Economy

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Contents
03 09 24 39
Chapter 1 Chapter 2 Chapter 3 Chapter 4
Introduction to National Income Economic Growth Money Supply
Economics and Development
50 67 84 102
Banking (Part I) Banking (Part II) Inflation Financial Markets
1
123 147 176 201
Taxation Government External Sector Economic Planning
Budgeting
220 246 277 296

Industries Financial Inclusion Global Economic Agriculture and
Institutions Food Management
328 353 360

Chapter 17 Previous Year Key Highlights
Infrastructure Questions of Economic
Survey 2020-21
2
CHAPTER - 1
INTRODUCTION TO ECONOMY
Economics allocation of various natural resources

to maximize the welfare of society.
• The term 'economics' derives from two • We can thus see that 'the problem
Greek words, 'eco' meaning home and of scarcity' is at the heart of study of
'nomos' refers to accounts. economics and thus:
• The subject has developed from being » Scarcity implies that human wants for
about how to maintain the family
goods, services or the resources exceed
accounts into the wide-ranging subject
what is available.
of today.
» Economics tries to balance between
scarcity and choice.
» Economics finds methods of reconciling
Evolution of Economics unlimited wants with limited resources.
• Economics has grown in scope, very
gradually up to the 19th century, however
at an accelerating rate ever since. Significance of Economics
• It was only in the 18th century, that • Resources are finite, and people and
Economics grew as a separate field of governments must make choices.
study when leading philosophers tried to Economics help us know how societies,
answer questions on the driving force of governments, businesses, households,
various economic activities and debated and individuals allocate these scarce
the role that governments should play resources.
with regards to this. • For example, from the limited budget
for agriculture, governments decide
how much to contribute for agricultural
Defining economics subsidies and for agricultural
infrastructure.
• There are a number of definitions of
Economics: • Economics provides us valuable
knowledge for arriving at decisions in
» Economics is a social science focused everyday life.
on the satisfaction of needs and wants • With the help of economics, we can
through the efficient allocation of scarce evaluate government policies and their
resources which have alternative usages. likely outcomes. It provide us with valuable
» It is the science which studies human insights on the state of economy.
behavior as a relationship between ends • Broadly, it tries to answer the following
and scarce means which have alternative three questions:
uses.
» By extension of our basic definition, » What goods and services to produce?
economics, as applied to national and » How to produce these goods and services?
societal level, is concerned with the efficient
» Whom to produce these for?
3
Branches of Economics Type of Economic
• Economics is generally divided into two
main branches, Microeconomics and Systems
Macroeconomics.
Economies can be further characterized into
three types, based on the role of government
Microeconomics and ownership.
• Microeconomics focuses on the actions

of individual agents within the economy,
like households, workers, and businesses.
Free Market Economy
• For example, if a person earns 50,000 INR • Free market economies are also known
monthly, how much should he save and as the capitalist economies. Before
how much should he spend? How should understanding the Capitalist Economy,
he allocate his expenditure budget we need to understand the concept of
between different goods and services, “Capitalism”.
given his unique likes and dislikes? • Capitalism is often believed of as an
• Microeconomics believes in the rational economic system in which private
actor model. In this model, individual players or organizations own and control
actors are considered as rational beings property in accordance with their
who make rational calculations to interests, and demand and supply freely
maximize their utility (well-being) through establish prices in markets in a way that
their economic decisions. can serve the best interests of society.
• The essential element of capitalism is the
motive to make a profit.
Macroeconomics
• The 18th-century philosopher and father
• Macroeconomics is branch of economics of modern economics, Adam Smith said:
which looks at the economy as a whole. “It is not from the benevolence of the
• It concentrates on broad issues such butcher, the baker, or the brewer that we
as the GDP growth, unemployed rate, expect our dinner, but from their regard
the inflationary increase in prices, to their own interest.”
government deficits, and levels of exports • It is this logical self-interest that can lead
and imports. to economic success and prosperity.
• Macroeconomics tries to understand • In a capitalist economy, capital assets, for
what drives the business cycle from boom instance mines, factories, and hospitals,
to bust, or from growth to recession, and can be privately owned and controlled.
what controls economic indicators such as Labour is purchased for money wages.
gross domestic product, unemployment, Capital gains accrue to private owners,
inflation. and prices allocate capital and labour
between competing uses.
These two are linked closely as the behaviour • The government's role in such an
of household or consumer or firm depends economy is limited to regulation and
upon the state of national as well as the control measures. The other measures
global economy and vice versa. For example, by the government such as ensuring free
business sentiments depend on the state of competition, consumer rights, etc., are
the economy. necessary for ensuring a free and fair
market for all participants. At times this
4
role is compared to that of an umpire. • Basically, these kind of economies came
• Examples of Capitalist Economies are in reaction to the challenges prevalent in
USA, UK, Germany, Singapore etc. the capitalist economic system.
Mixed Economy
Command Economy
• Mixed Economy is a combination of a
• Inspired by the ideas proposed by the capitalistic and socialistic economy,
German philosopher Karl Marx (1818– wherein both the market and government
1883), this type of economic system first decide the allocation of resources.
came up in the erstwhile USSR following
the Bolshevik Revolution (1917). It got its • Apart from private firms and consumers,
perfect shape in the People’s Republic the government may itself choose
of China (1949). This type of economic to produce or consume to affect the
system also spread to other countries resource allocation and distribution.
in Eastern Europe such as Poland and • This is usually done to address issues of
Yugoslavia. under-developed markets or enhance
• In this we see two different versions of the equitable distribution across citizens.
state economies. First, in erstwhile USSR • India follows the Mixed Economy system.
identified as the socialist economy and Thus, property is owned by the state as well
second in pre-1985 China, known as the as private entities and the decisions are
communist economy. also taken jointly by the both.
• A socialistic economy emphasized on
the collective ownership of the means
of production (property and assets). It Sectors of Economy
also recognized a large role of the state
in running the economy. In a Socialist • According to the 'three sector hypothesis',
Economy, all the factors of production the economic activities are broadly
are under the ownership and control of classified into 3 broad categories:
the community, indicated by State. So, all
the factories, machinery, plants, capital
etc. are owned by a community indicated Primary Sector
by State.
• On the other hand, the communist • It includes all those economic activities
economy advocated state ownership where there is direct use of natural
of all properties including labour with resources such as agriculture, forestry,
absolute power to state in running the fishing, mining etc.
economy. • The services in this sector are entirely
• The important decisions with respect dependent on the availability of the
to production, supply and prices are natural resource in order to keep day to
all taken exclusively by the state. Such day operations running.
economies were also called as Centrally • This sector forms the base for all the
Planned Economy, Centralized Economy other sectors of the economy.
or Non-market Economy. • In India, the primary sector particularly
• Here, we need to note that, for Karl Marx, Agricultural sector provides employment
Socialism was a transitional phase to to almost 53% of the entire workforce
communism. But, it never did occur in currently working and its contribution to
reality in any State. GDP is around 17%.
5
Secondary Sector Tertiary Sector
• Secondary Sector adds value to natural • This sector includes all those economic
resources by transforming the raw activities where different services are
material into valuable products. produced such as education, banking,
• For example, cotton fibre from the plant insurance, transportation, tourism etc.
is used to spin yarn and weave cloth. • The activities in this sector help in
Sugarcane from farms is used as a raw the development of the primary and
material to make sugar or gur. We convert secondary sectors.
earth into bricks which are then used to • This sector is also called as the Service
make houses and buildings. sector.
• As these activities are associated with • In India, the tertiary sector contribution
industries, this sector is also called the is the largest in terms of share of GDP
manufacturing or industrial sector. at 54% and it employs 29% of the total
• In India, the manufacturing industry workforce.
provides employment of almost 18% of Sector-wise contribution in the GDP of
the entire workforce currently working. India can be understood through the
Contribution of industrial sector to GDP following graph of 2019-2020:
is around 27%.
I m a g e 1.1: T h e s e c to r a l c o n t r i b u ti o n to GDP (%)
Economies based Agrarian Economy

on the shares of the • An economy is called agrarian if the share
of its primary sector is 50 % or more in the
particular sector in total output (GDP) of the economy.
GDP • At the time of independence, India was

an agrarian economy.
6
Industrial Economy India's direct
• If the secondary sector contributes 50%
or more to the total output (GDP) of the transformation from
economy, it is an industrial economy.
• Higher the contribution from the
primary sector to
secondary sector, the higher the level of
industrialisation.
services
• The natural economic movement for a
country is to go from agrarian economy
Service Economy to an industrial economy to a service
economy but India has leapfrogged
• If the service sector contributes 50% from an agrarian economy to a service
or more to the total output (GDP) of the economy.
economy, it is a Service Economy.
• Trend in sectoral contribution to GDP in
India.
‘India is a Service economy in terms of
contribution in GDP but Agrarian economy
in terms of dependency/employment.’
70
60
50
40
30
20
10
0
1950-51 1960-61 1970-71 1980-81 1990-92 2000-02 2007-08 2018- 19
Primary Secondary Tertiary
I m a g e 1.2: C h a n g i n g s h a r e o f va r i o u s s e c to r s i n GDP
Following reasons can be attributed to this labour force (E.g., Cheap labour force in
shift: IT industry as compared to some of the
developed western countries) are some
• India with educational investment of the reasons for the rapid growth of the
toward secondary and higher education service sector in the country.
produced a group of highly educated
workers who have largely worked in the • On the other hand, low growth in the
service sector. Secondary sector can be contributed
to License Raj, Restriction on foreign
• Well educated human resource, fluent in investment, stringent labour laws and
English and availability of skilled cheap
7
lack of skilled labour etc. responsible for the growth in service
• Even after the LPG reforms, the lack of sector.
availability of infrastructure, transport, • Some of the other important factors are:
power, communication severely
impacted manufacturing and industrial » Increase in per capita income- leads to
sectors. These factors also created a increase in demand for various services
base for service sectors. As compared related to education, health etc.
to secondary sector, the emergence of » Increase in tax revenue of the government-
various e-commerce platforms is an in the form of service tax.
example of how digital revolution can
lower transaction costs and increase
» Rampant migration-of rural population
to semi-urban and urban regions.
productivity which is ultimately
8
CHAPTER - 2
NATIONAL INCOME
National Income financial year.

• GDP includes only purchases of newly
Accounting produced goods and services and does
not include sale or resale of used goods
• National income accounting is a book- (but services provided in reselling are
keeping system that a government uses included in GDP).
to measure the level of the country's
economic activity in a given time period.
• Though national income accounting
What is domestic territory?
is not an exact science, but it provides • It includes political/geographical
useful insight into how well an economy boundaries of the country including
is functioning. territorial waters and airspace.
• Some of the metrics calculated by using • Ships and aircraft owned and operated
national income accounting consist of by residents between two or more
Gross Domestic Product (GDP), Gross countries. For example, Air India flight
National Product (GNP) and Gross between Japan and China is part of the
National Income (GNI) etc. domestic territory of India.
• The information collected with the help • Fishing vessels, oil and natural gas rigs
of national income accounting can be and floating platforms operated by a
used for a different variety of purposes resident of a country in the international
like the distribution of income within waters. For example, Fishing boat
a population, evaluating the current operated by Indian fishermen in the
standard of living, comparing activities international waters of the Indian Ocean.
within various sectors in an economy,
• Embassies, Consulate and Military
as well as changes within those sectors
establishments of a country located
over the period of time. A thorough
abroad.
analysis can assist in determining overall
economic stability within a nation.
• The quantitative information associated Goods
with national income accounting can be
used to determine the effect of various • Goods, in simple terms, are material
economic policies. things that satisfy human needs. Goods
can be classified as:
Gross Domestic » Final Goods: Final Goods can be further

classified as:
Product (GDP) − Consumption/Consumer Goods
• Gross Domestic Product is the value of all − Capital/Producer Goods
final goods and services produced in the » Intermediate Goods
domestic territory of the country during a
9
Final Goods • For example, tools, machinery, vehicle
etc.
• These are the Goods that are meant for
final use or final consumption. They do
not pass through any more stages of Intermediate Goods
production or transformation.
• Intermediate goods are the goods that
• A final good is thus a product that the are utilized as a raw material or input for
consumer finally uses. the production of final goods.
• For example, shirt is a final good, bricks • For example, copper used for making
used for construction of house are final utensils, steel sheets used for making
goods. automobiles, etc.
Consumption/Consumer Goods
Why only final goods are
• Consumer goods are those final goods
which are bought for consumption by counted?
consumers. • The value of final goods already includes
• For example, food, clothing etc. the value of the intermediate goods that
have entered into the production process
as inputs.
Capital/Producer Goods
• Counting them individually will lead to
• Capital goods are those final goods the error of double counting.
which help in the production of other
goods.
• Lat us take an example of the agricultural
sector. Suppose in a year a farmer
• They do not get transformed during the produces 100 Rs. worth of potatoes. A
production process rather they make Chips Company had to buy Rs. 50 worth
production possible. potato to produce Chips worth Rs. 200.
Now consider the following table:
Farmer Chips company
Production Value 100 200
Intermediate Good Used 0 50
Value added
(Production Value - 100-0= 100 200-50 = 150
Intermediate Good)
Total GDP when 100 + 200 = 300

intermediate goods are (Here, we can see the value of potato i.e. Rs. 50 is counted
included twice first in farmer’s case then for chips Company)
Total GDP when only Final

200-50 = 150
Good are counted
10
Financial/Fiscal/Accounting Potential Gross Domestic Product (GDP)
Year • It is a theoretical concept. It is an
estimate of the value of the output
• It is a period of 12 months, used by that the economy would produce if
governments, businesses, and other
labor and capital had been employed
organizations in order to calculate
at their maximum sustainable rates (at
budget, profit, losses, etc.
steady growth and stable inflation).
• In India, this period starts from 1st April • However, the cost of increasing
and ends on 31st March.
inflation could make an economy
• One financial year is divided into 4 momentarily produce more than its
quarters. potential level of production.
Q1 = 1st April-30th June. • The potential labour force depending
Q2 = 1st July-30th September. on various demographic factors and
participation rates, the capital stock,
Q3 = 1st October-31st December.
the non-accelerating inflation rate of
Q4 = 1st January-31st March. unemployment, and the level of labour
efficiency decide this potential output
which is very important to calculate
Different uses of the concept the output gap.
of GDP
• To determine the growth rate of an Net Domestic
economy. The growth rate of 6%
means that the size of the economy has Product (NDP)
increased by 6% from last year.
• It is a quantitative concept and its volume • Net Domestic Product (NDP) is the
indicate the ‘strength’ of the economy. annual measure of the economic output
But it does not tell anything about the of a nation that is adjusted to account for
‘qualitative’ aspects of the economy. For depreciation.
example, GDP will talk about the value NDP = GDP - Depreciation
of goods that a country produces but it
will not talk about the quality of goods
produced by the country. It also does Different uses of the concept
not focus on any negative impacts this
process has on the stakeholders. of NDP
• For example, pollution as a byproduct of • It is used to understand and analyze the
economic activity is not considered while loss due to depreciation to the economy.
calculation of GDP. • It is also used to show the achievement
• It is used for the comparative analysis by of the economy in the area of research
international organizations like IMF etc. and development in reducing loss due to
depreciation.
Depreciation
• The monetary value of an asset decreases
over time due to use, wear, and tear. This
11
decrease in value is called depreciation. USD 14.1 billion in March 2021, compared
• It is an annual allowance for wear and with a deficit of around USD 12.6 billion in
tear of a capital good. the previous month.
• In other words, it is the cost of the good

divided by the number of years of its
useful life.
b. Interest on external loans
• Ministry of Commerce and Industry in • The Net outcome of the inflow of interest
India announces the rate at which assets payment (on money lent out) and the
depreciate. outflow of interest payment (on the
money borrowed).
• That is, inflow of interest payment -
GNP/GNI outflow of interest payment.
• For India, it has been always Negative
• Gross National Product/Gross National (Since, for India Outflow of Interest
Income (GNP/GNI) is the monetary value Payment > Inflow of Interest Payment).
of all final goods and services produced
by the normal resident (explained
below) of the country in a financial year c. Private Remittances
regardless of production location.
• The Net outcome of the money inflow
• Residence, rather than citizenship, is the and outflow by Indian national working
criterion for determining nationality in
outside and the foreign national working
GNP calculations, as long as the residents
in India.
spend their income within the country.
• For India, it is Positive since India is the
• As per the global accounting conventions, largest recipient of remittances in the
residents are generally those people who
world.
have lived in the country for the past one
year or more. Similarly, non- residents • For example, Suresh who works in Dubai
are those who have stayed outside the sends money back to his family in India,
country for the past one year or more. hence that money will be included in
GNP = GDP + Net Factor Income from private remittance while calculating GNI.
abroad
In the case of India, NFIA is Negative.
GNP = GDP + Money flowing from Hence, India’s GNP is lower than its GDP.
foreign countries - Money flowing to
foreign countries
• The items which are included in Net Normal Resident
Factor Income from abroad are:
• It refers to the individual who usually
resides in a country, whose economic
interest lies in that country.
a. Trade Balance
• Normal Resident include:
• It is the Net outcome of total import and
export (i.e. Export-Import) of a country in » Citizens and Non-Citizens (residing for
a year. more than 1 year)
• For India, in recent years the trade balance » Institutions
is negative (Since, Import > Export). For
instance, India's Trade Balance was minus • For example, Lisa who is an American
12
GDP = A + C
National works in a software company NORMAL RESIDENTS GNP = A + B
in Delhi for past five years is a Normal [MOSTLY INDIANS + B
Resident since her economic interest lies RARE FOREIGNE R]
DOMESTIC TERRITORY OF INDIA
A
in India and her stay in India has been for
more than one year. NON - RESIDENTS
[RARE INDIANS +
MOSTLY FOREIGNE R]
C
Different uses of the concept A- Income earned by the normal

of GNP resident from the domestic territory.
B- Income earned by the normal
• GNP is preferred to GDP by organizations resident from abroad.
such as the World Bank because it
indicates both internal as well as external C- Income earned by the non-resident
strength of the economy. from the domestic territory of the
country.
Difference between GDP and GNP

GDP GNP
It measures the market value of all final It measures the market value of all final
goods and services produced within the goods and services produced regardless
domestic territory of a country. of production location.
The focus on GNP is on production by

The focus on GDP is on domestic production.
normal residents.
It highlights the strength of the country's It highlights how the resident of the
economy. country contributes to the economy.
Net National Cost

Product (NNP) • Cost is the value of money that has been
used up to produce something or to
• Net National Product (NNP) is the deliver a service.
(Gross National Product (GNP) minus
• The value of total produced goods and
depreciation.
services can be calculated at either at
NNP = GNP - Depreciation Factor Cost or market cost.
• NNP is used to find Per Capita Income Cost
(PCI) of the country.
PCI = NNP/total population of a nation.
Factor Cost Market Cost
13
Factor Cost Market Cost
• It is the input cost that the producer has • It is the cost at which the goods are sold
to incur in producing goods and services. in the market.
• Factor Cost includes all factors of • It is derived by adding the Net indirect
production used in producing a good or tax (E.g. GST) to Factor Cost (FC).
service.
• The factors of production comprise land, Market Cost = Factor Cost + Net Indirect
labour, capital, and entrepreneurship. Tax (Indirect tax - Subsidy)
• It is the price of the commodity from the • Market cost is used for determining actual
producer side.
GDP transaction i.e. GDP at Market Price
= GDP at FC + Indirect Taxes - Subsidy.
• For example, Ramesh sell 100 cakes.
The cost of production of cake is Rs. 9,
Ramesh sells 100 products.
Factor Market
Number of Cost Net Indirect Price GDP at GDP at
Years Tax Subsidies
Products per unit Tax per unit MP FC
product product
2014-15 100 9 2 1 2-1 = 1 10 1000 900
2015-16 100 9 3 1 2-1 = 1 11 1100 900
• From January 2015 Government of India NFIA D

started estimating GDP at Market Price. GDP GNP NNP ID - Sup
(at
• Generally, Factor Costs are used to Market
Price)
NI
(NNP at
UP + NIH
+ CT -
measure economic growth whereas FC) TrH
PTP +
Market Prices are used for actual PI
NP
transactions. PDI
I m a g e 2.1: D i a g r a m m ati c r e p r e s e n tati o n o f

t h e s u b c at e g o r i e s o f a g g r e g at e i n c o m e
Relation between different measures of
income:
• GNP = GDP + NFIA NFIA: Net Factor Income from Abroad,
D: Depreciation, ID: Indirect Taxes, Sub:
• GNP = NNP (at MP) + depreciation
Subsidies, UP: Undistributed Profits, NIH:
• NNP (at MP) = NNP (at FC) + Net Net Interest Payments by Households,
Indirect taxes CT: Corporate Taxes, TrH: Transfers
• NNP (at FC) = NI received by Households, PTP: Personal
Tax Payments, NP: Non-Tax Payments,
PI: Personal Income, PDI: Personal
Disposable Income
14
Current Price vs Real GDP
Constant Price • Real GDP is GDP calculated at the Market
Prices at base year.
• Current Price- Goods and Services • If we are comparing the GDP growth
are valued at the price of their year of
between two years, the nominal GDP
production.
growth might be overestimated due to
» Used for measuring actual transactions. the effect of inflation.
» GDP at Current Price gives us Nominal • Therefore, Economists use the prices
GDP. of goods from a base year to act as a
reference point when comparing GDP
• Constant Price-Goods and Services are from one year to another.
valued at base year price. • For example, if 2011 were chosen as the
base year, then real GDP for 2019 is
» Used in Estimating economic growth. calculated by taking the quantities of all
» GDP at Constant Price gives us Real GDP. goods and services purchased in 2019
and multiplying them by their 2011 prices.
• Nominal GDP > Real GDP. (But in theory
Nominal GDP this is not the case always.)
• Nominal GDP is GDP calculated at

current Market Prices. GDP Deflator
• Nominal GDP will incorporate all the
changes in Market Prices that have • GDP deflator measures the impact of
occurred during the current year due to inflation on the gross domestic product
inflation or deflation. (GDP) i.e. how much a change in GDP
• Because Nominal GDP is measured in relies on changes in the price level.
current prices, growing nominal GDP • It is calculated by dividing nominal GDP
might reflect a rise in prices as opposed by real GDP and then multiplying by 100.
to growth in the number of goods and
services produced. Hence, the nominal
GDP presents a distorted picture of the
actual growth.
• The GDP Deflator can be viewed as a
conversion factor that transforms real
GDP into nominal GDP.
• Table below shows the relation between
Nominal GDP, real GDP, and GDP deflator.
15
Real GDP =
GDP at
Number of Current Base Year GDP at GDP Nominal GDP/
Years Current
Products Price Price Base Price Deflator GDP Deflator)
Price
* 100
2011-12 100 10 10 1000 1000 100 1000
2012-13 100 15 10 1500 1000 150 1000
2013-14 100 22.5 15 2250 1500 150 1500
Income
• The income of a person has three forms.
Income
Nominal Income Real Income Disposable Income

[ Person’s Wages] [ Nominal Income
Adjusted for Inflation]
I m a g e 2.2: F o r m s of Income
National Income or NNP at Personal Disposable Income

Factor Cost (PDI)
• National Income at Factor Cost = NNP • It is the income left with the individuals
at Market Price - Indirect Tax + Subsidies. after the payment of direct taxes from
personal income.
• It is the actual income which can be
Personal Income (PI) spent on consumption by the household.
• Personal Income is the part of the National PDI = Personal Income (PI) - Personal tax
Income received by the household. payment - Non-tax payment
• PI = NI - Undistributed profits - Net
interest payments made by the
households - Corporate Tax + Transfer National Disposable Income
Payment to the household from the (NDI)
government and firms.
• It is the total income which is available
16
for use with all the resident of a country Criteria for selection of base
during a financial year.
year
NDI = NNP MP + Other current transfer • A base year has to be a normal year
from the rest of the world without large fluctuations in trade, prices
of commodities and variable should be
NDI = NI + Net Indirect taxes + Transfer on an average.
payment from the rest of the world
• The base year chosen should not be very
• NDI gives the idea of what is the old (so as to better reflect the basket of
maximum amount of goods and services items to be measured)
the domestic economy has at its disposal.
• Moreover, the year chosen should have
data available for all the necessary
variables.
Private Income
• It is the total income (earned as well as
unearned) of the private sector during Data Collection
the financial year.
Private Income = Earned income of Agency in India
private sector + Unearned income of the
private sector
Central Statistical Office (CSO)
[ e.g. transfer payment] • Central Statistical Office (CSO) in the
Ministry of Statistics and Programme
Implementation (MoSPI) is responsible
Base Year for macroeconomic data gathering and
record keeping.
• Base year is a year which is used as a • Release estimates of GDP, NI, GNP, NDP,
basis for comparison by a price index Per Capita Income, CPI, IIP etc.
such as GDP growth, CPI etc. • The CSO coordinates with the various
• The base year is allocated the value of State governments and organizations
100 in an index. to collect and compile data required to
calculate GDP and other statistics.
• For example, to find the rate of inflation
between 2013 and 2018, 2013 is the base • For example, At State level, State
year or the first year in the time set. Directorates of Economics and Statistics
(DESs) compile their respective State
Domestic Product and other indicators.
GDP Deflator: 2011-12 = 100
WPI : 2011-12 = 100 • All the required data is collected and
aggregated by CSO and used to arrive at
the final numbers.
Base year Reference value =100
• The base year is changed periodically to “New GDP Series”

take into account new goods and services
in the economy.
2015
• The Central Statistical Office (CSO)
came out with the new series of national
17
account with 2011-12 as the base year for • It covers data of financial sector from
computing National Account Statistics stock exchanges, financial institutions
like GDP, GNP etc. and from various regulators like Securities
• The New GDP Series will expand the size and Exchange Board of India (SEBI).
of the economy by broadening its base
in the farm, corporates, and unorganized
sectors. Production taxes
• The growth rate of the economy will now • These taxes are imposed on production
be measured by GDP at Market Price and are independent of the volume of
which will be called as GDP as they are actual production.
practiced internationally. Earlier, GDP at
• These are direct taxes.
Factor Cost was used for calculation of
GDP. • For example, Stamp duty, Registration
fees, Professional tax.
• Earlier: GDP at Factor Cost
• Now: GDP at Market Price
• The sector-wise estimate of Gross Value Production Subsidies
Added is calculated at the Base Price
instead of at Factor Cost. • These are paid by the government
in relation to production and are
independent of actual production.
In simple terms, for any product or
commodity, the Base Price is the amount • For example, Subsidies to railways, Input
receivable by the producer from the Subsidies to farmers etc.
purchaser for a unit of a product minus
any tax on the product plus any subsidy
on the product. Product Tax
However, GVA at basic prices will consist • Product Tax is paid on per unit of Output.
of production taxes and eliminate
production subsidies offered on the • These are Indirect tax.
commodity. • For example, Sales tax, Excise tax, Service
On the other side, GDP at Market Prices tax etc.
comprise both production and product
taxes and excludes both production and
product subsidies and GVA at Factor Product subsidies
Cost consist of no taxes and excludes no
subsidies.
• These are paid by the government on per
unit of output.
• GVA at Factor Cost + (production
taxes less production subsidies) = • For example, food, petroleum, fertilizer
GVA at basic prices subsidies to farmers etc.
• GDP at Market Prices = GVA at basic

prices + product taxes- product
subsidies
Criticism of New Methodology
• The 2011-12 series used for the first time
• In the current series, the data for used, an untested MCA21 database of
corporate income is collected from the
Ministry of Corporate Affairs.
Ministry of Corporate Affairs MCA-21
records which allow information even for • Doubtful GDP numbers: The GDP growth
small level firms. for financial year 2017 (the year of
18
demonetization), was raised to 8.1%, the • It is based on more sources of data (for
highest in the decade. For the financial instance, MCA21 is a larger database for
year 2018, the year of GST introduction, it industries).
was raised from 6.7% to 7.2%. But these
two events have been described by the
expert as twin shock to the economy
and it is difficult to see how an economic
Measurement of
growth rate could accelerate in such
scenario.
National Income
• National Income (NI) is the total income
earned by the normal resident of a
Positives of New Methodology country during the financial year.
• It confirms to international standards i.e. • There are 3 methods for the measurement
based on the convention of IMF. of National Income.
Measurement of National Income
Product/Value added Expenditure Method Income method

Method
I m a g e 2.3: M e t h o d for Measurement of N ati o n a l I n c o m e
Product or Value-Added in production, therefore the following

factors should be excluded or subtracted
Method from the output of the enterprise.
• The value-added method is also called
as output method or product method, » Net Indirect Taxes
and its primary goal is calculating the » Raw materials consumption
national income by taking into account » Capital consumption
the value added to a product during the
different stages of production. • For example, Suppose a year a farmer
• In this method, NI is estimated by adding produces 100 rupees worth of wheat for
up value addition of each firm for all which he does not need any assistance of
three sectors namely Primary, Secondary any input. Therefore, the entire amount of
and Tertiary Sector. Rs. 100 is the contribution of the farmer.
The baker had to buy Rs. 50 worth of
• As this method emphasizes on net wheat to produce bread worth of Rs. 200.
value addition by every component
19
Farmer Baker
Total production Value 100 200
Intermediate Goods Used 0 50
GVA (Gross Value Added) = (Production

100 200 - 50 = 150
value - Intermediate Good)
Income method Items not included

• In this method, NI is calculated by adding
the income of all factors of production in National Income
within the domestic territory in terms
of rent, royalties, interest, profit, wages, • The items that are not incorporated in
salaries, etc. the calculation of National Income are -
GDP = W + In + P + R
» Intermediary Goods = to avoid double
W = Wage and salaries. counting.
In = Interest Payments. » Transfer Payments like gifts, scholarships,
P = Gross Profit. remittances.
R = Rent. » Sale/Purchase of Old/Second-hand
goods (but the broker commission is
included).
Expenditure Method » Black Money.
• In this method, all the expenditure on » Capital Gains.
consumer goods and investment which » Household Services (only housewives
are produced within the domestic territory services if paid is counted).
incurred by the household, government,
firms are summed up to get NI.
GDP = C + I + G + (X-M) Facts regarding
C = Private
expenditure.
final consumption
National Income
G = Government final consumption • 1st estimate of National Income (NI) in
expenditure. India was made by Dadabhai Naoroji for
I = Expenditure on final Goods [ the year 1867-68. It was published in his
Investment or Capital Formation] book titled ‘Poverty and Un-British Rule
X = Exports M= Imports X-M = Net in India’.
Exports • 1st scientific estimate of National Income
20
(NI) was made by Professor V. K. R. Rao Gross National Product are not the same
for the year 1931-32. in an open economy.
• The first official estimate of National
Income (NI) was made by the Ministry of
Commerce for the year 1948-49. GDP and Welfare
• In 1949 the government established the
National Income Committee under the • Countries with higher GDP per capita
Chairmanship of Dr. P. C. Mahalanobis. often have a high score in various
development and welfare indices.
• Since 1956, the Central Statistical
Organization has been estimating • Yet, there are various limitations to the
National Income (NI) and related usefulness of GDP as the measure of
aggregates. These are published in welfare:
the Report titled ‘National Accounts
Statistics’.
Distribution of GDP is not
uniform
Domestic Income • If the GDP of the country is rising the
welfare may not rise as a consequence.
• It is the total income earned in the This is because the rise in GDP may be
domestic territory during a financial year.
concentrated in the hands of very few
DI = NDPFC individuals or firms. Economic inequality
NDPFC = GDPFC - Depreciation is not revealed by the GDP figures.
• Domestic Income can be calculated both

at current (Nominal DI) and constant
(Real DI).
Non-Monetary Exchange
• Many activities in the economy are
not estimated in monetary terms. For
Closed Economy vs example, the domestic services women
perform at home are not paid for. In
Open Economy developing countries, where many
remote regions are underdeveloped,
Closed Economy the exchange takes place as barter
exchange which is not registered as part
• Closed Economy is an economy that of economic activity. This is the case of
has no economic relations with other underestimation of GDP.
countries of the world.
• Due to this, the Gross Domestic Product
and Gross National Product are the same Externalities
in a closed economy.
• Externality is an economic term which
refers to the benefits (or harm) a firm or
Open Economy individual causes to another for which
they are not paid (or penalized).
• Open Economy is an economy that has • In other words, externalities can be
economic relations with other countries defined as the indirect effects that have
of the world. an impact on the consumption and
• Due to this, Gross Domestic Product and production opportunities of others.
21
• Pollution is a traditional example of • A closed economy's intent is to provide
externality. The producer of the good domestic consumers with everything they
focuses on the cost and profitability and need from within the country's borders.
does not pay attention to the indirect
costs to those who are harmed by
Q.3) The National income of a country
pollution.
for a given period is equal to the: (2013)
• Externalities are among the main reasons
(a) The total value of goods and services
for which the governments intervene in
produced by the nationals.
the economic sphere.
(b) Sum of total consumption and
investment expenditure.
UPSC CSE PRELIMS (c) Sum of personal income of all
individuals.
Previous Years (d) Money value of final goods and
Questions services produced.
Ans. (a)
Q.1) In terms of economy, the visit
by foreign nationals to witness the • Explanation: National income has
XIX Commonwealth Games in India been defined in a number of ways. It is
amounted to (2011) the total value a country’s final output
of all new goods and services produced
(a) Export
within a given year. In other words, it is
(b) Import the total amount of income accruing to
(c) Production a country from economic activities in a
year.
(d) Consumption
Ans. (a)
Q.4) A decrease in tax to GDP ratio
• Explanation: The income was from of a country indicates which of
“tourism” and that is an invisible export the following? (2015)
of service.
1. Slowing economic growth rates
2. Less equitable distribution of national
Q.2) A “closed economy” is an economy in income
which - (2011) Select the correct naswer using the code
(a) the money supply is fully controlled given below:
(a) 1 only
(b) deficit financing takes place
(b) 2 only
(c) only exports take place
(c) Both 1 and 2
(d) neither exports nor imports take
place (d) Neither 1 nor 2
Ans. (d) Ans. (b)
• Explanation: A closed economy is one • Explanation: Note: You will be able to

that has no trade activity with outside solve this question more effectively after
economies. taxation module.
• A closed economy is self-sufficient, which • Tax GDP ratio shows the tax revenue for
means no imports come into the country a country measured in terms of GDP.
and no exports leave the country. • For example, if India’s tax GDP ratio is
22
16%, it means that the government gets in the last decade.
16% of its GDP as tax contribution from Which of the statements given above is/
the public and entities. are correct?
• Here, Tax GDP ratio shows the richness of (a) 1 only
the government’s exchequer.
(b) 2 only
• The government’s ability to spend on
socio-economic development programs, (c) Both 1 and 2
military, salary, pension heads etc., (d) Neither 1 nor 2
depends on tax GDP ratio. Ans. (b)
• Lower tax GDP ratio indicates a less
equitable distribution of national income. • Explanation: Note: Rate of growth of Real
Gross Domestic Product has fluctuated a
lot during the last decade and reduced
Q.5) With reference to the India economy, significantly in 2008-09 because global
consider the following statements: (2015) financial crisis.
1. The rate of growth of real Gross • The rate of growth of real Gross Domestic
Domestic Product has steadily Product has fluctuated over the decade.
increased in the last decade.
• But, the Gross Domestic Product at
2. The Gross Domestic Product at Market Market Prices (in Rupees) has steadily
Prices (in rupees) has steadily increased increased in the last decade.
12%
10% 10.09%
10% 9.53%
GDP growth rate compared previous year
9.04%
7.9%
8% 7.59%
6.9%
6.4%
5.88% 5.9%
6%
4.9%
4%
2%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013* 2014*
I m a g e 2.4: R e a l GDP g r ow t h r at e f r o m 2004 to 2014
23
CHAPTER - 3
ECONOMIC GROWTH AND

