Commercial Banks: Commercial Bank may be defined as the financial institutions that deals with deposit and advances of a business organization [RBI is not a commercial bank]. These are of three type:
* Public Sector Bank ( 19 GoI undertaking + 1 IDBI + 1 SBI + 5 SBI Associate)
* Private Sector Bank (ICICI,YES,AXIS etc whose head office is in India)
* Foreign Banks (HSBC,BANK OF AMERICA etc whose head office is overseas)
Assets and Liabilities: for a bank asset is advances (loans) and liabilities is deposits.
Types of deposit: Term Deposit (That is open for a particular time period e.g. FD)
Demand Deposit (Current Account Saving Account)
Repo Rate: Repo rate is a measure to control the flow of money supply in the market. It is a rate at which Central Bank (RBI) lends funds to commercial banks. Regulated by RBI. (Currently 7.25%)
Reverse Repo Rate: it is a rate at which banks parks their access money with RBI. Regulated by RBI. (Repo Rate -1) % currently 6.25%)
CRR( Cash Reserve Ration): The portion of the banks net time and demand liabilities that is to be maintained with RBI is CRR. Regulated by RBI. (Currently 4.00%)
SLR (Statuary Liquidity Ration): The portion of the banks net time and demand liabilities that is to be maintained with Bank in the form of liquid (that is easily encashable like gold or government bond or securities) is SLR. Regulated by RBI. (Currently 23.00%)
How much a bank can lend for advances: Suppose total income =100. Than SLR =23 CRR =4 to be reserved. Rest 73 can be given as advances.
Note1: Reducing any rate means flowing the money in the market. Increasing any is vice versa.
Note2: Repo and Reverse repo are also called as liquidity adjustment facility (absorption and infusion of money; repo is infusion and reverse repo is absorption) If repo is increased bank will borrow money at high rate and also bank will lend the money to customer at higher rate and vice versa.
Supply of money:
RBI -- <----Banks----Customer-----Market
RBI lends money to banks banks lends to customer, customer invests in market.
If supply of money is in access purchasing power will increase for customer (Because if you have money you will invest it somewhere or you will purchase any goods). Purchasing power increases means inflation increases. So RBI increases the rate. And vice versa.
Priority Sector Lending: (Source : RBI http://rbi.org.in/scripts/FAQView.aspx?Id=87)
Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.
Priority Sector includes the following categories:
(i) Agriculture
(ii) Micro and Small Enterprises
(iii) Education
(iv) Housing
(v) Export Credit
CategoriesDomestic commercial banks / Foreign banks with 20 and above branches (As percent of ANBC or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher)Foreign banks with less than 20 branches (As percent of ANBC or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher)
Total Priority Sector4032
Total agriculture18No specific target.
Advances to Weaker Sections10No specific target.
Nostro and Vostro Account: Nostro account is account maintained in a foreign bank by domestic bank. Vostro account is account maintained in domestic bank of a foreign bank.
Non Performing Assets (NPA): Any bank asset(advance or loans) of which principal and interest amount is not repaid for a certain period of time is called Non Performing Assets. Generally if principal of an asset is not repaid in 90 days or interest is not repaid in 180 days the asset is classified as non performing asset (NPA).
Real time Gross Settlement(RTGS): The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time; 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable. (Source: RBI http://rbi.org.in/scripts/FAQView.aspx?Id=65)
National Electronic Fund Transfer: National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. (source RBI http://rbi.org.in/scripts/FAQView.aspx?Id=60)
Note: For transferring the funds through RTGS and NEFT the bank branches should be RTGS and NEFT enabled as the case may be.
Note2: Limit for NEFT: no minimum or maximum limit however PAN card is mendatory for NEFT remittance for more than 50,000). For RTGS minimum limit is 2,00,000 but there is no upper limit.
Base Rate: It is a minimum interest rate below which bank can not lend [advances/loans] to customer. It is determined by banks themselves.
SWIFT: Society for Worldwide Inter-bank Financial Telecommunication is a messaging system through which financial messages pass from one financial institute to other financial institute. It is a internationally acceptable financial messaging system. For ant messaging through SWIFT a bank must have a SWIFT code. It is helpful in forex transaction.
IFSC : IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system. This is an 11 digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to identify the originating / destination banks / branches and also to route the messages appropriately to the concerned banks / branches. (source RBI http://rbi.org.in/scripts/FAQView.aspx?Id=60). It is used for domestic transaction in India.
Electronic Clearing System (ECS): ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa.
ECS Credit is used by an institution for affording credit to a large number of beneficiaries (for instance, employees, investors etc.) having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.
ECS Debit is used by an institution for raising debits to a large number of accounts (for instance, consumers of utility services, borrowers, investors in mutual funds etc.) maintained with bank branches at various locations within the jurisdiction of a ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc., that are periodic or repetitive in nature and payable to the user institution by large number of customers etc.
Functions of RBI(source RBIhttp://www.rbi.org.in/commonman /English/scripts/organisation.aspx#MF) :
Monetary Authority:
* Formulates, implements and monitors the monetary policy.
* Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
Regulator and supervisor of the financial system:
* Prescribes broad parameters of banking operations within which the country''s banking and financial system functions.
* Objective: maintain public confidence in the system, protect depositors'' interest and provide cost-effective banking services to the public.
* Regulator and supervisor of the payment systems
* Authorises setting up of payment systems
* Lays down standards for operation of the payment system
* Issues direction, calls for returns/information from payment system operators.
Manager of Foreign Exchange
* Manages the Foreign Exchange Management Act, 1999.
* Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency:
* Issues and exchanges or destroys currency and coins not fit for circulation.
* Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
Developmental role
* Performs a wide range of promotional functions to support national objectives.
Related Functions
* Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
* Banker to banks: maintains banking accounts of all scheduled banks.
Other Name of RBI:
* Bankers Bank
1. Governments bank
2. Lender of the last Resort
3. Central Bank
4. Manager of foreign exchange
RBI Guidelines for Issuing Licence to Nw banks in private sectors:
Following are the highlights of the Reserve Bank of India's guidelines for licensing of new banks in the private sector:
* Corporates, PSUs and NBFCs can set up a bank.
* No bar on entities in sectors like brokerage, realty Minimum paid-up equity capital to be Rs. 500 crore.
* New banks to get listed within 3 years of business.
* Foreign shareholding limited to per cent for first 5 years.
* RBI to seek feedback on applicants' background from other regulators, Income Tax, CBI and ED.
* Licence seeker should have 10 years of successful financial track record, sound credentials and integrity.
* To comply with priority sector lending targets; open at least 25 per cent branches in unbanked rural areas.
* Boards to have majority of independent directors.
* Business plan should be realistic, viable and address financial inclusion.
Name: Bipin Chandra Upadhyay
List of references: http://www.rbi.org.in
http://www.rbi.org.in/commonman /English/scripts/organisation.aspx#MF
http://rbi.org.in/scripts/FAQView.aspx?Id=60
http://rbi.org.in/scripts/FAQView.aspx?Id=65
http://profit.ndtv.com/news/industries/article-rbi-issues-guidelines-for-new-banking-licences-highlights-318426
http://www.thehindu.com/business/Economy/new-panel-rbi-shortlists-5-people-for-application-screening/article5085825.ece
http://www.thehindu.com/business/Industry/bank-aspirants-get-more-time-to-set-up-holding-company/article4778314.ece
http://mrunal.org/economy
different sources of news papers regarding the definitions.
Showing posts with label RBI. Show all posts
Showing posts with label RBI. Show all posts
Monday, January 13, 2014
FSLRC
Financial Sector Legislative Reforms Commission
Set up in March 2011 by Ministry of Finance
To examine the existing age old institutional framework governing the financial sector in India and suggest reforms
Headed by Former Justice S M Krishna and has members from various disciplines like law, finance, public administration, economics etc.
Main intention:-
In spite of the drastically changing global scenario, over 60 acts, rules and regulations, some decade old laws have been getting only a few modifications without a substantial change in the basic foundation of laws. This Commission suggests an overhaul of all those laws and provides a structure to deal with all the financial products and services under one head.
Tasks:-
First task - To develop strategy in 9 areas of financial law (listed later)
Second task To establish financial regulators and provide for independence as well as accountability of the regulators.
All the suggestions in brief (main points for short answer)
Securities and Exchange Board of India (SEBI), Forward Markets Commission (FMC), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) should be merged into a Unified Financial Agency (UFA).
Role of RBI should be restricted to regulating banks and managing monetary policy.
Setting up of seven agencies for managing the financial sector (described in detail later) - RBI, UFA, Financial Sector Appellate Tribunal (FSAT), Financial Sector Development Council (FSDC),Resolution Corporation, Financial Redressal Agency and Public Debt Management Agency
FSDC should be given statutory framework.
Setting up of a new Debt Management Office (DMO) and subsuming the existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC) into the Resolution Corporation.
9 elements of Financial Law
1. Consumer Protection:-
To break caveat emptor attitude (which means the buyer alone is responsible for assessing the quality of purchase before buying)
Establishing FRA consumers can complain here about all the financial firms one stop agency
The problems will not only be solved but also be used as feedback to improve regulation
2. Micro-prudential regulation:-
If a financial firm makes a promise to a consumer, that promise has to be checked whether it can be upheld or if it would lead to the failure of the firm. This regulation is principle based.
