V and Schedule VI areas, approval of the
Gram Sabha shall be required for the usage of funds Objectives
and identification of beneficiaries. z Enter into the field of globalization and make the
economy more market oriented.
National Coal Index
z Reduce the inflation rate and rectify imbalances in
z Unveiled by the Ministry of Coal to Calculate the
payment.
Government’s revenue share from the auction of
coal mines. z Increase the growth rate of the economy and create
z Developed by the Indian Statistical Institute, Kolkata. enough foreign exchange reserves.
z Stabilize the economy and convert the economy
STRATEGIC CRUDE OIL RESERVES into a market economy by the removal of unwanted
restrictions.
z Government of India Special Purpose Vehicle, has
established Strategic Petroleum Reserves (SPR) z Allow the international flow of goods, capital,
facilities with total capacity of 5.33 Million Metric services, technology, human resources etc. without
Tonnes (MMT) at 3 locations: too many restrictions.
1. Visakhapatnam, z Enhance the participation of private players in all
2. Mangaluru sectors of the economy. For this, the reserved sectors
3. Padur for the government were reduced to just 3.
z Under Phase II of the SPR Programme, the Government ^ƚĞƉƐdĂŬĞŶ
has given in principle approval for establishing two
additional SPR facilities: Chandikhol in Odisha and
Padur in Karnataka. >ŝďĞƌĂůŝǌĂƚŝŽŶ WƌŝǀĂƚŝǌĂƚŝŽŶ 'ůŽďĂůŝǌĂƚŝŽŶ

Liberalization 2. B a s i c / K e y I n d u s t r i e s ( P u b l i c - c u m -
z To increase competition amongst domestic industries. Private Sector): like coal, iron & steel, aircraft
z Encouraging Foreign Trade. manufacturing, ship-building. To be set-up by the
Central Government.
z Opening up Industrial Sectors
z De-Licensing (ending license raj) 3. Important Industries (Controlled Private
Sector): continue under private sector however,
Privatization the central government, in consultation with
z By disinvestment the state government, had general control over
z By withdrawal of governmental ownership and them.
management of public sector companies. 4. Other Industries (Private and Cooperative
Sector): All other industries which were not
Globalization
included in the above mentioned three categories
z Reduction in tariffs: a gradual reduction in the
were left open for the private sector.
customs duties and tariffs on exports and imports to
make India attractive to global investment. Industrial Policy Resolution, 1956
z Long term trade policy: trade policy was enforced for
a longer duration. Reservation of Industries
Schedule A This schedule had 17 industrial areas
Main features of the Trade Policy
in which the Centre was given complete
z Liberal policy monopoly.
z Encouragement of open competition
Schedule B There were 12 industrial areas put
z Controls on foreign trade were removed under this schedule in which the state
z Almost all intermediate and capital goods were freed governments were supposed to take up
from the list for import restrictions. the initiatives with a more expansive
z The Indian currency was made partially convertible. follow up by the private sector.
z The equity limit of foreign capital investment was Schedule C All industrial areas left out of Schedules
raised from 40% to 100%. A and B were put under this in which the
z The Foreign Exchange Management Act (FEMA) private enterprises had the provisions to
was enacted replacing the draconian Foreign set up industries.
Exchange Regulation Act (FERA).
z Provision of Licencing → This provision established
the so-called Licence-Quota-Permit regime (raj) in
Industrial Policies
the economy
1948 First Industrial policy of India z Expansion of the Public Sector → Emphasis was on
1956
Industrial policy resolution. Focus was on Public heavy industries.
sector led heavy industries z Regional Disparity
1991
LPG reforms and New Industrial policy under z Emphasis on Small Industries
the backdrop of Balance of Payment Crisis. z Agricultural Sector
INDUSTRIAL POLICY RESOLUTION Industrial Policy Statement, 1969

z Aimed at solving the shortcomings of the licensing
Industrial Policy Resolution, 1948 policy started by the Industrial Policy of 1956.
z Role of the State in industrial development both as an z The Monopolistic and Restrictive Trade Practices
entrepreneur and authority. (MRTP) Act was passed
z India’s model- Mixed Economic Model. z The firms with assets of `25 crore or more were put
z It classified industries into four broad areas under obligation of taking
1. Strategic Industries (Public Sector): Central z permission from the GoI.
Government had monopoly-Arms and ammunition, z For the redressal of the prohibited and restricted
practices of trade, the government did set up an MRTP
Atomic energy and Rail transport.
Commission.

Industrial Policy Statement, 1973 z Under the overall regime of FERA, some relaxations
z A new classificatory term i.e., core industries was created. concerning the use of foreign exchange were permitted
z Out of the six core industries defined by the policy, the to boost essential technology.
private sector may apply for licences for the industries z The agriculture sector was attended with a new
which were not a part of schedule A of the Industrial scientific approach with many technology missions
Policy, 1956. being launched by the government.
z Some industries were put under the reserved list The Industries (Development and Regulation) Act was
z The concept of joint sector was developed which passed in 1951 to implement the Industrial Policy
allowed partnership among the Centre, state and the
private sector while setting up some industries. Resolution, 1948.
z To regulate foreign exchange the Foreign Exchange
New Industrial Policy (Economic Reforms) 1991
Regulation Act (FERA) was passed in 1973.
z A limited permission to foreign investment was given, z De-reservation of Public sector: Presently, only
with the multinational Corporations (MNCs) being two sectors- Atomic Energy and Railway operations-
allowed to set up subsidiaries in the country. are reserved exclusively for the public sector.
z De-licensing: Abolition of Industrial Licensing
Industrial Policy Statement, 1977 except for Electronic aerospace and defence
z Foreign investment in the unnecessary areas were equipment, Specified hazardous chemicals,
prohibited Industrial explosives, Cigars and cigarettes of
tobacco and manufactured tobacco substitutes.
z Emphasis on village industries with a redefinition of
the small and cottage industries. z Disinvestment of Public Sector: Government
stakes in Public Sector Enterprises were reduced to
z Decentralised industrialisation was given attention
enhance their efficiency and competitiveness.
with the objective of linking the masses to the process
of industrialisation. z Liberalization of Foreign Investment
z Democratic decentralisation got emphasised and the
khadi and village industries were restructured. DISINVESTMENT
z Serious attention was given on the level of production z Disinvestment means sale or liquidation of assets
and the prices of essential commodities of everyday by the government, usually Central and state public
use. sector enterprises, projects, or other fixed assets.
Industrial Policy Resolution, 1980 z Disinvestment in PSUs means the Government selling/
diluting its stake (share) in Public Sector Undertakings
z Foreign investment via the technology transfer route
was allowed again. in which it has a majority holding.
z The MRTP Limit was revised upward to `50 crore to z Disinvestment is carried out as a budgetary exercise,
promote setting up of bigger companies. under which the government announces yearly targets
z The DICs were continued with. for disinvestment for selected PSUs.
z Industrial licensing was simplified. z The Department of Investment and Public Asset
z Overall liberal attitude followed towards the expansion Management (DIPAM) under the Ministry of Finance
of private industries. has been made the nodal department for the strategic
stake sale in the Public Sector Undertakings (PSUs).
Industrial Policy Resolution, 1985 & 1986
z Foreign investment was further simplified with more Main Objectives of Disinvestment in India
industrial areas being open for their entries. z Reducing the fiscal burden on the exchequer
z The MRTP Limit was revised upward to `100 crore z Improving public finances
promoting the idea of bigger companies.
z Encouraging private ownership
z The provision of industrial licensing was simplified.
z Funding growth and development programmes
z High level attention on the sunrise industries such as
telecommunication, computerisation and electronics. z Maintaining and promoting competition in the market
z Modernization and the profitability aspects of public dǇƉĞƐŽĨŝƐŝŶǀĞƐƚŵĞŶƚ
sector undertakings were emphasized
z Industries based on imported raw materials got a
boost dŽŬĞŶŝƐŝŶǀĞƐƚŵĞŶƚ ^ƚƌĂƚĞŐŝĐŝƐŝŶǀĞƐƚŵĞŶƚ

Token Disinvestment Maharatnas
z Selling minority shares of Public Enterprises, to z The category of PSEs was created in 2011.
another entity be it public or private is disinvestment. z To be eligible for the grant of the Maharatna status
In this the government retains ownership of the the company should have -
enterprise. An average turnover of over `25000 crores
average,
Strategic Disinvestment Annual net worth of more than `15000 crores
z When the government sells majority shares in an
Average annual net profit of over rupees `5,000
enterprise, that is strategic disinvestment/sale. Here,
crore during the last 3 years.
the government gives up the ownership of the entity
as well. z Maharatna status’s board would not be required to
take the government permission for investments up
to `5000 crores in a joint venture project or wholly
TYPES OF PUBLIC SECTOR ENTERPRISES owned subsidiary.
(PSE)
Circular Economy
dǇƉĞƐŽĨWƵďůŝĐ^ĞĐƚŽƌŶƚĞƌƉƌŝƐĞƐ;W^Ϳ z Circular Economy: Entails markets that give
incentives to reusing products, rather than scrapping
DŝŶŝƌĂƚŶĂ EĂǀƌĂƚŶĂ DĂŚĂƌĂƚŶĂƐ them and then extracting new resources.
z India is already on its path to the circular economy;
Initiatives of the National Productivity Council
Miniratna (NPC) and government show that. NPC is an
z Category I Miniratna autonomous organisation under the Ministry of
Those PSEs which have made profits continuously Commerce and Industry.
for the last 3 years and earned net profit of rupees z Key Initiatives
30 crores are more in one of the 3 years. Productivity Week 2019’s theme was Circular
These miniratnas are granted certain autonomy Economy for Productivity and Sustainability.
like incurring capital expenditure without Digital India contains a significant component of
government approval up to `500 crores or equal the recycling of electronic wastes.
to their net worth whichever is lower.
Swachh Bharat Mission is also about making
z Category II Miniratna wealth out of wastes.
Those PSEs which have made profit for the last 3
years continuously and should have a positive net FINANCIAL MODEL
worth.
These miniratnas have autonomy to incurring the National Investment Fund (NIF)
capital expenditure without government approval
z The proceeds from disinvestment of UPUSs will be
up to `300 crores or upto 50% of their net worth
channelised into NIFs, which is to be maintained
whichever is lower.
outside the consolidated Fund of India.
Navratna z 75% of the annual income of finance selected
z Government introduced the Navratna concept in social sector schemes → education, health and
1997, it granted enhanced autonomy to nine selected employment.
PSEs referred to as Navratnas. z The residual 25% of the annual income of the fund → to
z These navratnas were subject to certain guidelines meet the capital investment requirements of profitable
now they have freedom to Incur capital expenditure, and revivable CPSUs that yield adequate returns.
decide upon joint ventures, set up subsidiaries/
offices abroad, enter into technological and Exchange Traded Fund
strategic alliances. z It will cumulate the shares of selected PSUs proposed
z They can raise funds from capital markets for disinvestment under a single fund.
(International and Domestic) enjoy substantial z The value of one unit depends upon prices of
operational and managerial autonomy. underlying PSU shares.
z Invest up to rupees 1000 crores or 15% of their net- z These units can be listed in the stock exchange as an
worth on a single project without seeking government ETF and can be traded like ordinary shares.
approval.

