1.Public Fund

2.MacroEconomics

3.RBI

4.Government Securities Market

5.Banking

6.Fin

7.Economy Concepts

8.Post Independent

ARISE, AWAKE AND STOP NOT TILL THE GOAL IS REACHED...

Office of the Economic Adviser

attached office to Department of Industrial Policy & Promotion (DIPP) of Ministry of Commerce & Industry
Its functions are

Economic policy inputs on industrial development and Analysis of trends of industrial production and growth
Rendering advice relating to formulation of Industrial Policy, Foreign Trade Policy
Examination of multilateral and bilateral issues and processing Policy Notes
Planning and Gender Budgeting on behalf of DIPP
Compiling and releasing monthly WPI Wholesale Price Indices
Compiling and releasing monthly ICIP Index of Core Industries Production
Developing other Indices on experimental basis, e.g. select business service price indices
Supervising as a ‘source agency’, compilation of monthly production statistics for identified industrial items, their validation, and onward transmission for computation of the monthly Index of Industrial Production (IIP) by Central Statistics Office.
Monthly Statistical compilation of macro indicators (secondary information)

Chief Economic Adviser (CEA) is the economic advisor to GOI, is ex-officio cadre controlling authority of Indian Economic Service. He is under the direct charge of Minister of Finance.

Economic Survey is prepared by the Economic Division of Department of Economic Affairs(DEA) in Finance Ministry under overall guidance of the Chief Economic Adviser.

Department of Economic Affairs (DEA) is also responsible for preparation and presentation of Union Budget to the Parliament.

Economic Advisory Council to Prime Minister (EAC-PM)

a non-constitutional, non-permanent and independent body constituted to give economic advice to PM.
serves to highlight key economic issues facing the country to GOI from a neutral viewpoint.
advises PM on a whole host of economic issues like inflation, micro-finance, industrial output, etc.
Since the term of the EAC-PM is parallel to that of PM, hence with the resignation of PM the EAC-PM also needs to resign.

Central Statistics Office —

co-ordinates the statistical activities and evolves statistical standards.
headed by a Director General assisted by 5 Additional Director Generals.
CSO has 5 Divisions of which the NAD (National Accounts Division) is responsible for the preparation of national accounts, which includes Gross Domestic Product, Government and Private Final Consumption Expenditure, Fixed Capital Formation and other macro-economic aggregates.

Gross FCF Fixed Capital Formation : Refers to the net increase in physical assets (investment minus disposals) within the measurement period. It does NOT account for the consumption (depreciation) of fixed capital and also does NOT include land purchases. It is a component of expenditure approach to calculating GDP.

Q. Office of the Economic Adviser works under

NITI AAYOG
Ministry of Finance
Ministry of Commerce and Industry (Ministry of Commerce & Industry Department of Industrial Policy & Promotion (DIPP))
Ministry of Corporate Affairs

Stock exchange speculators are classified into four categories such as

Bull,
Bear,
Stag, and
Lame Duck.

https://accountlearning.com/speculators-kinds-types-of-speculative-transactions/

Financial Administration : The following aspects emerge as the core areas of financial administration.

i) Financial planning
ii) Budgeting
iii) Resource mobilisation
iv) Investment decisions
v) Expenditure control
vi) Accounting, Reporting & Auditing

1. Public Funds in India

The Constitution of India has provision under Art. 112 to lay down Annual Financial Statement in Parliament before commencement of every new fiscal year , aka UNION BUDGET. It has three sets of data.

Actual Data of preceding year (for Year 2017-18 , actual data of 2015-16) — A
Provisional Data of current year (for Year 2017-18 , actual data of 2016-17) — PE
Budgetary estimates for the year for which budget is being presented — BE

Department of Economic Affairs (DEA) inter alia monitors current economic trends and advises the Government on all matters having bearing on internal and external aspects of economic management including, prices, credit, fiscal and monetary policy and investment regulations. All the external, financial and technical assistance received by India, except through specialized international organizations like FAO, ILO, UNIDO and except under international bilateral specific agreement in the field of science and technology, culture and education are also monitored by this department.

The department is responsible for preparation and presentation of Union Budget to the Parliament.
External financial assistance received by India can be monitored by this department.
The department also deals with policies and programmes relating to designs/security features of bank notes and coins.

Receipts = Revenue (i.e. Earnings from tax incomes, non-tax incomes , foreign grants which do not increase financial liabilities of govt.)

Non-Revenue (i.e. Not earnings but money raised by Borrowings which increase financial liabilities of govt.)

Revenue Receipts = Tax Revenue (Direct and Indirect collections) + Non-Tax Revenue (Profits, Dividends, Interests, Fiscal services, General services, fees , Grants, Penalties)

Note : In case of Loan Recovery, Capital received by GOI is known as Capital receipts but Interest received on it will be considered as Revenue receipts.

Revenue Expenditure= incurred in the ordinary conduct and administration of business, i.e. rent, carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.

Revenue Deficit = Balance of Total Revenue Receipts and Total Revenue Expenditures is Negative. (in Quantitative form and % of GDP)

Effective Revenue Deficit = The Revenue Deficit excluding the revenue expenditures of GOI which were done in form of GoCA(Grants for creation of Capital assets)

GoCA includes Grants given to States and UTs for implementation of Centrally sponsored schemes (PMGSY, AIBP, JNNURM etc.)

Capital Deficit = Capital Receipts (All non-revenue receipts of GOI like Loan Recovery, Internal and external Borrowings, Other receipts like PF, Postal deposits, Govt. Bonds) - Capital Expenditures (Loans disbursed internally or externally, Loans repayment, Plan expenditures, expenditures on Defence, General services like water, Railways, education, Rural development)
THERE IS NO SUCH terminology name like CAPITAL DEFICIT in PUBLIC FINANCE.

Fiscal Deficit = Balance of Total Receipts (Revenue + Capital Receipts) and Total Expenditures (Revenue + Capital Expenditures)

It can be shown as in Quantitative form and % of GDP.

FISCAL DEFICIT occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings.

Note : Fiscal deficit as a % of GDP had increased rapidly in recession years (post 2008) due the fiscal stimulus( An increase in public spending or a reduction in the level of taxation ) given by the government and then declined due to the fiscal consolidation measures (aimed at reducing government deficits and debt accumulation ) adopted.

Primary Deficit : Fiscal deficit excluding Interest Liabilities for that year. or Primary Deficit = Fiscal Deficit – Interest Payments

The total borrowing requirement of the government includes the interest commitments on accumulated debts.

Monetised Deficit : refers to that part of fiscal deficit which is provided for (financed) by the RBI to GOI for that year.

Current account deficit : Net revenue on exports minus payments for imports. Total exports is a country's income - It is what the country is selling to the world. Total imports is a country's expenditure.

Trade deficit : Largest component of the current account deficit and refers to a nation's balance of trade, or the relationship between the goods and services its imports and those it exports.

Twin deficits : A situation where an economy is running both a Fiscal Deficit and Current Account Deficit of the balance of payments.

If borrowings and other liabilities are added to budget deficit, we get Fiscal deficits. Hence Budget Deficit does NOT include Borrowings but Fiscal Deficits include it.

Budget deficit : can be encountered by Govt. by promoting economic growth through fiscal policies such as

Increasing direct taxes
Reducing government spending
Printing additional currency with the risk of devaluing the nation’s currency (to cover payments on debts owed by issuing securities including Treasury bills and bonds)
Reducing regulation to boost investments
Lowering corporate taxes ( to improve business confidence and increase treasury inflows from taxes )

Deficit Financing : When govt. and a firm speculates that total expenditures could exceed the total receipts, It starts using ways to decrease the burden of Fiscal deficit in following ways.

External Aid with soft interest and External Grants (India did not get EG since 1975 of first Pokharan testing)
External Borrowings is preferred over Internal Borrowings because

It brings in foreign currency that is useful to bridge Balance of payments apart from its utility in developmental expenditures.
It does not cause crowding out effect in the domestic market and is favourable to the domestic borrowers.

Internal Borrowings (but it will have same impact as expenditures have hence not preferred)
Printing Currency but it have damaging effects on the economy

It increases Inflation proportionally.
It brings in pressure and obligation on govt. to upward revision of salaries of its employees.

Note —> Inflow of FDI in India actually bridges the CAD current account deficit in the short-run BUT In the long-run, however, India has to pay more due to an outgo of both the principle and earned returns on investment in the long run.

Crowding out happens due to shortage of funds and a hike in interest rates following the shortage. This usually happens when government borrows in large quantities from markets. But, increased foreign exchange influx would actually help reduce crowding out by increasing the fund flow and lowering the interest rates.

Note : Main difference between revenue receipts and capital receipts is that in the case of revenue receipts, government is under no future obligation to return the amount, i.e., they are non-redeemable. But In case of capital receipts which are borrowings, government is under obligation to return the amount along with Interest. Capital receipts may be debt creating or non-debt creating.

Debt creating receipts are — Net borrowing by government at home, loans received from foreign governments, borrowing from RBI.

Non-debt capital receipts are — Recovery of loans, proceeds from sale of public enterprises (i.e., disinvestment), etc. These do not give rise to debt.

Receipts	Revenue (i.e Earnings from tax incomes, non-tax incomes , foreign grants which do not increase financial liabilities of govt.)	+	Non-Revenue (i.e. Not earnings but money raised by Borrowings which increase financial liabilities of govt.)
Revenue Receipts	Tax Revenue (Direct and Indirect collections)	+	Non-Tax Revenue (Profits, Dividends, Interests, Fiscal services,General services, fees , Grants, Penalties)
Capital Deficit	Capital Receipts (All non-revenue receipts of GOI — Loan Recovery, Internal and external Borrowings, Other receipts like PF, Postal deposits, Govt. Bonds)	-	Capital Expenditures (Loans disbursed internally or externally, Loans repayment, Plan expenditures, expenditures on Defence, General services like water, Railways, education, Rural development)

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Current Account : records exports and imports in goods and services and transfer payments.

Trade in services denoted as invisible trade includes both

Factor income (payment for inputs-investment income, that is, the interest, profits and dividends on our assets abroad minus the income foreigners earn on assets they own in India)
Non-factor income (shipping, banking, insurance, tourism, software services, etc.).

Transfer payments are receipts which residents of a country receive ‘for free’, without having to make payments in return. It consist of remittances, gifts and grants that could be official or private.

Exchange rate of a currency basically depends on the supply and demand of the currency.

BoP(balance of payments)

consists of current account and capital account
Current account includes trade, invisibles(services), remittances etc.
Capital account includes borrowings and long-term investments/debts of residents/foreigners with India.

Ways to neutralise BoP deficit

Capital inflows like FDI, FII help bridge the trade deficit and neutralise BoP.
If imports are high, it causes trade deficit and tends to cause a BoP deficit hence restrict unnecessary imports.
When currency appreciates, our exports become costlier to world and thus uncompetitive hence Devaluation of domestic currency
Export promotion would reduce trade deficit
Borrowing from abroad would increase capital account deficit and further inflate BoP deficit. Hence restrict on borrowings

To be Noted Down

A country could engage in official reserve transactions, running down its reserves of foreign exchange, in the case of a deficit by selling foreign currency in the foreign exchange market. The decrease in official reserves is called overall balance of payments deficit.
A country is said to be in balance of payments equilibrium when the sum of its current account and its non-reserve capital account equals zero. It means current account balance is financed entirely by international lending without reserve movements.
Official reserve transactions are more relevant under a regime of pegged exchange rates (fixing of currency with that of major economies) than when exchange rates are floating (exchange rate based on market mechanism ).

Autonomous transactions : International economic transactions which are made independently of the state of the BoP (for instance due to profit motive). These items are called ‘above the line’ items in the BoP. The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater (less) than autonomous payments.

Accommodating transactions (termed ‘below the line’ items), on the other hand, are determined by the net consequences of the autonomous items, that is, whether the BoP is in surplus or deficit. The official reserve transactions are seen as the accommodating item in the BoP (all others being autonomous).

Errors and Omissions constitute the third element in the BoP (apart from the current and capital accounts) which is the ‘balancing item’ reflecting our inability to record all international transactions accurately.

FRBM Act Fiscal Responsibility and Budget Management Act, 2003

Enacted by Parliament in 2003 to progressively cut fiscal deficit to 3% levels by 2008.
An Act of the Parliament of India to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget.
FRBM Act put limits on the fiscal and revenue deficit of the country by setting targets for both. These targets were to be monitored through the year by setting mid-year targets.
5 members N.K. Singh panel was set up by Finance ministry to review the Act. It provided Escape Clauses with deviation upto 0.5% of GDP.

Controller General of Accounts (CGoA) is:

The Principal Advisor on Accounting matters to the Union Government
Responsible for establishing and managing a technically sound Management Accounting System
Responsible for preparation and submission of the accounts of the Union Government
Responsible for exchequer control and internal audits

Zero-based budgeting

A method of budgeting in which all expenses for each new period must be justified. Under zero-based budgeting, no reference was made or considered of previous years. The budget request has to be evaluated thoroughly with its commencement from the zero-base.
In 1986, the Indian government adopted ZBB as a technique for determining expenditure budget. Since seventh five-year plan, the ZBB system was promoted and later not much progress happened in this area.

ZBB works on the principle that every year, the projected expenditure for each project/programme must be start from zero. It means all budget requests should be considered freshly for every year with cost-benefit analysis. ZBB never uses the previous year’s amounts so as to eliminate the past mistakes. The features are

I. Each item of expenditure is challenged in pre-budget review.

II. No minimum level of expenditure is allowed to be taken as given.

The ZBB concept became more popular only in 1970s. In 1960s, ZBB was formally initiated in the Department of Agriculture of the USA. The ZBB as practiced today was developed at Texas Instruments Inc. during 1969 by Peter Pyhrr. The process was first adopted in Georgia.

Voted and Charged Expenditures In India

After the budget is presented to the house (parliament), the government needs its approval to draw even one rupee from the Consolidated Fund of India. This approval comes by voting, which means that the Budget proposals must be passed by the Parliament. However, there are some charges which essentially have to be paid by the Government and for those charges no voting takes place.
Thus, the expenditure embodied in the Budget Documents is of two types:

The sums required for charged expenditures or non-votable.
The sums required for other expenditures as mentioned in the Budget Documents. These are votable.

Charged Expenditures or Non-Votable Charges : No voting takes place for the amount involved in these expenditures for their withdrawal from Consolidated Fund of India. Though discussion can take place in any house of the parliament. The demand for grant for these charges is also made on recommendation of the president (Article 113). The charged expenditures are:

Salary and Allowances of President, Speaker/Deputy speaker of Lok Sabha, Chairman/Deputy chairman of Rajya Sabha, Salaries and Allowances of Supreme Court judges, Pensions of Supreme Court as well as High Court Judges, Salaries and Allowances of CAG, Lok Pal
Debt charges of Government of India.

Votable / Voted Expenditures : The Votable part is actual Budget. The expenditures in the Budget are in the forms of Demand for Grants. These Budget also presents ways and means – how the government would be recovering the expenditures. Generally, the demands for Grants of each and every ministry are made separately in the Budget documents and each demand for grant has the provisions under its different heads.

NOTE :

Attorney General or Solicitor General is NOT a charged expenditure upon Consolidated Fund of India. They are paid a fee which comes from the budgetary allocations of Department of Legal Affairs, which itself though comes from consolidated fund but is a votable charge.
Further, while salary of High Court Judges is charged from Consolidated Fund of States, their pension comes from Consolidated Fund of India in form of Charged expenditure.

Gender Budgeting :

Allocation of funds and responsibilities on basis of gender.
It started in India with Union Budget of 2006-07 with outlay of Rs. 28723 Cr dedicated to Cause of the Women and created gender budgeting cells in 32 Ministries and Depts.
With the objective of facilitating the integration of
As per the guidelines “The Gender Budget Cell should comprise a cohesive group of senior/middle level officers from the Plan, Policy, Coordination, Budget and Accounts Division of the Ministry concerned.
This group should be headed by an officer not below the rank of Joint Secretary.
The functions and working of the GRB may be reviewed at least once a quarter at the level of Secretary/Additional Secretary of the Department.

Since 2005-06, the Expenditure Division of the Ministry of Finance has been issuing a note on Gender Budgeting as a part of the Budget Circular every year.

Outcome Budget is presented by different depts of ministries as Micro Economic level.

Performance Budget is presented by Finance Ministry as Macro Economic level.

CUT MOTION for BUDGET : India has mixed provisions of voting on the budget after discussion in both the houses. Parliament being the authority to check the expenditure of the government, it may not approve all demands.

Different provisions by which discussion is started to reduce grants, demands etc. are follows.

Token Cut aims that the amount of the Demand be reduced by Rs. 100” in order to ventilate a specific grievance which is within the sphere of the responsibility of the Government of India.
Economy Cut is moved so that the amount of the demand be reduced by a specified amount.
Disapproval of Policy Cut is moved so that the amount of the demand be reduced to Re.1.
Guillotine : Lok Sabha Speaker puts all the outstanding demands made by the Budget Directly Vote in the House. Hence Allowing No discussion on Budget by the House

Signing and ratification of the Extradition Treaty between India and Lithuania. It provide a legal framework for seeking extradition of terrorists, economic offenders and other criminals from and to Lithuania.

LTCG and STCG (Long and Short term Capital Gain) Taxes :

Capital Gain :

Any profit or gain that arises from the sale of a ‘capital asset’.
It is charged to tax in the year in which the transfer of the capital asset takes place.
Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be applicable.
The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will.

Capital Asset : building, land, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery.

However followings are NOT considered capital assets:

Any stock, consumables or raw material held for the purpose of business or profession.
Personal goods such as clothes and furniture held for personal use.
Agricultural land in rural India.
6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government.
Special bearer bonds (1991).
Gold deposit bond issued under the gold deposit scheme (1999).

Rural area (from AY 2014-15) – outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more.

Short-term capital asset :

Held for not more than 36 months or less in the case of jewellery, debt oriented mutual funds etc.
Held for not more than 24 months or less in the case of immovable property being land, building, and house property.
Held for 12 months or less if assets are :

Equity or preference shares in a company listed on a recognized stock exchange in India
Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
Units of UTI, whether quoted or not
Units of equity oriented mutual fund, whether quoted or not
Zero coupon bonds, whether quoted or not

Equity and Debt Mutual Funds

Funds that invest heavily in equities, usually exceeding 65% of their total portfolio, is called an equity fund.

Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset.

STT(Securities Transaction Tax ) is direct tax levied on securities sold in the market.

MAT Minimum alternate tax : aim is to bring Zero Tax Companies” into tax realm who do not pay any tax. It is ruled by provisions enclosed in secction 115JB of Income Tax Act, 1961. MAT is valid to all companies comprising foreign companies.

As per meaning of MAT, tax obligation of company will be higher if income tax of company calculated as per normal provision of income tax and tax calculated at 18.5% on book profit plus surcharge and cess.

Gross fixed capital formation (GFCF)

also called "investment" i.e. it is essentially net investment , component of the Expenditure method of calculating GDP.
It is defined as the acquisition of produced assets (including purchases of second-hand assets), including the production of such assets by producers for their own use, minus disposals.

GCF Gross capital formation,

is equivalent to investment made.
It was earlier called gross domestic investment.
The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS).
Some part of this GDS will be re-invested back, and that is called gross capital formation.
Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation Because how much in invested back will depend on many other factors.

In Budget of 2018-19

A long term capital gain tax at the rate of 10% on the gains to the tune of Rs. 1 lakh and above.
The tax liability will accrue only when the income from sale of equity/ equity mutual funds is over Rs. one lakh.

For instance, if you buy Rs. 5 lakh worth shares on April 1 and sell the shares on April 2 the year after for Rs. 5.8 lakh then no tax liability will occur on account of capital gains because the profit is Rs. 80,000 only and not Rs. one lakh or higher. However, if you sell the shares for Rs. 6,01,000 then you will have to pay tax at the rate of 10% on the profit of Rs. 1.01 lakh.
In case the shares are sold for a price which is over Rs. one lakh higher than the cost price but in less than one year of the purchase, then also NO tax liability will accrue on account of the capital gains since the long term capital gain (LTCG) tax accrues only when shares are sold after one year. however STCG tax will be levied.
When shares are sold in less than one year, the tax liability will be as per short term capital gains rules. The existing rate of short term capital gains is 15%.
No indexation is allowed in case of sale of equity shares.This means the rate at which inflation rises, the cost is also increased so as to calculate the profit. By giving the indexation benefit, the tax assessee get the benefit of lower tax liability. Depriving the assessee of this benefit means that their tax liability will rise further.
In case of capital gains on jewellery and real estate, the tax department allows indexation on account of inflation. But this will not be allowed in case of share sale.

2.MACRO

Economic Agents

The individuals or institutions which take economic decisions.
They can be consumers who decide what and how much to consume.
They may be producers of goods and services who decide what and how much to produce.
They may be entities like the government, corporation, banks which also take different economic decisions like how much to spend, what interest rate to charge on the credits, how much to tax, etc.

Difference between microeconomics and macroeconomics : in microeconomics we study the several factors and entities of a sector by keeping it not associated from the other sectors of economy and keeping the rest of economy unchangeable.

On other hand macroeconomics deals with interlinkages of all the sectors of an economy and also studies the all actors of each sector of economy.

Macroeconomics includes firms, government, external sector and household.
The four factors of production labour, capital, entrepreneurship and land.
The net contribution made by a firm is called its value added.
Including depreciation in value added then the measure of value added is called Gross Value Added.
GVA is the measure of the value of goods and services produced in an area, industry or sector of an economy.

In national accounts GVA is output minus intermediate consumption; it is a balancing item of the national accounts' production account.

We deduct the value of depreciation from gross value added we obtain Net Value Added. Hence Unlike gross value added, net value added does not include wear and tear that capital has undergone.
Gross value added ≡ Gross value of the output – Value of intermediate goods
The stock of unsold finished goods, or semi-finished goods or raw materials which a firm carries from one year to the next is called inventory.

change of inventories of a firm during a year ≡ production of the firm during the year – sale of the firm during the year.

Change in inventories may be planned or unplanned. In case of an unexpected fall in sales, the firm will have unsold stock of goods which it had not anticipated. Hence there will be unplanned accumulation of inventories. In the opposite case where there is unexpected rise in the sales there will be unplanned decumulation of inventories.
Gross domestic product of the economy is the sum total of the net value added and depreciation of all the firms of the economy.
Summation of net value added of all firms is called Net Domestic Product (NDP).

Debt-to-GDP ratio is the ratio between a country's government debt (a cumulative amount) and its GDP (measured in years). A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.

Credit-to-GDP gap is a measure that provides advanced signals of banking system stress and can be used to as part of a set of central bank policy tools to mitigate banking system risk.

—> Nominal GDP is simply the value of GDP at the current prevailing prices.

—> Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices).

GDP Deflator :

The ratio of nominal to real GDP is a well known index of prices and called GDP Deflator. GDP deflator is always positive. If GDP deflator is greater than one, economy was experiencing inflation.

NOT included in GDP :

Intermediate goods, second hand sales and 2 others-

Non market transactions-trading or barter, Homemaker services
Underground economy-gambling, smuggling, prostitution, drugs and counterfeiting

—> GDP = monetary measure of the market value(hence includes Inflation) of all final goods and services produced in a period (quarterly or yearly) of time.

—> NDP = GDP - Depreciation

—>GNP = GDP - NFIA

Gross National Product at factor cost is more realistic because it also takes into account the NFIA(Net Factor Income from Abroad) as well as factor cost (which is the manufacturing cost) But, then it does not take into account the depreciation of goods in the economy which effectively reduces the total effective production of last year.

—> NNP = GDP - (NFIA + Depreciation)

Annual Economic growth can be most realistically determined by Net National Product (NNP) at factor cost.

Economic Growth is measured in India :

Earlier Economic growth in India was measured as change in GDP at Factor Cost and the base year used for calculating the figures was 2004-05. From January, 2015, the MOPSI made two important changes in this:

First, the base year was changed from 2004-05 to 2011-12.
GDP at Factor cost was replaced by Gross Value Added (GVA) at basic prices.

