PA

RM
A
R
SS
C
 Indian Economy
-

Macroeconomics
-
Microeconomics
-

Focused with the action of individuals/

Focused on the action of govt./

...

C
businesses
countries take to influence broader
Individuals, firm
economies
Father: Adam Smith “The wealth of

SS
GDP, NI, Inflation nation”
Father: J. M. Keynes (England)
Demand and Supply
Classifications

-
3 types of economic systems
1. Capitalist
2. Socialist
3. Mixed R
Govt. has no
share holding
private has no
ownership
Both
eg: India
A
Capatalist Socialist Mixed

Public+Private
RM

Ownership Private ownership Public ownership

Economic motive Profit Social welfare Both

Govt. role No role Complete involvement Limited role

Income distribution Unequal Equal Less unequal

PA

Economic freedom Complete Lack of freedom Limited freedom

eg: USA eg: USSR, North Korea eg: India

 1991: Licence Raj -
Disinvestment: Govt. sell it’s shareholdings

↓
x LPG
Balance of payment

C
Sectors of Economy

..
-
-
Backbone on
of Indian Economy: Agriculture

1. Primary

SS
2. Secondary
3. Tertiary

Primary Sector
-

R
Directly dependent on environment, also called
agriculture sector
A
In India primary sector seen mostly in agriculture
Activities:
↑

Agriculture
RM

-
Fishing red collar jobs
/
Hunting and gathering I
- Forestry
Ghar se bahar
↑
Mining
nikalna padega
to perform such
All sectors are interlinked
PA

jobs I

Secondary Sector
. . .

↑
Also called manufacturing sector
↑
These add value to natural resources by transforming raw materials into valuable
products
Activities:
I Manufacturing
 Processing

i
Blue collar jobs, not developed in India properly, we have
Building/Construction work
-

leaped to tertiary sector directly

Secondary sector is called backbone of a country, helps in industrialisation of a country

eg: China
24-25%

C
SS
R
A
Tertiary Sector
RM

Also known as service sector

It is that part of economy where business produce *
services
services
eg: teaching, transport, advertising, retail
It is always intangible in nature
PA

which cannot be Tangible: that which can be

touched touched
Also, known as White collar jobs
 C
I -

SS
↓
Thermal energy
Coal

R
A
Decision making activity
-
eg: Activity of Politicians
This sector is known as
RM

Gold collar jobs -> Scientists that are highly qualified

Also known as knowledge sector
eg: Senior business executive
PA

~ Highest contribution in our economy:

Tertiary sector (India+other countries)

I
Primary sector employs more no. of people,
least contribution in GDP⑳(21-22%)
(14.39%)
#

-
Least no of people employed in Tertiary
-
GDP contribution: 31.46% sector and contributes s
more
most in GDP (54.15%)
(54%)
⑳
 C
competition in goods

SS
-- making

R
A
I
-
RM

Transport
Banking Facilitates trade
Advertisement
PA
 C
SS
R
A
RM
PA

> Employees’ Provident Fund

 C
SS
R
A
RM
PA

1- India is no. 1
Season based employment
-
PA
RM
A
R
SS
C
PA
RM
A
R
SS
C
PA
RM
A
R
SS
C
PA
RM
A
R
SS
C
 C
SS
R
A
RM

Investment Turnover

Micro Less than Rs 1 Cr Less than Rs 5 Cr

Less than Rs 50 Cr
PA

Small Less than Rs 10 Cr

Medium Less than Rs 20 Cr Less than Rs 100 Cr

W
r Stock: variables is measured over a specific period of time
eg: Inventory, cash, machinery, tools

- Flow: variable is measured over a defined period of time

eg: expenditure, savings, depreciation

C
SS
R
A
RM
PA
National Income: the total of money earned within a country

IAusten
-

-
Intercountry: growth within various countries such as India, US, China, etc.

Intercountry:
Intracountry: within the country what is growth in comparison to previous year
Intercountry:

C
Measures and Aggregates of NI

SS
GDP · GNP NDP NNP

↑
GDP: Gross Domestic Product
R
Total value of all final goods and services produced within the territory of a country

GNP: Gross National Product

A
↑

Total value of all final goods and services produced by the nationals of the country

GNP = GDP - Factor Income to

....
RM

Abroad + FI from Abroad

GNP = GDP + Net factor income from
abroad

NDP: Net Domestic Product

goods and services

-
NDP = GDP - Depreciation
PA

factors of production:
Monetary value of an asset
-
L
Land
decreases over time due to various
Labour
factors -
Capital
Entrepreneurs
W Financial year: 1 April to 31st March
>
- In GDP second hand goods are never counted
-
NNP: Net National Products
NNP = GNP - Depriciation

1 GDP was developed by American Economist “Simon Kuznetsk” in 1934

C
Real GDP vs Nominal GDP More than Real GDP due to inflation

->
↓

SS
I
Calculated on current prices
I
Base year is taken known as
I
*
Not inflation
Inflation adjusted
not adjusted
Base effect
/
Calculated on constant prices
I
It is inflation adjusted

R ↓
↓ Irvin Fisher mentioned it as:
A
-

Concept of Money Illusion

GDP P inflator
deflator is used to calculate
RM

this = Nominal GDP

X 100
Real GDP

L Methods to calculate GDP

PA

1. Value Added Method

-

/
Also known as Production Method
Value added method = Output - Input

2. Income Method
-

I
Compensation to employees
I
Operating surplus
I
Mixed income
 3. Expenditure Method
-

C + G + I + (X - M)
-
C: Consumption
I
G: Govt. expenditure
I
I: Investment
X: Export

C
W

-
M: Import

SS
-
Per Capita Income = National Income
-

Population

Purchasing Power Parity = A common basket of goods

↑

India -> GDP: 5th in the

R
A
↓ world Ranking (according to GDP)
USA
PPP: 3rd after USA and China China

↓
RM

Germany
Japan
Economy is inflated India

/
Personal Income: IfTtotal income of an individual earned from all the sources before taxes
PI = National Income + Income received not earned - Income earned but received
PA

PI = NI + Transfer payment - Undistributed corporate profit

↓
eg: subsidy by govt.

C Personal Disposable Income: PI - tax

GDP Calculation: by National Statistical Office under MOSPL (Ministry of Statistics

and Program )
 NNPFC: is also called National Income
I
GDPFC
t
FC
= GDPMP
MP
M
-- Net Indirect Taxes

GDPH
FC = GDPMC- (Indirect tax - Subsidy)
-

·
I
FC MP
⑳
GDP = GDPMC -
MP- Indirect tax + Subsidy
⑭
/

MFC
FC

GDP - Depreciation =Ple

Net GDP
Net DP

C
W

~
- GDP + NFIA = Gross NP
Market Price Factor Cost

SS
I Household income is not under GDP I ~

The market price is the final Factor cost is the cost of

value of the product being factors of production, or
sold, which includes indirect total value of inputs, where
taxes indirect tax is not included

R
Green GDP = GDP - Environmental Damage
A
: Potential GDP - Real GDP = Recessionary Gap
RM
PA
 C
SS
BUDGET AND TAXATION

R
A
RM
PA
 -
Budget: an approximation of revenue and expenses over a specified period
of time

C
Asset Liability

SS
I A propert owned by a L
Something that someone
person (Something that economical value) is responsible for (Debt/obligation)
Eg: Gold, Property Eg: payment of Loan

According to Govt.
Income
->-
Expenditure
Receipt
Expenditure R -
Share in profit is called dividend
A
Budget
RM

Revenue
- ->
↳
Capital
Asset
Frequent transactions Liability ↓ Less frequent
Asset
↑I
/
Liability
-

~ ↓ I
N
PA

L
Receipt Expenditure Capital Capital
(Paisa aa raha hai) (Paisa jaa raha hai) Receipt Expenditure
↓ ↓ (Kabhi-kabhi wala paisa (Kabhi-kabhi wala paisa
Neither decrease in Neither increase in
asset nor increase in asset nor decrease in liability
jo aa raha)
↳
↓ jo jaa raha hai)

↓ ↓ Plan Capital Exp ↓

liability Non-plan Non-plan Capital Exp
Plan
X t
Revenue Exp Revenue
Tax Revenue Non-tax revenue Exp
eg: Wealth tax eg: Challan
 l
Burrowing:
Borrowing Liability
4)
I
- Capital Receipt
I Disinvestment: Asset
Entertainment tax
-- Revenue
-

Excise duty

.
Two components
Examplesof budget
I
↓ - Capital Expenditure

C
Revenue Expenditure Road, bridge, etc
↓ ↑
Construction of any infrastructure

SS
Salary/Pension -

i
Subsidy/Grant >
Purchase of land/machinery
Interest Payment Investment
Maintenance of Infrastructure .
1
Loan
Repayment of Loan

