Ø
Intro:
o
Economy – All production units and workplaces
existing in a place
§
provides goods and services – directly or
indirectly satisfies wants of people
§
Consumer goods:
·
Single use CG – milk, eggs, meat etc
·
Durable CG – refrigerator, TV etc
§
Consumer services:
·
having a haircut, laundry, banks, doctors etc
§
Producer goods:
·
Goods req to produce more goods – machinery, raw
material etc
·
Single user PG – raw material
·
Durable PG – machinery
§
Producer services: single use
o
Vital processes of economy – Production,
consumption, investment
o
Stock investment Vs Fixed investment:
§
SI – addition to stock of raw materials, semi
finished n finished goods in a year
·
Opening n closing stock – stock at beginning and
closing of a year
·
If closing stock is less than opening stock then it is disinvestment
§ FI –
acquire durable use producer goods by production units
o Net
Investment = Gross Investment – Depreciation
o Production,
consumption and investment – interdependent
Ø Economic
Dev and Indian Economy:
o Economic
growth: increase in total volume of goods and services produced by a nation
§ 8.4%
- expected growth (12th financial commission)
o Eco
Dev:
§ Economic
growth + positive changes in other spheres of life
§ HDI
rank – 134
o World
Bank classifies nations into four levels based on Percapita GNP(LI, LMI, UMI,
HI)
Ø Income:
o Factor
Income: Profit earned by owner of
factor of production in return for the services rendered to the production
units(E)+
§ Worker
earns income called wages (L)+
§ Land
owner earns rent (L)+
§ Owner
of capital earns interest (C)
§ 4
Factors of production – land,labour,capital,entrepreneurship
o Non
factor income:
§ Money
receipts which do not involve any sacrifice on the part of their recipient
§ Gifts,
donations, charities, taxes, fines etc
§ Also
known as ‘Transfer incomes’
o National
income includes only factor incomes
o Diff
b/n land and capital – land is a free gift(nature), capital is produced by man
o Flows
During Economic activity:
§ Real
Flow – flow of goods or services from seller
§ Money
flow – flow of money from buyer
o Types
of Economy:
§ Closed
Economy – country which has no eco
relations with rest of world
§ Open
economy – country which has economic relations with rest of world
o How
to get finance:
§ Bond
– It is a security paper, with timed returns
§ Credit
rating companies – CRISIL, S&Ps, Moody
§ Junk
Bonds – Bonds with credit rating C or D – ‘High Yield Bond’
§ Gilt
Edge securities – Government bonds have high credit rating ‘AA’ – low interest
rate – but guaranteed returns
§ Bearer
Bonds – They don’t have the holder’s name but attached with coupons
which can be withdrawn by selling them to broker and fetch partial amount
§ Equity – Take money from individual and offer
partnership
§ IPO
– Initial Public Offer – Selling of Share Papers for the first time to the public
is called as IPO
·
Primary Market – where IPOs are sold
§ The
buyers of IPO sell these papers to others, these papers are called – equity or
shares
·
Secondary Market – where shares are sold
§ Venture
Capitalist – Company which gives initial money to start a company or expand a
company but in return demand Part of ownership
·
Deal with only big projects, big investments
§ Angel
Investors – Rich gentlemen; finance startup companies for getting partial
ownership and or assured returns of investment, after few years\
·
Can give money in the form of Debt or Equity
§ Underwriter
– charges commission but covers all technical things, paperwork, SEBI
regulations, selling, accepting money for IPO/Bonds sales
Ø
National Income:
o
The sum total of factor of incomes accruing to
the residents of the country, both from their activities within and outside the
economic territory is the national income of the country
o
Intermediate products – one production unit
purchasing from other for resale
o
Final product – all goods and services purchased
for consumption and investment , and not for resale
o
Value added = Value of output – Intermediate
cost
o
Gross value added = net value added +
depreciation
o
Indirect tax – all taxes levied on production,
finally paid by consumer of buyer
§
Ex – sales tax, excise, customs, octrol
o
Subsidies – Financial help given by the
government to the production units for selling the product at lower prices
o
Net Value added at factor cost (NVafc) = Net
value added at market price(NVamp)-indirect taxes + subsidies
o
National Product = Domestic product –
Factor income paid to rest of the world + Factor income received from rest of
world
o
National Income – same as ‘Net National Product
at factor cost’
o
Mixed income – mixture of factor incomes (land,
labour, capital, entrepreneurship) and difficult to allocate different factor
incomes
o
Private Final Consumption Expenditure – sum of
purchases made by households and value of free services provided by Non-profit
institutions serving households
o