For example, principles require proportionality (greater restrictions for greater risk), equal treatment (equal treatment of equal risk), and so on.
3. Resolution:-
A 'Resolution Corporation' would keep a check on all financial firms which made promises and when a firm is reaching the stage of closure, It would intervene even before it is completely bankrupt (i.e. networth of the firm is near zero but not negative) and force shutdown or sale of the firm thus protecting small consumers either by trasnferring them to more reliable firms or paying them.
The main difference between micro-prudential regulation and resolution is that micro-prudential regulation is a continuous affair whereas resolution comes into picture when a firm is about to fail. Both would have close co-ordination.
The above three are the main pillars of the proposed financial law.
4. Capital Control:-
Ministry of Finance would make rules that control inbound capital flows (and their repatriation) and RBI would make regulations about outbound capital flows(and their repatriation).
The implementation of all capital controls would vest with the RBI.
5. Systematic Risk:-
The essence of the systemic risk perspective to look at the financial system as a whole(not one firm or one sector etc. Can be considered as bigger version of micro-prudential regulation)
(Financial Stability and Development Council (FSDC)), will analyse the entire financial system and not
a subset of it
6. Financial inclusion and market development:-
The objectives are
Infrastructure development of market to be done by regulators - like taking initiatives etc
Redistribution and financial inclusion to be done by govt - like notifications in gazette etc
7. Monetary Policy:-
RBI has complete powers in deciding this
8.Public Debt Management Agency:-
Debt management requires an integrated picture of all onshore and offshore liabilities of the Government. At present, this information is fragmented across RBI and the Ministry of Finance. Unifying this information, and the related debt management functions, will yield better decisions.
The tasks of cash management and an overall picture of the contingent liabilities of the Government are integrated into this single agency
9. Contracts, trading and market abuse:-
Objectives are to regulate infrastructure institutions which impact the financial markets, regulate commercial laws and ensure integrity of the information provided by the financial markets. (The information provided by the securities etc has public goods characteristic and falsification of that information is called market abuse)
The seven agencies proposed by FSLRC
1. Reserve Bank of India
RBI will perform three functions: monetary policy, regulation and supervision of banking in enforcing the proposed consumer protection law and the micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws.
2. Unified Financial Agency
This would implement consumer protection law and micro-prudential law for all financial firms other than banking and payments. Thus all the financial trading would be organised under one head which would lead to consistency of regulation of all the firms. Also since the regulatory agency is the same in all sectors a level playing field would be provided for all the sectors. Since it takes over the work from RBI on areas of Bond-Currency-Derivatives Nexus, and from FMC for commodity futures, there would be clear marking of functions between the two agencies. This avoids conflict thus helping achieving accountability.
3. Financial Sector Appellate Tribunal
The present SAT will be subsumed in FSAT, which will hear appeals against RBI for its regulatory functions, the UFA, decisions of the FRA and some elements of the work of the Resolution Corporation.
4. Resolution Corporation
The present Deposit Insurance and Credit Gaurentee Corporation of India (DICGC) will be subsumed into the Resolution Corporation which will work across the financial system.
5. Financial Redressal Agency
This new agency will setup a nationwide machinery where consumers can file complaints against all financial firms.
6. Public Debt Management Agency
An independent debt management office is proposed.
7. Financial Stability and Development Council
The existing FSDC will become a statutory agency, and have modified functions in the fields of systemic risk and development.
References:-
http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf
http://articles.economictimes.indiatimes.com/2013-07-05/news/40392208_1_fslrc-financial-sector-appellate-tribunal-unified-financial-agency
Details:-
Manasa Srinivasan
Any
Set up in March 2011 by Ministry of Finance
To examine the existing age old institutional framework governing the financial sector in India and suggest reforms
Headed by Former Justice S M Krishna and has members from various disciplines like law, finance, public administration, economics etc.
Main intention:-
In spite of the drastically changing global scenario, over 60 acts, rules and regulations, some decade old laws have been getting only a few modifications without a substantial change in the basic foundation of laws. This Commission suggests an overhaul of all those laws and provides a structure to deal with all the financial products and services under one head.
Tasks:-
First task - To develop strategy in 9 areas of financial law (listed later)
Second task To establish financial regulators and provide for independence as well as accountability of the regulators.
All the suggestions in brief (main points for short answer)
Securities and Exchange Board of India (SEBI), Forward Markets Commission (FMC), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) should be merged into a Unified Financial Agency (UFA).
Role of RBI should be restricted to regulating banks and managing monetary policy.
Setting up of seven agencies for managing the financial sector (described in detail later) - RBI, UFA, Financial Sector Appellate Tribunal (FSAT), Financial Sector Development Council (FSDC),Resolution Corporation, Financial Redressal Agency and Public Debt Management Agency
FSDC should be given statutory framework.
Setting up of a new Debt Management Office (DMO) and subsuming the existing Deposit Insurance and Credit Guarantee Corporation of India (DICGC) into the Resolution Corporation.
9 elements of Financial Law
1. Consumer Protection:-
To break caveat emptor attitude (which means the buyer alone is responsible for assessing the quality of purchase before buying)
Establishing FRA consumers can complain here about all the financial firms one stop agency
The problems will not only be solved but also be used as feedback to improve regulation
2. Micro-prudential regulation:-
If a financial firm makes a promise to a consumer, that promise has to be checked whether it can be upheld or if it would lead to the failure of the firm. This regulation is principle based.
For example, principles require proportionality (greater restrictions for greater risk), equal treatment (equal treatment of equal risk), and so on.
3. Resolution:-
A 'Resolution Corporation' would keep a check on all financial firms which made promises and when a firm is reaching the stage of closure, It would intervene even before it is completely bankrupt (i.e. networth of the firm is near zero but not negative) and force shutdown or sale of the firm thus protecting small consumers either by trasnferring them to more reliable firms or paying them.
The main difference between micro-prudential regulation and resolution is that micro-prudential regulation is a continuous affair whereas resolution comes into picture when a firm is about to fail. Both would have close co-ordination.
The above three are the main pillars of the proposed financial law.
4. Capital Control:-
Ministry of Finance would make rules that control inbound capital flows (and their repatriation) and RBI would make regulations about outbound capital flows(and their repatriation).
The implementation of all capital controls would vest with the RBI.
5. Systematic Risk:-
The essence of the systemic risk perspective to look at the financial system as a whole(not one firm or one sector etc. Can be considered as bigger version of micro-prudential regulation)
(Financial Stability and Development Council (FSDC)), will analyse the entire financial system and not
a subset of it
6. Financial inclusion and market development:-
The objectives are
Infrastructure development of market to be done by regulators - like taking initiatives etc
Redistribution and financial inclusion to be done by govt - like notifications in gazette etc
7. Monetary Policy:-
RBI has complete powers in deciding this
8.Public Debt Management Agency:-
Debt management requires an integrated picture of all onshore and offshore liabilities of the Government. At present, this information is fragmented across RBI and the Ministry of Finance. Unifying this information, and the related debt management functions, will yield better decisions.
The tasks of cash management and an overall picture of the contingent liabilities of the Government are integrated into this single agency
9. Contracts, trading and market abuse:-
Objectives are to regulate infrastructure institutions which impact the financial markets, regulate commercial laws and ensure integrity of the information provided by the financial markets. (The information provided by the securities etc has public goods characteristic and falsification of that information is called market abuse)
The seven agencies proposed by FSLRC
1. Reserve Bank of India
RBI will perform three functions: monetary policy, regulation and supervision of banking in enforcing the proposed consumer protection law and the micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws.
2. Unified Financial Agency
This would implement consumer protection law and micro-prudential law for all financial firms other than banking and payments. Thus all the financial trading would be organised under one head which would lead to consistency of regulation of all the firms. Also since the regulatory agency is the same in all sectors a level playing field would be provided for all the sectors. Since it takes over the work from RBI on areas of Bond-Currency-Derivatives Nexus, and from FMC for commodity futures, there would be clear marking of functions between the two agencies. This avoids conflict thus helping achieving accountability.
3. Financial Sector Appellate Tribunal
The present SAT will be subsumed in FSAT, which will hear appeals against RBI for its regulatory functions, the UFA, decisions of the FRA and some elements of the work of the Resolution Corporation.
4. Resolution Corporation
The present Deposit Insurance and Credit Gaurentee Corporation of India (DICGC) will be subsumed into the Resolution Corporation which will work across the financial system.
5. Financial Redressal Agency
This new agency will setup a nationwide machinery where consumers can file complaints against all financial firms.
6. Public Debt Management Agency
An independent debt management office is proposed.
7. Financial Stability and Development Council
The existing FSDC will become a statutory agency, and have modified functions in the fields of systemic risk and development.
References:-
http://finmin.nic.in/fslrc/fslrc_report_vol1.pdf
http://articles.economictimes.indiatimes.com/2013-07-05/news/40392208_1_fslrc-financial-sector-appellate-tribunal-unified-financial-agency
Details:-
Manasa Srinivasan
Any
Topic: Fall of rupee, swine flue and onion.