R
A
Budget >
-
Annual Fiscal Statement: Art 112

Prepared by: Department of Economic Affairs

RM

(Ministry of Finance) Loan - Principal amount -> Capital

I

Presented by: Finance Minister Interest ->Revenue

1st budget presented by: R. K. Shanmukham Cherry n
Chetty
2nd budget by: John Mathai * Committee At present General Budget and Railway
Most no. of budget: Budget is merged
In a row 6 times
1. Morarji Desai (10 times) - Earlier ↓
PA

2. P Chidambaram (9 times)
3. Pranab Mukherjee (8 times) 1921: Acworth Recommendation Committee (Separate)
↓ ↓
General Budget Railway Budget

2016: Bibek Debroy Committee (Amalgamate)

Interim Budget and Full Time Budget
L

Presented on
Election Year
 Deficits: loss

Receipt Expenditure = Surplus budget Expenditure = Receipt Balanced Budget

3 Receipt = Deficit Budget
- >
-

· Expenditure

Types:

C
1. Budgetary Deficit
2. Revenue Deficit: Revenue Expenditure - Revenue Receipt
A
3. Fiscal Deficit: Total Exp - [Total receipt - dept creating Capital Receipt]

SS
I Or
accurate Total Exp A-= [Revenue receipt + Non-debt creating Capital Receipt]
measure of govt. deficit/govt. borrowing

*
4. Primary Deficit: Fiscal Deficit - Interest Payment
R
5. Effective Revenue Deficit: Revenue Deficit - Grant given for developmental
purpose
A
Taxation System in India
RM

-
Direct Tax
I
Indirect Tax

·
Directly payable
paid to govt.
to Govt. ,

*
Not directly
Indirectly paid totoGovt.
payable govt.
I

It cannot be passed to someone else -

It can be passed to someone else

Progressive tax Regressive tax /proportional tax
PA

·
I

↑ eg: Income tax, Wealth tax, Gift -

eg: GST Tobacco, alcohol
7

tax, capital gain tax -

Excise duty >
Petrol, Diesel, Aviation turbine fuel
I
Corporate tax
I

Custom duty

S
Income↑ > Tax↑
d
Marginal tax > Avg. tax rate

-
Marginal tax > Avg. tax rate
-
 GST

↑ 101 CA
I Operational by: 1st July 2017
/
Assam was the first state to ratify it
GST council is a constitutional body: Art 279A

C
33 members (2 from Centre+31 from States/UTs)
Chairman: Finance Minister

SS
Levied by Central govt. but
Surcharge Tax: Tax pe Tax (on rich people) not shared by State govt.
↑
Cess Tax: for a definite purpose (charged on everyone)
Pigouvian Tax: to lower the negative externalities

R
A
RM
PA
 I
Published 1 week before

C
the budget roughly in the
month of January or
February

SS
R
A
RM
PA
 C
SS
Laffers Curve

R
A
-
RM

Bell-shaped
Curve
PA
 SEBI
I
PA
RM
A
R
SS
C
 W
w
PA
RM
A
R
SS
C
 C
SS
DEMAND AND SUPPLY INFLATION

R
A
RM
PA
W
Demand and Supply
-

/ Demand -> Satisfaction -> Utility

=
Eagerness Affordibility
to buy something

C
Marginal Utility: the addition satisfaction or benefit that a consumer derived from buying

SS
an additional unit of a commodity/service

Demand Curve: Consumer’s side -Affordability

Price

Rs 100
R - L

->
-
negative sloping curve
A
- ↓
Tomato price Rs 50 ->

-
Relation between price and
-
-
demand: Inverse
-
RM

Rs 20
-

N
I
1 kg 2 kg 5 kg Quantity
Outward demanded
- -
Only Rightward and Tomato kg
leftward shift
PA

Inward

Other factors are constant

eg: Income
Supply Curve: from
- producer’s side/profitability

Price Positive sloping curve

Rs 100 ↓ -

C
-

Rs 50 -

SS
Rs 20 ->
1

!
N
N

1 kg 2 kg 5 kg Supply

↑
Things exists in equilibrium
R
A
-
Equilibrium shifts if any one
of the factors shift
RM

~
Rs 100

W
-

- -> Surplus
Deficit
Rs 50 -

-> Point of equilibrium

Rs 20 -

I I
PA

1 kg 2 kg 5 kg

/
Exceptions
-

-
Giffen goods: non-luxurious goods
eg: increase in price of wheat price X demand
v

I
Veblen goods: luxurious goods
eg: iPhone, Mercedes ↓
Demand is perfectly inelastic
/
Price Elasticity
-

Changes in price affect the*

demand
changes inindemand
changes
#
Usually -ve

ea
= % change in demand

C
% change in price

SS
I Perfectly Elastic Demand
-

Horizontal

Price
-
↳negligible/zero change in price
R causes major change in
demand (infinite)
A
Demand
ed 5
=
RM

Relatively Elastic Demand

-

1)

I
eg: gold
+-
P
PA

Slight change in price result in high &

increase
change in in
-
demand
P
v2
-

Q Q
>
ed 1
I Perfectly Inelastic Demand
n e

Vertical
Price
-
-

-> Veblen goods

-

-> No changes in quantity of

C
-

product demanded when the

price changes
u

SS
-

Demand
ed = 0

Relatively Inelastic Demand

I
e n

R
A
P1
-

Change in price causes relatively

i
- less change in quantity demand
P2
RM

!
Q 12
Q

ex 1
PA

I Income Elasticity
-

Relationship between change in income and demand for certain goods

↑
Income ↑ Demand ↑ +ve slope
-
Income ↓ Demand ↓ +ve slope
 Cross Price Elasticity

!
substitute of X
X Y
-
Price Demand A
Demand
Shift from product X to Y

C
due increase in price of X

SS
I People hold money for three purposes
-

1. Transaction motive future

2. Precautionary motive-> Father of Modern Economics: Adam Smith
↑

3. Speculative motive ↳ Receipt expenditure

R
Speculative Motive: by J M Keynes (Father of Economics)

i-t--
A
opportunity cost is involved

-
Speculative demand for money
RM

W If interest rate is less ->People keep more money -> Speculative demand high

to keep money with oneself

-
Interest rate is high ->People will keep less money -> Speculative demand less
Liquidity trap -> Rate ↓ Speculative demand perfectly elastic
PA

Types of Market
-

1. Monopoly
-

L only 1 seller
/ pure monopoly is rare
/
Entry barrier
eg: Indian railways

2. Oligopoly
Few dominant sellers
Many buyers
No easy entry
eg: Telecom sector, laptop market

3. Monopolistic Competition
Many sellers

C
Many buyers
Similar but slightly different products
eg: Toothpaste

SS
4. Perfect Competition
Many sellers
Many buyers 7 selling homogenous products
Free entry and exit
eg: Agricultural products
R
A
RM
PA
 C
INFLATION AND UNEMPLOYMENT

SS
R
A
RM
PA
 Inflation
Increase in the general level of prices of goods and services
↓
Purchasing power decreases in case of inflation - GDP Deflator = N x 100
-

R
Irwin Fisher: Money illusion concept

C
↑

MV = PT

SS
During inflation the debtor/borrower benefits more than the lender

.
I nominal GDP
Lender -> Debtor/Borrower ↳
GDP
Rs 10,000 I
real GDP
↓
Cause of Inflation
T
R adjusted to inflation
A
A

V
W

Demand Pull CostPush

Cost Pull
↓
↓
RM

-
Supply side inflation
-
Demand side inflation
↑
Increase in cost of any factors of
I “Too many dollars chasing too few
production and input cost
goods”
PA

Measurement of Inflation

2 V
WPI CPI
↓ ↓
Wholesale Price Index Consumer Price Index
More weightage to manufactured More weightage to food
goods ↓ items ↓
does not capture the changes in the prices Checked from
of services consumers perspective
Services
 1st time published: 1942
- (pre-Independence)
WPI CPI
↓ ↓
Base Year: 2011-12 Base Year: 2011-12
. .
-

Published by: Office of Economic Published by: National Statistic

!
Advisor (OEA) Office (NSO)
↓ ↓

C
Ministry of Commerce and Industry Ministry of Statistics and Program
Implementation (MoSPI)

lea↓

SS
Department of Promotion of Base Year: 1986-87
Industry and Internal Trade
CPI: Industrial workers
CPI: Agricultural workers
CPI: Rural workers
It
Labour
Bureau
RBI uses CPI (combined) to target inflation
↓
I