This changed the definition of GDP growth in the government accounts because now GDP growth refers to GDP at market prices, which growth in economy is measured in GVA at basic prices. The relation between GDP and GVA is as follows:

GDP = ΣGVA at basic prices + product taxes – product subsidies

Crony Capitalism : Close, mutually advantageous relationships between business leaders and government officials

Stigmatised Capitalism :

Per capita Income or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's total income by its total population.

National income of a country can be calculated by the three methods

A. Expenditure method : Measurement of the aggregate value of spending that the firms receive for the final goods and services which they produce.

B. Product Method : Measurement of aggregate value of final goods and services produced by all the firms for household use.

C. Income Method : Measurement of sum total of all factor payments paid by firms to household workers.

The goods which are consumed by final or ultimate purchase are known as final goods.

Final goods can be divided into categories first consumer or consumption goods and second capital goods.

Consumption goods used by ultimate purchasers like foods clothes etc while capital goods are used for the production of further goods.

Consumption goods are further divided in durable and nondurable goods.

Nondurable goods are used to be consumed in some time while durable goods are used for long time by the ultimate purchaser such as television laptop bike etc.

Net Investment = Gross investment – Depreciation where Depreciation is wear and tear for repair of the goods.

Depreciation is thus an annual allowance for wear and tear of a capital good.

Cross elasticity of demand or Cross–price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good.

Supply and Demand :

Transaction demand for money Concept : depends upon real GDP and Price level

Speculative demand for money Concept : If market rate of interest is getting increased, people need to deposit comparable less amount to get the fixed profit which in turn can be received if face value of Govt. bonds are kept low. Hence for increasing Market rate of interest , the face of value of govt. bonds should kept lowered.

Govt Bond’s value is inversely proportional to market rate of interest. In other words, speculative demand for money is inversely related to the rate of interest.

Liquidity Trap : If interest rate is already at low and then central bank injects the cash into the private banking system, gets failed to decrease interest rates and hence make monetary policy ineffective.

Total demand for money = ( Transaction + Speculative ) demand for money

Currency notes and coins are called fiat money. They do not have intrinsic value like a gold or silver coin. They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction. Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders.

High powered money aka monetary base consists of

Currency (notes and coins in circulation with the public and vault cash of commercial banks)
Notes and coins in circulation with the public
Deposits held by GOI and commercial banks with RBI
The total liability of RBI, is called the Monetary base or Money base or high powered money.

Reserve Money (M0) is “High Powered Money” or “Monetary Base”. Reserve Money forms the basis for the creation of liquid money in the economy. It includes currency with the Public; Other Deposits with the RBI; Cash Reserves of the banks held with themselves and Cash Reserves of the Banks held with RBI.

Narrow money - Money in forms that can be used as a medium of exchange, generally notes, coins, and certain balances held by banks.

Broad Money - Money in any form including bank or other deposits as well as notes and coins.

High Powered Money – The total liability of the monetary authority of a nation

Monetary Measurements

RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4 defined as follows
M1 = CU + DD ( CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks )
M2 = M1 + Savings deposits with Post Office savings banks
M3 = M1 + Net time deposits of commercial banks (TIME deposits are FD or RD) , aka aggregate monetary resources
M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)

Note : The interbank deposits, which a commercial bank holds in other commercial banks, are not to be regarded as part of money supply.

M1 and M2 —> Narrow Money M3 and m4 —> Broad Money

M1 is Most liquid and easiest transactions while M4 is least Liquid.

M3 is the most commonly used measure of money supply aka aggregate monetary resources1.

All the money held with public, RBI as well as government is called Total Stock of Money. Thus, public money does not include the money held by the government and the money held as CRR with RBI and SLR with themselves by commercial banks. The reason of excluding the above two categories from money supply is that this money held by the Government and RBI is out of circulation.

Liquidity Measurements

L1= M3 + all deposits with post office savings banks (excluding NSCs)
L2 = L1 + term deposits with term lending institutions and refinancing institutions (Fls), term borrowing by FIS + certificate of deposits issued by FIS
L3 = L2 + public deposits of NBFCs.

CDR Currency Deposit Ratio : The currency deposit ratio (cdr) is the ratio of money held by the public in currency to that they hold in bank deposits i.e. CU/DD. An increase in cash deposit ratio leads to a decrease in money multiplier

The money multiplier is the amount of money that banks generate with each dollar of reserves. Reserves is the amount of deposits that the Federal Reserve requires banks to hold and not lend. Banking reserves is the ratio of reserves to the total amount of deposits.

RDR Reserve Deposit Ratio : Banks hold a part of the money people keep in their bank deposits as reserve money and loan out the rest to various investment projects.

RBI uses various policy instruments to bring forth a healthy RDR in commercial banks.

The first instrument is the Cash Reserve Ratio which specifies the fraction of their deposits that banks must keep with RBI.
There is another tool called Statutory Liquidity Ratio which requires the banks to maintain a given fraction of their total demand and time deposits in the form of specified liquid assets.
RBI uses a certain interest rate called the Bank Rate to control the value of rdr.

The rate of interest offered by the bank to deposit holders is called the ‘borrowing rate’ and the rate at which banks lend out their reserves to investors is called the ‘lending rate’. The difference between the two rates, called ‘spread’, is the profit that is appropriated by the banks.

Deposits are broadly of two types

Demand deposits, payable by the banks on demand from the accountholder, e.g. current and savings account deposits,
Time deposits, which have a fixed period to maturity, e.g. fixed deposits. Lending by commercial banks consists mainly of cash credit, demand and short-term loans to private investors and banks’ investments in government securities and other approved bonds.

The GDP gap or the output gap is the difference between actual GDP or actual output and potential GDP.

Potential output (also referred to as "natural GDP gross domestic product") refers to the highest level of Real GDP(potential output) that can be sustained over the long term.

Actual GDP is a country's measured output at any interval.

The calculation for the output gap is Y–Y* where Y is actual output and Y* is potential output.
If this calculation yields a positive number it is called an inflationary gap and indicates the growth of aggregate demand is outpacing (rising) the growth of aggregate supply—possibly creating inflation;
if the calculation yields a negative number it is called a recessionary gap—possibly signifying deflation.

The percentage GDP gap is the actual GDP minus the potential GDP divided by the potential GDP.

actual GDP - potential GDP ——> GDP Gap

actual GDP > potential GDP ——> inflationary gap , creating inflation , led to boom period

actual GDP < potential GDP ——> recessionary gap , creating deflation

Deflationary gap

the amount by which actual aggregate demand falls short of aggregate supply at level of full employment.
It is a measure of amount of deficiency of aggregate demand.
Deflationary gap causes a decline in output, income and employment along with persistent fall in prices.

Inflationary gap

a signal that the economy is in the boom part of the trade cycle, resources are being used over their capacity, factories are operating with increasing average costs; wage rates increase because labour is used beyond normal hours at overtime pay rates. The main cause of inflationary gap is considered to be expansionary monetary policies carried out by the government.

Inflation can be defined as a “sustained rise in the general or overall level of prices of goods and services.” Thus, it can be understood that as inflation increases, every rupee you have buys a smaller percentage of goods or services i.e. value of money reduces or your purchasing power reduces. It is measured as an annual percentage increase.

Reasons of Inflation

Increase in Money supply
Increase in effective demand
Decreased effective supply or aggregate output

——> Companies don’t invest in High Inflation rates economy due to less returns

If an investor has invested 100 crores and expects to get a return of 20% with over 120 crores as revenue; he will receive less return if inflation is over 10% due to which effective return reduces to nearly 10%. The same 120 crore of revenue will now mean only 108 crores (10% deduction due to inflation) and thus means a loss for the company.

Erratic inflation rates makes these cost-benefit calculations even more difficult and thus companies hesitate to invest in High Inflation economy because high Inflation reduces effective returns on investments and financial planning becomes uncertain.

Types of Inflation

Deflation – a fall in the general price level;

disinflation – a decrease in the rate of inflation;

hyperinflation – an out-of-control inflationary spiral;

stagflation – a combination of inflation, slow economic growth and high unemployment;

reflation – an attempt to raise the general level of prices to counteract deflationary pressures; and

Asset price inflation – a general rise in the prices of financial assets without a corresponding increase in the prices of goods or services.

Cost Push Inflation : a type of inflation that occurs when higher production costs (increase in the cost of wages, raw materials etc.) push up the prices of goods and services. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level.

Demand Pull Inflation : A type of inflation that occurs when price level increases due to a greater demand for goods or services than there is supply available. In other words, Demand-pull inflation occurs when aggregate demand for goods or services outstrips aggregate supply. These constituents of the economy demand more goods than can be produced by the economy. When supply cannot rise to meet demand, sellers will increase prices, thereby causing inflation.

Bottleneck Inflation : when Supply falls drastically and Demand remains on same levels. Hence it could be type of Demand Pull Inflation.

KEYNESIAN THEORY ON INFLATION :

works through investment-saving mechanism.
There are two Keynesian theories of inflation

one is demand-pull theory and
other is the cost-push theory.

demand-pull theory was expressed in the form of an inflationary gap by Keynes in his book "How to Pay for War1’ 1940 and the cost-push theory was contained in his "General Theory."

Bent Hansen's dynamic'model of demand inflation
Schultze's sectoral demand-shift theory of inflation
The markup theory of inflation
The money-stock theory of inflation

Creeping inflation : Also called low or mild inflation, this type of inflation occurs when prices rise not more than 3% a year. It’s actually beneficial to economic growth. That’s because this mild inflation sets expectations that prices will continue to rise. As a result, it sparks increased demand as consumers decide to buy now before prices rise in the future. By increasing demand, mild inflation drives economic expansion.

Walking Inflation

This type of inflation occurs when price rises between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow’s much higher prices. This drives demand even further, so that suppliers can’t keep up. As a result, common goods and services are priced out of the reach of most people.

Galloping Inflation

When inflation rises to 10% or greater, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can’t keep up with costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable, and government leaders lose credibility. Galloping inflation must be prevented.

Hyper Inflation

Hyperinflation is when the prices of goods and services rise more than 50% a month. It is fortunately very rare. In fact, most examples of hyperinflation have occurred when the government printed money recklessly to pay for war. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and during the American Civil War.

Stagflation

Stagflation is when the economy experiences stagnant economic growth, high unemployment, and high inflation. It is unusual because policies to reduce inflation make life difficult for the unemployed, while steps to alleviate unemployment raise inflation.

Core Inflation

This shows price rise in all goods and services except food and energy due to high prices fluctuations. Oil is a highly volatile commodity, with daily price variations. Food prices change based on gas prices (it heavily reflects on transportation costs) , which are directly linked to oil prices. As the government needs a fairly stable and true picture of inflation, core inflation is calculated.

Headline Inflation

This measure considers total inflation in an economy, including food and energy prices, which are more volatile.

Deflation : is the reverse of inflation. It refers to a sustained decline in the price level of goods and services. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate) , resulting in an increase in the real value of money. Japan suffered from deflation for almost a decade in 1990s.

Disinflation : is a decrease in the rate of inflation, a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product (GDP) over time. Disinflation is distinct from deflation, a slow-down in the inflation rate, i.e. when inflation declines to a lower rate but is still positive.

Skewflation : A rising cost of living (inflation) coupled with falling asset prices such as houses, Gold and Equities (deflation). It refers to inflation in some commodities , deflation in others. Hence Skewflation means the skewness of inflation among different sectors of the economy — some sectors are facing huge inflation, some none and some deflation.

Inflationary Spiral : Every year, wages are revised upwards based on price rise. If the wage hike is made significant enough for every labour in the economy, more spending due to higher wages will result in further inflation, and then further demands for wage hikes. This will cause an inflationary spiral.

Wages increases due to price rise —> More spending due to higher wages —> More demands induce price rise —> Spiral repeats

Inflation Tax

It is Not an actual legal tax paid to a government; instead "inflation tax" refers to the penalty for holding cash at a time of high inflation.
When the government prints more money or reduces interest rates, it floods the market with cash, which raises inflation in the long run.
If an investor is holding securities, real estate or other assets, the effect of inflation may be negligible.
If a person is holding cash, though, this cash is worth less after inflation has risen.
The degree of decrease in the value of cash is termed the inflation tax for the way it punishes people who hold assets in cash, which tend to be lower- and middle-class wage earners.
It is noteworthy that even deficit financing (sometimes leading to high inflation) can act as a tax on people which actually was intended to boost demand in the economy.

NAIRU 􏰂􏰅􏰇􏰗􏰃􏰋􏰰􏰔non-accelerating inflation rate of unemployment : 􏰀􏰕􏰏􏰉􏰲􏰕􏰏􏰉􏰲If Monetary policy tried to keep unemployment below its natural rate, Inflation will be rising to higher level. 􏰌􏰔􏰪􏰪􏰉􏰌􏰗􏰉􏰒 NAIRU is lowest unemployment rate􏰋􏰀 􏰈􏰅􏰇􏰉􏰗􏰆􏰃􏰲 that an economy can sustain without any upward pressure on inflation rate.

Hence It refers to a level of unemployment below which inflation rises.

Phillips curve a single-equation empirical model, describing a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy. Stated simply, decreased unemployment, (i.e. increased levels of employment) in an economy will correlate with higher rates of inflation.

—> Laffer curve represents the relationship between tax rates and tax revenue collected by government.

=—> (Gini) Lorenz curve is the graphical representation of wealth distribution. The Lorenz curve can be used to show what percentage of a nation's residents possess what percentage of that nation's wealth. For example, it might show that the country's poorest 10% possess 2% of the country's wealth.

——> Gini coefficient represents the income distribution of a country’s residents. The higher is the Gini Coefficient, more is gap between rich and poor in a country. It is 1 for Highest Income Inequality and 0 for Lowest Income Inequality.

Engel's law is an observation in economics stating that as income rises, the proportion of income spent on food falls, even if absolute expenditure on food rises. In other words, the income elasticity of demand of food is between 0 and 1. It shows Consumer behaviour.

Inflation Targeting :

A monetary policy in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public.
It will have price stability as the main goal of monetary policy.
Many central banks adopted inflation targeting as a pragmatic response to the failure of other monetary policy regimes, such as those that targeted the money supply or the value of the currency in relation to another, presumably stable, currency.

——> Average inflation in 2017-18 was 3.5%. India’s real interest rate is higher by 2.5%, which is 3rd highest in the world.

“Real Interest Rate (R) = Nominal Interest Rate (r) – Rate of Inflation (i) “

When there is a general decline in prices, the component ‘I’ will be negative leading to a higher real interest rate than nominal interest rate.

Inflation Premium : is the Bonus brought by Inflation to borrowers. Because of Inflation, the value of currency gets decreased and hence borrowers have to return the lend amount to lenders without considering the inflation during the lending period.

Inflation Accounting : Due to inflation the profit of companies gets overstated. When a company calculates its profit after adjusting current level of Inflation , It is called Inflation Accounting.

Measures to Control the Inflation : There are broadly two ways of controlling inflation in an economy:

1) Monetary Measures : The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation.

2) Fiscal Measures : Fiscal measures to control inflation include taxation, government expenditure and public borrowings. The government can also take some protectionist measures (such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.)

Calculation of Inflation in India : Two categories of indices for measuring inflation i.e. wholesale prices and consumer prices.

WPI Wholesale Price Index

released by Office of the Economic Adviser, DIPP, Ministry of Commerce & Industry.
Has a total of 697 items & Weight of items in WPI are :

Primary articles (weight 22.62%) & 117 items for Primary Articles
Fuel & power (weight 13.15%) & 16 items for Fuel & Power
Manufactured products (weight 64.23%) & 564 items for Manufactured Products
WPI food index (weight 24.38%)

It is used for Macro level policy making
WPI considers only goods & NOT services market which count for nearly 65% of our economy.
WPI rates are captured from mandis or places of wholesale business and don’t include prices at household consumer level.
It measures the change in the price of commodities traded in wholesale market hence aka headline inflation having Current base year- 2011-12.

Wholesale Price Index (WPI): The index that is used to measure the change in the average price level of goods traded in wholesale market. Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in Ministry of commerce & Industry, GOI. Current WPI Base year is 2011-12. There are total 697 items in WPI ( including 117 items for Primary Articles like fruits, vegetables, minerals, gas , 16 items for Fuel & Power & 564 items for Manufactured Products) and inflation is computed taking 8331 Price quotations. WPI will now be calculated based on geometric mean rather than the earlier on arithmetic mean.

CPI Consumer Price Index

(a) CPI (Rural) - Current base year - 2012 Published by - CSO

(b) CPI (Urban) - Current base year - 2012 Published by - CSO

(c) CPI (Combined)- Current base year- 2012 Published by - CSO
Currently, in India inflation rate is measured with the help of Consumer Price Index - combined.

Consumer Price Index (CPI) : considers consumer or retail prices of goods. Earlier, there were four major segments of CPI, namely for industrial, agricultural and rural labourers and urban non-manual employees (UNME) . However, since January 2011, only urban household and rural household-linked CPI is calculated by the Central Statistics Office (CSO) in MoSPI Ministry of Statistics and Programme Implementation. Base year for CPI is 2012=100. The number of items in CPI basket include 448 in rural and 460 in urban. CPI is calculated on geometric mean. CPI is used in measurement of Core Inflation (excluding Food and Fuel component).

The national income estimates of GDP released quarterly by Central Statistics Office CSO (headed by a Director General assisted by 5 Additional Director Generals )
Annual Survey of Industries (ASI) is conducted by CSO. It does not cover unorganised or unregistered or informal sector enterprises and Data comes after 2 Years Lag.

Note : The Wholesale Price Index (WPI) was main index for measurement of inflation in India till April 2014 when RBI adopted new Consumer Price Index (CPI) (combined) i.e. CPI (rural) and CPI (urban) as the key measure of inflation. The RBI adopted consumer price-based inflation at 4% with a tolerance of ± 2% till March 2021 under the monetary policy framework.

Base years revised in line with the recommendations of the Saumitra Chaudhari Committee.

Consumer Food Price Index (CFPI)

is a measure of change in retail prices of food products consumed by a defined population group in a given area with reference to a base year.
CSO of MOSPI started releasing CFPI for 3 categories -

rural,
urban and
combined – separately on an all India basis with effect from May, 2014

Like Consumer Price Index (CPI), the CFPI is also calculated on a monthly basis and methodology remains the same as CPI. The base year presently used is 2012.

Cereals and products constitute the maximum weight within CFPI in all three categories -rural, urban and combined.

PPI Producer Price Index : measures the average change in the price of goods and services either as they leave the place of production, called output PPI or as they enter the production process, called input PPI. PPI estimates the change in average prices that a producer receives. It contrasts with other measures such as CPI which measures changes in prices from buyers or consumers perspective.

IIP Index of Industrial Production

Released by CSO is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to the base year 2011-12
Sectoral Composition of the IIP in decreasing order of weight: Manufacturing> Mining>Electricity
Index of Eight Core Industries comprise 40.27 % of the weight of items included in the Index of Industrial Production (IIP). It comprises of eight industries as follows;

o Refinery Products (weight: 28.04%),
o Electricity (weight : 19.85%),
o Steel (weight: 17.92%),
o Coal (weight : 10.33%)
o Crude Oil (weight: 8.98%),
o Natural Gas (weight : 6.88%)
o Cement (weight : 5.37%)
o Fertilizer (weight: 2.63%).

Business Cycles have 4 phases or stages :

Depression : both economic activities and national income fall and the cost is comparatively higher than price. Level of profit decreases and there is a reduction in the consumer and capital goods. Graph of bank credits goes downward. During depression the level income, employment, consumption, prices comes to the lowest level.

Recovery : During depression phase economy slowly moves towards recovery. Slowly and steadily the levels of income, employment, consumption and prices goes upward in revival phase of trade cycle. Those consumers delayed their consumption in the hope of decrease in prices, now come back to consumption. As the consumption starts in the economy businesses becomes profitable. There is noticeable re-employment in the economy.

Boom : is prosperity stage is the highest level of revival phase of trade cycle. In this stage demand, productivity, employment, people income and consumption are at the top. When there is a raise in profits, businesses are able to get loans from financial institutions. As the demand increased for bank credits and loans the rate of interest reaches the highest floor, which leads to sharp hike in the prices.

Recession : or Contraction phase is not the only phase of business cycle, recession is a change point where the forces set for recession take over the forces of extension. It results in a general slowdown in economic activity. In the previous stage banks were engaged in advances, however in recession stages, now have shifted towards loans recovery. The cost begins increase than the prices due to employment of less efficient factors of production with higher cost. As a result there a gradual disappear in profits. There is an uncertainty in the economy which leads to cut down the investment, production and employment.

Boom Phase & Overheated Economy : In boom stage demand, productivity, employment, people income and consumption are at the top. Due to a mismatch between supply and demand and higher consumption (and lower savings), there can be a shortage of investible capital. Due to this the economy heats up and supply - side bottlenecks (Traffic or Jam) become clearly visible.

Overheating of an economy occurs when its productive capacity is unable to keep pace with growing aggregate demand leading to inflation. It is generally characterised by an above-trend rate of economic growth, where growth is occurring at an unsustainable rate. The main reason behind overheating is insufficient supply allocation because of excess spending by the people due to increase in consumer wealth.

A seller’s market is an economic situation in which goods or shares are scarce(short supply) and sellers can keep prices high. During boom as demand outstrips supply, the situation can often be seen across.
The situation is reversed in a buyer’s market in which buyers can buy the goods at lower prices. It is an economic situation in which goods or shares are plentiful and buyers can keep prices down.

——> Boom periods are often characterised by overheating in the economy. An economy is said to be overheated when inflation increases due to prolonged good growth rate and the producers produce in excess thereby creating excess production capacity.

Repercussions of Forced Savings on Economy :

When people spend less (and save more) than they earn because there are not enough goods available to buy or because goods are too expensive, it is called as forced savings.

This forced savings constitutes an increase in the supply of loanable funds, and thereby pushes interest rates down, which increases investment in the economy.

Forced saving plays an important role in explaining how expansionary monetary policy generates artificial booms.

Tax Expenditures

It does not relate to the expenditures incurred by the Government in the collection of taxes.
Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers.
Tax expenditures indicate how much more revenue could have been collected by the Government if not for such measures.
It shows the extent of indirect subsidy enjoyed by the tax payers in the country.
It is Amount the government could NOT collect because of various exemptions.

GBS Gross Budgetary Support is an important component of the Central Plan of GOI. The Government's support to the Central plan is called the Gross Budgetary Support.

The GBS includes the tax receipts and other sources of revenue raised by the Government. In the recent years the GBS has been slightly more than 50% of the total Central Plan. The Planning Commission aggregates and puts forward the demand by various administrative Ministries in a consolidated form to the Finance Ministry for the budgetary support required from the Government. This demand is vetted and then approved by the Finance Ministry.

BUDGET :

There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government in respect of every financial year. The budget must distinguish expenditure on the revenue account from other expenditures. Therefore, the budget comprises of (a) Revenue Budget (b) Capital Budget

Revenue Account shows the current receipts of government and expenditure that can be met from these receipts.

Revenue Receipts : Neither create Liabilities nor cause loss of assets. Revenue receipts are divided into tax and non-tax revenues. (i)Tax revenues comprise of

direct taxes which fall directly on individuals (personal income tax) and firms (corporation tax)
indirect taxes like excise taxes (duties levied on goods produced within the country),
customs duties (taxes imposed on goods imported into and exported out of India)
Service tax.
other direct taxes like wealth tax, gift tax

(ii)Non-tax revenue consists of

interest receipts (on account of loans by GOI which constitutes the single largest item of non-tax revenue),
dividends and profits on investments made by the government,
fees and other receipts for services rendered by the government
Cash grants-in-aid from foreign countries and international organisations

Revenue Expenditure : Do NOT result in creation of physical or financial assets.

Budget documents classify total revenue expenditure into plan and non-plan expenditure

(i)Plan revenue expenditure relates to central Plans (Five-Year Plans) and central assistance for State and Union Territory Plans. It comprise of grants given to state governments and other parties (even though some of grants may be meant for creation of assets). (ii)Non-plan revenue expenditure comprises of

Interest payments on market loans, external loans and from various reserve funds (single largest component)
Defence services expenditure ( second largest component )
Subsidies through under-pricing of public goods and services like education and health, also extends subsidies explicitly on items such as exports, interest on loans, food and fertilisers.
Salaries and pensions

Capital Account an account of the assets as well as liabilities of central government, which takes into consideration changes in capital.