Topic: Fall of rupee, swine flue and onion.
As we cannot say when can a mans health will fall we cant say either when a nations health will fall. But we can surely assess the reasons and consequences of both the incidents and we can also give some remedy on such problem to a limited extent.
Recently the falling of the rupee increased concern of government officials and common man also.
When a man suffers from swine flue, cough, temperature and cold are symptoms of this disease and doctor do not give him separate tablets a tablet for cough, a tablet for temperature and a tablet for catching cold he gives that patient all included tablet i.e. Tammyflue: the tablet on swine flue. Similarly falling value of rupee and increasing current account deficit are not the diseases but merely the symptoms of ill economy.
Reasons behind falling value of rupee: There are two types of reasons
* International Reasons and B) Domestic Reasons
* International Reasons: -
1. The US investors invested large amounts of investments into Indian Economy the fear among the US investors that US Federal bank can soon stop their scheme under which they were purchasing debentures from market every month and generating huge amount of money into the US economy. (Name of the scheme was Quantitative Easing OR QE).
2. The above fear provoked US investors to withdraw their investments from Indian Economy and fulfill their domestic need of liquidity if any situation of urgency occurs in US due to closing of QE scheme.
3. Global slowdown is one of the reasons by which demands for Indian goods in global market has fallen down.
when demand of Indian goods falls in global market demand of rupee falls down ( they dont need rupee if they are not purchasing Indian goods) in global market which certainly affects the value of INR .
As compared to global conditions there was no such sign of huge slowdown in Indian Economy so the demand of goods in Indian market did not fall rapidly that means imports of goods did not fall and that import created demand for US Dollar ( the global currency).
The situation when imports do not fall and exports decreases results in decreasing value of INR
1. Rising prices of petrol resulted in rising in amount of imports as India is dependent on Arab countries for supply of petrol.
2. There are some other reasons like selfish nature of developed countries who often refused to help India and at some times taken advantage of critical economic conditions of Indian economy .At times they imposed unfair conditions on India which caused India great loss.
3. Domestic Reasons :-
1. Continuous current account deficit: current account deficit aggravated the fall of INR and made it The great fall of INR.
2. Huge imports compared to exports: since we started planning in India our imports grown rapidly and in huge numbers as compared to exports. The reason is our economy is a developing economy which needs certain inputs like machinery, technology etc. and that inputs cannot be produced by a developing nation itself therefore used to import such inputs. Prices of such inputs are obviously too high which makes our imports bulky.
3. Over reliance on imports for petrol: As India is making development she is facing the problem of increase in demand of petrol. Since India is not able to produce petrol India needs to import petrol for its economy to run.
As India is depended on imports for 80% of its domestic use of petrol, there is no such possibility of cutting down current account deficit.
4. Huge imports of gold: India is a gold lover country no one in India marries without wearing gold. India is greatest consumer of gold but not the greatest producer of the gold therefore we need to rely on imports for gold which is produced by China, US and African countries creates current account deficit and results in fall in the value of rupee.
5. Poor performance of production sector : As India is transformed directly from agricultural economy to service sector economy no progress of production sector is made as compared to service sector therefore India is not able to export its goods because the goods India produce are used to fulfill domestic need and no such surplus remains to export. Poor quality of goods compared to international standards is an issue also. Both resulted in poor exports which is one of the reasons for deficit in current account.
Steps taken by Government of India and RBI to stop Great fall of rupee:
1. GOI increased duties on import of gold; duties on imports of gold were 2% which was increased to 10% by GOI at the end of June 2013.
2. Marginal Standing Facility (i.e. MSF a type of loan, RBI gives to scheduled banks to maintain liquidity) was decreased.
3. Bank rates were raised to certain extent to draw out liquidity of the market. The liquidity in market produces demand for goods and this demand produces imports.
4. Debentures were sold by RBI to draw liquidity out of the market.
5. An appeal was made by ministers to the people that they should not buy gold and hold their love for gold.
All these measures taken to stop the falling value of INR were short term measures they vanish in long run.
When huge stones falls from the cliff of mountain it is foolish to give it support of a match stick.
Therefore searching of the fuel alternate to petrol, strengthening production sector, inspiring food processing industries could be some positive steps in long run. If enough emphasis were given on food processing it will make economy run faster and safer.
Suppose in Maharashra onions are produced on huge level when a year onion is produced more than enough its prices falls down but another year due to unfair natural conditions production of the onion falls down this results hike in the prices of the onion but when there will be enough food processing plants, suppose for onions if there will be a plant which makes fine paste out of onion then the farmer will not have to sell the whole of his onion to the market at falling prices he can himself make process on the onion which will prevent him against great loss, in addition to that a new industry of food processing will be flourished which will help us to increase exports and cut down on current account deficit. A market based price control system will be established abolishing the need of governments attention to the price level in the country.
Results of Great fall of rupee if it continues to further:-
1. Increasing import expenses: If falling trend in the value of rupee continued it means we will have to pay more money for every import we make. Outflow of currency will increase and huge amount of property of Indians will be drawn to foreign countries.
2. Increase in the value of dollar or fall in value of rupee will make current account deficit more adverse than ever for India.
3. There will be some inspiration to the exporters but due to low production of goods and small number of export industries India will not be able to avail the situation.
4. As the value of the dollar in Indian currency is increasing we are paying more rupees even though there is no price hike in the value of petrol.
5. Inflation is increasing on domestic levels: As we are paying more for petrol the travelling and transportation expenses are increasing and for that we will have to pay more money for goods coming to us via transportation.
6. Every nation takes loans from international institutions India also has taken loans from international institutions, now the value of dollar is increased for Indian rupee so our loans has increased (we have taken loans in the form of dollar when value of dollar increases for Indian rupee we have to give more rupees for the same amount of loan). That means our loan liability has increased.
As many nations India is now deeply connected to the global economy, now it is impossible for any economy to grow in isolation. Whether you wish or not effects of global situations on Indian economy are inevitable we can prepare our self for the upcoming situations but we cannot avoid them.
References : 1Bharatiya Arthvyavastha By Datta and Sundaram
2 Daily newspapers Lokamat Satara(Marathi), Lokasatta (pune :marathi newspaper) and Daily Sakaal marathi (satara)
by Vikram Prakash Otari .
As we cannot say when can a mans health will fall we cant say either when a nations health will fall. But we can surely assess the reasons and consequences of both the incidents and we can also give some remedy on such problem to a limited extent.
Recently the falling of the rupee increased concern of government officials and common man also.
When a man suffers from swine flue, cough, temperature and cold are symptoms of this disease and doctor do not give him separate tablets a tablet for cough, a tablet for temperature and a tablet for catching cold he gives that patient all included tablet i.e. Tammyflue: the tablet on swine flue. Similarly falling value of rupee and increasing current account deficit are not the diseases but merely the symptoms of ill economy.
Reasons behind falling value of rupee: There are two types of reasons
* International Reasons and B) Domestic Reasons
* International Reasons: -
1. The US investors invested large amounts of investments into Indian Economy the fear among the US investors that US Federal bank can soon stop their scheme under which they were purchasing debentures from market every month and generating huge amount of money into the US economy. (Name of the scheme was Quantitative Easing OR QE).
2. The above fear provoked US investors to withdraw their investments from Indian Economy and fulfill their domestic need of liquidity if any situation of urgency occurs in US due to closing of QE scheme.
3. Global slowdown is one of the reasons by which demands for Indian goods in global market has fallen down.
when demand of Indian goods falls in global market demand of rupee falls down ( they dont need rupee if they are not purchasing Indian goods) in global market which certainly affects the value of INR .
As compared to global conditions there was no such sign of huge slowdown in Indian Economy so the demand of goods in Indian market did not fall rapidly that means imports of goods did not fall and that import created demand for US Dollar ( the global currency).
The situation when imports do not fall and exports decreases results in decreasing value of INR
1. Rising prices of petrol resulted in rising in amount of imports as India is dependent on Arab countries for supply of petrol.
2. There are some other reasons like selfish nature of developed countries who often refused to help India and at some times taken advantage of critical economic conditions of Indian economy .At times they imposed unfair conditions on India which caused India great loss.
3. Domestic Reasons :-
1. Continuous current account deficit: current account deficit aggravated the fall of INR and made it The great fall of INR.
2. Huge imports compared to exports: since we started planning in India our imports grown rapidly and in huge numbers as compared to exports. The reason is our economy is a developing economy which needs certain inputs like machinery, technology etc. and that inputs cannot be produced by a developing nation itself therefore used to import such inputs. Prices of such inputs are obviously too high which makes our imports bulky.
3. Over reliance on imports for petrol: As India is making development she is facing the problem of increase in demand of petrol. Since India is not able to produce petrol India needs to import petrol for its economy to run.
As India is depended on imports for 80% of its domestic use of petrol, there is no such possibility of cutting down current account deficit.
4. Huge imports of gold: India is a gold lover country no one in India marries without wearing gold. India is greatest consumer of gold but not the greatest producer of the gold therefore we need to rely on imports for gold which is produced by China, US and African countries creates current account deficit and results in fall in the value of rupee.