DEVELOPMENT
Is a person’s well-being solely dependent • Economic Growth focuses on the
on his economic well-being? Are people quantitative aspects of growth of the
of countries with a higher Economic economy like GDP and NDP.
growth happier? What is the difference
between development and economic
growth? Very often these two words are
mistakenly understood the same. But in
Economic
the 1960s economists made a distinction
between Economic Growth and Economic
Development
Development. • Economic development refers to the
process of economic growth which is
Economic Growth
accompanied by an improvement in the
well-being of the people.
• It indicates a progressive change in
• An increase in an economic variable (like socio-economic structure in the economy
GDP, GNI, NI etc.) over a period of time is
and focuses on both quantitative and
known as economic growth.
qualitative growth of the economy.
• Concept of Economic growth is applicable • It measures all aspects like Wealth,
both for an individual (increase in Income)
Health, Education, etc.
and for Nation (with an increase in goods
and services produced by it over a period
of time).
Difference between Economic growth and

development
Economic Growth Economic Development
Economic growth is a narrower concept. It refers to

an increase in the production of goods and services Economic development is a much broader concept.
of a country.
Economic development is a 'Multidimensional'

Economic growth is considered one dimensional as
concept as it focuses on income, social welfare and
it focuses only on income.
other dimensions.
It is a Quantitative Concept. It is both Quantitative and Qualitative Concept.
24
Economic growth is possible even without economic Economic development cannot be achieved
development. without economic growth.
It is a short term process. It is a long term process.
Indicators are of Economic Growth are: Real GDP, Indicators of economic development are literacy
Real per capita income etc. rate, poverty ratio etc.
• Real GDP is not a satisfactory measure of

Indicators economic development because -
of Economic » It is based on the value but does not

Development take into account its various sector
composition (agriculture, secondary or
tertiary Sector).
• There are various indicators to measure
the level of economic development of a » Real GDP does not take into account the
nation are as follows - distribution of National income i.e., the
inequalities present in the society.
Net Economic Welfare (NEW) » It is silent on welfare dimension of
• Net Economic Welfare (NEW) is a broader economic development namely reduction
concept than GNP to measure economic in poverty, political liberty, literacy etc.
welfare.
• Real per capita income was used earlier,
• It adjusts GNP by adding the value of because of the lack of any satisfactory
beneficial non-market activities such as quantitative indicator of economic
Value of leisure and Subtracting ‘bads’ development.
from it such as pollution.
NEW = GNP + Value of Housewives Services +

Value of leisure - Expenditure on defence - Cost
Physical Quality of Life Index
of Environment Degradation (PQLI)
• It is a theoretical concept which highlights • Physical Quality of Life Index (PQLI)
limitations of GDP. It was given by Paul attempts to measure national well-being
Samuelson. using social indicators. These indicators
are:
» Life Expectancy at birth

Real per capita Income
» Infant mortality rate
• Real GDP per capita is a Real GDP
divided by the number of people.
» Literacy Rate
• It is used to compare the standard of • All three indicators are measured on a
living between countries and expressed scale which ranges from 1 to 100 where
in terms of commonly used international 1 represents the worst performance and
currencies such as the Dollar, Euro etc. 100 is the best performance.
• Real GDP helps to ascertain the country's • The average value of three-component is
development status. PQLI.
25
• It was developed by economist Morris • From 2010 UNDP began using a new
David Morris. method for calculating HDI. It used the
following three indices:
Human » Life Expectancy Index (LEI): Measures

life expectancy. This dimension uses
Development Index life expectancy at birth as its indicator.
It is defind as “the number of years a
new-born infant could expect to live
• This index is used to measure a country's if prevailing patterns of age-specific
overall achievement in its social and
mortality rates at the time of birth were
economic dimensions.
to stay the same throughout the child’s
• Human Development Index (HDI) was life”. It is calculated using a minimum
introduced by the United Nations value of 20 years and a maximum value
Development Programme (UNDP) in of 85 years.
World Human Development Report in
» Education Index (EI): It is average of mean
1990 to measure well-being.
years of schooling and expected years
• HDI was developed by economist of schooling. Estimates for mean years
Mahbub ul Haq. of schooling are based on the duration
• HDI measures the achievement of a of schooling at each level of education.
nation in three basic dimensions of Expected years of schooling estimates
human development. are based on two factors: enrolment by
age at all levels of education and the
» A long and healthy life: Calculated by life number of children of school age in the
expectancy. population for each level of education.
» Access to Education: Measured by the » Income Index (II): It measures GNI per
adult literacy rate and enrolment ratio. capita adjusted in Purchasing Power
Parity terms (PPP). UNDP shifted from
» Decent Standard of living: Assessed by
adopting GDP per capita to GNI per
Gross National Income (GNI) per capita
capita because GNI per capita is suitable
adjusted for the price level of the country.
to consider the wellbeing of people rather
• The HDI helps the United Nations than the income of the country.
determine which countries need
assistance, specifically Least Developed
• HDI is the geometric mean of the above
three indices.
Countries (LDC).
DIMENSION Long & healthy life Knowledge A decent standard of living
INDICATORS Life expectancy at birth Expected year Mean year GNI per capita (PPP $)
of schooling of schooling
DIMENSION Life Expectancy Index Education Index GNI Index

INDEX
Human Development Index (HDI)
26
Classification of countries on climate crisis. These inequalities are a
roadblock to achieving the 2030 agenda
the basis of HDI for sustainable development.
HDI scores lie between from 0 to 1 for
different countries.
» A score of 0-0.49 means low development Changes in Human
(For example, Mali). Development Report
» A score of 0.5-0.69 means medium UNDP introduced three new indices in the
development (for example, India). year 2010: Inequality-adjusted Human
» A score of 0.7-0.79 means high Development Index (IHDI), Multidimensional
development (For example, China). Poverty Index (MPI) and Gender Inequality
Index (GII).
» Above 0.8 means very high development
(For example, Norway).
Inequality-adjusted Human
• Out of total 189 countries, India has ranked
131 on the Human Development Index Development Index (IHDI)
2020. The country fell into the category • The IHDI is the HDI (Human Development
of the medium human development Index) adjusted for inequalities in the
(With an HDI value of 0.645). In 2019, distribution of achievements in each of
India’s rank was 129. the three components of the HDI (health,
education, and income).
• The IHDI will be equivalent to the HDI
1.0
value when there is no inequality.
0.9 However, it falls below the HDI value as
inequality rises.
0.8
0.7
• The difference between the HDI and the

0.6
0.5
0.4
0.3
IHDI represents the ‘loss’ in potential
0.2 human development due to inequality
0.1
0.0
and can be expressed as a percentage.
• Atkinson index is used to measure income
1990 2000 2010 2020
I m a g e 3.1: I n di a performance in HDI ov e r t h e inequality.

years
• Between 1990 and 2018, HDI value of Multidimensional Poverty Index

India increased by 50 percentages (from • Multidimensional Poverty Index (MPI)
0.431 to 0.647), which places it above measures poverty on the basis of
the average for other countries of South deprivation at household and individual
Asian (0.642) and above the average for level in health, education, and standard
countries which are part of the medium of living.
human development group (0.634).
• The above three dimensions are sub
• The Report states that ‘as the gap divided into 10 indicators: health (child
in basic standards is narrowing, with mortality, nutrition), education (years
an unprecedented number of people of schooling, enrollment), and living
escaping poverty, hunger and disease. standards (water, sanitation, electricity,
The next generation of inequalities and cooking fuel, floor, assets).
disparities is opening up, especially
around education, technology, and the • It is developed by UNDP and Oxford
27
Poverty & Human Development Initiative of living.
(OPHI) and it replaced the Human Poverty
Index (HPI).
• The 2019 Multidimensional Poverty Index
(MPI) states that across 101 countries, 1.3
• MPI identifies which of the above 10 billion people are multi-dimensionally
deprivations any household experiences. poor.
A household is classified as poor if it
suffers deprivations across one-third or
• India MPI value is 0.123 and India
accounts for 28 per cent of the 1.3 billion
more of the weighted indicators.
multi-dimensional poor in the world.
• MPI is calculated as follows:
• India managed to lift 27.1 crores, people,
MPI = H* A out of poverty from 2005-06 to 2015-16,
H = Percentage of people who are MPI recording the fastest reduction in the MPI
poor. value during the period.
A = Intensity of poverty (average
number of deprivations a poor person
suffers).
Gender Inequality Index (GII)
• The MPI goes beyond income as the sole • It is an index for measurement of gender
disparity.
indicator for poverty, by exploring the
ways in which people experience poverty • It uses the following three dimensions to
in their health, education, and standard measure gender disparity –
DIMENSION health Empowerment Labour market
INDICATORS Maternal Adolescent Female and male population Female and male Female and male
mortality birth with at least shares of labour force
ratio rate secondary education parliamentary seats participation rates
DIMENSION
Female reproductive Female empowerment Female labour Male empowerment Male labour
INDEX
health index index market index index market index
Female gender index Male gender index
Gender Inequality index (GII)
• The Gender Inequality Index (GII) Gender-related Development Index

provides insights into gender disparities (GDI)
in health, empowerment and the labour
market. Unlike the human development • Gender-related Development Index is
index (HDI), however, higher values in the an index to measure gender disparities
GII indicate worse achievements. with respect to three dimensions of HDI
i.e. Health, Knowledge and Standard of
• This index is a composite measure to
living.
quantify the loss of achievement within
a country because of gender inequality. GDI =
HDI (females)
HDI (males)
• India has a Gender Development index
(GDI) value of 0.829 ranking it 129 of 189 • It addresses gender-gaps in life
countries on the 2018 gender inequality expectancy, education, and incomes.
index.
28
• More than GDI value, lesser the gender World Happiness Report
disparity.
• World Happiness Report is a measure
of happiness, published by the United
Nations Sustainable Development
Has development Solutions Network (UN SDSN) since 2012.
• It was developed by Helliwell, Layard,
delivered happiness? and Sachs.
• The Report measures the happiness and
• For past decades, the world has chased well-being of a country and helps to guide
GDP growth to bring ‘posterity’ and public policy based on the following six
‘happiness’. We have succeeded in parameters -
growing global economic output. Yet
‘wellbeing’ and ‘happiness’ indices have » Real GDP per capita (at PPP)
largely remained flat, inequality has
» Healthy Life expectancy
increased, natural resources have been
degraded. » Social Support
• Our focus on GDP growth to achieve » Freedom to make life choices
happiness has not worked in delivering » Generosity
happiness.
» Perception of Corruption
• The Report uses data from the Gallup

Indicator of World Poll.
Happiness
World Happiness Report 2019
• There are various indicators to measure
the level of happiness of a nation. Some • This is the 7th annual World Happiness
such indicators are: Report, which ranks the 156 countries of
the world.
• The focus of the Report was - Happiness
Gross National Happiness and Community.
• Gross National Happiness index is utilized • The Report was topped by Finland.
to measure the collective happiness and • India is ranked 140th place compared to
wellbeing of a population. 133rd place in 2018. India is among the
• The term Gross National Happiness was five countries that had the largest drop
coined in 1972 by the then king of Bhutan, since 2008.
Jigme Singye Wangchuck. • People in war-torn South Sudan are the
• Gross National Happiness is based on most unhappy.
four dimensions- Sustainable Economic
Development, Good Governance,
Preservation of Cultural Values, and Indian State’s Happiness
Conservation of environment. Initiative
• The objective of GNH is to achieve a Madhya Pradesh
balanced development in all facets of life
that are essential for happiness. • Madhya Pradesh became the first state
to announce its happiness department.
29
• Madhya Pradesh in collaboration with is ranked 102nd out of 149 countries.
Indian Institute of Technology (IIT)
Kharagpur to develop a happiness index
for measuring the well-being of the
people.
Environmental
Performance Index
Andhra Pradesh
• Environmental Performance Index is
• Andhra Pradesh is the second state in used to measure the environmental
the country after Madhya Pradesh to performance of a country.
start happiness Index Department. • EPI highlights leaders, best practices and
• Its ‘Sunrise AP Vision 2029’ has taken provides guidance for other countries
Bhutan as a model to focus on matters that want to be leaders in environmental
including health, time use, education etc. sustainability.
• The index is prepared by Yale University,
Columbia University in collaboration
Maharashtra with World Economic Forum (WEF).
• Government of Maharashtra is • The First Environmental Performance
contemplating to introduce a separate Index Report was published in the year
'happiness ministry' to encourage 2006.
positivity in society.
• The Environmental Performance Index
(2018) ranks 180 countries of the world
on 24 performance indicators across
Social Progress 10 issues covering environmental health
Index
and ecosystem vitality.
• India is ranked at 177 places out of 180
countries in the Environment Performance
• The Social Progress Index (SPI) measures Index-2018.
the extent to which countries fulfil the
social and environmental needs of their • Switzerland topped the index and
citizens. Burundi was in the bottom of the index.
• The index is based on a range of social and • Low scores on the EPI suggests the
environmental indicators that capture necessity for national sustainability
three dimensions of social progress: efforts on a number of fronts, particularly
protecting biodiversity, cleaning up air
» Basic Human Needs quality, and reducing GHG emissions.
» Foundations of Wellbeing
» Opportunity
Purchasing Power
• The 2019 Social Progress Index includes
data from 149 countries on 51 indicators. Parity (PPP)
• The index is published by Social Progress • When making comparisons among
Imperative and is based on the writing
countries which use different currencies
of Amartya Sen, Douglas North, and
it is necessary to convert values, such
Joseph Stiglitz.
as national income (GDP), to a common
• Norway tops the 2019 SPI ranking, India currency. This is done through purchasing
30
power parity (PPP). Price, India’s economy is well behind
• Purchasing Power Parity states that the Japan. However, price levels in Japan are
expenditure on a similar commodity much higher than that of India.
must be the same in both currencies • So, when the national income of the two
when accounted for the exchange rate. countries is adjusted in terms of PPP
(using the ), Indian economy surpasses
Cost of Good X in currency in 1 Japanese economy because of lower
Purchasing Power Parity (PPP) =
Cost of Good Y in currency 2 prices in India.
• For example, Suppose the cost of cake

in India is Rs. 250, and the cost of the
same cake in the USA is $ 10. Therefore, Least developed
purchasing power parity will be 250/10 =
Rs. 25 per dollar. countries (LDC)
• Purchasing Power Parity (PPP) is very • LDCs is a list of developing nations that,
important and is used to compare the according to the United Nations (UN), are
national income and standard of living. at the bottom of the Human Development
• The World Bank every three years Index ratings.
compares countries in terms of PPP and • The classification of the least developed
the . country was introduced by the Economic
• India is ranked third in the world on the and Social Council (ECOSOC) of UNO in
basis of GDP (PPP) behind China and 1971.
the USA. • Countries are classified as LDCs on the
basis of the following criteria:
Difference between Market » Low-income criteria - A country must

have GNI per capita less than $1025 to
Exchange Rate & PPP be included on the LDC list.
• The market exchange rate is the Market » Human asset Index- It is a composite
Price of one currency in terms of another index of education and health used as
currency. an identification criterion for LDCs.
• Thus, the present market exchange rate » Economic Vulnerability Index (EVI)-
for Indian rupees is in the range of 65 to The Economic Vulnerability Index is
70 rupees per U.S. dollar. a composition of the following eight
• The market exchange rate depends indicators:
on the demand and supply of these
currencies in the open market. − Population size
• PPP exchange rate measures the relative − Remoteness
purchasing power of different currencies. − Merchandise export
• India ranks third when GDP is compared − Contribution of agriculture in the
in terms of purchasing power parity at Gross Domestic Product (GDP)
$11.40 trillion.
− Homelessness owing to natural
• Whereas India is the fifth-largest disasters
economy, with a nominal GDP of $2.936
− Instability of agricultural production
trillion.
− Instability of exports of goods and
• For Example, GDP calculation at Market
services
31
− Share of the population residing in September 2000 and has made its
low elevation coastal zone commitment towards the eight important
development goals.
• At present 47 countries are in the Least
Developed countries (LDCs) list.
• The goals of the MDGs converge with
India’s own development goals to
• Various International Organization give decrease child mortality, poverty and
special assistance to LDCs. other concerns.
• Criteria of LDCs are reviewed every three • India has witnessed significant
years by the Economic and Social Council improvement towards the MDGs, with
(ECOSOC). some goals having been met ahead of
• Countries may "graduate" out of the LDC the 2015 deadline, but, progress has been
categorization after indicators exceed inconsistent.
these criteria in two consecutive reviews. • For example, according to official
national estimates, India has achieved
the target for reducing poverty by half,
Millennium but it is falling short of achieving the
target for reducing hunger.
Development Goals
(MDGs) What is Sustainable
• The United Nations Millennium
Development Goals (MDG) are eight
Development?
goals that all 191 UN members had • UN World Commission on Environment
agreed to achieve by the year 2015. and Development (UNWCED) defines
• The Eight Millennium Development Goals it as “the development that meets the
- demands of the current generation
without compromising the needs of future
» Eradicate extreme poverty and hunger. generations to meet their own needs.
» Achieve universal primary education. • It is related to Carrying Capacity which
» Promote gender equality and empower refers to the capacity of the environment
women. to absorb the adverse impact of human
activity.
» Reduce child mortality.
• Sustainable Development presents a
» Improve maternal health. framework to generate economic growth,
» Combat malaria, HIV/AIDS, and other achieve social justice, and preserve
diseases. environmental sustainability.
» Ensure environmental sustainability. • It recognizes that growth must be both
» Develop a global partnership for inclusive and environmentally sound to
development. reduce poverty and meets the needs of
the future generation.
India’s achievement in MDGs Dimension of Sustainable

• India is a signatory to the Millennium Development
Declaration accepted at the United
Nations General Assembly (UNGA) in • There are 3 dimensions of Sustainable
32
Development - Genuine Saving
» Economic Dimension- Economic • Genuine Saving measures the
Dimension deals with encouraging sustainability of economic development.
business and organization to increase
investment, efficiency in production, • Genuine Saving = Gross Saving -
economic growth. Depreciation in man-made capital -
» Social Dimension- It deals with Depreciation in Natural capital
encouraging people to participate in • Natural Capital includes world stock of
environmental sustainability. all-natural assets like soil, air, water etc.
» Environmental Dimension- It defines • Man-Made Capital includes goods and
how to protect ecosystems, air quality, services that are used to produce other
focuses on the elements that place stress goods and services, such as machines,
on the environment. tools etc. it can also include ‘financial
capital’ like money.
Indicator of Sustainable • It has emerged as the important leading
economic indicator of sustainable
development economic development.
Green GDP
• Green Gross Domestic Product (Green
GDP) is an index of economic growth
Sustainable
where the environmental consequences
of growth are factored in while calculating
Development Goal
conventional GDP of a nation. (SDG)
• The economic cost of water pollution,
land degradation is not incorporated in • They are a universal set of targets, goals
the GDP. and indicators that UN member will be
expected to use to frame their nation’s
• For example, WWF’s ‘Living Planet’ policies over the next 15 years.
Report, which finds that “25% of India’s
total land is undergoing desertification. • Sustainable Development Goals (SDGs)
This will have a direct influence on the follow Millennium Development Goals
future food production thus affecting our which expire in 2015.
agrarian economy as the country could • The United Nations (UN) adopted the 2030
see a decrease in crop production. Agenda for Sustainable Development
• Ministry of Statistics and Programme which consist of 17 Sustainable
Implementation (MOSPI) set up an expert Development Goals (SDG), associated
group in 2011 led by Partha Dasgupta, with 169 targets and 304 indicators.
the mandate of developing a framework • The table below highlight 17 Sustainable
for a green national account in India. The Development Goals (SDG) and India’s
process is not yet completed. effort toward achieving each of them.
33
Goals Objective Description India Efforts
-Mahatma Gandhi National

Rural Employment Guarantee
BY 2030, End poverty in all its Scheme (MGNREGA)
Goal-1 No poverty
forms everywhere.
-National Social Assistance
Programme (NSAP)
-Targeted public distribution

system (PDS), National
Achieve food security, end hunger Nutrition Mission (NNM),
Goal-2 Zero Hunger
and better nutrition by 2030.
-National Food Security Act
(NFSA)
-National Health Mission

(NHM)
Good Health and Promote wellbeing and ensure
Goal -3
Well-being healthy lives for all at all stages. -Ayushman Bharat
Make Sure that all boys and girls

complete free, equitable and -Sarva Shiksha Abhiyan (SSA)
Goal-4 Quality Education
quality primary and secondary -National Education Policy
education by 2030.
To attain gender equality and -Sukanya Samridhi Yojana

Goal-5 Gender Equality
empower all females. -Janani Suraksha Yojana
Ensure affordability, availability -Swachh Bharat Abhiyan.

Clean Water and and sustainable management
Goal-6 -National Rural Drinking
Sanitation of water and sanitation for every
individual by 2030. Water Programme.
Ensure access to reliable,

Affordable and
Goal-7 affordable, sustainable and -National Solar Mission.
Clean Energy
modern energy for all by 2030.
-National Skill Development

Mission,
Decent Work and Promote sustained, inclusive, and
Goal-8 -Deendayal Upadhyaya
Economic Growth sustainable economic growth.
Antodaya Yojana,
-Atal Innovation Mission
Build resilient infrastructure,

Industry, Innovation promote inclusive & sustainable -Make in India
Goal-9
and Infrastructure industrialization and foster -Start-Up India
innovation by 2030.
34
-National Mission for
Empowerment of Women
-Rajiv Gandhi Scheme for
Empowerment of Adolescent
Decrease inequality within and
Goal-10 Reduced Inequality Girls (SABLA)
amongst countries by 2030.
-Kasturba Gandhi Balika
Vidyalay (KGBV)
-PMKISAN
-Smart Cities Mission

-Atal Mission for Rejuvenation
Make cities and human
Sustainable Cities and Urban Transformation
Goal-11 settlements inclusive, resilient,
and Communities (AMRUT)
secure, and sustainable.
-Pradhan Mantri Awas Yojana
(PMAY)
Responsible -National Policy on Biofuels

Ensure sustainable consumption
Goal-12 Consumption and for managing the efficient use
and production patterns.
Production of natural resources.
Take important and urgent action

-National Action Plan on
Goal-13 Climate Action to tackle climate change and its
Climate Change
effects.
Conserve and sustainably

-National Plan for the
utilize the seas, oceans and
Goal-14 Life Below Water Conservation of Aquatic Eco-
marine reserves for sustainable
systems
development.
Protect, restore, and promote -National Afforestation

sustainable utilization of Programme
Goal-15 Life on Land terrestrial ecosystems, combat
-Project Tiger
desertification and halt
biodiversity loss. -Project Elephant
-Development of
Promote inclusive and peaceful Infrastructure Facilities for the
Peace and Justice societies for sustainable Judiciary
Goal-16
Strong Institutions development; give access to
justice for all. - Introduction of AADHAR
card
-India’s membership in
Strengthen various means of
institutions like the Shanghai
Partnerships to implementation and revitalize
Goal-17 Cooperation Organization,
Achieve the Goal the international partnership for
BRICS, and its New
sustainable development.
Development Bank.
35
Why do we need Sustainable country like India puts pressure on
existing resources.
Development Goals (SDGs)?
• Defining Indicators: A number of targets
• SDGs carry forward the unfinished in SDGs are not quantified. Hence,
agenda of MDGs. measurement of progress in those
• Millennium Development Goals were indicators will depend on the availability
drawn up by a group of experts, whereas of data.
SDGs were drafted after a long and • Accountability: There was a lack of
extensive consultative process hence are accountability for inputs into MDGs. This
more comprehensive. issue needs to be addressed in SDGs.
• MDGs was focused only on 8 goals, 21
targets and 63 indicators, while SDGs Doughnut shape development model:
includes 17 goals with 169 targets.
• MDGs had adopted baseline data for • The Doughnut economic model is a visual
the year 1990, while for the SDGs, the framework for sustainable development.
baseline is from 2015 estimates. The central hole of the model reveals the
proportion of people globally falling short
on life’s essentials, such as water, food,
Challenges in achieving SDGs water, healthcare, and political freedom
of expression. A big part of humanity’s
• Financing SDGs: Cost for implementing test is to get everyone out of that hole.
SDGs is huge, which for a developing
I m a g e 3.2: D o u g h n u t shape development model
36
• At the same time, however, we cannot Q.2) Economic growth in country X
afford to be overshooting the Doughnut’s will necessarily have to occur if - 2013
outer crust if we are to safeguard (a) There is technical progress in the
Earth’s life-giving systems, like a healthy world economy
oceans, stable climate and a protective
ozone layer, on which all our wellbeing (b) There is population growth in X
fundamentally depends. (c) There is a capital formation in X
• This model was planned to observe the (d) The volume of trade grows in the
performance of an economy by the world economy
extent to which the needs of individuals Ans. (C)
are met without overshooting Earth's
ecological ceiling. (Note: You will be able to clearly understand
this question when we will study the Indian
Industries Module.)
UPSC CSE PRELIMS • Explanation: Internally capital formation

takes place when a country does
Previous Years not spend all its current income and
Questions
consumption, but saves a part of it and
uses it for investment for increasing
Q.1) Consider the following specific stages further production.
of demographic transition associated with • This act of saving and investment is
economic development: 2012 described as capital accumulation or
1. Low birth rate with a low death rate capital formation.
Q.3) Increase in absolute and per capita
2. High birthrate with a high death rate
real GNP do not connote a higher level of
3. High birthrate with a low death rate economic development, if: 2018
Select the correct order of the above stages (a) Industrial output fails to keep pace
using the codes given below : with agricultural output.
(a) 1 2 3 (b) Agricultural output fails to keep
pace with industrial output.
(b) 2 1 3
(c) Poverty and unemployment increase.
(c) 2 3 1
(d) Imports grow faster than exports
(d) 3 2 1
Ans. (c)
Ans. (c)
Explanation: Per capita, GNP is the entire
• Explanation: This is a very easy question.
value of all the goods and services produced
Economic Development means improved
by a country in a year, comprising income
living conditions.
from foreign investments, divided by the
• An improved living condition means a number of people living there.
low birth rate and low death rate.
• For nations which have huge foreign
• For example, we can say that India investments, GNP per capita is a more
has achieved impressive demographic accurate economic indicator.
transition owing to the decline of crude
birth rate, crude death rate, total fertility • GNP = GDP + Net income inflow from
rate and infant mortality rate. abroad: Net income outflow to foreign
countries.
• The question clearly mentions the impacts
37
on development and development is a (a) 1 only
multidimensional concept. If poverty (b) 2 only
and unemployment increases, the
growth is not equally distributed. It is (c) Both 1 and 2
concentrated in a few hands. Thus, (d) Neither 1 nor 2
it does not connote a higher level of
Ans. (a)
economic development.
Q.4) Consider the following statements: • Explanation: Purchasing Power Parity
(PPP) is an economic concept that
2019 compares different countries' currencies
1. Purchasing Power Parity (PPP) exchange with the help of a "basket of goods"
rates are calculated by comparing the approach.
prices of the same basket of goods and • According to this idea, two currencies are
services in different countries. in equilibrium—referred as the currencies
2. In terms of PPP dollars, India is the sixth being at par—when a basket of goods is
largest economy in the world. priced similar in the countries, considering
the exchange rates.
Which of the statements given above is/are
correct? • By purchasing power parity (PPP), an
exercise that seeks to find the ‘true’ value
of a currency vis-à-vis the dollar, India’s
rank is third, behind the US and China.
38
CHAPTER - 4
MONEY SUPPLY
• Indivisibility of certain goods: The barter

Money system of exchange was not applicable
in case of goods that lose their value if
• Money in general terms is a medium divided into parts.
of exchange. It is also referred to as
currency. It is a medium in which the » For example, the value of one cow is
prices of various goods and services are equal to two goats. This implies that if an
expressed. individual needs one goat in exchange
• Economically, each government has its for the cow, then in this condition he/she
own money system. Cryptocurrencies are has to sacrifice half of his/her cow.
also being developed for financing and
• Lack of standards for deferred payments:
international exchange across the world.
Deferred payment are those payments
• The need for money arose because of the that are made in the future (like loans,
inefficiency of the Barter system. interest). Since commodities are used
as the medium of exchange in a barter
system it is difficult to make the deferred
Barter System of exchange payment since there is no standard for
making such payments.
• It is a system of exchange where the
participants in a transaction directly • Difficulty in storing wealth: If a society
exchange goods or services for another relies exclusively on perishable goods,
goods or services in return. storing wealth for the future may be
impractical.
• For example, onion can be exchanged for
potato, rice for pulses, etc.
• Barter System can be bilateral or Evolution of Money
multilateral.
• Money went through a long evolution
• Bartering does not involve money; a before moving to the modern banking
person can buy items by exchanging an system.
item.
• Some of the major stages through which
money has evolved are as follow:
Limitations of Barter System I. Commodity Money
• Lack of Double coincidence of wants: • In the earliest period some commodities,
For barter to occur between two parties, for their use, were more sought than
both parties need to have what the other others.
wants. • Such commodity assumed the role of
• Lack of common measure of value: In currency and used as a medium for
a monetary economy, money plays the exchange.
role of a measure of the value of different • People used salt, rice, wheat, cow as
goods, so their values can be assessed Commodity Money.
against each other; this important role
may be absent in the barter economy. • The inadequacy of commodity money
39
led to the evolution of Metallic Money. electronic form.
II. Metallic Money • Digital Money can be transferred with the
help of technologies like smartphones,
• With the discovery of metal, it was used
Internet.
as the main standard of value because
of its advantage like divisibility, easy
transportation, etc.
Functions of Money
• The problem of uniformity of weight and
purity of metals lead to the evolution of The major functions of money can be
Paper Money. distinguished as:
III. Paper Money • Medium of exchange: Money is used
as a medium of exchange to facilitate
• The invention of Paper Money was a
the transactions. It eliminates the
very important stage in the evolution of
inefficiencies of the barter system, such
Money.
as the "coincidence of wants".
• Paper Money is printed and regulated by
Central Banks of the country (In India’s
• Unit of account: Money acts as a standard
measure and common denomination
case it is RBI).
of trade. Money is used to measure the
• Use of Paper Money has become value of goods or services produced and
universal along with Coins. also record financial transactions.
IV. Bank Deposit • Store of value: Money can be utilized for
• People keep a part of cash into bank current consumption and it can also be
deposits which they can withdraw in the held over a period of time and can be
future through cheque. used for future payments.
• Cheque (has replaced Paper Money • Standard of deferred payment: Money
for the major portion of commercial plays an important role in lending and
transactions. borrowing. This function of money allows
to defer payment from preset to a future
• A cheque is not money as it is an date.
instruction from a bank deposit holder to
transfer the required money in another
person’s account.
Properties of Money
• Hence, cheque itself is not money, it
To fulfill its various functions, money should
performs the functions as money.
have certain properties:
V. Plastic Money
• Fungibility: Its individual units must
• The latest type of money is Plastic Money. be capable of mutual substitution (i.e.,
• Plastic Money usually refers to the debit interchangeability).
and credit cards and are considered • Durability: Able to withstand repeated
alternatives to cash for everyday use.
payments.
• Portability: Easily carried and
• They aim at removing the need to carry transported.
cash for everyday payment.
• Divisibility: It can be broken down into
VI. Digital Money
smaller denomination.
• The latest type of Money is Digital Money. • Stability of value: Its value should not
• It is a currency available in digital/ fluctuate.
40
Types of Money currency without intrinsic value that is
not backed by a physical commodity
I. Full-bodied money: Full Bodied money like gold etc.
is one whose value in money is the same
as the value in the commodity (intrinsic » It does not have a use-value, and it
value). For example: Gold coin, silver has value only because a government
coin etc. maintains its value.
II. Token money: Token Money is one For example, U.S. Dollar, Indian
whose value in money is much more Rupee etc.
than its value as a commodity. For » Since central banks regulate how
example, coins. much currency is printed with
III. Representative full-bodied money: It is fiat money, governments' central
a type of token money issued against an banks have greater control over the
equivalent number of bullions (gold and economy.
silver) with Central Banks/governments. » It is inconvertible and cannot be
IV. Legal tender: It is a medium of payment redeemed.
recognized by law as a means for » As fiat money is not connected
meeting a financial obligation. to physical reserves, it risks losing
value because of inflation or even
» Usually, coins and paper currencies
becoming worthless in the occasion
are legal tenders, but the definitions
of hyperinflation.
vary from jurisdiction to jurisdiction.
For example, personal cheques, VIII. Near Money: Near Money is highly liquid
credit cards etc., may not be a legal non-cash assets like cheques, demand
tender in every jurisdiction. drafts etc.
» It can be limited or unlimited in IX. Plastic Money: Plastic Money usually
character. For example, Coins refers to the debit and credit cards and
function as limited legal tender in are considered alternatives to cash for
India. Hence, 50 paise coins can everyday payments.
be offered as legal tender for dues
up to ₹10 and smaller coins for X. Digital Money: It is a currency available
payments up to ₹1000. in digital form and is a money balance
noted electronically on a stored-value
» Currency notes are unlimited legal card or other devices.
tender and can be offered as
payment for dues of any size. » It is also called electronic money or
electronic currency.
V. Non-legal tender: It is a medium of
payment that is not necessary to be » They may be centralized (E.g.,
accepted. For example, personal digital wallets, debit cards, etc.) or
cheques, credit cards etc. decentralized (cryptocurrency).
VI. Fiduciary Money: It is the money that
is used for transactions based on trust Gresham’s Law
between the payer and payee. For
example, cheque is not a compulsorily • Gresham’s Law state that “bad money
accepted mode of payment but the drives out good money”.
transactions on the trust are based on • Whenever coins containing precious
the mutual trust of the parties involved. metals have been used along with
VII. Fiat Money: It is Government-issued metal coins of the same denomination,
41
both acting as legal tender, the more • Rise in the supply of money typically
valuable commodity (precious metal) will lowers interest rates (since more money
gradually disappear from circulation. leads to more opportunity to get loans
• Good Money is the money that shows hence lower interest rates), which in turn,
little difference between nominal value creates more investment and puts more
and its commodity value (value of a amount of money in the consumer hands,
commodity like gold etc.). thereby stimulating spending. Businesses
respond by ordering more raw materials
• Bad Money is the money whose and increasing production. The increased
commodity value is lower than the business activity raises the demand for
nominal value. labour. The opposite can take place if
• Gresham’s Law is named after Sir Thomas the money supply falls or when its growth
Gresham, an English financier during the rate declines.
Tudor Dynasty. • Macroeconomic schools of thought that
• For example, A discounted product emphasis heavily on the role of money
of inferior quality may drive out non- supply include Monetarist school by
discounted product of good quality in Milton Friedman.
the price-sensitive market like India.
Velocity of Money
Money Supply • It is the rate at which money is exchanged
in an economy.
• It is the total stock of all types of money
(currency, deposit) held by the public at • It is related to the number of times that
any specific point of time. money transfers from one transaction to
another. Simply put, it is the rate at which
• It is very significant to note that the term people spend money.
public includes all the economic entities
except government and banking system • For example, Consider an economy
(this money is not in actual circulation consisting of two individuals, farmer, and
in the economy hence not part of the seed supplier, they have ₹100 between
money supply). them in a year.
• The money supply can comprise cash, • Farmer buys seed from seed supplier for
coins, and the balances held in checking Rs. 100.
and savings accounts, and other near • Seed Supplier buys wheat from the
money substitutes. farmer for Rs. 80.
• Money Supply is only that part of the • Seed Supplier spends the remaining on
total stock of money which is held by the transportation Rs. 20.
public at a particular point of time. • In a course of time, Rs. 200 changed
• It measures the total purchasing power the hands, even though the size of the
in the economy. economy was Rs. 100.
• This entire multiplication in the value of
goods and services exchanged is made
Change in the money supply possible with the help of the velocity of
• Alteration in the money supply has long money in an economy.
been considered to be a major factor • The equation for GDP = Money Supply *
in driving macroeconomic performance Velocity of Money.
and business cycles.
42
• In the above example GDP = 200, Money Reserve Money (M0) =
supply = 100.
• Hence, the Velocity of Money is 2/year. Bankers' deposits with the Reserve Bank of
India (RBI) + 'Other' deposits with the RBI +
Currency in circulation
Monetary aggregates
• The another name of the Reserve Money
• Money is utilized as a medium of is “High Powered Money” and also
exchange, a unit of account, and as a Monetary Base.
ready store of value. Its different functions • It is the total liability of RBI.
are associated with various empirical
measures of the money supply. There • Currency in circulation includes Notes
is no single "correct" measure of the and Coins in circulation.
money supply. Instead, there are various • Banker’s deposit with RBI is Banks current
measures, classified along a spectrum or account deposit with RBI.
continuum between broad and narrow
• Other deposits include balance in the
monetary aggregates.
account of foreign Central Banks and
• Narrow money aggregates include only Government, the account of international
the most liquid assets, the ones most agencies such as IMF, etc.
easily used to spend (currency, checkable
• It can also be written as
deposits).
• Broad money aggregates incorporate Net RBI's credit to the Government + RBI's claims
fewer liquid types of assets (certificates on banks + RBI's credit to the commercial sector +
of deposit, etc.). RBI's net foreign assets + Government's currency
liabilities to the public: RBI's net non-monetary
• This continuum corresponds to the liabilities.
way that various types of money are
more or less impacted and controlled
by monetary policy. Narrow measures M1 (Narrow Money) =
comprise those more directly affected
and controlled by monetary policy, Currency with the public + Deposit money of
while broader measures are less closely the public (Demand deposits with the banking
associated with monetary-policy actions. organizations) + 'Other' deposits with the
Reserve Bank of India (RBI)
• It is a matter of constant argument as
to whether broader or narrower versions
of the money supply have a more
M2 =
predictable connection to nominal GDP.
• The several categories of money are Savings deposits with Post office savings banks
typically classified as "M"s. + M1
• The "M"s generally ranges from M1
(narrowest) to M3 (broadest) but which
"M"s are essentially focused on in policy M3 (broad money) =
formulation depends on the central bank
of the country. M1+ Time deposits with the banking system
• The Reserve Bank of India (RBI) defines