It consists of capital receipts and capital expenditure of the government.

Capital Receipts : comprise of

loans raised by government from the public which are called market borrowings,
borrowing by government from RBI and commercial banks
other financial institutions through the sale of treasury bills
loans received from foreign governments and international organisations(WB, IMF, ADB)
recoveries of loans granted by central government.
Other items include small savings (Post-Office Savings Accounts, National Savings Certificates, etc), provident funds and net receipts obtained from sale of shares in PSUs (e.g. Air India Disinvestment)

Capital Expenditure: includes expenditure on

Acquisition of land, building, machinery, equipment,
Investment in shares,
Loans and advances by central government to state and union territory governments, PSUs and other parties.
Capital expenditure is also categorised as plan and non-plan in the budget documents.

Plan capital expenditure relates to central plan and central assistance for state and union territory plans.
Non-plan capital expenditure covers various general, social and economic services provided by government.

Fiscal Deficit : is difference between government’s total expenditure and its total receipts excluding borrowing

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)

Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt.

India's external debt includes both the government and private debt and accounts for

commercial borrowings,
short term trade credits,
rupee denominated Non-resident Indian(NRI) deposits

External debt payment can be done in USD, INR, YEN and EURO, not in SDR.

India's Internal debt includes loans raised by the government in the open market through treasury bills and government securities, special securities issued to the RBI and most importantly various bonds like oil bonds, fertilizer bonds etc.

Unemployment : As per NSSO , if one is not getting any work for more than 6 months, that person is Unemployed.

Open Unemployment : aka Naked unemployment in which People are able to work and are also willing to work but there is no work for them. They are found partly in villages, but very largely in cities. Most of them come from villages in search of jobs.

Structural Unemployment : occurs due to Structural changes in technology (from labour intensive technology to capital intensive technology) or change in the pattern of demand. In a developing country like India, It exists both in the rural and the urban areas.

Frictional Unemployment : occurs when a worker is shifting from one job to the other. During the mobility period, he may unemployed for some time. It is a temporary phenomenon. In other words, Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search engine and can be voluntary based on the circumstances of the unemployed individual.

Cyclical Unemployment : occurs because of cyclical fluctuations in the economy like Phases of boom, recession, depression and recovery of a capitalist economy.

In boom phase, high level of economic activity results in high level of employment
Recession and depression phases marked with low demand results in more unemployment and
during the recovery phase unemployment is slowly reduced.

Under-employment when employed people are contributing to production less than they are capable of, in terms of time (visible under-employment) or type of work (invisible under-employment). Part-time workers come under this category.

Disguised Unemployment : A disguisedly unemployed person is the one who seems to be employed but actually he is not. His contribution to the total output is zero or negligible. When more people are engaged in a job than actually required, a state of disguised unemployment is created. It is mostly seen in rural areas.

Seasonal Unemployment : occurs only during seasonal months of the year. In India, it is very common in agriculture sector. In certain type of industries also this type of unemployment is found.

Note : Disguised unemployment and Seasonal unemployment are two most common types of unemployments found in rural India particularly in farm sector.

LFP Labour Force Participation rate is a measure of the active portion of an economy's labour force. It refers to the number of people who are either employed OR are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate.

Analysis of National Sample Survey data shows that India has been experiencing declining and low rates of female labour force participation.

Age group for WFP & LFP : 15-60 Years Age group.

Work Force Participation Rate (WFP) : Number of people out of total population who are employed in work.

Labour Force Participation rate (LFP) : Number of people who are either employed or are actively looking (unemployed) for work.

Working Age Population : Employed + Unemployed (looking for work) + Unemployed (NOT looking for work)

Type of Sectors in an Economy :

Primary —> Agriculture & includes forestry, mining & Quarrying , farming or fishing. These activities involve exhausting of Natural Sources.

Secondary —> Manufacturing

heavy industry include steelmaking, mining, production of chemicals, automotive, aircraft,
light industry includes the manufacturing of food, beverages, cosmetics, clothes, home electronics, etc.

Tertiary —> Services like insurance, tourism, banking, retail, health care, financial services, entertainment, education & social services

Quaternary —> knowledge-based industries such as R & D, Information Technology, consulting,Intellectual Services etc.

Closed Economy is self-sufficient, meaning that no imports are brought in and no exports are sent out. The goal is to provide consumers with everything that they need from within the economy's borders. A closed economy is the opposite of an open economy, in which a country will conduct trade with outside regions. So, if no capital or goods/services are imported, exported, the BoP will be zero.

OPEN MACRO

An open economy is one that trades with other nations in goods and services and, most often, also in financial assets.
Foreign trade influences Indian aggregate demand in two ways.

First, when Indians buy foreign goods, this spending escapes as a leakage from the circular flow of income decreasing aggregate demand.
Second, our exports to foreigners enter as an injection into the circular flow, increasing aggregate demand for domestically produced goods.
Total foreign trade (exports + imports) as a proportion of GDP is a common measure of the degree of openness of an economy. In comparison to other countries, India is relatively less open.

AGGREGATE DEMAND Under the effective demand principle, the equilibrium output of the final goods is equal to ex ante aggregate demand.
aggregate demand is determined as summation of increasing function of National Income, Investment, Government Spending.

AD = NI + Inv. + Gov. Sp.

A person holds his wealth in different forms such as land, bonds, money etc.

When they invest in bonds, different people have different expectations regarding the future movements in the market rate of interest based on their private information regarding the economy.
When the interest rate is very high everyone expects it to fall in future and hence anticipates capital gains from bond-holding. Hence people convert their money into bonds. Thus, speculative demand for money is low.
When interest rates are low, everyone expects them to rise in future which prompts them to increase their money holdings in view of capital loss from existing bonds. So, speculative money demand is high.

Predatory Pricing Policy – the pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market. It drives competitors out of business.

Arm’s length principle : refers a transaction in which the buyers and sellers of a product act independently and have no relationship to each other. It is mainly related to Transfer pricing.

MAP Mutual Agreement Procedure : An alternative dispute settlement mechanism that allows multinational companies (MNCs) to settle transfer pricing disputes with tax authorities and eliminate double taxation. The main benefit of pursuing MAP is the elimination of double taxation (either juridical or economic). MAP helps to increase comfort level of foreign investors over India’s tax laws.

Hindu rate of growth is a term referring to the low annual growth rate of the planned economy of India before the liberalisation of 1991, which stagnated around 3.5% from 1950s to 1980s, while per capita income growth averaged 1.3%. It was a concept given by Prof. Raj Krishna.

3. RBI & its Functions

RBI Status : Aug 2018

LAF	Repo rate :	6.5%	Base Rate :	8.75% - 9.45%
LAF	Reverse RR :	6.25%	MCLR (Overnight) :	7.90% - 8.05%
1+RR	MSF Rate :	6.75%	Savings Deposit Rate :	3.50% - 4.00%
	Bank Rate :	6.75%	Term Deposit Rate > 1 Year :	6.25% - 7.25%
	CRR :	4%	Sensex :	38000+
	SLR :	19.5%	Nifty :

Monetised Deficit : Part of Fiscal deficit provided by RBI to GOI for that year.

Sir Osborne Smith was the First Governor of the Reserve Bank during 1935 to 1937.
C.D. Deshmukh, a member of the Indian Civil Service, was the First Indian Governor of the Bank during 1943 to 1949.
RBI as lender of last resort.
It had first office in Calcutta and in 1937 it was shifted in Mumbai.
Initially privately owned but in 1949 by Banking Regulation Act,1949 It became fully owned by Govt.

Below Entities are regulated by RBI

Commercial Banks and Development Financial Institutions
Urban Co operative Banks
RRB , District Co operative & State Co operative
NBFC

Note : RRB is regulated by RBI but Inspected and Supervised by NABARD.

RBI has 7 major functions : is established in 1935 under the provisions of RBI Act, 1934.

RBI has the sole autonomy to print notes. GoI has the sole authority to mint coins and one rupee notes.
It manages government’s deposit accounts. It also represents govt. as a member of IMF and World Bank.
Custodian of Commercial Bank Deposits & Regulation and supervision of the banking and NBFCs, including credit information companies.
Custodian to Country’s Foreign Currency Reserves and management of Current and Capital accounts.
Lender of Last Resort : Commercial banks come to RBI for their monetary needs in case of emergency.
Central Clearance and Accounts Settlement : As RBI keeps cash reserves from commercial banks therefore it rediscounts their bills of exchange easily.
Credit Control : It controls supply of money in the economy through its monetary policy.

Contingency Fund of RBI :

Maintained by RBI to overcome unforeseen contingencies such as Black Swan events – the collapse of Lehman Bank in USA or any other bank which may endanger economic stability of the bank.
Acts as cushion against events such as unprecedented forex and gold fluctuations or other valuation losses in bond holdings.

Provisions under Reserve Bank of India Act, 1934 :

Definition of the so-called scheduled banks which were to have paid up capital and reserves above 5 lakh.
The manner in which the RBI can conduct business like

RBI can accept deposits from the central and state governments without interest.

It can purchase and discount bills of exchange from commercial banks.

It can purchase foreign exchange from banks and sell it to them.

It can provide loans to banks and state financial corporations.

It can provide advances to the central government and state governments.

It can buy or sell government securities.

It can deal in derivative, repo and reverse repo

RBI must conduct the banking affairs for the central government and manage public debt.
Only RBI has the exclusive rights to issue currency notes in India and maximum denomination a note can be ₹10,000 (US$150)
The act describes the legal tender character of Indian bank notes
RBI to form rules regarding the exchange of damaged and imperfect notes
In India only RBI or central government can issue and accept promissory notes that are payable on demand. However, cheque, that are payable on demand, can be issued by anyone.
Every scheduled bank must have an average daily balance with the RBI. The amount of the deposit shall be more that a certain percentage of its net time and demand liabilities (NTDL) in India.

As a banker to GOI, RBI undertakes to float loans and manage them on behalf of the Governments.
RBI provides Ways and Means Advances WMA – a short-term interest bearing advance – to the Governments, to meet temporary mismatches in their receipts and payments.
RBI arranges for investments of surplus cash balances of the Governments.
RBI acts as adviser to Government, whenever called upon to do so, on monetary and banking related matters.
GOI and State Governments may make rules for the receipt, custody and disbursement of money from the consolidated fund, contingency fund, and public account.
These rules are legally binding on RBI as accounts for these funds are with the Reserve Bank .

BANKER TO STATES GOVERNMENT :

(From RBI website)

Currently, RBI acts as banker to all the State Governments in India (including Union Territory of Puducherry), except Sikkim. For Sikkim, it has limited agreement for management of its public debt.
All the State Governments are required to maintain a minimum balance with RBI, which varies from state to state depending on the relative size of the state budget and economic activity.
To tide over temporary mismatches in the cash flow of receipts and payments, RBI provides Ways and Means Advances/Overdraft to the State Governments.
The WMA scheme for the State Governments has provision for Special Drawing Facility (SDF) and Normal WMA.
The SDF is extended against the collateral of the government securities held by the State Government.
To encourage the State’s participation to the Consolidated Sinking Fund and Guarantee Redemption Fund, incremental investments in these funds are also eligible to avail SDF.
After the SDF limit is exhausted, the State Government is provided a normal WMA which limits are based on 3-year average of actual revenue and capital expenditure of the state.
The withdrawal beyond the WMA limit is considered an overdraft.
A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter.
The rate of interest on WMA is linked to the Repo Rate.
Surplus balances of State Governments are invested in GOI 14-day Intermediate Treasury Bills automatically in accordance with the instructions.

——> The power to appoint RBI Governor solely rest with the Central Govt. and he holds office at the pleasure of Central Government (tenure not exceeding 5 years).

MPC Monetary Policy Committee

A committee of Reserve Bank of India, headed by its Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level.
The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.
Monetary Policy Committee is defined in Reserve Bank of India Act, 1934 and is constituted under same Act by amending the act in 2016.
The 6 members committee was constituted by Central Government by notification in the Official Gazette.
3 Members (Governor , Deputy Director and an officer from RBI) and Rest 3 Members( are appointed by GOI)
The MPC replaces the current system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, has COMPLETE control over monetary policy decisions.
A Committee-based approach will add lot of value and transparency to monetary policy decisions.
RBI’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy.

RBI governor will have a vote in case of a tie.

Financial Markets Operations Department (FMOD) operationalises the monetary policy, mainly through day-to-day liquidity management operations.

Financial Market Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the operating target of monetary policy (weighted average lending rate) is kept close to the policy repo rate.

Before the constitution of the MPC, a Technical Advisory Committee (TAC) on monetary policy with experts from monetary economics, central banking, financial markets and public finance advised RBI on the stance of monetary policy. However, its role was only advisory in nature.
With the formation of MPC, the TAC on Monetary Policy ceased to exist.

Monetary Policy :

It refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy.
RBI is vested with the responsibility of conducting monetary policy and have responsibility as explicitly mandated under Reserve Bank of India Act, 1934.
The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.

In May 2016 , RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework under which 4% Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6% and the lower tolerance limit of 2%.

Prior to the amendment in the RBI Act in May 2016, the flexible inflation targeting framework was governed by an Agreement on Monetary Policy Framework between the Government and the Reserve Bank of India of February 20, 2015.

-----> India is among the first few signatories of the Special Data Dissemination Standards (SDDS) as defined by the IMF for the purpose of releasing data and RBI contributes to SDDS in a significant manner.

Instruments of Monetary Policy :

Repo Rate: The (fixed) interest rate at which the RBI provides overnight liquidity to banks against the collateral of government and other approved securities under liquidity adjustment facility (LAF).

Reverse Repo Rate: The (fixed) interest rate at which the RBI absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.

Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, RBI has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.

LAF was introduced for the first time from June 2000 onwards on recommendations of 2nd Narsinghman Committee of 1998. LAF is primary instrument of RBI for modulating liquidity and transmitting interest rate signals to the market.

How LAF works

Two components of LAF are repo rate and reverse repo rate.
Under Repo, the banks borrow money from RBI to meet short term needs by putting government securities (G-secs) as collateral.
Under Reverse Repo, RBI borrows money from banks by lending securities.
While repo injects liquidity into the system, the Reverse repo absorbs the liquidity from the system.
RBI only announces Repo Rate.
The Reverse Repo Rate is linked to Repo Rate and is 100 basis points (1%) below repo rate.
RBI makes decision regarding Repo Rate on the basis of prevalent market conditions and relevant factors.
RBI conducts the Repo auctions and Reverse Repo auctions on daily basis from Monday to Friday except holidays. The tenure of the Repo is 7 working days. Informally, Liquidity Adjustment Facility is also known as Liquidity Corridor.
All the Scheduled Commercial Banks are eligible to participate in auctions except RRB i.e. Regional Rural Banks.
Under LAF , Bids need to be min 5 Cr. or in multiples of 5 Cr.
ONLY GOI dated Securities/Treasury Bills are used for collateral under LAF as of now.

Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from RBI by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.

It was created by RBI in its credit policy of May 2011 that provided the banks to borrow from RBI in certain emergency conditions when inter-bank liquidity dries up completely and there is a volatility in the overnight interest rates. The rate of interest on MSF is above 100 bps above the Repo Rate. The banks can borrow up to 1 % of their NDTL net demand and time liabilities from this facility.

Thus, if Repo Rate is X%, reverse repo rate is X-1% and rate of MSF is X+1%. currently they are 5.75 % , 6 % and 6.25 % where 25bps =100

NDTL is sum of demand and time liabilities (deposits) of banks with public and other banks wherein assets with other banks is subtracted to get net liability of other banks. Deposits of banks are its liability and consist of demand and time deposits of public and other banks.

Demand Liabilities are held in Savings accounts , Current accounts while Time Liabilities are held in FD and RD.

ODTL(Other Demand and Time Liabilities) include interest accrued on deposits, bills payable, unpaid dividends, suspense account balances representing amounts due to other banks or public, net credit balances in branch adjustment account, any amounts due to the banking system which are not in the nature of deposits or borrowing.

Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

Bank Rate: It is the rate at which RBI is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.

“MSF is a rate at which the scheduled banks can borrow funds overnight from RBI against government securities. ... The basic difference between MSF and Bank rate is time period. MSF for only very short period of time whereas bank rate is for long period of time.”

Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with RBI as a share of such % of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India. CRR remains in current account and banks don’t earn anything on that.

Significance of CRR : When CRR is reduced, banks have more cash to lend to customers. This increases the liquidity in the market. Primary liquidity is the amount that is injected in the market without any credit creation by banks. When banks lend the same money (obtained after relaxing CRR) repeatedly, extra credit is created. This extra credit is called secondary liquidity.

Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government(central or state) securities G-Sec, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector. In SLR, the money goes into investment in the government securities as which means the banks earn some amount of interest on that investment as against CRR where it earns zero.

Open Market Operations (OMOs): These include both, outright purchase & sale of government securities, for injection and absorption of durable liquidity, respectively.

OMO Open Market Operations : RBI purchases (or sells) government securities to general public in a bid to increase (or decrease) the stock of high powered money in the economy.

RBI often intervenes with its instruments to prevent disperse of more money in economy because of FDI or others. RBI undertakes an open market sale of government securities of an amount equal to amount of foreign exchange inflow in the economy, thereby keeping the stock of high powered money and total money supply unchanged. Thus it sterilises the economy against adverse external shocks. This operation of RBI is also known as Sterilisation.

Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

Market Stabilization Scheme (MSS)

was launched in 2004 with the objective of strengthening RBI's ability to Control liquidity in the market.
Under this scheme, GOI borrows from the RBI (such borrowing being additional to its normal borrowing requirements) and issues Treasury-Bills/Dated Securities that are utilized for absorbing excess liquidity from the market.
MSS constitutes an arrangement aiding in liquidity absorption, in keeping with the overall monetary policy stance of the RBI, alongside tools like the Liquidity Adjustment Facility (LAF) and Open Market Operations (OMO).
The securities issued under MSS, termed as Market Stabilization Scheme (MSS) Securities/Bonds, are issued by way of auctions conducted by the RBI and are done according to a specified ceiling mutually agreed upon by GoI and RBI.

Credit Control Measures by RBI : Quantitative v/s Qualitative

Two types of methods:

Quantitative control to regulates the volume of total credit. Quantitative measures : Bank rate policy, OMO, SLR, CRR
Qualitative Control to regulates the flow of credit Qualitative measures : controls the manner of channelizing of cash and credit in the economy. It is a 'selective method' of control as it restricts credit for certain section where as expands for the other known as the 'priority sector' depending on the situation.

marginal requirement,
publicity,
Rationing of credit,
moral persuasion or suasion,
Direct Action

Note : Below loans can be priced without reference to Base rates ---

DRI advances
Loans to Bank's own employees
Loans to bank's depositors against their own deposits

DRI loans scheme (also known as DIR loan scheme) was introduced in the year 1972 to financially assist chosen low income groups. The loan scheme envisages lending by banks to weaker section of the society at a uniform concessional rate of interest of 4% per annum.

Syndicated loan : a form of loan business in which 2 or more lenders jointly provide loans for one or more borrowers on the same loan terms and with different duties and sign the same loan agreement.
Usually, one bank is appointed as the agency bank to manage the loan business on behalf of the syndicate members.

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Marginal Cost of Funds based Lending Rate (MCLR) (in April 2016 by replacing BPLR )

To ensure better transmission of its rate cut to borrowers, RBI introduced it in 2016 to calculate the banks’ lending rate to borrowers.
All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the MCLR method.
The MCLR methodology will help the borrowers to reap the benefit of lower lending rates.
It will also improve transparency in the methodology followed by banks for determining interest rates on advances.
With the New MCLR, there will be quick change in the lending rate and the commercial banks will have to oblige with RBI at a fast pace as repo rate is included in MCLR calculation.
Unlike base rate policy , MCLR revised on monthly basis benefiting bank customers especially borrowers

RBI has instructed all the commercial banks to calculate their marginal cost. Novel feature of MCLR is the inclusion of repo rate along with marginal cost. Commercial banks now must include the marginal cost components along with the repo rate to arrive at the MCLR lending rate

A large portion of bank loans remain linked to the base rate despite the introduction of the MCLR in April 2016. Weak monetary transmission during a rate cut cycle has been one of the central bank’s pet peeves.

RBI has proposed to link the base rate for loans with the marginal cost of funds-based lending rate (MCLR) from 1 April to improve monetary policy transmission.

Unlike base rate regime, these rates are expected to get revised on monthly basis along with the repo rate including other borrowing rates.

Banks decide the actual lending rate based on the floating rate by adding the component of spread to MCLR which becomes the final lending rate.

The MCLR system was introduced by the Reserve Bank to provide loans on minimal rates as well as market rate fluctuation benefit to customers.

MCLR is calculated on the basis of incremental cost of funds, making it a more reliable benchmark rate as compared to the base rate, usually calculated by taking into account average cost of funds based on the borrower’s risk profile

In News An internal Study Group constituted by RBI has recommended that Banks should set interest rates based on an external benchmark and not as per internal benchmarks as is the practice now.

Bank’s interest rates are decided on the marginal cost of fund based lending rate (MCLR). This is calculated based on banks’ internal factors such as cost of funds. But, there is a problem with this method. This method of calculating interest rates (for lending) is insensitive to changes in the policy interest rate or repo rate.
Also, banks deviate in an ad hoc manner from the specified methodologies for calculating the MCLR to either inflate the base rate or prevent the base rate from falling in line with the cost of funds. The Study Group is of the view that the T-Bill rate, the CD rate and the RBI’s policy repo rate are better suited than other interest rates to serve the role of an external benchmark. This will make the bank’s interest rate responsive to the policy rates and RBI can easily affect the interest rates by the policy rates.

BANKER TO BANKS : as RBI focusses on:

Enabling smooth, swift and seamless clearing and settlement of inter-bank
Providing an efficient means of funds transfer for banks
Enabling banks to maintain their accounts with the Reserve Bank forstatutory reserve requirements and maintenance of transaction balances
Acting as a lender of last resort by saving a bank in unforeseen cases.

As common Banker function of RBI is performed through the Deposit Accounts Department (DAD) at RBI’s Regional offices.
The Department of Government and Bank Accounts oversees this function and formulates policy and issues operational instructions to DAD.
RBI has introduced the Centralised Funds Management System (CFMS) to facilitate centralised funds enquiry and transfer of funds across DADs.
This helps banks in their fund management as they can access information on their balances maintained across different DADs from a single location.
Currently, 75 banks are using the system and all DADs are connected to the system.
As Banker to Banks, RBI provides short-term loans and advances to select banks, when necessary, to facilitate lending to specific sectors and for specific purposes.
These loans are provided against promissory notes and other collateral given by the banks.

Negotiable Instrument means a promissory note, bill of exchange or a cheque, payable either to order or to bearer.

A Currency Note is NOT a negotiable instrument as per section 21 of the Indian Currency Act.
Holder is the person who is entitled in his own name to the possession of a negotiable instrument. Normally a payee or endorsee is a holder. “Holder may be or may not be with possession of the Instrument.”
The Amendment Act facilitates filing of cases only in a court within whose local jurisdiction the bank branch of the payee, where the payee delivers the cheque for payment through his account, is situated, except in case of bearer cheques, which are presented to the branch of the drawee bank and in that case the local Court of that branch would get jurisdiction.
The Amendment Act, also mandate centralization of cases against the same drawer.

CURRENCY :

Along with GOI, RBI is responsible for the design, production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes.

GOI is the issuing authority of coins and supplies coins to RBI on demand who puts the coins into circulation on behalf of GOI.

In consultation with GOI, RBI works towards maintaining confidence in the currency by constantly endeavouring to enhance integrity of banknotes through new design and security features.

4 printing presses print and supply banknotes. These are at

Dewas in Madhya Pradesh,

Nasik in Maharashtra,

Mysore in Karnataka,

Salboni in West Bengal.

The presses in MP and Maharashtra are owned by the Security Printing and Minting Corporation of India (SPMCIL), a wholly owned company of GOI.
The presses in Karnataka and WB are owned by the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of RBI.
Coins are minted by GOI and RBI as the agent of GOI is responsible for distribution, issue and handling of coins.
4 mints for Coins are in operation:

Mumbai in Maharashtra,

Noida in Uttar Pradesh,

Kolkata,

Hyderabad.