CPI -> Combined

R ↓I Rural
Urban
Ministry of Labour
A
↓
-
Base Year: 2012
NSO: MoSPI
RM

Types of Inflation
-

1. Creeping: 3-4%
2. Walking: 4-10%
3. Running: 10-20%
PA

4. Galloping: 20-100%
5. Hyper: 100% > -

Disinflation: Rate of inflation is decreasing

-

10% 8% 7% 5%
ry r
n

Deflation: opposite of ⑳
n
disflation
inflation
Fall in the general level of prices
. Purchasing power increases
/ IIP: Index of Industrial Production
-
Base Year: 2011-12
I
Published by: NSO (MoSPI )
8 core industries have 40% contributions
e

1. Refinery products
2. Electricity
3. Steel

C
e
4. Coal
Crude oil
5. Natural
NaturalGas
gas

SS
Cement
6. Cement
7. Fertilizers
Fertilizers
8. Crude Oil

-
Philips Curve: InflationA and Unemployment↓ have inverse relationship
-

R
A
RM
PA

Stagflation:
- Inflation↑ Unemployment↑
Philips Curve x
↓
No economic activity

·
Great Depression: 1930-33/1929-1939
-
1
1929-39
·
Great Recession: 2008-2009
2007-2009
 Types of Unemployment
e

1. Structural unemployment: there is a mismatch between worker’s skill and availability

of job
eg: technology advancement, like machinery replacing farmer labour
2. Educated unemployment: degree -> unemployment, seen in Urban part of India
3. Frictional Unemployment: type of unemployment while searching for a new job
eg: an employee leaving current job to move to a better one (seen in Urban)

C
4. Disguised Unemployment: Hidden unemployment when some people seem to be
employed but are not, marginal productivity is zero

SS
eg: Agriculture sector
5. Cyclical unemployment: Recession in economy (upturn and downturn)
When economy revives, there is opportunity to employment, seen in Urban

↓
eg: Great Recession
sub-type

R
Seasonal Unemployment: Employment based on the seasonal basis
Seen more rural part of India
eg: Light or fireworks sellers during Diwali
A
RM

When some goods or productive factors are completely fixed in amount, regardless of price, the supply

:
curve is vertical

The value of the slope of a normal demand curve is negative

-
The excess of total expenditure of Government over its total receipts, excluding borrowings, is known as
Fiscal deficit
PA

According to John Maynard Keynes (Father of Macroeconomic) employment depends upon aggregate
demand
Gave General theory of
Unemployment
 C
SS
MONEY AND BANKING

R
A
RM
PA
 Financial activities performed by banks: Banking

1 Classification of banks: RBI Act of 1934

Reserve Bank of India

1st April 1935: the first setup of RBI
Headquarter: Calcutta, At present

C
-S Headquarter: Mumbai in 1937
Independent body
was established on the basis of recommendation

SS
of Hilton Young Commission, 1926
Recommendation taken I
from B R Ambedkar as
well ↑ 1st RBI Governor: Osborne Smith
-
1st Indian RBI Governor: CD Deshmukh
↑

I
Functions of RBI

an
>.
1. ItBanks License
regulates bank
-
R
RBI Act 1934
7 RBI was nationalised on 1st Jan 1949
A
L
↓↓ ~

License CRR/SLR Regulate banks ->Banking Regulation Act, 1949

Interest Rate
↓
RM

Regulation power to banking system

2. Currency printing except F 1 ·

(under Ministry
note (under of Finance)
Ministry of Finance) Currency Printing Coins GOI - 1 note

..
↓ Nasik Mumbai

legal tender -> FIAT Money Quickly and Hyderabad

Dewas regularly
Mysore Calcutta
moves b/w financial
Salboni Noida

-
PA

L
Plastic Money: Credit card, debit card, etc. markets
f
Hot Money: Assets such as stocks, deposits, bonds, etc.

3. Monetary Policy ↳ Quickly and regularly

moves b/w financial
4. Lender of last resort and Bank of Banks markets
 RBI Act 1934

H
Under 2nd schedule
of RBI Act
L
Scheduled Banks
banking system I
Classification of

Non-scheduled Banks

↓ ↓

C
Commercial Cooperative Banks
↓ ↓

SS
Profit Non-profit

x - Depositors are owners

Public Sector Private Sector

Banks Banks
↓
I
12 nationalised
banks
↓
Indian banks
R
Foreign banks
eg: City Group,
A
eg: HDFC, Kotak
HSBC
RM

- Nationalisation of Banks in 1969 (14 banks) and 1980 (6 banks)

History of Banking System in India

-

1st bank: 1770 (Bank of Hindustan)

" 1806: Imperial Bank of Calcutta Merged

=
PA

1840: Imperial Bank of Bombay 1921, Imperial Bank of India

1843: Imperial Bank of Madras - 1955

State Bank of India

1st Indian owned bank: Allahabad Bank, in 1865 Statutory Body

> RRB Act 1976
Regional Rural Banks (RRBs): to enhance financial activities in rural areas
eg: Grameen Banks
1st: Pratham Grameen Bank (2nd Oct 1975, Moradabad, UP)
 RRB

15% holding by
State
-It 50% holding by Centre

35% holding by Sponsor Banks

(sponsors RRBs)
I
SIDBI: 2nd April 1990

C
--

Headquarter: Lucknow
Other Financial Institutions
e

SS
NABARD: National Bank for Agriculture and Rural Development
-

↑
Set up: 12 July 1982, on recommendation of B. Sivaramman Committee (1979)
W
Through NABARD Act 1981
Functions:
Regulate RBI
-

Provide finance for agriculture and rural development

-
↑
-

-
R
Supervises cooperative banks and RRBs
Does not deal directly with people
Provides financing through PMAY, KCC, Ru Pay Kisan Cards
Supervise NABARD
-
-
A
-
Headquarter: Mumbai
RM

National Housing Bank: 1988, through Act of 1987

-

-Statutory body
SEBI: through SEBI Act of 1992 and
-
on>
Af 12 April 1988
established (estd.)
on 12th April 1988
-
Headquarter: Mumbai
p
SEBI: Securities and Exchange Board of India
Function:
PA

↑ To protect the interests of investors

↑
Chairman: Madhabi Puri Buch (1st women, 1st non IAS chairman)

↑
IRDAI: Estd. through IRDAI Act of 1999, as a statutory body April 2000
- -

↳ Insurance Regulatory and Development Authority of India

 Micro Finance Institution

I
/ They offer financial services to low income population
eg: Loan, Savings, Insurance
I

↓
I
Microfinance loans is given to households having income uptothan
income less F 3₹lakhs
1.25 lakhs/annum

7 ₹ 3 lakhs max ↑ Collateral: mortgage

collateral free loan

C
I Father of Micro Finance system: Muhammed Yunus (Bangladesh)
↓

SS
gave concept of Grameen
Model Banks, 1970 and was
given Nobel Prize
7 Bangladesh Grameen Bank
1st Micro Finance institution in India: SEWA Bank (1974)

R
Business Model of Micro Finance Banks
-->
Min Max

Self Help Groups (SHG): group of 10-20 people come together to find ways to improve

I
A
↳

Informal
-

their living conditions

W Group of below poverty line (BPL) groups
Usually in rural areas
RM

-
Joint Liability Group: group of 4-10 people
-

↓
Could be a small business
↓
Min
↓
Max
I
venture for profit
PA

Micro Finance, collateral free loans

--
MUDRA scheme
I Micro Units Development and Refinance Agency, launched in 2015
-
3 types loan
-

1. Sishu: loans upto 50,000

2. Kishore: loans upto 50,000-5 lakhs
3. Tarun: loans upto 5 lakhs-10 lakhs
 Non-Banking Financial Companies (NBFC)
-

Eg: Bajaj Finance, Muthoot Finance, Mahindra and Mahindra

!
I
They are registered under Companies Act of 1956
-
Gives loans and advances on gold
They cannot accept Demand Deposits
W Deposits not guaranteed

C
They are regulated by RBI
↑
They need not maintain CRR and SLR

SS
NBFC-MFI
-

-
Provides micro loans/micro financial services
- Max limit on
Minimum
- Microfinance
requirement ofloans
Microother than NBFC
Finance Loans:MFI
75% of25% of assets
total total assests
I
Estd. through recommendation of a committee: Malegam Committee, 2010 (also sees issues of

↑
MFIs)
R
To qualify for NBFC MFI license they should have at least 75% of assets in Microfinance
A
RM

A non-banking financial company cannot seek demand deposits from public and cannot issue cheques

Payment banks

I
h
No loan Deposits
PA

↓
Max 2 lakhs
PA
RM
A
R
SS
C
NDTL: Net Demand and Time Liability (RBI keeps a part of your NDTL as a reserve)

Reserve

L V
Cash Reserve Ratio Statutory Liquid Ratio

C
V g
-
Reserve in the form of: Cash -
Reserve in the form of: Cash, Gold, G-Sec
↑ Banks do not earn any interest rate on ↑
Banks earn interest rate on SLR, profit is