the monetary aggregates as:
43
• It can also be written as banks distribute the remaining as loans
for injecting liquidity in the economy.
Bank credit to the commercial sector + Net bank
credit to the Government + Net foreign exchange
• Mathematically, money multiplier
assets of the banking domain + Government's formula can be represented as:
currency liabilities to the public: Net non- Money Multiplier = 1/r (Where r = Required
monetary liabilities of the banking sector (Other reserve ratio or cash reserve ratio.)
than Time Deposits)
• Central Bank of the country can influence
M4 = the money supply in the economy. The
money supply can be increased in an
Entire deposits with post office savings banks economy by purchasing government
(excluding National Savings Certificates) + M3
securities such as treasury bills and
government bonds.
• The reverse happens when the central
Liquidity bank tightens the money supply, by
selling securities on the open market,
• Liquidity refers to the degree to which an drawing liquid funds out of the banking
asset or security can be quickly bought system.
or sold in the existing market at a price
reflecting its intrinsic value.
• In another words: the ease of converting Bank Deposit
it to cash.
• Bank deposit is money kept in banking
• Cash is universally recognized as the institutions for future use.
most liquid asset, while tangible assets,
such as real estate, fine art, etc. are all
• Bank deposit refers to liability owned by
the bank to the depositor.
relatively less liquid.
• Other types of financial assets, ranging
from equities to partnership units, fall at
Types of Bank Deposit
various places on the liquidity spectrum.
• The liquidity of these kind of measures • Bank offers two types of kinds of deposit
are in order M1>M2>M3>M4 i.e., M1 is account.
most liquid and M4 is least liquid.
» Demand Deposit: Demand Deposit
account consists of funds that can be
withdrawn at any time.
Money Multiplier There are two types of demand deposit
• Money Multiplier is the ratio of the Broad accounts -
Money (M3) to Reserve Money (M0).
− Current Account Demand Deposit.
Money Multiplier = M3/M0
− Saving Account Demand Deposit.
• It shows the connection between the
monetary base and money supply in the » Term Deposit/Time Deposit: Term
economy. deposit account is used to hold money
for a fixed period
• It can also be considered as the amount
of money that banks generate with each Money deposited in term deposit cannot
unit of money. The commercial banks be withdrawn before its maturity that is
accept deposits from its customers. After fixed a particular time.
keeping a certain amount as a reserve,
44
There are two types of term deposit Liquidity Trap:
account:
An economic situation when the interest
• Fixed Deposit. rate is so low that people prefer to hold
• Recurring Deposit. money rather than invest it. In such
circumstances investors do not go to
increase investment even if the interest
Current account demand deposit rates on loans are reduced because
People are too afraid to invest.
• The money in the current account is
available for immediate access.
• The current account deposit is used by Cryptocurrency
businesses to conduct their business
transactions since there is no constraints • It is a virtual or digital currency that is
or restriction on the number of created, stored, and transacted using
transactions in a day. block chain technology.
• Bank does not offer interest rates in the • The word ‘Cryptocurrency’ is derived from
current account demand deposit. an encryption technique cryptography.
It is used to secure the decentralized
network.
Saving account demand deposit
• The most important characteristic
• Saving account unlike Current account of Cryptocurrency is that it is not
has restrictions on the number of controlled by any central authority (like
withdrawals as well as the amount of central banking system) instead it uses
withdrawal in a specific period. decentralized control.
• Bank offers fixed interest rates for saving • Example of cryptocurrency is Bitcoin,
account demand deposit. Digicoin, Litecoin, SOV etc.
Fixed account Deposit

Blockchain Technology
• A fixed account demand deposit allows a
deposit to be made for a specified period. • Blockchain technology is also called as
a distributed ledger technology wherein
• Banks offer deposit holder with a fixed the data of any of the individuals are
interest rate at a regular rate which is saved as blocks.
higher than the Saving account.
• The information related to the addition of
the block is shared with everyone on the
Recurring account Deposit blockchain and which makes modification
or hacking of the information difficult.
• In the Recurring deposit, a fixed amount
• Basic understanding of Blockchain
is deposited at regular intervals for a
technology can be related to this example.
fixed term.
Just Imagine a Microsoft Excel sheet file
• The total deposit along with interest is in your computer system with important
payable on maturity by the bank. details of some transactions you made.
• The rate of interest presented by the You can refer to it a ledger. Now, suppose
bank on this deposit is higher than saving that your file is copied to hundreds of your
account but less than fixed account friends’ computer system, linked to each
deposit. other establishing a network. The ledger
45
in your computer system has become a with a technology to consistently update
distributed ledger. After that imagine this this Microsoft Excel sheet, whenever you
network of computer systems is designed or your friends update the ledger.
Cash Semi - Digital Digital Economy

based Economy (Cash + based on Block
economy Bank regulated Chain Technology
online transactions)
Problems Problems Problems
1.Cost of 1.Single Server - 1.Decentralised

printing risk of hacking and thus trust
based
2. Theft of 2. Slow
cash 2. Can be created
transactions
by anybody
3.Time
consuming
I m a g e 4.1: B e n e f it s of C r y pto c u r r e n c y
How can one get • 1 bitcoin = 100 million Satoshi.

cryptocurrency? Cryptocurrency around the
• Cryptocurrency can be obtained in three world
ways:
Venezuela
• Mining: It is the process of adding the
transaction to the public ledger known • Venezuela adopted Petro Cryptocurrency
as the blockchain. It is done using special in year 2018.
software and high-speed computers. • Venezuela adopted Petro cryptocurrency
• Payment: By selling goods to a person because Venezuela is facing
who owns the cryptocurrency or the hyperinflation.
person who is involved in the process of
mining.
Marshall Island
• Purchasing: Purchasing cryptocurrency
by using currency. • Marshall Island adopted SOV or Digital
Sovereign in the year 2018.
• SOV is used as legal tender and provides
Bitcoin Marshall Island with its own currency
• It is one of the most popular and used reducing its dependence on the .
cryptocurrency in the world.
• Bitcoin was invented by Satoshi
India and Cryptocurrency
Nakomoto in the year 2009.
• The smallest unit to be recorded in the • India is necessarily a cash-based
blockchain of the bitcoin is known as economy, but the ‘Digital India’ initiatives
Satoshi. of the government have increased
emphasis on digital currency.
46
• In 2017, the Indian government formed a • Transparency: In cryptocurrency, every
committee headed by Subhas Chandra transaction is recorded on the blockchain.
Garg to study issues related to virtual Blockchain keeps the information about
currencies. every transaction.
• The committee recommendation is as • Decentralization: Since blockchain does
follows: not store any information in a central
location. Information is distributed across
» Banning of cryptocurrency: Due to networks of computers making it difficult
risk and volatility associated with to tamper with.
cryptocurrency.
Disadvantages of
» Digital Ledger Technology: The Report
highlighted the positive of Digital Ledger Cryptocurrency
Technology (DLT). DLT based system can • Lack of knowledge: Most people do not
be used by banks and other financial know what cryptocurrency is and how to
firms for the process like fraud detection, use cryptocurrency.
loan issuance, etc.
• Volatility: Since cryptocurrency is not
» Other proposals: Committee suggested regulated. Hence, its prices vary greatly
that the government should keep an eye from one day to another.
for ‘official digital currency’ as RBI Act
1943 permits the government to approve • Technology Cost: Cryptocurrency saves
Digital Currency. transaction cost, but for the transaction
to make happen it require a computer,
• The reasons as stated by the Subhash electricity making its adaptability difficult
Committee for banning cryptocurrency for a country like India.
are as follows:
» Volatile nature of cryptocurrencies

(however, other investments are also
UPSC CSE PRELIMS
volatile, and this should be left to the
investors).
Previous Year
» These are used for transactions between Questions
criminal groups and for criminal activities. Q.1) Which of the following measures
» No government backing. would result in an increase in the
money supply in the economy? 2012
1. Purchase of government securities from
Advantages of Cryptocurrency the public by the Central Bank
• Easy to use: Since cryptocurrency uses 2. Deposit of currency in commercial
modern technology like the Internet, banks by the public
smartphones etc. Funds can be 3. Borrowing by the government from the
transferred directly between the parties Central Bank
without the involvement of third parties
4. Sale of government securities to the
like banks.
public by the Central Bank
• Low transaction cost: Since
Select the correct answer using the codes
cryptocurrency removes the third party
given below:
like banks in the transaction its lower
transaction cost in comparison to the (a) 1 only
conventional banking system. (b) 2 and 4 only
47
(c) 1 and 3 • Explanation: Most liquid assets are the
(d) 2, 3 and 4 currency assets since they can be used
anytime.
Ans. (c)
• The least liquid assets are the time
Explanation: deposits, which are the deposits for a
fixed time period and can only be used
Note: You will be able to do this question
upon their maturity.
more effectively after reading “Money
Market module”. • Demand deposits are more liquid than
Explanation: Different ways to increase saving deposits because they can be
the money supply in an economy demanded by the holder from the bank
at any time.
• Print more money: Generally, this is done Q.3) Supply of money remaining the same
by the Central Bank, though in some when there is an increase in demand for
country’s governments can dictate the money, there will be: 2013
money supply. For instance, in Zimbabwe
in 2000s, the government printed more (a) a fall in the level of prices
money to pay wages. (b) an increase in the rate of interest
• Reducing interest rates- Lower interest (c) a decrease in the rate of interest
rates decrease the cost of borrowing.
This makes investment comparatively (d) an increase in the level of income and
more profitable, and so encourages employment
economic activity. Consumers will also Ans. (b)
see cheaper interest payments leading
• Explanation: With an increase in
to higher disposable income.
demand for money, people will deposit
• Central Bank buying government less money in banks. Hence, banks will
securities- If the Central Bank buy increase the rate of interest to attract
Government securities people who were people to deposit money in the bank.
holding the bonds have more money to
• Let us understand this through an
spend. Therefore, in certain conditions,
example Supply of money is constant
this can lead to an increase in the money
and demand of money is increasing, it
supply.
means more people are willing to loan
Q.2) Consider the following liquid assets: from banks, but the supply of money is
2013 constant, so the bank will increase its
rate of interest at which loan is given.
1. Demand deposits with the banks
Q.4) The problem of international liquidity
2. Time deposits with the banks
is related to the non-availability of: 2015
3. Savings deposits with the banks
(a) goods and services
4. Currency
(b) gold and silver
The correct sequence of these decreasing
order of Liquidity is (c) dollars and other hard currencies
(a) 1-4-3-2 (d) exportable surplus
(b) 4-3-2-1 Ans. (c)
(c) 2-3-1-4 Note: : This question you will be able to

do after reading “Foreign Investment and
(d) 4-1-3-2 trade module”
Ans. (d)
• Explanation: The concept of
48
international liquidity is related with (a) The money which is tendered in courts
international payments. These payments of law to defray the fee of legal cases
arise out of international trade in goods (b) The money which a creditor is under
and services and also in connection with compulsion to accept in settlement of his
capital movements among one country claims
to another.
(c) The bank money in the form of
• International liquidity refers to the cheques, drafts, bills of exchange, etc.
commonly accepted official means of
settling imbalances in international (d) The metallic money in circulation in a
payments which is basically dollars and country
hard currencies. Ans. (b)
Q.5) With reference to ‘Bitcoins’ sometimes • Legal tender money is a type of payment
seen in the news, which of the following that is protected by law.
statements is/are correct? 2016
• Legal tender is also known as a forced
1. Bitcoins are tracked by the Central tender which is very secure and it is
Banks of the countries. impossible to deny the legal tender while
2. Anyone with a Bitcoin address can send subsiding a debt which is assigned in the
and receive Bitcoins from anyone else same medium of exchange. In another
with a Bitcoin address. words, we can say that the term legal
3. Online payments can be sent without tender does not represent the money
either side knowing the identity of the itself, rather it is a kind of status which
other. can be bestowed on certain types of
money.
Select the correct answer using the code
given below. • The options given in the Question does
not properly explain the definition of
(a) 1 and 2 only legal tender money. So, the most suitable
(b) 2 and 3 only answer is b.
Q.7) If you withdraw Rs. 1,00,000 in cash
(c) 3 only
from your Demand Deposit Account
(d) 1, 2 and 3 at your bank, the immediate effect on
Ans. (b) aggregate money supply in the economy
will be
• Explanation: Bitcoin is a decentralized
virtual or digital currency without a (a) to reduce it by Rs. 1,00,000
central bank or single administrator. It (b) to increase it by Rs. 1,00,000
can be sent from one user to another on (c) to increase it by more than Rs.
the peer-to-peer bitcoin network without 1,00,000
the need for intermediaries
(d) to leave it unchanged
• Various transactions are verified by
network nodes through cryptography Ans. (d)
and recorded in a public distributed • Explanation: In the given case, while the
ledger called a blockchain. 'DD' (net demand deposits with banks)
Q.6) Which one of the following statements component will fall by Rs. 1,00,000, the 'C'
correctly describes the meaning of (currency held by the public) component
legal tender money? 2018 will increase by Rs. 1,00,000, thus, leaving
the money supply unchanged.
49
CHAPTER - 5
BANKING (PART I)
• Allahabad Bank (1865) was the first bank

What is a bank? that was completely run by Indians.
• Punjab National Bank Ltd was set up in
• A bank is a financial institution that
1894. It the oldest existing bank by Indian.
provides banking facilities and other
financial services to its customers. • Central Bank established in 1911 became
1st bank to be owned and managed by
• Banking Services include accepting
Indians.
deposits and giving loans.
• In 1921, all the Presidency Bank were
• Banks also provide many financial
merged to form Imperial Bank of India.
services like currency exchange, wealth
management, etc. • This became State Bank of India in 1955
by an Act of Parliament.
• Banking Sector is one of the key drivers of
the economy. It provides liquidity to the
economy which helps to create demand.
For example, car loans provided by banks Nationalization of
Banks
create demand for the car and hence
help in the growth of automobile sector.
• Due to the importance of banks for the
financial stability of the economy, banks
• Nationalization is the process of
transferring private assets of the banking
are highly regulated in most countries.
sector entities under the control of the
• Banking System is a group or network government.
of institutions which provide financial
services to people. Banking System
controls the money supply in the economy. Objectives of Nationalization
• At the time of independence, there were
Evolution of Bank in many small banks in India. One of the
reasons was to streamline the functioning
India of banks.
• The first bank of India was the General • To provide access to banking service to
the masses and reduce inequalities.
Bank of India, established in 1786.
• East India Company established three • To provide social orientation to the
banking sector i.e. to ensure adequate
individual banks which were called as
credit flow in agriculture and rural sectors.
Presidency Bank.
» Bank of Calcutta (1809)

» Bank of Bombay (1840) State Bank of India
» Bank of Madras (1843) • In 1955, the Government of India
nationalized Imperial Bank of Indian and
• Bank of Hindustan was established in was given the name “State Bank of India”.
1870.
50
• State Bank of India was established under • Allahabad Bank • Dena Bank
the The State Bank Of India Act, 1955. • Bank of India • Indian Overseas
• In the year 1959, the Government • Punjab National Bank
passed the SBI (Associates) Act, 1959 Bank • Indian Bank
to nationalize eight private banks with • Bank of Baroda • United Bank
good regional presence and named them • Bank of • Syndicate Bank
Associate of the SBI. Maharashtra • Union Bank of
• On 1st April 2017, the Government of India • Central Bank of India
merged 5 Associate Bank and Bhartiya India • UCO Bank
Mahila Bank with SBI. • Canara Bank
• Five associate banks which were merged • Six more banks with deposits greater
are State Bank of Bikaner and Jaipur, than 200 crores were nationalized in
State Bank of Hyderabad, State Bank of 1980.
Mysore, State Bank of Patiala, State Bank
of Travancore. • These banks were:
• Following this merger, SBI became the » Andhra Pradesh
largest bank of India and one of the top
» Corporation Bank
50 largest banks in the world.
» New Bank of India
» Oriental Bank of Commerce
Banking Nationalization Act of » Punjab & Sind Bank
1969 » Vijaya Bank
• In 1969, the Government of India » The nationalization of Bank in 1980
nationalized 14 major Indian Commercial became important to ensure that priority
Banks with a deposit of more than 50 sector lending reaches the poor through
crores. a wide branch network.
Some positives of this move:

• Banking under government control provided the public implicit faith and enormous
confidence related to the sustainability of the banks.
• It was responsible for major rise in bank deposits and financial savings.
• it had improved the overall performance of the agriculture and small-scale industries.
• It has also led to increased penetration of various banks in to part of india.
Some Negatives of this move:

• Banking sector is a highly competitive segment. However, the nationalisation of
banks had decreased the competition amongst the private and public banks.
• It had created a bureaucratic attitude in the functioning of the banking sector.
• Lack of initiative and resposibility, red-tapism, inordinate delays are common
characteristics of nationalized banks.
• Since 2012, Non-Performing Assets (NPA) issue is at least partly justified by the credit
bubble that developed under political patronage that emerged out of government's
control over banking sector.
51
• Regulator of foreign exchange: RBI
Reserve Bank Of stabilizes the value of Indian currency in
India the global economy. RBI manages India’s

foreign currency assets and gold reserve.
• Reserve Bank of India is the Central Bank • Developmental functions: RBI ensure
of India. It is the regulator of the entire credit availability to productive sectors,
banking system in India. promote financial inclusion, set up various
institutions like SIDBI, NABARD etc.
• Reserve Bank of India was established on
1st April 1935 following the enactment of • Other functions: RBI acts as an agent of
the RBI Act 1934. the government of India at IMF, controls
credit and monetary policy, publishes
• The purpose of the RBI Act 1934 was to monetary and banking data, etc.
issue notes and maintain reserves, but
the Act did not cover Banking Regulation.
• Reserve Bank of India was a privately
owned Bank, but it was nationalized in
Credit and Monetary
1949. Policy
• Banking Regulation Act 1949 conferred
on RBI a wide range of regulatory and • Monetary policy refers to the policy of the
supervisory power with the objective to Central Bank through which the desired
develop the banking system of India. level of money supply and demand is
regulated in the economy.
• The primary goal of the monetary policy
Functions of RBI is to maintain price stability while keeping
in mind the objective of growth.
• The issuer of currency: RBI is the sole
Agency in the country that can issue • Credit Policy is a part of monetary
currency and coins in India except for policy. It refers to the set of principles
One-Rupee coin and note both which is that determines whom and how much to
issued by the Finance Ministry. lend? At what rate money is to lend?
• RBI has the right to announce monetary
» RBI prints and distributes currency along policy from time to time depending upon
with regulation of the flow of currency in the state of the economy.
the economy.
• There are many tools through which RBI
• Banker of Government: RBI provides achieves the desired level of credit and
Banking services to both Central and monetary policy.
State governments. These services • These tools are:
include deposits, loans, etc.
• Bankers to the banks: RBI as the Central » Quantitative Instrument: Quantitative
Bank of India, supervises the Commercial instrument deals with the quantity/
Banks of the country. RBI provides volume of the money supply. These
various services to these banks like loans instruments regulate or control the total
to meet short and long term liabilities, volume of bank credit.
issue license to Banks and Lender of last
resort etc.
− Cash reserve ratio (CRR)
• Inflation targeting: RBI is tasked with the − Statutory Liquidity Ratio (SLR)
function of stabilizing the rate of Inflation. − Bank Rate
52
− Repo Rate securities, and prevent banks from facing
− Reverse Repo Rate insolvency issues.
− Marginal Standing Facility (MSF) • SLR is determined by RBI. Current SLR is

18.25%.
− Open Market Operation
Note: If the Bank fails to meet with the
» Qualitative Instrument: Qualitative CRR and SLR requirement, a penalty at a
Instrument does not regulate the volume rate of 3% per annum above the bank rate
of credit but regulates bad credit which is imposed.
creates economic instability.
− Margin Requirement Difference between CRR and SLR

− Moral Suasion CRR SLR
− Direct Action
Banks are required to
− Rationing of credit Banks are required to
maintain SLR in liquid
maintain CRR in cash
assets (government
only.
securities, gold, etc.).
Cash Reserve Ratio (CRR)
IN SLR, securities are
In CRR, the cash reserve
• Cash Reserve Ratio (CRR) refers to is kept with RBI.
kept with the bank
the percentage of total deposits that themselves.
commercial banks are required to keep
in the form of cash with the RBI. Banks do not earn Banks earn interest on
interest on CRR. the SLR.
• Banks are not allowed to use this fund
for their commercial purposes, and no
interest is paid by the RBI on CRR balance
kept by banks with the RBI.
How CRR and SLR changes affect
Money Supply
• One of the main aims of CRR is to remove
excess cash from the economy. • CRR and SLR changes affect the money
• Cash Reserve Ratio (CRR) is determined supply in the economy.
by RBI. Current CRR is 4%. • For example, Suppose there is a bank
XYZ. CRR fixed by RBI is 5% and SLR is
25%.
Statutory Liquidity Ratio (SLR)
Total Deposit of bank 100 cr
• Statutory Liquidity Ratio (SLR) refers to XYZ (Net Demand and
the percentage of total deposits (includes Time Liability)
Net Demand and Time Liability (NDTL))
of a bank which is to be maintained by CRR (at 5%) 5 cr
the bank with them in the form of liquid
asset (non-cash form) in addition to cash SLR (at 25%) 25 cr
reserve ratio.
• Liquid assets are assets that are readily Money Left with XYZ 100-5-25 = 70 cr
converted into cash. For example, Gold,
Government securities, etc. • Now Suppose RBI, increases CRR to 10%
and SLR to 40%.
• The main aim of SLR is to regulate bank
credit, ensure banks invest in government
53
Government securities, Corporate
Total Deposit of bank 100 cr
Securities, or any other securities which
XYZ (Net Demand and
Time Liability) Government permits for the transaction.
• Bank usually uses this route to fulfil short
CRR (at 10%) 10cr term liquidity crunch.
• Repo Rate is also known as Policy Rate.
SLR (at 40%) 40cr A change in the policy rate will alter
all other short-term interest rate in the
Money Left with XYZ 100 - 10- 40 = 50cr economy, thereby influencing the level of
economic growth and inflation.
• As shown in the above example, when
RBI increases CRR and SLR, the money
left with the bank has decreased from 9.00%
70cr to 50cr.
6.00%
Bank Rate
3.00%
• Bank Rate is the interest rate charged 0.00%

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by the RBI for long term lending to
commercial banks and other financial I m a g e 5.1: R e p o R at e O v e r 5 Y e a r s
institution. • The graph shows changes in Repo Rate
• Commercial Banks, State Governments over 5-year time. Repo Rate is fixed by RBI
and Financial Institutions also use bank taking into consideration the economic
rate to borrow funds from RBI to meet growth prospects.
their long-term requirements.
• Bank rate influences the lending rate of
Types of Repo Rate
commercial banks. Higher the Bank rate
higher will be the interest rate charged • Repo Rate is of two types based on
by the banks. maturity:
• RBI aligned Bank rate with the Marginal
Standing Facility (MSF) (discussed in
» Overnight Repo: It refers to the Repo
with single-day maturity.
below section) in 2012.
Indian Repo market is dominated by the
• RBI can use Bank rate to curb excess
overnight Repo market.
liquidity from the economy and vice
versa. » Term Repo: It refers to Repo that has a
fixed maturity longer than one day.
Repo Rate (Ready Forward Contract)

Reverse Repo
• Repo Rate or Repurchase Rate is the
interest rate charged by RBI for short • Reverse Repo is the rate of interest RBI
term lending to commercial banks. pays to commercial banks when RBI
borrows funds from the banks.
• Bank borrows funds from RBI by
selling securities with an agreement to • Reverse Repo is used to absorb excess
repurchase the securities on a mutually liquidity from the economy.
agreed future date at an agreed price. • Reverse Repo Rate allows banks to park
• Securities used in Repo Rate can be excess funds with the RBI to earn interest
54
rate. This serves two purposes: money supply in the economy. This is
important when inflation is high and
» One reduces excess liquidity from the there is a need to cut rising price level.
economy. But increase in rates decreases the level
» Second lower loan disbursal by banks of economic activity.
hence prevent bank losses due to NPA.
Repo Rate ↑ → Interest Rate ↑ → Consumption,
• An increase in Reverse Repo will decrease Investment ↓ → Growth ↓
money supply since it will encourage
banks to park their funds with RBI to earn • On the other hand, when inflation is under
interest and vice versa. control, and economic growth is slow, RBI
cuts Repo Rate and Reverse Repo Rate.
This leaves with more money with banks.
Liquidity Adjustment Facility (LAF) More availability of loans will increase
the money supply in the economy. This is
• Liquidity Adjustment Facility (LAF) is a important to increase the level of overall
facility extended by the RBI, to scheduled
economic activity.
commercial banks that allow banks to
borrow money through Repo or park
excess funds with RBI through Reverse Repo Rate ↓ → Interest Rate ↓ → Consumption,
Repo. Investment ↑ → Growth ↑
• Liquidity Adjustment Facility (LAF) is the

Combat Combat
mechanism used by RBI for managing the Inflation Deflation
liquidity needs of commercial banking. (increase in (decrease in
• LAF is used to aid banks in adjusting the price) price)
day to day mismatches in liquidity.
CRR, SLR ↑ ↓
• Components of LAF are:
Repo Rate ↑ ↓
» Repo
» Reverse Repo Bank Rate ↑ ↓
» Term Repo (for 14 and 7 days)

OMO RBI will Sell Purchase/Buy
» Overnight Repo (explained government government
later) securities securities
» Overnight Reverse Repo
• Above table, shows the changes in
• The introduction of the Liquidity facility in monetary policy instrument to combat
India was based on the recommendation inflation and deflation in the economy
of the Narsimham Committee on banking by RBI.
sector reform.
• It was introduced by RBI in the year 2000.
• Under LAF, the Minimum credit limit is Rs. Marginal Standing Facility (MSF)
5 crore. • Marginal Standing Facility is the penal
rate at which banks can borrow money
from the RBI over and above what is
How Repo Rate controls inflation available to banks through the LAF
• High Repo Rate and Reverse Repo Rate window.
leave less money available with banks, to • Under MSF, banks can overnight borrow
lend. Less availability of loan will restrict up to 1% of their Net Demand and Time
55
Liabilities (NDTL) at the interest rate of • (These rates are not constant but are
1%. fixed by RBI based on the requirement of
• MSF would be last resort for banks once the economy)
they exhaust all the borrowing options Bank Rate = MSF > Repo Rate > Reverse Repo
including Liquidity Adjustment Facility
(LAF).
Open Market Operation (OMOs)
• Bank offer Government Securities to RBI
within the limits of the statutory liquidity • Open Market Operation is the sale and
ratio (SLR). purchase of government securities in the
• The scheme has been introduced by RBI open market by the RBI.
with the main aim of reducing volatility • The main aim of the Open Market
in the overnight lending rates in the inter- Operation is to regulate money supply in
bank market. the economy.
• The minimum amount which can be • The purchase of Government Securities
accessed through MSF is Rs.1 crore and by the RBI will increase the money supply
in multiples of Rs.1 crore. in the economy, whereas the sale of
• Since MSF is penal rate MSF is always Government Securities absorbs excess
fixed above the Repo Rate. liquidity from the economy.
• Thus, MSF is now placed at 25% above • Open Market Operations changes the
the Repo Rate. Bank Rate is aligned to proportion of Securities held by RBI,
the MSF rate. Commercial Banks while maintaining the
total stock of securities the same.
• Repo Rate will be in the middle, the
Reverse Repo Rate will be 25 basis points • RBI carries Open Market operations
below it and the MSF rate 25 basis points through commercial banks and does not
above it. directly deal with the public.
• Current Rates are as follows: • For example, let us take an example where
XYZ bank, buys and sells government
Reverse Repo Rate - 4.90% Repo Rate - 5.15% securities.
Bank Rate - 5.40% MSF- 5.40%
• Let us consider the following situation:
Total Deposit of Bank OMO (Open Market Government Securities

Money left
XYZ Operation) with Bank XYZ
100 30 cr 70 cr
RBI sells government

100 securities worth Rs. 20 30cr + 20cr =50 cr 50 cr
cr, and Banks XYZ buy it
RBI buys government

100 30cr - 20cr = 10 cr 90 cr
securities worth Rs. 20 cr
56
• As seen in the above example when RBI suggestions, guidelines etc. for Scheduled
sells Government Securities in the market Commercial Banks regarding particular
it reduces money supply from 70cr to 50cr. policy.
Similarly, when RBI buys Government
Securities it increases the money supply
from 70cr to 90 cr. Direct Actions
• Direct Actions refers to strict actions taken
by RBI against a Scheduled Commercial
Qualitative Instrument Bank.
Margin Requirement • Under Banking Regulation Act, 1949
RBI has authority to take strict actions
• Banks keep aside some proportion of against any Scheduled Commercial Bank
loan(margin) whenever banks lend to which does not adhere to the direction of
some specified sectors for safety. the RBI.
• If the margin requirement for a particular
sector is increased, it will reduce the flow
of credit in that sector. If the Margin
requirement for a particular sector is
Urijit Patel
decreased, it will increase the flow of
credit in that sector.
Committee
• For example, suppose a loan of Rs. 100 • An expert committee was appointed to
is needed in rural sector and the margin examine the monetary policy framework
requirement is 20% which is equal to of the RBI in 2014.
20% of 100 = 20. Hence, maximum loan • The committee was headed by Urijit Patel,
that banks can give is 100-20= 80. with the aim to revise and strengthen and
• RBI can increase the flow of credit in the Monetary Policy Framework.
the above example by increasing or • The main recommendations of the
decreasing margin requirement. committee are:
» RBI should adopt new CPI (Consumer

Rationing of Credit Price Index) to measure inflation and
• Rationing of credit is a method through anchor monetary policy.
which RBI set the limit on the amount of » RBI should target CPI at 4%, + 2% [range
loans, that can be made in a particular is between 2% to 6%].
sector.
» Monetary Policy should be done by the
• Credit Rationing is used by RBI to Monetary Policy Committee (MPC), which
regulate credit flow, particularly in case is 5 members Committee.
of speculative activities.
− Governor
− Deputy Governor in charge of
Moral Suasion monetary policy
• Moral Suasion refers to the persuasion − RBI Executive Director in charge of
by RBI on Scheduled Commercial Banks monetary policy.
to follow certain policy without any strict
− Two External Members
action.
• Under Moral Suasion, RBI can issue
» Government debt and management
57
must be taken by the government’s Debt » Members of MPC will hold the office for 4
Management Office, with the Market years, and not eligible for reappointment.
Stabilization Scheme (MSS) and Cash » Not eligible for MPC selection -
Management Bill should be phased out.
» Open Market Operation (OMO) should be − Members of Parliament/Legislature/
used for liquidity management, and not Public servant/or anyone having a
used to manage yields on government conflict of interest with RBI.
securities. − Anyone above the age of 70.
» All sector specific refinance should
be phased out as committed to Asian » The MPC takes decisions based on a
Development Bank in 1992. majority vote (by those who are present
and voting).
» In case of a tie, the RBI governor will have
Monetary Policy the second or casting vote.
» The decision of the Committee would be
Committee binding on the RBI.
» The quorum for the meeting of the MPC
• Monetary Policy Committee is entrusted is four members.
with the task of setting policy interest
rate (Repo Rate) to contain inflation » RBI is mandated to publish a Monetary
within the defined target level. Policy Report every six months, explaining
the sources of inflation and the forecasts
• Contrary to the recommendation of the of inflation for the coming period of six to
Urijit Patel Committee (where RBI was to eighteen months.
set inflation target), the Finance Ministry
has set an inflation target for RBI. » If RBI fails to meet the inflation target,
RBI will give an explanation in the form
• The Reserve Bank of India and the of a Report to the Central Government.
Government of India signed the Monetary
Policy Framework Agreement in 2015. » In the Report RBI, give reasons for failure,
remedial actions as well as estimated
• In 2016 Government gave statutory time within which the inflation target
backing to Monetary Policy Committee shall be achieved.
with the amendment in RBI Act 1934.
• Functions of MPC - • The MPC replaces the previous system
where the RBI governor, with the aid
» RBI will be responsible for containing and advice of his advisory committee,
inflation targets at 4% (with a deviation RBI governor had complete control over
of 2%). monetary policy decisions.
» MPC will have six members: • The history of suggestions for setting
up an MPC can be tracked back to
− RBI Governor (Chairperson) 2002 when the Y. V. Reddy Committee
− RBI Deputy Governor in charge of recommended for an MPC to decide
monetary policy, policy actions. Subsequently, suggestions
were made to set up an MPC in 2006 by
− One official nominated by the RBI the Tarapore Committee, in 2007 by the
Board
Percy Mistry Committee, in 2009 by the
− Three members would be nominated Raghuram Rajan Committee and then in
by Government of India [committee 2013, both in the Report of the Financial
headed by Cabinet Secretary] Sector Legislative Reform Commission
58
(FSLRC) and the Urijit Patel Committee. • RBI decided to shift from base rate
• With the introduction of the Monetary to MCLR because the rates based on
Policy Committee, the RBI will follow marginal cost of funds are more sensitive
a system similar to the one followed by to changes in the policy rates. This is very
most global central banks. essential for the effective implementation
of monetary policy.
Monetary Policy Base Rate
Transmission • Base Rate is the minimum rate of

interest set by RBI below which banks
• Monetary Policy transmission refers to are not allowed to lend to its customer.
the process by which a central bank’s Base Rate vs MCLR
monetary policy changes (Repo Rate) is • Base rate calculation is based on
passed through the financial system to the cost of funds, a minimum rate of
affect the public. return, operating expenses, and cost
• Monetary Policy transmission is of maintaining cash reserve ratio.
dependent on Repo Rate. How far • MCLR is based on the marginal cost
changes in Repo Rate can bring change in of funds, tenor premium, operating
banks’ interest will depend on Monetary expenses, and cost of maintaining
Policy Transmission. The passing of rate cash reserve ratio.
changes by MPC is crucial for regulating
inflation, growth etc.
• To improve Monetary Policy Transmission,
RBI introduced the Marginal Cost of Limitation of
Funds Based Lending Rate (MCLR)
system in 2016.
Monetary Policy
• Large Non-Monetized Economy: In Rural
Marginal Cost
Economy, many transactions are barter
in nature. Hence, monetary policy fails to
of Funds Based influence this large section of people.

