The economic consequences of the British rule can be studied under three heads:

• Decline of Indian Handicrafts and progressive ruralisation of the Indian economy
• Growth of the new land system and the commercialisation of Indian agriculture
• Process of industrial transition of India

Decline of Handicrafts

• While India was an exporter of Handicrafts before the Industrial Revolution, the revolution reversed the character of India’s foreign trade
  • Increase in demand for raw material for British industries
  • Hence, steps were made to crush Indian handcrafts as well as commercialise agriculture to meet the interests of the British industries
• Principle causes for the decline of Indian handicrafts
  • Disappearance of Princely courts
  • Hostile policy of the East India Company and the British Parliament
  • Competition of machine-made goods
  • The development of new forms and patterns of demand as a result of foreign influence
• Economic consequences of the decline of handicrafts
  • Increased unemployment
  • Back-to-the-land movement: handicrafts were forced to take up agriculture or become landless labourers. This increased the pressure on land. This trend of growing proportion of the working force on agriculture is described as ‘progressive ruralisation’ or ‘deindustrialisation of India’. Thus, the crisis in handicrafts and industries seriously crippled Indian agriculture.

Land System during 1793-1850

• 1793: permanent settlement
• Zamindari, Ryotwari, Mahalwari systems
• Absentee landlordism emerged
• The result of the whole change in the land system led to the emergence of subsistence agriculture
• It helped the concentration of economic power in the hand of absentee landlords and moneylenders in rural India.

Commercialisation of Agriculture (1850-1947)

• Define: Production of crop for sale rather than for family consumption
• What distinguished commercial agriculture from normal sales of marketable surplus was that it was a deliberate policy worked up under the pressure from British industries. It was thus forced upon the Indian peasantry.
• Resistance: Indigo revolution etc
• Why CA? Industrial Revolution
• Impact of railways and road transport: Railways and road transport made possible a huge expansion in cash cropping, for national and international markets, and production regimes across the subcontinent were placed in a new context of opportunity
• Impact of CA
  • Mass movement to commercial agriculture caused decline in food production, increase in prices and famines.
  • Halted the process of industrialisation in India

 

Budgeting

Budgeting is the process of estimating the availability of resources and then allocating them to various activities of an organization according to a pre-determined priority. In most cases, approval of a budget also means the approval to various spending units to utilize the allocated resources. Budgeting plays a criucial role in the socio-economic development of the nation.

Budget is the annual statement of the outlays and tax revenues of the government of India together with the laws and regulations that approve and support those outlays and tax revenues . The budget has two purposes in general :
1. To finance the activities of the union government
2. To achieve macroeconomic objectives.

The Budget contains the financial statements of the government embodying the estimated receipts and expenditure for one financial year, ie.  it is a proposal of how much money is to be spent on what and how much of it will
be contributed by whom or raised from where during the coming year.

Different types of Budgeting

Economists throughout the globe have classified the budgets into different types based on the process and purpose of the budgets, which are as follows:-

1- The Line Item Budget

line-item budgeting was introduced in some countries in the late 19th centuary. Indeed line item budgeting which is the most common form of budgeting in a large number of countries and suffers from several drawbacks was a major reform initiative then. The line item budget is defined as “the budget in which the individual financial statement items are grouped by cost centers or departments .It shows the comparison between the financial data for the past  accounting or budgeting periods and estimated figures for the current or a future period”In a line-item system, expenditures for the budgeted period are listed according to objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on ensuring that the agencies
or units do not exceed the ceilings prescribed. A central authority or the Ministry of Finance keeps a watch on the spending of various units to ensure that the ceilings are not violated. The line item budget approach is easy to understand and implement. It also facilitates centralized control and fixing of authority and responsibility of the spending units. Its major disadvantage is that it does not provide enough information to the top levels about the activities and achievements of individual units.

2 – Performance Budgeting

a performance budget reflects the goal/objectives of the organization and spells out performance targets. These targets are sought to be achieved through a strategy. Unit costs are associated with the strategy and allocations are accordingly made for achievement of the objectives. A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation – it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.

3- Zero-based Budgeting

The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of Zero-based Budgeting is phasing out of programmes/ activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.

4- Programme Budgeting and Performance Budgeting

Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was introduced in the US Federal Government in the mid-1960s. Its core themes had much in common with earlier strands of performance budgeting.
Programme budgeting aimed at a system in which expenditure would be planned and controlled by the
objective. The basic building block of the system was classification of expenditure into programmes, which meant objective-oriented classification so that programmes with common objectives are considered together.
It aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.

 

 

Budgetary Control

Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed.

Budgetary control involves the following steps :

(a) The objects are set by preparing budgets.

(b) The business is divided into various responsibility centres for preparing various budgets.

(c) The actual figures are recorded.

(d) The budgeted and actual figures are compared for studying the performance of different cost centres.

(e) If actual performance is less than the budgeted norms, a remedial action is taken immediately.

The main objectives of budgetary control are the follows:

1. To ensure planning for future by setting up various budgets, the requirements and expected performance of the enterprise are anticipated.
2. To operate various cost centres and departments with efficiency and economy.
3. Elimination of wastes and increase in profitability.
4. To anticipate capital expenditure for future.
5. To centralise the control system.
6. Correction of deviations from the established standards.
7. Fixation of responsibility of various individuals in the organization.

 

Responsibility Accounting

Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts.

These decentralized parts are divided as : 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers.

1. revenue center (a segment that mainly generates revenue with relatively little costs),
2. costs for a cost center (a segment that generates costs, but no revenue),
3. a measure of profitability for a profit center (a segment that generates both revenue and costs) and
4. return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).

 

Advantages:-

1. It provides a way to manage an organization that would otherwise be unmanageable.
2. Assigning responsibility to lower level managers allows higher level managers to pursue other activities such as long term planning and policy making.
3. It also provides a way to motivate lower level managers and workers.
4. Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances.

In India the budget is prepared from top to bottom approach and responsible accounting would not only improve the efficiency of Indian budgetary system but also will help in performance analysis.

Social Accounting

Social accounting is concerned with the statistical classification of the activities of human beings and human institutions in ways which help us to understand the operation of the economy as a whole.

Social accounting is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large

The components of social accounting are production, consumption, capital accumulation, government transactions and transactions with the rest of the world.

The uses of social accounting are as follows:

(1) In Classifying Transactions

(2) In Understanding Economic Structure

(3) In Understanding Different Sectors and Flows

(4) In Clarifying Relations between Concepts

(7) In Explaining Movements in GNP

(8) Provide a Picture of the Working of Economy

(9) In Explaining Interdependence of Different Sectors of the Economy

(10) In Estimating Effects of Government Policies

(11) Helpful in Big Business Organisations

(12) Useful for International Purposes

(13) Basis of Economic Models

 

Budgetary Deficit

Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called deficit financing by the government of India. This deficit adds to money supply in the economy and, therefore, it can be a major cause of inflationary rise in prices.