Government’s Final Consumption Exp. – free
services provided by govt. to people
o
Gross Domestic Capital Formation – total on
investment by production units within economic territory – Gross Domestic Fixed
Capital + Net addition to stock
o
Net Export – Measure of investment abroad
Ø
National Income Measurement:
o
Primary sector: all production units engaged in
exploitation of natural resources
§
Agriculture, Fishing, Mining and Quarrying ,
Forestry and Logging
o
Secondary sector: all production units engaged
in transforming one good to another
§
Registered manufacture, unregistered, Construction, Electricity Gas Water supply
o
Tertiary sector: all units engaged in producing
services
§
Banking&Insurance, Trade hotel restaurant,
transport storage commn, Real estate dwelling, Public administration &
defence, other services
o
Three sectors are divided into 14 sub-sectors in
Indian economy
o
National income can be measured in three ways
§
Value added method, NNPfc = Sum of GVAmp of all
sectors (GDPmp – depreciation – indirect taxes + subsidies + Net factor income
from abroad)
§
Income Distribution method, NNPfc = Compensation
of employees + Rent + Interest + Profit + Net factor income from abroad
§
Final Expenditure Method = Private Final
Consumption Expenditure + Government Final Consumption Expenditure + Gross
Domestic Capital Formation + Net Exports
Ø
Uses of National Income Estimates:
o
Money income – income accrued by the people in
an year
o
Real Income – amount of goods and services that
can be purchased from money income
o
Real Income
- National income at constant prices
o
National income at constant prices = National
income at current prices / price index
o
Rate of growth of national income at constant
prices is a measure of rate of economic growth of a country
Ø
Micro economics:
o
Study of allocation of resources by a
producer on production of different
goods and services is subject matter of Micro economics
o
Study of actions and reactions of a consumer is
a micro economic study
o
Study of relationship between price and
commodity and its demand or supply is a micro economic study
o
Formulating economic theory by deductive method
– selecting problem, specifying assumptions, deducing hypothesis, testing of
hypothesis
o
Formulating economic theory by inductive method
– selecting problem, collection classification analysis of data, establish
relationship b/n variables through logic
Ø
Demand:
o
Quantity of commodity willing to buy at a given
price at a given unit of time – demand
o
Always expressed with reference to unit of time
and price
o
Factors affecting: Price, Income of buyer, Tastes n
Preferences, Prices of related goods
o
Law of demand: when other things are
constant, if price of commodity falls its quantity demand rises and if price
rises, its quantity demand falls(inversely related)
§
Exceptions:
·
Prestige goods – goods bought because their
possession increase social status of the buyers
·
Giffen goods – Day to day needed goods,
consumption of which cannot be decrease because of price hike, instead buyer
decreases other product buying to giffen good(like bread, rice)
·
Expectations – buyer expect more rise of price
in future
o
Expansion of demand – demand of good rises due
to fall in price(demand curve – downward)
o
Contraction of demand – demand of good falls due
to rise in price (demand curve – upward)
o
Increase in demand – demand of good rises due to
changes in other factors, price of good is same, it is increase in demand
(demand curve – upward)
o
Decrease in demand – demand of good falls due to
change in other factors, price of good is same, it is decrease in demand
(demand curve – downward)
Ø
Supply:
o
Quantity of good that seller is willing to sell
at a given price in a given time
o
Factors affecting: Price, other commodities,
factors of production, objective of producer, production technology
o
Law of supply: when other things remain same,
there is direct relationship between price of commodity and its quantity
supplied in the market
Ø
Price determination:
o
Equilibrium price of a commodity is the price at
which demand and supply are equal
o
Point of intersection of demand curve and supply
curve shows equilibrium quantity and equilibrium price
o
If quantity demanded is greater than the
quantity supplied then:
§
Price starts rising
§
Demand starts
falling
§
Supply starts rising
o
If quantity supplied is greater than quantity
demanded:
§
Price starts falling
§
Expansion of demand
§
Contraction of supply
o
If demand increases(decreases) supply schedule
remains constant, equilibrium price will rise(fall)
o
If supply increases(decreases) , demand schedule
remaining same, equilibrium price will fall(rise)
o
If supply increases(decreases), demand
decreases(increases) then equilibrium price will fall(rise)
Ø
Cost:
o
Paid out costs – actual payments, on purchasing
and hiring different goods and services used in production. Also known as explicit
costs.