---> 1906 Indian Coinage Act, is an Act to govern the laws related to Coinage and Mints in India. But recent most indian coinage act 2011 is applicable in India.

PSL Priority Sector Lending :

It is an important role given by RBI to the banks for providing a specified portion of the bank lending to few specific sectors. This is essentially meant for an all round development of the economy as opposed to focusing only on the financial sector.
It includes the following categories:

(i) Agriculture (small value loans to farmers)
(ii) Micro, Small and Medium Enterprises (MSME)
(iii) Export Credit
(iv) Education (for students)
(v) Housing (for poor people )
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others (for low income groups and weaker sections )

The objective of PSL is to ensure that adequate institutional credit flows into some of vulnerable sectors of economy.
The current Priority Sector target for domestic scheduled commercial banks and foreign banks with 20 branches and above are 40% of Adjusted Net Bank credit OR credit Equivalent Amount of Off - Balance Sheet Exposure, whichever is higher.
Foreign bank with less than 20 branches has to achieve priority sector target of 40% in a phased manner by 2020.

NOTE : Food and agro-based processing units and cold chain infrastructure have been brought under ambit of Priority Sector Lending (PSL).

It will help provide additional credit for food processing activities and infrastructure thereby, boosting food processing, reducing wastage, create employment and increasing farmers' income.

Priority Sector Lending Certificates (PSLCs) are a mechanism to enable banks to achieve the priority sector lending target and sub-targets by purchase of these instruments in the event of shortfall. This also incentivizes surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector. Under the PSLC mechanism, the seller sells fulfilment of priority sector obligation and the buyer buys the obligation with no transfer of risk or loan assets.

Hence RBI allows trading in Priority Sector Lending Certificates (PSLCs) whereby banks can buy and sell such credits to manage their priority sector lending requirements.

All Scheduled Commercial Banks (including RRBs Regional Rural Banks), Urban Co-operative Banks, Small Finance Banks (when they become operational) and Local Area Banks are eligible for PSLC trading.

Selective credit control

It refers to qualitative method of credit control by the central bank.
The method aims, unlike general or quantitative methods, at the regulation of credit taken for specific purposes or branches of economic activity.
It aims at encouraging good credit, i.e. development credit while at the same time discouraging bad credit, i.e. speculative credit.
For Example PSL: priority sector lending, DIRs: Differential interest rates

RBI’s BRANCH AUTHORISATION POLICY :

It aims to bring all branches and fixed business correspondent outlets under the definition of banking outlets.
Banking outlet is a manned service delivery point which is open for at least four hours a day for at least five days a week.
It should also provide services such as deposits, encashing cheques, cash withdrawal and lending.
It is necessary that Banks open 25% of these outlets in unbanked rural centres (URC).

BC Business Correspondent / Bank Saathi :

Individuals/entities engaged, and works as an agent of the bank for banking services at locations other than a bank branch/ATM.
Their functions : identification of borrowers, loan processing, creating awareness benefit of banking and finance, nurturing and monitoring of SHG/ Joint Liability Groups, post-sanction monitoring, follow-up of recovery.
can also attend to collection of small value deposit, disbursal of small value credit, recovery of principal / collection of interest, sale of micro insurance / mutual fund MF products/ pension products/ receipt and delivery of small value remittances/ other payment instruments.
All BCs or representative of any one particular bank can conduct business for other banks as well.

Monetary transmission

refers to the process by which a central bank’s monetary policy decisions are passed on to the financial markets.
It is essentially the process through which the policy action of RBI is transmitted to the ultimate objective of stable inflation and growth.
The policy action consists typically of changing the interest rate at which it borrows or lends “reserves” (in our case, Rupees) on an overnight basis with commercial banks.
The transmission mechanism hinges crucially on how monetary policy changes influence households’ and firms’ behaviour.
This change can take place through several channels.
Changes in RBI’s policy rate impact the economy with lags through a variety of channels, the primary ones being

(i) Interest rate channel,
(ii) Credit channel,
(iii) Exchange rate channel, and
(iv) Asset price channel.

How these channels function in a given economy depends on the stage of development of the economy and it’s underlying financial structure.
Monetary transmission remains weak in India due to

High volume of government borrowing through SLR route
High level of NPAs of banks (weak balance sheets of banks)
A number of Interest rate subvention schemes (lowering the interest rate by banks under various govt. schemes)
Practice of yearly resetting of administered interest rates on small savings (including PPF) linked to G-sec yields
Sticky bank rates

RECENTLY A five members panel of RBI headed by Dr. Janak Raj has recommended linking the bank lending rates to a market benchmark in order to hasten the monetary policy transmission.

Banking Ombudsman

A quasi judicial authority, created to resolve customer complaints against banks relating to certain services provided by them.
The Ombudsman is a senior official, who has been appointed by RBI Reserve Bank of India to address grievances and complaints from customers, pertaining deficiencies in banking services.
It covers all kinds of banks including Public sector banks, Private banks, Rural banks as well as Co-operative banks.
BO has Tenure of 3 years at a time and can be Reappointed.
Banking Ombudsman deals with matters less than or equal to Rs.10 lakhs.
Banking Ombudsman scheme was originally started in 1995.
Banking Ombudsman has total 20 offices throughout India
Under the revised scheme in 2006, the BO and the staff in the offices of the BO are drawn from the serving employees of the RBI.

Banking Ombudsman Scheme is an expeditious and inexpensive forum for bank customers for resolution of complaints relating to certain services rendered by banks.

It was introduced under Banking Regulation Act, 1949 by RBI with effect from 1995.
Presently Banking Ombudsman Scheme 2006 (as amended in 2017) is in operation.
The Banking Ombudsman can receive and consider any complaint related to :

non-payment or inordinate delay in the payment or collection of cheques, drafts, bills etc.;
non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof;
failure to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a bank or its direct selling agents;
Non-adherence to the instructions of Reserve Bank with regard to Mobile Banking / Electronic Banking service in India by the bank
Non-disbursement or delay in disbursement of pension etc.
Non-adherence to prescribed working hours of banks
Refusal to open deposit accounts without any valid reason for refusal
Levying of charges without adequate prior notice to the customer
Forced closure of deposit accounts without due notice or without sufficient reason

RBI has formulated a "Charter of Customer Rights" for banks as
1. Right to Fair Treatment
2. Right to Transparency, Fair and Honest Dealing
3. Right to Suitability
4. Right to Privacy
5. Right to Grievances Redress and Compensation

Ombudsman Scheme for NBFCs

Launched by RBI for redressal of complaints against NBFCs registered with RBI under RBI Act, 1934.
An officer at the RBI not below the rank of general manager will be appointed by the regulator as the ombudsman with territorial jurisdiction being specified by the central bank.
The tenure of each ombudsman cannot exceed 3 years and can be reduced by the regulator if needed.
A compliant can be filed by a customer with the ombudsman on various grounds like non-payment or inordinate delay in payment of interest, non-repayment of deposits, lack of transparency in loan agreement, non-compliance with RBI directives on fair practices code for NBFCs, levying of charges without sufficient notice to the customers and failure or delay in returning the securities documents despite repayment of dues among others.
The schemes provide for Appellate mechanism under which complainant/NBFC will have option to appeal against decision of Ombudsman before Appellate Authority.
The ombudsman will be required to send a report to the RBI governor annually on 30th June containing general review of the activities of his office during the preceding financial year and other information required by the central bank.

A no-frills account is a bank account that can be opened and maintained with a zero balance, levies zero or nominal charges and does away with the unnecessary services or frills.

‘Bank Run’ : when a large number of customers of a bank withdrawing their deposits simultaneously .

REGULATING CO-OPERATIVE BANKING :

The rural co-operative credit system in India is primarily mandated to ensure flow of credit to the agriculture sector.
It comprises short-term and long-term co-operative credit structures.
The short-term co-operative credit structure operates with a 3-tier system -

Primary Agricultural Credit Societies (PACS) at the village level, are outside the purview of the Banking Regulation Act, 1949 and hence NOT regulated by RBI.

Central Cooperative Banks (CCBs) at the district level

State Cooperative Banks (StCBs) at the State level.

StCBs/DCCBs are regulated by RBI but inspected and supervised by NABARD.

Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks (UCBs), cater to the financial needs of customers in urban and semi-urban areas.

UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002.

---> Hence Department of Co-operative Bank Regulation (DCBR) of RBI regulates the banking functions of StCBs/DCCBs/UCBs under the provisions of Banking Regulation Act, 1949.

The Lead Bank Scheme was introduced in 1969 by RBI on the basis of recommendations of both Gadgil Study Group and Banker’s Committee (Nariman Committee) to provide lead roles to individual banks (both in public sector and private sector) for the districts allotted to them.

4. FINANCIAL Market :

Financial markets are classified into 2 groups:

Capital Market is divided into 3 groups

Corporate Securities Market
Govt. Securities Market
Long term Loans Market

Money Market is divided into 2 types:

Unorganised Money Market
Organised Money Market

Under the regulatory ambit of RBI are

interest rate markets, including Government Securities market and money markets;
foreign exchange markets;
derivatives on interest rates/prices, repo, foreign exchange rates and credit derivatives.

Government Security (G-Sec)

It is a trade-able instrument issued by Central Government or State Governments. It acknowledges the Government’s debt obligation.
It is a security created and issued by the Government for the purpose of raising a public loan or for any other purpose as may be notified by the Government in the Official Gazette and having one of the forms mentioned in the Government Securities Act, 2006.
Such securities are short term (usually called treasury bills, with original maturities of less than one year)

long term (usually called Government bonds or dated securities with original maturity of one year or more).
In India, the Central Government issues both, treasury bills and bonds or dated securities (T-bills , G-Secs)
While the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).
G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
Following features of government securities earned them the name of gilt edged securities.

They have zero income default (we will not loss our money)
There is high rate of return
There is cent per cent liquidity (G-Secs are tradable in the stock m market.)

Treasury bills or T-bills : are money market instruments, are short term debt instruments issued by GOI and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity.

——> CMBs Cash Management Bills are a relatively new short-term instrument to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.

Bond :

is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate.
Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities.
Owners of bonds are debt holders, or creditors, of the issuer.

Various Type of Bonds : There are two types of bonds:

Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government bonds are issued as fixed rate bonds.
Floating Rate Bonds – Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set at pre-announced intervals (say, every six months or one year) by adding a spread over a base rate. These are issued by RBI.

If the central bank of a country enacts tighter monetary policy, that is to say, the government start selling its securities, this reduces the supply of money in an economy. This contraction of the monetary policy is known as quantitative tightening technique.

Zero Coupan Bonds : pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity (and usually taxed as such). The bondholder receives the full principal amount on the redemption date.

Maharaja Bond: It is rupee-denominated bond launched by IFC for issuances in India’s domestic capital markets.

MASALA BONDS

The Rupee-denominated bonds issued by Indian entities in the overseas market to raise funds.
As of now, it is being traded only at the London Stock exchange.
Named so by the IFC International Finance Corporation( an arm of World Bank ) which issued these bonds to raise money for infrastructure projects in India.
They protect investors from exchange rate fluctuations as opposed to external commercial borrowing (ECB) that have to be raised and repaid in dollar.

RECENTLY Union Minister of Road Transport & Highways and Shipping launched the NHAI Masala Bond (National Highways Authority of India) issue at the London Stock Exchange. Moreover, RBI has allowed NBFCs to sell the Masala Bond to foreign investors abroad.

Green Bonds :

A debt instrument issued by an entity for raising funds from investors for financing ‘green’ projects, such as renewable energy, low carbon transport, sustainable water management, climate change adaptation, energy efficiency, sustainable waste management, biodiversity conservation etc.
First ever green bond was issued by multilateral institutions (European Investment Bank and World Bank) in 2007.
The first green bond in India was issued by Yes Bank in 2015.
Masala green bonds have also been issued by Indian entities
SEBI made it mandatory for issuers to disclose environmental objectives of issuance of such securities and the projects ear-marked for the same.
Example of Green Bonds in India

India INX has listed Indian Railways Finance Corporation's (IRFC) first green bond on its global securities market (GSM). It has also become first debt security to be listed on an exchange at IFSC in Gujarat's GIFT city.

Initiative to promote Green Bond

Indian Green Bonds Council, formed in 2017 as a joint project of the federation of Indian Chambers of Commerce Industry (FICCI) and the Climate Bonds Initiative, to build the country’s green debt markets.
Green Infrastructure Investment Coalition (GIIC) launched at COP-21 of UN Climate Conference, aims to provide a platform for investors, development banks and advisors for countries to be able to tap when seeking finance for green infrastructure.

Public Debt Office (PDO) of RBI acts as the registry/depository of G-Secs and deals with the issue, interest payment and repayment of principal at maturity. Most of the dated securities are fixed coupon securities.

Clearing Corporation of India Limited CCIL is the clearing agency for G-Secs. It acts as a Central Counter Party (CCP) for all transactions in G-Secs by interposing itself between two counter parties.

Call money market:
Uncollaterised call money market is restricted to banks and Primary Dealers subject to prudential limits.
The collaterised segments include Collaterised Borrowing and Lending Facility (CBLO) and market repo transactions between banks and financial institutions.
The money market also includes Commercial Paper (CP) issuances by corporates, PDs and financial institutions and Certificates of Deposit (CD) issued by banks to institutional investors.

FOREIGN EXCHANGE MARKET

The market in which national currencies are traded for one another.
The major participants are commercial banks, foreign exchange brokers and other authorised dealers and the monetary authorities
Price of foreign currency in terms of domestic currency. This is bilateral nominal exchange rate.
The ratio of foreign to domestic prices, measured in the same currency , is real exchange rate.
If the real exchange rate is equal to one, currencies are at PPP purchasing power parity.
If the real exchange rises above one, this means that goods abroad have become more expensive than goods at home.
The real exchange rate is often taken as a measure of a country’s international competitiveness.
Foreign Exchange Management Act, 1999 aka FEMA, 1999 provides the statutory framework for the regulation of Foreign Exchange derivatives contracts.
Residents can hedge their foreign exchange exposures through various products, such as, forward contracts, options involving rupee and foreign currencies, currency swaps and cost reduction option structures in the OTC market.
Foreign investors can also hedge their investments in equity and/or debt in India through forwards and options.

NEER : Weighted average of exchange rates before currencies of India's major trading partners is known as nominal effective exchange rate.

REER : Rate of inflation is adjusted with nominal effective exchange rate is known as real effective exchange rate.

Real effective exchange rate (REER) is defined as “a weighted average of nominal exchange rates (NEER) adjusted for relative price differential between the domestic and foreign countries, relates to the purchasing power parity (PPP) hypothesis”.

REER takes price differential and inflation into account and, therefore, is said to be a better indicator of the competitiveness of the country in terms of exchange rates.

In an economy, when aggregate demand increases, the imports from foreign countries also increase. It leads to flow of currency from domestic to foreign which eventually depreciates the value of domestic currency.

Aggregate demand —> leads to depreciation of domestic currency

Fixed Exchange Rate — fixing of exchange rate wrt to major economies

Floated Exchange Rate — changes in Exchange Rate on the basis of “Market Mechanism”

Managed Exchange Rate — Mix of Fixed and Floated , hence called “Dirty Floating” in which Central bank of a country sell or buy the foreign currency in order to manipulate its Exchange Rate.

Managed floating exchange rate system or ‘dirty floating’ is a mixture of a flexible exchange rate system (the float part) and a fixed rate system (the managed part). Under this system central banks intervene to buy and sell foreign currencies in an attempt to moderate exchange rate movements whenever they feel that such actions are appropriate.

The country’s central bank may occasionally intervene in order to direct the country’s currency value into a certain direction. This is generally done in order to act as a buffer against economic shocks and hence soften its effect in the economy.

Pegged Exchange Rate :

LERMS Liberalised Exchange Rate Management System:

In March 1992, LERMS involving the dual exchange rate was instituted.
A unified single market-determined exchange rate system based on the demand for and supply of foreign exchange replaced the LERMS effective March 1, 1993.

Foreign Exchange Reserve Management :

RBI as is the custodian of the country’s foreign exchange reserves and is vested with the responsibility of managing their investment under Reserve Bank of India Act, 1934.

RBI’s reserves management function has in recent years grown both in terms of importance and sophistication for 2 main reasons.

First, the share of foreign currency assets in the balance sheet of RBI has substantially increased.

Second, with the increased volatility in exchange and interest rates in the global market, the task of preserving the value of reserves and obtaining a reasonable return on them has become challenging.

The basic parameters of the RBI’s policies for foreign exchange reserves management are safety, liquidity and returns.
RBI Act permits RBI to invest the reserves in the following types of instruments:

1) Deposits with Bank for International Settlements and other central banks
2) Deposits with foreign commercial banks
3) Debt instruments representing sovereign or sovereign-guaranteed liability of not more than 10 years of residual maturity
4) Other instruments and institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act
5) Certain types of derivatives

RBI, in consultation with the Government, continuously reviews the reserves management strategies.

Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves. Reserve Bank of India accumulates foreign currency reserves by purchasing from authorized dealers in open market operations. Foreign exchange reserves of India act as a cushion against rupee volatility once global interest rates start rising.
Foreign exchange reserves of India consists of below 4 categories :

Foreign Currency Assets

Gold

Special Drawing Rights (SDRs) : maintained by IMF and having five currencies : U.S. dollar 41.73%, Euro 30.93%, Renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound 8.09%

Reserve Tranche Position of a country is : difference between a member's quota and the IMF's holdings of its currency

LRS Liberalised Remittance Scheme :

It provides all resident individuals to freely remit $250,000 (Rs. 1.5 crore) overseas every financial year for a permissible set of current or capital account transactions.
Under the LRS, Indians can open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions, without permission from RBI.

RECENTLY RBI has tightened reporting norms for the Liberalised Remittance Scheme (LRS). Now banks will be required to upload daily transaction-wise information undertaken by them under LRS.

ECB EXTERNAL COMMERCIAL BORROWINGS :

Indian companies are allowed to raise external commercial borrowings including commercial-bank loans, buyers’ credit, suppliers’ credit, and securitised instruments.
Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs) are also governed by the ECB guidelines.

Bretton Woods System:

The monetary management established the rules for commercial and financial relations among United States, Canada, Western Europe, Australia, and Japan after the 1944 Bretton-Woods Agreement.
It set up IMF and IBRD later ka World Bank and reestablished a system of fixed exchange rates.
US insisted that the Bretton Woods system rest on both gold and US dollar.

The credibility of US commitment to convert dollars into gold at the fixed price can be eroded. The central banks would thus have an overwhelming incentive to convert the existing dollar holdings into gold, and that would, in turn, force the US to give up its commitment. This was Triffin Dilemma. Triffin suggested that the IMF should be turned into a ‘deposit bank’ for central banks and a new ‘reserve asset’ be created under the control of the IMF.

In 1967, gold was displaced by creating the Special Drawing Rights (SDRs), also known as ‘paper gold’, in the IMF with the intention of increasing the stock of international reserves. Originally defined in terms of gold, with 35 SDRs being equal to one ounce of gold (the dollar-gold rate of the Bretton Woods system).

SDR is similar to global reserve currency named by John Keynard as “Bancor”.

At present, SDR is calculated daily as the weighted sum of the values in dollars of four currencies (euro, dollar, Japanese yen, pound sterling & Renminbi ) of the Six countries (France, Germany, Japan, UK, US & China). It derives its strength from IMF members being willing to use it as a reserve currency and use it as a means of payment between central banks to exchange for national currencies.

In August 1971, United States unilaterally terminated convertibility of US dollar to gold, effectively bringing Bretton Woods system to an end and rendering the dollar a fiat currency. This action, referred to as Nixon shock, created the situation in which the US dollar became a reserve currency used by many states.

The ‘Smithsonian Agreement’ in 1971, which widened the permissible band of movements of the exchange rates to 2.5 per cent above or below the new ‘central rates’ with the hope of reducing pressure on deficit countries, lasted only 14 months.

In 1976, revision of IMF Articles allowed countries to choose whether to float their currencies or to peg them (to a single currency, a basket of currencies, or to the SDR). There are no rules governing pegged rates and no de facto supervision of floating exchange rates.

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies.

Mundell’s ‘impossible trinity’ : The old trilemma asserts that a country cannot maintain, simultaneously, all three policy goals of –

(a) Free capital flows, (b) a fixed exchange rate, and (c) an independent monetary policy.

India has dual exchange rate regime.

Floated i.e. based on market mechanism
RBI use to sell or purchase foreign currency

FIMMDA Fixed Income Money Market and Derivatives Association of India

an association of Scheduled Commercial Banks, Public Financial Institutions, Primary Dealers and Insurance Companies was incorporated as a Company under Companies Act,1956 on June 3, 1998.
FIMMDA is a voluntary market body for the bond, money and derivatives markets.
FIMMDA has members representing all major institutional segments of the market includes Nationalized Banks such SBI, its associate banks and other nationalized banks; Private sector banks such as ICICI Bank, HDFC Bank; Foreign Banks such as BoFa, Citibank, Financial institutions such as IDFC, EXIM Bank, NABARD, Insurance Companies like LIC, ICICI Prudential Life Insurance Company, Birla Sun Life Insurance Company and all Primary Dealers.
FIMMDA represents market participants and aids the development of the bond, money and derivatives markets. It acts as an interface with the regulators on various issues that impact the functioning of these markets
FIMMDA also plays a constructive role in the evolution of best market practices by its members so that the market as a whole operates transparently as well as efficiently

FBIL Financial benchmarks India Pvt Ltd :

RBI set up a Committee on Financial Benchmarks in June 2013 to review the existing systems governing major financial benchmarks in India headed by Shri Vijaya Bhaskar, the then Executive Director, RBI made wide-ranging recommendations to reform the benchmark administration in India.
These were accepted by RBI in early 2014, who identified FIMMDA and FEDAI as the benchmark administrators for the Indian rupee interest rates and Forex benchmarks respectively.
It was suggested that these associations may jointly or independently form a separate entity to administer the benchmarks. This is the first major step for formation of Financial Benchmark India Pvt. Ltd (FBIL) as an independent benchmark administrator for interest rates and foreign exchange.
The FBIL, jointly owned by FIMMDA, FEDAI and IBA, was formed in December 2014 as a private limited company under the Companies Act 2013 and aims to develop and administer benchmarks relating to money market, government securities and foreign exchange in India.
FBIL is responsible for all the aspects relating to the benchmarks to be issued by it, namely, collection and submission of market data and information including polled data , formulation, adoption and periodic review of benchmark calculation methodologies, calculation, publication and administration of benchmarks confirming to the highest standards of integrity, transparency and precision.
The FBIL is committed to providing financial benchmarks that are

(i) free from bias,
(ii) backed by robust data driven research
(iii) compliant with global best practices.

EMC Expenditure Management Commission :

Announced in the Budget Speech of 2014-15as recommendation body with the primary responsibility of suggesting major expenditure reforms that will enable the government to reduce and manage its fiscal deficit at more sustainable levels.
EMC is a 5 members body composed of the former Reserve Bank Of India (RBI) Governor Bimal Jalan, who has been appointed to Head the Commission, former Finance Secretary Sumit Bose, former Deputy RBI Governor Subir Gokarn and two other members.
Despite the legal mandate intended to lower the Fiscal Deficit to 3% within the stipulated time FRBM Act 2003, India has witnessed a persistent high fiscal deficit.
The commission is mandated to evaluate proposals for reducing the three 3 subsidies (i.e. food, fertilizer and oil).

Terms of Reference of EMC :

Review the major areas of Central Government expenditure, and to suggest ways of creating fiscal space required to meet developmental expenditure needs, without compromising the commitment to fiscal discipline;
Review the institutional arrangement, including budgeting process and FRBM rules, for enforcing aggregate fiscal discipline and suggest improvements therein;
Suggest measures to improve allocative efficiencies in the existing expenditure classification system, including focus on capital expenditure;
Design a framework to improve operational efficiency of expenditures through focus on utilization, targets and outcomes;
Suggest an effective strategy for meeting reasonable proportion of expenditure on services through user charges;
Suggest measures to achieve reduction in financial costs through better Cash Management System;
Suggest greater use of IT tools for expenditure management;
Suggest improved financial reporting systems in terms of accounting, budgeting, etc., and;
Consider any other relevant issue concerning Public Expenditure Management in Central Government and make suitable recommendations.