Budgetary Deficit of central government of India was Rs. 2,576 crores in 1980-81, it went up to Rs. 11,347 crores in 1990-91 to Rs. 13,184 crores in 1996-97.

The concept of budgetary deficit has lost its significance after the presentation of the 1997-98 Budget. In this budget, the practice of ad hoc treasury bills as source of finance for government was discontinued. Ad hoc treasury bills are issued by the government and held only by the RBI. They carry a low rate of interest and fund monetized deficit. These bills were replaced by ways and means advance. Budgetary deficit has not figured in union budgets since 1997-98. Since 1997-98, instead of budgetary deficit, Gross Fiscal Deficit (GFD) became the key indicator.

 

Fiscal Deficit

• The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government and thus amounts to all the borrowings of the government . While calculating the total revenue, borrowings are not included.
• The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
• Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
• A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

 

Revenue Deficit

• Revenue deficit is concerned with the revenue expenditures and revenue receipts of the government. It refers to excess of revenue expenditure over revenue receipts during the given fiscal year.
• Revenue Deficit = Revenue Expenditure – Revenue Receipts
• Revenue deficit signifies that government’s own revenue is insufficient to meet the expenditures on normal functioning of government departments and provisions for various services.
• In India social expenditure like MNREGA is a revenue expenditure though a part of Plan expenditure.
• Its targeted to be 2.9% of GPD in the year 2014-15, though the fiscal revenue and budget management act specifies it to be zero by 2008-09

Indian Public Finance

Value Added Tax

• Under the constitution the States have the exclusive power to tax sales and purchases of goods other than newspapers
• There are however defects of sales tax
  • It is regressive in nature. Families with low income a larger proportion of their income as sales tax.
  • Has a cascading effect – tax is collected at all stages and every time a commodity is bought or sold
  • Sales tax is easily evaded by the consumers by not asking for receipts.
• VAT is the tax on the value added to goods in the process of production and distribution.
• With the implementation of VAT, the origin based Central Sales Tax is phased out.
• Introduced from April 1, 2005
• Advantages
  • Is a neutral tax. Does not have a distortionary effect
  • Imposed on a large number of firms instead of at the final stage
  • Easier to enforce as tax paid by one firm is reported as a deduction by a subsequent firm
  • Difficult to evade as collection is done at different stages
  • Incentive to produce and invest more as producer goods can be easily excluded under VAT
  • Encourages exports since VAT is identifiable and fully rebated on exports
• Difficulties in implementing
  • For collection of VAT all producers, distributers, traders and everyone in the chain of production should keep proper account of all their transactions
  • Bribing of sales tax officials to escape taxes
  • The government has to simplify VAT procedures for small traders and artisans

Goods and Services Tax

• Has not yet been introduced because of the support of opposition in Rajya Sabha

State Finances

• Borrowing by the State governments is subordinated to prior approval by the national government <Article 293>
• Furthermore, State Governments are not permitted to borrow externally unlike the centre.

Public Debt

• The aggregate stock of public debt of the Centre and States as a percentage of GDP is high (around 75 pc)
• Unique features of public debt in India
  • States have no direct exposure to external debt
  • Almost the whole of PD is local currency denominated and held almost wholly by residents
  • The PD of both centre and states is actively managed by the RBI ensuring comfort the financial markets without any undue volatility.
  • The g-sec market has developed significantly in recent years
  • Contractual savings supplement marketable debt in financing deficits
  • Direct monetary financing of primary issues of debt has been discontinued since April 2006.

Millenium Development Goals
1.	Eradicate extreme poverty and hunger
2.	Achieve universal primary education
3.	Promote gender equality and empower women
4.	Reduce child mortality
5.	Improve maternal health
6.	Combat HIV/AIDS, malaria, and other diseases
7.	Ensure environmental sustainability
8.	Develop a global partnership for development

Financial Inclusion

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable.

Government of India has launched an innovative scheme of Jan Dhan Yojna for Financial Inclusion to provide the financial services to millions out of the regulated banking sector.

 

 

 

 

Various program’s for financial inclusion are:-

• Swabhimaan Scheme:under the Swabhimaan campaign, the Banks were advised to provide appropriate banking facilities to habitations having a population in excess of 2000 (as per 2001 census) by March 2012.
• Extention of  the banking networkin unbanked areas,
• Expansion of Business Correspondent Agent (BCA)Network
• Direct Benefit Transfer(DBT) and Direct Benefit Transfer for LPG (DBTL)
• RuPay, a new card payment scheme has been conceived by NPCI to offer a domestic, open-loop, multilateral card payment system which will allow all Indian banks and financial Institutions in India to participate in electronic payments.
• Pradhan Mantri Jan-Dhan Yojana (PMJDY)was formally launched on 28th August, 2014. The Yojana envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension. The beneficiaries would get a RuPay Debit Card having inbuilt accident insurance cover of Rs.1.00 lakh. In addition there is a life insurance cover of Rs.30000/- to those people who opened their bank accounts for the first time between 15.08.2014 to 26.01.2015 and meet other eligibility conditions of the Yojana.

 

 

 

Inflation in India

<use fundaes from your MAP> this question is very likely to be asked given the present inflationary trend.

Monetary Policy of India

Topics

1. MP background
2. Evolution of monetary policy in India: Different phases
3. Transmission Mechanism
4. Goals of MP
5. Instruments of MP
6. Determinants of MP
7. Role of RBI: Pre and post-reforms
8. MP: pre and post reforms
9. Committees on Monetary Management in India
10. MP and Money Market
11. MP and Fiscal Policy
12. MP and the external sector
13. MP and the banking sector
14. MP and Economic growth
15. MP and Inflation
16. Financial Stability: New Challenge
17. Challenges before monetary policy
18. Criticisms of India’s MP

 

Some background information

• An important factor that determines the effectiveness of MP is its transmission – a process through which changes in the policy achieve the objectives of controlling inflation and achieving growth
• MP transmission mechanism describes how MP action affects output and inflation, the final objectives of MP
• Various MP transmission channels
  • Quantum Channel relating to money supply and credit
  • Interest Rate Channel –this has become important in the post reform period
  • Exchange Rate Channel
  • Asset Price Channel
• How these channels function in an economy depends on its stage of development and its underlying financial structure.
• These channels, however, are not mutually exclusive. There could be considerable feedback and interaction among them.