Bharat-22 LINEAR ECONOMY
z Bharat-22 has 19 central public sector enterprises, Resource Extraction  Production  Distribution 
government banks and some holdings of the Consumption  Waste.
government investment arm Specified Undertaking
of the Unit Trust of India (SUUTI). SPECIAL ECONOMIC ZONES (SEZ)
z Public Private Partnership means an arrangement
between a government/statutory entity/government z The SEZ Act 2005 provides a legal framework for
owned entity on one side and a private sector entity SEZs in India.
on the other. z Salient Features Of SEZs
Designated duty-free enclave to be treated as a
Build Operate Transfer (BOT-Toll and BOT- territory outside the customs territory of India.
Annuity) Goods entering into SEZs from the domestic tariff
z Private partner is responsible to design, build, area are treated as exports from India and goods
operate (during the contracted period) and transfer supplied from the SEZ to the DTA are treated as
back the facility to the public sector. imports into India.
z Role of the private sector partner is to bring the finance No license required for import.
for the project and take the responsibility to construct Manufacturing or service activities allowed.
and maintain it. Units are required to achieve Positive Net Foreign
z In return, the public sector will allow it to collect Exchange within a period of five years.
revenue from the users in BOT–Toll model and Domestic sales subject to full customs duty
Government pays an annual fee in BOT- Annuity model No routine examination by customs authorities of
z The national highway projects contracted out by NHAI export/import cargo.
under PPP mode is a major example for the BOT model. SEZ Developers /Co-Developers and Units enjoy
Direct Tax and Indirect Tax benefits as prescribed
Hybrid Annuity Model (HAM) in the SEZs Act, 2005.
z In India, the new HAM is a mix of BOT Annuity and
EPC models. NATIONAL INVESTMENT &
z As per the design, the government will contribute to
40% of the project cost in the first five years through
MANUFACTURING ZONES (NIMZ)
annual payments (annuity). z They are one of the important instruments of the
z Whereas the remaining 60% is raised by the developer National Manufacturing Policy, 2011.
from equity or loan as variable depending upon the z NIMZs are envisaged as large areas of developed land
value of assets created. with the requisite eco-system for promoting world
z Under HAM, Revenue collection would be the class manufacturing activity.
responsibility of the National Highways Authority of z NIMZs are different from SEZs in terms of size, level
India (NHAI). The developer doesn’t have the right to of infrastructure planning, governance structures
collect revenue. related to regulatory procedures, and exit policies.
DIFFERENCE BETWEEN NIMZ AND SEZ

Basis NIMZ SEZ
Under National Manufacturing Policy, 2011. SEZ Act, 2005
Minimum Area 5000 hectares 10-1000 hectare
Maximum Area Not specific 5000 hectares
Environmental Impact Assessment State Government Project Developer
What Are They? They will be self-sustained townships They are “Deemed Foreign Territories”
encompassing all support systems like and are exclusively for export-oriented
schools, electricity etc. industries.

Industrial Corridors
PRODUCTION LINKED INCENTIVE
(PLI) SCHEME Delhi-Mumbai Industrial Corridor (DMIC),
(Assistance of Japan)
z Part of Atma Nirbhar Bharat Package.
z Uttar z Haryana z Rajasthan
z Objective: Boost domestic manufacturing and attract
large investments in domestic manufacturing Pradesh
z Incentives: Extend an incentive of 4% to 7% on z Madhya z Gujarat z Maharashtra

incremental sales (over base year of 2019-20) of Pradesh
goods manufactured in India for a period of 5 years. Chennai-Bengaluru Industrial Corridor (CBIC),
z Eligibility: Incentives are provided under the scheme (Assistance of Japan)
to only those companies which cross the threshold
z Tamil Nadu z Andhra z Karnataka
level in terms of incremental sale of Manufactured
Pradesh
Goods and Incremental investment over the base
year. Bengaluru-Mumbai Economic Corridor (BMEC),
z Tenure of Scheme: 5 years (Assistance of UK)
Government approved PLI schemes z Maharashtra z Karnataka
for 3 sectors
Amritsar-Kolkata Industrial Corridor (AKIC)
z Mobile Manufacturing and specified electronics
components z Punjab z Haryana z Uttarakhand
z Active Pharmaceuticals Ingredients (APIs) z Uttar z Bihar z Jharkhand
z Manufacturing of Medical Devices Pradesh z West Bengal
Later 10 more sectors
East Coast Economic Corridor (ECEC), (Assistance of
z Telecom & Networking Products
Asian Development Bank-ADB)
z Textile Products
z Pharmaceuticals Drugs z West Bengal z Odisha z Andhra
z Food Products Pradesh
z Electronic/Technology Products
z Tamil Nadu
z Automobiles
z Advance Cell Chemistry Battery Vizag-Chennai Industrial Corridor (VCIC) is the first
z Auto Components coastal economic corridor in the country.
z High Efficiency Solar PV Modules
z White Goods and Specialty Steel.
INDUSTRIAL CORRIDORS
z Composed of multi-modal transport services with the
intent to stimulate industrial development that would
pass through the states.
z Projects will be implemented through National
Industrial Corridor Development and
Implementation Trust (NICDIT)- an apex body
under the Department for Promotion of Industry
and Internal Trade (DPIIT), Ministry of Commerce
and Industry.
z Manufacturing is a key economic driver in these
projects.

Nodal ministry: The Union Ministry of Shipping has
RELATED SCHEMES AND INITIATIVES z
been appointed as the nodal ministry for this initiative.
z Implementing Agency (State): State governments
PM Gati Shakti Scheme would set up State Sagarmala committees, headed by
z Aim: To ensure integrated planning and the chief minister or the minister in charge of ports.
implementation of infrastructure projects in the next z Central level: Sagarmala Development Company
four years, with focus on expediting works on the (SDC) will be set up to provide equity support to assist
ground, saving costs and creating jobs. various special purpose vehicles (SPVs) setup for
various projects.
z Subsume `110 lakh crore National Infrastructure
Pipeline that was launched in 2019. Bharatmala Pariyojana
z Target: 11 industrial corridors; 2 new defence z Umbrella program for the highways sector envisaged
corridors (Tamil Nadu and UP); Extending 4G by the Ministry of Road Transport and Highways.
connectivity to all villages; Adding 17,000 kms to the z Objective: To optimise the efficiency of freight
gas pipeline network; Expanding NH; etc. and passenger movement across the country by
bridging critical infrastructure gaps through effective
Dedicated Freight Corridor (DFC) interventions.
z High speed and high capacity railway corridor that is z Economic Corridors: These are integrated networks
exclusively meant for the transportation of freight of infrastructure within a geographical area designed
to stimulate economic development.
z Seamless integration of better infrastructure and
z Greenfield Projects: They lack constraints imposed
state of the art technology.
by prior work on the site. Typically, it entails
z Eastern Dedicated Freight Corridor (EDFC) development on a completely vacant site and architects
z Route: Sahnewal (Ludhiana) in Punjab → Dankuni in start completely from scratch.
West Bengal z Brownfield Projects: They carry constraints related to
the current state of the site and might be contaminated
z Covered States: Punjab, Haryana, Uttar Pradesh,
or have existing structures that architects have to tear
Bihar, Jharkhand and West Bengal down or modify in some way before the project can
z Route has: coal mines, thermal power plants and move forward.
industrial cities.
z Major Funding: World Bank
Electronic Way (E-Way) Bill
z Unique bill number generated for the specific
z Western Dedicated Freight Corridor (WDFC)
consignment involving the movement of goods.
z Route: Dadri in Uttar Pradesh to Jawaharlal Nehru z Mandatory under the GST regime → for inter-state
Port Trust in Mumbai transportation of goods valued over `50,000 from
z Covered States: Haryana, Rajasthan, Gujarat, April 2018 (exemption to precious items such as
Maharashtra and Uttar Pradesh. gold.)
z Major Funding: Japan International Cooperation z Mechanism: to ensure that goods being transported
comply with the GST Law and is a tool to track
Agency
movement of goods and check tax evasion.
z Connecting Link for Eastern and Western Arm:
Under construction between Dadri and Khurja. FasTag
Sagarmala z Reloadable tag that allows automatic deduction of
toll without having to stop for carrying out the cash
z Seeks to develop a string of ports around India’s coast. transaction.
z Objective: to promote “Port-led development” along z Uses Radio Frequency Identification (RFID)
India’s 7500 km long coastline. technology and is fixed on the windscreen of the
z Aims: To develop access to new development vehicle once active.
regions with intermodal solutions and promotion z RFID is the use of radio waves to read and capture
of the optimum modal split, enhanced connectivity information stored on a tag attached to an object.
with main economic centres and beyond through z A tag can be read from up to several feet away and
expansion of rail, inland water, coastal and road does not need to be within the direct line-of-sight of
services. the reader to be tracked.

z To reduce the logistics cost from the present 14% of
NATIONAL INFRASTRUCTURE the Gross Domestic Product (GDP) to less than 10%
PIPELINE (NIP) of GDP.
z Announced: In the budget speech of 2019-2020. Reason Behind New Law

z One stop solution for all stakeholders looking for z The new law tends to define various participants
information on infrastructure projects in New India. of the logistics sector and create a light regulatory
z NIP includes economic and social infrastructure ecosystem.
projects. z There was no clear definition of the logistics sector in
z During the fiscal years 2020 to 2025, sectors such the MMTG.
as Energy (24%), Roads (19%), Urban (16%) and
Railways (13%) amount to around 70% of the MSME (MICRO, SMALL, AND MEDIUM
projected capital expenditure in infrastructure in
India.
ENTERPRISES)
z It has outlined plans to invest more than `102 lakh z In accordance with the Micro, Small, and Medium
crore on infrastructure projects by 2024-25, with Enterprises Development (MSMED) Act in 2006,
the Centre, States and the private sector to share the the enterprises are classified into two divisions:
capital expenditure in a 39:39:22 formula. 1. Manufacturing enterprises – engaged in the
manufacturing or production of goods in any
Task Force Recommendations industry
z Committee to monitor NIP progress and eliminate
2. Service enterprises – engaged in providing or
delays
rendering services
z Steering Committee at each Infrastructure ministry
level to follow up on the implementation process Manufacturing Enterprises and Enterprises
z Steering Committee in DEA for raising financial rendering Services are classified as following:
resources for the NIP.
Micro Investments not exceeding `1 crore
Atanu Chakraborty Committee Recommendations enterprises and turnover of ` 5 crore.
z Investment needed: `111 lakh crore over the Small investment up to `10 crore and
next five years (2020-2025) to build infrastructure enterprises turnover of up to `50 crore.
projects and drive economic growth. Medium investments not exceeding `50 crore
z Energy, roads, railways and urban projects are enterprises and turnover of `250 crore.
estimated to account for the bulk of projects (around z MSME ministry has set a target to up its contribution
70%). to GDP to 50% by 2025 as India becomes a $5 trillion
z The centre (39 percent) and state (40 percent) economy.
are expected to have an almost equal share in z A person willing to establish a micro, medium or
implementing the projects, while the private sector small enterprise shall file registration at the Udyam
has 21 % share. registration portal. The registration is based on
z Aggressive push towards asset sales. self-declaration. Upon registration, the enterprise
z Monetization of infrastructure assets. is provided with a unique number called the Udyam
Registration Number (URN).
z Setting up of development finance institutions.
z Udyam Sakhi portal was launched for women
z Strengthening the municipal bond market.
entrepreneurs separately.
NATIONAL LOGISTICS EFFICIENCY INTELLECTUAL PROPERTY RIGHTS

AND ADVANCEMENT PREDICTABILITY (IPR)
AND SAFETY ACT (NLEAPS)
Meaning
z They are the rights given to persons over the creations
Aim of their minds- inventions, literary and artistic works,
z To streamline the logistics ecosystem in the country. and symbols, names etc.
z To modernize and formalise the logistics services and z Give the creator an exclusive right over the use of his/
promote digitisation in the sector. her creation for a certain period of time.