• Lack of financial Inclusion: Non-banking
Lending Rate financial intermediaries like moneylenders
etc. operate in large numbers, they are
(MCLR) not under the regulation of RBI. This limit
the effective transmission of monetary
• The marginal cost of funds based lending policy changes.
rate (MCLR) refers to the minimum interest • Natural Factors: Many natural factors
rate of a bank below which it cannot lend, like a cyclone, floods, unseasonal rains
except in some cases allowed by the RBI. etc. affect crop production hence
• This new methodology replaces the base inflation. For example, Rising prices of
rate system introduced in July 2010. onion cannot be controlled by monetary
policy.
59
Banking Sector banks should be rationalized.
» The RBI should be the primary authority
Reform for the regulation of the banking system
in the country.
Committee on Financial
System (CFS)
• Government of India, in 1991 constituted Narasimham Committee II
a nine-member committee headed by M. • Government of India, in 1998 constituted
Narasimham. a committee on Banking Sector Reforms
• The Narasimham Committee 1 was (BSR) under the chairmanship of M.
constituted with the aim to bring out Narasimham.
“operational flexibility” and “functional • The Narasimham Committee 2 was
autonomy” to enhance efficiency, constituted with the aim to initiate the
productivity, and profitability. second generation of financial sector
• The major recommendations of reforms.
Narasimham Committee 1 are as follow- • Narasimham committee Report II has
focused on structural changes so as to
» Establishment of a four-tier hierarchy for strengthen the banking system to make
the banking structure consisting of three
it more stable.
to four large banks with SBI at the top.
• The major recommendations of the
» The private sector banks should be Narasimham Committee Report II are
treated equally with the public sector
mentioned below:
banks. The ban on setting new banks in
the private sector should be lifted and the » Merger among strong public sector
licensing policy in the branch expansion banks and closure of weaker banks if
must be abolished. their rehabilitation is not possible.
» Statutory Liquidity Ratio (SLR) and » The committee recommended the idea
Cash Reserve Ratio (CRR) should be of setting up an asset reconstruction
progressively brought down from 1991-92 fund to tackle the problem of huge non-
levels. performing assets (NPAs) of public sector
» The priority sector should be redefined banks.
to comprise small and marginal farmers, » Competition between the public sector
tiny industrial sector, small traders, and and private sector banks should be
weaker sections. enhanced.
» The government’s share of public sector » Formation of asset reconstruction fund
banks should be disinvested to a certain to tackle the problem of huge non-
percentage. performing assets of public sector banks.
» Interest rates should be deregulated to » Capital adequacy norms should be
suit the market conditions. enhanced from the present level of 8 %
» The Government has to be more liberal in but did not specify the amount to which
the expansion of foreign bank branches it should be raised.
and also foreign operations of Indian
60
Operation Twist
• 'Operation Twist’ is economic condition when the central bank utilizes the proceeds
from the sale of short-term securities to buy long-term government debt papers,
leading to easing of interest rates on the long-term papers.
• Operation Twist first appeared in 1961 as a method to strengthen the U.S. dollar and
accelerate cash flow into the economy.
• In 2019 and 2020, the Reserve Bank of India (RBI) conducted its version of ‘Operation
Twist’ with the help of simultaneous purchase and sale of government securities
under Open Market Operations (OMOs). Under this, the Reserve Bank of India
will buy long term bonds of the government and at the same time sell short term
securities of the government.
Inverted Yield Curve
• Generally, someone who lent to the government or a corporation for one year (by
purchasing a one-year government or corporate bond) would anticipate to obtain
a lower interest rate as compared to someone who lent for five or ten years, making
the yield curve upward-sloping.
• An inverted yield curve represents a condition in which long-term debt instruments
have lower yields as compared to short-term debt instruments of the same credit
quality. An inverted yield curve is sometimes described as a negative yield curve.
» The Banking Sector Reform Committee lends money to domestic banks, often
further suggested that the existence in the form of very short-term loans.
of healthy competition between public Managing the bank rate is a method by
sector banks and private sector banks which central banks affect economic
was essential. activity.
• Lower bank rates can help to expand the
economy by lowering the cost of funds
UPSC CSE PRELIMS for borrowers, and higher bank rates help
to reign in the economy when inflation is
Previous Year higher than desired.
Questions • In order to curb liquidity, the central bank

can resort to raising the bank rate and
Q.1) The lowering of Bank Rate by the vice versa.
Reserve Bank of India leads to: 2011 Q.2) The Reserve Bank of India (RBI) acts
(a) More liquidity in the market as a bankers’ bank. This would imply
(b) Less liquidity in the market which of the following? 2012
(c) No change in the liquidity in the 1. Other banks retain their deposits with
market the RBI.
(d) Mobilization of more deposits by 2. The RBI lends funds to the commercial
commercial banks banks in times of need.
Ans. (a) 3. The RBI advises the commercial banks

on monetary matters.
• Explanation: A bank rate is the interest Select the correct answer using the codes
rate at which a nation's central bank given below:
61
(a) 2 and 3 only (b) 1 and 2 only
(b) 1 and 2 only (c) 2, 3 and 4 only
(c) 1 and 3 only (d) 1, 2, 3 and 4
(d) 1, 2 and 3 Ans. (d)
Ans. (d) • Explanation: The Reserve Bank of India
• Explanation: As bankers’ bank, the RBI (RBI) is the central bank of India, which
holds a part of the cash reserves of banks, was established on April 1, 1935, under
lends them funds for short periods, and the Reserve Bank of India Act.
provides them with centralized clearing • The Reserve Bank of India uses monetary
and cheap and quick remittance facilities. policy to create financial stability in
• In the early stages of the development India, and it is charged with regulating
of central banking, banks used to keep the country's currency and credit
some of their cash reserves voluntarily systems.
with a leading bank which gradually took • The main purpose of the RBI is to conduct
over the role of a central bank. consolidated supervision of the financial
• Under the Reserve Bank of India Act, 1934 sector in India, which is made up of
and the Banking Regulation Act, 1949 commercial banks, financial institutions,
(as amended from time to time), the RBI and non-banking finance firms. Initiatives
enjoys extensive powers of supervision, adopted by the RBI include restructuring
regulation, and control over commercial bank inspections, introducing off-site
and co-operative banks. surveillance of banks and financial
institutions and strengthening the role
• The Bank’s regulatory functions relating of auditors.
to banks cover their establishment
Q.4) An increase in the Bank Rate generally
(i.e., licensing), branch expansion, the
indicates that the: 2013
liquidity of their assets, management
and methods of working, amalgamation, (a) market rate of interest is likely to fall
reconstruction, and liquidation. (b) Central Bank is no longer making
• The control by the Bank is exercised loans to commercial banks
through periodic inspec tion of banks (c) Central Bank is following an easy
and follow-up action and by calling for money policy
returns and other information from them.
(d) Central Bank is following a tight
• The objective of such supervision and money policy
control is to ensure the development of
a sound banking system in the country. Ans. (d)
Q.3) The Reserve Bank of India regulates • Explanation: Bank rate is the rate
the commercial banks in matters of: 2013 charged by the central bank for lending
1. Liquidity of assets funds to commercial banks.
2. Branch expansion • Bank rates influence lending rates of
commercial banks.
3. Merger of banks
• Higher bank rate will translate to higher
4. Winding-up of banks
lending rates by the banks.
• In order to curb liquidity, the central
given below.
bank can resort to raising the bank rate
(a) 1 and 4 only and vice versa.
62
• In India, the Reserve Bank of India (a) banking operations
determines the bank rate, which is the rate (b) communication networking
at which it makes loans to commercial
banks with no collateral (RBI Act 1934 (c) military strategies
sec.49 ) The Reserve Bank of India also (d) supply and demand of agricultural
provides short term loans to its clients products
(keeping collateral) at what is called the
Ans. (A)
Repo Rate.
• This rate is revised periodically. • Explanation: Marginal Standing Facility
(MSF) is a new scheme announced by the
• However, there is no predetermined Reserve Bank of India (RBI) in its Monetary
schedule.
Policy (2011-12) and refers to the penal
• The Repo Rates are changed reactively rate at which banks can borrow money
depending on the economy. from the central bank over and above
• As in other countries, Repo Rates affect what is available to them through the
the money flow into the nation's economy LAF window.
and affect the inflation and commercial Q.7) If the interest rate is decreased
banks' lending or interest rate. in an economy, it will 2014
Q5) In the context of Indian economy, (a) decrease the consumption
Open Market Operations’ refers to: 2013 expenditure in the economy
(a) Borrowing by scheduled banks from (b) increase the tax collection of the
the RBI Government
(b) Lending by commercial banks to (c) increase the investment expenditure
industry and trade in the economy
(c) Purchase and sale of government (d) increase the total savings in the
securities by the RBI economy
(d) None of the above
Ans. (c)
Ans. (c)
• Explanation: Lower Interest rates
• Explanation: An open market operation encourage additional investment
(OMO) is an activity by a central bank to
spending, which gives the economy a
give (or take) liquidity in its currency to
(or from) a bank. boost in times of slow economic growth.
• A central bank uses OMO as the primary • Changes in interest rates affect the
means of implementing monetary policy. public's demand for goods and services
• The aim of open market operations and, thus, aggregate investment
is— supplying commercial banks with spending.
liquidity and sometimes taking surplus • A decrease in interest rates lowers the
liquidity from commercial banks. cost of borrowing, which encourages
• Monetary targets, such as inflation, businesses to increase investment
interest rates, or exchange rates, are used spending.
to guide this implementation.
• Lower interest rates also give banks
Q.6) The terms ‘Marginal Standing
more incentive to lend to businesses
Facility Rate’ and ‘Net Demand and Time
Liabilities’, sometimes appearing in the and households, allowing them to spend
news, are used in relation to 2014 more.
63
Q.8) In the context of Indian economy which (b) Foreign Institutional Investors may
of the following is/are the purpose/purposes bring more capital into our country.
of ‘Statutory Reserve Requirements’? 2014 (c) Scheduled Commercial Banks may
1. To enable the Central Bank to control cut their lending rates.
the amount of advances the banks can (d) it may drastically reduce the liquidity
create to the banking system.
2. To make the people’s deposits with Ans. (c)
banks safe and liquid
3. To prevent commercial banks from • Explanation: SLR cut means more
making excessive profits liquidity which may prompt the banks to
4. To force the banks to have sufficient lower the lending rates.
vault cash to meet their day-to-day Q.11) With reference to Indian economy,
requirements consider the following: 2015
Select the correct answer using the code 1. Bank rate
given below.
2. Open market operations
(a) 1 only
3. Public debt
(b) 1 and 2 only
4. Public revenue
(c) 2 and 3 only
Which of the above is/are component/
(d) 1, 2, 3 and 4 components of Monetary Policy?
Ans. (b) (a) 1 only
• Explanation: Statutory liquidity ratio (b) 2, 3 and 4
(SLR) refers to reserve requirement (c) 1 and 2
that the commercial banks in India are
(d) 1, 3 and 4
required to maintain in the form of cash,
gold reserves, RBI approved securities Ans. (c)
before providing credit to the customers.
• Explanation: Public debt is not part of
• Statutory liquidity ratio is determined by Monetary Policy (it is a part of Fiscal
the Reserve Bank of India maintained policy) and OMOs together with CRR,
by banks. The SLR is determined by a SLR, Repo, Reverse Repo by RBI are
percentage of total demand and time certainly a part of their monetary policy.
liabilities.
• So, the answer should be the option C.
• When there is a rise in the SLR, a bank
is also restricted in terms of its leverage Q.12) What is/are the purpose/purposes
position. Hence, this decrease in the SLR of the ‘Marginal Cost of Funds based
will enable a bank to release more funds Lending Rate (MCLR)’ announced by RBI?
into the economy and in turn, contribute 2016
towards the overall development of the 1. These guidelines help improve the
economy and vice-versa. transparency in the methodology
Q.10) When the Reserve Bank of followed by banks for determining the
India reduces the Statutory Liquidity interest rates on advances
by 50 basis points, which of the
2. These guidelines help ensure availability
following is likely to happen? 2015
of bank credit & interest rates which
(a) India’s GDP growth rate increases are fair to the borrowers as well as the
drastically.
64
banks • The meetings of the Monetary Policy
Select the correct answer using the code Committee are held at least 4 times a
given below: year and it publishes its decisions after
each such meeting.
(a) 1 only
• The committee comprises six members,
(b) 2 only three officials of the Reserve Bank of India
(c) Both 1 and 2 and three external members nominated
by the Government of India.
(d) Neither 1 nor 2
• They need to observe a "silent period"
Ans. (c)
seven days before and after the rate
• Explanation: The marginal cost of funds- decision for "utmost confidentiality".
based lending rate (MCLR) refers to the • The Governor of Reserve Bank of India
minimum interest rate of a bank below is the chairperson ex officio of the
which it cannot lend, except in some committee.
cases allowed by the RBI.
• Decisions are taken by the majority with
• Reasons for introducing MCLR: the Governor having the casting vote in
case of a tie.
» RBI decided to shift from base rate
to MCLR because the rates based on
• The current mandate of the committee
is to maintain 4% annual inflation until
marginal cost of funds are more sensitive
March 31, 2021, with an upper tolerance
to changes in the policy rates. This is very
of 6% and a lower tolerance of 2%
essential for the effective implementation
of monetary policy. • The committee was created in 2016 to
bring transparency and accountability in
Q.13) Which of the following statements
fixing India's Monetary Policy.
is/are correct regarding the Monetary
Policy Committee (MPC)? 2017 • The monetary policy is published after
every meeting with each member
1. It decides the RBI’s benchmark interest explaining his opinions.
rates.
• The committee is answerable to the
2. It is a 12-member body including the Government of India if the inflation
Governor of RBI and is reconstituted exceeds the range prescribed for three
every year. consecutive months.
3. It functions under the chairmanship of Q.14) "Gold Tranche" (Reserve Tranche)
the Union Finance Minister. refers to: 2020
Select the correct answer using the code (a) a loan system of the World Bank
given below:
(b) one of the operations of a Central
(a) 1 only Bank
(b) 1 and 2 only (c) a credit system granted by WTO to
(c) 3 only its members
(d) 2 and 3 only (d) a credit system granted by IMF to its
Ans. (a) members
Ans. (d)
• Explanation: The Monetary Policy
Committee of India is responsible for • Explanation: A reserve tranche is a
fixing the benchmark interest rate in part of the required quota of currency
India. every member country must give to the
International Monetary Fund (IMF) that
65
can be used for its own purposes— (c) 1 and 3 only
without a service fee or economic reform (d) 1, 2 and 3
provisions.
Ans: (a)
Q.15) What is the importance of the term
"Interest Coverage Ratio" of a firm in • Explanation: The term ‘The interest
India? 2020 coverage ratio’ refers to a debt ratio and
1. It helps in understanding the present profitability ratio utilized to determine
risk of a firm that a bank is going to how comfortably a company can pay
give loan to. interest on its outstanding debt. A
greater coverage ratio is better, although
2. It helps in evaluating the emerging risk the ideal ratio may differ by industry.
of a firm that a bank is going to give Therefore, statement 3 is not correct.
loan to.
• The Interest coverage ratio is also known
3. The higher a borrowing firm's level of
as “times interest earned.” Lenders,
Interest Coverage Ratio, the worse is its
creditors, and investors often utilize this
ability to service its debt.
formula to decide a company's riskiness
Select the correct answer using the code relative to its existing debt or for future
given below. borrowing. This ratio is utilized to see
(a) 1 and 2 only how well a firm can pay the interest on
outstanding debt.
(b) 2 only
• Therefore, statements 1 and 2 are correct.
66
CHAPTER - 6
BANKING (PART II)
• It is also called Capital to Risk-weighted

Why Bank is Asset Ratio (CRAR).
important for the • Risk Weighted Assets (RWA) refers to

the assets with different risk profiles. For
Economy? instance, an asset-backed by collateral
would carry lesser risks as compared to
• In an economy, banks play a very loans, which have no collateral.
important role by offering a service • For example, Let us take an example of a
to people to save, provide finance to bank XYZ, it has a Capital Reserve of Rs.
businesses for investment and expansion. 1 crore.
• Bank loans to businesses are important XYZ Capital Reserve= Rs. 1crore.
for enabling economic growth. Deposit of XYZ = Rs. 100 crore
• Loans provided by banks to business has Loan given by XYZ = Rs. 70 crore [Rest
a certain amount of risk associated with Rs. 30crore kept as CRR & SLR]
it, of non-payment of loans.
Suppose there is Loss = Rs. 5 crore
• Central Banks of the world have adopted
various tools to minimize the risk. • But since the Bank has only Rs. 1 cr in
Capital rest Rs. 4 crore will be shared
» Some of the tools are: among depositors which is unjust.
» Cash Reserve Ratio (CRR) • Thus, Central banks are instructing the
» Statutory Liquidity Ratio (SLR) banks to increase capital. More the
capital by owners of banks, the more
» Capital Adequacy Ratio (CAR) will be the capability of the banks to
(CRR and SLR are explained in chapter 5) overcome the crisis.
• RBI introduced the Capital to Risk-
Capital Adequacy Weighted Assets Ratio (CRAR) systems
for Indian Banks in the year 1992.
Ratio (CAR)
• It is the percentage of total capital to Tier 1 Capital
total risk-weighted assets. • Tier 1 Capital/Core Capital is the capital
that can absorb losses without bank
CAR =
Total Capital
* 100 =
Tier 1 Capital + Tier 2 Capital
* 100
required to cease operation.
Risk-Weighted Assets Risk-Weighted Assets
• Tier 1 Capital is the primary indicator to
• CAR is the parameter to measure the measure a bank's financial strength.
financial soundness of the Bank. • Tier 1 capital is disclosed reserves,
• CAR ensures that banks have enough that appear on the bank's financial
capital to cover the risk of potential loss statements. These include:
and to protect the depositor and general
creditors against losses. » Share Capital,
67
» Undistributed Profit, and • Basel Norms are agreed upon at Basel,
» Preference Share Capital. Switzerland at the meeting of the Bank
of International Settlement (BIS).
• Tier 1 capital will be more in the form of • BIS encourages cooperation among
equities. central banks with a common goal of
ensuring financial stability and common
standards of banking regulations across
Tier 2 Capital the globe.
• Tier 2 Capital/Supplementary Capital • Basel Committee’s decisions have no

is the capital that can absorb losses in legal force neither it is a multilateral
the event of winding-up of bank and organization. The committee formulates
therefore provides a lesser degree of supervisory standards and guidelines and
protection to depositors. recommends best practices in banking
regulations.
• Tier 2 capital includes undisclosed funds
that do not appear on a bank's financial
statements.
Basel I
• Tier 2 capital include:
• Basel I norms was agreed in the year 1998,
» Subordinate Debt, hence minimum capital requirement was
» Revaluation Reserve, imposed on banks.
» General loan-loss reserves, and • In Basel I norms, the minimum capital

requirement was fixed at 8% of Risk-
» Hybrid (debt/equity) capital instruments. Weighted Assets.
• Most of the Tier 2 capital is in the form of • Basel I norms focused entirely on credit
debts and reserves etc. risk (risk of default on loan).
At the end of 1974, in the aftermath of seri- • India adopted Basel I guidelines in 1999.
ous disturbances in international currency
and banking markets (failure of Bankhaus
Herstatt in West Germany), the Basel Basel II
Committee (Committee on Banking Reg-
ulations and Supervisory Practices) was • Basel II norms were introduced in the
established. year 2004 and were reformed version of
Basel I norm.
• Basel II norms focus on three main pillars:
Basel Norms » Minimum Capital Requirement: Banks
• Basel Norms are standards set by should maintain a minimum capital
the Basel Committee on Banking adequacy requirement of 8% of risk
Supervision (BCBS). assets.
• BCSC is an international committee » Supervisory Review: Banks are required to

established with an aim to develop develop and use better risk management
standards for banking regulation. methods in managing and monitoring all
the three types of risks that a banking
• In 2019, the BCBS has 45 members from sector faces, viz. market risk, credit risk,
28 Jurisdictions, consisting of Central and operational risks.
Banks and authorities with responsibility
of banking regulation. » Market Discipline: Banks need to
68
mandatorily disclose their risk exposure Counter-Cyclical Capital Buffer
to the central bank. (CCCB)
• Presently banking system of India follows • Counter-Cyclical Capital buffer is the
Basel II norms. capital to be kept by a bank to meet
business cycle related risks.
• These are an additional provision that
Basel III banks are expected to make during good
• In the year 2010, Basel III guidelines were times to provide for capital erosion during
released in response to the financial crisis bad business periods.
of 2008. • The buffer may fluctuate from zero to
• Basel III aims at: 2.5% of the total risk-weighted assets
(RWA) of banks.
» Improving Banking sector ability to • It is maintained in the form of common
absorb shock arising from financial and equity Tier 1 Capital.
economic instability.
» Improve Governance and Risk
Management of the banking sector. Challenges in the
» Strengthen transparency and Disclosure. implementation of Basel III
• The minimum requirement for common
Norms
equity has been raised under Basel III Higher capital requirement for bank
from 2% to 4.5% of total Risk-Weighted
Assets (RWA). • The public sector banks (PSBs) in India
will require large capital requirements
under Basel III. This will be difficult for
the banks, because of the large number
Buffers introduced in Basel III of bad loans on their books.
Norms
Capital Conservation Buffer (CCB) Mounting Pile of Stressed Assets
• It is a mandatory capital that financial • The banking sector in India is facing
institutions are required to hold in challenges due to low credit growth,
addition to another minimum capital deteriorating asset quality and low
requirement. profitability.
• The minimum capital requirement is 9%
in India.
Economic and policy changes
• The CCB would be 2.5% over and above
the minimum capital requirement. • In India, the banking domain is
facing headwinds because of policy
• It is maintained in the form of common
and economic regulations like GST,
equity Tier 1 Capital.
demonetization, Real Estate (Regulation
and Development) Act of 2016.
• This could slow the procedure for
implementation of global risk norms
mentioned under Basel III.
69
Basel Norm Criteria
Basel II Basel III RBI
Common Equity 2% 4.5% 5.5%
Tier 1 Capital 4% 6% 7%
Total Capital 8% 8% 9%
(Tier 1 + 2 + 3) (Tier 1 + 2)
• Tier 3 capital is tertiary capital, which further into the following three categories
several banks hold to support their on basis of the period for which the asset
market risk, commodities risk, and foreign has remained as non-performing asset:
currency risk. Tier 3 capital comprises a
greater variety of debt than tier 1 and tier » Sub-standard Assets
2 capitals.
− Assets which has remained NPAs
for a period less than or equal to 12
Non-Performing months.
» Doubtful Assets
Asset (NPA)
− An asset is to be categorized as
• An asset gets converted into non- doubtful assets if it has remained NPA
performing when it ceases to create for a period exceeding 12 months.
income for the bank i.e., when the
borrower pays neither the interest nor » Loss Assets
principal after a certain period of time.
− An asset is to be classified as loss
• Non-performing Asset (NPA) shall be an assets, where loss has been recognized
advance(loan) where: by the bank or the RBI inspection
or internal or external auditors, but
» Installment and/or interest of principal the amount has not been written off
remain unpaid for a period of more than wholly.
90 days in respect of a term loan.
− In another words, such asset is
» Installment and/or interest of principal considered uncollectible.
remains unpaid for two harvest seasons
but for a period not surpassing two half
years in the situation of an advance
granted for agricultural purposes. Indian Banks and NPA
» Any amount to be received remains • Data on NPAs is regularly published
unpaid for a period of more than ninety by RBI as part of its Financial Stability
days in respect of other accounts. Reports.
• As per RBI provisional data on global
operations, as on 31st March, 2019, the
Categories of NPAs aggregate amount of gross NPAs of PSBs
and Scheduled Commercial Banks (SCBs)
• Banks are required to categorize NPAs
70
was Rs. 8,06,412 crore and Rs. 9,49,279 several infrastructure projects.
crores, respectively. • External Factors, such as decreases in
• According to Financial Stability Report global commodity prices leading to
(FSR) released by the RBI, banks' slower exports.
gross NPAs may increase to 13.5% by
September 2021, as compared to 7.5%
in September 2020 under the baseline Impact of NPAs on Indian
scenario.
Economy
• Declining profitability of the banks makes
them vulnerable to adverse economic • The crisis of NPAs in the Indian banking
shocks and consequently putting system is one of the foremost and the
consumer deposits at risk. most formidable problems that had
impacted the entire banking system.
• Increasing volume of Bank frauds is
swallowing all the economic development » Profitability
of India and is producing financial
indiscipline in the country. Big defaulter − NPAs impact profitability, banks
such as Vijay Malya, Mehul Choksi and stop to earn income on one hand
Nirav Modi usurps thousands of crores and attract higher provisioning (set
which not only adds to growth in the aside an amount in an organization's
quantum of Non-Performing Assets account) compared to standard
(NPAs) but takes out the sizable reserves assets on the other hand.
that could have otherwise been utilized
for economic well-being of thousands » Capital Adequacy
of poor people willing to become
entrepreneurs with banks’ support and − According to the Basel norms, banks
plan to start up their small businesses. are required to maintain adequate
capital on risk-weighted assets.
− Every increase in the NPAs level adds
Causes for increase in NPAs to risk-weighted assets which require
banks to increase their capital.
• Excess expansion of corporate during
the boom period. However, as economic » Liability Management
growth stagnated following the 2008
global financial crisis the repayment − In the light of high non-performing
capability of these corporations reduced. assets, banks tend to lower the
This contributed to what is now identified interest rates on deposits on one
as India’s Twin Balance Sheet problem, hand and likely to levy higher interest
where both the banking sector (that rates on advances. This may hamper
gives loans) and the corporate sector economic growth.
(that takes and must repay these loans)
have come under financial stress. » Public confidence
• Domestic and economic slowdown. − The credibility of the banking system
• Indiscriminate lending without proper is also affected greatly due to higher
credit risk assessment. level NPAs because it has impacted
the confidence of the general public of
• Political pressure to lend to particular
the society with respect to soundness
enterprises.
of the banking system.
• Long delays and gestation periods of
71
What is being done to manage ninety days if the extension is approved
by NCLT.
the issue of growing NPAs?
• If the CoC does not approve the resolution
• The actions taken to prevent and resolve plan, the debtor will go into liquidation.
NPAs can broadly be classified into two
• The IBC also adds that the resolution
kinds. First, regulatory means of resolving
process must be finalized within 330
NPAs with various laws (like the Insolvency
days. This includes time for any extension
and Bankruptcy Code) and second,
granted and the time taken in legal
remedial measures for banks prescribed
proceedings in relation to the process.
and regulated by the RBI for the internal
restructuring of stressed assets. • Debt Recovery Tribunal is the
Adjudicating Authority with jurisdiction
over individuals and unlimited liability
Insolvency and Bankruptcy Code partnership firms. Appeals from the order
(IBC) of Debt Recovery Tribunal shall lie to the
Debt Recovery Appellate Tribunal (DRAT).
• IBC provides a time-bound procedure
to resolve insolvency in companies and
• National Company Law Tribunal (NCLT)
shall be the Adjudicating Authority with
amongst individuals. Insolvency is a
jurisdiction over companies, limited
condition where companies or individuals
liability entities. Appeals from the NCLT
are unable to repay their outstanding
order shall lie to the National Company
debt.
Law Appellate Tribunal (NCLAT).
• When a default in repayment happens,
creditors gain control over the debtor’s
• The administration of the Insolvency
and Bankruptcy Code, 2016 has been
(who owes money) assets and must take
transferred to the Ministry of Corporate
decisions to resolve insolvency within a
Affairs.
180-day period.
• Under IBC, a financial creditor may
file an application before the National SARFAESI Act 2002
Company Law Tribunal for starting
the insolvency resolution process. The • SARFAESI (Securitization and
National Company Law Tribunal must Reconstruction of Financial Assets and
find the existence of default within Enforcement of Securities Interest) Act,
fourteen days. 2002, was framed to address the problem
of NPAs (Non-Performing Assets) or bad
• A Committee of Creditors (CoC) assets.
comprising financial creditors will be
constituted for taking decisions with • The provision of the act allows banks
respect to insolvency resolution. The and other financial institution to auction
CoC may either choose to restructure the residential or commercial properties to
debtor’s debt by preparing a resolution recover loans.
plan or liquidate the debtor’s assets. • In case of loan default, banks can
• The Committee of Creditors will appoint seize the collateral/securities (except
a resolution professional who will make agricultural land) without the intervention
and present a resolution plan to the of the court.
CoC. The CoC must approve this plan, • The law does not apply to
and the process of resolution must be
finalized within 180 days. This process » Unsecured loans,
may be extended by a period of up to » Loans below ₹100,000
72
» Where the remaining debt is below 20% • Government has amended the SARFAESI
of the original principal. Act in 2016 to empower the Asset
Reconstruction Companies (ARC).
• The SARFAESI Act provides for the
establishment of Asset Reconstruction
• ARC is a specialized and dedicated
financial institution that buys the NPAs or
Companies (ARCs) which are to be
bad assets from the financial institutions
regulated by RBI.
or banks so that the latter can clean up
• Banks/Financial Institution can sell their balance sheets.
securities to Asset Reconstruction
Companies (ARCs).
• ARCs are registered under the RBI and
regulated under the SARFAESI Act, 2002.
4R framework
The 4R formula (Recognition, Recapitalization, Resolution, Reform) suggested by the
Economic Survey 2015-16 to resolve NPAs crisis.
• Recognition: Banks must value their various assets as far as possible close to true
value as the Reserve Bank of India has been emphasizing.
• Re-capitalization: Once they do so, their capital position must be protected through
infusion of equity as the banks have been demanding.
• Resolution: The various underlying stressed assets in the corporate segment must
be sold or rehabilitated as the government has been desiring.
• Reform: Future incentives for the private sector and corporates must be set-
appropriate to prevent a repetition of the problem.
Prompt Corrective Action (PCA) − Those banks with CRAR of more than
6.25 percent but less than 7.75 percent
• To ensure that Commercial banks do not fall in the threshold 2.
go bust, RBI has put in place some trigger
points to assess, monitor, control and − If bank’s common equity Tier 1 (the
take corrective actions on banks which bare minimum capital under CRAR)
are weak and troubled. The process or falls below 3.625 percent, it gets
mechanism under which such actions are categorized under the threshold 3
taken is known as PCA. level.
• Framework of PCA considers banks as » Banking organizations that have a Net