Evolution of MP

• 1935: Proportional Reserve System
• 1954: Minimum Reserve System
• 1973-76: Minimum and maximum lending rates for bank loans prescribed
• 1985: Flexible monetary targeting with feedback
• 1998: Multiple indicator approach adopted

Divide MP into phases and study

Functions of RBI

• Monetary functions
  • Conduct of monetary policy
  • Bank of issue
  • Banker to the government
  • Banker’s Bank and Lender of the Last Resort
  • Controller of credit
  • Custodian of foreign exchange reserves
  • Foreign exchange management – current and capital account management
  • Oversight of the payment and settlement systems
• Non-monetary functions
  • Regulation and supervision of the banking and non-banking financial institutions, including credit information companies
  • Regulation of money, forex and government securities markets as also certain financial derivatives
  • Promotional functions: promotion of IFCI, SFC etc
  • Developmental role
  • Research and statistics

Objective of MP

• To catalyse economic growth: by ensuring adequate flow of credit to productive sectors
• Price stability
• After the financial crisis, achieving Financial Stability has emerged as an important objective. Exchange rate management can be yet another objective

Tools of MP

• General Credit Control (Quantitative Control)
  • Bank Rate
  • Open Market Operations
  • Cash Reserve Ratio
• Specific and direct credit control (Qualitative Control)
  • Lending margins
  • Purpose specific credit ceiling
  • Discriminatory interest rates
  • Eg: Credit Authorisation Scheme, Credit Monitoring Arrangement.

MP pre-reforms

• MP in India was conducted under the monetary targeting framework till 1997-98 with M3 as an intermediate target. This amounted to regulating money supply consistent with the expected growth in real income and a projected level of inflation.
• During the monetary targeting phase (1985-1998), while M₃ growth provided the nominal anchor, reserve money was used as the operating target and   cash reserve ratio (CRR) was used as the principal operating instrument.  Besides CRR, in the pre-reform period prior to 1991, given the command and control nature of the economy, the Reserve Bank had to resort to direct instruments like interest rate regulations and selective credit control. These instruments were used intermittently to neutralize the expansionary impact of large fiscal deficits which were partly monetised. The administered interest rate regime kept the yield rate of the government securities artificially low. The demand for them was created through periodic hikes in the Statutory Liquidity Ratio (SLR) for banks. The task before the Reserve Bank was, therefore, to develop the financial markets to prepare the ground for indirect operations.

MP post-reform

• In the wake of the financial reforms, questions were raised about the appropriateness of this framework.
• Working Group on Money Supply (1998)
  • Highlighted that the interest rate channel of transmission mechanism was gaining importance
• On the recommendation of this working group, RBI shifted over to a multiple-indicator approach from 1998-9
• Multiple Indicator Approach: Interest rates or rates of return in different markets (money, capital and g-sec), along with such data as on currency, credit extended by banks and financial institutions, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange available on high-frequency basis, are juxtaposed with output data for drawing policy perspectives.
• LAF: Another important feature post reform is the increased use of LAF. It has enabled RBI to modulate short-term liquidity under varied financial market conditions, including large capital inflows from abroad.
• CRR: Reduced
• 1992-93: market borrowing programme of the government was put through the auction process
• SLR was brought down to its statutory minimum of 25 pc by Oct 1997 and 24 pc in 2010
• CRR was brought down from 15 pc of NDTL of banks to 9.5 pc in Nov 1997 which has stabilised at 6 pc for a long time. Not bound by its statutory limit (lower) of 3 pc now.
• Narsimhan Committee (1998) recommended reforms in the money market
  • RBI introduced LAF in 2000 to manage market liquidity on a daily basis and also to transmit interest rate signals to the market. In the post-reform period, LAF, with OMO, has emerged as the dominant instrument of MP, though CRR continued to be used as an additional instrument of policy.
  • Call money market was transformed into a pure inter-bank market by 2005.
  • With the introduction of prudential limits on borrowing and lending by banks in the call money market, the collateralized money market segments developed rapidly
• To absorb the capital inflows in excess of the absorptive capacity of the economy MSS was introduced in 2004. Interestingly, in the face of reversal of capital flows during the recent crisis, unwinding of the sterilised liquidity under the MSS helped to ease liquidity conditions.
• Increased Micro-finance: To strengthen rural finance RBI has focused on SHGs.
• Fiscal Monetary Separation: Automatic monetization of deficit faced out since 1994. Thus it has separated the monetary policy from the fiscal policy.
• Changed interest rate structure: Phased deregulation of lending rates in the credit market. Minimum lending rates had been abolished and lending rates above Rs. 2 lakh were freed. In 2010, the base rate mechanism was adopted. Savings rate was deregulated in 2011
• Higher market orientation for banking: the banking sector got more autonomy and operational flexibility.

 

Challenges in the post-reform period

• A major challenge is the conduct of monetary policy in surplus liquidity conditions.
• Increased capital inflows
  • To deal with this, RBI initiated the Market Stabilization Scheme (MSS) in 2004
  • Under the scheme RBI issues Treasury Bills and dated government securities. The money generated from sale of these bills is kept in a different account held by the government and maintained and operated by RBI. This money is not available for government’s expenditure. Thus, liquidity in the market is mopped.
  • The operationalisation of the MSS to absorb liquidity of more enduring nature has considerably reduced the burden of sterilization on the LAF window.
• Financial stability is an emerging concern
• The ongoing modernisation of the payments system with the introduction of RTGS would have a significant impact on MP.
• The transmission of policy signals to banks’ lending rates has been rather slow. <base rate system introduced to correct this?>
• Central bank independence

Criticisms/Limitations

• In case of high fiscal deficit, monetary expansion has continued to happen
• Limited coverage: The MP covers only commercial banking system and leaves out the non-bank institutions. This limits the effectiveness of MP
• Unorganised money market: Its pretty large and does not come under the control of the RBI. Hence, MP does not affect them.
• Predominance of cash transcation (?): <check out the current situation> In India, still there is huge dominance of cash in total money supply. It is one of the main obstables in the effective implementation of MP. Because MP operates on the bank credit rather than cash.
• Increase volatility: As MP has adoptged changes in accordance to the changes in the external sector as well, it could lead to a high amount of volatility.

Evaluation of the changes in MP and Money Market

• In response to the reforms, over the years the turnover in various market segments increased significantly
• The reforms have also led to improvement in liquidity management operations by the RBI as is evident from the stability in call money rates, which also helped improve integration of various money market segments and thereby effective transmission of policy signals
• The rule based fiscal policy pursued under the FRBM Act, by easing fiscal dominance, contributed to overall improvement in monetary management.
• With the changing framework of monetary policy in India from monetary targeting to an augmented multiple indictors approach, the operating targets and processes have also undergone a change. There has been a shift from quantitative intermediate targets to interest rates, as the development of financial markets enabled transmission of policy signals through the interest rate channel. At the same time, availability of multiple instruments such as CRR, OMO including LAF and MSS has provided necessary flexibility to monetary operations. While monetary policy formulation is a technical process, it has become more consultative and participative with the involvement of market participant, academics and experts. The internal process has also been re-engineered with more technical analysis and market orientation. In order to enhance transparency in communication the focus has been on dissemination of information and analysis to the public through the Governor’s monetary policy statements and also through regular sharing of policy research and macroeconomic and financial information.
• The availability of multiple instruments and their flexible use in the implementation of monetary policy have enabled the RBI to successfully influence the liquidity and interest rate conditions in the economy.