Outlined In Related Terms
z Article 27 of the Universal Declaration of Human z COMPULSORY LICENSING: When a government
Rights allows someone else to produce a patented product
or process without the consent of the patent owner or
Related Treaties plans to use the patent-protected invention itself.
z Paris Convention for the Protection of Industrial z EVERGREENING OF PATENTS: When producers
Property (1883)
extend the lifetime of their patents in order to retain
z Berne Convention for the Protection of Literary and royalties from them, by either taking out new patents
Artistic Works (1886). Both treaties are administered
or by buying out, or frustrating competitors, for longer
by the World Intellectual Property Organization (WIPO)
periods of time than would normally be permissible
Division under the law
z Copyright and rights related to copyright: The
rights of authors of literary and artistic works (such Kapila Programme
as books and other writings, musical compositions, z The Union Education Ministry has launched KAPILA
paintings, sculpture, computer programs and films) (Kalam Program for IP Literacy and Awareness).
are protected by copyright, for a minimum period of
50 years after the death of the author. Global Innovation Index By WIPO
z Industrial property: Trademarks and Geographical
z India is at the 48th position in 2020. And was in 52nd
Indications. Industrial designs and trade secrets.
position in 2019.
India and IPR
z India is a member of the WTO and committed to the
Related Agreements
Agreement on Trade Related Aspects of Intellectual z Nice Agreement: International classification of Goods
Property (TRIPS Agreement). and Services for the purposes of registration of marks
z India is also a member of WIPO, a body responsible z Vienna Agreement
for the promotion of the protection of intellectual z Locarno Agreement: establishing an International
property rights throughout the world. classification for industrial designs.
National IPR Policy, 2016 FOURTH INDUSTRIAL REVOLUTION
z Department of Industrial Policy & Promotion (DIPP),
Ministry of Commerce the nodal department to (IR 4.0)
coordinate, guide and oversee the implementation of z It includes emerging technologies like robotics,
IPRs in India. artificial intelligence, quantum computing,
z ‘Cell for IPR Promotion & Management (CIPAM)’, setup biotechnology, Internet of Things (IoT), 3D
under DIPP, for implementation of the National IPR printing, etc. It merges physical, digital and
Policy. biological spheres.
ϭƐƚ ϮŶĚ ϯƌĚ ϰƚŚ

DĞĐŚĂŶŝƐĂƚŝŽŶ͕ DĂƐƐƉƌŽĚƵĐƚŝŽŶ ŽŵƉƵƚĞƌ ǇďĞƌƉŚǇƐŝĐĂů
ǁĂƚĞƌƉŽǁĞƌ͕ƐƚĞĂŵƉŽǁĞƌ ĂƐƐĞŵďůǇůŝŶĞ͕ĞůĞĐƚƌŝĐŝƚǇ ĂŶĚĂƵƚŽŵĂƚŝŽŶ ƐǇƐƚĞŵƐ
PATENT PROSECUTION HIGHWAY z This would allow a patent applicant to demand fast-
tracking of his patent application by showing that his
(PPH) PROGRAMME product or process has already been granted a patent
z PPH is a set of initiatives for providing accelerated in Japan.
patent prosecution procedures by sharing information
between some patent offices. Example- between Japan
Patent Office (JPO) and Indian Patent Office.

REPORTS
Report Given By India’s Position
Global Intellectual Global Innovation Policy Center z India has slipped to 40th position in 2020 from the
Property Index 2020 or GIPC of the US Chambers of 36th position in 2019.
Commerce
Ease of Doing World Bank z India was at 63rd position (2019) out of 190
Business, 2020 countries
z It improved 14 places from its 77th position in 2018.
z India continues to maintain its first position among
South Asian countries.
z 10 parameters considered-
1. Starting a Business,
2. Dealing with Construction permits,
3. Electricity availability,
4. Property registration,
5. Credit availability,
6. Protecting minority Investors,
7. Paying Taxes,
8. Trading across borders,
9. Contracts enforcement, and
10. Resolving Insolvency.
z It ranks countries on the basis of Distance to Frontier
(DTF) score that highlights the gap of an economy
with respect to the global best practice.
Industrial United Nations Industrial z The theme of Industrial Development
Development Development Report-2020 is Industrialization in the Digital
Age.
Report Organization (UNIDO)
z In the Industrial Development Report (IDR) for
the year 2020 released by UNIDO, India’s position
has improved significantly as compared to the
report of the year 2018.
z This report has included India in the list of top
10 countries in the world that are leading the
development and application of ADP technologies.
z According to this report, out of 130 countries, only
3 countries (India, China and Indonesia) have seen
value-added growth in the manufacturing sector
World Intellectual World Intellectual Property z Published every two years.
Property Report Organisation (WIPO) z India ranks 10th in the number of patents given
according to the 2018 report.

Index of Economic Heritage Foundation & z Economic freedom is measured broadly on 4 pillars-
Freedom Wall Street Journal 1. Rule of Law,
2. Government- fiscal health, tax burden
3. Regulatory efficiency, and
4. Open Markets
Travel and Tourism World Economic Forum z It measures the factors and policies that make a
Competitiveness (WEF) country a viable place to invest within the Travel
and Tourism sector.
Index
z India has secured 34th place in the Index.
  

13 Service Sector in India
z The basic characteristic of the service sector is the z Services account for around 55 per cent of total size
production of services rather than end-products. of the economy, about 38 per cent of total exports and
z Services are intangible goods which include two-thirds of total FDI inflows into India.
attention, advice, experience, and discussion used z Services sector has been the largest recipient of FDI
to enhance productivity, performance, potential and in India with inflow of US$ 83.14 billion between
sustainability. April 2000 and June 2020.
z Backbone of the global economy and the most dynamic z NITI Aayog in partnership with the Institute of
component of international trade. Competitiveness released the Export Preparedness
Index (EPI) report 2020- India’s merchandise
E.g. From communications to transport, finance, exports have witnessed growth from USD 275.9 billion
education, tourism in 2016-17 to USD 331.0 billion in 2019-20.
COMPOSITION OF SERVICE SECTOR

z In the National Income Accounting in India, service sector includes the following:
Trade, Hotels and Restaurants (THR) Trade Hotels and Restaurants
Transport, Storage and Railways Transport by other Means
Communication Storage Communication
Financing, Insurance, Real Estate and Banking and Insurance
Business Services Real Estate, Ownership of Dwellings and Business Services
Community, Social and Personal Public Administration and Defense
Services Other Services
z Robust expansion in PMI services, indicative of service

SPREAD OF SERVICE SECTOR sector activity, observed since July 2022.
z India was among the top ten services exporting
Union List countries in 2021, with its share in world commercial
z Telecommunications, postal, broadcasting, financial services exports increasing from 3 per cent in 2015 to
services (including insurance and banking), national 4 per cent in 2021.
highways, mining services.
z Credit to services sector has grown by over 16% since
State List July 2022.
z Healthcare and related services, real estate services, z US$ 7.1 billion FDI equity inflows in services sector in
retail, services incidental to agriculture, hunting, and FY22.
forestry. z Contact-intensive services are set to reclaim pre-
pandemic level growth rates in FY23.
Concurrent List z Sustained growth in the real estate sector is taking
z Professional services, education, printing and housing sales to pre-pandemic levels, with a 50% rise
publishing, electricity. between 2021 and 2022.
z Hotel occupancy rate has improved from 30-32% in
SERVICES: SOURCE OF STRENGTH April 2021 to 68-70% in November 2022.
z Services sector is expected to grow at 9.1% in FY23, as z India’s e-commerce market is projected to grow at 18
against 8.4% (YoY) in FY22. per cent annually through 2025.
SERVICE SECTOR PERFORMANCE Research and Development Services
z At rank 48, India stands among the top 50 countries in
Tourism Sector the Global Innovation Index 2020.
z India’s gross expenditure in R&D was forecast to reach
z FY20: 39 million jobs (8.0% of the total employment
US$ 96.50 billion in 2020.
in the country) were created.
z By 2022, R&D expenditure is targeted to reach at least
z e-Visa scheme: foreign tourist arrivals to India on
2% of the country’s GDP.
e-visas have increased from 4.45 lakh in 2015 to
23.69 lakh in 2018 and stood at 21.75 lakh in January- z Global Innovation Index (GII), 2020: Co-published
October 2019. by Cornell University, INSEAD, and the WIPO. India
improved by four spots and is now at 48th position.
z Better connectivity: flight connectivity to tourist
destinations → UDAN Scheme z R&D Statistics and Indicators, 2019-20: Report
published by the Department of Science and
Schemes Technology (DST). According to WIPO, India’s Patent
Office stands at the 7th position among the top 10
Swadesh Darshan, National Mission on Pilgrimage
Patent Filing Offices in the world. Women participation
Rejuvenation and Spiritual Heritage Augmentation Drive
in R&D projects has increased significantly from 13%
(PRASHAD), etc.
in 2000-01 to 24% in 2016-17.
IT-BPM Services Transport Services
z March, 2019: The Indian IT-BPM Industry has an
z GOI has allocated `111 lakh crores under the National
industry size of about US$ 177 billion.
Infrastructure Pipeline (NIP) for FY 2019-25.
z Policy initiatives: Start-up India, National Software
z Roads sector is expected to account for 18% capital
Product Policy and removal of issues related to Angel
expenditure over FY 2019-25.
Tax have given a boost to the sector.
z Indian Railways plans to run on 100 percent electricity
z Start-up Ecosystem: Third largest in the world with
by 2024 and become a net-zero emission network by
24 unicorns.
2030.
Schemes Power Services
Pradhan Mantri Digital Saksharta Abhiyan (PMGDISHA), z India is the third-largest producer and second-
Digital India Mission, Public Procurement (Preference to largest consumer of electricity in the world and had
Make in India) Order 2017, etc. an installed power capacity of 3,74,199 MW as of
November, 2020.
Port and Shipping Services
z Of this 3,74,199 MW, following is the breakup between
z FY20: major ports in India handled 704.82 million different energy sources:
tonnes of cargo traffic.
Thermal → 61.80%
z Turnaround time of ships: a key indicator of
Hydro (Renewable) → 12.20%
efficiency of the ports sector, has been on a continuous
Nuclear → 1.80%
decline, almost halving between 2010-11 and 2018-
19, from 4.67 days to 2.48 days. Other Renewable Energy → 24.20%
z Government schemes & initiatives: Project Unnati,