o
Imputed costs – cost of self-owned and self
provided inputs
o
Normal profit – minimum remuneration earned over
the monetary and imputed costs
o
Fixed costs – expenditure which remains fixed
irrespective of quantity of output
o
Variable costs – cost which change with every
change in output
o
Marginal cost – the additional cost incurred on
production of last unit of output
Ø
Revenue:
o
Total Revenue = Quantity produced and sold(Q) x
Price per unit product(P)
o
Average Revenue = Total Revenue/Total Quantity (TR/Q)
o
Marginal revenue – Additional revenue from the
output level increased by one unit
o
Revenue – receipt from sales of the product
o
Profit – excess of Revenue over cost
o
If price of product is same at all levels of
output then AR is equal to MR or price at all levels of output
o
If more of a product can be sold only by
lowering its price then MR is less than AR or Price as the price of the product
falls
Ø
Profit Maximization:
o
Normal (Zero) Profit – If TR=TC then level of
profit is zero
o
Above Normal (more than zero) profit – If
TR>TC then level of profit greater than 0
o
Loss Position – below normal position (ie,
TR<TC) then it is a loss position
o
Profit is maximum when excess of Total Revenue
over Total Cost is maximum
o
If MR>MC – profit;
o
When MC=MR and this equality is at the level of
output from which no profitable movement is possible, producer gets maximum
profit
Ø
Government Budgeting:
o
Budget –
statement of expected expenditure of government and sources of financing these
expenditures during the financial year
o
Fiscal policy or budgetary policy –
Implementation of government policies through budget formulation
o
Budget – two parts: Receipts, expenditure
o
Receipts:
§
Revenue receipts – current income receipts from
all sources
·
Taxes, profits from public enterprises, grants
etc
·
No future obligation to return the amount
§
Capital receipts – borrowings of the government
·
Govt. is under the obligation to return the
amount along with interest
o
Revenue Receipts:
§
Tax revenue – legally compulsory payment imposed
on people by Govt.
·
Direct tax –
o
Corporation tax – income tax on profits of
companies
o
Income tax – imposed on who earn income
o
Interest tax – tax on interest income
o
Expenditure tax – tax on expenditure incurred
o
Wealth tax – tax on wealth of individuals
o
Gift tax – tax on gifts given
·
Indirect tax –
o
Sales tax – imposed on sales of goods and
services
o
Customs – taxes on imports and exports
o
Union Excise duty – tax on manufacturing goods
o
Service tax – tax on producing services
§
Non – tax revenue:
·
Interest receipts – interest on loans given to
people, enterprises, local govt.