Changes in MP

	Pre-reform	Post-reform
Operating Target	Reserve Money was used as the operating target in the monetary targeting framework until mid-1990s	Multiple Indicator Approach
Monetary Policy Instruments	CRR and SLR was heavily used	Reliance on direct instruments has been reduced and liquidity management in the system is carried out through OMOs in the form of outright purchases of g-secs and daily repo and reverse repo operations under LAF. MSS also introduced.
		Large capital inflows witnessed in recent years have posed a major challenge in the conduct of monetary and exchange rate management.
		Phased deregulation of the interest rates
	High SLR and CRR	Low SLR and CRR

 

Money Market

• RBI operationalises its monetary policy through its operations in government securities, foreign exchange and money markets
• 1985: Money Market reforms begin
• 1992: Introduction of auction system for government securities
• 1996: Primary Dealer System initiated
• 2002: Electronic trading and guaranteed settlement through CCIL for G-Sec starts
• 2006: RBI expressly empowered to regulate money, forex, G-sec and gold related securities markets

 

Role of RBI

	Pre-reform	Post-reform
Developmental Role: the developmental role has increased in view of the changing structure of the economy with a focus on SMEs and financial inclusion	Priority Sector Lending: Introduced from 1974 with public sector banks. Extended to all commercial banks by 1992	In the revised guidelines for PSL the thrust is on ensuring adequate flow of bank credit to those sectors that impact large segments of the population and weaker sections, and to the sectors which are employment intensive such as agriculture and small enterprises
	Lead Bank Scheme	Special Agricultural Credit Plan introduced.
		Kisan Credit Card scheme (1998-99)
		Focus on credit flow to micro, small and  medium enterprises development
		Financial Inclusion
Monetary Policy: the role of RBI has changed from regulating credit and money flow directly to using market mechanisms for achieving policy targets. MP framework has changed to promote financial deregulations and market development. Role as a facilitator rather than as principal actor.	M3 as an intermediary target	Multiple Indicator Approach
	Regulation of foreign exchange	Management of foreign exchange
	Direct credit control	Open Market Operations, MSS, LAF
	Rupee convertability highly managed	Full current ac convertability and some capital account convertability
Banker to the government	Monetary policy was linked to the fiscal policy due to automatic monetisation of the deficit	Delinking of monetary policy from the fiscal policy. From 2006, under FRBM, RBI ceased to participate in the primary market auctions of the central government’s securities.
As regulator of financial sector: As regulator of the financial sector, RBI has faced the challenge of regulating the increasing financial sector in India. Credit flows have increased. RBI had to make sure that financial institutions are regulated in a way to protect the consumers while not impeding economic growth.	Reduction in SLR
Custodian of FOREX reserves		Forex reserves have increased drastically. Need to manage it adequately and avoid inflationary impact
Inflation	Direct instruments were used	Multiple indicators
Financial Stability	Closed economy	Increased FDI and FII has made financial stability one of the policy objectives.
Money Market		Narsimhan Committee (1998) recommended reforms in the money market

 

The term Sustainable growth became prominent after the World Conservation Strategy Presented in 1980 by the International Union for the Conservation of Nature and Natural Resources. Brundland Report(1987) define sustainable development as the a process which seek to meet the needs and aspirations of the present generation without compromising the ability of the future generation to meet their own demands.

Natural resources are limited and thus sustainable development promotes their judicious use and put emphasis on conservation and protection of environment.Global warming and Climate change has brought the issue of Sustainable development in prominence.

Inclusive Growth is economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.Indian Plans after the independence were based on the downward infiltration theory, which failed to bring equitable growth to all the sections of the Indian society.

Approach paper of 11th five year plan talked about “Inclusive and more faster growth” through bridging divides by including those in growth process who were excluded. Divide between above and Below Poverty Line, between those with productive jobs and those who are unemployed or grossly unemployed is at alarming stage.

Liberalization and Privatization after 1990’s have brought the nation out of the hindu growth rate syndrome but the share of growth has not been equitably distributed amongst different sections of Indian Society.

Various dimensions of Inclusive growth are:-

1. economic
2. social
3. financial
4. environmental

Important issues that are needed to be addressed to achieve the inclusive growth are:-

1. Poverty
2. Unemployment
3. Rural Infrastructure
4. Financial Inclusion
5. Balanced regional development
6. Gender equality
7. Human Resource Development (Health, Education, Skill Development)
8. Basic Human Resources like sanitation, drinking water, housing etc.

Government has launched several programs and policies for Inclusive growth such as:-

1. MNREGA
2. Jan Dhan Yojna
3. Atal Pension Yojna
4. Skill India Mission
5. Deen Dayal Upadhyaya Gram Jyoti Yojana
6. Pradhan Mantri Suraksha Bima Yojana
7. Pradhan Mantri Jeevan Jyoti Bima Yojana
8. Sukanya Samridhi Yojana
9. Pradhan Mantri  Garib Kalyan Yojana
10. Jan Aushadhi Yojana (JAY)
11. Nai Manzil Scheme for minority students
12. The Pradhan Mantri Awas Yojana (PMAY) or Housing for all by 2022

 

Food Security & Public Distribution System(PDS)

WHO Defines Food security to exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life.
Food security has three interlinked contents such as :-

1. Availability of food,
2. Access to food and
3. absorption of food.

Food security is a multidimensional concept covering even the  micro level household food security,energy intakes and indicators of malnutrition.

 

Major components of food security are:-

1. Production and Procurement
2. Storage
3. Distribution

Indian Agriculture is rightly called as a gamble with Monsoon, variability in food production and rising population creates food insecurity in the nation and worst effected are the downtrodden section of the society.

While India has seen impressive economic growth in recent years, the country still struggles with widespread poverty and hunger. India’s poor population amounts to more than 300 million people, with almost 30 percent of India’s rural population living in poverty. The good news is, poverty has been on the decline in recent years. According to official government of India estimates, poverty declined from 37.2% in 2004-05 to 29.8% in 2009-10.

Need for Self-Sufficiency:

India suffered two very severe droughts in 1965 and 1966. Food Aid to India was restricted to a monthly basis by USA under the P.L. 480 programme.  The Green Revolution made a significant change in the scene. India achieved self-sufficiency in food grains by the year 1976 through the implementation of the seed- water-fertilizer policy adopted by the Government of India.

Food grain production increased four-fold during 1950-51 and 2001-2002 from 51 million tons to 212 million tones. The country is no longer exposed to real famines. But the regional variation in the success of Green Revolution which was chiefly limited to northern- Western states has lead to the divide in the nation. Evergreen revoloution and Bringing green revolution to eastern India is the need of the hour.