FDI of up to 100% under the automatic route for port NATIONAL INVESTMENT AND
and harbor construction and maintenance projects, INFRASTRUCTURE FUND (NIIF)
etc.
z GOI set up NIIF as a fund of funds with `40,000crore
Telecom Services in 2015 as a Category-II Alternative Investment
Fund (AIF).
z Biggest consumers of data worldwide
z As an investment vehicle for funding commercially
z TRAI: average wireless data usage per wireless data
viable greenfield, brownfield and stalled
subscriber was 11 GB per month in FY 2020 - expected
infrastructure projects.
to reach 18 GB by 2024.
z NIIF isdifferent from the National Investment
Pharmaceuticals Fund (NIF) as proceeds from disinvestment of Central
Public Sector Enterprises were to be channelized in
z India ranks 3rd worldwide for pharmaceutical
NIF.
production by volume and 14th by value.

z GOI is investing 49% and the rest of the corpus
is to be raised from third-party investors such as LOGISTICS EASE ACROSS DIFFERENT
sovereign wealth funds, insurance and pension funds, STATES (LEADS) REPORT (INDEX) 2021
endowments, etc.
z Launched: 2018
z With the Centre’s significant stake, NIIF is considered z Aim: Gauging the logistics performance of States and
India’s quasi-sovereign wealth fund. UT and identifying areas where they can improve
logistics performance.
PURCHASING MANAGERS INDEX (PMI) z Published by: Ministry of Commerce & Industry.
z Indicator of business activity, both in the z Ranking Criteria: Based on quality and capacity of
key infrastructure - road, rail and warehousing as well
manufacturing and services sectors.
as on operational ease of logistics → security of cargo,
z Purpose: to provide information about current and speed of terminal services and regulatory approvals.
future business conditions to company decision- z Structure of the Report: Based on three dimensions →
makers, analysts, and investors. Infrastructure, Services, and Operating and Regulatory
z Calculated separately for the manufacturing and Environment which are further categorised into 17
services sectors and then a composite index is also parameters.
constructed.
Ranking of States
z PMI summarizes the future possibilities of market
z Top States: Gujarat, Haryana and Punjab
conditions → expanding, neutral, or contracting.
z Top UTs: Delhi
z Compiled by IHS Markit for more than 40 economies
z North Eastern States and Himalayan Region:
worldwide. Jammu & Kashmir, Sikkim and Meghalaya.
z Indicators
Headline PMI is a number from 0 to 100. CHAMPION SERVICES SECTOR (CSS)
PMI above 50: represents an expansion when z CSS was identified to give attention to 12 identified
compared to the previous month. Champion Services Sectors for realizing their potential.
PMI under 50: represents a contraction. z A fund of `5000 crores is proposed.
PMI at 50: indicates no change. z It is a Central Sector, umbrella scheme of Department
z Different from the IIP of Commerce for the period 2019-20 to 2023-24.
z Dept. for Promotion of Industry and Internal
IIP covers the broader industrial sector compared
Trade is the nodal department for the Champion
to PMI.
Sectors in manufacturing and the Department of
PMI is more dynamic compared to a standard Commerce would coordinate the proposed initiative
industrial production index. for the Champion Sectors in Services.
z The Department of Commerce would coordinate the
LOGISTICS PERFORMANCE INDEX (LPI) proposed initiative for the Champion Sectors in Services.
z LPI is developed by the World Bank Group.
Champion service sectors include
z It is released every two years.
z IT and ITes
LPI is the weighted average of the country’s scores z Tourism and Hospitality Services
on the six key dimensions: z Medical Value Travel
1. Efficiency of the clearance process z Transport and Logistics services
z Accounting and FInance Services
2. Time taken for shipment to reach destination
z Audio Visual Services
3. Ability to track and trace consignments z Legal Services
4. Quality of trade and transport related infrastructure z Communication Services
5. Ease of arranging competitively priced shipment z Construction and Related Engineering Services
z Environmental Services
6. Competence and quality of logistics services
z Financial Services
z India ranked 44thon the LPI in 2018. z Education Services
Service Sector in India 133

TARGETS
z The share of India’s services sector in global services exports is expected to increase from 3.3% to 4.2% for 2022.
z This scheme is expected to raise the share of services in GVA to 60% (67% including construction services) by the
year 2022 from 53% for India in 2015-16.
WTO AND SERVICES

z The creation of the General Agreement on Trade in Services (GATS) was one of the landmark achievements of the
Uruguay Round of trade negotiations.
z The GATS is a legally bindingset of rules covering international trade in services.
z Negotiations is services under GATS are classified in 4 modes, interests of different countries depend upon
this classification:
GOVERNMENT SCHEMES & INITIATIVES Start Up India Fund/ Funds of Funds for
Startups
Start Up India Scheme z Launched in the year 2016 with the corpus of
`10,000 crore
z A startup is defined as an entity that is
z SIDBI manages the fund.
Headquartered in India,
z Government launched this fund to help startups get
Opened less than 10 years ago, funding in early stages.
an annual turnover less than `100 cr z The fund does not directly invest in startups, instead,
z Principal financial institution: Small Industries it allocates money to venture capitalists (VC) funds,
which are required to invest at least twice the amount
Development Bank of India (SIDBI) of contributions received from the government.
  

Human Development and
14 Sustainable Development
z Building human capabilities in the areas of health,

HUMAN DEVELOPMENT education and access to resources is the key to
z Human development is defined as the process of increasing human development.
enlarging people’s freedoms and opportunities and
improving their well-being rather than simply the UNDP HUMAN DEVELOPMENT
richness of the economy in which human beings live.
REPORT (HDR)
z Income growth is seen as a means to development,
rather than an end in itself.
z 4 Pillars: Equity, Sustainability, Productivity,
Published
Empowerment. z By UNDP annually.
APPROACHES TO HUMAN Developed By

DEVELOPMENT z Economist Mahbub Ul Haq and is anchored in the
Nobel laureate Amartya Sen’s work on human
capabilities.
Income Approach
z Oldest approaches to human development. Objectives
z Human development is seen as being linked to income. z Advancement of human development
z The level of income reflects the level of freedom an
z Expansion of opportunities, choices and freedom of
individual enjoys. Higher the level of income, the
people across the globe
higher is the level of human development.
z Introduction to the innovative ideas concerning
Welfare Approach human development
z This approach looks at human beings as beneficiaries z Advocation of practical policy changes
or targets of all development activities. z Challenging the policies and approaches that hinder
z It argues for higher government expenditure on human development
education, health, social secondary and amenities. z Theme of 2020: The next frontier - Human
z People are not participants in development but only development and the Anthropocene.
passive recipients.
z The government is responsible for increasing levels of 5 indices
human development by maximizing expenditure on 1. Human Development Index (HDI)
welfare.
2. HDI adjusted for inequality.
Basic Needs Approach 3. Gender Development Index (GDI).
z This approach was initially proposed by the 4. Gender Inequality Index (GII).
International Labor Organization (ILO). 5. Multidimensional Poverty Index (MPI)
z Six basic needs i.e. health, education, food, water
supply, sanitation, and housing. UNDP HUMAN DEVELOPMENT INDEX
z The question of human choices is ignored, and the
emphasis is on the provision of basic needs of defined (HDI)
sections. z Tool to measure a country’s overall achievement in its
social and economic dimensions based on the health
Capability Approach of people, their level of education attainment and
z This approach is associated with Prof. Amartya Sen. their standard of living.
ŝŵĞŶƐŝŽŶƐ >ŽŶŐĂŶĚ,ĞĂůƚŚǇ>ŝĨĞ <ŶŽǁůĞĚŐĞ ĚĞĐĞŶƚƐƚĂŶĚĂƌĚŽĨůŝǀŝŶŐ
/ŶĚŝĐĂƚŽƌƐ >ŝĨĞĞǆƉĞĐƚĂŶĐǇĂƚďŝƌƚŚ ǆƉĞĐƚĞĚǇĞĂƌƐ DĞĂŶǇĞĂƌƐ 'E/ƉĞƌĐĂƉŝƚĂ;WWWΨͿ

ŽĨƐĐŚŽŽůŝŶŐ ŽĨƐĐŚŽŽůŝŶŐ
ŝŵĞŶƐŝŽŶ/ŶĚĞǆ >ŝĨĞĞǆƉĞĐƚĂŶĐǇŝŶĚĞǆ ĚƵĐĂƚŝŽŶŝŶĚĞǆ 'E/ŝŶĚĞǆ
,ƵŵĂŶĞǀĞůŽƉŵĞŶƚ/ŶĚĞǆ;,/Ϳ
z For the first time, UNDP introduced a new metric called Mean Years of Schooling – 6.5 years.
the Planetary Pressures-adjusted HDI, or PHDI. Per-capita GNI $6,829.
z PHDI reflects the impact caused by each country’s per-
capita carbon emissions and its material footprint. INEQUALITY ADJUSTED HDI
z The PHDI measures the HDI for pressures on the planet z HDI doesn’t show the inequalities in the country. For
to reflect a concern for intergenerational inequality. this, we need inequality-adjusted HDI.
z India dropped two ranks, standing at 131 out of 189 z The difference between the IHDI and HDI is the human
countries in the 2020 report. India is placed in the development cost of inequality – the overall loss to
medium human development group. human development due to inequality.
Life expectancy at birth – 69 years. z This leads to better understanding of inequalities
Expected Years of Schooling – 12.2 years. across populations.
ŝŵĞŶƐŝŽŶƐ >ŽŶŐĂŶĚ,ĞĂůƚŚǇ>ŝĨĞ <ŶŽǁůĞĚŐĞ ĚĞĐĞŶƚƐƚĂŶĚĂƌĚŽĨůŝǀŝŶŐ
/ŶĚŝĐĂƚŽƌƐ >ŝĨĞĞǆƉĞĐƚĂŶĐǇĂƚďŝƌƚŚ ǆƉĞĐƚĞĚǇĞĂƌƐ DĞĂŶǇĞĂƌƐ 'E/ƉĞƌĐĂƉŝƚĂ;WWWΨͿ

ŽĨƐĐŚŽŽůŝŶŐ ŽĨƐĐŚŽŽůŝŶŐ
ŝŵĞŶƐŝŽŶ/ŶĚĞǆ >ŝĨĞĞǆƉĞĐƚĂŶĐǇ zĞĂƌƐŽĨƐĐŚŽŽůŝŶŐ /ŶĐŽŵĞͬĐŽŶƐƵŵƉƚŝŽŶ
/ŶĞƋƵĂůŝƚǇĚũƵƐƚĞĚ /ŶĞƋƵĂůŝƚǇͲĂĚũƵƐƚĞĚ /ŶĞƋƵĂůŝƚǇͲĂĚũƵƐƚĞĚ /ŶĞƋƵĂůŝƚǇͲĂĚũƵƐƚĞĚ