SS
CRR obtained

R
A
RM

Balance Sheet
PA

L v
Liability Asset
g ↓
Deposits Loan

L V
Demand Deposits Time/Term Deposits
W W
Savings Account Fixed Deposit (matures at a certain time)
Current Account Recurring Deposits (eg: SIP in mutual funds)

Business
↓
 C
Inflation
RBI > Regulates money supply in the economy

SS
Deflation ↓
Monetary Policy
With the use of tools
V
Monetary Policy Tools

Monetary Policy Committee

↓
6 members
R >
On recommendation of Urjit Patel Committee
A
L V
3 3
↓ ↓
RM

RBI
Government
W
RBI Governor
Deputy Governor
Executive
PA

Money Multiplier: a maximum amount of new money created by banks for every dollar of
reserves

MM
· 1
CRR N
 Monetary Policy Tools

L V
Quantitative tools Qualitative tools
W
/

Bank Rate
-

Open Market Operations

I

Marginal Standing Facility

C
1. Bank Rate: RBI provides loan to Commercial Banks (without keeping any securities)
↓ Loan to No collateral

SS
7

RBI
- ↓
For long-term
6.75% Banks

2. Open Market Operation

#
Types
Outright purchase

-
Repurchase agreement
Selling and buying of Government securities
R
> G-Sec as Collateral

↳> Short term

A
↳
G-Sec T
Cash
* Repo means Repurchase Obligation
↑

When inflation is high - selling of G-sec by RBI

>
RM

Repurchase Agreement

H V
Repo Rate Reverse Repo Rate
Loan to Loan to
L ↓ ↳
for short-term RBI Banks RBI Bank
PA

collateral < ↳
Counters inflation even with increase in
Reverse Repo Rate
W
Collectively called: Liquidity Adjustment Facility

3. Marginal Standing Facility >

- 2% NDTL is a limit

CRR and SLR is not maintained 7 Is a “overnight loan”

Penalty + loan
↑

Can use SLE Quota G-Sec as collateral

 CRR Case 1: During inflation
SLR
&
CRR, SLR, BR, RRR, RR
Tools Increase in regulators

.
BR
RR
(
Interest Rates high in order to keep inflation under control
RRR
Case 2: During deflation
L >
-
CRR, SLR, BR, RRR, RR

C
Contractionary/Tight/Dear/ -

Reduction in regulators
Hawkish Monetary Policy Decrease in interest rates

SS
↳

Dovish/Easy/Expansionary
Monetary Policy

Currency Deposit Ratio =

R
Money held by public in the form of currency
A
Money in the form of Deposits in the Bank
RM
PA
 Fiscal Policy
↓
Used by Government of India to control inflation or deflation

L ~ -
Tax ↑ Subsidy MSP 4
↓

C
Less disposable
income

SS
R
A
RM
PA
 C
SS
MONEY AND BANKING
R
A
RM
PA
 Types of Money in our Economy

I
g W V V
Deposits with Bank Postal Deposit

C
Currency in circulation Deposits with RBI

p V W
Currency with
V
Currency with Bank Deposits Other

SS
public bank with RBI deposits with
RBI V V
W V
Demand Deposit Term Deposit Demand Deposit Term Deposit
&

↓
g W

Saving Account Fixed Deposit

Same as bank
L I

Current Account Recurring Deposit

/

R
...
A
Liquidity in Economics
RM

-
Liquidity: the ease with which an asset or security can be converted into ready cash without
affecting its market price

- Demand Deposit is more liquid than Term Deposit

Liquidity: Cash > Cheque > Bonds

PA

Fiduciary Money
Fiat currency
 Monetary Aggregates
-

RBI -> to check liquidity -

Fiduciary money (Mutual agreement)

↓ Eg: checks, bitcoins
Usable

M : Monetary Base/High Powered Money/Reserve Money

C
o
3 components:
-

1. Currency in circulation

SS
2. Bankers deposit with RBI
3. Other deposits with RBI (eg: deposits of Governmental/Quasi-Judicial authority)

·
l
M 1 : Narrow money
43 components
⑳
-

1. Currency with public

2. Demand Deposits
3. Other deposits with RBI
R Narrow Money
A
M :
2 M + Saving deposits with Post Office
1

7 Actual Money Supply

RM

-
M 3: M 1 + Time deposits with Bank -

7- Broad Money (M35 priority)

· M : M + All deposits with Post Office

43
-

I Liquidity Order
PA

M1 M 2 > M >
M

Money Multiplier 4% 4000 6000

- ->I
-

Loan
-10,000 -> Bank -> 10,000 12,000
L 15,000 C
↑
↓
Money multiplied
 MM = 1 = Money in Circulation
-
-

CRR Reserve Money

↓
CRR ↓ Money multiply ↑
CRR↑ Money multiply ↓

C
Value of Circulation of Money: No. of hands exchanged
I
I

SS
Eg:
E 100 to shopkeeper
represented as ‘V’
↓
Loader
↓
Books
↓
R
A
Refreshment
RM

↓
Theory by
Irving Fisher
PA

purchasing power of
↓ - money decreases

e
x +A
When Money Supply↑ keeping other factors constant (Velocity of

t circulation/transactions) -> Price level of goods A

eg:
Currency printing - Banks
Money Illusion
-

Given by Fisher

C
SS
R
A
RM
PA

130 countries were there when estd.

Basel Norms
I
Basel is a place in Switzerland ↑ 1930

Headquarter of Bank of International Settlements (BIS): Basel, Switzerland

↓
Basel Committee, 1974 by G10
 3 norms -> India Pete follows
adopted BASEL I in the year 1999
BASEL I: 1988
-

-
Focused on Credit Risk
↑
Min. capital requirement at 8% of Risk Weighted Assets (RWA)
↳ Capital Adequacy Ratio

C
Eg:
-

Risk
-

Salaried employee: 100% 0

SS
Ratan Tata: 90% 10%
Ashneer Grover: 50% 50%
Vijay Mallya: 10% 90%
Microlending

+
Non-banking Financial Companies-MFI (NBFC-MFI)
R
Capital Adequacy Ratio: 15% of RWA
A
NBFC cannot accept Demand Deposits
: CRR/SLR maintenance: No
RM

BASEL II: 2004

+BASEL III: 2008

Tier 1
12.9%
-

-> Tier 2 ·
-
-
Capital

Tier 3
PA
 LAF: Liquidity Adjustment Facility

I ↓
Repo Rate Reverse Repo Rate

C
Liquidity Trap: A situation in economy where people love to hold their money despite of

II
any changes in interest rates which renders any Monetary Policy ineffective

SS
No spending
Speculative Demand is generally
happens when rates will increase
relatively inelastic
Speculative Demand: perfectly elastic
Rate: Interbank Money Transfer to

I
Money Market
e

Short-term loans
R I fulfil their CRR
Also called Offer Rate

↓
A
1. Call Money: to be paid within a day
2. Notice Money: to be paid within 2-14 days
LIBOR: London Interbank Offer Rate

⑧
RM

Capital Market
-
base
-
Long-term loans In India: MIBOR (Mumbai Interbank Offer
Rate)
Treasury Bills: issued by RBI
-
Removed: 31st Dec 2021
I
Maturity Bills: less than 1 year Now, it’s SOFR: Secured Overnight
3 types of maturity bills:
-
Financial Rate
1. 91 days
PA

2. 182 days
3. 364 days
They are always listed on discount rate
:
No rate of interest
Non Performing Assets (NPA): Delay is more than 90 days
-

Assets
+ 2
Regular Assets Stressed Assets NPA

↓X

C
Sub standard Doubtful Loss asset

SS
↓
Write off
Bad Banks: Financial entity setup to buy NPAs
I
Recovery of NPAs
2021 budget:
-

R
2 bad banks to be established
1. National Asset Reconstruction Company Ltd. (NARCL)
A
2. India Debt Resolution Company Ltd. (IDRCL)
RM

SARFAESI Act 2002

-

Full form: Securitisation and Reconstruction of Financial Assets and enforcement of

-

Security Interest Act

--
Provides power to the bank/any financial institution to seize the property of a defaulting
borrower
PA

-
Wilful Defaulter: a person who would not pay to banks even if he has the ability to do so
-

Insolvency and Bankruptcy code, 2016

-

W
Consolidates the existing laws on bankruptcy
 BALANCE OF PAYMENT

C
pe &
MISCELLANEOUS

SS
POVERTY

R
A
RM
PA
 Poverty
-

1. Absolute Poverty: SAsevere deprivation of Basic Human needs

2. Relative Poverty: Household income lower than the median income
3. Subjective Poverty
Poverty Estimation
-

Pre Independence
-

C
-
1st done by: Dadabhai Naroji, gave unofficial poverty line through his book “Poverty and
-