risky if they slip below certain standards NPAs of 6% or more but less than 9% fall
on three parameters — Asset Quality, under threshold 1, and those with 12%
Capital Ratios, and Profitability. or more fall under the category of third
threshold level.
» It has 3 risk threshold levels (1 being the
lowest and 3 the highest) on basis of » On profitability, banks with a negative
where a bank stands on these ratios. return on assets for two, three and four
consecutive years fall under threshold 1,
− Banking organizations with capital threshold 2 and threshold 3, respectively.
to risk-weighted assets ratio (CRAR)
of lower than 10.25 percent but • Once the PCA is imposed, Banks are not
more than 7.75 percent fall under allowed to renew or access costly deposits
threshold 1. or take different steps to increase their
fee-based income. Banks will also have
73
to introduce a special drive to reduce the functions of the BIC. Once BIC is formed,
stock of NPAs and contain generation of the BBB will be dissolved.
fresh NPAs. » The BBB will advise on appointments to
• They will also not be permitted to enter the board, banks’ chairman and other
into new lines of business. RBI will executive directors.
also impose restrictions on the bank » The Government should consider
on mergers, borrowings, etc. from the decreasing its holding in public sector
interbank market. banks to less than 50%, in order to
restore a level playing field for different
public sector banks.
Other important RBI
Committees Nachiket Mor committee
PJ Nayak Committee • The “Committee on Comprehensive
Financial Services for Small Businesses
• RBI constituted the P.J. Nayak committee
and Low-Income Households” was set
in 2014 to review the governance of
up by the RBI under the chairmanship of
Board of Banks in India.
Nachiket Mor.
• The Committee was presided by P J
• The committee was tasked for framing
Nayak and its major recommendations
a clear vision for financial inclusion and
are -
financial deepening in India.
» Repeal the SBI Act, the SBI Subsidiaries • Committee has outlined six vision
Act and the Bank Nationalization Act statements for full financial inclusion and
(1970, 1980). This is because the provision financial deepening in India:
of these acts require the government
to have above 50 percent share in the » Universal Electronic Bank Account
banks. (UEBA):
» The Government should establish a − Each Indian resident, above the
Bank Investment Company (BIC) as a age of eighteen years, would have
core investment company to hold equity an individual, full-service, safe, and
stakes in banks which are currently held secure electronic bank account.
by the Government. Bank Investment
Company should be incorporated under » Ubiquitous Access to Payment Services
the Companies Act 2013. and Deposit Products at Reasonable
» The government to allocate its share in Charges:
the banks to this BIC. Consequently, the
BIC would become the parent holding − The Committee envisions that every
company of all these national banks, and resident in India would be within a
bank would become subsidiaries of BIC. fifteen-minute walking distance of a
BIC will be an autonomous body and will payment access point.
have the authority to appoint the Board
» Sufficient Access to Affordable Formal
of Directors and make other important
policy decisions. Credit:
» Until the BIC is created, a temporary − Each low-income household and

body called as the Bank Boards Bureau small-business would have access
(BBB) will be established to do the various to a formally regulated lender that
74
is capable of assessing and meeting » Monitoring at the district level such as
their credit needs. deposits and advances as a percentage
− Such a lender must also be able to of gross domestic product (GDP).
offer them a full range of suitable » Adjusted 50 per cent priority sector
credit products at an affordable price. lending target with adjustments for
sectors and regions based on difficulty in
» Universal Access to a Range of Deposit lending.
and Investment Products at Reasonable
Charges:
− Each low-income household and Mission

small-business would have access to
providers that can offer them suitable Indradhanush
investment and deposit products.
• The government of India, in order to
− Such services must be available to resolve the issues faced by the Public
them at reasonable charges. Sector Banks launched a 7-pronged plan
called “Mission Indradhanush”.
» Universal Access to a Range of Insurance
and Risk Management Products at • Mission Indradhanush aims at revamping
Reasonable Charges: the functioning of the Public Sector
Banks to enable them to compete with
− Each low-income household and the Private Sector Banks.
small business would have access • (There is another mission of the
to providers that have the ability to Governent with the same name. Mission
offer them suitable insurance and risk Indradhanush (MI) of the Ministry of
management products. Health and Family Welfare, was launched
− These products must at minimum in 2014 and aims at increasing the full
allow them to manage risks related immunization coverage to children to
to (a) commodity price movements; 90%.)
(b) longevity, disability, and death of • The seven components include:
human beings; (c) death of livestock;
(d) rainfall; (e) damage to property. » Appointments
» Right to Suitability: − Separation of the important posts
of Chief Executive Officer (CEO) and
− Each low-income household and the Managing Director (MD) to avoid
small-business would have a legally concentration of power and smooth
protected right to be offered only functioning of the different banks.
suitable financial services.
− Induction of talent from various
− She will have the right to seek legal private sector into public banks.
redress if she feels that due process to
establish Suitability was not followed » Bank Boards Bureau (BBB)
or that there was gross negligence.
− The Appointments Board of the
• The main recommendation of the PSBs (Public Sector Banks) would be
committee are as follow: substituted by the Bank Board Bureau
(BBB).
» Aadhaar will be the prime driver towards
rapid expansion in the number of bank − It would advise banks in the matters
accounts. of raising funds, mergers, and
75
acquisitions etc.
− BBB will have 3 ex-officio members
Types of Banks in
and 3 expert members in addition to
the chairman.
India
RBI
» Capitalization:
− Because of the high NPAs and the SCHEDULED BANKS NON- SCHEDULED BANK
need to meet the provisions of the
Basel III norms, capitalization of
banks by inducing Rs. 70,000 crores REGIONAL RURAL PRIVATE SECTOR
in next 4 years. BANK BANK
» De-stressing PUBLIC SECTOR

BANK
DIFFERENTIAL
BANK
− Solving problems arising in the I m a g e 6.1: T y p e s of Bank in I n di a

infrastructure sector in order to check
the stressed assets in the banks.
Scheduled Banks
» Empowerment
• Any kind of bank which is listed in the
− Providing better flexibility and Second Schedule of the Reserve Bank
autonomy to PSBs in hiring manpower. of India (RBI) Act, 1934 is considered a
scheduled bank.
» Framework of Accountability
• To qualify as a scheduled bank:
− The evaluation of the working of banks
would be based on new performance » The paid-up capital and collected funds
indicators. of the bank must not be less than Rs. 5
lakh.
− Quantitative Parameters like growth,
Non-Performing Assets Management, » Any activity of the bank will not adversely
diversification, return on capital, affect the interests of the depositors.
financial inclusion.
• Scheduled banks include State Bank of
− Qualitative Parameters like steps India, Nationalized Banks, Regional Rural
taken in improving asset quality, Banks, Foreign Banks, Private Sector
human resources initiatives etc. Banks.
» Governance Reforms • Scheduled Banks are eligible for

obtaining debts/loans on bank rate from
− Gyan Sangam conferences amongst the RBI and are given membership to
the government officials and bankers clearing houses.
for resolving the banking sector
issues and deciding the future course
of action. Non-Scheduled Banks
• They are those banks which are not listed
in the second schedule of the RBI Act,
1934.
• Non-scheduled banks are not entitled
to borrow from the RBI for normal
76
banking purposes, except in emergency with banks sanctioned by the Reserve
circumstances. For Example, Jammu & Bank of India. These accounts include:
Kashmir Bank.
Note: All other types of banks will be » Non-Resident External Account (NRE
covered in financial inclusion module. account)
» FCNR (B) [Foreign Currency Non-Resident
(Bank)] account
Types of ATM » Non-Resident Ordinary Rupee Account
(NRO account)
A. Bank’s own ATM
• These types of ATM are owned and
operated by the bank and carry the FCNR (B) account
bank logo.
• These kinds of accounts can be opened
by Overseas Corporate Bodies (OCBs)
and NRIs with an authorized dealer.
B. Brown Label ATM
• The type of accounts can be opened in
• These ATMs are owned and maintained the form of term deposits.
by the service provider, but the bank
• Deposits of funds are permitted in , Pound
manages the cash and connectivity to
Sterling, Euro and Japanese Yen.
the bank network.
• Rate of interest valid to this type of
• They carry the logo of the bank which accounts are in accordance with the
outsource their services.
directives issued by Reserve Bank of
India.
C. White Label ATM

• These are owned and operated by a third NRE account
party (non-banking firm).
• NRE accounts can be opened by
• To aid financial inclusion and ATM Overseas Corporate Bodies (OCBs) and
penetration in the country, the RBI has NRIs with authorized dealers and with
permitted the launch of White Labelled banks approved by RBI.
ATMs.
• These can be in the form of current,
• These white label ATMs will not display savings, recurring or fixed deposit
the logo of any particular bank. accounts.
• TATA launched the first white label ATM in • Deposits are permitted in any permitted
India under the brand name of Indicash. currency.
• Rate of interest valid to these accounts is
in accordance with the directives issued
Non Resident Indian by RBI.
Deposit
NRO account
• Foreign Exchange Management
(Deposit) Regulations, 2000 allows NRIs • These kinds of accounts can be opened
(Non-Resident Indians) to have deposit by any individual resident outside India
accounts with authorized dealers and with an authorized bank, an authorized
77
dealer for collecting their funds from local • The foreign investment ceiling in New
bonafide transactions in Indian Rupees. bank would be 49% (ceiling for an
• When a resident becomes an NRI, his existing bank is 74%).
existing Rupee accounts are designated • Within 1 year of licensing, banks should
as NRO. be established and within 3 years, banks
• These types of accounts can be in the should be listed in the stock exchange.
form of savings, current, savings, recurring
or fixed deposit accounts.
Priority Sector
Licensing policy of Lending (PSL)
Bank • The RBI requires banks to lend a certain
percentage of their funds to specific
• RBI guidelines for granting of license to sectors which are recognized as “priority
commercial banks are - sector” by the RBI. Ex: Agriculture, MSMEs,
export credit, education, housing, etc.
» Individual/Group resident in India • The objective of priority sector lending
confirming to fit a proper criteria, can is to ensure that adequate institutional
promote/establish new banks with the credit flows into vulnerable sectors of the
following criteria: economy.
− Sound credential and integrity • Priority Sector comprises the following
categories:
− Sufficient finances
(i) Agriculture
− Successful business track record of at
(ii) Export Credit
least 10 years.
(iii) Micro, Small and Medium
• A New Bank could be established only Enterprises
through a Non-Operative Financial (iv) Education (Loans to individuals for
Holding Company (NOFHC), which educational purposes up to Rs. 10 lakh)
would be registered with RBI as an NBFC.
Its objective is to separate the business (v) Housing (Housing loans to individuals
activities of the promoter group from the loan upto Rs.28 Lakh in Metros, Rs.20
New bank. The NOFHC would be holding Lakh in other centres)
company of all the financial business of (vi) Social Infrastructure (Loans up
the promoter group. to ₹5 crores per borrower for building
• The paid-up capital should be at least social infrastructure)
Rs. 500 crore. Out of which, the NOHFC (vii) Renewable Energy (for individual
has to invest at least 40% which would households, the loan limit will be ₹10
be locked in for 5 years. However, the lakh per borrower, Loan up to Rs.15
NOHFC has to reduce its shareholding in crore for purposes like solar-based
the New bank to 15% or less over the 12 power generators etc.)
years from the establishment of the bank.
• (viii) Others
• At least 50% of the directors of New
bank should be independent directors • The different targets and sub-targets for
(Director who do not have any kind of banks under priority sector are as follows
vested interest in the company)
78
Domestic scheduled commercial
Foreign banks with less than 20
Categories banks and Foreign banks with 20
branches
branches and above
40% of Adjusted Net Bank Credit

40% of Adjusted Net Bank Credit or Credit Equivalent Amount of
or Credit Equivalent Amount of Off-Balance Sheet Exposure,
Total Priority Sector
Off-Balance Sheet Exposure, whichever is higher, to be
whichever is higher. achieved in a phased manner by
2020.
18% of ANBC.
Agriculture Within the 18% target for Not applicable

agriculture, a target of 10%
is prescribed for Small and
Marginal Farmers.
Micro Enterprises 7.5% of ANBC. Not applicable
Advances to Weaker Sections 12% of ANBC. Not applicable
PSL does not apply to Regional Rural Banks (RRB) and Small Finance Banks (SFB) because these banks
are already working in the sector which are defined in PSL norms.
• The rate of interest for bank loans under

priority sector will be decided by RBI. National Payments
• If the Banks fail to meet its PSL target, Corporation of India (NPCI)
then banks may be required to invest • NPCI is the umbrella organization for
in the Rural Infrastructure Development entire retail payment systems in India.
Fund (RIDF).
• NPCI is an initiative of RBI and Indian
• Priority Sector Lending Certificates Banks’ Association (IBA) under the
(PSLCs) are a mechanism to enable provisions of the Payment and Settlement
banks to achieve the priority sector Systems Act, 2007.
lending target and sub-targets by
purchase of these instruments in the • Founded in 2008, the NPCI is not-for-
event of shortfall. This also incentivizes profit organization registered under the
surplus banks as it allows them to sell their Companies Act 2013.
excess achievement over targets thereby • Product of NPCI are as follows:
enhancing lending to the categories
under priority sector. Under the PSLC
mechanism, the seller sells fulfilment of a. RuPay
priority sector obligation and the buyer
buys the obligation with no transfer of
• RuPay is the first-of-its-kind domestic
Debit and Credit Card payment network
risk or loan assets.
of India.
• RuPay fulfils RBI’s vision of initiating a
Digital Initiative ‘less-cash’ economy.
• Singapore will be the first nation to issue
79
RuPay cards in the country. • The only inputs essential for a customer
• RuPay card has been introduced in the to do a transaction are:
following countries Bhutan, Maldives,
» Aadhaar Number.
UAE, Bahrain, Saudi Arabia.
» Issuer Identification Number (Finding the
Bank to which the customer is associated).
b. Unified Payment Interface (UPI) » Fingerprint captured during their
• UPI is a real-time interbank payment enrollment.
system for sending or receiving money.
• UPI uses existing systems, such as f. National Financial Switch
Immediate Payment Service (IMPS)
and Aadhaar Enabled Payment System • NFS is the largest domestic ATM network
(AEPS), to ensure seamless settlement in India.
across accounts. • NFS is designed, developed and deployed
• In 2018, UPI 2.0 was launched which by the Institute for Development and
enabled users to link their Overdraft Research in Banking Technology (IDRBT).
accounts to a UPI. • NFS facilitates routing of ATM
transactions through inter-connectivity
between the Bank’s Switches, such that
c. BHIM the transactions made at any ATM could
• Bharat Interface for Money (BHIM) is a be routed to the connected banks.
mobile payment app that allows users
to make quick transactions using Unified
Payments Interface (UPI). Core Banking
• Minimum amount: ₹1, Maximum Number
of Transactions/day: 10. Solution (CBS)
• Maximum Fund transfer limit: ₹20,000/ • Core banking solution refers to a
transaction, Maximum: ₹40,000 in a 24- centralized system established by a bank
hour period. which allows its customers to conduct
their business from any branch of the
bank, regardless of where he maintains
d. Bharat Bill Payment System his account.
(BBPS)
• CORE is an acronym for "Centralized
• BBPS is an interoperable platform that Online Real-time Exchange".
allows a customer to pay bills like water, • For example, E-Kuber is the Core Banking
telephone, gas, direct-to-home (DTH) Solution of Reserve Bank of India.
and electricity at a single location—
electronic or physical.
UPSC CSE PRELIMS

e. Aadhaar Enabled Payment
System (AePS) Previous Years
• It allows people to carry out financial Questions
transactions on a Micro-ATM using the Q.1) Priority Sector Lending by banks in
Aadhaar authentication. India constitutes the lending to: 2013
80
(a) Agriculture • Largely in response to the credit crisis,
(b) Micro and small enterprises banks are needed to maintain proper
leverage ratios and meet certain
(c) Weaker Sections minimum capital requirements.
(d) All of the above Q.3) The term ‘Core Banking Solution’ is
Ans. (d) sometimes seen in the news. Which of
the following statements best describes/
• Explanation: Priority Sector Lending describe this term? 2016
(PSL) is an significant role given by the
central bank of India (RBI) to the banks 1. It is networking of a bank’s branches
for providing a definite portion of the which enables customers to operate
bank lending to a certain sectors such their accounts from any branch of the
as micro and small enterprises, poor bank on its network regardless of where
people for housing, agriculture and allied they open their accounts.
activities, students for education purpose 2. It is an effort to increase RBI’s control
and other low income groups and weaker over commercial banks through
sections. This is essentially meant for all- computerization.
round development of the economy as
3. It is a detailed procedure by which a
opposed to concentrating only on the
bank with huge non-performing assets
financial sector.
is taken over by another bank.
Q.2) ‘Basel III Accord’ or simply ‘Basel
III’, often seen in the news, seeks to: 2015 Select the correct answer using the code
given below:
(a) develop national strategies for the
conservation and sustainable use of (a) 1 only
biological diversity (b) 2 and 3 only
(b) improve the banking sector’s ability (c) 1 and 3 only
to deal with financial and economic (d) 1, 2 and 3
stress and improve risk management
Ans. (a)
(c) reduce greenhouse gas emissions but
places a heavier burden on developed
countries • Explanation: Core Banking Solution
(d) transfer technology from developed (CBS) is the networking of branches,
Countries to poor countries to which allows Customers to operate
enable them to replace the use of their accounts, and avail various types
chlorofluorocarbons in refrigeration of banking services from any branch of
with harmless chemicals the Bank on CBS network, regardless of
where he maintains his account.
Ans. (b)
• Another interesting fact regarding
• Explanation: Basel III is an international CBS is that all CBS branches are inter-
regulatory consensus that introduced connected with each other.
a set of reforms intended to improve
the supervision, regulation and risk • Therefore, customers of CBS branches
management within the banking system. can avail various banking facilities from
any other CBS branch located anywhere
• In late 2009, the Basel Committee on in the world.
Banking Supervision (BCBS) published
Q.4) Consider the following statements:
the first version of Basel III, providing
banks approximately three years to 2017
satisfy all types of requirements. 1. National Payments Corporation
81
of India (NPCI) helps in promoting the physical currency in about two
financial inclusion in the country. decades.
2. NPCI has launched RuPay, a card (c) FDI inflows will drastically increase.
payment scheme. (d) Direct transfer of subsidies to poor
Which of the statements given above is/ people will become very effective.
are correct? Ans. (a)
(a) 1 only
• Explanation: Unified Payments Interface
(b) 2 only (UPI) is an instant real-time payment
(c) Both 1 and 2 structure developed by National
Payments Corporation of India enabling
(d) Neither 1 nor 2
inter-bank transactions.
Ans. (c)
• The interface controlled by the central
• Explanation: NPCI is an umbrella bank of India (RBI) and works by instantly
institution for operating numerous retail transferring funds amongst two bank
payments and settlement systems in accounts on a mobile platform.
India. It is an initiative of Indian Banks’
• UPI is a system that powers multiple bank
Association (IBA) and RBI under the
accounts into a single mobile application
provisions of the Payment and Settlement
(of any participating bank), merging
Systems Act of 2007, for forming a robust
several banking features, seamless fund
Payment & Settlement Infrastructure in
routing & merchant payments into one
India.
hood.
• NPCI enables an affordable payment
mechanism to benefit the common man • It also caters to the “Peer to Peer” collect
across the country and finally helps in request which can be scheduled and paid
fulfilling goal of financial inclusion. as per requirement and convenience.
• NPCI has been recognized as a “Not • Each Bank provides its own UPI App
for Profit” Company under Section 25 for Android, Windows, and iOS mobile
of Companies Act,1956 (now Section platform(s).
8 of Companies Act of 2013), with an • UPI 2.0 was launched on August 16, 2018
aim to give infrastructure to the whole which allowed users to connect their
banking system in India for physical Overdraft accounts to a UPI handle.
along with electronic payment and
settlement systems. The Company is • In this users were also able to pre-
concentrating on bringing innovations authorize transactions by issuing a
in the retail payment systems with the mandate for a specific merchant. 2.0
help of technology for attaining greater version included a feature to view and
efficiency in operations and widening the store the invoice for the transactions.
overall reach of payment systems. Q.6) Which one of the following links
• RuPay, a indigenous payment card all the ATMs in India? 2018
launched by NPCI for all Indian banks. (a) Indian banks' Association
Q.5) Which of the following is the most (b) National Securities Depository
likely consequence of implementing the Limited
‘Unified Payments Interface (UPI)’? 2017
(c) National Payments Corporation of
(a) Mobile wallets will not be necessary India
for online payments.
(d) Reserve Bank of India
(b) Digital currency will totally replace
Ans. (c)
82
• Explanation: In India, National Financial Q.8) The Chairman of public sector banks
Switch (NFS) is the largest network of are selected by the 2019
shared automated teller machines (ATMs). (a) Banks Board Bureau
In 2004, it was developed, designed and
deployed by IDRBT (the Institute for (b) Reserve Bank of India
Development and Research in Banking (c) Union Ministry of Finance
Technology), with the objective of inter- (d) Management of concerned bank
connecting the ATMs in the country and
enabling convenience banking. Ans. (a)
• NFS is run by the National Payments • Explanation: Banks Board Bureau (BBB)
Corporation of India (NPCI). NPCI is an is an autonomous body established
umbrella organization for entire retail by Indian government with the task to
payments in India. improve the governance of various Public
• It was established with the guidance and Sector Banks (PSBs), recommend the
support of the Reserve Bank of India (RBI) selection of chiefs of government owned
and Indian Banks Association (IBA). banks and financial institutions and to
support banks in developing strategies
and capital raising plans.
2018
Q.9) Which of the following is not
1. Capital Adequacy Ratio (CAR) is the
included in the assets of a commercial
amount that banks have to maintain
bank in India? 2019
in the form of their own funds to offset
any loss that banks incur if the account- (a) Advances
holders fail to repay dues. (b) Deposits
2. CAR is decided by each individual (c) Investments
bank.
(d) Money at call and short notice
Which of the statements given above is/
Ans. B
are correct?
(a) 1 only • Explanation: Deposits of banks are a
liability not assets
(b) 2 only
• Commercial Banks hold their assets
(c) Both 1 and 2
largely in the form of -
(d) Neither 1 nor 2 (i) loans and advances and bills
Ans. (a) purchased and discounted, together
constituting bank credit,
• Explanation: Capital Adequacy Ratio
(CAR) is also called as Capital to Risk (ii) investment, and
(Weighted) Assets Ratio (CRAR). (iii) cash.
• It is the ratio of a bank's capital in relation • Money at Call at Short Notice:
to its risk-weighted assets and current
liabilities. » It is the money lent to other banks, stock
• It is used as a measure of a bank's capital. brokers, and other financial institutions
for a very short period of time varying
• It is expressed in terms of percentage of from 1 to 14 days.
a bank's risk-weighted credit exposures.
CAR is not decided by each individual » Banks place their surplus amount of
bank but by RBI on the basis of Basel cash in such loans to earn some interest
Committee recommendations. without straining their liquidity.
83
CHAPTER - 7
INFLATION
• Inflation refers to a sustained increase • It is measured on a year-on-year basis (or

in the general price level of goods and month/week basis). The rate of change
services in an economy over a period of in the price level in a given month vis a
time. vis corresponding month of last year is
• It considers the prices of most goods and known as point to point inflation.
services of daily or common use, such
as food, clothing, housing, recreation,
transport, consumer staples, etc. Types of Inflation
• Inflation measures the average price
change in a basket of commodities and • Depending on the cause, inflation can be
services over time. classified as:
• Rate of inflation is the rate of change in » Demand-Pull Inflation
general price level which is measured as
follows: » Cost-Push Inflation
• Based on rate of increase in price:
Rate of inflation (year X) = Price (year X) - Price (year X-1) * 100
Price (year X-1) » Low Inflation
• Consider a bar of chocolate is priced » Galloping Inflation
at ₹100 in 2019. If all the other factors » Hyperinflation
are constant and the same chocolate is
priced at ₹110 in 2020, the inflation rate
is 10% per annum.
Price (year 2020) - Price (year 2019) Demand-Pull Inflation
Rate of inflation (year 2020) = * 100
Price (year 2019)
• When overall demand for goods and
110-100
=
100
* 100 = 10% services in the economy increases more
rapidly than the economy's production
• With the increase general price level, capacity, then it is called as demand-pull
only fewer goods and services can be inflation.
bought with each unit of currency; This
• It creates a demand-supply gap as the
means inflation reduces the purchasing
demand is higher and supply is less,
power of currency– the currency loses its
which results in higher prices.
real value in medium of exchange and a
unit of account within the economy. • For instance, during the sowing season
demand for fertilizer increases. Because
• Suppose one ₹100 note buys 10 liters of of its higher demand prices go up and
petrol in 1980. In the year 2020, the same
inflation occurs.
₹100 buys 2 liters of petrol. This shows
that although ₹100 note did not lose its
value over time, it has lost its purchasing
power over this time of 30 years. This
example explains how money loses its
value over time when prices rise.
84
• When the money supply in the economy
AS increases, inflation occurs. As more
amount of money is available with the
consumers, they tend to spend more.
This creates more demand and prices of
goods and services increase.
• Thus, when the demand increases and
supply is low, the purchasing power of
PRICE
money decreases.
LEVEL AD1 • As shown in the graph as demand
AD
increases from AD to AD1 price increases.
NATIONAL INCOME • Causes of Demand-Pull Inflation are:
• Increase in Government Expenditure/

• Increase in Money Supply.
Public Expenditure
• Decrease in Direct Taxes.
• Increase in Exports
• Increase in Population
• Decrease in Imports
Cost-Push Inflation place.
• When there is an increase in prices of • Causes of Cost-Push Inflation are:

factors of production like labour, raw
» Increase in Cost of Production
material, etc., it is called as Cost Push
Inflation. » Decrease in Output
» Hoarding and Speculation
AS 1 » Increase in Indirect Taxes
AS » Defective Supply Chain
» Increase in price of imported Commodity
(like oil)
• As shown in the graph, as the cost of

PRICE production rises, the aggregate supply
LEVEL decreases from AS to AS1, causing an
AD increase in the price level.
OUTPUT
Low Inflation
• As the cost of factors production
increases the producers tries to keep the • Low Inflation used to describe a period
profit same by increasing the prices or of time when prices are rising slowly.
producers offers good and services at the Such Inflation occurs slowly and can be
same prices but they reduce the quantity. predicted.
In such cases cost-push inflation takes • This type of Inflation is also called
85
Creeping Inflation. money supply and inflation, Therefore,
• If the prices increase by 3% or less controlling money supply with the help
annually, then such inflation is creeping of monetary policy the inflation can be
inflation. controlled.
• Using contractionary monetary policy,
the money supply in the economy can
Galloping Inflation be decreased. This leads to decrease in
aggregate demand in the market and
• When the prices of goods and services in thereby reduces inflation.
the economy increases at a double-digit
(i.e. 15% etc.) or triple-digit (i.e. 100%
• Decrease in supply of money → rate of
interest increases → Investment decreases
etc.) rate per annum, then it is called as
→ Aggregate demand decreases → prices
galloping inflation.
decline → rate of inflation is lowered
• Galloping inflation is also called as
Jumping inflation/Running Inflation.
• Similar process follows when CRR, SLR,
Repo Rates are increased and decreased.
• Rates like CRR, SLR, Repo Rate and
Hyperinflation Reverse Repo Rate are increased to
impact the money supply in the economy
• Hyperinflation takes place when the rate by the RBI to control inflation.
of increase in prices of goods and services
is extremely high and that increase in
price takes place in a short span of time. Fiscal Policy
• In other words, hyperinflation takes place
when the increase in prices is more than
• Fiscal Policy refers to the revenue and
expenditure policy of the government.
three-digit rate annually.
• Germany had witnessed hyperinflation • Contractionary Fiscal Policy can be
useful to tackle high inflation rates. The
after the First World War in the 1920s.
process is as follows:
• The most recent instance of hyperinflation,
Zimbabwe’s currency woes hit a peak in » Increased taxes (keeping government
November 2008 and according to some spending constant) → disposable
Report it reached a monthly inflation personal income decreases→
rate of approximately close to 79 billion consumption decreases → aggregate
percent. demand decreases → prices decline →
rate of inflation is lowered
» Similar process follows if government cuts
Measures to Control down on its expenditures without raising
taxes (or reduces its deficit/increases
Inflation surplus).
• The government adopts various measures • Some of the fiscal policy measures are as
to control the increase in the price of follows:
goods and services.
» Reducing Import Duties
» Banning exports or Imposing minimum
Monetary Policy export prices.
• There is a close link between the » Suspending the futures trading of
86
commodities. • Long overdue supply-side reforms.
» Raising the stock limit for the commodities • Inefficiencies in the monetary policy
transmission.
• Limited control of Government and RBI
Supply Management Measures in controlling rupee depreciation.
• Supply Management Measures aims • Political compulsion in reducing
to increase the competitiveness and expenditure and fiscal deficit.
efficiency of the supply chain, putting • Populist measures of the government.
downward pressure on long-term costs.
• Some of the supply management
measures taken are as follows: Impact of Inflation
» Restricting exports of commodities in Positive Impact
short supply and increasing their imports.
» Effective implementation of the Essential • A moderate level of inflation stimulates
economic growth because it increases
Commodities Act, 1952 to prevent
profit margins of firms in the short
hoarding and speculation.
run, that encourages them to increase
» Incentivizing the increase in production production and supply.
of commodities through tax concessions,
subsidies, institutional support etc.
• It indicates that there is no deficiency
of demand in the economy which
» Higher MSP has been announced to improves profitability expectation which
incentivize production and thereby encourages firms to invest and increases
enhance the availability of food items production capacity.
which may help moderate prices.
» Fixing the ceiling prices of the
commodities and taking measures to Negative/Adverse Impact
control the black marketing of those
goods. • It deteriorates the standard of living
of people as it reduces income at their
» Reforming the supply chain through disposable.
infrastructure development, foreign
investments etc. • It is regressive, i.e. it affects poor relatively
more because the marginal utility of
money for them is relatively high.
Constraints Faced • High inflation may cause shortages of

goods if consumers start hoarding out of
by the Government concern that prices will increase in the
future.
in controlling • High inflation retards economic growth
inflation as it induces the government to adopt
contractionary fiscal and monetary
policies.
• India imports more than 80 percent of
its oil requirements. Oil prices are volatile • It deteriorates the balance of payments
owing to the various geopolitical and situation of the country. It discourages
economic events in the international export and encourages import which
arena. widens creates a deficit and tends to
reduce FOREX reserves.
87
Industry and Internal Trade, Ministry of
INFLATION
REAL INCOME CAPACITY TO SAVE Commerce and Industry publishes the
REAL INTEREST RATE WILLINGNESS OF SAVING
WPI.
• The WPI is used for the following
Measurement of purposes:
a. To give the estimates of inflation at
Inflation the wholesale transaction levels for
the economy as a whole. It helps in
• Following are two main set of inflation timely intervention by the monetary
indices for measuring price level changes authorities to check the inflation
in India: particularly in essential commodities
before the price increase affects the
» Wholesale Price Index (WPI) retail prices.
» Consumer Price Index (CPI) b. Global investors also consider WPI
as one of the key macro indicators
for investment decisions.
Wholesale Price Index (WPI) • The Government reviews and revises the
• Wholesale Price Index (WPI) measures base year of the WPI as a regular exercise
the changes in the prices of goods to capture structural changes occurred
sold and traded in bulk by wholesale in the economy and improve the quality,
businesses to other businesses instead of coverage, and representativeness of the
consumers. indices.
• The index basket of the WPI includes • The base year of All-India WPI has been
commodities falling under the three changed from 2004-05 to 2011-12 in 2017
major groups namely Primary Articles, to bring it in line with the base year of
Manufactured Products and Fuel & other macroeconomic indicators like
Power. Index of Industrial Production (IIP) and
the Gross Domestic Product (GDP).
• The WPI basket has a total of 697 items
with base year 2011-12: • The new series with base year 2011-12=100
was based on the recommendations of
» Primary Articles: 117 items the Working Group which was constituted
in 2012 under the chairmanship of Late
» Fuel & Power: 16 items
Dr. Saumitra Chaudhuri.
» Manufactured Products: 564 items
• WPI calculated with 2011-12 base year
• The prices tracked are mandi price for does not include taxes in order to remove
agricultural commodities, ex-factory the impact of fiscal policy.
price for manufactured products, and ex-
mines prices for minerals. Primary Articles Fuel & Power Manufactured Products
• Weightage given to each commodity

covered in the WPI basket is based on 63.75 64.97 64.23
the value of production adjusted for net
imports. 14.23 14.91 13.15
• WPI basket does not cover services. 22.03 20.12 22.62
1993-94 2004-05 2011-12
• In India, the Office of Economic Advisor
(OEA), Department of Promotion of I m a g e 7.1: W e i g h ti n g S t r u c t u r e of WPI
88
Key Highlights of WPI with 2011-12 Government and the RBI in 2015 the sole
as base year objective of the RBI is price stability and
the Consumer Price Index (Combined) is
• In the new and present WPI series, there measured as the target inflation.
has been significant improvements in
• Consumer Price Index compiled for four
concept, coverage, and methodology.
groups of consumers in India
• The WPI basket has been updated and
the number of items has been increased » CPI for Industrial workers CPI(IW)
from 676 to 697. » Consumer Price Index for Urban Non-
• New definition of Wholesale Price Index Manual Employees (UNME)
(WPI) does not include taxes to remove » CPI for Agricultural Labourers CPI(AL)
the impacts of fiscal policy. It also brings
new WPI series closer to Producer Price » CPI for Rural Labourers CPI(RL)
Index (PPI) and is in consonance with the
global practices.
CPI for Industrial workers CPI(IW)
• The indices are being compiled based
on Geometric Mean as compared to • This is the oldest index among the CPI
Arithmetic Mean used in the WPI 2004- indices as it was started as early as in
05 series. 1946.
• Consumer Price Index for Industrial
Workers (IW) measure a change in prices
Consumer Price Index (CPI) of a fixed basket of goods and services
consumed by Industrial Workers over a
• Consumer Price Index (CPI) measures the fixed period of time.
inflation at retail level.
• The target group is an average working-
• Consumer Price Index (CPI) is a measure class family belonging to any of the seven
of change in retail prices of goods and
sectors of the economy- mines, factories,
services consumed by people in a given
plantation, motor transport, port,
area with reference to a base year.
electricity generation and distribution
• The main uses of CPI are the following: and railways.
a. It is widely considered as a • The Labour and Employment Ministry
barometer of inflation revised the CPI (IW) base year from 2001
b. Tool for monitoring price stability to 2016 to reflect shifting consumption
patterns, giving more weight to spending
• The formula for calculating Consumer on health, education, leisure, and other
Price Index is called as Laspeyres index miscellaneous expenses while decreasing
and the formula is: the weight of food and beverages.
Total cost of a fixed basket of goods and services in the current period
* 100
• It is used to decide wages and to fix
Total cost of the same basket in the base period
the dearness allowance for government
employees.
• The Reserve Bank of India is now using
CPI(Combined) as the as the benchmark • The retail prices used in the calculation
for its monetary policy tools like Repo of CPI(IW) are collected by the Labour
Rate, Reverse Repo Rate. Bureau, Ministry of Labour.
• According to the Agreement on Monetary
Policy Framework signed between the
89
CPI for Urban Non-Manual • CPI (RL) is currently calculated at base
Employees (UNME) 1986-87=100.
• CPI (RL) is compiled by the Labour
• This index depicts the changes in the Bureau in the Ministry of Labour.
level of average retail prices of goods
and services consumed by the urban Note: The Labour Bureau has started
section of the population. The target the process of revising the base year for
group of this index was urban families Consumer Price Index for Agricultural and
who derived a major portion of their Rural Labourers CPI (AL/RL) to 2019-20,
income from non-manual employment in from 1986-87.
the non-agricultural sector.
• The index was being released by CSO Revision in CPI
with a time lag of nearly two weeks
• Some public and private sector • The CPI (IW) and CPI (Al & RL) pertain
undertakings, State Governments, to specific segments of the population.
foreign embassies, etc. are using this Since these indices do not cover all
index for purposes of regulating Dearness segments of the population, it is difficult
Allowance. to ascertain the true variations in the
price level.
• The release of all-India linked CPI(UNME)
has been discontinued since January • To overcome this problem, government
2011. announced a new index with wider
coverage,
CPI for Agricultural Labourers CPI » CPI (Urban): Representative of the entire
(AL) Urban population
» CPI (Rural): Representative of the entire
• CPI for Agricultural labourers (AL) Rural population
measures the extent of change in the
retail prices of goods and services » CPI (Combined)
consumed by the agricultural labourers.
• It is compiled by the Central
• CPI (AL) is currently calculated at base Statistics Office (CSO) under the
1986-87 = 100. Ministry of Statistics and Programme
• CPI (AL) is basically used for revising Implementation (MOSPI).
minimum wages for agricultural labour in
• The base year was also revised from
different States.
2004-05 to 2010-11.
• CPI (AL) is compiled by the Labour
Bureau in the Ministry of Labour.
• In 2015, CPI was again revised by CSO.
» The base year was revised from 2011-12
= 100.
CPI for Rural Labourers CPI (RL)
» The number of groups was increased to
• CPI for Rural labourers (RL) measures six in the new series i.e.
the extent of change in the retail prices
of goods and services consumed by the
Rural labourers.
90
Groups Rural Urban Combined
Food and beverages 34.18 36.29 45.86
Pan, tobacco and