/ŶĚĞǆ ůŝĨĞĞǆƉĞĐƚĂŶĐǇŝŶĚĞǆ ĞĚƵĐĂƚŝŽŶŝŶĚĞǆ ŝŶĐŽŵĞŝŶĚĞǆ
/ŶĞƋƵĂůŝƚǇͲĂĚũƵƐƚĞĚ,ƵŵĂŶĞǀĞůŽƉŵĞŶƚ/ŶĚĞǆ;/,/Ϳ
GENDER DEVELOPMENT INDEX (GDI) z The GDI measures gender gaps in human
development achievements by accounting for
dŚƌĞĞŝŵĞŶƐŝŽŶƐ &ŝǀĞ/ŶĚŝĐĂƚŽƌƐ disparities between women and men—using the
same component indicators as in the HDI- health,
ZĞƉƌŽĚƵĐƚŝǀĞ DĂƚĞƌŶĂůDŽƌƚĂůŝƚǇ
knowledge and living standards.
,ĞĂůƚŚ
'ĞŶĚĞƌ /ŶĞƋƵĂůŝƚǇ /ŶĚĞǆ
ĚŽůĞƐĐĞŶƚ&ĞƌƚŝůŝƚǇ z The GDI is the ratio of the HDIs for females and males.
WĂƌůŝĂŵĞŶƚĂƌǇ Gender Development Index Groups

ZĞƉƌĞƐĞŶƚĂƚŝŽŶ z Countries are divided into five groups by absolute
ŵƉŽǁĞƌŵĞŶƚ
ĚƵĐĂƚŝŽŶĂůƚƚĂŝŶŵĞŶƚ deviation from gender parity in HDI values.
;^ĞĐŽŶĚĂƌǇůĞǀĞůĂŶĚĂďŽǀĞͿ 1. Group 1: countries with high equality in HDI
>ĂďŽƵƌ&ŽƌĐĞ [Norway, Ireland, Sweden etc.].
>ĂďŽƵƌDĂŬ
WĂƌƚŝĐŝƉĂƚŝŽŶ 2. Group 2: comprises countries with medium to high
equality in HDI [Germany, Switzerland, Hong Kong,
Myanmar etc.].

3. Group 3: comprises countries with medium equality in HDI [Korea, UAE, Nepal, Congo, Zimbabwe etc.]
4. Group 4: comprises countries with medium to low equality in HDI [Turkey, Bahrain, Maldives, Bhutan, Bangladesh
etc.]
5. Group 5: comprises countries with low equality in HDI [Saudi Arabia, Iran, India, Lebanon, Pakistan etc.]
DIFFERENCE BETWEEN GII, GGG, GPI

Gender Inequality Index Global Gender Gap Index Gender Parity Index
By: UNDP WEF UNESCO
Uses 3 dimensions- 4 dimensions- Ratio of girls to boys in primary,
1. Reproductive Health, 1. Economy, secondary, tertiary education
2. Empowerment 2. Education,
3. Labor Market Participation 3. Health,
4. Political Representation.
India Rank: 123 Top: Ireland; India: 112/153; Bottom: Yemen.
WORLD HAPPINESS REPORT

Introduction z The World Happiness Report is an annual report published by the United Nations
Sustainable Development Solutions Network (SDSN).
z The report ranks countries by how happy their citizens perceive themselves to be.
Evaluation Factor z GDP Per Capita, z Social Support, z Healthy Life Expectancy,
z Personal Freedom, z Generosity, z Levels of Corruption
Parameters z The survey used the Gallup World Poll. The poll asked people to vote on three indicators:
z Life Evaluations: Under this, people were asked to evaluate their current life using the
image of a ladder. The best possible life for them is rated at 10 and the worst possible at 0.
z Positive Emotions: Under this, respondents were asked whether they smiled or laughed
a lot the previous day. An affirmative response is coded as a 1 while a negative response is
coded as 0.
z Negative Emotions: Under this, people were asked whether they have experienced negative
emotions such as worry, sadness, and anger a lot on the same day.
World Happiness Report 2021 WORLD BANK- HUMAN CAPITAL

z Focus: The effects of COVID-19 and how people all PROJECT
over the world have fared.
z As part of the World Development Report (WDR),
z Key Findings Related to India: India has been the World Bank has launched a Human Capital Project
ranked 139 out of 149 countries in the World (HCP). It aims to advocate, measure, and analyze to
raise awareness and increase demand for interventions
Happiness Report 2021. to build human capital.
z In 2020, India was ranked 144 out of 156 countries. z There are 3 components of HCP:
z Other Key Findings: 1. Human Capital Index (HCI),
Finland ranked as the happiest country in the 2. Measurement and research to inform policy action.
world for the fourth consecutive year, followed by 3. Countries Engagement.
Iceland, Denmark, Switzerland, Netherlands,
WORLD BANK- HUMAN CAPITAL INDEX
Sweden, Germany, and Norway.
z The HCI has been constructed for 157 countries.
Afghanistan (149) is the most unhappy country.
z It claims to seek to measure the amount of human
Zimbabwe (148), Rwanda (147), Botswana
capital that a child born today can expect to attain
(146), and Lesotho (145) followed it. by age 18.
Human Development and Sustainable Development 137

The HCI has three components
1. Survival: as measured by under-5 mortality rates
2. Expected years of Quality-Adjusted School: which combines information on the quantity and quality of education
3. Health environment: Using two parameters of adult survival rates and rate of stunting for children under age 5.
Human Capital Index Human Development Index

z By World Bank z By UNDP
z HCI uses survival rates and stunting rate as measure of z HDI uses life expectancy and merely years of schooling
health, and quality-adjusted learning. as a measure of education.
z HCI excludes per capita income z The HDI uses per capita income.
HUMAN CAPITAL INDEX, 2020

z India has been ranked at 116th. However, India’s score increased to 0.49 from 0.44 in 2018.
z It includes health and education data for 174 countries up to March 2020, providing a pre-pandemic baseline on
the health and education of children.
Gross Happiness Index Physical Quality of Life Index

What it measures? z Measures economic and moral z It measures the quality of life or well-being of a
progress as an alternative to GDP country based on 3 variables- Basic literacy rate,
measurement. infant mortality, and life expectancy at age one.
History z It is constructed based upon a z PQLI was developed in the mid-1970s by Morris
methodology known as the Alkire- David Morris. It was created due to dissatisfaction
Foster method. with the use of GNP as an indicator of development.
Indicators z 33 indicators categorized under z Consider only the physical variables- adult literacy,
nine domains includin psychological life expectancy at birth and infant survival rate. All
well-being, standard of living, good equally weighted on a 0 to 100 scale.
governance, health, community
vitality, cultural diversity, time use,
and ecological resilience.
SUSTAINABLE DEVELOPMENT SUSTAINABLE DEVELOPMENT GOALS

z Sustainable Development was defined by the (SDGS) 2030
BRUNDTLAND COMMISSION in its report OUR
COMMON FUTURE (1987) as the form of development z The United Nations (UN) launched the 2030 Agenda
which meets the needs of the present without for Sustainable Development and SDGs.
compromising the resources for future generations. z There are 17 goals and 169 specific targets to be
Sustainable development (SD) calls for concerted achieved by 2030.
efforts towards building an inclusive, sustainable and z NITI Aayog is the nodal institution for the
resilient future for people and planet. implementation of SDGs in India

SDG INDEX- NITI AAYOG CLIMATE CHANGE AND ENVIRONMENT:
z The SDG Index aims to promote healthy competition PREPARING TO FACE THE FUTURE -
among states and UTs by evaluating their progress
in social, economic and environmental terms which
ECONOMIC SURVEY 2022-23
will help India achieve the UN SDG goals by 2030. z India declared the Net Zero Pledge to achieve net
z Based on their performances, states and UTs were zero emissions goal by 2070.
given scores ranging from 0 to 100. States and UTs z India achieved its target of 40 per cent installed
were classified into four categories, namely Achiever, electric capacity from non-fossil fuels ahead of 2030.
Front Runner, Performer and Aspirant. z The likely installed capacity from non-fossil fuels to
z India has become the first country in the world to be more than 500 GW by 2030 resulting in decline
measure the goals at a sub-national level. of average emission rate by around 29% by 2029-30,
compared to 2014-15.
SDG Index- SSDN z India to reduce emissions intensity of its GDP by 45%
z The Sustainable Development Report 2020 presents by 2030 from 2005 levels.
the SDG Index for all UN member states. z About 50% cumulative electric power installed
capacity to come from non-fossil fuel-based energy
z Prepared the Sustainable Development Solutions
resources by 2030.
Network (SDSN).
z A mass movement LIFE– Life style for Environment
z The SDG index frames the implementation of 17 launched.
SDG goals among UN member states.
z Sovereign Green Bond Framework (SGrBs) issued in
z Ranking: China > Brazil > Russia > Maldives > Sri November 2022.
Lanka > Nepal > Bangladesh > India > Pakistan. z RBI auctions two tranches of ¹ 4,000 crore Sovereign
Green Bonds (SGrB).
PARIS AGREEMENT (COP 21) z National Green Hydrogen Mission to enable India to be
z The Paris Agreement was adopted in 2015; entered energy independent by 2047.
into force in 2016; legally binding. z Green hydrogen production capacity of at least 5 MMT
(Million Metric Tonne) per annum to be developed by 2030.
z Goal: to limit global warming to well below 2,
preferably to 1.5 degrees Celsius, compared to pre- z Cumulative reduction in fossil fuel imports over¹
1 lakh crore and creation of over 6 lakh jobs by
industrial levels.
2030 under the National green Hydrogen Mission.
z Rich nations to maintain a $100bn a year funding Renewable energy capacity addition of about
pledge beyond 2020. 125 GW and abatement of nearly 50 MMT of annual
z Countries submit their plans for climate action known GHG emissions by 2030.
as nationally determined contributions (NDCs). z Survey highlights the progress on eight missions
under the NAP on CC to address climate concerns and
GENDER SOCIAL NORMS INDEX (GSNI) promote sustainable development.
z Solar power capacity installed, a key metric under the
z Introduced as a part of 2019 HDI Report.
National Solar Mission stood at 61.6 GW as on October
z It captures how social beliefs can obstruct 2022.
gender equality along four dimensions: Political, z India becoming a favored destination for renewables;
Educational, Economic, and Physical integrity. investments in 7 years stand at USD 78.1 billion.
z The GSNI ranges from 0 to 1. Higher GSNI values z 62.8 lakh individual household toilets and 6.2 lakh
indicate higher bias against gender equality. community and public toilets constructed (August
z It is constructed based on responses to seven questions 2022) under the National Mission on Sustainable
from the World Values Survey. Habitat.
  