UnBritish Rule in India” ↓

-
He made the earliest estimation of poverty

SS
Talked about drain of wealth
↓ from India
National Planning Committee, 1938 -> Subash Chandra Bose
↳ 1st Chairman: J L Nehru
↓
Bombay Plan, 1944
-
It was a set of proposals by influential businessman leaders for the development of India
·
I 75 per capita per year

Post Independence
R
A
-

1. Dandekar and Rath Committee, 1971

-

-
Made the 1st systematic assessment of Poverty
↑
Used the data of NSSO (National Sample Survey Office)
RM

-
Expenditure based poverty line ↳ Under MoSPI

2. Alagh Committee, 1979 Rural: 2400 Calories

-

-
Nutrition based poverty line
Urban: 2100 Calories

3. Lakdawala Committee, 1993

PA

e n

I
Poverty line based on CPI-IW, CPI-AW
-
State-wise poverty line ↳Rural ↳ Urban Uniform Reference Period
7 Replaced by
V
Mixed Reference Period (Health/education)
A
4. Tendulkar Committee, 2009

C
-

↑ Health and Education should also be taken under Basic Needs

Poverty line based on Purchasing Power Parity: if someone is spending more than E33/
day (not poor), not more than E33/day (poor)

Poverty Line (2011-12)

1.ERural: 816/month
2. Urban: E 1000/month
L
% of people below poverty line: 21.9% (2011-12)
↓7
Urban Rural
13.7% 25.7%

Poverty Ratio: 29.5%

C
-

7
Head count ratio = No. of multidimensionally poor people
W
Urban: 26.4% Total Population
/
Rural: 30.9%

SS
/ Head count Ratio: Proportion of Population BPL
-

5. Rangarajan Committee, 2014

-

↑
Created categories within nutritional requirements
I
Calories R
..
Protein
Fat
A
· Also, talked about Modified Mixed Reference Period
RM

Balance of Payment
-

-
Record of a Nation’s Financial Transaction (import and export) Borrowing/Lending

↓ ↓
Change in Foreign exchange
Visible items reserve
Invisible items
Current Account Capital Account
PA

-
-

Goods (visible) Investments

"
Services (invisible) ↓ t
Transfer payments Foreign Direct Investment Foreign Institutional Investors/
n e

Remittances
-

W
Long-term investment Foreign Portfolio Investments
-

eg: Walmart acquired I Short-term investments

India is top receiver of majority stakes of -
Also called as Hot Money
remittances (1st) Flipkart Eg: borrowing, lending, sale/
purchase of assets, NRI
deposits
 Current Account Deficit (CAD): 3.3% of GDP (currently)
1
Value of imports Value of Exports

I Twin Deficit: CAD + Fiscal Deficit

Empty of FOREX Reserves
Balance of Payment Crisis -

C
1991: Balance of payment crisis in India (then PM, P V Narasimha Rao, Manmohan
Singh (then Finance Minister)

SS
LPG Reforms

Liberalisation Privatisation Globalisation

FOREX Reserves
1. Foreign currency assets
R - Euro
Currencies
USA
A
2. Gold reserves
3. Special Drawing Rights (SDR)
E Yen (Japan)
Yuan (China)
RM

Pound (Britain)
4. Reserve Tranche Position: required quota to be maintained within the IMF

Debaters in IMF
. 1st: Argentina
PA

4th Pakistan

IMF (International Monetary Fund)

Headquarter: Washington D.C.

UN Monetary and Financial Conference

Bretton Woods Conference, 1944 - 44 Nations -> 730 delegates

↓ ↓
IMF World Bank
↳ HQ: Washington, D.C.
I NOSTRO: Owna
Our account/money in your bank
Eg: Bank X has an account with Bank Y in Bank Y’s home currency

VOSTRO: Your account/money in our bank

I

Eg: City Banks partners with HDFC Bank based in India and opens an account with the
denoted currency INR

C
FERA: Foreign Exchange Regulation Act, 1973

-
replaced by
FEMA: Foreign Exchange Management Act, 1999

SS
Exporters will benefit in case of
N
Depreciation: Decrease
loss of value
Loss of domestic
in value of domesticcurrency
currency depreciation
Due to market forces
Appreciation: Increase of value of domestic currency ·
Floating Exchange Rates

n
R
Devaluation: it is Official Depreciation

Regulation: it is Official Appreciation

Revaluation:
Government interference
· Fixed Exchange Rates
A
-

Lorenz Curve: wealth distribution, talks about income inequality

RM

I Gini Coefficient:
lity
-

0- 1
a
equ O: perfect equality
e of
1: perfect inequality
Lin
PA

V
V
More Inequality
Less Inequality
 C
SS
↓
MPI Concept: 2010 by UNDP along with
the Oxford Poverty and Human
V
v W
Development Initiative (OPHI)
Total indicators: 10

-
R
NITI AAYOG launched: 12 indicators -
> National Multidimensional Poverty Index
A
V

Multidimensional Poverty in India since 2005-06

↑
Recently 24.82 Cr people have escaped poverty
7
RM

In Uttar Pradesh max people have escaped poverty

*

I
Lorez Curve - Inequality in distribution of income or wealth
Phillips Curve - Inflation and Employment
: Engel Curve - Income and proportion of expenditure on food
-

Laffer Curve - Tax rates and tax revenue

PA

Gini Coefficient or Gini Ratio can be associated with measurement of income inequality in an economy

I
Devaluation of currency will be more beneficial if prices of exports rise proportionately
PA
RM
A
R
SS
C
 C
FIVE YEAR PLAN AND

SS
INDUSTRIAL POLICY
RESOLUTION
R
A
RM
PA
 Five Year Plans
-

Post Independence, 1947

Taken from: USSR -> Introduced in 1928 by Joseph Stalin
-

Introduction in India

C
Planning Commission -> Chairman: PM
1. 1st Five Year Plan, 1st April 1951 -> Based on Harrod-Domar Model
-

↑
Duration: 1951-56

SS
Key Focus: Primary Sector
-->
Agriculture During Jawaharlal Nehru Target: 2.1%
I
On his birth anniversary 29
I

↓ Achieved: 3.6% June: Statistics Day

-
Setting up Dams to promote the growth of (Fully successful) Founded: Indian Statistical

:
Agriculture Bhakra Nangal Dam Institute, Kolkata
↑

Hirakud Dam

↑
R
Nagarjuna Sagar Dam
2. 2nd Five Year Plan -> Based on P.C. Mahalanobis Model
Duration: 1956-1961 I During Jawaharlal Nehru
-
Target: 4.5%
Achieved: 4.27%
4.3%
(Moderately successful)
A
Key Focus: Public Sector
-

Rapid Industrialisation -> Industrial Policy Resolution, 1956 (2nd IPR)

↓
RM

1. Rourkela Steel Plant: Odisha (Germany)

2. Durgapur Steel Plant: West Bengal (UK)
3. Bhilai Steel Plant: Chattisgarh (USSR) Target: 5.6%

->
3. 3rd Five Year Plan -> Based on Gadgil Formula
I Achieved: 2.8% (failure)

FCI: 14 Jan 1965 -

PA

Duration: 1961-66 CACP: 1 Jan 1965 ↑

Key Focus: China War: 1962

..
IDBI: 1 July 1965I

Indo-Pak: 1965
-

Self reliant and Self generating economy 1

↑

UTI: 1963 I

PL-480: India was

importing wheat from USA
Break: Plan Holiday
-
Two Prime Ministers
I 3 years: 1966-69
-
-

J L Nehru
I
Annual Plan - New agricultural strategy -

Lal Bahadur Shashtri >

- Raised the slogan “Jai

Jawan Jai Kisan” when

India went to war with
Pakistan
 4. 4th Five Year Plan Gadgil Formula/Rudra Allen Model

:
Duration: 1969-1974 PM: Indira Gandhi
Growth with stability
Progressive achievement of self reliance Target: e
5.7%
5.6%

1. Family Planning Achieved: 3.3% (a big failure)

2. 14 banks nationalisation 1971

C
3. Underground nuclear test: Smiling Buddha Indo-Pak War
-

-
Bangladesh

5. 5th Five Year Plan Based on D.P. Dhar Model

SS
↑
Duration: 1974-78 During Indira Gandhi
Key focus:
1. Removal of poverty (Garibi Hatao) Target: 4.4%
2. Attainment of self reliance Achieved: 4.8% (a bit successful)
3. Minimum Needs Programme (1974)

R
Basic needs to be provided to all
20 points programme (1975)
A
4. RRBs were setup (1975)
RM

Rolling Plan were introduced During Janta Govt./Moraji Desai

:
Duration: 1978-80
Key focus:
I
Emphasis was on employment
PA

6. 6th Five Year Plan During Indira Gandhi Target: 5.2%

Duration: 1980-85 Achieved: 5.7% (Successful)
Key focus:
1. National Income
2. Modernisation of technology
3. Unemployment
4. Established NABARD (12 July 1982)
5. Landless Labour Employment Guarantee Programme (RLEGP) on 15 August 1983
 7. 7th Five Year Plan - During Rajiv Gandhi
-