Green revolution was focused on wheat and rice and thus the production of pulses was stagnant.

National Food Security Mission comprising rice, wheat and pulses to increase the production of rice by 10 million tons, wheat by 8 million tons and pulses by 2 million tons by the end of the Eleventh Plan (2011-12). The Mission is being continued during 12th Five Year Plan with new targets of additional production of food grains of 25 million tons of food grains comprising of 10 million tons rice, 8 million tons of wheat, 4 million tons of pulses and 3 million tons of coarse cereals by the end of 12th Five Year Plan.
The National Food Security Mission (NFSM) during the 12th Five Year Plan will have five components

(i) NFSM- Rice;

(ii) NFSM-Wheat;

(iii) NFSM-Pulses,

(iv) NFSM-Coarse cereals and

(v) NFSM-Commercial Crops.

Government through Public Distribution System has tried to counter the problem of food insecurity by providing the food grains through fair price shops.

The central Government through Food Corporation of India has assumed the responsibilities of  procurement,storage,transfer and bulk allocation of food grains to state governments.

The public distribution system (PDS) has played an important role in attaining higher levels of the household food security and completely eliminating the threats of famines from the face of the country, it will be in the fitness of things that its evolution, working and efficacy are examined in some details.

PDS was initiated as a deliberate social policy of the government with the objectives of:

1. i) Providing foodgrains and other essential items to vulnerable sections of the society at resonable (subsidised) prices;
2. ii) to have a moderating influence on the open market prices of cereals, the distribution of which constitutes a fairly big share of the total marketable surplus; and

iii) to attempt socialisation in the matter of distribution of essential commodities.

 

The focus of the Targeted Public Distribution System (TPDS) is on “poor in all areas” and TPDS involves issue of     35 Kg of food grains per family per month for the population Below Poverty Line (BPL) at specially subsidized prices. The TPDS requires the states to Formulate and implement :-

1. foolproof arrangements for identification of poor,
2. Effective delivery of food grains to Fair Price Shops (FPSs)
3. Its distribution in a transparent and accountable manner at the FPS level.

 

 

 

 

Establishment of Various Financial Institutions

1.			Reserve Bank of India			1934
2.			Industrial Finance Corporation of India			1948. Sick financial institution.
3.			ICICI			1955
4.			SBI			1955. Nationalized
5.			Life Insurance Corporation (LIC)			1956
6.			Industrial Development Bank of India (IDBI)			1964
7.			Unit Trust of India (UTI)			1964
8.			HUDCO			1970
9.			General Insurance Corporation (GIC)			1972
10.			NABARD			1982
11.			SEBI (Replaced Controller of Capital Issue)			1988  Functional in 1992
12.			Small Industries Development Bank of India (SIDBI)			1990. Subsidiary of IDBI
13.			IRDA			1999
					Various Acts & their Enactment Years
			1.		Banking Regulation Act			1949
			2.		Industries (Development & Regulation) Act			1951
			3.		MRTP Act			1969
			4.		FERA			1973
			5.		Negotiable Instrument Act			1981
			6.		FEMA			2000
			7.		Competition Act			2002
					FDI Upper Limit in Various Sectors
		1.		Print Media			26 % (Recent)
		2.		Defense Sector			26 % (Recent)
		3.		Private Sector Banking, Radio (FM)			74%
		4.		Insurance			26%
		5.		Telecommunications			74%
		6.		Trading			51%
		7.		Power, Drugs & Pharmaceuticals, Road and highways, Ports			100%
				and harbours, Hotel & Tourism, Advertising, Films, Mass
				Rapid Transport Systems, Pollution Control & Management,
				Special Economic Zones, Petroleum Refining(Private Sector)
				Construction Development, Non Banking Financial Companies.
		8.		Airports			74%
		9.		Domestic Airlines			49%
		10.		Agriculture (including plantation except tea), Atomic Energy,			Not Allowed
				Railways (except Mass Rapid transport system)
		11.		Tea Plantation			100%

 

 

 

 

 

 

 

 

 

Depository Receipt

A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depositary receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s.

 

Global Depository Receipt

A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

 

Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.

 

American Depositary Receipt

An American Depositary Receipt (abbreviated ADR) represents ownership in the shares of a non-U.S. company that trades in U.S. financial markets. The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border & cross-currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

 

Each ADR is issued by a U.S. depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock.

 

Commercial Paper

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

 

Qualified Institutional Placement – QIP

A designation of a securities issue given by the Securities and Exchange Board of India (SEBI) that allows an Indian-listed company to raise capital from its domestic markets without the need to submit any pre-issue filings to market regulators. The SEBI instituted the guidelines for this relatively new Indian financing avenue on May 8, 2006.

 

Minimum Alternate Tax (MAT)

The Indian Income Tax Act contains large number of exemptions from total income. Besides exemptions, there are several deductions permitted from gross total income. Further, depreciation allowable under the Income Tax Act is not the same as required under the Companies Act. The result of such exemptions, deductions, and other incentives under the Income tax Act in the form of liberal rates of depreciation is the emergence of Zero tax companies which inspite of having high book profit are able to reduce their taxable income to nil.

 

The system of minimum alternate tax has accordingly been introduced under which a company is required to pay a minimum tax of 7 % of the book profit in case the tax on the total income computed under the normal provisions of law works out to less than this amount [Sec 115JB].

 

 

 

Negotiated Dealing System

Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments.

 

NDS facilitates electronic submission of bids/application by members for primary issuance of Government Securities by RBI through auction and floatation. NDS also provides interface to Securities Settlement System (SSS) of Public Debt Office, RBI, thereby facilitating settlement of transactions in Government Securities including treasury bills, both outright and repos.

 

National Spot Exchange

Estd. 2008

 

HQ: Mumbai

 

It is a private commodity exchange in India that is a joint venture of Financial Technologies (India) Ltd. (FTIL), Multi Commodity Exchange (MCX) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED).

 

Basel III

India is a member of the Basel Committee on Banking Supervision. It has actively engaged in the development of the Basel III accord. Proposals entail:

 

Require banks to hold more and better quality capital

Require banks to carry more liquid assets

This would limit their leverage and mandate them to build up capital buffers in good times that can be drawn down in periods of stress.

 

Teaser Loans

Loans – usually house loans – that have low, customer friendly and fixed interest rate for initial some time and high interest rate set on a floating rate basis thereafter.

 

The problem with such loans is that there is a greater risk of default as the interest rate increases.

 

National Payments Corporation of India

Incorporated in 2008. To consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems. Promoted by 10 banks.