Human Development and Sustainable Development 139

Important Concepts
15 in Economy
Trickle-Down Effect Liquidity Trap

z It refers to the phenomenon of fashion trends z A liquidity trap is a situation, described in Keynesian
flowing from the upper classes to the lower classes economics, in which, “after the rate of interest has
in a society. fallen to a certain level, liquidity preference may
z Similarly, it may also refer to how new consumer become virtually absolute in the sense that almost
products when first introduced into the market are everyone prefers holding cash rather than holding a
especially costly and only affordable by the wealthy, debt which yields a low rate of interest.
but as a product matures its price will begin to fall so
it may be more widely adopted by the general public.
Capital Flight
z Finally, the trickle-down effect is a phenomenon where
an advertisement is rapidly disseminated by word of z A destructive process in which investors (both
mouth or by viral marketing. foreigners and domestic residents) withdraw their
financial capital from a country as a result of what are
Fiat Money perceived to be non-favourable changes in economic
z This type of money is also termed as legal tender as policies, political conditions, or other factors.
notified by the Central Government and Central Bank. z The consequences of capital flight can include a
This is unlike commodity money; it might not have an contraction in real investment spending, a dramatic
intrinsic value. Paper currencies and metal coins depreciation in the exchange rate, and a rapid
are examples of fiat money. tightening of credit conditions.
z In modern economies or current phase, it mainly exists
as data such as bank balances and records of credit or Evergreening
debit card purchases.
z Evergreening is any of various legal, business and
technological strategies by which producers extend
Predatory Pricing
their patents over products that are about to expire,
z The pricing policy of a firm with the purpose of
harming rivals or exploiting the consumer. in order to retain royalties from them, by either taking
out new patents or by buying out, or frustrating
z By price-cutting, firstly the rivals are ousted from
the market and later the consumers are exploited as competitors, for longer periods of time than would
monopolistic suppliers by the firm. normally be permissible under the law.
Externalities Helicopter Money

z Those benefits or harms accruing to another person, z Helicopter money is a proposed unconventional
firm or any other entity which occur because some monetary policy, sometimes suggested as an
person, firm or any other entity may be involved in an
alternative to quantitative easing (QE) when the
economic activity.
economy is in a liquidity trap (when interest rates
z If someone is causing benefits or good externality to
another, the latter does not pay the former. near zero and the economy remains in recession).
z If someone is inflicting harm or bad externality to
another, the former does not compensate the latter. Currency War
z Currency war, also known as competitive
Double Coincidence of Wants devaluations, is a condition in international affairs
z A situation where two economic agents have where countries seek to gain a trade advantage over
complementary demand for each other’s surplus other countries by causing the exchange rate of their
production. currency to fall in relation to other currencies.
Capital Gains Tax PHILLIPS CURVE
z Any profit or gain that arises from the sale of a
‘capital asset’ is a capital gain. This gain or profit z It shows the trade-off between unemployment and
comes under the category income, and hence you will inflation.
need to pay tax for that amount in the year in which z It indicates that to reduce unemployment, an economy
the transfer of the capital asset takes place. This is has to adjust with a higher level of inflation.
called capital gains tax.
ϴй
Grandfathering Clause ϳй
ϲй
z It is the exemption granted to existing investors or ϱй
gains made by them before the new tax law comes ϰй
into force. ϯй
Ϯй
Anti-Dumping Duties ϯй ϰй ϱй ϲй ϳй ϴй
z Tariffs imposed by importer countries on exporter
countries when such dumped goods are exported
below market price. It is a way of increasing the price LAFFER CURVE
of goods which are too cheap.
z It shows the relationship between tax revenue and
Break-Even Price tax rate.
z It is the price necessary to make a normal profit. z Its message is that if the tax is fixed at an optimum
z It is a price which includes all costs, including variable (reasonably low levels), tax revenue will be
and fixed costs. At the break-even price, the firm maximum.
neither makes a loss or profit.
Dependency Ratio dĂǆ ZĞǀĞŶƵĞ

z The dependency ratio measures the % of dependent
people (not of working age) / number of people of
working age (economically active).
Dependency Ratio = Number of Children +
Number of Pensioners/ Number of Working age dĂǆZĂƚĞ;йͿ
Wage-Price Spiral
z The wage-price spiral refers to the strong mutual BEVERIDGE CURVE, OR UV CURVE
link between wage growth and inflation.
z It is a graphical representation of the relationship
z Rising wages invariably put upward pressure on prices between unemployment and the job vacancy
and inflation.
rate, the number of unfilled jobs expressed as a
z High inflation creates upward pressure on wages proportion of the labour force.
as workers seek to gain an increase in wages to meet
the rising prices and maintain living standards z It typically has vacancies on the vertical axis and
unemployment on the horizontal.
ENVIRONMENTAL KUZNETS CURVE /ŵƉƌŽǀŝŶŐ
sĂĐĂŶĐŝĞƐ
ĂŐŐƌĞŐĂƚĞ
z It explains the relationship between economic ĚĞŵĂŶĚ >ĞƐƐ
growth and environmental degradation.
ĞĨĨŝĐŝĞŶƚ
/ŶĚƵƐƚƌŝĂů ŵĂƚĐŚŝŶŐ
>ĞǀĞů ŽĨ ĞŶǀŝƌŽŶŵĞŶƚĂů ĚĞŐƌĂĚĂƚŝŽŶ
ĐŽŶŽŵŝĐƐ WŽƐƚŝŶĚƵƐƚƌŝĂů
WƌĞͲŝŶĚƵƐƚƌŝĂů
ƚƵƌŶŝŶŐƉŽŝŶƚ ;ƐĞƌǀŝĐĞƐĞĐƚŽƌ ĞĐůŝŶŝŶŐ
ďĂƐĞĚĞĐŽŶŽŵǇͿ
ĞĐŽŶŽŵŝĞƐ ĂŐŐƌĞŐĂƚĞ
DŽƌĞ ĚĞŵĂŶĚ
ĞĨĨŝĐŝĞŶƚ
ŵĂƚĐŚŝŶŐ
hŶĞŵƉůŽǇŵĞŶƚ
'WƉĞƌĂƉŝƚĂ;ĞĐŽŶŐƌŽǁƚŚͿ dŚĞĞǀĞƌŝĚŐĞƵƌǀĞͲhŶĞŵƉůŽǇŵĞŶƚͲsĂĐĂŶĐǇZĞůĂƚŝŽŶƐŚŝƉ
  
Important Concepts in Economy 141

16 Important Indices and Reports
WORLD ECONOMIC FORUM (WEF) Reporters Without Borders

z World Press Freedom Index
z Inclusive Development Index
z Global Environment Performance Index UNDP (United Nations Development
z Travel and Tourism Competitiveness Report Programme)
z Global Energy Architecture Performance Index Report z Gender Inequality Index
z Global Competitiveness Report
z Global Gender Gap Index World Wide Fund for Nature (WWF)
z Global Information Technology Report z The Energy Report & Living Planet Report
International Energy Agency (IEA) UN-Sustainable Development Solutions

z World Energy Outlook (WEO) Network (SDSN)
z World Happiness Report
United Nations Conference on Trade and
Development (UNCTAD) United Nations Industrial Development
z The Technology and Innovation Report Organization (UNIDO)
z World Investment Report z Industrial Development Report
z The Information Economy Report
z The Trade & Development Report
United Nations Office on Drugs and Crime
(UNODC)
UN-Habitat z World Wildlife Crime Report
z World Cities Report
z World Drug Report
International Labor Organization (ILO) z Global Report on Trafficking in Persons
z World Employment and Social Outlook
z Global Wage Report United Nations Educational, Scientific and
z World Social protection report Cultural Organization (UNESCO)
z Global Education Monitoring Report
United Nations Environment Programme
z Gender Parity Index
(UNEP)
z Emission Gap Report Transparency International
z Global Environment Outlook
z Corruption Perception Index
Food and Agriculture Organization (FAO) z Global Corruption Report (GCR)
z World State of Forest Report
World Health Organization (WHO)
World Intellectual Property Organization z Ambient Air pollution Report
(WIPO)
z World Intellectual Property Report (WIPR) Bank for International Settlements (BIS)
z Global Financial System Report
International Food Policy Research Institute
(IFPRI) Financial Action Task Force (FATF)
z Global Hunger Index Report z Global Money Laundering Report
International Monetary Fund (IMF) z Global Economic Prospect (GEP) Report
z World Economic Outlook z World Development Report
z Global Financial Stability Report z Ease of Doing Business
z Human Capital Index
Organization for Economic Development
(OECD) Oxfam
z The Programme for International Student Assessment z Global Inequality Crisis Report
(PISA)
US Chamber of Commerce
World Trade Organisation (WTO) z Intellectual Property Index
z World Trade Outlook Indicator
RBI
United Nations Population Fund (UNFPA) z Financial Stability Report
z State of World Population Report z Report on Trend and Progress of Banking in India
UN Department for Economic and Social z Consumer Confidence Survey (Index)
Affairs (UN-DESA)
NITI Aayog
z World Economic Situation and Prospectus Report
z Agriculture Transformation Index
Institute of Economics & Peace (IEP) z Multidimensional Poverty Index (MPI) (National)
z Global Peace Index z Composite Water Management Index
z Export Preparedness Index
INSEAD
z School Education Quality Index
z Global Talent Competitiveness Index
z District Hospital Index
World Bank z India Innovation Index
z Remittance Report z State Health Index
z Universal Health Coverage Index z State Energy Index
z The Service trade restriction index z SDG India Index
z Ease of Living Index z National Monetization Pipeline
  
Important Indices and Reports 143

Economic Survey and
17 Union Budget
ECONOMIC SURVEY 2022-23 India’s Growth Outlook Arises from -