↑
Duration: 1985-90
Key Focus:
-
-
Target: 5%
1. Food grain production -
Food -
Achieved: 6% (very successful)
2. Employment opportunities to be generated Work
-

3. Productivity - Productivity

C
Hindu Rate of Growth, 1978
-

~ Concept by: Prof. Raj Krishna

India from 1960-80 has seen slow economic growth

SS
↑

-
> Annual Plan: 1990-92

8. 8th
- Five Year-
Plan P V Narasimha Rao
I Duration: 1992-97
· 1991 -Balance of Payment Crisis

↑ 1991 -
Liberalisation

7 Privatisation
R
Annual Plans
A
Globalisation
-
1992
Key Focus:
RM

1. New Indicative Policy

2. Economic and Fiscal Reforms - Target: 5.6%
3. Share of public sector declined - Achieved: 6.8% (highly successful)
↓
Licence Raj ended
PA

9. 9th Five Year Plan ->During Atal Bihari Vajpayee

-

- Duration: 1997-2002 Target: 6.5%

↑

-
Growth with social justice and equality Achieved: 5.4%
-

10. 10th
--> Five Year Plan By Atal Bihari Vajpayee and Manmohan Singh
-

W
Duration: 2002-2007
Target: 8%
t
National Horticulture Mission (NHM) was promoted by govt.
I
Achieved: 7.6%
 11. 11th Five Year Plan -> During Manmohan Singh
-

-
Duration: 2007-2012
Key Focus:
-

~ Towards faster and more inclusive growth

↑
Target: 9%
↑
Achieved: 8%

C
12. 12th Five Year Plan -During Manmohan Singh
-

SS
->
↑ Duration: 2012-2017
-
2014
Key focus:
-

I Towards faster, inclusive, and sustainable growth

NITI AAYOG
- In place of Planning Commission
↑

↑
-
Setup on: 1st Jan 2015
It is a Think Tank of govt.
R
A
/ Publishes reports
· Vision Document
RM
PA
 Industrial Policy Resolution
-

1st IPR, 1948 (Main person: Dr. Shyama Prasad Mukherjee)

-

·
Govt. monopoly (Atomic Energy, Railways, etc.)
-
License Raj Begining

C
2nd IPR, 1956
-

I Also known as economic constitution of India

SS
-
Industries diversification

I
V
-
Schedule A: les
Public sector (17)
Govt. Sector
↑
Man
Schedule B: Public
Govt. + Private sector (12)
Schedule C: only private sector (remaining)
-

R
A
3rd IPR 1977: extension of 1956 policy
--

↑ Major focus on Decentralisation

↑
It gave priority to small scale industries -> called Tiny Unit
RM

/ Imposed restrictions on MNCs

4th IPR 1980

--

-
FERA Act, 1973
/
Started Monopolistic and Restrictive Trade Practices (MRTP Act)
PA

5th IPR 1991: New Industrial Policy L

-

-
- -
-

FDI ceiling increased P

-
-

&

Disinvestment of Public Sector G

"
End of License Raj
 Marginal Propensity to Consume
The proportion of an aggregate raise in a
MPC = C Consumption
I - Income
> pay that a consumer spends on the
consumption of goods and services as
0 < MPC < 1
opposed to saving it
1
Money Multiplier = 1 - MPC

X
Marginal Propensity to

C
Consume
Consumption

SS
Income

>
-
Multipliers will be lower with low marginal propensity to consume

R
A
RM
PA
 Also known as service sector
Focused on the action of govt./countries take
to influence broader economies
It is that part of economy where business
produce services
Macroeconomics GDP, NI, Inflation

Activities - teaching, transport, advertising,

retail Tertiary Sector Sectors Father - J. M. Keynes (England)

It is always intangible in nature

Focused with the action of
White collar jobs individuals/businesses
Also called manufacturing sector

These add value to natural resources by Microeconomics Individuals, firm

transforming raw materials into valuable
products Father - Adam Smith (The wealth of nation)

Blue collar jobs Secondary Sector

Activities - Manufacturing, Processing,
Building/Construction work
Directly dependent on environment Indian Economy
Secondary sector is called backbone of a
country, helps in industrialisation of a country also called agriculture sector
eg: China
types of
In India primary sector seen mostly in
agriculture Primary Sector economic systems

red collar jobs

Activities - Agriculture, Fishing, Hunting &

gathering, Forestry & Mining
 the total of money earned within a country

growth within various countries such as India,

Intercountry
US, China, etc

within the country what is growth in

National Income Intracountry
comparison to previous year

Gross Domestic Product

Total value of all final goods and services

produced within the territory of a country

developed by American Economist “Simon

Kuznetsk” in 1934

GDP second hand goods are never counted

total income of an individual earned from all

the sources before taxes

Personal Income
eg: subsidy by govt.

A common basket of goods

National Income
Purchasing Power Parity

Gross National Product

GDP Calculation by National Statistical Office
under MOSPLI (Ministry of Statistics & Total value of all final goods and services
Program Implementation) Measures & Aggregates GNP
produced by the nationals of the country

Also known as Production Method

Value Added Method

Compensation to employees

Operating surplus Income Method

Methods to Net Domestic Product
calculate GDP
Mixed income

NDP

Expenditure Method
Financial year 1 April to 31st March

Net National Products

NNP
 Tax pe Tax (on rich people) Surcharge Tax an approximation of revenue and expenses
over a specified period of time
for a definite purpose (charged on everyone) Cess Tax
Annual Fiscal Statement (Art. 112)
to lower the negative externalities Pigouvian Tax 101 CA
Department of Economic Affairs
Prepared by
(Ministry of Finance)
Operational by: 1st July 2017

Presented by Finance Minister

Assam was the first state to ratify it
Directly payable to govt.
1st budget presented by R. K. Shanmukham
GST council is a constitutional body: Art 279A GST
It cannot be passed to someone else
33 members (2 from Centre+31 from Budget 2nd budget by John Mathai
Progressive tax Direct Tax States/UTs)
Morarji Desai (10 times)
eg: Income tax, Wealth tax, Gift tax, Chairman: Finance Minister
capital gain tax Most no. of budget P Chidambaram (9 times)

Pranab Mukherjee (8 times)

Corporate tax Taxation System
Indirectly payable to govt. Receipt > Expenditure Surplus budget

It can be passed to someone else Expenditure > Receipt Deficit Budget

Indirect Tax
Regressive tax Expenditure = Receipt Balanced Budget
A propert owned by a person
(Something that economical value)
eg: GST, Excise duty, Custom duty Asset
Eg: Gold, Property
Budgetary Deficit
Budget & Taxation Something that someone is responsible for
Revenue Expenditure - Revenue Receipt Revenue Deficit (Debt/obligation)
Liability
accurate measure of govt. deficit/govt. Eg: payment of Loan
borrowing
Fiscal Deficit Deficits
Total Expenditure - Total Receipts - Borrowings

Fiscal Deficit - Interest Payment Primary Deficit

Revenue Deficit - Grant given for Salary/Pension

Effective Revenue Deficit
developmental purpose
Subsidy/Grant
Revenue Expenditure
Interest Payment

Maintenance of Infrastructure
components
Construction of any infrastructure
of budget
Purchase of land/machinery

Investment Capital Expenditure

Loan

Repayment of Loan
 only 1 seller Satisfaction - Utility

pure monopoly is rare Demand Affordibility

Monopoly
Entry barrier Eagerness to buy something

eg: Indian railways

the addition satisfaction or benefit that a
Few dominant sellers Marginal Utility consumer derived from buying an additional
unit of a commodity/service Consumer’s side - Affordability
Many buyers
Oligopoly
No easy entry

eg: Telecom sector, laptop market

Demand Curve
Types of Market
Many sellers
from producer’s side/profitability
Many buyers
Monopolistic Competition
Similar but slightly different products

eg: Toothpaste

Many sellers
selling homogenous products Supply Curve
Many buyers Transaction motive
Perfect Competition
future
Free entry and exit
Precautionary motive
People hold money
eg: Agricultural products Receipt expenditure for three purposes
by J M Keynes (Father of Economics)
Speculative motive
Father of Modern Economics -
Adam Smith

Things exists in equilibrium non-luxurious goods

Giffen goods
Perfectly Inelastic Demand
eg: increase in price of wheat

Exceptions luxurious goods

Veblen goods Demand is perfectly inelastic

Changes in price (usually -ve) affect the
Demand & Supply changes of demand
eg: iPhone, Mercedes

Relatively Inelastic Demand

Price Elasticity

Price Elasticity Perfectly Elastic Demand

Relationship between change in income and
demand for certain goods
Income Elasticity