INDRADHANUSH PLAN: an umbrella scheme for banking reforms which includes 7 elements

Appointment: Separating post of Chairman and Managing Director to bring more professionalism.

BBB Bank Board Bureau: a body of eminent professionals and officials, with various important functions like recommending for selection of heads, helping banks in developing strategies and plans, advising banks on strategies of consolidation, etc.

Capitalization: by infusion of equity capital
De-stressing: Strengthening Asset Reconstruction Companies and Establishment of six New debt recovery tribunals (DRCs) and creation of a Central Repository of Information on Large Credits (CRILC) by RBI to collect, store and disseminate credit data to banks.
Empowerment: Non-interference in the functioning of public sector banks and encouraging them to take decisions independently; keeping the commercial interest of the organization in mind.
Framework for accountability: through key performance indicators for state-run PSBs
Governance reforms: “Gyan Sangam” a conclave of PSBs and Financial institutions attended by all major stake-holders.

———> To address challenge of NPAs, Economic Survey 2018 had recommended 4 R's: Recognition, Recapitalization, Resolution, and Reform.

Tackling Bad Loans or NPA : RBI has introduced multiple ways to solve the crisis of NPAs.

Types of Stressed Assets :

NPA : overdue for period of 90 days for any firms (In case of Agriculture sector, For short duration crops if it remains overdue for 2 crop seasons & for Long duration crops if it remains overdue for 1 crop season)
Sub-standard assets : remained NPA for a period less than or equal to 12 months
Doubtful assets : remained in the substandard category for a period of 12 months.
Loss assets : Considered uncollectible

SMAs Special Mentioned accounts : The standard accounts which show earlier sign to fall between the Standard and Sub Standard (NPA) category.

SMA-1 accounts are those where repayments have been overdue for between 31 and 60 days, while SMA-2 accounts are ones with a delay of between 61 and 90 days. If an account sees repayments delayed by 90 days, it turns into an NPA.

SMA -2 Special Mention Accounts -2

loans that reports repayment problems for the last 60 days.
As per the present norm, the JLF can take steps when an account with a size of More than Rs 100 crores or more doesn’t return payments and becomes a special mention account.

—> ‘Gross Non-Performing Assets (NPA)’, includes assets of Foreign Banks , Regional Rural Banks , Non-Banking Financial Companies.

CRILC Central Repository of Information on Large Credits

An arrangement created by RBI that collects information about loans of Rs 50 crore and more.
The data about such big borrowers are kept and transferred to banks.

ARC Asset reconstruction Companies :

If NPA remains so for more than two years, the bank can also sell the same to Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).
This apart, the private Asset Reconstruction Companies(ARCs) under SARFESI Act 2002 were established so that the banks can remove focus from NPAs and focus more on their main business.
However, ARCs purchase the bad loans in too cheap prices and banks are unable to accept their offers.

AQR Asset quality Review

SARFAESI Act provides for the banks to take legal recourse to recover their dues. Under this act, when a borrower defaults the payments, the banks can take possession of the assets and can also give it on lease or sell it. Additionally If a bank fails a minimum of 2 times to auction the assets, it can go for private treaties.

PARA Public Sector Asset Rehabilitation Agency (PARA) in 2016

Also called “Bad Bank” is a proposed agency to assume the Non-Performing Assets (NPA) of public sector banks(PSBs) in India and to deal with the recovery of the bad loans.
The main function of PARA would be to take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.
The funding of this body would come either by selling the bonds or by inviting private companies to buy its equities.
The survey also suggests that instead of investing funds and recapitalise the banks year after year, it would be better for the government to focus on recovery.

—— > RBI WITHDRAWS older Schemes

With the enactment of IBC Code, 2016, RBI decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets. RBIS has withdrawn below Schemes:

SDR Strategic Debt Restructuring Scheme
S4A Scheme for Sustainable Structuring of Stressed Assets
CDR Corporate Debt Restructuring Scheme
JLF Joint Lenders’ Forum
Flexible Structuring of Existing Long-Term
Project Loans or 5/25 refinancing.

Flexible refinancing of Infrastructure(5/25 scheme)

RBI had launched a 5:25 scheme under which the creditors were allowed to increase debt period up to 25 years with interest rates adjusted every five years.
It forcing banks to infuse additional grants thus leading to problem of “ever greening of loans”.

SDR Strategic Debt Restructuring

Launched by RBI in 2015 under which the banks could take over firms that were unable to pay; and subsequently sell them to new owners.

This scheme also has not been much successful so far.

LDR

JLF Joint Lender’s Forum

A dedicated grouping of lender banks that is formed to speed up decisions when an asset (loan) of more Rs 100 crore or more turns out to be a stressed asset.
A body comprised of banks who have given loan to the concerned borrower entity.
RBI has issued guidelines titled ‘Framework for Revitalizing Distressed Economy’ (2014) for the formation of JLF in 2014 for the effective management of stressed assets.
The existing guidelines says that “As soon as an account is reported to CRILC as SMA-2, all lenders, including NBFCSIs, (Non-Banking Financial Companies-Systemically Important) should form a lenders’ committee to be called Joint Lenders’ Forum (JLF) under a convener and formulate a joint corrective action plan (CAP) for early resolution of the stress in the account.”
The RBI has instructed banks to form JLF Empowered Group (JLF-EG) to approve the restructuring package for stressed loans.

Corrective Action Plan (CAP) by JLF should be aimed to make an early solution to the stressed asset problem by initiating rectification, recovery and restructuring as part of the CAP.

Twin Balance Sheet problem for Indian economy which deals with:

Over leveraged companies – Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans.
Bad loan encumbered banks – Non Performing Assets (NPA) of the banks is 9% for the total banking system of India. It is as high as 12.1% for Public Sector Banks. As companies fail to pay back principal or interest, banks are also in trouble. Higher cost, lower revenues, greater financial costs-all squeezed corporate cash flow leading to NPAs in the banking sector.

Decisive action through 4 R’s (Recognition, Resolution, Recapitalisation and Reforms) was taken to tackle Twin balance sheet challenge.
Government announced a large recapitalisation package to strengthen the balance sheets of PSBs which are under the pressure of NPAs.

Government is considering the levy of an inheritance tax(Also popularly known as estate tax or estate duty) on high net worth individuals, with 5 to 10%

Tax buoyancy : an indicator to measure efficiency and responsiveness of revenue mobilization in response to growth in the GDP or National income. It is calculated as a ratio of percentage growth in tax revenues to growth in nominal GDP for a given year.

A tax is said to be buoyant if the tax revenues increase more than proportionately in response to a rise in national income or output.
A tax is buoyant when revenues increase by more than, say, 1% for a 1% increase in GDP.
Usually, tax elasticity is considered a better indicator to measure tax responsiveness.
Tax elasticity is a measure designed for this purpose since it measures the responsiveness of tax revenue to a change in national income or output after controlling for exogenous influences such as discretionary changes in tax policy.
If a tax is elastic, a 1 % increase in GNP or GDP results in a greater than 1% increase in revenue from the tax holding constant for discretionary tax changes.

Tax is said to be buoyant (more than 1) if the gross tax revenues increase more than proportionately in response to a rise in GDP figures. If it is less than 1, it means tax revenues have not increased proportionately with GDP growth.

IBC Insolvency and Bankruptcy Code, 2016

is bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
The code will be able to protect the interests of small investors and make the process of doing business a less cumbersome process
It is applicable to Individuals, partnerships, LLP , Corporates.
Adjudicating Authorities are NCLT for Corporates , DRT for Individuals & partnership firms
Adjudicating Authorities to decide insolvency application within 180 days (90 days extension allowed)
Also provision for fast tracking resolution process to complete it in 90 days which could be extendable by further 45 days. However, only small companies and start-ups could opt for this method.
During the resolution process financial creditors’ assess whether the debtors’ business could be restructured and also consider options for the revival.
If the insolvency resolution process fails, the liquidation of assets begins.
The resolution processes are conducted by licensed Insolvency Professionals (IPs).
Adjudicating Authorities have been set up under Companies Act, 2013 & Recovery of Debt due to Banks & Financial Institutions Act, 1993

IBBI Insolvency and Bankruptcy Board of India was set up on 1st October 2016 under IBC Insolvency and Bankruptcy Code, 2016.

It is a unique regulator: regulates a profession as well as transactions.
The IBBI has a 10 members board including a Chairman. Following is the structure of the IBBI:

One Chairperson
Three members from Central Government officers not below the rank of Joint Secretary or equivalent.
One nominated member from the RBI.
Five members nominated by the Central Government; of these, three shall be whole-time members.

National e-Governance Services Ltd (NeSL) has become India’s first information utility (IU) for bankruptcy cases under the Insolvency and Bankruptcy Code 2016.

NeSL is owned by State Bank of India(SBI) and Life Insurance Corporation Ltd (LIC).
It is an information network which would store financial data like borrowings, default and security interests etc. of firms.
It is mandatory for financial creditors to provide financial information to the information utility. Hence, database and records maintained by them would help lenders in taking informed decisions about credit transactions.
Information available with the utility can be used as evidence in bankruptcy cases before NCLT National Company Law Tribunal.

PCA Prompt Corrective Action : with an aim to check NPAs

PCA norms allow the regulator to place certain restrictions such as halting branch expansion and stopping dividend payment.
It can even cap a bank’s lending limit to one entity or sector.
Other corrective action that can be imposed on banks include special audit, restructuring operations and activation of recovery plan.
Banks’ promoters can be asked to bring in new management, too.
The RBI can also supersede the bank’s board, under PCA.
There are two type of restrictions, mandatory and discretionary.

Restrictions on dividend, branch expansion, directors compensation, are mandatory while
Discretionary restrictions could include curbs on lending and deposit.

In the cases of two banks where PCA was invoked after the revised guidelines were issued — IDBI Bank and UCO Bank — only mandatory restrictions were imposed. Both the banks breached risk threshold 2.

Fin Ministry will initiate Performance review of heads of PSBs under RBI's PCA which imposed restrictions on the banks such as Mandatory and Discretionary. On IDBI and UCO banks , PCA is invoked after revised guidelines.

Effects on Banks once PCA is applied on them :

Not allowed to re new or access costly deposits or take steps to increase their fee-based income.
Have to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs.
Not be allowed to enter into new lines of business.
RBI will also impose restrictions on the bank on borrowings from interbank market.

Indirect Effects on MSME Sec : Since the PCA framework restricts the amount of loans banks can extend, this will definitely put pressure on credit being made available to companies especially the MSMEs. If more state-owned banks are brought under PCA, it will impact the credit availability for the MSME segment.

RECENTLY RBI has directed banks to link the SWIFT with CBS core banking solutions of banks by April 30 as the failure of SWIFT-CBS link led to recent fraud at PNB.

e-Kuber : The CBS of RBI provides the provision of a single current account for each bank across the country, with decentralised access to this account from anywhere-anytime using portal based services in a safe manner.

LOU Letter of Undertakings

LoU is a letter of assurance or guarantee issued by one bank to branches of other banks to meet a liability on behalf of an importer, based on which foreign branches offer credit to buyers.

A bank guarantee under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency.
The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank. LoUs, which are essentially a form of guarantee, have come to be a far cheaper and convenient way for importer to raise credit.
RBI has asked all banks for details of the LoUs they had issued, including the amounts outstanding, and whether the banks had pre-approved credit limits or kept enough cash on margin before issuing the guarantees.

5.BANKING-

History :

Among the first banks were the Bank of Hindustan, which was established in 1770 in Calcutta under European Management and liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791.
The largest bank, and the oldest still in existence, is the State Bank of India (S.B.I). It originated as the Bank of Calcutta in June 1806.
The Bank of Madras merged into the other two "presidency banks" in British India, the Bank of Calcutta and the Bank of Bombay, to form the Imperial Bank of India, which in turn became State Bank of India in 1955. On 7 October 2013, Arundhati Bhattacharya became the first woman to be appointed Chairperson of the bank.
Banks which are merged into SBI —> SBS (Saurashtra) in 2008, SBN (Indore) in 2009 and 7 banks namely SBBJ(Bikaner, Jaisalmer) , SBH(Hyderabad), SBM(Mysore) , SBP(Patiala), SBT(Travancore) & Bhartiya Mahila bank with effect on 1 Apr 2017. YONO, an online banking platform run by SBI
During the period of British rule merchants established the Union Bank of Calcutta in 1829, first as a private joint stock association, then partnership. It failed within a decade.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India, it was not the first though. The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 145 years is Allahabad Bank.
Punjab National Bank,(first bank purely managed by Indians ) established in Lahore in 1894, which has survived to the present and is now one of the largest banks in India.
The first Indian commercial bank which was wholly owned and managed by Indians was Central Bank of India which was established in 1911. So, Central Bank of India is called India’s First Truly Swadeshi bank.

Reserve Bank of India, India's central banking authority, was established in April 1935, but was Nationalized on 1 Jan 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation. The image is a newspaper clipping giving the views of Governor CD Deshmukh, prior to nationalisation.

In 1949, the Banking Regulation Act was enacted, which empowered RBI "...to regulate, control, and inspect the banks in India." Further, the Banking Regulation (Amendment) Act of 1965 gave extensive powers to the Reserve Bank of India and via this act, the Reserve Bank of India was made the Central Banking Authority.

Air transport was nationalised by GOI under the Air Corporations Act, 1953. On 25 August 1953, GOI exercised its option to purchase a majority stake in the carrier and Air India International Limited was born as one of the fruits of the Air Corporations Act.

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

The first major step was Nationalization of Imperial Bank of India in 1955 via State Bank of India Act. SBI was made to act as the principal agent of RBI and handle banking transactions of the Union and State Governments.
In a major process of nationalization, 7 subsidiaries of SBI were nationalized via State Bank of India (Subsidiary Banks) Act,1959.
In 1969, 14 major private commercial banks were nationalized by Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 —>

CBI,
Bo Maharashtra,
Dena,
PNB,
Syndicate,
Canara,
Indian,
Indian Overseas,
Bo Baroda,
Union,
Allahabad,
United,
Uco,
BoI

It was followed by a Second phase of nationalization with 6 more banks in 1980 —>

OBC
Corporation
Andhra
Punjab & Sindh
Vijaya
New Bank of India

There are currently 27 public sector banks in India out of which 19 are nationalised banks and 6 are SBI and its associate banks, and rest 2 are IDBI Bank and Bharatiya Mahila Bank. There are total 93 commercial banks in India.

RBI has issued an ombudsman scheme for NBFCs, offering a grievance redressal mechanism for their customers.

Ombudsman : An officer at the RBI not below the rank of general manager will be appointed by the regulator as the ombudsman with territorial jurisdiction being specified by the central bank. The tenure of each ombudsman CANNOT exceed 3 years and can be reduced by the regulator if needed.

RRB Regional Rural Banks :

Scheduled Commercial Banks (Government Banks) operating at regional level.
may have branches set up for urban operations and their area of operation may include urban areas too.
Established under provisions of an Ordinance passed on 26th September,1975 & RRB Act 1976 to provide sufficient banking and credit facility for agriculture & other rural sectors.
5 RRBs were set up on 2nd October,1975,Gandhi Jayanti on recommendations of Narshimham committee Working Group during tenure of Indira Gandhi's Government.
1st RRB was Prathama Bank,Head Office at Moradabad (U.P.) with authorised capital of Rs 5 crore.
first RRB in the Eastern Region of India was set up at Malda , WB.
owned by Central Government(50%), State Government(15%) and the Sponsor Bank (35%).
RRB are recognized by the law and they have legal significance under Regional Rural Banks Act, 1976.
Recapitalization of RRBs is recommended by KC Chakrabarty Committee.
Lead bank system in RRBs is recommended by Narshimham Committee.
RRBs is regulated by RBI & supervised by NABARD.
M Swaminathan was considered as Father of RRBs in India.
As on Oct 2019 , total RRBs in India are 45.
No presence of RRBs in Goa & Sikkim.

Industrial Finance in India:

Industries require both short term, medium term and long term finance for meeting their requirements of fixed capital expenditure and also to meet their working capital needs.

Type	Duration	Purpose
Long Term	3 yrs & above	For expansion and modernisation of industrial projects and also to meet its fixed capital expenditure requirement. Sale of shares and debentures, and loan from term lending financial institutions like IDBI, IFCI, ICICI etc.
Medium Term	Above 1 yr to 3 yrs	Available from banks and other financial institutions
Short Term	b/w 1 to 12 months	Working capital needs and other sundry expenses of the industrial projects. offered by Commercial banks on cash-credit basis on the security or stocks and overdraft facilities to the industries.

Sources of Industrial Finance: as below

Shares and Debentures:

Public Deposits:

Commercial Banks:

Indigenous Bankers:

Term-lending Institutions:

Retained Profits:

The Industrial Development Bank of India (IDBI)

established in 1964 under an Act of Parliament as a wholly owned subsidiary of RBI.

At present the government holds 85.96% stake in IDBI Bank.

In 1976, the ownership of IDBI was transferred to the GOI & was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in India.

A committee formed by RBI recommended the IDBI to diversify its activity and harmonise the role of development financing and banking activities by getting away from the conventional distinction between commercial banking and developmental banking.

Alexander Hamilton the right-hand man was against this but stayed dead silent.

To keep up with reforms in financial sector, IDBI reshaped its role from a development finance institution to a commercial institution. With the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the status of a limited company viz., IDBI Ltd.

Subsequently, in September 2004, RBI incorporated IDBI as a 'scheduled bank' under the RBI Act, 1934.

Consequently, IDBI, formally entered the portals of banking business as IDBI Ltd. from 1 October 2004. The commercial banking arm, IDBI BANK, was merged into IDBI in 2005.

IDBI provided financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernisation and diversification purposes.

In the wake of financial sector reforms unveiled by the government since 1992, IDBI also provided indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms.

It's subsidiary are IDBI bank, IDBI market, IDBI MC, Sidbi.

In June 2018, LIC has got a technical go-ahead from Insurance Regulatory and Development Authority of India (IRDAI) to increase stake in IDBI Bank up to 51%.

IDBI Bank recently partnered with consulting firm Boston Consulting Group (BCG) to turn around its business under an initiative called Project Nishchay.

Stock Holding Corporation of India Limited (SHCIL)

India's largest custodian and depository participant, based in Mumbai.

established in 1986 and was granted a status of a government company as Indian Companies Act, 2013.

In 2014. SHCIL is known for its online trading portal with investors and traders.

It is also responsible for e-stamping system around India.

It is also authorised by RBI as Agency Bank to distribute and receive GOI savings/relief bond 2003 along with nationalized banks.

lCICI Bank launched a new home loan product that offers borrowers the benefit of 1 per cent cash-back for every equated monthly instalment (EMI) over the entire loan tenure.

Mastercard recently announced the launch of its first Lab in India at Pune, which will work with partners in the fintech industry to identify and experiment with future technologies.

Nedungadi Bank Ltd (NBL) was taken over by Punjab National Bank (PNB)

As per Section 12 (2) of the Banking Regulation Act, 1949, any shareholder’s voting rights in private sector banks are capped at 10 per cent. This limit can be raised to 26 per cent in a phased manner by the RBI. Further, as per Section 12B of the Act ibid, any acquisition of 5 per cent or more of paid-up share capital in a private sector bank will require prior approval of RBI.

Local Area Bank :

Banking Codes and Standards Board of India BCSBI is an independent and autonomous institution to monitor and ensure that the Banking Codes and Standards adopted by the banks are adhered to in true spirit while delivering their services.

The Centralised Funds Management System

It is a system set up, operated and maintained by RBI to enable operations on current accounts maintained at various offices of the Bank, through standard message formats in a secure manner.The CFMS comprises two components – the Centralised Funds Enquiry System (CFES) and Centralised Funds Transfer System (CFTS).

Takeout financing is a route of refinance wherein new lenders take over project loans of existing lenders and thereby stretch the loan’s repayment over a longer period. Through this route, existing lenders get relief on their capital to pursue new lending opportunities and infrastructure projects get the benefit of a longer repayment period.

Bancassurance is an arrangement in which a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank's client base. This partnership arrangement can be profitable for both companies. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer bases without having to expand their sales forces or pay commissions to insurance agents or brokers.

‘Mutilated note'; means a note of which a portion is missing or which is composed of more than two pieces.

For Mortgage — The Transfer of Property Act, 1882

limit on the amount of compensation as specified in an award under Banking Ombudsman Scheme — 20 lakhs

Differentiated Bank was mooted by Nachiket More Committee 2014, for Financial Inclusion.

It can be classified as Payment Banks, Small Finance Banks, Regional Rural Banks, Local Area Banks wholesale and long-term finance (WLTF) banks etc.
Wholesale and long-term finance WLTF banks focused primarily on lending to infrastructure sector and small, medium and corporate businesses.
Aditya Birla Idea Payments Bank is 1st payment bank of India.

DSIBs Domestic - Systematically Important Banks :

Also referred to as “Too Big To Fail” (TBTF) because of their size, cross- jurisdictional activities, complexity and lack of substitute and interconnection.
Banks whose assets cross 2% of the GDP are considered DSIBs.If these banks fail, they can have a disruptive effect on the economy
They are categorised under 5 buckets. According to these buckets the banks have to keep aside the Additional Common Equity Tier 1 as a percentage of Risk Weighted Assets (RWAs).
D-SIBs are closely monitored by the central bank
They are domestically identified by Central Banks of a country and globally by BASEL committee on banking supervision.
Currently there are 3 DSIBs banks in India - namely SBI, ICICI, HDFC(recently added in the list)

Types of ATMs :

White-label ATMs : owned and operated to increase the geographical spread of ATMs and enhance financial inclusion. It allows (since 2011 by RBI) non-banking companies to set up and run their own ATMs, under a pact with a sponsor bank and a network provider. These ATMs will NOT come under the ambit of the RBI guideline which mandates five free transactions on ATMs of other banks.
White label ATM doesn’t have a Bank logo, hence called White label ATMs. Tata Communications Payment Solutions Limited =the first company to get RBI’s permission to open White label ATMs.They started their chain under brandname “Indicash”. Any non-bank entity with the net worth of Rs.100 cr can apply for White Label ATM’s.

Bank ATM : owned and operated by the respective bank.
Brown Label ATM : banks outsource the ATM operations to a third party. They have logo of the bank. The Bank provides the cash for the ATM which are owned and operated by private companies, which outsourced the contract.

NBFC NON-BANKING FINANCIAL COMPANIES :

An NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of securities issued by Government, insurance business, chit business etc but does NOT include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
They are regulated by and are registered with RBI under Section 45-IA of the RBI Act, 1934.
NBFCs CANNOT accept DDs demand deposits;
NBFCs do NOT form part of the payment and settlement system and CANNOT issue cheques drawn on itself;
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is NOT available to depositors of NBFCs, unlike in case of banks.

The gross NPA ratio (per cent to advances) of NBFC sector declined to 5.5 per cent as on end-September 2017 from 6.1 per cent as on March 31, 2017. NBFC sector, as a whole, accounted for 17 per cent of bank assets and 0.26 per cent
of bank deposits. The consolidated balance sheet size of the NBFC sector is 20.7 lakh crores.

Nidhi Companies

Regulated by Ministry of Corporate Affairs, GOI.
They belong to the non-banking Indian finance sector and is recognized under Companies Act, 2013.
Their core business is borrowing and lending money between their members.
They are also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company.
They are created for cultivating the habit of savings among its members. The basic concept of Nidhi is "Principle of Mutuality"
BUT RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities.
A Nidhi Company can be started with a initial capital of Rs.5 lakh and require atleast 7 people to start with.

Chit Fund Companies : by State govt (Though Central Govt. can make legislations)

A company that manages, conducts, or supervises such a chit fund, as defined in Chit Funds Act, 1982. Hence Chit Fund Company is a company which collects subscriptions from specified number of subscribers periodically and in turn distributes the same as prizes amongst them.
A chit fund is a type of saving scheme where a specified number of subscribers contribute payments in installment over a defined period.
Being part of the Concurrent List of the Indian Constitution; both the centre and state can frame legislation regarding chit funds.
RBI does NOT regulate the chit fund business. However, RBI can provide guidance to state governments on regulatory aspects like creating rules or exempting certain chit funds.
SEBI regulates collective investment schemes. However, the SEBI Act specifically excludes chit funds.