5. Poor performance of production sector : As India is transformed directly from agricultural economy to service sector economy no progress of production sector is made as compared to service sector therefore India is not able to export its goods because the goods India produce are used to fulfill domestic need and no such surplus remains to export. Poor quality of goods compared to international standards is an issue also. Both resulted in poor exports which is one of the reasons for deficit in current account.
Steps taken by Government of India and RBI to stop Great fall of rupee:
1. GOI increased duties on import of gold; duties on imports of gold were 2% which was increased to 10% by GOI at the end of June 2013.
2. Marginal Standing Facility (i.e. MSF a type of loan, RBI gives to scheduled banks to maintain liquidity) was decreased.
3. Bank rates were raised to certain extent to draw out liquidity of the market. The liquidity in market produces demand for goods and this demand produces imports.
4. Debentures were sold by RBI to draw liquidity out of the market.
5. An appeal was made by ministers to the people that they should not buy gold and hold their love for gold.
All these measures taken to stop the falling value of INR were short term measures they vanish in long run.
When huge stones falls from the cliff of mountain it is foolish to give it support of a match stick.
Therefore searching of the fuel alternate to petrol, strengthening production sector, inspiring food processing industries could be some positive steps in long run. If enough emphasis were given on food processing it will make economy run faster and safer.
Suppose in Maharashra onions are produced on huge level when a year onion is produced more than enough its prices falls down but another year due to unfair natural conditions production of the onion falls down this results hike in the prices of the onion but when there will be enough food processing plants, suppose for onions if there will be a plant which makes fine paste out of onion then the farmer will not have to sell the whole of his onion to the market at falling prices he can himself make process on the onion which will prevent him against great loss, in addition to that a new industry of food processing will be flourished which will help us to increase exports and cut down on current account deficit. A market based price control system will be established abolishing the need of governments attention to the price level in the country.
Results of Great fall of rupee if it continues to further:-
1. Increasing import expenses: If falling trend in the value of rupee continued it means we will have to pay more money for every import we make. Outflow of currency will increase and huge amount of property of Indians will be drawn to foreign countries.
2. Increase in the value of dollar or fall in value of rupee will make current account deficit more adverse than ever for India.
3. There will be some inspiration to the exporters but due to low production of goods and small number of export industries India will not be able to avail the situation.
4. As the value of the dollar in Indian currency is increasing we are paying more rupees even though there is no price hike in the value of petrol.
5. Inflation is increasing on domestic levels: As we are paying more for petrol the travelling and transportation expenses are increasing and for that we will have to pay more money for goods coming to us via transportation.
6. Every nation takes loans from international institutions India also has taken loans from international institutions, now the value of dollar is increased for Indian rupee so our loans has increased (we have taken loans in the form of dollar when value of dollar increases for Indian rupee we have to give more rupees for the same amount of loan). That means our loan liability has increased.
As many nations India is now deeply connected to the global economy, now it is impossible for any economy to grow in isolation. Whether you wish or not effects of global situations on Indian economy are inevitable we can prepare our self for the upcoming situations but we cannot avoid them.
References : 1Bharatiya Arthvyavastha By Datta and Sundaram
2 Daily newspapers Lokamat Satara(Marathi), Lokasatta (pune :marathi newspaper) and Daily Sakaal marathi (satara)
by Vikram Prakash Otari .
Date: 19 September 2013
Economic Reforms of 1991 in India: Reasons, Timing and effects.
The current write up is a try to answer the question : Why economic reforms had to be implemented in the year 1991 ? Why the need arised after 40 yrs of independence and not immediately after the independence or 10 yrs after the independence? The main reason for this is the huge dependency on imported products, in particular oil.
From 1947 to 1985, Indias oil demand was very low because of low industrialization. Also the government policies didnt helped to improve it. The numbers of oil dependent products like cars, bikes, automobiles, trucks, etc. were very less. Also because companies related to these products were also very less and due to inferior technology the prices of these products were very high and beyond the reach of common man. So except rich people, no one purchased these products. So India had always sufficient foreign currency with it to pay for imported oil. India earned its foreign currency from export of goods like coal, iron ore, agricultural products, etc. So during this period from 1947 to 1990, the crisis of balance of payments never arised.
From 1980s onwards slowly the technology in mass production of cars and bikes increased. Number of companies manufacturing these equipments like Bajaj, etc increased. Indian government itself started its own company Maruti Suzuki in collaboration with Japanese company Suzuki with the intention of serving the objective: A car affordable to common man. For this it launched its first and most popular model Maruti 800. The government itself sowed the seeds of economic crisis of 1991. During the period between independence and 1991 the class of export products more or less remained same coal, iron ore, etc. These are primary articles and less valuable as compared to electronic gadgets,etc. India never enhanced the class of export items. So the number of cars, bikes, trucks, started increasing from 1985 onwards. Slowly Indias demand for oil started rising. The policymakers were never able to anticipate that, due to increase in oil demand we will face a economic crisis in near future, so we should take steps now in order to avert the crisis. Also political environment was also unstable during this period due to events like Indira Gandhi death and then unstable government in 1989 and 1990.
So initial problem of balance of payments that was small in nature and unnoticeable in 1985 onwards started converting into a big crisis year on year. And in 1991 it resulted into a complete collapse of our balance of payments situation. A condition so grave arised that we didnt had a single penny of foreign currency remaining to buy oil. To understand why this situation arised lets understand Indias economy prior to 1991. From 1947 to 1991 Indias politics and so its government was very much of socialist mindset. Because of recent independence from British empire. And so it feared for any foreign interference in domestic economy. It was very much a closed economy. The government adopted this policy because it wanted to protect Indian companies from competition of foreign companies. So very less foreign companies were allowed to do business or start factory in India. This too was also not easy. There were tremendous government restrictions and barriers. So India had very few sources of foreign currency. This created a crisis situation in 1991.
To overcome this situation , then finance minister Manmohan Singh had no option but turn towards IMF and world bank for help and demand for loan. Also he had to keep quite a big amount of gold from RBIs custody as a security with IMF. IMF was ready to give loan to India but like any banker, was skeptical and non confident that India can repay the loan easily. IMF didnt had confidence because India had not many sources of foreign currency to repay the debt. Also the growth of Indian economy was not so convincing such that tax collection by government would have increased in order to repay the debt. So IMF put conditions and restrictions before Indias finance minister. The main conditions were : to allow foreign companies to invest in India, reduce trade restrictions and barriers, reduce subsidies, adopting flexible currency system, etc. These measures would ensure IMF that India will be able to repay the debt. Now considering the grave situation and to meet its oil demand, our then finance minister had no other option but to accept the rules and restrictions of IMF. Also our finance minister was not confident of current tax collection rate and that it will increase at the optimum desirable rate, such that future debt repayment installments will not affect growth of our economy adversely. So to ensure steady growth of our economy our finance minister accepted the rules and restrictions of IMF. So it resulted in so called Economic Reforms and Manmohan Singh was glamorized in India as a successful and efficient finance minister. He was revered as savior of Indian economy from grave crisis. His image was created as that of a messiah.
In this way from 1991 Indias economy became a so called free market economy and slowly it started shifting towards being more a capitalist economy than socialist economy. Initially only few sectors were restricted to foreigners, but slowly more sectors were allowed for foreign investment. In this way crisis situation was averted. By taking lesson from this situation, which we faced because of our own mismanagement and lack of foresight, we (India) now keeps that much foreign currency in RBIs custody, which will be enough to pay import bills of upto 6 months. And RBI now keeps constant watch on these foreign currency reserves and also on the exchange rate of rupee, such that its extreme volatility does not affect the quantity of reserves. Though exchange rate of rupee is dependent completely on market conditions, but in extreme and rare conditions, like current situation when current exchange rate has surpassed 60 Rs. mark for one dollar, RBI intervenes to stabilize the fall of rupee. This intervention is necessary because our external debt is in dollars and if RBI doesnt intervene and exchange rate reaches to very low level, then we will need more rupees to convert them into required dollars to pay the required installment of debt repayment. This will increase already existing huge fiscal deficit and thus less money will be left with government for development. Or else government will have to increase the tax burden or reduce its expenditure, either way affecting growth of our economy negatively.
Of the many options available the two main options to avoid the crisis similar to 1991 are : either to reduce our imports by decreasing our dependency on foreign oil if possible or improve the class of our export products from agricultural based to manufactured products.
By, Sujeet Suresh Patil,
The current write up is a try to answer the question : Why economic reforms had to be implemented in the year 1991 ? Why the need arised after 40 yrs of independence and not immediately after the independence or 10 yrs after the independence? The main reason for this is the huge dependency on imported products, in particular oil.
From 1947 to 1985, Indias oil demand was very low because of low industrialization. Also the government policies didnt helped to improve it. The numbers of oil dependent products like cars, bikes, automobiles, trucks, etc. were very less. Also because companies related to these products were also very less and due to inferior technology the prices of these products were very high and beyond the reach of common man. So except rich people, no one purchased these products. So India had always sufficient foreign currency with it to pay for imported oil. India earned its foreign currency from export of goods like coal, iron ore, agricultural products, etc. So during this period from 1947 to 1990, the crisis of balance of payments never arised.