(i) limited health and economic fallout for the rest of the
world from the current surge in Covid-19 infections
GDP Growth Projection - 6.0% - 6.8 % in
in China and, therefore, continued normalisation of
2023-24 supply chains
z India’s economy to grow 6.5% in 2023-24, compared (ii) Inflationary impulses from the reopening of China’s
to 7% this fiscal and 8.7% in 2021-22. Gross domestic economy turning out to be neither significant nor
product (GDP) in nominal terms to be 11% in next persistent
fiscal (iii) Recessionary tendencies in major Advanced
z Real GDP growth to be in the range of 6-6.8% next fiscal Economies (AEs) triggering a cessation of monetary
tightening and a return of capital flows to India amidst
depending on global economic, political developments
a stable domestic inflation rate below 6 per cent
z Country’s current account deficit widened to 4.4% of
the GDP in the quarter ending September, from 2.2% 6 challenges Faced by the Global Economy
of the GDP during the April-June period due to a higher z COVID-19 related disruptions in economies
trade gap, according to the latest Reserve Bank of India
z Russian-Ukraine conflict and its adverse impact along
(RBI) data. with disruption in supply chain, mainly of food, fuel
and fertilizer
Factors Leading to Projected Growth - z Central Banks across economies led by Federal Reserve
z Rebound of private consumption given a boost to responding with synchronised policy rate hikes to
production activity curb inflation, leading to appreciation of US Dollar and
z Higher Capital Expenditure (Capex) Near-universal the widening of the Current Account Deficits (CAD) in
net importing economies.
vaccination coverage enabling people to spend on
contact-based services, such as restaurants, hotels, z Prospects of global stagflation, nations, feeling
compelled to protect their respective economic space,
shopping malls, and cinemas
thus slowing cross-border trade affecting overall
z Return of migrant workers to cities to work in growth.
construction sites leading to a significant decline in
z China experiencing a considerable slowdown induced
housing market inventory by its policies.
z Strengthening of the balance sheets of the Corporates z Scarring from the pandemic brought in by the loss of
z Well-capitalised public sector banks ready to increase education and income-earning opportunities.
the credit supply and the credit growth to the Micro,
Small, and Medium Enterprises (MSME) sector State of the Economy 2022-23: Recovery
z Expansion of public digital platforms and path- Complete
breaking measures such as PM GatiShakti, the National z Recovering from pandemic-induced contraction,
Logistics Policy, and the Production-Linked Incentive Russian-Ukraine conflict and inflation, Indian
schemes to boost manufacturing output. economy is staging a broad based recovery across
z India’s economic growth in FY23 has been principally sectors, positioning to ascend to the pre-pandemic
led by private consumption and capital formation and growth path in FY23.
they have helped generate employment as seen in the z India’s GDP growth is expected to remain robust
declining urban unemployment rate and in the faster in FY24. GDP forecast for FY24 to be in the range of
net registration in Employee Provident Fund. 6-6.8 %.
z Private consumption in H1 is highest since FY15 and overshoot of inflation above the upper end of the
this has led to a boost to production activity resulting target range in India was, however, one of the lowest
in enhanced capacity utilisation across sectors. in the world.
z The Capital Expenditure of Central Government and z In higher education, the total enrolment in higher
crowding in the private Capex led by strengthening education has increased to nearly 4.1 crore in FY21
of the balance sheets of the Corporates is one of the from 3.9 crore in FY20. Since FY15, there has been an
growth driver of the Indian economy in the current increase of around 72 lakh in enrolment (21 per cent).
year. The female enrolment has increased to 2.0 crore in
z Credit growth to the MSME sector was over 30.6% on FY21 from 1.9 crore in FY20.
average during Jan-Nov 2022. z In 2022, India became the 3rd largest automobile
z Retail inflation is back within RBI’s target range in market, surpassing Japan and Germany in terms of
November 2022. sales. In 2021, India was the largest manufacturer
z Indian Rupee performed well compared to other of two-wheeler and three-wheeler vehicles and the
Emerging Market Economies in Apr-Dec 2022. world’s fourth-largest manufacturer of passenger cars.
z Direct Tax collections for the period April-November z The number of recognised startups in the country has
2022 remain buoyant. increased from 452 in 2016 to 84,012 in 2022. About
48 percent of our startups are from tier 2 & 3 cities
z Enhanced Employment generation seen in the
declining urban unemployment rate and in the faster z Startups are exploring “reverse-flipping”, or shifting
net registration in Employee Provident Fund. their domicile back to India
z Economic growth to be boosted from the expansion z 89,151 projects costing `141.4 lakh crore under
of public digital platforms and measures to boost different stages of implementation. 1009 projects
manufacturing output. worth ¹ 5.5 lakh crore completed.
z India is the largest recipient of remittances in the
MAJOR HIGHLIGHTS OFTHE ECONOMIC world receiving $100 bn in 2022. Remittances are the
second largest major source of external financing after
SURVEY 2022-23 service export.
z India has sufficient forex reserves to finance CAD and z General Government Debt to GDP ratio increased from
intervene in forex market to manage rupee volatility 75.7 per cent of end-March 2020 to 89.6 per cent at
z The growth in exports has moderated in second half of the end of the pandemic year FY21. It is estimated to
current fiscal; the surge in growth rate in 2021-22 and decline to 84.5 per cent of GDP by end-March 2022.
first half of current fiscal led to production processes The emphasis on capex-led growth will enable India
shifting gears from ‘mild acceleration’ to ‘cruise mode’ to keep the growth-interest rate differential positive.
z Slowing world growth, shrinking global trade led to A positive growth-interest rate differential keeps the
loss of export stimulus in the second half of current debt levels sustainable.
year z Investments of `47,500 crore were seen under the
z Bank credit growth likely to be brisk in FY24 on back Production Linked Incentive (PLI) schemes in FY22,
of benign inflation, moderate credit cost which is 106 percent of the designated target for the
year. Production/sales worth `3.85 lakh crore and
z Credit growth to small businesses high at over 30.5%
employment generation of 3 lakh have been recorded
in January-November, 2022
due to PLI schemes.
z Central govt capex grew 63.4% in April-November of
z An augmented female LFPR of 46.2 percent, which is
current fiscal
much higher than the 32.5 percent estimated by the
z Stock market gave positive returns in calendar year conventional definition.
2022 unfazed by FPI withdrawal
z Indian equity market is expensive compared to its
z Private consumption, capital formation led economic global peers. Nifty 50, with its valuation at 21.8 times
growth in current fiscal has helped generate the earnings of the constituent stocks (P/E ratio) on
employment; urban employment rate declined, while trailing basis at the end of December 2022, is expensive
Employee Provident Fund registration rose compared to global markets.
z The Survey said that ‘entrenched inflation’ may z Annual FDI equity inflows in the manufacturing sector
prolong the tightening cycle and therefore borrowing have been steadily increasing over the last few years.
costs may stay higher for longer It jumped from US$ 12.1 billion in FY21 to US$ 21.3
z Inflation - India’s retail inflation rate peaked at 7.8 billion in FY22 as the pandemic-driven expansionary
percent in April 2022, above the Reserve Bank of policies of advanced economies led to a surge in global
India’s (RBI) upper tolerance limit of 6 percent. The liquidity.
Economic Survey and Union Budget 145

z Until 31 December 2022, ceiling prices for 890 (5) Green Growth - The budget provides for `35,000 crore
formulations of 358 drugs/medicines across various capital investment towards energy transition and net
therapeutic categories under National List of Essential zero objective and energy security by the Ministry of
Drugs . petroleum and natural gas.
z High rainfall affecting output in certain sectors such (6) Youth Power - Launch of PM Kaushal Vikas Yojana 4.0
as real estate and construction but rainfall also led to to skill lakhs of youth tol cover new age courses.
cooler weather and hurt power demand. Survey says
(7) Financial Sector - The revamp schemes to take effect
manufacturing output hit by inventory build-up and
from 2023 through an infusion of `9,000 crore in the
also by uneven growth—for example, automobiles
corpus.
have done well (domestic-dependent) but textiles
have not (export-dependent).
Policy Achievements (2014-22)
z India now a global force in steel production and the
2nd largest crude steel producer in the world. The z Indian economy has increased in size from being 10th
steel sector’s performance in the current fiscal year to 5th largest in the world in the past 9 years.
has been robust, with cumulative production and z Per capita income has more than doubled to ¹ 1.97
consumption of finished steel at 88 MT and 86 MT, lakh in around 9 years.
respectively. z EPFO membership has more than doubled to 27 crore.
z FY23 has been lackluster in terms of fund mobilisation z 7,400 crore digital payments of ¹ 126 lakh crore has
through initial public offerings (IPOs) so far, but the taken place through UPI in 2022.
number of small and medium enterprises (SME) z 11.7 crore household toilets constructed under
rushing to D-Street has been encouraging. Between Swachh Bharat Mission.
April and December 2022, about 85 SMEs came out z 9.6 crore LPG connections provided under Ujjwala.
with their public issues. During the same period, BSE
z 220 crore covid vaccination of 102 crore persons.
SME IPO index jumped nearly 73 percent.
z 47.8 crore PM Jan Dhan bank accounts.
z Centre’s Capital expenditure for Defence Services
(capital outlay) in Apr-Nov FY23 stood at `1.52 lakh z Insurance cover for 44.6 crore persons under PM
crore rise of 0.88% Yo Suraksha Bima and PM Jeevan Jyoti Yojana.
z Centre’s Capital expenditure for Road Transport and z Cash transfer of ¹ 2.2 lakh crore to over 11.4 crore
Highways in Apr-Nov FY23 stood at `1.49 lakh crore farmers under PM Kisan Samman Nidhi.
rise of 102% YoY
z Central and State Governments’ budgeted expenditure Major Highlights and Announcements
on the health sector reached 2.1 percent of GDP in Union Budget 2023-24 : Programs and
FY23 (BE) and 2.2 percent in FY22 (RE), against 1.6
percent in FY21 Policies
z Atmanirbhar Clean Plant Program with an outlay of
UNION BUDGET 2023-24 `2200 crore to be launched to boost availability of
disease-free, quality planting material for high value
7 Priorities of the Budget – Saptarishi horticultural crops.
157 new nursing colleges to be established in
(1) Inclusive Development - Government’s Sabka
Saath Sabka Vikas policy has benefitted many co-location with the existing 157 medical colleges
sections, including women, SCs, STs, OBCs, and other established since 2014.
underprivileged groups. Centre to recruit 38,800 teachers and support staff
(2) Reaching the Last Mile - Building on the huge success for the 740 Eklavya Model Residential Schools,
of Aspirational District program, Aspirational Blocks serving 3.5 lakh tribal students over the next three
program, covering 500 blocks for saturation of years.
government services launched. Outlay for PM Awas Yojana is being enhanced by
(3) Infrastructure and Investment - Capex outlay is being 66% to over `79,000 crore.
increased steeply by 33% to `10 lakh crore, which Capital outlay of `2.40 lakh crore has been
would be 3.3% of the GDP. provided for the Railways, which is the highest
(4) Unleashing the Potential - A National Data Governance ever outlay and about nine times the outlay made
Policy will be brought up enabling access to in 2013-14.
anonimised data to unleash innovation and research Urban Infrastructure Development Fund (UIDF)
by startups and academia. will be established through use of priority Sector

Lending shortfall, which will be managed by the A new sub-scheme of PM Matsya Sampada Yojana
national Housing Bank, and will be used by public with targeted investment of ¹ 6,000 crore to be
agencies to create urban infrastructure in Tier 2 launched to further enable activities of fishermen,
and Tier 3 cities. fish vendors, and micro & small enterprises,
Entity DigiLocker to be setup for use by MSMEs, improve value chain efficiencies, and expand the
large business and charitable trusts to store and market.
share documents online securely. Digital public infrastructure for agriculture to be
100 labs to be setup for 5G services based built as an open source, open standard and inter
application development to realize a new range of operable public good to enable inclusive farmer
opportunities, business models, and employment centric solutions and support for growth of agri-
potential. tech industry and start-ups.
500 new waste to wealth plants under GOBARdhan Computerisation of 63,000 Primary Agricultural
(Galvanizing Organic Bio-Agro Resources Dhan) Credit Societies (PACS) with an investment of ¹
scheme to be established for promoting circular 2,516 crore initiated.
economy at total investment of `10,000 crore. 5% z Massive decentralised storage capacity to be set
compressed biogas mandate to be introduced for up to help farmers store their produce and realize
all organizations marketing natural and bio gas. remunerative prices through sale at appropriate times.
Centre to facilitate 1 crore farmers to adopt natural z Sickle Cell Anaemia elimination mission to be launched.
farming over the next 3 years, for which, 10,000 z Joint public and Private Medical research to be
Bio-Input Resource Centres to be set-up, creating encouraged via select ICMR labs for encouraging
a national-level distributed micro-fertilizer and collaborative research and innovation.
pesticide manufacturing network.
z New Programme to promote research in
Pradhan Mantri Kaushal Vikas Yojana 4.0, to be
Pharmaceuticals to be launched.
launched to skill lakhs of youth within the next
three years covering new age courses for Industry z `10 lakh crore capital investment, a steep increase of
4.0 like coding, AI, robotics, mechatronics, IOT, 3D 33% for third year in a row, to enhance growth potential
printing, drones, and soft skills. and job creation, crowd-in private investments, and
30 Skill India International Centres to be set provide a cushion against global headwinds.
up across different States to skill youth for z Aspirational Blocks Programme covering 500 blocks
international opportunities. launched for saturation of essential government
Revamped credit guarantee scheme for MSMEs to services across multiple domains such as health,
take effect from 1st April 2023 through infusion of nutrition, education, agriculture, water resources,
`9,000 crore in the corpus, to enable additional financial inclusion, skill development, and basic
collateral-free guaranteed credit of `2 lakh crore infrastructure.
and reduce the cost of the credit by about 1%. z `15,000 crore for implementation of Pradhan Mantri
Central Processing Centre to be setup for faster PVTG Development Mission over the next three years
response to companies through centralized under the Development Action Plan for the Scheduled
handling of various forms filed with field offices Tribes.
under the Companies Act. z Investment of `75,000 crore, including `15,000
Maximum deposit limit for Senior Citizen crore from private sources, for one hundred critical
Savings Scheme to be enhanced from `15 lakh to transport infrastructure projects, for last and first mile
`30 lakh. connectivity for ports, coal, steel, fertilizer, and food
Targeted Fiscal Deficit to be below 4.5% by grains sectors.
2025-26.
z New Infrastructure Finance Secretariat established
Agriculture Accelerator Fund to be set-up to to enhance opportunities for private investment in
encourage agri-startups by young entrepreneurs
infrastructure.
in rural areas.
z District Institutes of Education and Training to be
To make India a global hub for ‘Shree Anna’, the
developed as vibrant institutes of excellence for
Indian Institute of Millet Research, Hyderabad
will be supported as the Centre of Excellence for Teachers’ Training
sharing best practices, research and technologies z A National Digital Library for Children and Adolescents
at the international level. to be set-up for facilitating availability of quality books
`20 lakh crore agricultural credit targeted at across geographies, languages, genres and levels, and
animal husbandry, dairy and fisheries. device agnostic accessibility.