For e.g. the Kerala State Financial Enterprise (KSFE) and Mysore Sales international limited (MSIL) are PSUs that run chit fund business in a clean and transparent manner.

CHIT FUNDS (AMENDMENT) BILL, 2018 : Bill makes amendments to the Chit Funds Act, 1982, to facilitate orderly growth of the Chit Funds sector and remove bottlenecks (traffic, Jam, Congestion) thereby enabling greater financial access of people to other financial products.

Venture Capitalists : SEBI

Peer to Peer (P2P) and Account Aggregators are the new categories of NBFC that have been introduced recently.

PEER TO PEER (P2P) LENDING :

Refers to a crowd - funding platform (mostly online) where people looking to invest and people in need of borrowing come together.
Till now, P2P companies were registered under the Companies Act.
Such companies follow a reverse auction process that lenders bid for borrower’s proposal and the borrower is free to choose whether or not to borrow.
Registered as NBFC by RBI , Hence RBI regulations for P2P

P2P lending will get access to credit bureaus and will have to share loan related data with it.
P2P platforms will also have to mandatorily share the borrower’s credit information.
P2P platforms (being NBFCs) can now pursue cheque bounce (P2P loan recovery works through post-dated cheques) cases in court.
P2P platforms also need to put a proper grievance mechanism in place and appoint a nodal officer.

Account aggregation is a method that involves compiling information from different accounts, which may include bank accounts, credit card accounts, investment accounts and other consumer or business accounts, into a single place.

NBFC Account Aggregator is a financial entity that function as an account aggregator (for NBFC customers), who provides information on various accounts held by a customer in different NBFC entities. The account information will be a consolidated, organised and retrievable data about the various types of financial enagagement by a customer among different NBFC products (like insurance, mutual funds etc).

6.FINANCIAL MARKET

Financial Assets/Instruments

A market for short-term money and financial assets that is a substitute for money.

Short-term means generally a period of one year substitutes for money is used to denote any financial asset which can be quickly converted into money.

Some of the important instruments are as follows:

Call notice Money,
Term Money,
T-Bills,
Certificates of Deposits,
Commercial Paper

Call /Notice-Money:

is the money borrowed on demand for a very short period.

When money is lent for a day it is known as Call Money.

Intervening holidays and Sunday are excluded for this purpose.

Thus money borrowed on a day and repaid on the next working day is Call Money.

When the money is borrowed or lent for more than a day up to 14 days it is called Notice Money.

No collateral security is required to cover these transactions.

Term Money:

Deposits with maturity period beyond 14 days is referred as the term money.

The entry restrictions are the same as that of Call/Notice Money, the specified entities not allowed to lend beyond 14 days.

Treasury Bills:

T-Bills are short-term (upto 1 year) borrowing instruments of the union government.

It’s a promise by the Government to pay the stated sum after the expiry of the stated period from the date of issue (less than 1 year).

They are issued at a discount off the face value and on maturity, the face value is paid to the holder.

Certificate of Deposits:

is a money market instrument issued in dematerialised form or as a Promissory Note for funds deposited at a bank, other eligible financial institution for a specified period.

Commercial Paper:

CP is a note in evidence of the debt obligation of the issuer.

On issuing commercial paper the debt is transformed into an instrument.

CP is an unsecured promissory note privately placed with investors at a discount rate of face value determined by market forces.

Financial markets are classified into two groups:

Capital Market is divided into 3 groups

Corporate Securities Market
Govt. Securities Market
Long term Loans Market

Money Market is divided into 2 types:

Unorganised Money Market
Organised Money Market

Capital Market

An organised market which provides long-term finance for business and is used for selling and buying "Debts and Equity" Instruments.

Capital Market also refers to the facilities and institutional arrangements for borrowing and lending long-term funds.

Capital Market is divided into 3 groups:

Corporate Securities Market: Corporate securities are equity and preference shares, debentures and bonds of companies. The corporate security market is a very sensitive and active market. It can be divided into two groups: primary and secondary.

Primary : Investors buy securities directly from the company issuing them. For Example : Initial Public Offerings , Setting up new business or expanding or modernizing the existing business. It is also called "New Issue Market" (NIM) because Securities are sold here for the 1st time.

Secondary : Investors trade securities among themselves and the company with the security being traded does usually not participate in the transaction. In this Market An investor sell his/her property to another investor to reicive the cash.

Government Securities Market: In this market government securities are bought and sold. The securities are issued in the form of bonds and credit notes. The buyers of such securities are Banks, Insurance Companies, Provident funds, RBI and Individuals.

Long-Term Loans Market: Banks and Financial institutions that provide long-term loans to firms for modernization, expansion and diversification of business. Long-Term Loan Market can be divided into

Term Loans Market : Market in which the lent amount is repaid in regular payments over a set period of time.

Mortgages Market : where home loans and servicing rights are bought and sold between lenders and investors.

Financial Guarantees Market. in which a non-cancellable indemnity bond backed by an insurer toguarantee investors that principal and interest payments will be made.

Money Market

Money Market is the market for short-term funds for less than 1 year.

The money market is divided into 2 types:

Unorganised Money Market :It consists of Money lenders, Indigenous Bankers, Chit Funds, etc.

Organised Money Market : It consists of

Treasury Bills,

Commercial Paper,

Certificate Of Deposit,

Call Money Market,

Commercial Bill Market

Organised Markets work as per the rules and regulations of RBI. RBI controls the Organized Financial Market in India.

FINANCIAL INTERMEDIARY

An institution which connects the deficit and surplus money.

The best example of an intermediary is a bank which transforms the bank deposits to bank loans.

The role of the financial intermediary is to distribute funds from people who have extra inflow of money to those who don’t have enough money to fulfil the needs.

Functions of Financial Intermediary are are as follows:

Maturity transformation: Deals with the conversion of short-term liabilities to long term assets.

Risk transformation: Conversion of risky investments into relatively risk free ones.

Convenience denomination: It is a way of matching small deposits with large loans and large deposits with small loans.

Financial Intermediaries are divided into two types:

Depository institutions: These are banks and credit unions that collect money from the public and use that money to advance loans to financial customers.

Non-Depository institutions: These are brokerage firms, insurance and mutual funds companies that cannot collect money deposits but can sell financial products to financial customers.

Bonds vs Debenture

Bonds are more secure than debentures, but the rate of interest is lower.

Debentures are unsecured loans but carries a higher rate of interest.

In bankruptcy, bondholders are paid first, but liability towards debenture holders is less.

Debenture holders get periodical interest.

Bond holders receive accrued payment upon completion of the term.

Bonds are more secure as they are mostly issued by government firms

QIP QUALIFIED INSTITUTIONAL PLACEMENT :

A capital raising tool wherein a listed company can issue equity shares, fully and partly convertible debentures, or any security (other than warrants) that is convertible to equity shares.
QIP can be classified as a method of private placement, apart from Public issue, Rights issue, and Bonus Placement.
Components of QIP:

Mutual Funds,
Domestic financial institutions such as banks and insurance companies,
Venture Capital Funds,
Foreign institutional investors.

SEBI suggested that there should be at least 2 QIBs if the issue size is less than Rs.250 crore, and at least 5 investors if the size is more than Rs.250 crore.
A single investor CANNOT be allotted more than 50% of the issue.

Recently, SBI raised Rs. 15000 cr. through QIP.

Methods of raising Capital are SEBI ICDR Regulations

Public Issue :

Initial public offer (IPO):
Further public offer (FPO):

Right Issue:
Composite Issue
Bonus Issue
Private Placement :

Preferential allotment :
Institutional Placement Programme (IPP):
Qualified Institutional Placement QIP

ICEX Indian Commodity Exchange Limited

A nation-wide online trading platform in commodity derivative
The Exchange is a public-private partnership (PPP) with MMTC Ltd, Indian Potash Ltd, KRIBHCO, IDFC Bank Ltd, Reliance Exchangenext Ltd (Reliance Capital) and India-bulls Housing Finance Ltd as prominent shareholders
It commenced the world’s first diamond futures exchange trading operations last year.

Multi Commodity Exchange :

Independent commodity exchange based in Mumbai India was established in 2003 and operates within regulatory framework of Forward Contracts Regulation Act, 1952 (FCRA, 1952) under SEBI.
It is India's largest commodity derivatives exchange where the clearance and settlements of the exchange happens.
MCX offers options trading in gold and futures trading in non-ferrous metals, bullion, energy, and a number of agricultural commodities (mentha oil, cardamom, crude palm oil, cotton and others).
In 2017 MCX partnered with Thomson Reuters to develop India’s first co-branded commodity index series, the iCOMDEX that consists of iCOMDEX Composite, iCOMDEX Base Metals, iCOMDEX Bullion, iCOMDEX Gold, iCOMDEX Copper and iCOMDEX Crude Oil.
It has also set up a web-based application “ComRIS” (Commodity Receipts Information System) in order to maintain electronic record of commodities deposited at the Exchange accredited warehouses and ensure flow of real time information from the warehouses.
MCX is being regulated by SEBI.
It provides live feeds for all traded commodities.
Commodities traded include :

Metal - Aluminium, Aluminium Mini, Copper, Copper Mini, Lead, Lead Mini, Nickel, Nickel Mini, Zinc, Zinc Mini
Bullion - Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Petal ( New Delhi), Gold Global, Silver, Silver Mini, Silver Micro, Silver 1000
Agro Commodities - Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil, Castorseed, RBD Palmolien , Black Pepper
Energy - Brent Crude Oil, Crude Oil, Crude Oil Mini, Natural Gas

World’s first brass futures contract: Recently MCX has launched futures trading in Brass for first time in the world. With the launch of a transparent brass futures contract, MCX will emerge as the benchmark price as volume picks up in two months time.

Brass would be first non-ferrous contract with compulsory delivery options – the IS-319 grade brass ingots and billets can be delivered at Jamnagar in Gujarat.
Brass, an alloy, usually contains 60% zinc and the rest is copper. It finds varied industrial use in electrical appliance, switch gears, sanitary ware, automobiles and defence sectors.

——> Gold options were launched for the first time in India on Multi Commodity Exchange (MCX) becoming the first commodity that the SEBI has approved for options trading in 14 years.

——> National Commodity and Derivatives Exchange Ltd. unveiled India’s first agri - commodity option in GUAR SEED designed as a hedge for farmers to safeguard their price risk.

Derivatives:
In the OTC(Over the Counter), interest rate derivatives (IRD) segment, interest rate swaps (IRS) and forward rate agreements (FRA) are permitted on various benchmarks where banks and primary dealers (PD) take hedging and trading positions.
Other regulated entities like insurance companies, mutual funds, NBFC can participate in IRD for the purpose of hedging.
The activity in IRS market has shown impressive growth with the average daily inter-bank trading volume (notional principal) in Rupee IRS at Rs. 88.60 billion in financial year 2014-15.
In addition, there are exchange traded interest rate futures (IRF) which are also open to Foreign Portfolio Investors (FPI).
Trading activity in the IRF market has picked up in the recent period with average daily trading volume of Rs. 19.18 billion during the financial year 2014-15.

Over-The-Counter OTC Market :

An OTC market handles the exchanging of public stocks not listed on the NASDAQ, NSE, BSE Exchanges etc.

Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without the supervision of an exchange.

In an OTC trade, the price is not necessarily published for the public.

Hence It can be used to refer to stocks that trade via a dealer network as opposed to on a centralized exchange.

Derivatives :

It is an instrument whose value is derived from the value of one or more basic variables called bases (underlying asset, index, or reference rate) in a contractual manner.
The underlying asset can be equity, commodity, forex or any other asset.
The major financial derivative products are Forwards, Futures , Options and Swaps.

Forward Contracts : A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. The main features of this definition are

There is an agreement
Agreement is to buy or sell the underlying asset
The transaction takes place on a pre-determined future date
The price at which the transaction will take place is also predetermined.

Future Contracts :

A future contract is effectively a forward contract which is standardized in nature and is exchange traded.
Future contracts remove the lacunas of forward contracts as they are not exposed to counter party risk and are also much more liquid.
The standardization of the contract is with respect to

Quality of underlying
Quantity of underlying
Term of the contract

Note : Futures are traded on an exchange whereas forwards are traded OTC over-the-counter. Futures contracts are highly standardized whereas the terms of each forward contract can be privately negotiated.

Options :

are derivative contracts (which derive its value from some other asset e.g. Stock Options or Commodity Options) that give the buyer the right but not the obligation to buy or sell a specific asset at a specified price in future.
An option contract is a contract which gives one party the right to buy or sell the underlying asset on a future date at a pre-determined price.
The other party has the obligation to sell/buy the underlying asset at this pre-determined price (called the strike price).
The option which gives the right to buy is called the CALL option while the option which gives the right to sell is called the PUT option.

Call Option : A Call is an options contract that gives the buyer the right to buy the underlying asset at the strike price at any time up to the expiration date

Put Option : A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.

Swap : is a derivative in which two counter-parties agree to exchange one stream of cash flows against another stream. Swaps can be used to hedge interest rate risks or to speculate on changes in the underlying prices. Since swaps are not used in equity markets in India.

SEBI and Functions

Securities and Exchange Board of India (SEBI) :

The regulator for the securities market in India was set up as Autonomous in 1988 and given Statutory body status by SEBI act, 1992 passed on 12 April 1992.
HQ at Mumbai with regional offices at New Delhi, Kolkata, Chennai, Ahmedabad
is managed by its members, which consists of :

Chairman (Ajai Tyagi) who is nominated by Union Government of India.
Two members, i.e. Officers from Union Finance Ministry, One member from Reserve Bank of India(RBI)
The remaining five members are nominated by Union Government of India, out of them at least three shall be whole-time members.

After amendment of 1999, collective investment scheme brought under SEBI except NIDHI, chit fund and cooperatives.
It aims to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental thereto.
SEBI has to be responsive to the needs of 3 groups, which constitute the market:

● The issuers of securities
● The investors
● The market intermediaries

SEBI has 3 functions rolled into one body:

quasi-legislative ( drafting regulations)
quasi-judicial ( passes rulings and orders)
quasi-executive ( conducts investigation and enforcement action)

SEBI has taken a very proactive role in streamlining disclosure requirements to international standards.

There is a Securities Appellate Tribunal which is a three-member tribunal and is headed by Mr. Justice J P Devadhar, a former judge of the Bombay High Court.A second appeal lies directly to the Supreme Court.

Securities Contracts (Regulation) Act, 1956 also known as SCRA is an Act of the Parliament of India enacted to prevent undesirable exchanges in securities and to control the working of stock exchange in India. It came into force on February 20, 1957

Provisions of SEBI Act 1992 :

It shall be deemed to have come into force on the 30th day of January, 1992.
It have power subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.
Central Government shall remove a member from office if He/She is
(a) adjudicated as insolvent;

(b) of unsound mind and stands so declared by a competent court;

(c) convicted of an offence which, in the opinion of the Central Government,
involves a moral turpitude;

(d) has, in the opinion of the Central Government, so abused his position as to render his continuation in office detrimental to the public interest :
Provided that no member shall be removed under this clause unless he has been given a reasonable opportunity of being heard in the matter.
All questions which come up before any meeting of the Board shall be decided by a majority votes of the members present and voting, and, in the event of an equality of votes, the Chairman, or in his absence, the person presiding, shall have a second or casting vote.
Without prejudice to the generality of the foregoing provisions, the measures by SEBI referred to therein may provide for—

(a) regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; registering and regulating the working of the depositories, 14[participants], custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;]

(c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;

(d) promoting and regulating self-regulatory organisations;

(e) prohibiting fraudulent and unfair trade practices relating to securities markets;

(f) promoting investors‘ education and training of intermediaries of securities markets;

(g) prohibiting insider trading in securities;

(h) regulating substantial acquisition of shares and take over of companies;

(i) calling for information from, undertaking inspection, conducting inquiries and audits of the [stock exchanges, mutual funds, other persons associated with the securities market], intermediaries and self-regulatory organisations in the securities market;

SEBI Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities.
Any scheme or arrangement which satisfies the conditions referred below shall be a collective investment scheme: Provided that any pooling of funds under any scheme or arrangement, which is not registered with the Board or is not covered , involving a corpus amount of one hundred crore rupees or more shall be deemed to be a collective investment scheme.
Any scheme or arrangement made or offered by any person under which,—
(i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement;

(ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement;

(iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors;

(iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement.

Autonomy and Accountability of SEBI :

SEBI Act granted powers of last resort to Central Government as It obligated SEBI, in exercise of its powers and performance of its functions, to be bound by the directions of the Central Government on questions of policy. Whether a question is one of policy or not shall be decided by the Central Government.

Further, the Central Government was empowered to supersede the Board for a period not exceeding six months if it is of the opinion that the Board is unable to discharge the functions and the duties under the Act on account of grave emergency, or the Board has persistently defaulted in complying with any directions issued by the Central Government under the Act and as a result of such default the financial position or the administration of the Board has deteriorated, or the circumstances exist which render it necessary in the public interest to do so.

The SEBI Board was obligated to furnish to the Central Government such returns and statements and such particulars in regard to any proposed or existing programme for the promotion and development of the securities market, as the Central Government may, from time to time, require.

The SEBI Board was also obligated to submit to Central Government a report in the prescribed form giving a true and full account of its activities, policy and programmes during the previous year within 60 days (increased to 90 days by 1995 amendment) of the end of each financial year.

A copy of this report shall be laid before each house of parliament. While the Act empowered Central Government to make rules for carrying out the purposes of the Act, it empowered SEBI to make regulations, with the previous approval of Central Government, consistent with the Act and the rules, to carry out the purposes of the Act.

In order to ensure accountability, it was provided that all the rules and regulations made under the Act shall be laid before each house of parliament.

It was also provided that any person aggrieved by an order of the Board under the Act may prefer an appeal to the Central Government. The Act empowered Central Government to exempt, in public interest, any person or class of persons dealing in securities from the requirements of registration.

In the interest of autonomy of SEBI, it was empowered to levy fees or other charges for carrying on the purposes of the Act. This power to levy fees has been upheld by the Supreme Court in the matter of BSE Brokers’ Forum and others v. SEBI and Others.

All the powers under the Securities Contracts (Regulation) Rules, 1957 have been transferred to SEBI from Central Government in 1996.

Graded surveillance system : introduced by SEBI to check for fraudulent practices. It also issued a notification that if such price movements were found the companies would be classified as shell companies and money laundering provisions could be initiated against such companies

SAT Securities Appellate Tribunal

A statutory body established under the provisions of Section 15K of the Securities and Exchange Board of India Act, 1992 to hear and dispose of appeals against orders passed by SEBI or by an adjudicating officer under the Act;
and to exercise jurisdiction, powers and authority conferred on the Tribunal by or under this Act or any other law for the time being in force.
Consequent to Government Notification dated 27th May, 2014 SAT hears and disposes of appeals against orders passed by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act, 2013.
Further, in terms of Government Notification dated 23rd March, 2015, SAT hears and disposes of appeals against orders passed by the Insurance Regulatory Development Authority of India (IRDAI) under the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority Act, 1999 and the Rules and Regulations framed there under.
Presiding Officer of Securities Appellate Tribunal is appointed by Central Government.
Presiding Officer and Members are eligible for re-appointment and have term for 5 years.(not sure)
Securities Appellate Tribunal has only one bench which sits at Mumbai.
Every appeal against order of SEBI will be filled within 45 days to SAT.
Any person agrieved by decision or order of SAT may file appeal to Supreme court within 60 Days of the order.
Hence SAT hears cases against

SEBI
PFRDA
IRDAI
General Insurance Business

SEBI Guidelines Terminology

Book Building & Public Issue:

SEBI defines Book Building as "a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document".
Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery.
It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price.
Difference between Book Building Issue and Fixed Price Issue is

In Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered at a fixed price in case of a public issue.

In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue.

AIFs Alternative Investment Funds

AIFs refer to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).
AIF does not include funds covered under SEBI (Mutual Funds) Regulations,1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.
Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.
As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, AIFs shall seek registration in one of the three categories
Category I : Mainly invests in start- ups, SME's or any other sector which Govt. considers economically and socially viable.
Category II : These include private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator.
Category III : Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator.

A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. It covers a risk of fluctuations in the foreign exchange rates in future.

TER total expense ratio

A measure of the total cost of a fund to the investor.
Total costs may include various fees (purchase, redemption, auditing) and other expenses.
TER, calculated by dividing the total annual cost by the fund's total assets averaged over that year, is denoted as a percentage.
SEBI has reduced TER by 2% in Sep 2018.
TER for equity oriented MF scheme has been capped at 1.2% by SEBI.
TER for equity oriented MF scheme when selling to B-30 Cities has been capped at 1.55% by SEBI.

HR khan committee recommendations

OBSERVATIONs : One of the reasons for the lack of trading volume is non-availability of sufficient floating stock for each International Securities Identification Number (ISIN) as corporates have preferred fresh issuance rather than going for reissuance of bonds. Each new issuance from the same issuer receives a separate ISIN; hence older bonds in the same maturity become illiquid. b. To augment market liquidity, it is necessary that corporates are encouraged to re-issue existing bonds under the same ISIN code. c. A major argument against common ISINs is the bunching of liabilities on the same date which can lead to asset-liability mismatch; however, this can be resolved by spreading out the redemption amount across the year through amortizing the payments.
SEBI has enabled consolidation and re-issuance with a view to reducing fragmentation in corporate bond market. Though SEBI has recently allowed reissuances by the corporates, there has not been any reissue of bonds by any corporate due to problems related to bunching of liabilities and stamp duty. e. Corporates may be permitted to issue bonds under the same ISIN with a flexibility in terms of timing for raising the funds as well as structuring of the redemption requirements.

Financial Markets from NFCM Module:

Markets and Financial Instruments Types of Markets: Equity Debt, Derivatives Commodities; Meaning and features of private Public companies; Types of investment avenues
Primary Market Initial Public Offer (IPO); Book Building through Online IPO; Eligibility to issue securities; Pricing of Issues; Fixed versus Book Building issues; allotment of Shares; Basis of Allotment; Private Placement
Secondary Market Role and functions of Securities and Exchange Board of India (SEBI); Depositories; Stock exchanges; Intermediaries in the Indian stock market Listing; Membership; Trading Clearing and settlement and risk management; Investor protection fund (IPF); Equity and debt investment.
Derivatives Types of derivatives; Commodity and commodity exchanges; Commodity versus financial derivatives.
Financial Statement Analysis Balance sheet; Profit & loss account; Stock market related ratios; Simple analysis before investing in the shares; understanding annual report; Director's report etc.

History of Securities in India :

Control of capital issues was introduced through the Defence of India Rules in 1943 under the Defence of India Act, 1939 to channel resources to support the war effort.

The control was retained after the war with some modifications as a means of controlling the raising of capital by companies and to ensure that national resources were channeled to serve the goals and priorities of the government, and to protect the interests of investors.

The relevant provisions in the Defence of India Rules were replaced by the Capital Issues (Continuance of Control) Act or CICA 1947 in April 1947.

Though the stock exchanges were in operation, there was no legislation for their regulation till the Bombay Securities Contracts Control Act was enacted in 1925. This was, however, deficient in many respects.

Under the constitution which came into force on January 26, 1950, stock exchanges and forward markets came under the exclusive authority of the central government.

Following the recommendations of the A. D. Gorwala Committee in 1951, the Securities Contracts (Regulation) Act, 1956 SCRA was enacted to provide for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and to prevent undesirable transactions in securities.

SCRA gives gives Central Government regulatory jurisdiction over

(a) stock exchanges through a process of recognition and continued supervision,
(b) contracts in securities, and
(c) listing of securities on stock exchanges.

As a condition of recognition, a stock exchange complies with conditions prescribed by Central Government. Organised trading activity in securities is permitted on recognised stock exchanges.