From 1980s onwards slowly the technology in mass production of cars and bikes increased. Number of companies manufacturing these equipments like Bajaj, etc increased. Indian government itself started its own company Maruti Suzuki in collaboration with Japanese company Suzuki with the intention of serving the objective: A car affordable to common man. For this it launched its first and most popular model Maruti 800. The government itself sowed the seeds of economic crisis of 1991. During the period between independence and 1991 the class of export products more or less remained same coal, iron ore, etc. These are primary articles and less valuable as compared to electronic gadgets,etc. India never enhanced the class of export items. So the number of cars, bikes, trucks, started increasing from 1985 onwards. Slowly Indias demand for oil started rising. The policymakers were never able to anticipate that, due to increase in oil demand we will face a economic crisis in near future, so we should take steps now in order to avert the crisis. Also political environment was also unstable during this period due to events like Indira Gandhi death and then unstable government in 1989 and 1990.
So initial problem of balance of payments that was small in nature and unnoticeable in 1985 onwards started converting into a big crisis year on year. And in 1991 it resulted into a complete collapse of our balance of payments situation. A condition so grave arised that we didnt had a single penny of foreign currency remaining to buy oil. To understand why this situation arised lets understand Indias economy prior to 1991. From 1947 to 1991 Indias politics and so its government was very much of socialist mindset. Because of recent independence from British empire. And so it feared for any foreign interference in domestic economy. It was very much a closed economy. The government adopted this policy because it wanted to protect Indian companies from competition of foreign companies. So very less foreign companies were allowed to do business or start factory in India. This too was also not easy. There were tremendous government restrictions and barriers. So India had very few sources of foreign currency. This created a crisis situation in 1991.
To overcome this situation , then finance minister Manmohan Singh had no option but turn towards IMF and world bank for help and demand for loan. Also he had to keep quite a big amount of gold from RBIs custody as a security with IMF. IMF was ready to give loan to India but like any banker, was skeptical and non confident that India can repay the loan easily. IMF didnt had confidence because India had not many sources of foreign currency to repay the debt. Also the growth of Indian economy was not so convincing such that tax collection by government would have increased in order to repay the debt. So IMF put conditions and restrictions before Indias finance minister. The main conditions were : to allow foreign companies to invest in India, reduce trade restrictions and barriers, reduce subsidies, adopting flexible currency system, etc. These measures would ensure IMF that India will be able to repay the debt. Now considering the grave situation and to meet its oil demand, our then finance minister had no other option but to accept the rules and restrictions of IMF. Also our finance minister was not confident of current tax collection rate and that it will increase at the optimum desirable rate, such that future debt repayment installments will not affect growth of our economy adversely. So to ensure steady growth of our economy our finance minister accepted the rules and restrictions of IMF. So it resulted in so called Economic Reforms and Manmohan Singh was glamorized in India as a successful and efficient finance minister. He was revered as savior of Indian economy from grave crisis. His image was created as that of a messiah.
In this way from 1991 Indias economy became a so called free market economy and slowly it started shifting towards being more a capitalist economy than socialist economy. Initially only few sectors were restricted to foreigners, but slowly more sectors were allowed for foreign investment. In this way crisis situation was averted. By taking lesson from this situation, which we faced because of our own mismanagement and lack of foresight, we (India) now keeps that much foreign currency in RBIs custody, which will be enough to pay import bills of upto 6 months. And RBI now keeps constant watch on these foreign currency reserves and also on the exchange rate of rupee, such that its extreme volatility does not affect the quantity of reserves. Though exchange rate of rupee is dependent completely on market conditions, but in extreme and rare conditions, like current situation when current exchange rate has surpassed 60 Rs. mark for one dollar, RBI intervenes to stabilize the fall of rupee. This intervention is necessary because our external debt is in dollars and if RBI doesnt intervene and exchange rate reaches to very low level, then we will need more rupees to convert them into required dollars to pay the required installment of debt repayment. This will increase already existing huge fiscal deficit and thus less money will be left with government for development. Or else government will have to increase the tax burden or reduce its expenditure, either way affecting growth of our economy negatively.
Of the many options available the two main options to avoid the crisis similar to 1991 are : either to reduce our imports by decreasing our dependency on foreign oil if possible or improve the class of our export products from agricultural based to manufactured products.
By, Sujeet Suresh Patil,
ECONOMY BASICS
* Intro:
* 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
* Vital processes of economy Production, consumption, investment
* 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
* Net Investment = Gross Investment Depreciation
* Production, consumption and investment interdependent
* Economic Dev and Indian Economy:
* Economic growth: increase in total volume of goods and services produced by a nation
* 8.4% - expected growth (12th financial commission)
* Eco Dev:
* Economic growth + positive changes in other spheres of life
* HDI rank 134
* World Bank classifies nations into four levels based on Percapita GNP(LI, LMI, UMI, HI)
* Income:
* 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
* 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
* National income includes only factor incomes
* Diff b/n land and capital land is a free gift(nature), capital is produced by man
* Flows During Economic activity:
* Real Flow flow of goods or services from seller
* Money flow flow of money from buyer
* 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
* 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 dont have the holders 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
* National Income:
* 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
* Intermediate products one production unit purchasing from other for resale
* Final product all goods and services purchased for consumption and investment , and not for resale
* Value added = Value of output Intermediate cost
* Gross value added = net value added + depreciation
* Indirect tax all taxes levied on production, finally paid by consumer of buyer
* Ex sales tax, excise, customs, octrol
* Subsidies Financial help given by the government to the production units for selling the product at lower prices
* Net Value added at factor cost (NVafc) = Net value added at market price(NVamp)-indirect taxes + subsidies
* National Product = Domestic product Factor income paid to rest of the world + Factor income received from rest of world
* National Income same as Net National Product at factor cost
* Mixed income mixture of factor incomes (land, labour, capital, entrepreneurship) and difficult to allocate different factor incomes
* Private Final Consumption Expenditure sum of purchases made by households and value of free services provided by Non-profit institutions serving households
* Governments Final Consumption Exp. free services provided by govt. to people
* Gross Domestic Capital Formation total on investment by production units within economic territory Gross Domestic Fixed Capital + Net addition to stock
* Net Export Measure of investment abroad
* National Income Measurement:
* Primary sector: all production units engaged in exploitation of natural resources
* Agriculture, Fishing, Mining and Quarrying , Forestry and Logging
* Secondary sector: all production units engaged in transforming one good to another
* Registered manufacture, unregistered, Construction, Electricity Gas Water supply
* Tertiary sector: all units engaged in producing services
* Banking&Insurance, Trade hotel restaurant, transport storage commn, Real estate dwelling, Public administration & defence, other services
* Three sectors are divided into 14 sub-sectors in Indian economy
* 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
* Uses of National Income Estimates:
* Money income income accrued by the people in an year
* Real Income amount of goods and services that can be purchased from money income
* Real Income - National income at constant prices
* National income at constant prices = National income at current prices / price index
* Rate of growth of national income at constant prices is a measure of rate of economic growth of a country
* Micro economics:
* Study of allocation of resources by a producer on production of different goods and services is subject matter of Micro economics
* Study of actions and reactions of a consumer is a micro economic study
* Study of relationship between price and commodity and its demand or supply is a micro economic study
* Formulating economic theory by deductive method selecting problem, specifying assumptions, deducing hypothesis, testing of hypothesis
* Formulating economic theory by inductive method selecting problem, collection classification analysis of data, establish relationship b/n variables through logic
* Demand:
* Quantity of commodity willing to buy at a given price at a given unit of time demand
* Always expressed with reference to unit of time and price
* Factors affecting: Price, Income of buyer, Tastes n Preferences, Prices of related goods
* 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
* Expansion of demand demand of good rises due to fall in price(demand curve downward)
* Contraction of demand demand of good falls due to rise in price (demand curve upward)
* 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)
* 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)
* Supply:
* Quantity of good that seller is willing to sell at a given price in a given time
* Factors affecting: Price, other commodities, factors of production, objective of producer, production technology
* Law of supply: when other things remain same, there is direct relationship between price of commodity and its quantity supplied in the market
* Price determination:
* Equilibrium price of a commodity is the price at which demand and supply are equal
* Point of intersection of demand curve and supply curve shows equilibrium quantity and equilibrium price
* If quantity demanded is greater than the quantity supplied then:
* Price starts rising
* Demand starts falling
* Supply starts rising
* If quantity supplied is greater than quantity demanded:
* Price starts falling
* Expansion of demand
* Contraction of supply
* If demand increases(decreases) supply schedule remains constant, equilibrium price will rise(fall)
* If supply increases(decreases) , demand schedule remaining same, equilibrium price will fall(rise)
* If supply increases(decreases), demand decreases(increases) then equilibrium price will fall(rise)
* Cost:
* Paid out costs actual payments, on purchasing and hiring different goods and services used in production. Also known as explicit costs.