 

Multidimensional Poverty Index

Developed by Oxford Poverty and Human Development Initiative supported by UNDP

It was featured in HDR-2010 and replaces Human Poverty Index (HPI) which had been included in HDR since 1997

Was created using a technique developed by Sabina Alkire and James Foster

The Alkire-Foster method measures outcomes at the individual level (person or household) against multiple criteria (dimensions and indicators)

The method is flexible and can be used with different dimensions and indicators to create measures specific to different societies and situations

The method can show the incidence, intensity and depth of poverty, as well as inequality among the poor, depending on the type of data available to create the measure

<details in the file in the economy section>

de-mutualised, online exchange dealing in numerous commodities

Indian Commodity Exchange (ICEX) –

Others are:

 

Bharat Diamond Bourse – (Diamond Exchange) – Mumbai

International Pepper Exchange – 1997 – Kochi

These are regulated by the Forward Market Commission setup in 1953

 

Credit Default Swaps

It is a form of insurance against debt default. When an investor buys corporate (or govt) bonds he/she faces the risks of default on part of the issuing agent. The investor can insure its investment in such bonds against default through a third party. The investor pays a premium to the party providing insurance. In the event of default by the bond issuer, the insurer would step and pay the investor. A CDS is just that insurance, which is bought by those who fear default and sold by those who believe it wont.

 

Seigniorage

When the cost of production of a note or coin is less than its face value, seigniorage is said to exist. In some cases, especially for low denomination coins, negative seigniorage can exist. This will mean that the cost of producing the coin is more than its face value.

 

Takeout Finance

Takeout finance is essentially a mechanism designed to enable banks/lenders to avoid asset liability mismatch that may arise out of extending long tenor loans to infrastructure projects. Under this arrangement, banks that extend credit facility to infrastructure projects enter into an arrangement with a financial institution for transferring the loan outstanding in the banks’ books to the books of the financial institution who take out the loan.

 

Subsequent to the announcement in the Union Budget of 2010-11, the government entrusted India Infrastructure Finance Company Ltd (IIFCL) with the task of introducing the Takeout Finance Schemes (TFS)

 

The scheme enhances the availability of long tenor debt finance for infrastructure projects, enables availability of cheaper cost of finance available for the borrower, addresses sectoral/group/single party exposure issues of banks etc. three institutions IIFCL, LIC and IDFC signed MoU to provide takeout finance for infrastructure projects.

 

Impact of Liberalisation

The leading economists of the country differ in their opinion about the socioeconomic and ecological consequences of the policy of liberalisation.Liberalization has led to several positive and negative effects on Indian economy and society. Some of the consequences of liberalisation have been briefly described here:

1. Increase in the Direct Foreign Investment:The policy of liberalisation has resulted in a tremendous increase in the direct foreign investment in the industrial and infrastructural sector (roads and electricity).
2. Enhancement in the Growth of GDP:There is a significant growth in the Gross Domestic Product (GDP). Prior to the liberalisation, the growth rate of GDP was around 4 per cent which rose to around 10 per cent in 2006-07.
3. Reduction in Industrial Recession: The industrial sector of India was passing through a period of recession prior to the policy of liberalisation. The foreign and private investment has checked the recession trend. This happened because of the massive investment in modernisation, expansion, and setting up of many new projects. Industries like automobiles, auto-components, coal-mining, consumer electronics, chemicals, food-processing, metal, petrochemicals, software, sport-goods, and textiles have undergone a growth rate of about 25 per cent. In addition to these, other industries, like crude-oil, construction, fertilisers, and power generation have shown an increase of about 15 per cent.
4. Employment:The heavy investments in industries and infrastructure by the Indian and foreign investors have generated great employment opportunities for the professionals, and skilled and unskilled workers.
5. Development of Infrastructure: Prior to the liberalisation, the infrastructure (roads and electricity) were in a bad shape affecting the industrial growth and economic development of the country adversely. Heavy investment in infrastructure has improved the efficiency of the industrial sector significantly.
6. Rise in Export:There is a phenomenal increase in export after liberalisation. Simultaneously India is importing raw materials, machinery, and finished products. Despite heavy imports, there has been a tangible improvement in the balance of payment.

7-Increase in Regional Disparities:The policy of liberalisation and New Industrial Policy (1991) could not reduce the regional inequalities in economic development. In fact, investments by the Indians and foreign investors have been made in the states of Andhra Pradesh, Gujarat, Haryana, Karnataka, Maharashtra, Rajasthan, Tamil Nadu, and West Bengal. The states like Bihar, Himachal Pradesh, Jammu and Kashmir, Kerala, Meghalaya, Mizoram, Nagaland, Orissa, Tripura, Uttar Pradesh, and Uttarakhand are lagging behind. This has accentuated the regional imbalance and has lead to north south devide. The maximum investment so far has been done in Maharashtra, Gujarat, Andhra Pradesh, West Bengal, and Tamil Nadu. This uneven industrial development has resulted into many socioeconomic and political problems. The Naxal Movement, ULFA, and political turmoil in Jammu and Kashmir may be partly explained as being caused due to the less industrial and economic development of the regions.
8. Damage to Cottage and Small Scale Industries:Liberalisation in a country like India has adversely affected the traditional cottage and small scale industries which are unable to compete with the large-scale industries established by the multinationals. The cottage and small scale industries need protection in the form of subsidies, technology, technical access, funds, and network to export their products, Indian traditional workers such as silk workers of bihar are threatened by the imported synthetic silk.

9.Sophisticated Technology: The latest technology, being sophisticated, replaces labour and thus results in unemployment. This may be counter productive and detrimental to our industrial structure.

10. Comparatively Little Direct Investment: The foreign investors are more inclined to portfolio investment rather than direct investment. The former may be withdrawn at will at the slightest of hurdles giving a jolt to the economy of the country  and it may create instability to Indian economy.

    11. Investment in Selected Industries: Most of the foreign investment comes to white-goods and not to wage-good sector. Hence, it may be fruitful in improving the high priority sector and bringing in the latest technology. This will be counter productive. India is blessed with demographic dividend and the selective investment has failed to harness it.

    12. Economic and Political Freedoms are at Stake: The over-enthusiasm of liberalisation to attract more investors and foreign exchange might lead to gradual handling over of the whole economy to the multinationals. This will affect adversely our economic and political freedom.

11. Inflation:Since the new industrial policy and liberalisations, the rate of inflation is continuously increasing. A section of the society is becoming more rich and adopting the lifestyle of consumerism. As opposed to this, the absolute number below the poverty line is also increasing. The gulf between the rich and the poor may be the cause of numerous social problems resulting in social tension.