With the enactment of the SEBI Act, 1992 Govt. repealed of the Capital Issues (Control) Act, 1947 in 1992 which paved way for market determined allocation of resources.
It followed the Securities Laws (Amendment) Act in 1995, which extended SEBI’s jurisdiction over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market.
It empowered SEBI to appoint adjudicating officers to adjudicate wide range of violations and impose monetary penalties and provided for establishment of Securities Appellate Tribunals (SATs) to hear appeals against the orders of the adjudicating officers.
It followed the Depositories Act in 1996 to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security.
It made securities of public limited companies freely transferable subject to certain exceptions;

dematerialised the securities in the depository mode;
provided for maintenance of ownership records in a book entry form.

The Depositories Related Laws (Amendment) Act, 1997 amended various legislations to facilitate dematerialization of securities.
The Securities Laws (Amendment) Act, 1999 was enacted to provide a legal framework for trading of derivatives of securities and units of CIS.
The Securities Laws (Second Amendment) Act, 1999 was enacted to empower SAT to deal with appeals against orders of SEBI under the Depositories Act and the SEBI Act, and against refusal of stock exchanges to list securities under the SCRA.
he next intervention is the SEBI (Amendment) Act, 2002 which enhanced powers of SEBI substantially in respect of inspection, investigation and enforcement. (quasi-executive, quasi-legislative, quasi-judicial)
The latest and the ninth legislative intervention namely the Securities Laws (Amendment) Bill, 2003 introduced to amend the SCRA to provide for demutualisation of stock exchanges is awaiting approval. The approval to this bill is a matter of time as it is a money bill.

Economy QnA

law of demand — price and goods demanded

NI lowest in 3rd 5 yrs plan + population growth control in 3rd five yrs plan

bombay SE - 1875

NSDL

Autonomous investment

NI calculated by all three methods in india —> PIE

Land development banks — co -operative bank

national agriculture extention project by ICAR

yellow revolution — oil seed

Major source of irrigation ??

Moisture content of Soil- hygrometer

IFFCO

national seed policy

agriculturist gets maximum credit from commercial bank (Not from nabard)

angle of land slope — Clinometer

Bt cotton first , bt brinjal yet to

India have 15 Agro climatic zones , UP alone have 11

1st irrigation commission — 1901

Mgnrega

CN ration in FYM 40:1 ???

FINANCIAL Institutions : There are 4 All India Financial Institutions regulated and supervised by the Reserve Bank. SIDBI , EXIM Bank , NHB , NABARD

SIDBI Small Industries Development Bank of India : HQ at LUCKNOW

was established on 2 April 1990 and current chairman & MD is Mohammad Mustafa, IAS
Set up on 2 April 1992 through an Act of Parliament.
It focuses on investment into units in which the investment in plant and machinery does not exceed Rs.10 million.
It is principal financial institution for promotion , financing, development of MSME Sector.
In addition, SIDBI's assistance flows to the transport, health care, hotel and tourism sectors, infrastructure, etc, and also to the professional and self-employed persons setting up small- sized professional ventures.
SIDBI also extends Refinance Assistance for SC / ST or Physically handicapped Persons.
The Stand Up India Scheme provides for refinance window through (SIDBI) with an initial amount of Rs. 10,000 crore.

Udyami Mitra : Loan Portal for MSMEs set up by SIDBI

EXIM Export Import Bank of India : HQ at Mumbai

Premier Export finance Institution in India established in 1982 under EXIM Act 1981.
Key role in Cross Border trade , EXIM and investment
Managing director : David Rasquinha

ECGC Export Credit Guarantee Corporation : HQ at Mumbai

owned by GOI, was set up in 1957 with the objective of promoting exports from the country by providing Credit Risk Insurance and related services for exports.
an export promotion organization, seeking to improve the competitiveness of the Indian exporters by providing them with credit insurance covers
functions under the administrative control of Ministry of Commerce & Industry, and is managed by a Board of Directors comprising representatives of the Government, RBI, and insurance and exporting community.
It was named as ECGC in 1983. Current CMD : Geetha Muralidhar
7th largest credit insurer in the world in terms of national exports

NHB National Housing Board : HQ at New Delhi

Wholly owned subsidiary of RBI ,Set up on 9 July 1988 under NHB act 1987.
Established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.
registers, regulates and supervises Housing Finance Company (HFCs), keeps surveillance through On-site & Off-site Mechanisms and co-ordinates with other Regulators
MD and CEO : Sriram Kalyanraman

NABARD National Bank for Agriculture and Rural Development : formed in 1982

Apex development financial institution in India, headquartered at Mumbai with branches all over India.
Active in developing financial inclusion policy and is a member of the Alliance for Financial Inclusion.
Entrusted with "matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India. Current Chairman : Harsh Kumar Bhanwala
On recommendations of CRAFICARD aka B.Sivaraman Committee, (by Act 61, 1981 of Parliament) on 12 July 1982 to implement NABARD Act 1981.
NABARD came into existence on 12 July 1982 by transferring the agricultural credit functions of RBI and refinance functions of the then Agricultural Refinance and Development Corporation (ARDC) with 100 Crore Rs. initially.
NABARD today is fully owned by Government of India.
NABARD is the National Implementing Entity (NIE) responsible for implementation of adaptation projects under the NAFCC as GCF(Green Climate Fund) of UNFCCC.
E-Shakti for digitisation of Self Help Groups (SHGs) is a pilot project. SHG micro-finance is a core part of NABARD’s working.
NABARD is responsible for providing and regulating facilities like credit for agricultural and industrial development in the rural areas.
A special Fund of Rs. 2000 crore in NABARD has been established to make available affordable credit at concessional rate of interest to designated food parks and agro processing units in the designated food parks(DFPs).
Farmers’ Clubs (Informal forum of farmers) are actively promoted by NABARD.
NABARD provides

Loans for Food Parks and Food Processing Units in Designated Food Parks
Credit Facilities to Marketing Federations
Direct Refinance Assistance to Co-operative Banks
Long term irrigation Fund
Short Term re-financing for seasonal agricultural operations
Procurement of agricultural commodities including milk
Aggregation, storage and value addition in few select commodities like milk etc.
Marketing

NABARD will soon initiate a Rs 8,000-crore fund that FIN MIN announced in this year’s budget to support the dairy sector.

NABARD would be making contributions to Alternative Investment Funds (AIFs)

GOI in 2016-17 for Long Term Irrigation Fund (LTIF) in NABARD with an initial corpus of Rs 20,000 crore for funding of irrigation projects which were languishing incomplete for want of funds for many years. Tenure -15 years with 3 years moratorium @ 6 %

NABARD Bill 2017

Allows GOI to increase capital of NABARD to Rs. 30,000 crore.
The capital may be increased further by the GOI in consultation with the RBI. Also provides that the GOI alone must hold at least 51% of the share capital of NABARD. Majority share will be held by the GOI, and the rest by RBI (0.4%).
Replaces the terms ‘small-scale industry’ with MSME sector as per MSME Development Act, 2006 and hence extends the provisions to MSME sector.
Credit and other facilities to industries provided by NABARD for machinery and plant ,is Extended to enterprises with investment upto Rs 10 crore in the manufacturing sector and Rs 5 crore in the services sector.
It will be in Consistency with the Companies Act, 2013 and include provisions that deal with:

(i) definition of a government company,
(ii) qualifications of auditors.

RIDF Rural Infrastructure Development Fund

Created under NABARD.
Agriculture, social sector and rural connectivity all are covered under the broad categories of the scheme.
Panchayat Raj Institutions as well as Self Help Groups (SHGs) are eligible for assistance under the scheme.

RIDF

was set up by the Government in 1995-96 for financing ongoing rural Infrastructure projects.
The Fund is maintained by NABARD.
Domestic commercial banks contribute to the Fund to the extent of their shortfall in stipulated priority sector lending to agriculture.
The main objective of the Fund is to provide loans to State Governments and State-owned corporations to enable them to complete ongoing rural infrastructure projects.
At present, there are 37 eligible activities under RIDF as approved by GoI.
The eligible activities are classified under three broad categories i.e.

Agriculture and related sector
Social sector
Rural connectivity

Eligible Institutions

State Governments / Union Territories
State Owned Corporations / State Govt. Undertakings
State Govt. Sponsored / Supported Organisations
Panchayat Raj Institutions/Self Help Groups (SHGs)/ NGOs

(provided the projects are submitted through the nodal department of State Government, i.e Finance Department)

LTIF Long Term Irrigation Fund was announced in the Union Budget 2016-17 with an initial corpus of Rs 20,000 crore for funding and fast tracking the implementation of incomplete major and medium irrigation projects. LTIF has instituted in NABARD as a part of Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) with interest rates kept at 6% and the interest cost to be borne by GoI.

FPO’s FARMER PRODUCER COMPANIES

a hybrid between cooperative societies and private limited companies which provides for sharing of profits/benefits among members.
Government exempted the profits of Farmer Producer Companies (FPC) from tax for a period of five years from the next financial year.

The important features include:

It is formed by a group of producers for either farm or non-farm activities;
It is a registered body and a legal entity (under Companies Act, 1956);
A part of the profit is shared amongst the producers and rest of the surplus is added to its owned funds for business expansion.

NABARD initiated the Producer Organisation Development Fund (PODF) and Small Farmers Agribusiness Consortium (SFAC) has set up
nearly 250 FPOs since 2011.
To strengthen their capital base, SFAC has launched a new Central Sector Scheme “Equity Grant and Credit Guarantee Fund Scheme for Farmers Producer Companies”.

IRDA Insurance Regulatory and Development Authority : HQ at Hyderabad, Telangana moved from Delhi in 2001

an autonomous, statutory body tasked with regulating and promoting the insurance and re-insurance industries in India.
It was constituted by the Insurance Regulatory and Development Authority Act, 1999, an Act of Parliament passed by GOI.
IRDAI is a 10-member body including the chairman, 5 full-time and 4 part-time members appointed by GOI
Chairman post is vacant from 21 Feb 2018

——> In India insurance was mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthashastra), which examined the pooling of resources for redistribution after fire, floods, epidemics and famine.

PFRDA Pension Fund Regulatory and Development Authority : HQ at New Delhi

A statutory body as the pension regulator of India which was established by GOI on Aug 2003 and was authorized by Department of Financial Services , Ministry of Finance.
After passage of the PFRDA Act in 2013, the Authority became a Central Autonomous Body.
Like other financial sector regulators namely RBI, SEBI, IRDAI and IBBI, PFRDA is a quasi government organization having executive, legislative and judicial powers.
PFRDA promotes old age income security by establishing, developing and regulating pension funds and protects the interests of subscribers to schemes of pension funds and related matters.
Currently, PFRDA is regulating and administering the National Pension System (NPS) along with administering the Atal Pension Yojana (APY) which is a defined benefits pension scheme for the unorganized sector, guaranteed by GOI.
PFRDA is responsible for appointment of various intermediate agencies such as Central Record Keeping Agency (CRA), Pension Fund Managers, Custodian, NPS Trustee Bank, etc.
A Non- Resident Indian may subscribe provided a subscriptions are made through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act.

CEO : Hemant Contractor

—>Insurers and mutual funds continue to sell pension products outside PFRDA’s watch. Currently, pension products floated by insurance companies and those sold by mutual funds are under purview of IRDA and SEBI respectively.

IIFCL India Infrastructure Finance Company Limited : HQ at New Delhi

A wholly - owned GOI company set up in 2006 to provide long term debt for infrastructure projects since Infrastructure projects are typically long gestation projects and require debt of longer maturity.
It provides long term finance to viable infrastructure projects through the Scheme for Financing Viable Infrastructure Projects through a Special Purpose Vehicle called IIFCL, broadly referred to as SIFTI.
Registered as NBFC-ND-IFC with RBI since sep 2013.
provides financial assistance to commercially viable projects, which includes projects implemented by a public sector company; a private sector company; or a private sector company selected under a PPP Initiative
Raises funds from domestic as well as external markets on the strength of government guarantees.
The eligible sectors are : transportation, energy, water, sanitation, communication, social and commercial infrastructure.
MD : Pankaj jain

IFCI Industrial Finance Corporation of India

It is a Systemically Important Non-Deposit taking Non-Banking Finance Company (NBFC-ND-SI), registered with the RBI.
IFCI Ltd was set up in 1948 as Industrial Finance Corporation of India, a Statutory Corporation, through ‘The Industrial Finance Corporation of India Act, 1948’ of Parliament to provide medium and long term finance to industry.
After repeal of this Act in 1993, IFCI became a Public Limited Company registered under Companies Act, 1956.
The shareholding of GOI in paid-up share capital of IFCI has been increased to 51.04% and IFCI has become a Government Company under Section 2(45) of the Companies Act, 2013.
The primary business of IFCI is to provide medium to long term financial assistance to the manufacturing, services and infrastructure sectors.

SMERA Ratings Ltd : HQ at Mumbai (Small and Medium Enterprises Rating Agency)

Founded in 2005 by SIDBI, Dun & Bradstreet Ltd, Several leading govt. public banks in India
Full service credit rating agency exclusively set up for micro, small and medium enterprises (MSME) in India and has grown to rate SME, mid & large corporate .
It provides ratings which enable MSME, SMEs,Corporates to raise bank loans at competitive rates of interest.
However, its registration with SEBI, as a Credit Rating Agency and accreditation by RBI, in September 2012 as an external credit assessment institution (ECAI) to rate bank loan ratings under Basel II guidelines has paved way for SMERA to rate/grade various instruments such as: IPO, NCDs, Commercial Papers, Bonds, Security Receipts, Fixed Deposits etc.
In addition to this, RBI has told that Banks may use ratings of bank facilities (Bank Loan Ratings) from SMERA, to assign risks to loans for the purpose of computing capital adequacy requirements.

CEO : Shankar Chakraborti

Major points under the Indradhanush strategy

Bank Investment Company will be setup. It will have holding interest in PSBs.
Bank Boards bureau to be setup to search for head of banks; advise banks on ways to raise capital; and monitor key performance indicators.
Repeal of the Banking Companies (Acquisition and Transfer of Undertakings), 1969
State-owned banks will be incorporated under the Companies Act
Capitalization of state-owned banks
Speedy project approvals to reduce the NPAs of banks
More flexibility to banks for hiring staff
revamping of Public sector Banks in India

BBB Banks Board Bureau :

Super authority (autonomous body) of eminent professionals and officials for public sector banks (PSBs).
It was announced by GOI in August 2015 as part of 7 point Indradhanush Mission to revamp PSBs and started functioning in April 2016.
It had replaced Appointments Board of Government. It is housed in RBI’s central office in Mumbai.
BBB is considered as the first step towards Bank Investment Company as recommended by P J Nayak committee.
Functions

Give recommendations for appointment of full-time Directors as well as non-Executive Chairman of PSBs.
Give advice to PSBs in developing differentiated strategies for raising funds through innovative financial methods and instruments and to deal with issues of stressed assets.
Guide banks on mergers and consolidations and governance issues to address bad loans problem among other issues.

It’s first Chairman was former CAG : Vinod Rai. New current Chairman : Bhanu Pratap Sharma

BBB Banks Board Bureau : Autonomous body of GOI tasked to improve the governance of Public Sector Banks, recommend selection of chiefs of government owned banks and financial institutions and to help banks in developing strategies and capital raising plans.

Started functioning from April 2016, BBB works as step towards governance reforms in PSBs as recommended by P.J. Nayak Committee.

Vinod Rai is the Chairman of the Mumbaibased Bureau. It is housed in RBI’s Central Office in Mumbai.

IBA Indian Banks' Association

formed on 26 Sep 1946 as a representative body of management of banking in India operating in India - an association of Indian banks and financial institutions based in Mumbai.
With an initial membership representing 22 banks in India in 1946, IBA currently represents 237 banking companies operating in India.
IBA was formed for development, coordination and strengthening of Indian banking, and assist the member banks in various ways including implementation of new systems and adoption of standards among the members.
Indian Banks' Association is managed by a managing committee, and the current managing committee consists of one chairman, 3 deputy chairmen, 1 honorary secretary and 26 members.
Current chief executive is V G Kannan.

RECENTLY IBA has proposed only 2% increment in salary of banks staffs because of heavy burden of NPAs on the Banks.

TransUnion CIBIL Limited

India’s first Credit Information Company (CIC) founded in August 2000. The organisation was created to play a critical role in India’s Financial system by helping loan providers manage their business.
“CIBIL” stands for ‘Credit Information Bureau India Limited’.

Headquarters	Chairperson & MD
Mumbai	Mr. Satish Pillai

Functions of TransUnion CIBIL :

Collects and maintains records of an individual’s payments pertaining to loans and credit cards. This information is provided to CIBIL by member banks and credit institutions.
The information is then used to create Credit Information Reports (CIR) and credit scores which are provided to credit institutions in order to help evaluate and approve loan applications.

Credit Scores : It is a numerical expression to represent the creditworthiness of an individual. Banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualities for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue.

Divisions of CIBIL : CIBIL houses credit on over 220 million trades across individuals and businesses, organized into two divisions:
1. Consumer Bureau
2. Commercial Bureau and MFI Bureau

The CIBIL Score and Report help loan providers identify consumers who are likely to be able to pay back their loans. For instance, an individual with a credit score above 750 has better bargaining power with the lenders, since he is perceived as a responsible borrower. Consumers can now access their Credit Scores and CIRs directly from CIBIL and can see for themselves how they are perceived by the lenders before applying for a loan.Hence, CIBIL empowers both loan providers and individuals
to see their Financial and credit history more clearly and hence, take better and more informed decisions.

—> The Oriental Life Insurance Company, the first company in India offering life insurance coverage, was established in Kolkata in 1818 by "Anita Bhavsar" and others.

LIC Life Insurance Corporation : HQ at Mumbai

largest insurance company in India with an estimated asset value of ₹1,560,482 crore
founded in 1956 when the Parliament passed the Life Insurance of India Act 1956 that nationalised the private insurance industry in India.
Over 245 insurance companies and provident societies were merged to create the state owned LIC.
Surendranath Tagore had founded Hindusthan Insurance Society, which later became Life Insurance Corporation.
LIC's slogan yogakshemam vahamyaha is in Sanskrit language from Bhagwat Geeta which translates in English as "Your welfare is our responsibility".

Chairman : V.K. Sharma

NSEL National Spot Exchange Limited

was India’s first electronic commodity spot exchange that was established to create a “single market” across the country for both manufactured and agricultural produce.
NSEL commenced operations providing an electronic trading platform in October 2008 and simultaneously, as many as six state governments issued licenses under the model Agricultural Produce Market Committees (APMC) Act to NSEL.
In August 2011, the Forward Markets Commission (FMC) was appointed as the ‘designated agency’ to regulate these spot exchanges.
Any investor can buy gold in small quantities on the NSEL and sell it after making a profit. One can also take physical delivery of the metal.
In 2017, NSEL is merged with FTIL.

7.ECONOMY Concepts

CAR or CRAR Capital adequacy — the adequate amount (usually defined by regulators) of capital (shareholder money) a bank needs to hold, as a percentage of its risk-weighted assets.

Capital Leverage ratio — while capital adequacy ratio considers the ratio of risk-weighted assets (mainly loans) to capital, leverage ratio takes the available capital and divides it by the total assets.

Basel III: International framework for liquidity risk measurement, standards and monitoring presented the details of global regulatory standards on liquidity. Two minimum standards i.e. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for funding liquidity were prescribed by the Basel Committee for achieving two separate but complementary objectives.

—> LCR Liquidity Coverage Ratio refers to highly liquid assets held by financial institutions to meet short-term obligations.

LCR is one of the Basel Committee's key reforms to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. The LCR promotes the short-term resilience of a bank's liquidity risk profile. LCR defined as below

Stock of high quality liquid assets (HQLAs) ≥ 100%

Total net cash outflows over the next 30 calendar days

—> NSFR promotes resilience over longer-term time horizons by requiring banks to fund their activities with more stable sources of funding on an ongoing basis. In addition, a set of five monitoring tools to be used for monitoring the liquidity risk exposures of banks was also prescribed.

Fixed capital Formation are the assets used in the productive process.
It includes Building or expanding existing factory, Purchase of transport equipment and all other machineries used in the productive process
Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate income. Increasing an economy's capital stock also increases its capacity for production, which means an economy can produce more. Producing more goods and services can lead to an increase in national income levels. For example

Road and bridge construction
Energy infrastructure
Office equipment, such as computers

Ricardian equivalence :

Green-field and brown-field investments are two different types of foreign direct investment (FDI). Green–field investments occur when a parent company or government begins a new venture by constructing new facilities in a country outside of where the company is headquartered. Brown-field investments occur when an entity purchases an existing facility to begin new production.

Greenfield & brownfield Projects

Greenfield project means that a work which is not following a prior work. In infrastructure the projects on the unused lands where there is no need to remodel or demolish an existing structure are called Green Field Projects.
Greenfield investment Building new production facilities in a foreign country, It refers to investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist.
The projects which are modified or upgraded are called brownfield projects. Brownfield investment Used for purchasing or leasing existing production facilities to launch a new production activity.

Protectionism : In economics, protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations. Protectionist policies protect the producers, businesses, and workers of the import-competing sector in a country from foreign competitors. However, they adversely affect consumers in general, and the producers and workers in export sectors, both in the country implementing protectionist policies, and in the countries protected against. A form of economic “Protectionism” by India :

Entry restrictions for Foreign Nationals i.e. any attempt to protect domestic industries from global competition. Restricting movements of people (labour), goods, services will all be considered under economic protectionism
Preferential market access policies for domestic industries i.e. Preference to domestic industries creates barriers for other MNCs that desire investing in India
Increasing custom duties on imported goods and services i.e. Indian goods to be more competitive than goods imported from abroad

Paradox of thrift : was popularized by the renowned economist John Maynard Keynes who stated that “When people try to save more, they actually end up saving less”.

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies.

NDB is the first such Development Bank established by BRICS with the FORTALEZA DECLARATION signed in 2014.

• The NDB members represent 42 percent of world population, 27 percent of the global surface area and accounting for over 20% of the Global GDP.

• The five member nations – Brazil, Russia, India, China and South Africa – have an EQUAL SHAREHOLDING in the NDB

• The NDB was established aiming to mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, complementing the existing efforts of multilateral and regional financial institutions for global growth and development.

MFN : Under the WTO agreements, countries cannot normally discriminate between their trading partners – a treatment which is known as “Most favoured Nation (MFN)” status.

In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all it’s trading partners — whether rich or poor, weak or strong. It is one of the core principles of WTO.

India has already granted Pakistan the MFN status, but Pakistan has cited unreasonable grounds to deny this status to India.

Even if Pakistan allows India to be a MFN partner, it does not mean they will come under free trade regime, or will merge to be a common market. It just implies that now Pakistan will be treating India in the same way as it treats its other WTO partners.

Escrow account temporary pass through account held by a third party during the process of a transaction between two parties. and works as temporary account as it operates until the completion of a transaction process, which is implemented after all the conditions between the buyer and the seller are settled.
As per the Real Estate (Regulation and Development) Act, 2016, the promoter of a real estate development firm has to maintain a separate escrow account for each of their projects.

A minimum 70% of the money from investors and buyers will have to be deposited. This money can only be used for the construction of the project and the cost borne towards the land.

Capital asset is defined to include: Any kind of property held by an assesses, whether or not connected with business or profession of the assesses, stocks, movable property, jewellery; archaeological collections; drawings; paintings; sculptures; or any work of art.

Two major types of planning – IMPERATIVE and INDICATIVE.

Under Imperative type of planning, economic decisions are made through a central planning authority instead of a market system.There is the absence of institutions of private property, competition and profit motive of industrialists, etc. (India before 1991 LPG)
Indicative planning or planning by inducement is found in capitalist countries as well as in mixed economies, ( like India currently ). It recognises not only consumers’ sovereignty but also producers’ freedom so that the targets and priorities of the plans are achieved. It then involves a middle path of planning mechanism and market mechanism—a kind of coordination between private and public activities.

India’s 8th Five years Plan was unique in the sense that it attempted to manage the transition from a centrally planned economy to a market-oriented economy without tearing the socio-cultural framework of the country, or to be more specific, our social commitments to the under- privileged sections. The 8th Plan mentioned that planning would have to be reoriented so as to make it indicative.

Exceptional Demand Curve : slopes from left to right upward if despite the increase in price of the commodity, people tend to buy more due to reasons like fear of shortages or it may be an absolutely essential good.