* Imputed costs cost of self-owned and self provided inputs
* Normal profit minimum remuneration earned over the monetary and imputed costs
* Fixed costs expenditure which remains fixed irrespective of quantity of output
* Variable costs cost which change with every change in output
* Marginal cost the additional cost incurred on production of last unit of output
* Revenue:
* Total Revenue = Quantity produced and sold(Q) x Price per unit product(P)
* Average Revenue = Total Revenue/Total Quantity (TR/Q)
* Marginal revenue Additional revenue from the output level increased by one unit
* Revenue receipt from sales of the product
* Profit excess of Revenue over cost
* If price of product is same at all levels of output then AR is equal to MR or price at all levels of output
* 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
* Profit Maximization:
* Normal (Zero) Profit If TR=TC then level of profit is zero
* Above Normal (more than zero) profit If TR>TC then level of profit greater than 0
* Loss Position below normal position (ie, TR
* Profit is maximum when excess of Total Revenue over Total Cost is maximum
* If MR>MC profit;
* When MC=MR and this equality is at the level of output from which no profitable movement is possible, producer gets maximum profit
* Government Budgeting:
* Budget statement of expected expenditure of government and sources of financing these expenditures during the financial year
* Fiscal policy or budgetary policy Implementation of government policies through budget formulation
* Budget two parts: Receipts, expenditure
* 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
* Revenue Receipts:
* Tax revenue legally compulsory payment imposed on people by Govt.
* Direct tax
* Corporation tax income tax on profits of companies
* Income tax imposed on who earn income
* Interest tax tax on interest income
* Expenditure tax tax on expenditure incurred
* Wealth tax tax on wealth of individuals
* Gift tax tax on gifts given
* Indirect tax
* Sales tax imposed on sales of goods and services
* Customs taxes on imports and exports
* Union Excise duty tax on manufacturing goods
* 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
* Capital Receipts:
* Borrowings Domestic borrowings, External assistance
* Recovery of loans
* Resale of shares in the Public Sector Undertakings
* 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
* Budgetary Deficit excess of all budgetary expenditures over budgeted receipts
* BD = Total Budget expenditure Total budget receipts
* Fiscal Deficit Excess of all expenditures over total receipts reduced by borrowings
* FD = Total Budget expenditure Total budget receipts net of borrowings
* Sources of financing deficit:
* Borrowing from public and foreign governments
* Withdrawing of cash balance with RBI
* Borrowing from RBI
* 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
* Money Supply & Regulation:
* Demand deposits money from these deposits can be withdrawn on demand
* Time deposits deposits without instant withdrawal facility; can be withdrawn after mutually agreed time period expires
* Legal tender money any money backed by legal assurance
* Currency notes and coins are legal tender money
* Bank deposits are not legal tender money
* 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
* Statutory Liquid Ratio: minimum percentage of deposits to be held with itself(bank)
* Cash Reserve Ratio: minimum percentage of deposits to be held with RBI
* Legal Reserve The minimum percentage of deposits which commercial banks are required to keep in the form of reserves
* LR = SLR + CRR
* 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)
* Total stock of cash in country (Paper Money)= (1)+(2)+(3)
* Total cash with commercial banks = (2) + (3)
* (4) is money in form of DD used for payment by cheques Bank money
* Transaction money (Narrow Money or M1) = (1) + (4)
* Bank Rate The interest rate charged on the commercial banks by central bank
* Planning in India
* Economic development sustained rise in national product plus other positive changes
* 5 year plans prepared to fulfil the overall objectives of economic planning of india
* Objectives of economic planning in India are:
* Accelerated economic growth
* Reduction in economic inequalities
* Self reliance
* Balanced regional development
* Modernization
* Reduction of unemployment
* Achievements of Economic Planning:
* Economic growth
* Reduction of income inequalities
* Increase in agricultural, industrial production
* Modernization of technology, economy
* Alround development of economy
* Major failures of Economic Planning:
* Objective of rapid economic growth not fulfilled
* Reduction of inequalities
* Self reliance
* Unemployment
* Balance regional growth
* Economic Reforms:
* 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
* 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
* Nature of Indian Economic planning became indicative planning from 8th 5year plan
* Govt now depends on inequalities, removal of poverty, reduction of unemployment, balanced regional growth
* Agriculture:
* Agriculture production can be increase by
* Extensive cultivation increasing total area under cultivation
* Intensive cultivation growing more on same area
* Productivity of cultivation land =Total physical output crop/total cultivated area of crop
* 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
* 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
* Co-operative Credit Societies, Regional Rural Banks, NABARD
* Industries:
* 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
* 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
* 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:
* Index of Industrial Production(IIP) Performance of industrial sector is measured by IIP
* IPR 1991 has de-reserved 9 industries out of 17 public sector industries
* Small scale industries are labour intensive
* Interrelationship between Industry and Agriculture:
* 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
* 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
* Financial Institutions:
* Financing Arrangement of money to be used for any purpose
* Price paid for obtaining finance is called Rate of Interest(RoI)
* 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
* Money market Source which meet short term requirements of money
* Capital market Source which meet medium and long term requirements of money
* Sources of finance:
* Non Institutional sources source taken from individuals (ex,chits, financer)
* Institutional source organizations which are setup for providing finance
* 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.
* 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.
* 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
* BoT and BoP:
* Trade account of a Balance of Payments include exports and imports of goods in a year
* The difference between value of exports of goods and value of imports of goods is called Balance of Trade
* Trade acc includes exports and imports of goods only
* Exports and Imports of Goods is called as Transaction of visible items or Merchandise
* Balance of Trade Balance of visibles
* Difference b/n total receipts and total payments of foreign currencies on account of invisibles is called Balance on account of invisibles
* Current Account Deficit If Indias receipts of foreign currencies on account of trade and invisibles has been less than its payments
* Foreign Exchange Rate:
* Ways to determine Foreign Exchange Rate:
* Fixed by central bank of India
* Determined by foreign exchange market
* 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
* 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
* To regulate big fluctuations in FOREX rates RBI buys and sells foreign exchange in open market
* Inflow of Capital (Foreign):
* Foreign capital investments made by Non Resident Institutions and foreign ind.
* Forms of External Capital FDI, International Loans & Grants (Foreign Aid)
* Debt-GDP ratio or Debt trap If countrys debt crosses 30% country is in an international debt trap
* New Trade Policy Implications:
* Pre reform trade period Curbs on Import, incentives for export promotion
* Imports controlled by import licenses, import quotas, custom duties, import prohibitions
* 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)
* 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)
* March 1992, Liberalized Exchange Rate Mgmt. System (LERMS)
GV Simha
* 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
* Vital processes of economy Production, consumption, investment
* 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
* Net Investment = Gross Investment Depreciation
* Production, consumption and investment interdependent
* Economic Dev and Indian Economy:
* Economic growth: increase in total volume of goods and services produced by a nation
* 8.4% - expected growth (12th financial commission)
* Eco Dev:
* Economic growth + positive changes in other spheres of life
* HDI rank 134
* World Bank classifies nations into four levels based on Percapita GNP(LI, LMI, UMI, HI)
* Income:
* 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
* 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
* National income includes only factor incomes
* Diff b/n land and capital land is a free gift(nature), capital is produced by man
* Flows During Economic activity:
* Real Flow flow of goods or services from seller
* Money flow flow of money from buyer
* 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
* 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 dont have the holders 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
* National Income:
* 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
* Intermediate products one production unit purchasing from other for resale
* Final product all goods and services purchased for consumption and investment , and not for resale
* Value added = Value of output Intermediate cost
* Gross value added = net value added + depreciation
* Indirect tax all taxes levied on production, finally paid by consumer of buyer
* Ex sales tax, excise, customs, octrol
* Subsidies Financial help given by the government to the production units for selling the product at lower prices
* Net Value added at factor cost (NVafc) = Net value added at market price(NVamp)-indirect taxes + subsidies
* National Product = Domestic product Factor income paid to rest of the world + Factor income received from rest of world
* National Income same as Net National Product at factor cost
* Mixed income mixture of factor incomes (land, labour, capital, entrepreneurship) and difficult to allocate different factor incomes
* Private Final Consumption Expenditure sum of purchases made by households and value of free services provided by Non-profit institutions serving households
* Governments Final Consumption Exp. free services provided by govt. to people
* Gross Domestic Capital Formation total on investment by production units within economic territory Gross Domestic Fixed Capital + Net addition to stock
* Net Export Measure of investment abroad
* National Income Measurement:
* Primary sector: all production units engaged in exploitation of natural resources
* Agriculture, Fishing, Mining and Quarrying , Forestry and Logging
* Secondary sector: all production units engaged in transforming one good to another
* Registered manufacture, unregistered, Construction, Electricity Gas Water supply
* Tertiary sector: all units engaged in producing services
* Banking&Insurance, Trade hotel restaurant, transport storage commn, Real estate dwelling, Public administration & defence, other services
* Three sectors are divided into 14 sub-sectors in Indian economy
* 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
* Uses of National Income Estimates:
* Money income income accrued by the people in an year
* Real Income amount of goods and services that can be purchased from money income
* Real Income - National income at constant prices
* National income at constant prices = National income at current prices / price index
* Rate of growth of national income at constant prices is a measure of rate of economic growth of a country
* Micro economics:
* Study of allocation of resources by a producer on production of different goods and services is subject matter of Micro economics
* Study of actions and reactions of a consumer is a micro economic study
* Study of relationship between price and commodity and its demand or supply is a micro economic study
* Formulating economic theory by deductive method selecting problem, specifying assumptions, deducing hypothesis, testing of hypothesis
* Formulating economic theory by inductive method selecting problem, collection classification analysis of data, establish relationship b/n variables through logic
* Demand:
* Quantity of commodity willing to buy at a given price at a given unit of time demand
* Always expressed with reference to unit of time and price
* Factors affecting: Price, Income of buyer, Tastes n Preferences, Prices of related goods
* 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
* Expansion of demand demand of good rises due to fall in price(demand curve downward)
* Contraction of demand demand of good falls due to rise in price (demand curve upward)
* 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)
* 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)
* Supply:
* Quantity of good that seller is willing to sell at a given price in a given time
* Factors affecting: Price, other commodities, factors of production, objective of producer, production technology
* Law of supply: when other things remain same, there is direct relationship between price of commodity and its quantity supplied in the market
* Price determination:
* Equilibrium price of a commodity is the price at which demand and supply are equal
* Point of intersection of demand curve and supply curve shows equilibrium quantity and equilibrium price
* If quantity demanded is greater than the quantity supplied then:
* Price starts rising
* Demand starts falling
* Supply starts rising
* If quantity supplied is greater than quantity demanded:
* Price starts falling
* Expansion of demand
* Contraction of supply
* If demand increases(decreases) supply schedule remains constant, equilibrium price will rise(fall)
* If supply increases(decreases) , demand schedule remaining same, equilibrium price will fall(rise)
* If supply increases(decreases), demand decreases(increases) then equilibrium price will fall(rise)
* Cost:
* Paid out costs actual payments, on purchasing and hiring different goods and services used in production. Also known as explicit costs.