3.26 1.36 2.35
intoxicants
(newly added )
7.36 5.57 6.53

Clothing and Footwear
Housing ----- 21.67 10.07
Fuel and Light 7.94 5.50 6.84
Miscellaneous 27.26 29.53 28.32
Total 100 100 100
» Consumer Food Price Index (CFPI) will be » The indices are now being computed
compiled as the weighted average of the using Geometric Means (GM) in place of
following indices: Arithmetic Mean (AM) used for the old
series.
− CFPI (Rural)
− CFPI (Urban)
− CFPI (Combined)
Nov.2019 (Provisional) Oct 2019

Indices
Rural Urban Combined Rural Urban Combined
CPI
5.27 5.76 5.54 4.29 5.11 4.62
(General)
CFPI 8.83 12.26 10.01 6.42 10.47 7.89
WPI vs CPI
Wholesale Price Index (WPI) Consumer Price Index (CPI)
CPI measures the average price that households

WPI keeps track of the wholesale price of goods.
pay for a basket of different goods and services.
The prices used for WPI are collected at ex-

factory level for manufactured products, at ex- Retail prices applicable to consumers and collected
mine level for mineral products and mandi level for from various markets are used to compile CPI.
agricultural products.
91
Compiled by Office of Economic Advisor (Ministry Compiled by Central Statistics Office (Ministry of
of Commerce & Industry). Statistics and Programme Implementation).
Goods only. Goods and Services both.
WPI basket weight of 24.4% (Food articles and

CPI Food group has a weight of 39.1%.
Manufactured Food products).
Price paid by Manufacturers and wholesalers. Price paid by Consumer.
• In December 2019, retail inflation rose to

Trends in Inflation five and a half year high to 7.35% primarily
on the account of rising vegetable and
• Inflationary trends in India are not food prices. Food items make up almost
uniform and it has been a mixed bag. 46 per cent of the inflation basket.
There were years when the annual rate
• According to the National Statistical
of inflation was high (due to supply-side
Office (NSO), retail inflation based on
shortfalls caused by drought, price rise
the Consumer Price Index (CPI) was only
of crude oil), while in other years it was
2.11% in December 2018 and 5.54% in
negative.
November 2019.
• Decadal inflation in India has been as
• Onion prices were above the Rs. 100 per
follows:
kg mark in many major cities due to fall
in production. Along with rise in the price
12.00%
of vegetables, high prices of pulses, meat
and fish contributed to the spike.
8.00%
4.00%
Inflation Targeting in
0.00%
1940s 1960s 1980s 2000s
India
I m a g e 7.2: I n f l ati o n train scene Independent
• Inflation targeting is a monetary policy
• Between 2009-13, the inflation remained measure used by Central Banks (RBI) for
high due to: maintaining price level at a certain level
or within a specified range.
» Food inflation due to the shift in dietary
habit to protein-rich food. • Inflation targeting brings in more
transparency and predictability while
» Increased wages (due to schemes like deciding various monetary policy rates.
MGNREGA etc.) If the RBI could ensure price stability,
» Increase in prices of the commodity in companies and households can plan in
the global market. well advance, negotiating wages based
on targeted inflation.
• Since 2014 inflation started moderating • The Government of India and RBI
due to a decrease in global crude oil signed a Monetary Policy Framework
prices, softening in global food prices, Agreement in 2015. As per terms of this
RBI tight monetary policy. agreement, the objective of monetary
92
policy framework would be primarily to of food products which are consumed by
maintain price stability, while keeping in a defined group of population in a given
mind the objectives of growth. area with reference to the base year.
• The monetary policy framework is • The Central Statistics Office (CSO),
operated by the RBI. RBI is responsible to Ministry of Statistics and Programme
contain consumer price inflation within 4 Implementation (MOSPI), started
per cent with a band of (+/-) 2 per cent. publishing Consumer Food Price Indices
• In case of retail inflation is more than 6% (CFPI) under three heads, rural, urban,
for three consecutive quarters and less and combined, separately on an all-India
than 2% for three consecutive quarters basis from May 2014.
RBI will have to explain the reason for its • Like Consumer Price Index (CPI), the CFPI
failure to meet the target and also give a is also calculated on a monthly basis and
time-frame within which it will achieve it. methodology remains the same as CPI.
• The RBI will also be required to publish • The base year presently used is 2012.
a document after every six months to
explain the sources of inflation and
forecast the inflation for the next 6-18 Note: Globally, the food price index is
months. being released by the Food and Agriculture
Organization (FAO) of the United Nations.
The FAO Food Price Index calculates the
Food Prices Indices monthly change in international prices of

a basket of food articles. It consists of the
average of five commodity group price
WPI food index indices (Vegetable Oil, Cereal, Sugar Meat
• As a part of revised WPI series, WPI food and Dairy) weighted with the average
index was launched in 2017 with base export shares of each of these groups for
year 2011-12. 2002-2004.
• WPI food index measures the fluctuations
Other Index
in prices of food items at the producer’s
level.
• The WPI Food index is calculated by Producer Price Index (PPI)
taking the aggregate of WPI for “Food
Products” under “Manufacture Products” • Producer Price Index calculates the
and “Food Articles” from “Primary Article” price of goods as they are sold to the
using weighted arithmetic mean. wholesalers by the producers.
• Producer Price Index calculates price
change from the perspective of the
Consumer Food Price Index producers.
(CFPI) • Government of India has established a
committee under the chairmanship of
• Consumer Food Price Index (CFPI) is a B.N Goldar to advise methodology for
measure of fluctuations in retail prices introducing PPI in the country.
93
PPI vs WPI
PPI WPI
WPI captures the price changes at the point of bulk

PPI measures the average change in prices received transactions and may include some taxes levied
by the producer and excludes indirect taxes. and distribution costs up to the stage of wholesale
transactions.
PPI includes Services. WPI does not cover Services.
Weight of an item in WPI is based on Net Traded

PPI weights are derived from Supply Use Table.
Value.
NHB RESIDEX • HPI is based on transaction data collected

from housing registration authorities in
• NHB RESIDEX, India’s first official ten major cities.
housing price index, an initiative of
• RBI started compiling HPI in 2007 for
the National Housing Bank (NHB) was
Mumbai.
launched in 2007.
• NHB RESIDEX is designed in such a way
that it tracks changes in housing prices Service Price Index
at neighbourhood, city and national
levels. Price changes will be measured • Service Price Index would capture the
over period and across different cities movement of prices in various services
and various locations within cities. like insurance, banking, transport,
communication.
• Service Price Index was recommended
Housing Price Index of RBI by Abhijit Sen Committee.
• Reserve Bank compiles the quarterly • The tertiary sector contributes about 60
house price index (HPI) (base: 2010- per cent in the country’s gross domestic
11=100) for ten major cities i.e., Mumbai, product (GDP), the need for this index
Delhi, Chennai, Kolkata, Bengaluru, is important because of the growing
Lucknow, Ahmedabad, Jaipur, Kanpur, dominance of the tertiary sector.
and Kochi.
Effects of Inflation
Effect Reason
The interest rate charged by the bank is nominal interest

On Creditor Loss rate(NIR), which is not same as the Real interest rate(RIR)
paid by the borrower.
RIR = NIR - Inflation
Real interest rate is always lower than the Nominal
On Debtor Profit
interest rate if inflation is taking place.
94
Since money supply increases it increases the demand
On Demand Increases
for commodity.
Inflation in the short-run boost investment since it

On Investment Increases indicates higher demand, industries increase production
to match demand.
Inflation reflects a reduction in the purchasing power per

unit of money i.e each unit of currency buys fewer goods
On Saving Reduces and services.
That is why people try to keep the least money with
themselves and hold maximum in the bank.
As indirect tax is imposed on the value of products, with

On Indirect Tax Increases an increase in price of the product, people pay more.
Hence, indirect tax increases.
Due to Inflation, tax-payer income increases, due to

On Direct Tax Increases which, taxpayer is moved in a higher income tax slab.
Hence, direct tax burden increases.
Due to inflation currency of the economy loses its values.

On Exchange Rate Depreciate For example, $1 = Rs50
after inflation $1 = Rs. 60
On Export Increases Export will increase in volume but will decrease in value.
Because of the increase in the costs of imported products,

On Import Decrease
hence, the volume of import decreases.
Inflation increases employment in the short run. But in

On Employment Increases long term, as costs rise it may substitute labour with
other factors, such as new technology.
Inflation increases the nominal value of the wages while

On Salary Increases
their real wages(adjusted for inflation) falls.
If inflation is in the specified range than it is healthy for the economy, otherwise
On Economy
not good.
• This inflation occurs when the supply

Other Variants of falls drastically, and the demand remains
Inflation at the same level. Such situations arise

due to supply-side hurdles, hazards, or
mismanagement.
Structural Inflation/Bottleneck
Inflation • For example, recent prices of onion prices
rise in recent days because of unseasonal
• Structural inflation is inflation that results rains, affecting supply whereas demand
from changes in the structure of demand remained the same.
and supply.
95
Headline Inflation Open Inflation
• Headline Inflation reflects the rate of It is the situation in which price level
change in prices of all goods and services increases without any price suppressive
in an economy over a period of time. measure by the government.
• It includes price rise in food, fuel, and all Government does not suppress inflation
other commodities. with subsidies and monetary policy.
• In India, the CPI is used as the headline

inflation as it reflects the prices of Suppressed/Repressed
essential consumption goods.
Inflation
• The headline CPI inflation in India tends
to increase whenever there is a surge in • The situation in which aggregate demand
food and fuel prices. is greater than aggregate supply in the
economy but the government prevents
price level from rising through direct price
Core Inflation control measures like ceiling price etc.
• Repressed inflation is the state in which
• Core Inflation is also called as underlying there is persistent excess demand for
inflation. Core inflation is calculated by goods and services.
excluding items that are vulnerable to
volatile price movement, specifically • Governments in India are not effective in
food and energy items. suppressing inflation because the supply
chain is highly unorganized.
• Thus, Core Inflation is nothing but
Headline Inflation minus inflation caused
Important Terms
by food and energy articles.
• To understand the concept, we can say
that food and fuel prices may rise in the Reflation
short term due to some disturbances in
the agriculture sector or oil industry. But, • Reflation is a situation in which price
over the long period they revert to their level increases along with an increase
normal growth trend. The prices of other in output, employment etc., when
commodities do not fluctuate as regularly an economy moves from recession/
as food and fuel. But as such, an increase depression.
in their prices could be taken relatively to • Reflation refers to the combination of
be much more of a permanent nature. monetary and fiscal policy initiatives
• Reserve Bank of India and Central Banks aimed to combat lower economic growth
across the World always monitor the and is usually done by increasing the
core inflation. Whenever core inflation money supply, lowering interest rates and
increases, Central Banks increase their tax rate cuts.
key policy rates to reduce excessive
liquidity from the market and vice versa.
It is, thus, a preferred tool for framing Stagflation
long-term policy. • Stagflation is defined as a combination
of economic phenomenon where there
is high inflation along with increasing
unemployment and relatively slow
economic growth or recession.
96
• It is caused due to cost-push inflation. • Deflation Gap leads to deflation and
• Stagflation is a combination where recession.
economy suffers from high inflation and
low growth.
Agriflation
• In the 1970s oil crisis in the world there
was stagflation in the world economy. • Increase in the price of agricultural
products.
Skewflation Disinflation
• Skewflation refers to price rise of one • Reduction in the rate of inflation. It is a
or a small group of commodities over a
situation where rate of increase in price
sustained period of time.
level decreases without any adverse
• In India, food prices went up steadily impact on output, national income,
during the last few months of 2009 and the employment etc.
early months of 2010, though the prices of
non-food items continued to be relatively
stable. As it was unusual phenomenon Deflation
Skewflation appeared in the Economic
Survey 2009-10, Government of India, • A persistent decrease in price level i.e.
Ministry of Finance. negative inflation. It is the situation in
which price level reduces along with the
reduction in the output
Misery Index • It leads to recession (which is never
desirable), unemployment etc.
• Misery Index is the summation of the
inflation rate and unemployment rate. • Central banks try to keep the overall price
levels stable by avoiding situations of
severe inflation/Deflation. They may ease
Inflationary Gap the money supply into the economy to
counterbalance the deflationary impact.
• The situation in which aggregate demand
• Deflation is different from disinflation as
is more than the productive capacity of
the disinflation implies a decrease in the
the economy.
level of inflation while on the other hand
deflation implies negative inflation.
Aggregate Demand >Aggregate Supply Full employment
• Inflation Gap leads to excess demand Phillips Curve

which leads to inflation.
• It is a graphic curve which depicts the
relationship between inflation and
unemployment in an economy.
Deflationary Gap
• Phillips Curve depicts that there is an
• The situation in which aggregate demand inverse relation between inflation and
is less than the productive capacity of unemployment.
the economy.
• That is when inflation is high,
unemployment is less in short terms
Aggregate Demand <Aggregate Supply Full employment
and higher the inflation lowers the
unemployment.
97
in the short term. Phillips curve fails to
justify the situations of stagflation when
both inflation and unemployment are
alarmingly high.
INFLATION • This concept was given by A.W. Philips.
GDP Deflator
• GDP deflator measures the impact of
inflation on the gross domestic product
UNEMPLOYMENT RATE
(GDP) i.e. how much a change in GDP
• However, the implications of Phillips relies on changes in the price level.
curve have been found to be true only • It is calculated by dividing nominal GDP
by real GDP and then multiplying by 100.
GDP Deflator WPI
WPI is based on a limited basket of goods and

GDP deflator reflects the prices of all domestically
services, thereby not representing the entire
produced goods and services in the economy.
economy.
GDP deflator also includes the prices of investment

WPI (at present) has no representation of the
goods, government services and exports, and
services sector.
excludes the price of imports.
• If the inflation rate was too low in the

Base Effect corresponding period of the previous
year, even a relatively smaller rise in the
• The base effect refers to the impact of Price Index will arithmetically give a high
the rise in the price level (i.e. last year’s rate of current inflation.
inflation) in the previous year over the
corresponding rise in price levels in the
• For example, the index has increased
by 20 points in all the three years: 2008,
current year (i.e., current inflation).
2009 and 2010. However, the inflation
Price Index Inflation
2007 2008 2009 2010 2008 2009 2010
(120-100) *100=20% (140-120) = 16.67%

April 100 120 140 160 100 120 14.29
rate (calculated on a year-on-year basis) 20 points in the price index in each year
tends to decline over the three years increases the base year price index by an
from 20% in 2008 to 14.29% in 2010. equivalent amount, while the absolute
This is because the absolute increase of increase in price index remains the same.
98
Inflation Indexed UPSC CSE PRELIMS
Bond (IIB) Previous Years
• Inflation-Indexed Bond (IIB) is a bond Questions
issued by the RBI, which provides the Q.1) India has experienced persistent and
investor a constant return irrespective of high food inflation in the recent past.
the level of inflation in the economy. What could be the reason? 2011
• The main objective of Inflation- 1. Due to a gradual switchover to the
Indexed Bonds is to provide a hedge cultivation of commercial crops, the
and to safeguard the investor against area under cultivation of food grains
macroeconomic risks in an economy. has steadily decreased in the last five
• In the Indian context, inflation was one years by about 30%.
of the major macroeconomic concerns 2. As a consequence of increasing
of the economy during the period 2008- incomes, the consumption patterns
2013 where real interest rates were of the people have undergone a
consistently negative. significant change.
• This leads to huge investment in the 3. The food supply chain has structural
alternate instrument (gold) by the constraints.
households, necessitating heavy
Which of the statements given above are
import of gold. In order to reduce the
correct?
attractiveness of gold for investment and
reduce the CAD, the Government of India (a) 1 and 2 only
launched Inflation-indexed bonds (IIB) in (b) 2 and 3 only
2013.
(c) 1 and 3 only
• The Reserve Bank of India auctioned its
(d) 1, 2 and 3
first tranche, linking to Wholesale Price
Index (WPI) inflation, as WPI headline Ans. (b)
inflation was then used as the key
measure of inflation by RBI.
• Explanation: According to the RBI:
Except few cases of lower inflation, food
• Over time, IIB bonds lost its attractiveness, price inflation has remained persistently
as there has been significant moderation elevated for over a year now, reflecting
in inflation since 2014-15 in part the structural demand-supply
• Since April 2014, RBI adopted Consumer mismatches in several commodities.
Price Index (CPI combined) as the key • The trend of food inflation was pointing
measure of inflation for its monetary at not only structural demand-supply
policy stance. mismatches in commodities comprises
• In case RBI issues new IIB bonds in the the essential consumption basket but
near future, it would be based on CPI, as also at changing consumption patterns.
CPI (combined) has been accepted by
RBI as the key measure of inflation for its Q.2) A rapid increase in the rate of
monetary policy stance, since 2014. inflation is sometimes attributed to the
“base effect”. What is “base effect”? 2011
(a) It is the impact of drastic deficiency
in supply due to the failure of crops
99
(b) It is the impact of the surge in Ans. (c)
demand due to rapid economic growth
• Explanation: RBI plays a key/primary
(c) It is the impact of the price levels of role in controlling inflation through its
the previous year on the calculation of monetary policy.
inflation rate
• So, option (a) and (b) are out.
(d) None of the statements
• Now increased money supply shall only
Ans. (c) add fuel to the fire and send inflation
• Explanation: The base effect is the impact skyrocketing.
of the increase in the price level (i.e. last • So, the answer should be the option (c).
year’s inflation) in the previous year over
the corresponding increase in price levels
in the current year (i.e., current inflation). Q.5) Consider the following statements:
1. The weightage of food in Consumer
Price Index (CPI) is higher than that in
Q.3) A rise in the general level of Wholesale Price Index (WPI).
prices may be caused by: 2013
2. The WPI does not capture changes in the
1. an increase in the money supply prices of services, which CPI does.
2. a decrease in the aggregate level of
3. Reserve Bank of India has now adopted
output
WPI as its key measure of inflation and to
3. an increase in the effective demand decide on changing the key policy rates.
Select the correct answer using the codes Which of the statements given above is/
given below. are correct?
(a) 1 only (a) 1 and 2 only
(b) 1 and 2 only (b) 2 only
(c) 2 and 3 only (c) 3 only
(d) 1, 2 and 3 (d) 1, 2 and 3
Ans. (d) Ans. (a)
• Explanation: All the statements are • Explanation: Option 1 is correct: Food

correct. has a much higher weightage in CPI as
compared to WPI. This essentially means
an increase in food prices will cause a
Q.4) Which reference to inflation greater spike in the CPI basket than in
in India, which of the following the WPI one.
statements is correct? 2015 • Option 2 is correct: Other major difference
(a) Controlling the inflation in India is the amongst the two indices is that the
responsibility of the Government of India wholesale market is only for goods, you
only cannot purchase services on a wholesale
basis. So WPI does not comprise services,
(b) The Reserve Bank of India has no role
while the retail price index does. WPI,
in controlling the inflation
unlike the Consumer Price Index (CPI),
(c) Decreased money circulation helps in only tracks the prices of goods bought
controlling the inflation by consumers.
(d) Increased money circulation helps in • Option 3 is correct: Based on the
controlling the inflation recommendations of the Urjit Patel
100
committee, monetary policy (MP) in India (a) 1 and 2 only
is to be prepared in reference to the CPI (b) 2 only
(instead of WPI) based inflation. (The
recommendation was accepted in 2014 (c) 1 and 3 only
itself.) (d) 1, 2 and 3
Ans. (b)
• Explanation: Expansionary/Expansionist
Q.6) If the RBI decides to adopt an monetary policy is when the central bank
expansionist monetary policy, which of of a nation increases money supply to
the following would it not do? accelerate the economy. Increase the
1. Cut and optimize the Statutory Liquidity MSF rate of interest will make borrowing
Ratio expensive, and thus is something that
the RBI would not do as part of its
2. Increase the Marginal Standing Facility expansionist monetary policy.
Rate
• Various mechanism of an expansionist
3. Cut the Bank Rate and Repo Rate
monetary policy are cutting and
Select the correct answer using the code optimizing SLR and Cutting bank rate
given below: and Repo Rate.
101
CHAPTER - 8
FINANCIAL MARKET
• It provides liquidity to the financial

Financial Market commodities i.e., investors can sell their
financial commodities and convert them
• Financial Market is the system consisting into cash in a very short period.
of the financial institution (banks
• It saves the time, money, and efforts of
etc.), instruments (bonds and shares),
investors. The financial market gives a
organisations (stock exchange) and
platform where both the buyers and
regulatory bodies (RBI, SEBI etc.), which
sellers can find each other easily.
facilitates the flow of equity and debt
capital.
• The financial market gives a platform to
the buyers and sellers for trading assets Types of Financial
at the prices determined by the demand
and supply forces.
Market
• There are two types of Financial Markets
Functions of » Money Market
Financial Market Money Market is the market which

fulfills the requirements of funds for the
period ranging from overnight to one
• It facilitates mobilization of savings, year.
where an investor can invest his saving
according to risk and choice assessment. » Capital Market
• It helps in determining the price of Capital Market is the market which
financial commodities based on demand fulfills the requirements of funds for the
and supply. period above one year.
Money Market vs Capital Market

Money Market Capital Market
It deals with medium and long term financial

It deals with short term financial transactions.
transactions.
It finances capital equipment to firms i.e. it

It is the source of working capital finance for firms.
promotes capital formation.
It deals with bonds. Example- commercial papers,

commercial bills, certificate of deposit, treasury bill It deals with both bonds and equities.
etc.
102
Usually, it deals with high volume transaction. It deals with both low and high volume transaction.
In India, the participation of the general public is

People participation is significant.
limited.
All types of Financial Instrument participate

Participation is confined to banks.
actively.
RBI is the prime regulator. SEBI is the prime regulator.
It consists of both organized and unorganized

It is mainly confined to organized sector.
sector.
Money Market Instruments

Money Market
Organised Sector Unorganised Sector
Sub Market of
Banks Money Market Moneylender Hundi
Treasury Commercial Commercial Certificate Call Money

Bill Paper Bill of Market
Deposit
I m a g e 8.1: M o n e y M a r k e t i n i n di a
Commercial Paper » All-India Financial Institutions (FIs):

• Commercial Paper (CP) is a short-term • These can be issued for maturities
unsecured money market instrument between a minimum of 7 days and a
issued in the form of a promissory note maximum of up to one year from the
(legal instrument). date of issue.
• In India, it was introduced in 1990 to • These can be issued in denominations of
enable highly rated corporate borrowers Rs.5 lakh or multiples thereof.
to diversify their short-term sources of
borrowings and to provide an additional
instrument to investors. Commercial Bill
• Commercial Paper can be issued by: • It is unsecured security issued by one
merchant firm to another against a credit
» Corporates (whose tangible net worth is transaction.
not less than Rs. 4 crores)
• These are issued at a discount (investors
» Primary Dealers (PDs) and pay a price lower than the face value).
103
• Its maturity ranges between 14 days to 1 • Its objective is to provide liquidity to
year. banks.
• It is a source of working capital finance • The interest rate charged on such
for small corporations. transactions is called ‘call money rate’
• For example: Suppose there are two firms and is based on market demand.
A and B. Firm B needs to buy raw material • It is a very competitive market that
from A worth Rs. 1 Lakh. But firm B does reflects the liquidity position of banks.
not have the money to buy raw material.
So firm B will issue a commercial bill to Average Daily
Firm A as per the guideline of RBI. Firm A Banks Cash Available
Withdrawal
will give the raw material of less than Rs.
1 Lakh. Firm B is liable to pay Firm A. ICICI 50 Lakh 1 Crore
SBI 1 Crore 2 Crore

Certificate of Deposit
• It is the bond/security issued by a bank to • For example, If a person comes and
the depositor of the fund. withdraws 90 Lakh from ICICI, it cannot
give withdrawal to other customers on
• It is an agreement to deposit money for a that day. So ICICI will borrow some huge
fixed period of time with a bank that will amounts from SBI and may return in 2- 3
pay interest. days (should not take more than 14 days).
• Certificates of Deposit are issued in The interest may vary from bank to bank.
multiples of Rs. 1 lakh subject to a
minimum value of Rs. 25 lakh.
Government Security (G-Sec)
• These are issued at a discount.
• Certificate of Deposit are similar to fixed • Government Security (G-Sec) is a tradable
deposits but are negotiable and tradable instrument issued by the Government of
in the money market. India or the State Governments.
• These can be issued by: • It acknowledges the debt obligation of

Government.
» Scheduled commercial banks {except • Such government securities are either
Regional Rural Banks and Local Area short term (generally called treasury bills,
Banks}. with maturities of less than 1 year) or
long term (generally called Government
» Selected All-India Financial Institutions bonds or dated securities with an original
(FIs) which are permitted by RBI.
maturity of one year or more).
• These can also be issued to Non-Resident • G-Secs have practically no risk of default
Indians (NRI). and, therefore, are called risk-free gilt-
edged instruments.
• Short term government securities are:
Call Money Market Treasury Bills (T-bills)
• It deals with day-to-day lending and • Treasury bills or T-bills are short term debt
borrowing transactions of banks amongst instruments issued by the Government of
themselves. India and are presently issued in three
• It deals in very short loans that have maturity periods of 91 days, 182 days, and
maturity ranging between 2 - 14 days. 364 days.
104
• Treasury bills are zero-coupon securities the market segments like treasury bills,
as it does not carry any interest. Rather, call money market etc.
these are issued at a discounted value • In 2004, RBI transferred its total holding
and redeemed at the face value at the to SBI Giltz Limited. Its new name is SBI
time of maturity. DFHI.
• For example, a 182-day Treasury bill of
₹1000/- (face value) may be issued at
say ₹ 998.20, that is, at a discount of say, LIBOR (London Interbank Offered
₹1.80 and would be redeemed at the face Rate)
value of ₹1000/-
• It is the interest rate at which major
global banks lend to one another in the
Cash Management Bills (CMBs) international interbank market for short-
term loans.
• In 2010, the Government of India, in
consultation with the RBI introduced • LIBOR is administered by the
a new short-term instrument Cash Intercontinental Exchange or ICE.
Management Bills (CMBs), to fulfill the • It is computed for five currencies Swiss
temporary cash flow mismatches of the franc, euro, pound sterling, Japanese yen,
Government of India. and US dollar.
• The Cash Management Bills have the
generic character of T-bills but are issued
for maturities less than 91 days. MIBOR and MIBID
• Mumbai Interbank Offer Rate (MIBOR)
and Mumbai Interbank Bid Rate (MIBID)
Repo (Ready Forward Contract) are the benchmark rates at which Indian
• Repo allows the bank and other financial banks lend to each other.
institutions to borrow money from the • These rates reflect the short-term funding
RBI for the short term. costs of major banks.
• The interest rate at which the Reserve • Mumbai Interbank Offer Rate (MIBOR)
Bank of India (RBI) gives short term loans is the interest rate at which banks are
to commercial banks is called the Repo willing to offer loans to other banks and
Rate. MIBID is the rate at which banks would
like to borrow from other banks.
Discount and Finance House of
India (DFHI) Hundi
• DFHI was set up by RBI in 1998 to • Hundi is an unconditional writing order
strengthen the money market and provide made by a person which directs another
liquidity to money market instruments. person to pay a certain amount of money
• It was established based on the to a person mentioned in the order.
recommendation of the Vaghul • Hundis, being a part of the informal
Committee. system have no legal status and are
• The main objective of DFHI is to develop not covered under the Negotiable
an active secondary market for the Instruments Act, 1881.
money market instruments.
• DFHI participates in transactions in all
105
Capital Market which company can raise the capital
from primary market:
• Capital Market refers to the market where

long-term capital is raised via both debt Initial Public Offer (IPO)
and equity instruments such as equity
share, preference share, debenture, etc. • Initial Public Offer is the process of
offering its new securities to the public/
• The demand for long term capital comes investor for the first time through the
from both the government and the issue of prospectus.
private sector.
• It is issued only by the unlisted company
• Every Capital Market has two (a company whose shares are not traded
complementary market: on a stock exchange).
» Primary Market:
Follow on Public Offer (FPO)
− Deals with the issuance and sale of
the instrument of capital market to • Follow on Public Offer (FPO) refers to the
investors directly by the issuer. process where already listed company
offers its securities to the public/investor
− When a company or corporate entity to an offer for sale.
issues stock or bonds for the first time
and sells that securities directly to the • A follow-on offering is the issuance of
investors, that transaction occurs on additional shares made by a company
the primary market. after an initial public offering (IPO).
• It is also called as the secondary offering.
» Secondary Market:
− The market where instruments of Right Issue
the capital market are being traded
among the primary instrument • A listed company offers its new securities
holders. only to the existing shareholders in
− In the secondary market, all the proportion to their existing shareholding.
transactions occur between various • In the Right Issue, shares are issued at a
investors, and the proceeds of each discount.
sale go to the selling investor, not to
the company that issued the stock.
It means company is not directly Referential Issue
involved in the transactions of
secondary market.
• Under this, a listed company offers its
new securities only to a selected class of
− Such transactions need a platform for shareholders.
their trading, stock exchange provides
the platform for the secondary
market. Bonus Issue
• Bonus shares or issues are additional
shares given to the existing shareholders
Means of raising fund in the without any additional cost, in the
primary market proportion of their shareholding in lieu of
distribution of dividend.
• Following are the different ways through
106
Private Placement Over the Counter Exchange
• Raising capital by selling the share to a (OTC)
select group of investors, or individual.
• Over the Counter Exchange refers to the
• The advantage of the private placement process in which securities are traded
is saving in marketing expenses. by companies which are not listed on a
• Under this, number of investors who are formal exchange markets like NSE, BSE
issued shares cannot be more than 50. etc.
• Securities that are traded over the
counter are traded via a broker-dealer
Sweat Equity network as opposed to on a centralized
• Under this, the share is allotted to top exchange market.
management like directors of a company • These securities are qualified for listing
at a highly discounted price in recognition on a standard market exchange
of their outstanding contribution. • Over the Counter Exchange of India
Limited was established in 1999. It
facilitates trade-in companies having
Secondary market paid-up capital of Rs. 30 Lakh or more.
as a trading
instrument Stock Exchanges in
• Secondary market is used as a trading
India
instrument in the following ways:
• Major stock exchanges in India are:
Stock Exchange Bombay Stock Exchange (BSE)