Impacts of Privatization

Privatization in generic terms refers to the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity with the aim of profit maximization.
ADVANTAGES OF PRIVATIZATION
Privatization indeed is beneficial for the growth and sustainability of the state-owned enterprises.
• State owned enterprises usually are outdone by the private enterprises competitively. When compared the latter show better results in terms of revenues and efficiency and productivity. Hence, privatization can provide the necessary impetus to the underperforming PSUs .
• Privatization brings about radical structural changes providing momentum in the competitive sectors .
• Privatization leads to adoption of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.
• Privatization has a positive impact on the financial health of the sector which was previously state dominated by way of reducing the deficits and debts .
• The net transfer to the State owned Enterprises is lowered through privatization .
• Helps in escalating the performance benchmarks of the industry in general .
• Can initially have an undesirable impact on the employees but gradually in the long term, shall prove beneficial for the growth and prosperity of the employees .
• Privatized enterprises provide better and prompt services to the customers and help in improving the overall infrastructure of the country.

DISADVANTAGES OF PRIVATIZATION
Privatization in spite of the numerous benefits it provides to the state owned enterprises, there is the other side to it as well. Here are the prominent disadvantages of privatization:
• Private sector focuses more on profit maximization and less on social objectives unlike public sector that initiates socially viable adjustments in case of emergencies and criticalities .
• There is lack of transparency in private sector and stakeholders do not get the complete information about the functionality of the enterprise .
• Privatization has provided the unnecessary support to the corruption and illegitimate ways of accomplishments of licenses and business deals
ADVANTAGES AND DISADVANTAGES OF PRIVATISATION IN INDIA

• Privatization loses the mission with which the enterprise was established and profit maximization agenda encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation etc..
  • Privatization results in high employee turnover and a lot of investment is required to train the lesser-qualified staff and even making the existing manpower of PSU abreast with the latest business practices .
  • There can be a conflict of interest amongst stakeholders and the management of the buyer private company and initial resistance to change can hamper the performance of the enterprise .
  • Privatization escalates price inflation in general as privatized enterprises do not enjoy government subsidies after the deal and the burden of this inflation effects common man

 

 

Impacts of Globalisation:-

Definition of Globalization :- Its a process(not an outcome) characterized by increasing global Interconnections by gradual removal of barriers to trade and investment between nation and higher economic efficiency through competitiveness.

Various economic, political, social and cultural effects of globalization are as follows:-

Economic:-

• Breaking down of national economic barriers
• International spread of Trade, Financial and productive activities
• Growing power of transnational cooperation and International financial Institutions(WTO, IMF)Through the process of:-

1- Liberalization- relaxation of restrictions, reduction in role of state in economic activities,decline in role of govt in key industries, social and infrastructural sector.

2- Privatization- Public offering of shares and private sale of shares, entry of private sector in public sector and sale of govt enterprises.

3- FDI

4- International regulatory bodies(WTO,IMF)

5- MNC’s

6- Infrastructural development

7- Expansion of information and communication technology and birth of information age.

8- Outsourcing of services- ie BPO and Call Centres.

9- Trade related intellectual property rights(TRIPS)- product based patent rather than process based.

Social effects:-

• Withdrawal of National govt from social sectors ie declining share of govt in public spending, reducing social benefits for worker(social dumping,pension cuts,subsidies reduction)
• Labor  reforms and deteriorating Labor welfare:-
  • Labour Market deregulation:-
    • Minimum wage fixing
    • Employment security
    • Modifying tax regulation
    • Relaxed standards of security
  • Increased Mechanization demands skilled labour and thus loss of job for unskilled labour
  • Loss of jobs for traditional workers for example bihar silk workers due to imported Chinese- Korean silk
• Feminism of Labour ie increased women participation specially in soft industries
• Trickle down theory of poverty reduction has limited success and in agricultural nations poverty has infect increased.
• Unsustainable development practices such as:- excessive use of fertilizers, irrigation, fish trawling by mnc’s(Protein flight ),Exploitation of natural resources by MNC’s.
• Migration and urbanization have lead to problem of slums
• Commercialization of indigenous knowledge:- patenting
• Rising inequality in wealth concentration

 

Cultural:-

• Increased pace of cultural penetration
• Globalization of culture
• Development of hybrid culture
• Resurgence of cultural nationalism ie shivsena opposing valentine day

 

Political:-

• Globalization of National Policies- Influenced by International agencies
• Reducing economic role of govt
• Political lobbying

 

Positive effects of Globalization

• Increased competition
• Employment generation
• Investment and capital flow
• Foreign trade
• Spread of technical know how
• Spread of education
• Legal and ethical effects
• Improved status of women in the society
• Urbanization
• Agriculture:- greater efficiency,productivity, use of HYV seeds, Future contracts and cooperative farming
• Higher standard of living

 

 

Financial Stablity

 

Reasons for financial instability

• Increased non-official capital flows across countries through banks and international capital markets.
• Hasty and non-strategic liberalisation
• Deregulation of financial sector
• Opening up of the capital account in many countries

Intiatives by RBI

• Had set up the Committee on Financial Sector Assessment in 2009
• Will setup a dedicated interdisciplinary Financial Stability Unit with the remit to assess the health of the financial system with a focus on identify and analysing potential risks to systemic stability and carrying out stress tests on an ongoing basis
• Financial Stability Reports are being released

Financial Stability Report

• Three FSRs released till June 2011
• First was released in March 2010
• As per the three FSRs released so far, there is no serious threat to the Indian financial system
• FSR 2011
  • states that the Indian financial system remains stable in the face of some fragilities being observed in the global macro-financial environment.
  • Banking sector continues to be stable
  • Banking stability indicator confirms the overall improvement in the stability of banking sector
  • Toxity index/vulnerability index: the probability of a bank causing distress to another bank or being affected by the distress of another bank

FS in India

• The relatively crisis free environment in the Indian financial system can be attributed to the strength of state home grown policies pursued with caution and prudence.
• In the late 1990s, FS was incorporated as a specific objective of the RBI’s policy after the Asian Financial crisis.
• Present weaknesses in the financial system
  • Greater access of domestic corporate to ECBs has resulted in increased currency mismatches
  • Increased reliance on market borrowings could adversely affect the liquidity position of banks
  • There remains gaps in the regulatory framework for NBFCs

 

 

Money Supply

Money supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts.

• Money Supply can be estimated as narrow or broad money.
• There are four measures of money supply in India which are denoted by M₁, M₂, M₃and M₄. This classification was introduced by the Reserve Bank of India (RBI) in April 1977. Prior to this till March 1968, the RBI published only one measure of the money supply, M or defined as currency and demand deposits with the public. This was in keeping with the traditional and Keynesian views of the narrow measure of the money supply.
• M1 (Narrow Money) consists of:

(i) Currency with the public which includes notes and coins of all denominations in circulation excluding cash on hand with banks:

(ii) Demand deposits with commercial and cooperative banks, excluding inter-bank deposits; and

(iii) ‘Other deposits’ with RBI which include current deposits of foreign central banks, financial institutions and quasi-financial institutions such as IDBI, IFCI, etc., other than of banks, IMF, IBRD, etc. The RBI characterizes as narrow money.