·
Dividends and Profits – Dividends and profits
received from Public Sector Enterprises
·
External grants – Financial help received from
foreign govts in form of donations,
gifts etc
o
Capital Receipts:
§
Borrowings – Domestic borrowings, External
assistance
§
Recovery of loans
§
Resale of shares in the Public Sector
Undertakings
o
Expenditures:
§
Capital Vs Revenue:
·
Capital Expenditure – expenditure of creation of
assets
·
Revenue Expenditure – expenditure on items which
do not lead to asset
§
Plan Vs Non Plan:
·
Plan expenditure – Provision of expenditure in
the budget
·
Non plan – expenditure on routine functions of
govt throughout year
o
Budgetary Deficit – excess of all budgetary
expenditures over budgeted receipts
§
BD = Total Budget expenditure – Total budget
receipts
o
Fiscal Deficit – Excess of all expenditures over
total receipts reduced by borrowings
§
FD = Total Budget expenditure – Total budget
receipts net of borrowings
o
Sources of financing deficit:
§
Borrowing from public and foreign governments
§
Withdrawing of cash balance with RBI
§
Borrowing from RBI
o
Main objectives of Budget Policy:
§
Providing effective administration
§
Providing infrastructure facilities
§
Providing employment opportunities
§
Ensuring stability in prices
§
Reducing inequalities of incomes
§
Promoting economic growth
§
Correcting balance of payments deficit
Ø
Money Supply & Regulation:
o
Demand deposits – money from these deposits can
be withdrawn on demand
o
Time deposits – deposits without instant
withdrawal facility; can be withdrawn after mutually agreed time period expires
o
Legal tender money – any money backed by legal
assurance
§
Currency notes and coins are legal tender money
§
Bank deposits are not legal tender money
o
RBI – central bank; apex bank; deals only with
govt and maintains govt accounts
§
Currency notes from 2 to 1000 are issued by RBI
§
1 rupee note (Signed by Ministry of Fin,GoI),
coins are issued by ‘Govt. of India’
§
Regulates functioning of all banking
institutions
§
Commercial bank – banks other than RBI
o
Statutory Liquid Ratio: minimum percentage of
deposits to be held with itself(bank)
o
Cash Reserve Ratio: minimum percentage of
deposits to be held with RBI
o
Legal Reserve – The minimum percentage of
deposits which commercial banks are required to keep in the form of reserves
§
LR = SLR + CRR
o
National Stock on money in an economic system:
§
Notes and coins with public (other than banks)
.. (1)
§
Notes and coins with commercial banks .. (2)
§
Deposits of commercial banks with the central
bank .. (3)
§
Demand deposits with commercial banks .. (4)
o
Total stock of cash in country (Paper Money)=
(1)+(2)+(3)
o
Total cash with commercial banks = (2) + (3)
o
(4) is money in form of DD used for payment by
cheques – Bank money
o
Transaction money (Narrow Money or M1) = (1) +
(4)
o
Bank Rate – The interest rate charged on the
commercial banks by central bank
Ø
Planning in India
o
Economic development – sustained rise in
national product plus other positive changes
o
5 year plans prepared to fulfil the overall
objectives of economic planning of india
o
Objectives of economic planning in India are:
§
Accelerated economic growth
§
Reduction in economic inequalities
§
Self reliance
§
Balanced regional development
§
Modernization
§
Reduction of unemployment
o
Achievements of Economic Planning:
§
Economic growth
§
Reduction of income inequalities
§
Increase in agricultural, industrial production
§
Modernization of technology, economy
§
Alround development of economy
o
Major failures of Economic Planning:
§
Objective of rapid economic growth not fulfilled
§
Reduction of inequalities
§
Self reliance
§
Unemployment
§
Balance regional growth
Ø
Economic Reforms:
o
In 1991, India faced a severe Foreign Exchange
shortage
§
There was a growing gap in officially fixed
exchange rate of rupee with other countries and the market determined rate
§
Petrol rates rose because of Iraq – Kuwait war.