* Imputed costs cost of self-owned and self provided inputs
* Normal profit minimum remuneration earned over the monetary and imputed costs
* Fixed costs expenditure which remains fixed irrespective of quantity of output
* Variable costs cost which change with every change in output
* Marginal cost the additional cost incurred on production of last unit of output
* Revenue:
* Total Revenue = Quantity produced and sold(Q) x Price per unit product(P)
* Average Revenue = Total Revenue/Total Quantity (TR/Q)
* Marginal revenue Additional revenue from the output level increased by one unit
* Revenue receipt from sales of the product
* Profit excess of Revenue over cost
* If price of product is same at all levels of output then AR is equal to MR or price at all levels of output
* 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
* Profit Maximization:
* Normal (Zero) Profit If TR=TC then level of profit is zero
* Above Normal (more than zero) profit If TR>TC then level of profit greater than 0
* Loss Position below normal position (ie, TR
* Profit is maximum when excess of Total Revenue over Total Cost is maximum
* If MR>MC profit;
* When MC=MR and this equality is at the level of output from which no profitable movement is possible, producer gets maximum profit
* Government Budgeting:
* Budget statement of expected expenditure of government and sources of financing these expenditures during the financial year
* Fiscal policy or budgetary policy Implementation of government policies through budget formulation
* Budget two parts: Receipts, expenditure
* 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
* Revenue Receipts:
* Tax revenue legally compulsory payment imposed on people by Govt.
* Direct tax
* Corporation tax income tax on profits of companies
* Income tax imposed on who earn income
* Interest tax tax on interest income
* Expenditure tax tax on expenditure incurred
* Wealth tax tax on wealth of individuals
* Gift tax tax on gifts given
* Indirect tax
* Sales tax imposed on sales of goods and services
* Customs taxes on imports and exports
* Union Excise duty tax on manufacturing goods
* 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
* Capital Receipts:
* Borrowings Domestic borrowings, External assistance
* Recovery of loans
* Resale of shares in the Public Sector Undertakings
* 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
* Budgetary Deficit excess of all budgetary expenditures over budgeted receipts
* BD = Total Budget expenditure Total budget receipts
* Fiscal Deficit Excess of all expenditures over total receipts reduced by borrowings
* FD = Total Budget expenditure Total budget receipts net of borrowings
* Sources of financing deficit:
* Borrowing from public and foreign governments
* Withdrawing of cash balance with RBI
* Borrowing from RBI
* 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
* Money Supply & Regulation:
* Demand deposits money from these deposits can be withdrawn on demand
* Time deposits deposits without instant withdrawal facility; can be withdrawn after mutually agreed time period expires
* Legal tender money any money backed by legal assurance
* Currency notes and coins are legal tender money
* Bank deposits are not legal tender money
* 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
* Statutory Liquid Ratio: minimum percentage of deposits to be held with itself(bank)
* Cash Reserve Ratio: minimum percentage of deposits to be held with RBI
* Legal Reserve The minimum percentage of deposits which commercial banks are required to keep in the form of reserves
* LR = SLR + CRR
* 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)
* Total stock of cash in country (Paper Money)= (1)+(2)+(3)
* Total cash with commercial banks = (2) + (3)
* (4) is money in form of DD used for payment by cheques Bank money
* Transaction money (Narrow Money or M1) = (1) + (4)
* Bank Rate The interest rate charged on the commercial banks by central bank
* Planning in India
* Economic development sustained rise in national product plus other positive changes
* 5 year plans prepared to fulfil the overall objectives of economic planning of india
* Objectives of economic planning in India are:
* Accelerated economic growth
* Reduction in economic inequalities
* Self reliance
* Balanced regional development
* Modernization
* Reduction of unemployment
* Achievements of Economic Planning:
* Economic growth
* Reduction of income inequalities
* Increase in agricultural, industrial production
* Modernization of technology, economy
* Alround development of economy
* Major failures of Economic Planning:
* Objective of rapid economic growth not fulfilled
* Reduction of inequalities
* Self reliance
* Unemployment
* Balance regional growth
* Economic Reforms:
* 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
* 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
* Nature of Indian Economic planning became indicative planning from 8th 5year plan
* Govt now depends on inequalities, removal of poverty, reduction of unemployment, balanced regional growth
* Agriculture:
* Agriculture production can be increase by
* Extensive cultivation increasing total area under cultivation
* Intensive cultivation growing more on same area
* Productivity of cultivation land =Total physical output crop/total cultivated area of crop
* 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
* 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
* Co-operative Credit Societies, Regional Rural Banks, NABARD
* Industries:
* 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
* 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
* 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:
* Index of Industrial Production(IIP) Performance of industrial sector is measured by IIP
* IPR 1991 has de-reserved 9 industries out of 17 public sector industries
* Small scale industries are labour intensive
* Interrelationship between Industry and Agriculture:
* 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
* 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
* Financial Institutions:
* Financing Arrangement of money to be used for any purpose
* Price paid for obtaining finance is called Rate of Interest(RoI)
* 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
* Money market Source which meet short term requirements of money
* Capital market Source which meet medium and long term requirements of money
* Sources of finance:
* Non Institutional sources source taken from individuals (ex,chits, financer)
* Institutional source organizations which are setup for providing finance
* 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.
* 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.
* 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
* BoT and BoP:
* Trade account of a Balance of Payments include exports and imports of goods in a year
* The difference between value of exports of goods and value of imports of goods is called Balance of Trade
* Trade acc includes exports and imports of goods only
* Exports and Imports of Goods is called as Transaction of visible items or Merchandise
* Balance of Trade Balance of visibles
* Difference b/n total receipts and total payments of foreign currencies on account of invisibles is called Balance on account of invisibles
* Current Account Deficit If Indias receipts of foreign currencies on account of trade and invisibles has been less than its payments
* Foreign Exchange Rate:
* Ways to determine Foreign Exchange Rate:
* Fixed by central bank of India
* Determined by foreign exchange market
* 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
* 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
* To regulate big fluctuations in FOREX rates RBI buys and sells foreign exchange in open market
* Inflow of Capital (Foreign):
* Foreign capital investments made by Non Resident Institutions and foreign ind.
* Forms of External Capital FDI, International Loans & Grants (Foreign Aid)
* Debt-GDP ratio or Debt trap If countrys debt crosses 30% country is in an international debt trap
* New Trade Policy Implications:
* Pre reform trade period Curbs on Import, incentives for export promotion
* Imports controlled by import licenses, import quotas, custom duties, import prohibitions
* 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)
* 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)
* March 1992, Liberalized Exchange Rate Mgmt. System (LERMS)
GV Simha
BASEL III norms and INDIA
BASEL III norms and India
Capital Adequacy ratio(CAR)- is aratioof abank'scapitalto itsrisk.RBItrack a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutoryCapital requirements. It is expressed as a percentage of a bank's risk weighted credit exposures.
Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."
More CAR is signifying better and stable bank.
What are Basel norms?
Basel is a set of standards and practices developed for global banks to ensure that they maintain adequate capital to withstand periods of economic strain. It is a comprehensive set of reform measures designed to improve the regulation, disclosures and risk management within the banking sector.
In simple terms, It provides internationally accepted detailed guidelines abouthow much money should a bank keep aside, to deal with financial crisis.
Even if loan-takers run away without paying, Bank should have money to give back to deposit holders.
More risk the bank takes, more money it has to keep aside in reserve to counter the risk.
Q: What does Basel III norm stipulate?