• M₂. which consists of M₁plus post office savings bank deposits. Since savings bank deposits of commercial and cooperative banks are included in the money supply, it is essential to include post office savings bank deposits. The majority of people in rural and urban India have preference for post office deposits from the safety viewpoint than bank deposits.
• M₃. (Broad Money) which consists of M₁, plus time deposits with commercial and cooperative banks, excluding interbank time deposits. The RBI calls M₃as broad money.
• M₄.which consists of M₃plus total post office deposits comprising time deposits and demand deposits as well. This is the broadest measure of money supply.
• High powered money – The total liability of the monetary authority of the country, RBI, is called the monetary base or high powered money. It consists of currency ( notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI. If a memeber of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. Similarly, the deposits are also refundable by RBI on demand from deposit holders. These items are claims which the general public, government or banks have on RBI and are considered to be the liability of RBI.
• RBI acquires assets against these liabilities. The process can be understood easily if we consider a simple stylised example. Suppose RBI purchases gold or dollars worth Rs. 5. It pays for thr gold or foreign exchange by issuing currency to the seller. The currency in circulation in the economy thus goes up by Rs. 5, an item that shows up on the liabilityside of RBI’s Balance sheet. The value of the acquired asset, also equal to Rs. 5, is entered under the appropriate head on the Assets side. Similarly, the RBI acquires debt bonds or securities issued by the government and pays the government by issuing currency. It issues loans to commercial banks in a similar fashion.

	Commissions/Committees & Their Purpose
Arjun Sen Gupta			Public Sector Enterprise Autonomy
Committee
Rangarajan Committee			Disinvestment of PSUs & Balance of Payments.
Malhotra Committee			Insurance Sector & its regulation. Follow up led to setting up of IRDA.
Madhukar Committee			Gold exchange traded fund implementation.
L.C. Gupta Committee			Derivatives in India Model
Naresh Chandra Committee			Corporate Audit & Governance
JJ Irani Committee			Company Law
B. Bhattacharya Committee			Committee on pension reforms
Rakesh Mohan Committee			Small saving & Administered interest rates
Vijay Kelkar Committee			FRBM  (fiscal responsibility & budget management) Act implementation
S.P. Gupta Committee			Generation of Employment opportunities in the 10th plan.
Raghvan Committee			Replacement of MRTP act by competition act.
Eradi Panel			Industrial Insolvency.
M.S. Verma			Restructuring weak banks
Lakdawala Committee			Estimating Poverty line in India
Montek Singh Ahuluwalia			Power Sector reforms
Rakesh Mohan Committee			Development of Infrastructure in India
Abid Hussain Committee			Small Scale Sector
Jha Committee			MODVAT
Vasudev Committee			NBFC
Omkar Goswami Committe			Industrial Sickness
G.V. Ramakrishna			Disinvestment Commission
Arvind Virmani			Import Tariff Reform
Vaghul Committee			Money Markets India reforms

 

FERA		FEMA
Violation of FERA was a criminal offence.	Violation of FEMA is a civil wrong.
Offences under FERA were not compoundable.	Offences under FEMA are compoundable.
Penalty was 5 times the amount involved.	Penalty is 3 times the sum involved.
Citizenship was a criteria to determine residential	Stay in India for more than 182 days is the
status of a person under FERA.	criteria to decide residential status.
There was only one Appellate Authority namely	There are two appellate authorities namely
Foreign Exchange Regulation Appellate Board.	1.	Special Director (Appeals) and
	2.	Appellate Tribunal for Foreign Exchange.

 

 

 

 

 

Fiscal Responsibility & Budget Management (FRBM) Act 2003

 

• The revenue deficit as a ratio of GDP should be brought down by 0.5 per cent every year and eliminated by 2007-08;

 

• The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every year and brought down to 3 per cent by 2007-08;

 

• The total liabilities of the Union Government should not rise by more than 9 per cent a year;

 

• The Union Government shall not give guarantee to loans raised by PSUs and State governments for more than 0.5 per cent of GDP in the aggregate;

 

Population Policy 2000

 

The immediate objective of the NPP 2000 is to address the unmet needs for contraception, health care infrastructure, and health personnel, and to provide integrated service delivery forbasic reproductive and child health care. To bring the TFR to replacement levels by 2010. Stable population by 2045 at a level consistent with sustainable economic growth.

National Socio-Demographic Goals for 2010

 

1. Address the unmet needs for basic reproductive and child health services, supplies and infrastructure.

 

2. Make school education up to age 14 free and compulsory, and reduce drop outs at primary and secondary school levels to below 20 percent for both boys and girls.

 

3. Reduce infant mortality rate to below 30 per 1000 live births.
4. Reduce maternal mortality ratio to below 100 per 100,000 live births.

 

5. Achieve universal immunization of children against all vaccine preventable diseases.

 

6. Promote delayed marriage for girls, not earlier than age 18 and preferably after 20 years of age.
7. Achieve 80 percent institutional deliveries and 100 percent deliveries by trained persons.

 

8. Achieve universal access to information/counseling, and services for fertility regulation and contraception with a wide basket of choices.

 

9. Achieve 100 per cent registration of births, deaths, marriage and pregnancy.

 

10. Contain the spread of Acquired Immunodeficiency Syndrome (AIDS), and promote greater integration between the management of reproductive tract infections (RTI) and sexually transmitted infections (STI) and the National AIDS Control Organisation.

 

11. Prevent and control communicable diseases.

 

12. Integrate Indian Systems of Medicine (ISM) in the provision of reproductive and child health services, and in reaching out to households.

 

13. Promote vigorously the small family norm to achieve replacement levels of TFR.

 

14. Bring about convergence in implementation of related social sector programs so that family welfare becomes a people centred programme.

	Selected Terms
Revenue Deficit	Difference between revenue expenditure & revenue receipts
Budget Deficit	Difference between total expenditure & revenue receipts
Fiscal Deficit	Budget deficit plus non debt creating capital receipts
Primary Deficit	Fiscal deficit – Interest Payments.
FIPB	Foreign Investment Promotion Council
MIGA	Multilateral Investment Guarantee Agency

 

 

				Components of Money Supply
M1	Consists of currency with the public (ie notes & coins in circulation minus cash with the banks)
	plus demand deposits with the bank (deposits which can be withdrawn without notice) plus
	other deposits with RBI (usually negligible). Also called narrow money
M2	M1	+ saving deposits + Certificate of Deposits (CDs) + term deposits maturing within a year.
M3	M2	+ term deposits with maturity more than a year + term borrowing of banking system. Also
	known as broad money.
L1	M3	+ all Deposits with the Post Office Savings Banks (excluding National Savings Certificates)
L2	L1 + Term Deposits with Term Lending Institutions and Refinancing Institutions (FIs) + Term
	Borrowing by FIs+ Certificates of Deposit issued by FIs; and
L3	L2 + Public Deposits of Non-Banking Financial Companies