Income from these countries decreased
§
India political situation was not stable,
because of minority government
o
These resulted in a massive change in Industrial
policy:
§
Industrial policy changes:
·
De licensing of industries
·
Freedom to import technology
·
Freedom to foreign investment
·
Restriction on large industry removed
·
Industries reserved for government opened for
private sector
§
Trade and Foreign Exchange Policy changes:
·
Reduction in import duties
·
Import licensing liberalized
·
Controls on Foreign Exchange removed
§
Fiscal Policy changes:
·
Reduction in Excise duty
·
Reduction in rate of direct taxes
·
Reduction in government expenditures
·
Sale of government capital
o
Nature of Indian Economic planning became
‘indicative planning’ from 8th 5year plan
o
Govt now depends on – inequalities, removal of
poverty, reduction of unemployment, balanced regional growth
Ø
Agriculture:
o
Agriculture production can be increase by
§
Extensive cultivation – increasing total area
under cultivation
§
Intensive cultivation – growing more on same
area
o
Productivity of cultivation land =Total physical
output crop/total cultivated area of crop
o
Causes for low productivity:
§
Lack of incentive for making improvements on
land
§
Subdivision and fragmentation of land holdings
§
Lack of proper irrigation facilities
·
Untimely rains, inadequate rains
§
Dependence on traditional methods of cultivation
§
Lack of use of other inputs
·
Seeds, fertilizers, pesticides
§
Lack of rural credit
§
Lack of other facilities such as storage or
marketing
§
More number of marginalized farmers than medium
and big farmers which decrease productivity ultimately
o
Measures to increase agriculture productivity:
§
Institutional Measures (land reforms)
·
Abolition of intermediaries
·
Providing security to tenant farmers
·
Ceiling on land holdings
·
Consolidation of land holdings
§
Technological measures
·
Irrigation facilities; surface water resources;
ground water resources
·
Availability of better quality of inputs –
seeds, fertilizers, pesticides
·
Provision of rural credit
o
Co-operative Credit Societies, Regional Rural
Banks, NABARD
Ø
Industries:
o
Industries play important role in Indian
Economy:
§
Produce goods for consumption, production units
§
Help in production of services
§
Make country self reliant
§
Promote exports
§
Important source of livelihood
§
Help in exploration and exploitation of natural
resources
o
Factors affecting industrial growth:
§
Availability of raw materials
§
Availability of technology
§
Availability of infrastructure facilities
§
Availability of manpower
§
Employer and employee relations
§
Demand for goods
o
New Economic Policy, July 1991:
§
Private sector is made to allow entry of
industries based on iron and steel, electricity, air transportation, ship
building, heavy machinery
§
Industries covered under licensing system:
·
o
Index of Industrial Production(IIP) – Performance
of industrial sector is measured by IIP
o
IPR 1991 has de-reserved 9 industries out of 17
public sector industries
o
Small scale industries are labour
intensive
Ø
Interrelationship between Industry and
Agriculture:
o
The Industry is dependent on agriculture:
§
Industrial sector receives raw materials from
agriculture sector
§
Population engaged in agriculture is source of
demand for industrial growth
§
Agriculture is a source of labour for Industrial
sector
§
Agriculture sector provides food to labour engaged
in Industrial sector
§
Source of funds for Industrial sector
o
Agriculture is dependent on industry because:
§
Industry sector provides seeds to agriculture
§
It provides fertilizers
§
Industries provide equipment and instruments
needed for agriculture
§
Provides pesticides
§
Provides materials for building infra for
agriculture marketing and storage
§
Manufactured goods to people engaged in
agricultural sector
§
Source of funds to agriculture sector
Ø
Financial Institutions:
o
Financing – Arrangement of money to be used for
any purpose
o
Price paid for obtaining finance is called Rate
of Interest(RoI)
o
Types of financing:
§
Short term finance – period range less than 15
months
§
Medium term finance – period range between 15
months to 5 years
§
Long term finance – period of more than 5 years
o
Money market – Source which meet short term
requirements of money
o
Capital market – Source which meet medium and
long term requirements of money
o
Sources of finance:
§
Non Institutional sources – source taken from
individuals (ex,chits, financer)
§
Institutional source – organizations which are
setup for providing finance
o
NABARD:
§
Apex bank in provision of institutional finance
in rural areas
§
Provides short, medium & long term credit to
State Coooperative banks, Regional Rural Banks, other Financial institutions
approved by RBI
§
Not only provides loans for agricultural
activities, but also for activities related to agriculture(allied) and promotes
agriculture and rural development.