PPF Public Provident Fund : Major features of PPF are —

Deposits can be made in lump-sum or in instalments
Joint account CANNOT be opened
Maturity period is 15 years but the same can be extended within one year of maturity for further 5 years and so on.
Maturity value can be retained without extension and without further deposits also.
Premature closure is not allowed before 15 years But withdrawal is permissible every year from 7th financial year from year of opening account.
No attachment under court decree order.
Deposits qualify for deduction from income under Sec. 80C of IT Act.
Interest is completely tax-free.
Loan facility available from 3rd financial year.
Minimum opening with 100 Rs , Minimum deposit in financial year 500 Rs. Max deposit in financial year 1.5 Lac Rs.

NSC National Savings Certificates :

Post Office Saving Scheme, specially designed for govt. employees, Businessmen and other salaried classes who are Income Tax assesses.
Features are:

No maximum limit for investment
No Tax deduction at source (No TDS)
Certificates can be kept as collateral security to get loan from banks.
Trust and HUF CANNOT invest.
Buy National Savings Certificates (NSCs) every month for Five years – Re-invest on maturity and relax -On retirement it will fetch you monthly pension as the NSC matures.
A single holder type certificate can be purchased by an adult for himself or on behalf of a minor or to a minor.
Deposits qualify for tax rebate under Sec. 80C of IT Act.
The interest accruing annually but deemed to be reinvested under Section 80C of IT Act.

KVP Kisan Vikas Patra :

Amount Invested matures in 115 months( less than 10 yrs or 120 months).
Rate of Interest 7.5%.
Certificate can be purchased by an adult for himself or on behalf of a minor or by two adults.
KVP can be purchased from any Departmental Post office.
Facility of nomination is available.
Certificate can be transferred from one person to another and from one post office to another.
Certificate can be encash after 2 & 1/2 years i.e. 30 Months from the date of issue.
Minimum 1000 Rs. and Maximum No Limit

KCC Kisan Credit Card :

introduced in August 1998 by Indian banks and model scheme was prepared by NABARD on the recommendations of R.V.GUPTA.
Its objective is to meet the comprehensive credit requirements of the agriculture sector by giving financial support to farmers.
includes all commercial banks, Regional Rural Banks, and state co-operative banks.
has short term credit limits for crops, and term loans.
KCC credit holders are covered under personal accident insurance up to ₹50,000 for death and permanent disability, and up to ₹25,000 for other risk with The premium borne by both the bank and borrower in a 2:1 ratio.
offering credit to the farmers in two types viz,

1. Cash Credit

2. Term Credit ( for allied activities such as pump sets, land development, plantation, drip irrigation)

In 2018 Budget , GOI decided to provide the KCC facilities to Fisheries and Animal Husbandry Farmers.

Operational risk is defined as any risk, which is not categorised as market or credit risk, or the risk of loss arising from various types of human or technical error. The most important type of operational risk involves breakdowns in internal controls and corporate governance (as is being recognised in the PNB scam). Such breakdowns can lead to financial loss through error, fraud, or failure to perform in a timely manner or cause the interest of the bank to be compromised.
Credit risk or default risk involves inability or unwillingness of a customer or counter-party to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions.
Traditionally, credit risk management was the primary challenge for banks. With progressive deregulation,
market risk arising from adverse changes in market variables, such as interest rate, foreign exchange rate, equity price and commodity price has become relatively more important.
Forex risk is the risk that a bank may suffer losses as a result of adverse exchange rate movements.

PTA Preferential Trade Agreement

A preferential trade agreement is perhaps the weakest form of economic integration. In a PTA countries would offer tariff reductions, though perhaps not eliminations, to a set of partner countries in some product categories. Higher tariffs, perhaps non-discriminatory tariffs, would remain in all remaining product categories. This type of trade agreement is not allowed among WTO members who are obligated to grant most favored nation status to all other WTO members.

Under the most-favored nation (MFN) rule countries agree not to discriminate against other WTO member countries. Thus, if a country's low tariff on bicycle imports, for example, is 5%, then it must charge 5% on imports from all other WTO members. Discrimination or preferential treatment for some countries is not allowed. The country is free to charge a higher tariff on imports from non-WTO members, however. In 1998 the US proposed legislation to eliminate tariffs on imports from the nations in sub-Sahara Africa. This action represents a unilateral preferential trade agreement since tariffs would be reduced in one direction but not the other. [Note: a PTA is also used, more generally, to describe all types of economic integration since they all incorporate some degree of "preferred" treatment.]

EHS Early harvest scheme

A precursor to a free trade agreement (FTA) between two trading partners. This is to help the two trading countries to identify certain products for tariff liberalisation pending the conclusion of FTA negotiation. It is primarily a confidence building measure. A good example of an EHS is between India and Thailand signed in October 2003, wherein 83 products were identified to be reduced to zero in a phased manner. The EHS has been used as a mechanism to build greater confidence amongst trading partners to prepare them for even bigger economic engagement.

FTA Free Trade Area

A free trade area occurs when a group of countries agree to eliminate tariffs between themselves, but maintain their own external tariff on imports from the rest of the world. The North American Free Trade Area is an example of a FTA. When the NAFTA is fully implemented, tariffs of automobile imports between the US and Mexico will be zero. However, Mexico may continue to set a different tariff than the US on auto imports from non-NAFTA countries.

Because of the different external tariffs, FTAs generally develop elaborate “Rules of origin". These rules are designed to prevent goods from being imported into the FTA member country with the lowest tariff and then trans shipped to the country with higher tariffs. Of the thousands of pages of text that made up the NAFTA, most of them described rules of origin.

ROO Rules of Origin

are the criteria needed to determine the identity of a product for purposes of international trade.
Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports.
Rules of origin are used:

to implement measures and instruments of commercial policy such as antidumping duties and safeguard measures;
to determine whether imported products shall receive most-favoured-nation (MFN) treatment or preferential treatment;
for the purpose of trade statistics;
for the application of labelling and marking requirements; and for government procurement

The Rules of Origin are important in the context of making an assessment on the application of preferential tariff under an FTA. Hence, without the rules of origin, the preferential tariffs under an FTA cannot be implemented. Moreover, the non-members to the FTA are not provided with the benefit of the preferential tariffs, agreed between the FTA partners
Without the Rules of Origin (ROO), it will be difficult to

Decide whether imported products shall receive preferential treatment for tariffs
Implement anti-dumping duties and safeguard measures with regards to certain products

Customs Union

A customs union occurs when a group of countries agree to eliminate tariffs between themselves and set a common external tariff on imports from the rest of the world. The European Union represents such an arrangement. A customs union avoids the problem of developing complicated rules of origin, but introduces the problem of policy coordination. With a customs union, all member countries must be able to agree on tariff rates across many different import industries.

Common Market

A common market establishes free trade in goods and services, sets common external tariffs among members and also allows for the free mobility of capital and labor across countries. The European Union was established as a common market by the Treaty of Rome in 1957, although it took a long time for the transition to take place. Today, EU citizens have a common passport, can work in any EU member country and can invest throughout the union without restriction.

Economic Union

An economic union typically will maintain free trade in goods and services, set common external tariffs among members, allow the free mobility of capital and labor, and will also relegate some fiscal spending responsibilities to a supra-national agency. The European Union's Common Agriculture Policy (CAP) is an example of a type of fiscal coordination indicative of an economic union.

Monetary Union

Monetary union establishes a common currency among a group of countries. This involves the formation of a central monetary authority which will determine monetary policy for the entire group. The Maastricht treaty signed by EU members in 1991 proposed the implementation of a single European currency (the Euro) by 1999. The degree of monetary union that will arise remains uncertain in 1998.

Perhaps the best example of an economic and monetary union is the United States. Each US state has its own government which sets policies and laws for its own residents. However, each state cedes control, to some extent, over foreign policy, agricultural policy, welfare policy, and monetary policy to the federal government. Goods, services, labor and capital can all move freely, without restrictions among the US states and the Nations sets a common external trade policy.

Free trade area —> Trade is free and no Customs Duties
Customs union —> No Customs Duties but duties on nonmembers
Common market —> No restrictions on trade and factor movement
Economic union —> Advanced stage of integration

—> India has signed a PTA with MERCOSUR (South American trade bloc of Argentina, Brazil, Paraguay and Uruguay) since 2004. It is presently limited to just 450 products.

—> India has signed FTA with ASEAN in 2009.

—> India and EU are still under negotiations for FTA due to several sticking issues such as automobile imports, patent and IP protection.

8.POST Independence Economic HISTORY

The crucial parts of Nehru - Mahalanobis strategy were

(a) high savings rate,

(b) heavy industry bias,

(d) Import substitution, and

(e) Socialistic pattern of society.

PC Mahalanobis :

He was Architect of Indian Planning provide ideas for Second Plan, a landmark contribution to development planning in general, laid down the basic ideas regarding goals of Indian planning.
In 1946 he was made a Fellow (member) of Britain’s Royal Society, one of the most prestigious organisations of scientists.
Mahalanobis established Indian Statistical Institute (ISI) in Calcutta and started a journal, Sankhya, which still serves as a respected forum for statisticians to discuss their ideas.

Both, the ISI and Sankhya, are highly regarded by statisticians and economists all over the world to this day.

Five Years PLAN :

Our plan documents not only specify the objectives to be attained in the five years of a plan but also what is to be achieved over a period of twenty years. This long-term plan is called ‘perspective plan’. The five year plans are supposed to provide the basis for the perspective plan.

Common goals of five year plans are growth, modernisation, self-sufficiency and equity.

National Development Council NDC, headed by Prime Minister with all Chief Ministers and Cabinet Ministers on board, is the final authority to approve the five-year long policy document.

The concept of economic planning in India is derived from the Russia (then USSR). India has launched 12 five year plans so far. First five year plan was launched in 1951. Now the present NDA government has stopped the formation of five year plans. So 12^th five year plan would be called the last five year plan of India.

1. First Five Year Plan: duration of 1951 to 1956

II. It was based on the Harrod-Domar model.

III. Its main focus was on the agricultural development of the country.

IV. This plan was successful and achieved growth rate of 3.6% (more than its target)

2. Second Five Year Plan: duration of 1956 to 1961

II. It was based on the P.C. Mahalanobis Model.

III. Its main focus was on the industrial development of the country.

IV. This plan was successful and achieved growth rate of 4.1%

3. Third Five Year Plan: duration of 1961 to 1966

II. This plan is called ‘Gadgil Yojna’ also.

III. The main target of this plan was to make the economy independent and to reach self active position of take off.

IV. Due to china war, this plan could not achieve its growth target of 5.6%

4. Plan Holiday:

I. The duration of plan holiday was from 1966 to 1969.

II. The main reason behind the plan holiday was the Indo-Pakistan war & failure of third plan.

III. During this plan annual plans were made and equal priority was given to agriculture its allied sectors and the industry sector.

5. Fourth Five Year Plan: duration was from 1969 to 1974.

II. There were two main objective of this plan i.e. growth with stability and progressive achievement of self reliance.

III. During this plan the slogan of “Garibi Hatao” is given during the 1971 elections by Indira Gandhi.

IV. This plan failed and could achieve growth rate of 3.3% only against the target of 5.7%.

6. Fifth Five Year Plan: duration was 1974 to 1979.

II. In this plan top priority was given to agriculture, next came to industry and mines.

III. Overall this plan was successful which achieved the growth of 4.8% against the target of 4.4%.

IV. The draft of this plan was prepared and launched by the D.P. Dhar. This plan was terminated in 1978.

7. Rolling Plan: This plan was started with an annual plan for 1978-79 and as a continuation of the terminated fifth year plan.

8. Sixth Five Year Plan: duration was from 1980 to 1985.

II. The basic objective of this plan was poverty eradication and technological self reliance.

III. It was based on investment yojna, infrastructural changing and trend to growth model.

IV. Its growth target was 5.2% but it achieved 5.7%.

9. Seventh Five Year Plan: duration was from 1985 to 1990.

II. Objectives of this plan include the establishment of the self sufficient economy, opportunities for productive employment.

III. For the first time the private sector got the priority over public sector.

IV. Its growth target was 5.0% but it achieved 6.0%.

Annual Plans: Eighth five Plan could not take place due to volatile political situation at the centre. So two annual programmes are formed in 1990-91& 1991-92.

Five Year Plans before the Liberalisation

10. Eighth Five Year Plan: duration was from 1992 to 1997.

II. In this plan the top priority was given to development of the human resources i.e. employment, education, and public health.

III. During this plan Narasimha Rao Govt. launched New Economic Policy of India.

IV. This plan was successful and got annual growth rate of 6.8& against the target of 5.6%.

11. Ninth Five Year Plan: duration was from 1997 to 2002.

II. The main focus of this plan was “growth with justice and equity”.

III. It was launched in the 50th year of independence of India.

IV. This plan failed to achieve the growth target of 7% and grow only at the rate of 5.6%.

12. Tenth Five Year Plan: duration was from 2002 to 2007.

II. This plan aims to double the per capita income of India in the next 10 years.

III. It aims to reduce the poverty ratio 15% by 2012.

IV. Its growth target was 8.0% but it achieved only 7.2%.

Agriculture was chosen as the Prime Moving force of the economy since 2002 on the advice of the Planning Commission. As a major policy shift, it was aimed at solving the following issues affecting the Indian Economy.

a) Food Security, which in a sense means ensuring adequate infrastructure in rural areas in agriculture. It is because food security is not just about productivity; it is also about accessibility of food.

b) Market Failure: It also had to solve the case of India being a market failure. It means that goods and services are available in the economy, but there is little demand. This is because majority of population lives on agriculture which does not provide them with good purchasing power.

c) Boosting aggregate demand in economy : this policy shift their incomes were supposed to be improved and market demand be boosted.
d) Generating more rural employment : Investment in agriculture also involves creation of capital goods such as warehousing, irrigation infrastructure which both directly and indirectly generates employment.

13. Eleventh Five Year Plan: duration was from 2007 to 2012.

II. It was prepared by the C. Rangarajan.

III. Its main theme was “faster and more inclusive growth”

IV. Its growth rate target was 8.1% but it achieved only 7.9%

14. Twelfth Five Year Plan: duration is from 2012 to 2017.

II. Its main theme is “Faster, More Inclusive and Sustainable Growth”.

III. Its growth rate target is 8%.

IV. It is the current five year plan of India.

Industrial Policy Resolution 1956 (IPR 1956):

formed the basis of the 2nd Five Year Plan and classified industries into 3 categories.

1st category comprised industries which would be exclusively owned by the state
2nd category consisted of industries in which the private sector could supplement the efforts of the state sector, with the state taking the sole responsibility for starting new units;
3rd category consisted of the remaining industries which were to be in the private sector.

No new industry was allowed unless a License was obtained from the government.
was used for promoting industry in backward regions by giving concessions such as tax benefits and electricity at a lower tariff in economically backward area.
The purpose of this policy was to promote regional equality.
Even an existing industry had to obtain a License for expanding output or for diversifying production (producing a new variety of goods).

Small-Scale Industry:

In 1955, the Village and Small-Scale Industries Committee, also called the Karve Committee, noted the possibility of using small-scale industries for promoting rural development.
A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets of a unit. This limit has changed over a period of time. In 1950 a small-scale industrial unit was one which invested a maximum of rupees five lakh; at present the maximum investment allowed is rupees one crore.
Small-Scale Industries were also given concessions such as lower excise duty and bank loans at lower interest rates to save their interests.

Equity in agriculture called for land reforms which primarily refer to change in the ownership of landholdings.
Land ceiling was another policy to promote equity in the agricultural sector. This means fixing the maximum size of land which could be owned by an individual.
portion of agricultural produce which is sold in the market by the farmers is called marketed surplus.

Poverty In India

In pre-independent India, Dadabhai Naoroji was the first to discuss the concept of a Poverty Line.
To study poverty In 1979, a body called the ‘Task Force on Projections of Minimum Needs and Effective Consumption Demand’ was formed. In 1989 and 2005, ‘Expert Groups’ were constituted for the same purpose.

chronic poor who may sometimes have a little more money (example: casual workers) are grouped together.
churning poor who regularly move in and out of poverty (example: small farmers and seasonal workers)
occasionally poor who are rich most of the time but may sometimes have a patch of bad luck. They are called the transient poor. And then there are those who are never poor and they are the non-poor.

Government uses Monthly Per Capita Expenditure (MPCE) as proxy for income of households to identify the poor.
The official data on poverty is made available to the public by NITI Aayog which is estimated on the basis of consumption expenditure data collected by NSSO.
Self-employment programmes are Rural Employment Generation Programme (REGP), Prime Minister’s Rozgar Yojana (PMRY) and Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
SGSY Swarnajayanti Gram Swarozgar Yojana restructured as National Rural Livelihoods Mission (NRLM)
MGNREGA - In August 2005, the Parliament passed a new Act to provide guaranteed wage employment to every rural household whose adult volunteer is to do unskilled manual work for a minimum of 100 days in a year.

Three major programmes that aim at improving the food and nutritional status of the poor are PDS, ICDS and Midday Meal Scheme.
National Social Assistance Programme aimed that elderly people who do not have anyone to take care of them are given pension to sustain themselves. Poor women who are destitute and widows are also covered under this scheme.

“Trickle down” strategy of poverty reduction relies on ECONOMIC Growth As Economists state that the benefits of economic growth have not trickled down to the poor. It was felt that rapid industrial development and transformation of agriculture through green revolution in select regions would benefit the underdeveloped regions and the more backward sections of the community. The argument is that promoting economic growth, increases total income in society, creating more jobs and income, which could be redistributed. This was the major focus of planning in the 1950s and early 1960s.

However, growth failed to “trickle down” and it widened relative poverty because it benefitted only the highly skilled and wealthy classes more than those at the bottom. This led to the approach of providing subsidized public services and generating gainful employment for the poor.

Sen Poverty Index based on Poverty Gap Index.
Poverty Gap Index — measure of intensity of poverty , defined as average poverty gap in the population as a proportion of the poverty line.
Squared Poverty Gap — squares the poverty gap for each individual/household, and thus puts more emphasis on observations that fall far short of the poverty line rather than those that are closer. This measure is a member of the FGT (Foster, Greer, Thorbecke) family of poverty measures.

profligate — means extravagant, excessive

IMPORT SUBSTITUTION :

aimed at replacing or substituting imports with domestic production. For example, instead of importing vehicles made in a foreign country, industries would be encouraged to produce them in India itself.
In this policy the government protected the domestic industries from foreign competition.
Protection from imports took two forms : tariffs and quotas. The effect of tariffs and quotas is that they restrict imports and, therefore, protect the domestic firms from foreign competition.

Tariffs are a tax on imported goods; they make imported goods more expensive and discourage their use.
Quotas specify the quantity of goods which can be imported.

Countervailing Duties : are imposed in order to counter the negative impact of import subsidies to protect domestic producers.

ECONOMIC REFORMS SINCE 1991

India agreed to the conditionality’s of World Bank and IMF and announced the New Economic Policy (NEP).
The set of policies within NEP can broadly be classified into two groups:

Stabilisation measures — are short- term measures, intended to correct some of the weaknesses that have developed in the balance of payments (maintain sufficient foreign exchange reserves ) and to bring inflation (rising prices) under control.
Structural reform measures — are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy.

Initiated variety of policies which fall under three heads LPG reforms

LIBERALISATION - to put an end to these restrictions and open up various sectors of the economy

Reform of Industrial Sector : Industrial licensing was abolished for almost all except product categories — alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals. The only industries which are now reserved for the public sector are defence equipments, atomic energy generation and railway transport.
Financial Sector Reforms : to reduce the role of RBI from regulator to facilitator of financial sector that may be allowed to take decisions on many matters without consulting the RBI. It led to the establishment of private sector banks, Indian as well as foreign. Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.
Tax Reforms : continuous reduction in the taxes on individual incomes. Corporation Tax was also Lowered. Better compliance on the part of taxpayers many procedures were simplified.
Foreign Exchange Reforms : to resolve the balance of payments(BoP) crisis, the rupee was devalued against foreign currencies which led to an increase in the inflow of foreign exchange. Also set the tone to free the determination of rupee value in the foreign exchange market from government control And markets started determine exchange rates based on the demand and supply of foreign exchange.
Trade and Investment Policy Reforms : to increase international competitiveness of industrial production and also foreign investments and technology into the economy , to promote the efficiency of the local industries and the adoption of modern technologies. (i)Reduced quantitative restrictions on imports and exports (ii)Reduction of tariff rates (iii) removal of licensing procedures for imports (iv) Import licensing was abolished except in case of hazardous and environmentally sensitive industries.

PRIVATISATION - shedding of the ownership or management of a government owned enterprise

Government companies are converted into private companies in two ways (i) by withdrawal of the government from ownership and management of public sector companies and or (ii) by Disinvestment of PSEs to improve financial discipline and facilitate modernisation.
Privatisation could provide strong impetus to the inflow of FDI.
To improve the efficiency of PSUs by giving them autonomy in taking managerial decisions , some PSUs have been granted special status as maharatnas, navratnas and miniratnas

Privatisation of the public sector enterprises by selling off part of the equity of PSEs to public is known as disinvestment.

CPSE Central Public Sector Enterprises are designated with different status as follows. The granting of status resulted in better performance of these companies.

(i) Maharatnas – IOCL, SAIL

(ii) Navratnas – HAL, MTNL

(iii) Miniratnas – BSNL, AAI, IRCTC

GLOBALISATION - to mean integration of the economy of the country with the world economy

It involves creation of networks and activities transcending economic, social and geographical boundaries such as

Outsourcing - by companies in developed countries to India In which a company in foreign country hires regular service from external sources(i.e. from India), which was previously provided internally or from within the country (like legal advice, computer service, advertisement, security — each provided by respective departments of the company).
India has kept its commitments towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and reducing tariff rates.

Outcomes of Globalisation

ONGC Videsh, a subsidiary of the Indian public sector enterprise ONGC engaged in oil and gas exploration and production has projects in 16 countries.
Tata Steel, a private company established in 1907, is one of the top ten global steel companies in the world which have operations in 26 countries and sell its products in 50 countries.
Dr Reddy's Laboratories, initially was a small company supplying pharmaceutical goods to big Indian companies, today has manufacturing plants and research centres across the world.

Gains and Losses of LPG Economic 1991

The growth of GDP increased from 5.6 per cent during 1980-91 to 8.2 per cent during 2007-1012.
Reforms have not benefited the agriculture sector. The growth of agriculture has declined.
While the industrial sectors reported fluctuation, the growth of service sector has gone up.
The rapid increase in foreign direct investment and foreign exchange reserves.
Foreign investment FDI and FII, has increased from about US$100 million in 1990-91 to US$467 billion in 2012-13.
Increase in the foreign exchange reserves from about US$6 billion in 1990-91 to about US$404 billion in 2017-18. India has become one of the largest foreign exchange reserve holders in the world.
Rising prices have also been kept under control.
Not being able to address some of the basic problems facing our economy especially in the areas of employment, agriculture, industry, infrastructure development and fiscal management.
Public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads, market linkages and research and extension (which played a crucial role in the Green Revolution), has fallen in the reform period.
The removal of fertiliser subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers.
Industrial growth has also recorded a slowdown because of decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc.
Globalisation is, thus, often seen as creating conditions for the free movement of goods and services from foreign countries that adversely affect the local industries and employment opportunities in developing countries. Moreover, a developing country like India still does not have the access to developed countries’ markets because of high non-tariff barriers. E.g. although all quota restrictions on exports of textiles and clothing have been removed in India, USA has not removed their quota restriction on import of textiles from India and China.
The tax reductions in the reform period, aimed at yielding larger revenue and to curb tax evasion

Critics argue that globalisation is a strategy of the developed countries to expand their markets in other countries. The market-driven globalisation has widened the economic disparities among nations and people.

Narsihman Committee Report 1991 recommends:

Merger of public sector banks to make them stronger.
It had envisaged a 3-tier banking structure with 3 large banks with international presence at the top, 8 to 10 national banks at tier two, and a large number of regional and local banks at the bottom.
Factors like regional balance, geographical reach, financial burden and smooth human resource transition have to be looked into while taking a merger decision.

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