Relatively Elastic Demand

Cross Price Elasticity
 Increase in general level of prices of
goods & services
a mismatch between worker’s skill &
availability of job Purchasing power decreases in case of inflation
Structural unemployment
eg: technology advancement, like machinery Money illusion concept
replacing farmer labour Inflation Irwin Fisher
MV = PT
degree - unemployment, seen in Urban part of
Educated unemployment
India During inflation the debtor/borrower benefits
more than the lender Demand side inflation
type of unemployment while searching for a Demand Pull
new job “Too many dollars chasing too few goods”
Frictional unemployment Cause of Inflation
eg: an employee leaving current job to move to Supply side inflation
a better one (seen in Urban) Types of Cost Pull
Wholesale Price Index Increase in cost of any factors of production &
when some people seem to be employed but
Unemployment input cost
are not, marginal productivity is zero More weightage to manufactured goods
Disguised/Hidden unemployment
eg: Agriculture sector does not capture the changes in the prices of
WPI
services
Recession in economy (upturn & downturn)
Base Year - 2011-12
When economy revives, there is opportunity to
employment, seen in Urban Published by: Office of Economic Advisor (OEA)
Ministry of Commerce & Industry
eg: Great Recession Cyclical unemployment
Measurement Consumer Price Index
Employment based on the seasonal basis
of Inflation More weightage to food items
Seen more rural part of India Seasonal Unemployment Inflation (inc.) & Unemployment (inc.)
Checked from consumers perspective
eg: Light or fireworks sellers during Diwali
No economic activity
Stagflation Base Year - 2011-12
Great Depression - 1929-1939
Inflation (inc.) & Unemployment (dec.) have Published by: National Statistic Office (NSO)
inverse relationship Great Recession - 2007-2009 CPI Ministry of Statistics & Program
Implementation (MoSPI)

RBI uses CPI (combined) to target inflation

Philips Curve

Inflation &
Index of Industrial Production
Unemployment
Base Year: 2011-12

Published by - NSO (MoSP)

Refinery products
IIP Creeping 3-4%
Electricity
Walking 4-10%
Steel
Types of Inflation Running 10-20%
Crude oil
8 core industries have Galloping 20-100%
40% contributions
Natural gas Disinflation Rate of inflation is decreasing
Hyper 100%
Cement
opposite of disflation
Fertilizer
Deflation Fall in the general level of prices
Crude Oil
Purchasing power increases
 Provides micro loans/micro financial services Reserve Bank of India was established
as Independent body
Minimum requirement of Micro Finance Loans:
75% of total assets on recommendation of
Hilton Young Commission, 1926
Estd. through recommendation of a NBFC-MFI
Eg: Bajaj Finance, Muthoot Finance, Mahindra committee: Malegam Committee, 2010 (also 1st setup of RBI Headquarter
and Mahindra 1st April 1935
sees issues of MFIs) - Calcutta, At present
RBI Act of 1934
They are registered under Companies Act of To qualify for NBFC MFI license they should Headquarter - Mumbai in 1937
1956 have at least 75% of assets in Microfinance
Banking Regulation Act, 1949 1st RBI Governor - Osborne Smith
Gives loans and advances on gold

They cannot accept Demand Deposits

Non-Banking Financial License 1st Indian RBI Governor - CD Deshmukh
its regulates Banks
Companies (NBFC) CRR/SLR RBI was nationalised on 1st Jan 1949
Deposits not guaranteed
Regulate ban
They are regulated by RBI
except Rs.1 note (under Ministry of Finance)
They need not maintain CRR and SLR Micro Finance, collateral free loans
legal tender - FIAT Money
They offer financial services to low income Micro Units Development and Refinance
population Agency, launched in 2015 MUDRA scheme Plastic Money - Credit card, debit card, etc.

eg: Loan, Savings, Insurance loans upto 50,000 Sishu Hot Money - Assets such as stocks, deposits,
Functions of RBI Currency printing
bonds, etc
Microfinance loans is given to households loans upto 50,000-5 lakhs Kishore 3 types loan
having income less than Rs.1.25 lakhs/annum
loans upto 5 lakhs-10 lakhs Tarun
gave concept of Grameen Model Banks, 1970 Father of Micro Finance system
and was given Nobel Prize - Muhammed Yunus (Bangladesh)

1st Micro Finance institution in India Micro Finance

- SEWA Bank (1974)
Institution Monetary Policy
group of 10-20 people come together
to find ways to improve their living Lender of last resort and Bank of Banks
National Bank for Agriculture and Rural
conditions Development

Group of below poverty line (BPL)

Self Help Groups
(SHG) Set up - 12 July 1982, on recommendation of B.
Classification of
Informal
banking system
groups Usually in rural areas
Business Model
Sivaramman Committee (1979)
Money & Banking
group of 4-10 people Through NABARD Act 1981 NABARD
Joint Liability Group
Could be a small business Headquarter - Mumbai
venture for profit
Provide finance for agriculture and rural development

Regulate - RBI 1st bank - 1770 (Bank of Hindustan)

Supervises cooperative banks and RRBs Functions
Supervise - NABARD 1806 - Imperial Bank of Calcutta
Does not deal directly with people Merged
1840 - Imperial Bank of Bombay 1921 - Imperial Bank of India
Provides financing through PMAY, KCC, Ru Pay Kisan Cards 1955 - State Bank of India
1843 - Imperial Bank of Madras
1988, through Act of 1987 National Housing Bank
Other Financial 1st Indian owned bank - Allahabad Bank, in 1865
Securities and Exchange Board of India
Institutions RRB Act 1976
through SEBI Act of 1992, established on 12 April 1988
to enhance financial activities in rural areas
Statutory body
History of Banking
SEBI Regional Rural Banks (RRBs) eg: Grameen Banks
Headquarter - Mumbai
1st - Pratham Grameen Bank (2nd Oct 1975,
To protect the interests of investors Function Moradabad, UP)

Chairman - Madhabi Puri Buch (1st women, 1st non IAS chairman)

Insurance Regulatory and Development Authority of India

Estd. through IRDAI Act of 1999 IRDAI

2nd April 1990
as a statutory body April 2000 SIDBI
Headquarter: Lucknow
 RBI provides loan to Commercial Banks
(without keeping any securities)
Net Demand and Time Liability
6.75% Bank Rate
(RBI keeps a part of your NDTL as a reserve)

NDTL Cash Reserve Ratio

Reserve in the form of - Cash

Banks do not earn any interest rate on CRR

Outright purchase Reserve
Reserve in the form of - Cash, Gold, G-Sec
Selling and buying of G-sec for shot term Statutory Liquid Ratio
Banks earn interest rate on SLR, profit is
obtained
Open Market Operations

Fiscal Policy
Repurchase agreement

Quantitative tools

Repo means Repurchase Obligation

2% NDTL is a limit

overnight loan

CRR and SLR is not maintained Balance Sheet

Penalty + loan

Can use SLE Quota G-Sec as collatera

Monetary Policy
Marginal Standing Facility

Monetary
Policy Tools

RBI Regulates money supply in the economy

with the help of Monetary Policy Tools

in case of
Inflation/Deflation On recommendation of Urjit Patel Committee

Monetary Policy RBI Governor

Committee
3 RBI Deputy Governor

6 members Executive

3 Govt.
a maximum amount of new money created by
Qualitative tools banks for every dollar of reserves
Money Multiplier
 Currency with public
Currency in circulation
Securitisation And Reconstruction of Financial Currency with bank
Assets &Enforcement of Security Interest Act
Saving Account
Provides power to the bank/any financial Demand Deposit
institution to seize the property of a Current Account
defaulting borrower Deposits with Bank
SARFAESI Act 2002 Fixed Deposit
Term Deposit
who would not pay to banks even it he has the
Wilful Defaulter
Types of Money Recurring Deposit
ablity to do so
Bank Deposits with RBI
Consolidates the existing laws on bankruptcy Insolvency & Bankruptcy Code, 2016 Deposits with RBI
Other deposits with RBI

Demand Deposit
Financial entity setup to buy NPAs
Postal Deposit same as bank
Term Deposit
Recovery of NPAs

2 bad banks to be established

Bad Banks the ease with which an asset or security can
be converted into ready cash without
National Asset Reconstruction Company Ltd. affecting its market price Monetary Base/High Powered Money/Reserve
2021 budget Money
(NARCL)
Non Performing Assets Demand Deposit is more liquid than Term
India Debt Resolution Company Ltd. (IDRCL) (NPA) Liquidity Deposit Currency in circulation

Cash > Cheque > Bonds M0 Bankers deposit with RBI

A situation in economy where people love to
components
hold their money despite of any changes in Delay is more than 90 days
interest rates which renders any Monetary Mutual agreement Other deposits with RBI
Policy ineffective Fiduciary money eg: deposits of Governmental/Quasi-Judicial
Eg: checks, bitcoins authority