• A physical institutional set-up where • Bombay Stock Exchange (BSE) was
capital market instruments (shares,
established in 1875 and is the oldest stock
debenture, etc.) are traded.
exchange in Asia.
• It performs the following major functions: • On August 31, 1957, the Bombay Stock
» Efficient price discovery: A stock Exchange became the first stock
exchange determines the process of exchange to be recognized by the
price discovery via constant valuation of Indian Government under the Securities
all the securities. Contracts Regulation Act.
» Liquidity: Stock Market ensures high • Around 5500 companies are listed on
liquidity. The securities can be sold at a BSE, the largest number of companies
short notice and be converted to cash. listed in the world (but not the largest
stock exchange in the world).
» Investor Protection: The government
regulates stock exchanges. This provides • It introduced BOLT (BSE online trading
the investor with assurances to transact system) in 1995 to promote transparency
in securities. and eliminate any errors.
• Presently, there are four Indices
connected with BSE:
107
» Sensex: Sensex is the stock market index • NSE was established on the basis of
of 30 well established and financially the recommendation of “Phirwani
sound companies listed in Bombay Stock Committee” as the most modern stock
Exchange. exchange of the country.
» BSE 100: An index of 100 stocks. • National Stock Exchange is ranked as
» BSE 500: This index represents major the largest stock exchange in India in
industries and many sub-sectors of the terms of total and average daily turnover
economy. for equity shares.
» BSE 200: This is the 200-stock share • Presently, there are two Indices connected
index of the BSE. with NSE:
National Stock Exchange (NSE) » S&P CNX 50 (Nifty Fifty)
• NSE was established in 1992 and started » S&P CNX 500

trading in 1994.
Stock Exchange and Indices

Stock Exchange Indices
New York Stock Exchange Dow Jones
NASDAQ NASDAQ Index
National Stock Exchange (NSE) NIFTY
Korean Stock Exchange Kospi
Shanghai Stock Exchange Composite Index
Bombay Stock Exchange (BSE) Sensex
London Stock Exchange FTSE-100
Hongkong Stock Exchange Hang Seng Index
Singapore Stock Exchange Straits Times Index
Tokyo Stock Exchange Nikkei
108
Important Terms of Stag
• It refers to a speculator who purchases
Stock Exchange security from the primary market like IPO
for selling them in the secondary market.
Bear and Bull
• Bull market is a market which is on
upward trends. It is a sustained increase Buyback of Share
in market share prices and subsequent
returns on each share. In such times, • Under Buyback, a company purchases its
investors often believe that the uptrend own shares from the investor.
will continue over the long term and • It reduces the number of outstanding
investors infuse more money for better shares of the company.
returns. • It increases the dividend per share.
• Bear market is a market that is on the
decline. Share prices are continuously
falling, resulting in a downward trend. In Short Selling
such scenario investors tend to withdraw
their money to reduce their losses. This • Under this, an investor sells security which
causes fall in share market trends. is not possessed by him/her, but such an
investor has to purchase that security
within a specified period of time.
Speculation • Short sellers gain with fall in the price of
a security.
• Speculation refers to buying a commodity/
currency/security with the intention of
selling it in the near future at a higher Insider Trading
price to make a profit.
• Here the sole intention is just to sell when • It refers to buying or selling shares of a
company on the basis of unpublished
the price goes up and not to purchase.
price sensitive information.
• Moderate speculation is good as it checks
prices from going up.
• It is a criminal offense.
Arbitrage Algorithm Trading

• It refers to buying a commodity/security • Under this, securities are traded on
the basis of inference from advanced
from a cheaper market and selling it
mathematical models.
immediately in another market at higher
prices. • Algorithmic trading makes use of
complex formulae, combined with
• Arbitrage is a trade that generate profits
mathematical models and human
by exploiting the price differences of
oversight. Such algorithm trading is used
identical or similar financial instruments
to make decisions to buy or sell financial
available on different markets or in
securities on an exchange.
different forms.
• Arbitrage exists because of market • It can be used in a wide range of situations
like order execution, arbitrage etc.
inefficiencies and would therefore not
exist if all markets were perfectly efficient. • Concerns: Algo trades have been
109
criticized for exaggerating market market, particularly in the Stock
patterns and causing flash crashes. A Exchange.
programming flaw or a trader's mistake » To promote investor education and
may cause stock prices to fluctuate wildly, awareness.
potentially collapsing the economy.
» To protect the interest of the investor.
• SEBI approves Algo programmes before
they can be used on any of the Indian
exchanges, and stock exchanges must
assign each approved algorithm a unique
identifier and ensure that each order is Capital Market
marked with it.
• Recently, SEBI has put in place new
Reforms
framework on order-to-trade ratio (OTR) • The stock exchange scam of 1992
of algo orders issued by stockbrokers. (Harshad Mehta) and Ketan Parekh
Under the scheme, stock exchanges may scam in 2000 led to various measures to
be allowed to introduce additional slabs protect the interest of the investor.
up to an OTR of 2,000 (from the current
OTR of 500), and for OTR more than
2,000, such slabs can be announced with Circuit Breakers
deterrent incremental penalty, which
stock exchanges may decide jointly. It • It is a mechanism under which trading in
has also suggested tighter oversight a stock exchange is halted for a specified
of these trades to ensure the market's period of time, in case of deviation in the
smooth operation. index of Stock Exchange (or share price)
beyond a certain limit.
Stock Exchange Dematerialization/Demat

Regulator Trading
SEBI (Security Exchange Board • Under this, computer records of a Stock
Exchange are maintained instead of
of India): issuing shares/security certificate in the
• Initially SEBI was constituted in 1988 as physical form.
a non-statutory body to deal with all • At present, two public sector depositories
the matters relating to regulation and are functioning in India:
development of the capital market.
• It was granted statutory status under the » NSDL (National Securities Depositories
SEBI Act 1992. Limited)
• Functions of SEBI are: » CDSL (Central Depositories Services

Limited)
» Regulation of Capital Market (both in the
primary and secondary markets).
» To register and regulate intermediaries Depository Participants (DP)
in the capital market like brokers, sub- • These are agents of depositories that
brokers, trustees, underwriters, mutual provide demand service/online security
funds. trading services to the investors.
» To check malpractices in the securities'
110
• Example: India Infoline, ICICI Direct, Axis • The 1st stock exchange to be corporatized
Direct etc. and demutualized in India was BSE in
2005.
Rolling Settlement » Ownership = Shareholder

» Management = Directors (Board of
• Badla System: Under this, a spot market Directors)
transaction in a stock exchange could be
postponed by the buyers. It leads to over » Brokerage = Open to all
speculation and defaults in the stock
exchange transaction. So, it was replaced
by rolling settlement. Investor Protection and
• Under Rolling Settlement, a spot market Education Fund (IPEF)
transaction in the stock market must be
completed within a specified period i.e.,
• It was established in 2001 by SEBI and
the central government for promoting
settlement period cannot be shifted.
investor’s awareness and to protect the
• It is on the basis of the T+2 system (T= interest of investors, especially small
transaction day; T+2= transaction day + investors.
2 working day).
Introduction of Forward/
Corporatization Derivative Trading
• Historically, the stock exchange was
• To enable investors to hedge (using
formed as a mutual organization i.e.,
financial instruments to offset the risk of
formed by trading members themselves
any adverse price movements) market
for their common benefits.
risks.
• They mainly focus on the interest of
members instead of investors. The
Government of India introduced
corporatization of stock exchange, by Derivative Trading
which ownership, management and
trading membership of stock exchange • Derivative Trading refers to contracts/
would be separated from each other. transactions of a forward contract.
• Objectives of corporatization of stock Derivative

exchange:
• It is a financial instrument whose value
» To reduce the scope of manipulation by is derived from the value of one or more
brokers. underlying assets which can be precious
metals, commodities, currency, bonds,
» To enable the stock exchange to raise stocks indices, stocks etc.
funds from the public through IPO
modernization. • Following are the four most common
examples of derivative instruments:
Futures, Forwards, Options and Swaps.
Demutualization
• It refers to separation of ownership, Forward Market
Management, and brokerage rights in
the stock exchange. • In this market, contracts are made to
111
buy/sell a financial instrument at a exposed to counterparty risk.
predetermined price and date (i.e., in » Each contract is custom designed and
future). thus is unique in terms of contract size,
expiration date, and the asset quality
MARKET and type.
» The contract is settled by delivering of
SPOT MARKETF ORWARD MARKET
the asset on the expiration date.
• Benefits of forward are:

FORWARD OPTIONS
» It tends to stabilize the prevailing spot
Market Prices, as it provides future
FUTURE SWAP
reference price.
» It enables farmers, producers, exporters
CALL OPTION PUT OPTION to hedge marketing risk.
I m a g e 8.2: D e r i vati v e T r a di n g
Future
Forward • These are exchange-traded contracts
• A forward is a mutual/bilateral contract to sell or buy financial instruments or
between two parties, where settlement physical commodities in the future at the
takes place on a specific date in the pre-determined price.
future at a price agreed today. • In Future contracts, there is an agreement
• Following are the key features of forward to buy or sell a specified quantity of
contracts: financial instruments commodity in
a designated future month at a price
» These are bilateral contracts and thus agreed upon by the buyer and seller.
Difference of Forward vs Future
Basis Futures Forward
Nature Traded on an organized exchange Over the Counter
Contract Terms Standardized Customized
Liquidity More liquid Less liquid
Settlement Follows daily settlement At the end of the period.
Margin Payments Requires margin payments Not required
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Options » MCX (Multi Commodity Exchange):
Largest Exchange in India
• These are standardized exchange-traded » NCDEX (National Commodities and
contracts that provide options/rights (not
Derivative Exchange)
the obligation) to an investor to sell and
buy a commodity at a predetermined » NMCE (National Multi-Commodity
date and rate in the future against the Exchange)
payment of options premium. » ICE (Indian Commodity Exchange
• There are two types of options: A call Limited)
option provides the holder the right to » UCX (Universal Commodity Exchange)
buy a stock and a put option provides the
holder the right to sell a particular stock.
» ACE Derivatives & Commodity Exchange
Ltd. (ACE)
» Call Option: option to buy
» Put Option: option to sell
Spot Market
• In this market, trading is done at the
Swaps prevailing price and transactions are
• These are bilateral contracts to exchange done on the spot.
a commodity/security with another at a
predetermined date and rate.
• These instruments can be anything, but Spot Exchanges in India
most of the swaps include cash, based on • Spot Exchanges refer to electronic trading
a notional principal amount. platforms which facilitate purchase and
• Swaps are primarily over-the-counter sale of specified commodities, including
contracts between companies or agricultural commodities, metals,
financial institutions. and bullion by providing spot delivery
contracts (provides for the delivery of
goods and the payment of the price) in
Commodity these commodities.

• There are four-spot exchanges currently
Exchanges in India operating in the country. These exchanges
are:
• Commodity Exchange provides a
platform for trading in commodities. » National Spot Exchange Ltd (NSEL):
Largest spot exchange in India
• It determines and enforces rules and
procedures for trading standardized » NCDEX Spot Exchange Limited
commodity contracts and related » Reliance Spot Exchange Limited
investment products. » Indian Bullion Spot Exchange Limited
• Commodity Exchange was first regulated
by Forward Market Commission (FMC) • Advantage of Spot Exchange:
but with the merger of FMC with SEBI in
2015 it is now regulated by SEBI. » Creates a National Market
• Commodity Exchange in India are as » Shows overall demand-supply of
follow: commodity
» Eliminates Middleman
113
Depository Receipt Indian Depository Receipts
(IDR)
• It is a financial instrument representing • If Depository Receipts are issued in India
certain securities (e.g., shares, bonds, etc.) on the basis of the securities/shares of
issued by a company/entity in a foreign the foreign company.
jurisdiction.
• Standard Chartered issued the first IDR
• DR constitutes an important mechanism in India.
through which issuers can raise funds
outside their home jurisdiction.
• DR is issued for tapping foreign investors
who otherwise may not be able to
Participatory Note
participate directly in the domestic
market.
(PN, P-note)
• Securities of a company are deposited • P-Notes are instruments used by foreign
with a domestic custodian in the investors not registered with the SEBI to
company’s domestic jurisdiction, and invest in Indian securities market.
a corresponding “depository receipt” is • These unregistered foreign investors may
issued in foreign, which can be purchased invest in equity, debt, derivatives or may
by foreign investors. even be an index.
• For investors, DRs are the method to • As foreign investors are not required to
diversify the risks, by getting exposure register with SEBI, the P-notes gained
to a foreign market, but without the popularity like FIIs. This allows the
exchange rate risk as they are foreign investors to remain anonymous and
currency denominated. Further, they feel speculate on Indian stock markets.
safer to invest from their home location.
• PN is also called as Equity Linked
• Depending on the location where these Notes, Overseas Derivative Instruments,
receipts are issued the Depository Participating Return Notes and Capped
Receipt (DR) are classified as: Return Notes, etc.
• The investor in P-notes does not own the
underlying Indian security, which is held
American Depository Receipts by the FII (Foreign Institutional Investor)
(ADRs)/Global Depository who issues the PN.
Receipt (GDR) • Thus, the investors in PN gains the
• If the Depository Receipts are issued economic benefits by investing in the
outside India on the basis of the shares/ securities without actually holding them.
securities of the domestic (say Indian) They get benefited due to fluctuations in
company, it is ADR. the price of the underlying security as the
value of the PN is linked with the value of
• Hence, ADR or GDR are issued outside the underlying Indian security.
India by a foreign depository on the
back of Indian security deposited with a • The P-Notes holders also does not have
domestic Indian custodian (SEBI) in India. any voting rights in relation to security/
shares.
• In India, any company, whether public
limited or private limited or listed or • One of the key reasons for the emergence
unlisted, can issue DR. of an Off-shore Derivative market is
the restrictions on foreign investments
114
like capital account convertibility, entry
barrier etc. Financial Sector
• Advantages of PN are: Legislative Reforms
» Reduces transactions cost Commission
» Lower financing costs
» Enhance portfolio yields • Financial Sector Legislative Reforms
Commission (FSLRC) was established
by the Government of India as per the
announcement made in Union Budget
Concerns raised related to 2010-11, to help to rewrite and to harmonize
Participatory Notes the financial sector legislation, rules, and
regulations to address the contemporary
• Participatory notes are derivative
requirements of the sector.
instruments and are also freely tradable,
these can be easily transferred to other • The Commission was chaired by retired
entity, which creates multiple layers, Supreme Court Judge B. N. Srikrishna
which makes the process complex to and included ten members with expertise
identify the real owner. Because of from the fields of economics, finance,
these concerns about the identity of the law, and other relevant fields.
ultimate beneficial owner and the source • The recommendations of the Commission
of funds arise. can be divided into two parts:
• As these are issued outside of India, SEBI
does not have full control over them. » Legislative aspects
• It is also alleged that most of the money » Non-legislative aspects.
invested through P-Notes is unaccounted
money or black money. P-Notes are also
• The legislative aspects deal with
revamping the legislative framework of
used for money laundering purposes
the financial sector regulatory system
which converts the black money into
by a non- sectoral, principle-based
white money.
approach and by restructuring existing
• SEBI has been successful in taking action regulatory bodies and setting up new
against FIIs who are non-compliant and bodies wherever needed.
those who have misreported offshore
derivatives.
• For this, the Commission has
recommended a seven-agency regulatory
• SEBI has made it mandatory from architecture, namely, Reserve Bank of
January 2011 that all FIIs have had to India, Financial Sector Appellate Tribunal,
follow KYC norms and submit details of Unified Financial Agency, Resolution
transactions including P-Notes. Corporation, Financial Redress Agency,
• In 2014, SEBI has made it mandatory for Financial Stability and Development
those FPIs issuing P-Notes to submit a Council and Public Debt Management
monthly Report disclosing their portfolios. Agency in the Draft law- Indian Financial
Code to replace a number of existing laws.
• The non-legislative aspects of the
FSLRC recommendations are broadly
in the nature of governance enhancing
principles for enhanced consumer
protection, greater transparency in the
functioning of financial sector regulators.
115
FSLRC’s regulatory architecture
Present Proposed Functions
Monetary policy; regulation and

supervision of banks; regulation
RBI RBI
and supervision of payments
system.
Regulation and supervision of all

SEBI, FMC, IRDA, PFRDA United Financial Agency (UFA) non-bank and payments related
markets.
Securities Appellate Tribunal Hear appeals against RBI, the

FSAT
(SAT) UFA and FRA.
Deposit Insurance and Credit Resolution work across the entire

Resolution Corporation
Guarantee Corporation (DICGC) financial system.
Financial Stability Development Statutory agency for systemic

FSDC
Council (FSDC) risk and development.
An independent debt
Debt Management Agency
management agency.
New entities
Financial Redressal Agency (FRA) Consumer complaints.
116
Financial Stability and Development Council (FSDC)
• FSDC was established on the recommendation of G-20 in 2010.
• The mandate of FSDC Council:
» To monitor macro-prudential supervision of the economy, along with the functioning
of large financial conglomerates.
» It will also address inter-regulatory coordination issues and hence spur the financial
sector development.
» It will also focus on financial inclusion and financial literacy.
• The Chairman of the FSDC is the Finance Minister of India.
• Members include the
» Heads of the financial sector regulatory bodies (i.e., SEBI, IRDA, RBI, PFRDA and
IBBI)
» Finance Secretary
» Secretary, (Department of Financial Services, Ministry of Finance)
» Secretary, Department of Economic Affairs (Ministry of Finance)
» Chief Economic Adviser
• A sub-committee of FSDC has also been constituted under the chairmanship of
Governor RBI.
• Sub-Committee discusses and decides on a range of issues relating to financial
sector development and stability including substantive issues relating to inter-
regulatory coordination.
» Fragmented jurisdiction in public debt

Public management: RBI manages the market
Debt Management borrowing programs of Central and

State Governments. But external debt
Agency (PDMA) was managed directly by the Central
Government. A centralized debt
management agency would consolidate
• Public Debt Management Agency (PDMA) all debt management functions in a
is a specialized autonomous independent unified body which will make holistic
body that manages both the internal management of the internal and external
and external liabilities of the Indian liabilities.
Government in a holistic manner and
advises on such matters in return for a fee. » Most advanced economies have
dedicated debt management agencies
• The agency was proposed to be and thus it is an internationally accepted
established in India through the Finance best practice. Hence, debt management
Bill, 2015. should be disaggregated from monetary
• But PDMA was not established due to the policy and taken out of the realm of the
differences of opinion on the matter and central bank.
the relevant clauses were dropped from » It was recommended by various
the Finance Bill, 2015. committees like the Percy Mistry
• Argument in favor of PDMA: committee, Raghurajan committee and
117
FSLRC. inflation target of 4%, with a tolerance
» There is a conflict of interest between band of +/- 2 percentage points for
setting the short-term interest rates using the Monetary Policy Committee of
various tools of monetary policy and the RBI for the coming five years.
selling the government bonds. If the RBI
» Instrument autonomy
tries to be an effective debt manager, it
will sell bonds at very high prices, which − Use of instrument of monetary policy.
will lower the interest rate. This leads to For example, Repo Rate etc.
an inflationary bias in monetary policy.
− In general, this is the autonomy of
the RBI. Due to political factors, the
government cannot do this work.
Argument against PDMA:
• The scope of conflict of interest has
significantly reduced as FRBM 2003 Argument in favor of RBI
has prohibited RBI from involving in the autonomy
primary auctions of the government
securities (as it would lead to printing • Expertise and professionalism in
money). decision making would reduce political
• The RBI has been handling multiple interference.
tasks very efficiently. It has ensured • Monetary stability is essential for the
transparency in managing public debt efficient functioning of the economic
in a cost-effective manner (low cost of system which can be achieved if a
raising funds for the government). professional central bank with a long-
• The function of debt management lies term perspective is given charge.
at the crossroad of fiscal and monetary
policies, so it requires some coordinated
approach. Argument against RBI
• Some countries like Denmark and Iceland autonomy
have reverted the debt management
• The RBI lacks political legitimacy.
function back to the central bank.
• It may lead to political friction between
the government and the central bank
RBI Autonomy affecting the coordination between fiscal

and monetary policies.
• Constitutionally, RBI is not autonomous • Full autonomy of RBI is not desirable as

but practically the government has given accountability would be compromised.
it significantly autonomy/conventional
autonomy.
• Aspect of autonomy: Venture Capital
» Objective Autonomy • These are investment funds that manage
the money of investors who seek private
− To fix goals of inflation/GDP growth. equity stakes in startups and small-
− The inflation target is set by the to medium-sized enterprises which
government and RBI has to maintain have strong growth potential in the
inflation in the target. Ex: Recently future. These investments are usually
government has decided to retain the characterized as high-risk/high-return
118
opportunities. investors who are going to invest in
• It is a type of equity financing that gives the company.
entrepreneurial or other small companies
the ability to raise funds.
• Venture capital seeks to invest in firms External
that have high-risk/high-return profiles,
based on a company's size, assets, and
Commercial
stage of product development. Borrowing (ECB)
• The money provided by VCF is termed as
Venture Capital. • In India, an external commercial
• In India, the VCF is regulated by the SEBI. borrowing (ECB) is an instrument used
to facilitate Indian companies or big
corporates to raise money outside the
Angel funds
country in foreign currency.
• External Commercial Borrowing is
fundamentally a loan availed by an
• Angel funds is a money pool created by Indian company from a non-resident
high-net-worth individuals or companies
foreign lender.
(generally called angel investors), for
investing in business start-ups. • Most of the ECBs are raised by companies
through foreign commercial banks and
• They are a subcategory of venture capital other institutions.
funds with a special focus on startups,
whereas venture capitalists generally • Indian corporations can raise money via
invest at a later stage of development of ECB for expansion of existing capacity as
the company. well as for fresh investments.
• Angel funds can raise funds only by • ECB can be availed either by automatic
issuing of units to angel investors which route or by approval route.
should have a corpus of at least hundred
million rupees. » Automatic route: If a company passes
all the prescribed norms specified by the
• In India, Angel Funds are defined under government, it can raise money without
SEBI (Alternative Investment Funds) any prior approval.
(Amendment) Regulations, 2013.
» Approval route: For specific sectors, the
• Under this regulation, Angel fund is borrowers have to take the permission
defined as a sub-category of Venture of the government before borrowing
Capital Fund under Category I- through ECB.
Alternative Investment Fund (AIF) that
raises funds from angel investors. • Advantage of ECB are as follow:
• Angel funds can make investments only
in investee companies that:
» ECB provides an opportunity to borrow a
large volume of funds for long term.
i. Are incorporated in India and should
not be more than 3 years old. » The cost of funds is usually cheaper if
borrowed from economies with a lower
ii. Have a turnover not exceeding Rs. rate of interest.
25 crore.
» ECB allows the borrower to diversify the
iii. Are unlisted. investor base.
iv. Has no family connection with the
119
Terms Employee Stock Ownership
Plan (ESOP)
Mutual Fund
• It is an employee benefit plan which
• It is a professionally managed trust provides workers ownership interest in
that collects money from a number of the company.
investors to invest in securities like bonds, • Under this, the employer gives certain
stocks, money market instruments, and stocks of the company to the employee
other assets. for negligible or less costs.
• A mutual fund is operated by a group of • These plans are aimed at improving the
qualified persons who form a company, company’s performance and increasing
called as asset management company the value of the shares by involving
(AMC) and the operations of the AMC stockholders, who are also the employees.
are under the guidance of another group
of people, called trustees.
• In India Mutual funds are regulated by Debenture
the Securities and Exchange Board of
India (SEBI). • Debentures are a debt instruments used
by companies and the government to
issue the loan.
Exchange-Traded Fund (ETF) • Debentures are issued to raise capital
to meet the expenses of an upcoming
• An exchange-traded fund (ETF) is a type project or to pay for a planned expansion
of security that involves a collection of in business.
securities (stocks, commodities, etc.) and
often tracks an underlying index such as • The important features of debentures
a stock index or bond index. are as follows:
• Exchange Traded Funds are in many » A debenture is redeemed after a fixed
ways similar to mutual funds; however, period of time.
they are listed on stock exchanges and
ETF shares trade throughout the day just » Debentures may be either secured or
like an ordinary share. unsecured.
» Debenture holders do not have any
voting rights.
Greenshoe Option
• A greenshoe option is an over-allotment
option. UPSC CSE PRELIMS
• Under this, company can issue shares for Previous Years
the first time (IPO) is allowed to sell some
additional shares to the public. Questions
• Greenshoe Option gets its name from Q.1) What does venture capital mean?
USA Green Shoe Company which was 2014
allowed such an option.
(a) A short-term capital provided to
industries
(b) A long-term start-up capital provided
to new entrepreneurs
120
(c) Funds provided to industries at times • The new body envisages to strengthen
of incurring losses and institutionalize the mechanism of
(d) Funds provided for replacement and maintaining financial stability, financial
renovation of industries sector development, inter-regulatory
coordination along with monitoring
Ans. (b) macro-prudential regulation of the
• Explanation: Venture capital is financing economy.
that investors provide to startup • No funds are separately allocated to the
companies and small businesses that council for undertaking its activities.
are believed to have long-term growth
potential.
• Venture capital generally comes from Q.3) Which of the following is issued by
well-off investors, investment banks and registered foreign portfolio investors
other financial institutions. to overseas investors who want to be
part of the Indian stock market without
registering themselves directly? 2019
Q.2) With reference to ‘Financial Stability (a) Certificate of Deposit
and Development Council’, consider the
following statements: 2016 (b) Commercial Paper
1. It is an organ of NITI Aayog. (c) Promissory Note
2. It is headed by the Union Finance (d) Participatory Note
Minister. Ans. (d)
3. It monitors the macro-prudential • Explanation: P-Notes or Participatory
supervision of the economy. Notes are Overseas Derivative
Which of the statements given above is/ Instruments that have Indian stocks as
are correct? their underlying assets.
(a) 1 and 2 only • They allow foreign investors to buy stocks
(b) 3 Only listed on Indian exchanges through FIIs
without being registered.
(c) 2 and 3 only
(d) 1, 2 and 3
Q.4) With reference to the Indian economy,
Ans. (c) consider the following statements: 2020
• Explanation: Financial Stability and 1. 'Commercial Paper' is a short-term
Development Council (FSDC) is an unsecured promissory note.
apex-level body constituted by the 2. 'Certificate of Deposit' is a long-term
government of India and the chairman instrument issued by the Reserve Bank
of the council is the Finance Minister. of India to a corporation.
• The idea to create such a super-regulatory 3. 'Call Money' is a short-term finance
body was first mooted by Raghuram used for interbank transactions.
Rajan Committee in 2008.
4. 'Zero-Coupon Bonds are the interest-
• Finally, in 2010, the then Finance Minister bearing short-term bond issued by
of India, Pranab Mukherjee, decided to the Scheduled Commercial Banks to
set up such an autonomous body dealing corporations.
with macroprudential and financial
regularities in the entire financial sector
are correct?
of India.
121
(a) 1 and 2 only are issued at a discount and redeemed
(b) 4 only at par. No interest payment is made on
such type of bonds at periodic intervals
(c) 1 and 3 only before maturity.
(d) 2, 3 and 4 only
Ans. (c) Q.5) In the context of the Indian economy,
non-financial debt includes which of the
• Explanation: Statement 1 is correct:
following? 2020
Commercial Paper (CP) is a short- term
unsecured money market tool issued 1. Housing loans owed by households
in the form of a promissory note. This 2. Amounts outstanding on credit cards
can be issued for maturities between a
minimum of seven days and a maximum 3. Treasury bills
of up to one year from the date of issue. Select the correct answer using the code
given below:
• Statement 2 is not correct: Certificate of
Deposit (CD) is a negotiable money market (a) 1 only
tool, and it is issued in dematerialized (b) 1 and 2 only
form against funds deposited at a bank
or other eligible financial institution for a (c) 3 only
specified period of time. It is issued by the (d) 1, 2 and 3
Federal Deposit Insurance Corporation Ans. (d)
(FDIC) and regulated by the Reserve
Bank of India (RBI), the CD is a promissory Explanation: Non-financial debt comprises
note, the interest on which is paid by the credit instruments issued by governmental
financial institution. entities, households and businesses that are
not incorporated in the financial sector. (The
• Statement 3 is correct: In Call money financial sector includes commercial banks,
rate, short term funds are borrowed and non-banking financial companies (NBFC),
lent in the money market between banks cooperatives, pension funds, insurance
on a day-to-day basis. Banks resort to companies, mutual funds, and other smaller
this kind of loan to fill the asset liability financial entities). Non-financial debt
mismatch, comply with the statutory comprises household or commercial loans,
CRR and SLR obligations and to meet credit card balances and Treasury bills.
the sudden requirement of funds. They share most of the same features with
• Statement 4 is correct: Bonds are a form financial debt, except the issuers are non-
of debt instrument. Zero Coupon Bonds financial.
122
CHAPTER - 9
TAXATION
• A tax is a compulsory financial payment for most governments and works as a

imposed upon a taxpayer (an individual tool for income distribution.
or legal entity) by a government in order • For Example: Suppose a Government
to fund various public expenditures. imposes a rate of income tax i.e., 20%.
• Taxes are the primary source of revenue
Income disparity Income Disparity

Income after
Person Income between A and B between A and B
paying tax
before tax after tax
A 40,000 32,000
10,000 8,000
B 50,000 40,000
• As shown in the table, the difference

between their income before tax was Rs. Type of Tax
10,000. But after Tax is imposed at 20%
income difference reduced to Rs. 8,000.
Direct Tax
• Hence, the imposition of income tax • A direct tax is paid directly by the
reduces income disparity between both organization or an individual to the
A and B. government.
• It is the type of tax which has incidence
and impact both at the similar point—the
The purposes that taxation serves are: individual who is hit, the same individual
• Resource Allocation: When high taxes bleeds.
are imposed on some industries, • Examples of Direct Tax are income tax,
then resources from the high-taxed poll tax, land tax, and personal property
industries will shift to the low-taxed tax.
industries.
• Income Distribution: It is meant to
lessen inequalities in the distribution Indirect Tax
of income and wealth to enhance the
objective of social equity. • The tax which has incidence and impact
at different points is called as the indirect
• Stabilization: Tackling issues such tax. As, for instance, sales tax, excise duty
as slowdown, inflation, etc. (through etc., are imposed on either the traders or
appropriate fiscal policy). It helps in the producers. However, it is the general
maintaining high employment and consumers who bear the burden of tax.
price stability. Some of the other examples are GST,
Customs duty, service tax and value-
123
added tax. • For example, Suppose you buy Shirt from
• It is normally imposed on a manufacturer an online website priced at Rs. 500. At
or supplier who then passes on the tax to the time of the payment additional tax is
the consumer. imposed on the price of the Shirt.
Direct Tax vs Indirect Tax

Direct Tax Indirect Tax
Direct tax is paid directly by liable person

Indirect tax is paid indirectly to government.
or organization to the government.
Imposed on income or profits. Imposed on goods and services.
The burden to pay the tax directly falls on The burden is shifted to the consumer by
the individual. the manufacturer or service provider.
Indirect Tax does not look at the consumer’s

Direct taxes are levied based on the paying
ability to pay but is the same for everyone
capacity of the individual.
who buys the goods or services.
Direct taxes can be evaded if there Indirect taxes cannot be escaped from as
is an absence of proper collection they are charged automatically on goods
administration. and services.
Direct taxation is example of progressive Indirect taxes is example of regressive

taxation method. taxation method.
Income Tax, Wealth Tax, Corporate Tax GST (Goods and Services Tax), Sales Tax
etc. are the examples of direct taxes. etc. are the examples of indirect taxes.
Method of Taxation above Rs. 5 Lakh is charged 20% Income

tax.
There are three methods of taxation
prevalent in economies:
Tax
Progressive Taxation Rate
• A progressive tax imposes a higher

percentage of tax on people with higher
incomes.
• It means that the more a person’s income,
the higher his rate of tax will be.
Taxable Income
• For example, Income Tax increases with I m a g e 9.1: P r o g r e s s i v e T a x ati o n graph
an increase in personal income. A person
earning below is Rs. 5 Lakh is charged • Progressive Taxation discourages more
5% income tax and the person earning earning by the individual/organization i.e.,
124
poor is rewarded while rich is punished. Proportional Taxation
• The progressive tax system is used with
an aim to help reduce inequality. For
• A proportional tax is a tax where all
taxpayers are taxed at the same rate of
instance, taking lower average levels of
tax, irrespective of their income levels.
tax from low wage earners and taking
more from higher wage earners. • A proportional tax levies the same tax
rate across low, middle, and high-income
• Progressive taxation is the most popular taxpayers.
taxation method in the world.
• Proportional Tax is generally not used as
an independent method of Taxation. It is
used as a complementary method with
Regressive Taxation either progressive or regressive taxation
• In regressive taxation system people method.
with low income are levied with higher
tax rates. On the other had people with
higher income attract low tax rates.
Tax
Rate
Tax
Rate
Taxable Income
I m a g e 9.3: P r o p o r ti o n a l T a x ati o n G r a p h
Taxable Income • It is used as a complementary method