§
o
Source of industrial finance within country are:
§
Public issues (shares and debentures)
·
Share – unit of company where individual treated
as owner
·
Debenture – holder have no concern with
ownership, they get interest at some pre-determined rate of interest
§
Public deposits
§
Commercial banks
·
Give short term loans
·
People can deposit money
·
They are confined to giving loans
§
Industrial banks
·
Give medium, long term loans
·
People cannot deposit money in industrial banks
·
Apart from giving loans they offer technical
advice and market inf.
o
Financial Institutions (Industrial Banks):
§
Industrial Finance Corporation of India(IFCI):
·
First development bank to setup in 1948 by GoI
§
Industrial Development Bank of India(IDBI):
·
Apex institution providing term finance from
1964
§
Industrial Credit and Investment Corporation of
India(ICICI):
·
Setup in January,1955 for purpose of developing
small and medium industries in private sector
§
Small Industries Development Bank of
India(SIDBI):
·
Setup in 1990 as a wholly owned subsidiary of
IDBI
·
Principal financial institution for financing
and development of small scale industries
§
Export Import Bank of India (EXIM bank):
·
Setup in 1982, provide finance for development
of exports
§
Unit Trust of India (UTI):
·
Setup in 1964 by RBI. 50% subsidiary of IDBI,
rest 50% by LIC, SBI, other scheduled banks, IFCI, ICICI
·
Main source of funds are sale of units to public
under various schemes
Ø
BoT and BoP:
o
Trade account of a Balance of Payments include
exports and imports of goods in a year
o
The difference between value of exports of goods
and value of imports of goods is called Balance of Trade
o
Trade acc includes – exports and imports of
goods only
o
Exports and Imports of Goods is called as
Transaction of visible items or Merchandise
o
Balance of Trade – Balance of visibles
o
Difference b/n total receipts and total payments
of foreign currencies on account of invisibles is called Balance on account of
invisibles
o
Current Account Deficit – If India’s receipts of
foreign currencies on account of trade and invisibles has been less than its
payments
Ø
Foreign Exchange Rate:
o
Ways to determine Foreign Exchange Rate:
§
Fixed by central bank of India
§
Determined by foreign exchange market
o
Fixed foreign exchange rate – till 1991, Foreign
rate was used to be fixed by RBI
§ Official
exchange rate
§
Devaluation – Fall in the value of domestic
currency in terms of foreign currency
o
Market Determined Foreign Exchange Rate:
§ Flexible
exchange rate
§
Forex market – foreign exchange market is one in
which foreign currencies are bought and sold
§
Foreign exchange rate (llly good) has:
·
Inverse relation to demand
·
Direct relation to supply
§
Depreciation – fall of rupee value for a foreign
currency
o
To regulate big fluctuations in FOREX rates RBI
buys and sells foreign exchange in open market
Ø
Inflow of Capital (Foreign):
o
Foreign capital – investments made by Non
Resident Institutions and foreign ind.
o
Forms of
External Capital – FDI, International Loans & Grants (Foreign Aid)
o
Debt-GDP ratio or Debt trap – If country’s debt
crosses 30% country is in an international debt trap
Ø
New Trade Policy – Implications:
o
Pre reform trade period – Curbs on Import,
incentives for export promotion
o
Imports controlled by – import licenses, import
quotas, custom duties, import
prohibitions
o
Reasons NTP 1991:
§
BoP showed Deficit – because of low quality high
cost products – no foreign demand
§
Sharp decline in Forex reserves to $1bn (not
enough for two weeks country req)
o
Reforms in Trade Policy:
§
Reduction in tariff rates and rationalization in
tariff structure
§
Liberalization of import licenses; abolition of
licensing of many import items
§
Role of Public sector trading agencies
§
Exchange rate reforms (From fixed ex rate to
Market driven)
o
March 1992, Liberalized Exchange Rate Mgmt.
System (LERMS)