No spending Liquidity Trap

Currency with public
happens when rates will increase
M1 Demand Deposits
Narrow Money
Speculative Demand: perfectly elastic Monetary Other deposits with RBI
Short-term loans Aggregates
M2 M1 + Saving deposits with Post Offic
to be paid within a day Call Money Money Market
M1 + Time deposits with Bank
Liquidity Adjustment Facility
to be paid within 2-14 days Notice Money
LAF Banking M3
Actual Money Supply
Broad Money
(M3 - priority)
Long-term loans Capital Market
M4 M3 + All deposits with Post Office
issued by RBI Treasury Bills
Liquidity Order -
less than 1 year Basel is a place in Switzerland by Irving Fisher M1 > M2 > M3 > M4

91 days Headquarter of Bank of International

Settlements (BIS) - Basel, Switzerland
182 days types Maturity Bills

364 days Basel Committee, 1974 by G10

They are always listed on discount rate Focused on Credit Risk

Min. capital requirement at 8% of Risk

Basel Norms
No rate of interest Weighted Assets (RWA) BASEL I - 1988
Capital Adequacy Ratio

Capital Adequacy Ratio: 15% of RWA

Non-banking Financial Companies-MFI
NBFC cannot accept Demand Deposits
(NBFC-MFI)
CRR/SLR maintenance: No 3 norms

BASEL II - 2004
Quantity theory of money

BASEL III - 2008

 12 indicators -
National Multidimensional Poverty Index

Multidimensional Poverty in India

since 2005-06 NITI AAYOG Poverty
24.82 Cr people have escaped poverty
Absolute Poverty severe deprivation of Basic Human needs
In Uttar Pradesh max people
wealth distribution, talks
have escaped poverty
about income inequality Household income lower than the median
Relative Poverty
income
Gini Coefficient: - 0 to 1
0 - perfect equality Subjective Poverty
1 - perfect inequality
Headquarter - Washington D.C
Lorenz Curve
1st done by - Dadabhai Naroji,
MPI gave unofficial poverty line through his
book - Poverty and UnBritish Rule in India

He made the earliest estimation of poverty

Pre Independence
Own account/money in your bank National Planning Committee, 1938
by Subash Chandra Bose
NOSTRO 1st Chairman: J L Nehru
Eg: Bank X has an account with Bank Y in Bank
Y’s home currency
Bombay Plan, 1944
Your account/money in our bank
VOSTRO
IMF (International Made the 1st systematic assessment of
Poverty
Eg: City Banks partners with HDFC Bank based
in India and opens an account with the
Monetary Fund)
Dandekar & Rath Committee Used the data of NSSO (National Sample
denoted currency INR
1971 Survey Office) Under MoSPI

Foreign Exchange Regulation Act, 1973 FERA POVERTY Expenditure based poverty line
replaced by
Foreign Exchange Management Act, 1999 FEMA Nutrition based poverty line
Alagh Committee
Poverty 1979
Rural - 2400 Calories
Urban - 2100 Calories
Decreases of value of domestic currency Estimation
Depreciation
Due to market forces Poverty line based on
Exporters will benefit in case of depreciation
Floating Exchange Rates Lakdawala Committee CPI-IW (Rular), CPI-AW (Urban)
1993
Increase of value of domestic currency Appreciation 1991 - Balance of payment crisis in India State-wise poverty line

it is Official Depreciation Devaluation Foreign currency assets Health and Education should also be taken
Government interference
under Basic Needs
Fixed Exchange Rates
it is Official Appreciation Revaluation Gold reserves
Poverty line based on Purchasing Power Parity:
Currencies - if someone is spending more than 33/day (not
USA, Euro, Yen (Japan), Special Drawing Rights (SDR) Empty of FOREX Reserves poor), not more than 33/day (poor)
Yuan (China) & Pound (Britain)
Uniform Reference Period replaced by
Mixed Reference Period (Health/education)
Reserve Tranche Position: required quota to be Balance of Post Independence
maintained within the IMF
Payment Crisis Tendulkar Committee
Poverty Line (2011-12)
Rural - 816/month

then PM - P V Narasimha Rao 2009

Urban - 1000/month
then Finance Minister - Manmohan Singh
Rural - 25.7%
% of people below poverty line
- 21.9% (2011-12)
Urban - 13.7%

Rural - 30.9%
Poverty Ratio - 29.5%
1st - Argentina Urban - 26.4%
Debaters in IMF
4th - Pakistan Proportion of Population BPL
Head count Ratio

Balance of Payment
Calories
3.3% of GDP (currently) Created categories within
Current Account Deficit (CAD) Protein
nutritional requirements
Value of imports > Value of Exports Rangarajan Committee Fat
2014
Twin Deficit = CAD + Fiscal Deficit Also, talked about Modified Mixed Reference
Period
 in place of Planning Commission
Chairman - PM
Setup on: 1st Jan 2015
Post Independence, 1947 launched on - 1st April 1951
It is a Think Tank of govt. NITI AAYOG
Planning Taken from - USSR Based on Harrod-Domar Model
Publishes reports
Commission
During Manmohan Singh During Jawaharlal Nehru
Introduced in 1928
Vision Document
by Joseph Stalin
2012-2017 Duration 12th FYP Duration 1951-56
During Manmohan Singh
Towards faster, inclusive,
& sustainable growth
Key Focus 1st FYP Key Focus Primary Sector
2007-2012 Duration
Target - 2.1%
Towards faster & more Fully successful
Achieved - 3.6%
inclusive growth
Key Focus 11th FYP Based on P.C. Mahalanobis Model

During Jawaharlal Nehru Bhakra Nangal Dam

Target - 9%
Achieved - 8% During Atal Bihari Vajpayee & Manmohan Singh Setting up Dams to promote
Duration 1956-61 Hirakud Dam
growth of Agriculture
2002-2007 Duration Nagarjuna Sagar Dam
2nd FYP Key Focus Rapid Industrialisation

Target - 8%
Achieved - 7.6% 10th FYP Target - 4.5%
Moderately successful
Achieved - 4.27%

During Atal Bihari Vajpayee National Horticulture Mission (NHM) was

Industrial Policy Resolution, 1956 (2nd IPR)
promoted by govt
1997-2002 Duration Rourkela Steel Plant - Odisha (Germany)
Rapid
Industrialisation
Growth with social Durgapur Steel Plant - West Bengal (UK)
justice and equality
Key Focus 9th FYP
Bhilai Steel Plant - Chattisgarh (USSR)
Target - 6.5% Based on Gadgil Formula
Achieved - 5.4% During P V Narasimha Rao
During Jawaharlal Nehru & Lal Bahadur Shashtri
1992-97 Duration
Duration 1961-66
New Indicative Policy
Five Year Plans Key Focus
Self reliant &
Economic and Fiscal Reforms Key Focus 8th FYP Self generating economy Plan Holiday

Share of public sector declined Target - 5.6%

(Licence Raj ended) 3rd FYP Achieved - 2.8%
failure
Annual Plan for 3 years 1966-69
Target - 5.6% China War - 1962
highly successful Annual Plan New agricultural strategy
Achieved - 6.8% War
1990-92 Indo-Pak - 1965

PL-480 - importing wheat from USA

FCI - 14 Jan 1965 Based on Gadgil Formula/Rudra Allen Mode

During Rajiv Gandhi CACP - 1 Jan 1965
IDBI - 1 July 1965 During Indira Gandhi
1985-90 Duration UTI - 1963
Duration 1969-1974
Food grain production
Growth with stability
Employment opportunities to be generated Key Focus 7th FYP
4th FYP Key Focus Family Planning
Productivity Progressive achievement
14 banks nationalisation
of self reliance
Target - 5%
very successful Underground nuclear test
Achieved - 6% During Indira Gandhi Based on D.P. Dhar Model - Smiling Buddha

Concept by - Prof. Raj Krishna 1980-85 Duration During Indira Gandhi Target - 5.6%
Hindu Rate of Growth a big failure
Achieved - 3.3%
India from 1960-80 has seen 1978 National Income Duration 1974-78
slow economic growth
Modernisation of technology Removal of poverty (Garibi Hatao)

Unemployment Key Focus 6th FYP 5th FYP Attainment of self reliance
Rolling Plan
introduced Established NABARD Basic needs to be provided to all
Key Focus Minimum Needs Programme (1974)
Landless Labour Employment Guarantee 20 points programme (1975)
Programme (RLEGP) on 15 August 1983
During Janta Govt./Moraji Desai RRBs were setup (1975)
Target - 5.2%
successful
Duration: 1978-80 Achieved - 5.7% Target - 4.4%
a bit successful
Achieved - 4.8%
Emphasis was on employment Key focus