Basel III establishes tougher capital standards through more restrictive capital definitions, higher risk-weighted assets (RWA), additional capital buffers and higher requirements for minimum capital ratios. It also introduces new strict liquidity requirements.(basically compared to BASEL I & II , this tym more money will have to be kept in the banks and less money to lend..thus less liquidity in the system.)
Q: Why Basel III?
It is widely felt that the shortcoming in Basel II norms is what led to the global financial crisis of 2008. That is because Basel II did not have any explicit regulation on the debt that banks could take on their books.
Q: What is the biggest criticism against Basel III?
That the stringent capital requirements come at a time when the global economy is in the midst of a slowdown. This will leave banks with less money to lend, in turn pushing up the cost of borrowing; and thereby further aggravating the slowdown.
Q: What is the deadline for banks to become Basel III compliant?
For international banks the deadline is December 31, 2018 and March 31, 2018 for Indian banks.
Q: Why are Indian banks concerned about Basel III norms?
Just like for international banks, Basel III norms will affect the profitability and return ratios of Indian banks as well. Something which is admitted by the RBI.
Basel III requires higher and better quality capital. Admittedly, the cost of equity capital is high. The average Return on Equity (RoE) of the Indian banking system for the last three years has been approximately 15%. Implementation of Basel III is expected to result in a decline in Indian banks' RoE in the short-term.
RoE means the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
Q: Indian banks are much better off than global banks that caused the financial crisis. Why then should Indian banks then comply with Basel III norms?
The RBI said: India should transit to Basel III because of several reasons. By far the most important reason is that as India integrates with the rest of the world, as increasingly Indian banks go abroad and foreign banks come on to our shores, we cannot afford to have a regulatory deviation from global standards. Any deviation will hurt us both by way of perception and also in actual practice. Also, it is important that Indian banks have the cushion afforded by improved risk management systems to withstand shocks from external systems, especially as they deepen their links with the global financial system going forward.
Issues related to Basel 3 norms in Indian context
RBI has estimated that the amount needed in capital for these new requirements is roughly 1.4 times the amount Indias banks have raised from equity and bond market in the last five years. Since Indias growth dropped to nearly 4.7% and banking sectors NPA rose to a five-year high, hence banks will not find easy money from markets. Also in the election year, P Chindambaram has already announced he wud works towards fiscal consolidation so no capital influx from govt side either.
And considering the current CAR, private banks fare better than state banks hence it wud be more difficult fr state banks to fulfil basel norms. Also state banks are worst performers in NPA and thus weak share performance.
GoI is aware of the funding crunch its state banks face. To ease the pressure govt and RBI have floated the idea of setting up a financial holding company that raises capital and inject into state banks. The holding company can issue bonds to local and international markets and thus simplifying the capital injection process. But the problem with this idea is rating agencies consider bonds issued from a holding company as subordinate to the bonds issued directly by banks.
Possible solutions ahead for India
One way to reduce the amount of capital its state banks need would be to consolidate weaker banks with stronger ones. This would leave more funding from both international and local capital markets. Also govt capital injection share for each bank will be more in this case. However, some experts believe it offers sizeable risks. A bank buying a peer with a lot of bad loans or weak capital ratio would have to raise additional capital on top of cost of the acquisition and its own rising BASEL-3 related capital needs. It is likely to be a complex process. It can make or break a merged banks ability to raise capital.
Thus the best possible solution is the most painful: the RBI and govt should compel the banks to take control of bad loans (NPAs). They should be forced to select borrowers based on proper due diligence and not on relationships.
Govt also need to learn the lessons, It likes to lean on its pet banks to lend to systematically imp sectors such as agriculture and trading and then to not chase the debtors for prompt repayment. If govt allows banks to assess risk before offering money it wud be good fr that industry in becoming more efficient as well for bank in reducing its NPAs.
And also slow govt policy machinery has led to poor output from these industries who have taken loans....thus no output has led to no repayment of loans. Govt needs to look into this aspect as well.
Basel 3 norms have highlighted the shady Indian state bank practices but it also offers a rare opportunity for govt. To instil fiscal discipline into its banking institutions and India should seize it.
Karthik Reddy
Good will entry, dont need books.
Sorry I am not able to mention the reference coz when i prepared this issue i didnt know about this competition. And now i dont remember the references i used. Hope u understand.
Capital Adequacy ratio(CAR)- is aratioof abank'scapitalto itsrisk.RBItrack a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutoryCapital requirements. It is expressed as a percentage of a bank's risk weighted credit exposures.
Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."
More CAR is signifying better and stable bank.
What are Basel norms?
Basel is a set of standards and practices developed for global banks to ensure that they maintain adequate capital to withstand periods of economic strain. It is a comprehensive set of reform measures designed to improve the regulation, disclosures and risk management within the banking sector.
In simple terms, It provides internationally accepted detailed guidelines abouthow much money should a bank keep aside, to deal with financial crisis.
Even if loan-takers run away without paying, Bank should have money to give back to deposit holders.
More risk the bank takes, more money it has to keep aside in reserve to counter the risk.
Q: What does Basel III norm stipulate?
Basel III establishes tougher capital standards through more restrictive capital definitions, higher risk-weighted assets (RWA), additional capital buffers and higher requirements for minimum capital ratios. It also introduces new strict liquidity requirements.(basically compared to BASEL I & II , this tym more money will have to be kept in the banks and less money to lend..thus less liquidity in the system.)
Q: Why Basel III?
It is widely felt that the shortcoming in Basel II norms is what led to the global financial crisis of 2008. That is because Basel II did not have any explicit regulation on the debt that banks could take on their books.
Q: What is the biggest criticism against Basel III?
That the stringent capital requirements come at a time when the global economy is in the midst of a slowdown. This will leave banks with less money to lend, in turn pushing up the cost of borrowing; and thereby further aggravating the slowdown.
Q: What is the deadline for banks to become Basel III compliant?
For international banks the deadline is December 31, 2018 and March 31, 2018 for Indian banks.
Q: Why are Indian banks concerned about Basel III norms?
Just like for international banks, Basel III norms will affect the profitability and return ratios of Indian banks as well. Something which is admitted by the RBI.
Basel III requires higher and better quality capital. Admittedly, the cost of equity capital is high. The average Return on Equity (RoE) of the Indian banking system for the last three years has been approximately 15%. Implementation of Basel III is expected to result in a decline in Indian banks' RoE in the short-term.
RoE means the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
Q: Indian banks are much better off than global banks that caused the financial crisis. Why then should Indian banks then comply with Basel III norms?
The RBI said: India should transit to Basel III because of several reasons. By far the most important reason is that as India integrates with the rest of the world, as increasingly Indian banks go abroad and foreign banks come on to our shores, we cannot afford to have a regulatory deviation from global standards. Any deviation will hurt us both by way of perception and also in actual practice. Also, it is important that Indian banks have the cushion afforded by improved risk management systems to withstand shocks from external systems, especially as they deepen their links with the global financial system going forward.
Issues related to Basel 3 norms in Indian context
RBI has estimated that the amount needed in capital for these new requirements is roughly 1.4 times the amount Indias banks have raised from equity and bond market in the last five years. Since Indias growth dropped to nearly 4.7% and banking sectors NPA rose to a five-year high, hence banks will not find easy money from markets. Also in the election year, P Chindambaram has already announced he wud works towards fiscal consolidation so no capital influx from govt side either.
And considering the current CAR, private banks fare better than state banks hence it wud be more difficult fr state banks to fulfil basel norms. Also state banks are worst performers in NPA and thus weak share performance.
GoI is aware of the funding crunch its state banks face. To ease the pressure govt and RBI have floated the idea of setting up a financial holding company that raises capital and inject into state banks. The holding company can issue bonds to local and international markets and thus simplifying the capital injection process. But the problem with this idea is rating agencies consider bonds issued from a holding company as subordinate to the bonds issued directly by banks.
Possible solutions ahead for India
One way to reduce the amount of capital its state banks need would be to consolidate weaker banks with stronger ones. This would leave more funding from both international and local capital markets. Also govt capital injection share for each bank will be more in this case. However, some experts believe it offers sizeable risks. A bank buying a peer with a lot of bad loans or weak capital ratio would have to raise additional capital on top of cost of the acquisition and its own rising BASEL-3 related capital needs. It is likely to be a complex process. It can make or break a merged banks ability to raise capital.
Thus the best possible solution is the most painful: the RBI and govt should compel the banks to take control of bad loans (NPAs). They should be forced to select borrowers based on proper due diligence and not on relationships.
Govt also need to learn the lessons, It likes to lean on its pet banks to lend to systematically imp sectors such as agriculture and trading and then to not chase the debtors for prompt repayment. If govt allows banks to assess risk before offering money it wud be good fr that industry in becoming more efficient as well for bank in reducing its NPAs.
And also slow govt policy machinery has led to poor output from these industries who have taken loans....thus no output has led to no repayment of loans. Govt needs to look into this aspect as well.
Basel 3 norms have highlighted the shady Indian state bank practices but it also offers a rare opportunity for govt. To instil fiscal discipline into its banking institutions and India should seize it.
Karthik Reddy
Good will entry, dont need books.
Sorry I am not able to mention the reference coz when i prepared this issue i didnt know about this competition. And now i dont remember the references i used. Hope u understand.
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