z `5,300 crore to be given as central assistance to Upper z R & D grant for Lab Grown Diamonds (LGD) sector to
Bhadra Project to provide sustainable micro irrigation encourage indigenous production of LGD seeds and
and filling up of surface tanks for drinking water. machines and to reduce import dependency.
z Bharat Shared Repository of Inscriptions to be set up z Annual production of 5 MMT under Green Hydrogen
in a digital epigraphy museum, with digitization of one Mission to be targeted by 2030.
lakh ancient inscriptions in the first stage.
z Effective Capital Expenditure of Centre to be Budget Estimates 2023-24
`13.7 lakh crore. z Total receipts other than borrowings and the total
z Continuation of 50-year interest free loan to state expenditure are estimated at `27.2 lakh crore and
governments for one more year to spur investment `45 lakh crore respectively.
in infrastructure and to incentivize them for z The net tax receipts are estimated at `23.3 lakh crore.
complementary policy actions. z The fiscal deficit is estimated to be 5.9 per cent of GDP.
z Encouragement to states and cities to undertake urban
planning reforms and actions to transform our cities Rate
Total Income (Rs)
into sustainable cities of tomorrow. (per cent)
z Transition from manhole to machine-hole mode by Up to 3,00,000 Nil
enabling all cities and towns to undertake 100 percent
mechanical desludging of septic tanks and sewers. From 3,00,001 to 6,00,000 5
z iGOT Karmayogi, an integrated online training
platform, launched to provide continuous learning From 6,00,001 to 9,00,000 10
opportunities for lakhs of government employees From 9,00,001 to 12,00,000 15
to upgrade their skills and facilitate people-centric
approach. From 12,00,001 to 15,00,000 20
z More than 39,000 compliances reduced and more Above 15,00,000 30
than 3,400 legal provisions decriminalized to enhance
Ease Of Doing Business.
z Jan Vishwas Bill to amend 42 Central Acts have been
Indirect Taxes
introduced to further trust-based governance. z Number of basic customs duty rates on goods, other
than textiles and agriculture, reduced to 13 from 21.
z 3 centres of excellence for Artificial Intelligence to be
set-up in top educational institutions to realise the z Minor changes in the basic custom duties, cesses and
surcharges on some items including toys, bicycles,
vision of “Make AI in India and Make AI work for India”.
automobiles and naphtha.
z National Data Governance Policy to be brought out
z Excise duty exempted on GST-paid compressed bio gas
to unleash innovation and research by start-ups and
contained in blended compressed natural gas.
academia.
z Customs Duty on specified capital goods/machinery
z One stop solution for reconciliation and updation of for manufacture of lithium-ion cell for use in battery
identity and address of individuals to be established of electrically operated vehicle (EVs) extended to
using DigiLocker service and Aadhaar as foundational 31.03.2024
identity. z Customs duty exempted on vehicles, specified
z PAN will be used as the common identifier for all automobile parts/components, sub-systems and tyres
digital systems of specified government agencies to when imported by notified testing agencies, for the
bring in Ease of Doing Business. purpose of testing and/ or certification, subject to
z 95% of the forfeited amount relating to bid or conditions.
performance security, will be returned to MSME’s by z National Calamity Contingent Duty (NCCD) on specified
government and government undertakings in cases cigarettes revised upwards by about 16 per cent.
the MSME’s failed to execute contracts during Covid
period. Important Layouts in the Budget
z Result Based Financing to better allocate scarce z National Data Governance Policy - to unleash
resources for competing development needs. innovation and research by start-ups and academia,
which will enable access to anonymized data.
z Phase-3 of the E-Courts project to be launched with
an outlay of `7,000 crore for efficient administration z States will be encouraged to set up a Unity Mall in their
of justice. state capital or most prominent tourism centre or the
financial capital for promotion and sale of their own

ODOPs (one district, one product), GI products and Fintech Sector
other handicraft products, and for providing space for
z Digital payments rose 76% in transaction and 91% in
such products of all other States.
value terms in 2022
Green Growth z 7,400 crore digital payments of `126 lakh crore
z Green hydrogen, clean energy storage and transmission through UPI in 2022.
are the key drivers of the government’s “Green Growth” z Fiscal support for digital public infrastructure (DPI)
priority sector. will continue in 2023-2024
z 48% rise in allocation towards renewable energy
z The scope of documents available in DigiLocker for
sector in this budget
individuals will be expanded
z Battery energy storage systems with capacity of 4,000
MWh will be supported with viability gap funding. z An entity DigiLocker will be set up for use by MSMEs
z A detailed framework for pumped storage will be and large businesses
formulated. z PM VIKAS scheme will now include access to digital
z Inter-state transmission system for evacuation and payments and social security.
grid integration of 13 GW renewable energy from z Subsidy for UPI expected to jump two-folds to
Ladakh will be constructed with an investment of
`2,137 crore in FY23 over previous fiscal.
`20,700 crore including Central support of `8,300
crore. z Allocation for digital payments promotion remains
z A green credit programme for encouraging behavioural stagnant at `1500 crore for last three years
change will be notified under the Environment
Protection Act. Digital Initiatives Focusing on Artificial
z 500 new ‘waste to wealth’ plants under GOBARdhan Intelligence in the Education Sector
(Galvanizing Organic Bio-Agro Resources Dhan) z 3 centres of excellence for artificial intelligence will be
scheme will be established for promoting circular
established in top educational institutions
economy. These will include 200 compressed biogas
(CBG) plants, including 75 plants in urban areas, z 100 laboratories in engineering institutions will be
and 300 community or cluster-based plants at total developing applications using 5G services
investment of `10,000 crore. z A national digital library will be set up for children and
z Bhartiya Prakritik Kheti Bio-Input Resource Centres – adolescents for facilitating the availability of quality
Centre to facilitate 1 crore farmers to adopt natural
books across geographies, languages and genres
farming over the next 3 years, for which 10,000
Bio-Input Resource Centres will be set-up, creating z Centre to recruit 38,800 teachers and support staff
a national-level distributed micro-fertilizer and for 749 Eklavya Model Residential Schools that will
pesticide manufacturing network. service 3.5 lakh tribal students.
  

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EDITION: 2023-24

z Discussion of Highly Probable Topics for Prelims

1. Economics: An Introduction................................ 1-9 3. Public Finance..................................................... 17-22

 Human Development.............................................. 135 15. Important Concepts

Economics:- A discipline studying economic behaviour

Economy:- An area of production, consumption &

Example: Employment, national income, poverty, etc.

Example: Demand, supply, pricing, Production &

US economist John Williamson coined the term.

Keynesian Economics: It believes in the liberal Santiago Consensus

India Adopted it in 2002.

2 Udaan 300+ Indian Economy

ON BASIS OF ACTIVITIES Quaternary Sector (Knowledge Sector)

ON BASIS OF ASSET OWNERSHIP PPP (Public Private Partnership)

4 Udaan 300+ Indian Economy

Evaluation of National Income Rao (1931-32)

CENTRAL STATISTICAL ORGANIZATION Activities Undertaken by CSO

Gross Investment sector + household sector.

Gross Value Added (GVA) PRO-CYCLICAL AND COUNTER-

6 Udaan 300+ Indian Economy

Unemployment is an example of a countercyclical

METHODS OF NATIONAL INCOME

Income Method NEW GDP SERIES 2011-12

DIFFERENCE BETWEEN GNP AND GDP

DIFFERENCE BETWEEN GDP AND GVA

Parameters to attain: (i) Higher real per capita

8 Udaan 300+ Indian Economy

Variants of Subsidies z Reported by the Ministry of Statistics and

REAL GDP vs NOMINAL GDP

DIFFERENCE BETWEEN GDP DEFLATOR AND CPI

PRACTICE | REVISION | EVALUATION

PW ONLY IAS www.pw.live

(DVC) in India (1948) and Volta River Project in

Indicative Planning Functional Planning

Structural Planning Decentralized Planning

12 Udaan 300+ Indian Economy

Targeted growth rate – 7 percent. Achieved growth rate

14 Udaan 300+ Indian Economy

NITI AAYOG VIZ-A-VIZ PLANNING COMMISSION

16 Udaan 300+ Indian Economy

COMPREHENSIVE FOUNDATION COURSE FOR UPSC CSE 2024

COMPREHENSIVE FOUNDATION COURSE FOR UPSC CSE 2024

CONCISE COURSE FOR UPSC CSE PRELIMS 2023

COMPREHENSIVE FOUNDATION COURSE FOR UPSC CSE 2024

COMPREHENSIVE FOUNDATION COURSE FOR UPSC CSE 2024

PW ONLY IAS www.pw.live

Weekly Current Affairs

Doubt Engine Facility

PW ONLY IAS www.pw.live

Public Finance z It refers to the management of a country’s revenue,

z Some recent reforms related to budget: Budget

18 Udaan 300+ Indian Economy

MONETARY POLICY VIS-A-VIS FISCAL POLICY

Expansionary Fiscal Policy z Reduction in government spending or a reduction in

Contractionary Fiscal Policy DEFICIT FINANCING

Strengthening of government finances and includes the

20 Udaan 300+ Indian Economy

z Fiscal Responsibility and Budget Management Public Debt

Objectives of FRBM, Act

22 Udaan 300+ Indian Economy

SAMPOORNA TOTAL 18 BOOKS

COMPREHENSIVE BOOKLETS FOR UPSC PREPARATION

Companion For Integrated Preparation of

• Ancient History • Indian Society • Indian Economy & Economic

Human Development.............................................. 135 15. Important Concepts

z Price control by government as a short-term measure. Income distribution

Improve the turnaround time of vehicles.