I m a g e 9.2: R e g r e s s i v e T a x ati o n G r a p h because if progressive tax is not
converted into proportional tax it will go
on increasing and similarly regressive tax
• Regressive Taxation can be utilized to will decrease to zero.
promote certain sectors- for increasing • The table shows the change in the tax
production etc. rate in different taxation system.
• There are not any permanent or specific
divisions for such category of taxes. As
a provision of promotion, some specific
sectors might be imposed with regressive Value Added Tax
taxes.
• As for instance, to promote the growth and
(VAT)
development of small-scale businesses, • Value Added Tax (VAT) is a tax collection
once India had regressive excise duty on method (it is also the name of tax) which is
their productions—with growing slabs of imposed on each stage of value addition
volume they produced, the burden of tax on each stage of economic activity.
used to go on reducing.
• Every commodity goes through different
stages of production and distribution
before reaching the consumers. Some
value additions are done at each stage
125
of the production and distribution chain, pass this tax to the consumers. VAT is
for example, a metal tool is more valuable based on a taxpayer's consumption
than metal. rather than their income.
• Since VAT method of tax collection is • It is implemented as a destination-
imposed and collected at a different based tax, as the tax rate is based on
stage of value addition that is why it is the location of the consumer where the
multi-point tax collection. goods and services are consumed.
• It is called as a consumption tax because • VAT is calculated by deducting input tax
the tax is ultimately paid by the final (charged to the customer by a dealer)
consumers. The dealer or producer or from output tax (tax paid by the dealer
manufacturer acts as a link between for purchases).
government and people for paying the VAT = Output Tax - Input Tax
tax to the government, but they ultimately
Stages Firm/ Product Value of Input Value of Output Value VAT Non VAT
of value Producer Tax addition Method
Input Output Tax (Output
addition (10%) Tax- (For
(10%)
Input Tax)
1 Farmer Wheat 10 1 30 3 20 2 3
2 Mill Flour 30 3 40 4 10 1 4
3 Baker Cake 40 4 90 9 50 5 9
4 Retailer Sale 90 9 100 10 10 1 10
Total 170 17 260 26 90 9 26
Above table shows, stages of value addition Hence, VAT does not have the ‘cascading
from farmer to retailer i.e., Wheat → Flour effect’ on the price of goods. It does not
→ Cake → Sale. increase inflation and is, therefore, more
suitable for developing economy like India.
Cost Tax Market Price
Andhra Pradesh 9 4 13
Tamil Nadu 10 1 11
126
Limitation of VAT In the year 2000, the Prime Minister
introduced the concept of GST and set up a
committee to design a GST model for the
• It is highly resource-intensive that it 2000 conuntry
requires computerization to maintain

Announcement by Union Finance Minister,
records of firms in a specified format, during budget of 2006-07 that GST world
centralized record of indirect tax, trained 2006 Introduced from April 2010
officials etc.
• The process of estimation of VAT is quite First Discussion Paper was released by the
complex. 2009
Empowered Committee
Goods and Service

Constitution (115th) Amendment Bill
introduced and subsequeently lapsed
2011
Tax (GST) The Constitution (122nd) Amendment Bill

was introduced in the Lok Sabha
2014
• Goods and Services Tax is the single
unified tax system created by subjugating
The Cosstitution (101st) Amendment
a various Central and State taxes
Aug Act was enacted
presently applicable in India.
2016
• Most of the domestic indirect taxes like
excise tax, service tax, entertainment tax 1st GST Council Meeting
Sep
etc. would be merged into one.
2016
• It is will be levied at different levels like
GST Council Recommends the CGST, SGST,
» Central Government will levy and collect March IGST, UTGST and Compensation Cess Act
2017
Central GST (CGST)
» State Government will levy and collect CGST, IGST, UTGST and Compensation Cess
State GST (SGST) on intra-state supply of April Acts Passed
2017
goods/services.
» Centre Government will levy and collect GST Council Recommends all the rules
Integrated GST (IGST) on inter-state May
2017
supply of goods/services.
• The 101st Constitution Amendment Act 30th June

All State except J&K passed their SGST ACT
in September 2016 added a definition 2017

of GST in Article 366 of the Indian
Constitution by adding a sub-clause 12A. GST Launched
1st
• Since then, the GST Council came into July2017
existence as the Constitutional body to SGST Act passed by J&K; CGST and IGST
decide issues relating to GST. Ordinances promulgated to extend GST to
8th
J&K
• Under GST, firms have to pay taxes on July2017
the basis of their value of output. But the
taxes paid on the input would be offset Amendments to CGST, IGST, UTGST and
1st 1st Compensation to State Acts enacted
(reimbursed) in the form of Input Tax February,
Credit (ITC). 2019
I m a g e 9.4: T i m e line of GST i n i n di a
127
Salient Features of GST as of now, petroleum and petroleum
products do not attract GST and its
• Following are the salient features of implementation will start at a future
Goods and Services Tax: date on the recommendation of the GST
Council.
» GST is a Value Added Tax which provides
for input tax credits and taxes are » Exports would be zero-taxed. The
levied only on the value addition which exporter has an option to either pay the
happened in the process of production of tax for the output and claim the refund or
good/service. export under bond without tax and claim
refund of Input Tax Credit.
» GST would be levied on supply of goods/
services as against the previous system » Import of goods and services are
of levying tax on the sale or manufacture considered as inter-State trade and
of goods or on provision of services. thus, it would attract IGST along with
applicable customs duties.
» GST is a destination-based tax which
means GST would be applicable at the » GST Council would be a joint platform
location where goods and services are where both Centre and states will have
provided as against the previous system representation.
of origin-based tax where tax is levied at » The Union Government cannot impose
the point of consumption. So as per new surcharges on articles which are covered
tax rules, the SGST collected will usually under GST regime.
accrue to the State where the consumer » States will be compensated by the
of various goods or services sold resides Government of India for loss of revenue
and not to the State where the goods are incurred due to implementation of the
produced. GST from July 1, 2017 for a period up to 5
» Central GST and State GST would be years. The compensation will be given in
levied at rates to be mutually agreed the following manner:
upon by the Centre and the States.
− First three years: 100%.
» All goods and services, excluding
alcoholic liquor for human consumption, − Fourth year: 75%.
have already been brought under GST (to − Fifth year: 50%.
bring alcoholic liquor under GST which is
a major source of revenue for the states,
another constitutional amendment Taxes amalgamated in GST
would be necessary).
• Following taxes will be subsumed under
» Crude Petroleum and some petroleum GST which are currently levied by Centre
products have already been and States.
Constitutionally brought under GST. But,
128
Central Taxes Subsumed State Taxes Subsumed
• Central Excise duty • State VAT/Sales Tax

• Additional Excise Duties (Textiles and Textile • Luxury Tax
Products) • Central Sales Tax (levied by the Centre and
• Taxes on the sale or purchase of newspapers collected by the States)
and on advertisements published. • Entry Tax i.e., taxes on the entry of goods into a
• Excise Duty levied under the Medicinal and local area for consumption, use or sale. (other
Toilet Preparations (Excise Duties) Act 1955, than those in lieu of octroi)
• Additional Excise Duties (Goods of Special • Octroi
Importance) • Entertainment Tax not levied by the local
• Special Additional Duty of Customs (SAD) bodies.
• Additional Customs Duty (calledas • Purchase Tax
Countervailing duties or CVD) • Taxes on lotteries, betting, and gambling
• Cess and surcharges on the supply of goods • Taxes on general advertisements
and services
• State cess and surcharges insofar as they relate
• Service Tax. to the supply of goods or services
Advantages of GST 1400000

Advantages for the government 1200000
1000000
• GST will make India a unified common 800000
600000
national market, which will help attract
400000
foreign investment and “Make in India” 200000
campaign. 0
FY 2017-18 FY 2018-19 FY 2019-20
• Harmonization of acts, procedures and (Jul-Mar)
tax rates between Centre and States and
I m a g e 9.5: R e v e n u e C o l l e c ti o n in ₹ CR
across the States.
• Improved tax compliance, as all returns
are to be filed online, input credits to be Advantages to Trade and Industry
verified online, which will create paper
• Reduction in multiplicity of taxes that
trail of transactions at each level of the
existed earlier will lead to simplification
supply chain.
and uniformity in indirect tax regime.
• Greater use of Information Technology • Elimination of double taxation on certain
will reduce human interface between the
sectors such as contracts, software,
taxpayers and the government, which
hospitality sector.
will act as a deterrent for corruption.
• Increased ease of doing business:
• Common registration procedures for Simplified and automated procedures for
taxpayers, refund of taxes, common
various processes such as registration,
tax base, uniform formats of tax return,
returns, refunds, tax payments, etc.
classification of goods and services
under common system will lend greater • Reduction in compliance costs: No
certainty to the taxation system. multiple record-keeping for various
kinds of taxes, thus fewer investment of
129
resources and manpower in maintaining • GST will generate more employment and
records. more financial resources which will help
• A leading logistics corporation recently in poverty eradication.
said that after the implementation of
the E-way bill and GST, heavy transport
vehicles i.e., Trucks are covering around
Advantages to States
10-15% more distance as compared to • GST backed up by strong IT infrastructure
the previous regime. In previous regime, will bring the entire supply chain from
heavy transport vehicles were hovering manufacturing to retail under the ambit
close to around 300-350 km per day, of indirect tax system. This will help
but after the implementation of GST, this states to expand their tax base. More and
distance has improved to 400-410 km more suppliers will opt for GST as non-
per day. registered suppliers would not be able
to claim benefits under input tax credit
system.
Advantages to Consumer
• Earlier, only central government was
• Prices of commodities and goods will empowered to tax services, but under
reduce in the long run due to reduction in GST system states will also levy taxes on
cascading impact of taxation. The year- services. This will also boost revenue and
on-year Consumer price index (CPI) was give States access to the fastest-growing
more than 6% in July 2016, which now sector of the economy.
has decreased to a little over 2 percent in
January 2019.
• Improve the investment climate in
India which will naturally benefit the
• Final prices of goods are expected to be development in the States
transparent due to the seamless flow of
input tax credit among the manufacturers,
• Improved Compliance by the taxpayers
will contribute greatly to improving the
retailers, and service suppliers.
revenue collection of the States.
Pre-GST Indirect Tax structure in India GST Stucture in India
Center State GST

Customs Excise State Levies VAT
Duty Duty
SGST/UTGST CGST IGST
Luxury Tax Electricity Duty
Central Service
Sales Tax Tax Entertainment Entry Tax &
Collected Collected
Tax Octroi by State by Center
Problems
Benefits
Multiple Tax Multiple Multiple Single Single Tax Uniform Uniform

Administration Act & Rules procedures Structure Administration law Procedures
(of centre and (Computerized)
different State )
I m a g e 9.6: GST S t r u c t u r e in I n di a
130
GST and Revenue Neutral Rate GST Council
(RNR) • GST Council is a Constitutional body
• Revenue Neutral Rate (RNR) refers to that which make recommendations to the
single rate, which preserves revenue at Union and State Governments on issues
desired (current) levels. related to GST.
• Revenue Neutral Rate is the rate of GST • According to Article 279A of the
at which the amount of taxes currently Constitution, the GST Council will be a
collected by the government and the joint forum of the Centre and the States,
amount collected by the government in and consist of the following members:
the pre-GST regime remains the same
» Chairman: Union Finance Minister
i.e., it does not lead to revenue loss or
gain. » Members: Ministers in charge of Finance/
Revenue or Minister nominated by each
• The Government of India constituted a of the States & UTs having Legislatures
committee under Arvind Subramanian
which suggested the RNR to be from 15% • Voting powers are divided between Centre
to 15.50%. and States with central government
• The RNR is kept slightly high to ensure no having 1/3rd voting power and remaining
loss in the revenue generation. 2/3rd with states.
• Currently, the RNR under GST is 15.5%. • Decisions are taken only if it has more
than 3/4th majority and such decisions
will be immune from the deficiencies
GST and Fiscal Autonomy of in the establishment of the Council or
appointment of its members or any
State procedural irregularity.
• States majorly depend on two sources for • Functions of GST Council: According to
their revenue: their own revenue raised Article 279A (4), the Council will make
through taxation powers given under recommendations to the Union and the
State List of Seventh Schedule of the State governments on important issues
Constitution and various central transfers related to GST, like
including revenue share recommended
by Finance Commission. » Taxes, surcharges, and cess to be
subsumed under the GST.
• With the commencement of GST, many
indirect taxes levied by the states have » Exempting or bringing goods and services
been subsumed under GST. under GST.
• Earlier states were empowered to decide » The upper limit of turnover for application
their own tax rates, but under GST regime, of GST.
tax rates are decided by the GST Council. » GST rates.
• This implies that states have limited » Model GST laws, principles related
flexibility in making decisions regarding to place of supply, principles of levy,
tax rates on goods and services. apportionment of IGST and principles
• Therefore, higher reliance on GST receipts related to place of supply.
for revenue reduces states’ autonomy » Special provisions with regard to the
as these receipts depend on tax rates eight northeastern states, Uttarakhand,
decided by the GST Council. Jammu and Kashmir and Himachal
Pradesh.
131
» Other related matters. • It has been established primarily to
provide IT infrastructure and services
to the Central and State Governments,
GSTN taxpayers, and other stakeholders for the
seamless implementation of the Goods
• Goods and Services Tax Network (GSTN) and Services Tax.
is a non-profit, non-Government, private
limited company.
• It was incorporated in 2013. GST Tax Slab
• The Government of India holds 50% • GST is currently levied on every product
equity in GSTN while states hold in five slabs of 0,5, 12, 18 and 28 per cent.
remaining 50% equity in the GSTN.
Essential Goods
(For example, cereals, fresh fruits, and vegetables, 0%
salt, natural honey, milk, human blood etc.)
Commonly used Goods and Services 5%
Standard Goods and Services fall under 1st slab 12%

(computer and processed food)
Standard Goods and Services fall under 2nd Slab

(capital goods and industrial intermediaries are 18%
covered in this slab)
Special category of Goods and Services including

luxury (Luxury items such as small cars, premium 28%
cars, cigarettes and aerated drinks)
• Further, a cess will be levied on certain

goods like aerated drinks, luxury cars, GST Tax System vs
tobacco products and pan masala, over
and above the rate of 28% for payment Non-GST Tax System
of compensation to the States.
• Non-GST Tax System
• 97.5 per cent articles covered by 18 per
cent or lower GST slab. » Imagine a T-Shirt manufacturer. He buys
• Some of the products are not covered raw material worth Rs. 5,000, for which
under GST. These are: he pays a sales tax of 10% i.e., Rs. 500.
» He manufactures shirts by adding the
» Alcohol for human consumption value of Rs. 1000 including profit.
» Tobacco » For the total cost, the manufacturer will
» Electricity include 5,000 + 1000 + 500 and fix the
» Petroleum Product price as 6,500.
» The customer buying will pay the final
cost of 7,150 (6,500 + 10% sales tax i.e.,
132
650). not been attained is the roll out of the
» So, the total tax liability to the government simplified tax compliance regime.
is 500 + 650 = 1,150. • The complication and complexity of
return mechanism and the technical
• GST Tax System glitches resulted in roll back of invoice-
matching, rendering the system prone
» Imagine a T-Shirt manufacturer. He buys to various ITC frauds. The GST Network
raw material worth Rs. 5,000, for which (GSTN) still faces numerous technical
he pays a tax at 10% i.e., Rs.500. glitches. This is very problematic as it is
» He manufactures shirts by adding the required by the businesses to register,
value of Rs.1000 including profit. filing GST returns, etc., with the help of
» For the total cost, the manufacturer will this portal.
include 5,000 + 1,000 and fix the price as • Presently, the Union government charges
6,000. 14% excise duty on Aviation Turbine
» Manufacturer leaves out 500 paid as a Fuel (ATF), and governments of States
tax because it will be reimbursed by the charge nearly 29% of the sales tax on the
government as input tax credit. same. India is one of the fastest-growing
aviation markets in the world. However,
» The customer buying will pay the final the aviation businesses are burdened by
cost of 6,600 (6,000 + 10% tax i.e., 600). growing debt and bankruptcy because
» So, the total tax liability to the government of high fuel cost and depreciation of the
is 600. rupee.
Challenges Way Forward

Associated with the • It is very important to give clarity on the
Implementation of
various procedures to be followed while
filing GST and also to repair the present
GST problems and prevent future ones from

arising for an effective tax regime.
• Because of the enormous shortfalls in the • Though currently the GST may face
tax collection under GST (exacerbated certain glitches and weaknesses, it is very
by the Covid-19 lockdowns), the Union flexible in nature as the implementations
government and State Governments and decisions are based on transparent
have come at loggerheads as Centre has conversation within GST Council. This
revealed its incapability to compensate permits for flexible resolution and
the States as promised under the response of the issues related to GST.
provision of GST Act. • The Central Government must also be
• Comptroller and Auditor General of India required to lead the country out of its
(CAG) noticed that matching invoice GST standstill by borrowing more from
of buyers and sellers, an anti-evasion different financial markets or directly
measure envisioned in the regime of from the Central Bank. The Union
indirect tax, was still not in place. Government must appreciate that it is
their legal obligation, and they cannot
• As per the CAG Report (2018-2019), one abrogate it. State Governments should
important area where the full potential respond by settling for a more realistic
of GST (Goods and Services tax) has compensation for time being while
133
exploring the options recommended by Finance Act of 1987. It was introduced
the Central Government. to tax the ‘zero tax companies’. Zero tax
• The government also should think about companies are such companies which
rationalization of the GST slabs. show zero or negligible income to avoid
tax nets.
• The GST base can be increased by
including fuel, alcohol and real estate in • Under MAT, such companies are taxed a
GST and by prevention of ITC fraud. certain percentage of their book profit as
taxable income.
• GST is a positive step towards shifting
economy of India from the informal • MAT has been brought in to reduce tax
to formal economy. It is very crucial to avoidance practices followed by some
utilize experiences from international companies to avoid the income tax,
economies that have implemented GST though they had the “ability to pay”.
before us, to overcome the impending • MAT is applicable to all corporate entities,
challenges. whether public or private.
• MAT is not applicable to:
Direct Tax » Any income accruing or arising to a

company from the life insurance business.
• Different types of direct taxes are: » Shipping income liable to tonnage
taxation.
Personal Income Tax
• An income tax is a tax which governments
impose on individuals within their Alternate Minimum Tax (AMT)
jurisdiction.
• It is leviable alternative to normal tax.
• AMT is a tax levied on ‘adjusted total
Corporate Tax income’ in a FY wherein tax on normal
income is lower than AMT on adjusted
• Corporate tax is a tax levied on the net total income. So, irrespective of normal
income of the company. tax, AMT has to be paid by taxpayers to
• Companies, both private and public whom AMT provisions apply.
which are registered in India under the
Companies Act 1956, are liable to pay
corporate tax. Capital Gain Tax
• Capital gain is any profit that is received
through the sale of a capital asset (Land,
Dividend Distribution Tax building, house property etc.).
• The Dividend Distribution Tax is imposed • The tax that is paid on that profit is called
on dividends that a company pays to its capital gains tax.
shareholders out of its profits.
• Capital gain tax can either be long term
(individuals own an asset for a duration
of more than 36 months) or short term (In
Minimum Alternate Tax case assets are held for a duration of 36
• Minimum Alternate Tax (MAT) was months or less).
effectively introduced in India by the
134
Securities Transaction Tax (STT) tax provision without amendment in tax
law.
• Securities Transaction Tax (STT) is a type
of financial transaction tax levied in India • In 2017, the Government set up an expert
on transactions done on the domestic committee under Akhilesh Ranjan to
stock exchanges. draft a new Direct Taxes Code. The task
force submitted its Report in 2019 which
• The rates of STT are prescribed by the
has not been made public.
Central/Union Government through its
Budget from time to time.
• It is categorized as a direct tax. In 2020, Union Government launched
the ‘Transparent Taxation: Honoring the
Honest’ platform to honour the honest
Commodity Transaction Tax taxpayers of the Nation.
(CTT) This platform has important reforms
such as faceless assessment, taxpayers
• Commodities transaction tax (CTT) is a charter and faceless appeal.
tax similar to Securities Transaction Tax
(STT), levied in India, on transactions done Faceless Assessment: Objective of this
on the domestic commodity derivatives is to eliminate human interface amongst
exchanges. the taxpayer and the income tax
department.
• The concept of CTT was first introduced
in the Union Budget 2008-09. Taxpayer Charter: It outlines the
responsibilities and rights of both
• CTT aims at discouraging excessive taxpayers and tax officers.
speculation, which is detrimental to the
market. Faceless Appeal: Under this arrangement,
appeals will be randomly assigned to any
officer in the country. The identity of the
Direct Tax Code officer deciding the appeal will remain

anonymous.
(DTC)
• DTC is the proposed legislative reform of General Anti-
the direct taxation system.
• It seeks to simplify and consolidate all Avoidance Rule
the direct tax of the central government
like income tax, gift tax, wealth tax etc.
(GAAR)
• It seeks to increase tax revenue by • It is a provision under direct tax law which
broadening the tax base. seeks to check tax avoidance i.e. misuse
of exemption, ambiguous language,
• Features of DTC are:
loophole in tax laws etc.
» Tax laws will be rewritten in simple and • It provides discretionary power to deny
unambiguous language to reduce the any tax benefit to a firm in case it made
scope of misinterpretation. an arrangement solely for the purpose of
» Reduce exemption- deduction debate to tax avoidance i.e. if there is no commercial
reduce their scope of misuse. substance.
» Flexible tax system to make changes in • A transaction that disguises the value,
135
location, source, ownership or control Parthasarathi Shome Panel
of funds would also be deemed to lack
commercial substance. • The Parthasarathi Shome Panel was
set up in 2012 for drawing up the final
• It empowers tax officials to override certain
guidelines on GAAR.
provision of domestic tax law as well as
Double Taxation Avoidance Agreement • Recommendations of the committee are:
(DTAA) (a bilateral agreement).
» GAAR should be deferred for three
• The provision of GAAR is to codify the years to 1st April 2016 for safeguarding
doctrine of ‘substance over form’ where and consultation with investors and for
the real intention of the parties and training tax officials.
purpose of an arrangement is taken
into account for determining the tax » It should be invoked by the approving
consequences, irrespective of the legal panel with 5 members.
structure of the concerned transaction or
arrangement.
− Head: High Court Judge
• India’s general anti-avoidance rule − Two Member: Income Tax Department
(GAAR) came into effect on 1 April 2017 − Two Member: Non- government
for the assessment year 2018-19. Members
• The focus of GAAR should be to check

the misuse of tax provision rather than
Why GAAR? increase tax revenue.
• GAAR was brought in to address the tax • It should be imposed only if the sole
avoidance issues and ensure that those in objective of an arrangement is tax
different tax brackets are taxed correctly. avoidance.
• In many cases of tax avoidance, • The application of GAAR should be
arrangements could take place for clarified through an appropriate
gaining a tax advantage while complying illustration.
with the law.
• Firms should be permitted to clarify the
applicability of GAAR before making
Advantage of GAAR
investment/transactions i.e., advanced
• To check tax avoidance. ruling.
• It would plug loopholes in the taxation • The threshold limit for applicability of
system. GAAR should be fixed at tax avoidance
• It would also check misuse of DTAA. of at least Rs. 3 crore or more.
• It should not be used to assess the
Disadvantage of GAAR genuineness of tax residency certificate
• It may increase the scope of corruption issued under DTAA even by tax havens.
as it provides discretionary power to • It should not be applied in the case where
tax officials. Special Anti-Avoidance Rules (SAAR) are
• It may adversely affect domestic applicable.
and foreign investment as it
creates uncertainty regarding the
interpretation of tax provision.
136
Tax Administration (IRS) officers should specialize in
particular tax administration areas.
Reform Commission − The Central Vigilance Commission

should have a Member who has been
(TARC) an IRS officer.
• The Tax Administration Reforms

» Dispute Resolution and Management:
Commission (TARC) under the − Avoid retrospective laws.
Chairmanship of Dr. Parthasarathi Shome
was appointed in 2013 by the Government − Currently tax litigations are clogging
of India for giving recommendations for the system. Thus, Both Boards should
reviewing the public tax administration start a special drive for review and
system of India. liquidation of such cases by setting
up dedicated task forces.
• TARC made the following
recommendations: » Internal Processes:
» Consumer Focus: − The Permanent Account Number
(PAN) should be made as a Common
− A minimum of 10 percent of the tax Business Identification Number (CBIN),
administration’s budget must be used to be used by other departments such
for taxpayer services. as excise, customs, etc.
− The decision of the Ombudsman
with respect to grievance redressal of
taxpayers should be binding on tax
authorities.
Tax Reform
− Pre-filled tax returns should be Committee
made available to all taxpayers. The
taxpayers will have the option to • The government of India Constituted
accept the tax return or modify it. a tax reform committee under Raja J.
Chelliah, Director of National Institute of
» Structure and Governance: Public Finance and Policy (NIPFP) in 1991.
− Central Board of Direct Taxes (CBDT) • The major recommendations of the
and Central Board of Excise and committee are as follows:
Customs (CBEC) should be fully
integrated in next ten years. Within » Reforming the personal taxation system
the next five years, they should evolve by reducing the tax rates.
into a unified authority as Central » Reducing the corporate tax rates.
Board of Direct and Indirect Taxes. » Reducing the cost of imported inputs by
− The post of Revenue Secretary should decreasing the customs duties.
be discontinued, and its functions » Integration of excise duties with a Value-
should be assigned to the two Boards. Added Tax (VAT) system.
» Human Resource Development: » Bringing the services sector within a VAT
system.
− There should be a focus on » Broadening of the tax base.
specialization by bringing expertise,
including lateral entry of specialists » Improving the quality of tax
in the Boards. Indian Revenue Service administration.
137
− Abolish Minimum Alternate Tax.
Task Force on Tax
» Wealth Tax
Reform
− Currently there is no wealth tax in
• The Government of India constituted a India after it was abolished in the
Task Force on Tax Reform under Vijay Union Budget 2015.
Kelkar with the objective of rationalizing − When it was in effect, the tax was
cumbersome tax structure so as to applicable to individuals, Hindu
reverse the deteriorating trend in public Undivided Families, companies, etc.
finances, improve tax-to-GDP ratio by
making the tax administration simple − Under the current direct tax structure,
and meaningful and also to make the tax instead of wealth tax, the tax
base wide with low rates. authorities apply a surcharge on
those with higher income and this
» Administration of Direct Tax surcharge was increased in the Union
Budget 2019.
− The taxpayer services should be − As of Assessment Year 2019-20, 10%
expanded both in quantity and quality surcharge on Income Tax is applicable
and taxpayers should get easy access to individuals with annual income
through the internet and emails. exceeding Rs. 50 lakh, while this rate
− Expanding PAN (Permanent Account is 15% if total income exceeds Rs. 1
Number) to cover all citizens. crore.
− Tax Information Network should be
established to modernize, simplify,
and rationalize tax collection, Double Taxation
particularly TDS and TCS.
− Empower CBDT with appropriate Avoidance
administrative and financial powers.
Agreement (DTAA)
» Personal income tax
• Double taxation refers to the imposition
− Rationalize income tax slabs, of tax by two or more countries on the
eliminate surcharge on personal same declared income, asset, or financial
income tax. transaction.
− Exemption for senior citizens and • When such income is taxed in two
widows. different countries, the total tax liability
will form a substantial part of total
− Increase deduction under Section income.
80CCC for contribution to pension
funds. • This double liability can be avoided in
many ways, one of them being a tax
» Corporate Tax treaty between the countries in question.
• Double Taxation Avoidance Agreement
− The listed companies should be (DTAA) is a tax treaty signed between two
exempted from dividend tax and or more countries with the aim to help
capital gain tax. taxpayers avoid paying double taxes on
− Increase rate of depreciation for the same income.
plants and machinery. • It means that there are agreed tax rates
and jurisdiction on specified types of
138
income arising in a country. 15% of its GDP as tax revenue from the
• A Double Taxation Avoidance Agreement public.
is applicable in situations where a Taxes and GDP are generally related. The
taxpayer is a resident of one nation but higher the GDP, the more tax a nation
earns income in another country. collects. Conversely, countries with lower
taxes produce a lower GDP.
• For example, Suppose an NRI earns
income both in India and let us say
Singapore, the income earned in India
would be taxed both in India and 11.9
Singapore. If India has a DTAA in place 10.6

11.2 11.2
10.9
with Singapore, NRIs can either avoid 10.2

10.4
10.1 10
paying tax twice or pay a lower rate of

tax. 2011 -12 2012 -13 2013 -14 2014 -15 2015 -16 2016- 17 2017- 18 2018- 19 2019- 20
(BE) (BE)
I m a g e 9.7: T ota l T a x to GDP%

Objective of DTAA?
• To prevent tax avoidance, evasion, grant • Tax to GDP ratio has risen consistently in
relief. the past 10 years which can be seen in
the above graph.
• To improve the cooperation between two
countries taxing authorities. • Reasons for the low tax to GDP ratio in
India:
• To attract foreign investments by
providing relief from double taxation. » Tax GDP ratio is lower because of the
• To prevent discrimination between narrow tax base. Ex: Top 5% individual
taxpayers. taxpayers contribute nearly two-thirds of
all the taxes collected.
» There are large scale tax evasion and tax
India and DTAA? avoidance. Ex: Just the top 5% of tax-
paying firms contribute about 95% of the
• India presently has DTAA with 80+
total corporate tax collections
countries. Thus, there are agreed tax
rates and jurisdiction on specific types » Numerous exceptions and poor tax
of income arising in a country to a tax paying culture.
resident of another country. » Weaknesses in tax administration.
• Some of the countries with which it has » Complex taxation structure gives
comprehensive agreements include loopholes for tax avoidance.
Australia, Canada, the United Arab
Emirates, Germany, Mauritius, Singapore,
the United Kingdom, and the United
States of America. Feature of Indian
Taxation System.
Tax to GDP Ratio
• Indian taxation system follows a
• Tax to GDP ratio shows the tax revenue progressive method of taxation.
for a country measured in terms of GDP. • Indian taxation system is complex and
• For example, if India’s tax to GDP ratio is prone to tax evasion.
15%, it means that the government earns
• It includes multiple exemptions,
139
deduction, and rebates. • For example, Under Section 80C, up to
• Moderately high tax rate (despite a Rs. 1.5 Lakh can be saved. If a person
significant reduction in tax rate). income is Rs. 7 Lakh and he invests Rs. 1.5
Lakh under Section 80C now his taxable
• Narrow tax base and low tax to GDP income reduces to Rs. 5.5 Lakh (7 Lakh -
ratio. 1.5 Lakh).
Terms Exemption
Surcharge • Tax Exemption refers to expenditure,
income, or investment on which no tax is
• Surcharge is an additional charge and levied.
not an additional tax.
• Thus, if a particular income is exempted
• A surcharge of 10% on a tax rate of from tax, it is excluded from the total
30% effectively raises the combined tax revenue of the government. This reduces
burden to 33%. the total taxable income of the taxpayers.
• Objective of Surcharge is: • For example, House Rent Allowance
(HRA), Leave Travel Allowance (LTA) etc.
» To increase the tax revenue temporarily
(additional fund mobilization). • Income tax exemptions are provided on
particular sources of income and not on
» To make the tax system more progressive. the total income.
Cess Tax Rebate

• It is an additional charge (Tax on Tax) • Tax rebate is a refund to the taxpayers if
which is imposed to finance a specific
the taxpayers pay more tax than they are
activity.
supposed to.
• Cess does not constitute permanent • Tax rebate helps to lower the tax burden
source of revenue for the government,
on the low-income bracket individuals.
and it is discontinued when its purpose
is fulfilled. • Income tax rebates are supposed to be
claimed from the total tax payable.
• It can be levied on both direct and
indirect taxes.
• For example, Education Cess, Swachh Incidence of Tax
Bharat Cess, Clean Energy Cess etc.
• The government can impose any one of • It refers to the point of the imposition of
tax i.e., on person or firm on which tax is
the surcharge or cess or both.
imposed.
• The impact of a tax is on the person or
Deduction entity on whom it is imposed first.
• Tax Deduction is the reduction in tax

obligation. Under this, amount of Impact of Tax
deduction is subtracted from the total
income to estimate taxable income. • The incidence of a tax means the extent
to which an individual or organization
• It reduces taxable income.
140
suffers from the imposition of a tax. • The shape of the Laffer curve depicts
• The tax incidence shows the distribution that as tax rates increase, tax revenue
will also increase. But these increased tax
of the tax obligations, which must be
revenues will only increase until a peak,
covered by the buyer and seller.
and after which, the tax revenues begin
• Impact is the initial burden of the tax, to decline.
while incidence refers to the ultimate
• The curve was developed in 1979 by
burden of the tax.
economist Arthur Laffer.
• For Direct tax, impact and incidence is • The curve starts at 0% tax where revenue
both at the same point. is also zero, gives maximum revenue at
• For Indirect tax, impact and incidence is an intermediate rate of taxation which is
at a different point. also called as optimum tax rate at which
revenue is maximum, and then falls again
to zero revenue at a 100% tax rate.
Tax Expenditure • The shape of the Laffer curve is uncertain.
• Tax Expenditure are special provisions
such as exclusions, deductions, deferrals,
credits etc. given to the taxpayers. Tobin Tax
• Tax expenditure indicates how much • A Tobin tax is levied on international flow
more revenue could have been collected of short term capital or hot money which
by the Government if not for such are very speculative.
measures. • The aim of a Tobin tax was to generate
• It shows the extent of indirect subsidy stability in currency markets.
given to the taxpayers in the country. • The Tobin tax proposed by James Tobin
in 1972 in the form a currency transaction
tax.
Laffer Curve
• Laffer Curve shows the relation between Pigouvian Tax
rates of taxation and the resulting levels
of government revenue. • A Pigouvian tax is a government tax on
activities that create socially harmful
externalities.
• Pollution is a negative externality. For
Tax example, the driver of a non-compliant
Revenue vehicle does not necessarily suffer
immediately from the exhaust released
from the vehicle but as the vehicle drives
down the road, everyone behind the
vehicle may suffer. Their exhaust may
also increase pollution for everyone in
the community.
Tax Rate
• The government imposes a Pigouvian
tax on non-compliant vehicles to make
I m a g e 9.8: L a f f e r C u r v e
the driver take on more of the cost of the
suffering they may cause.
141
Tax Haven Tax Buoyancy
• A tax haven is defined as a country or • It referred to as the responsiveness of tax
place with very low "effective" rates of revenue growth to changes in GDP.
taxation for foreign investors. • It is the relationship between the changes
• Tax havens also share limited or no in the government’s tax revenue growth
financial information with foreign tax and the changes in GDP.
authorities. • It is calculated by dividing the change in
• Tax havens do not typically require tax collection with GDP growth.
residency or business presence for
individuals and businesses to benefit Change in tax revenue
Tax buoyancy =
from their tax policies. Change in GDP
• A list of some of the popular tax haven • A tax is buoyant when revenues increase
countries includes the Bahamas, for example by more than 5 per cent for
Bermuda, the British Virgin Islands, the a 5 per cent increase in GDP.
Cayman Islands, Hong Kong, Mauritius,
Lichtenstein, Monaco, Panama, St. Kitts,
and Nevis. Tax Elasticity
• Tax elasticity refers to changes in tax
Round Tripping revenue in response to changes in tax
rate.
• It refers to the transfer of illegitimate
money through a foreign company
(through tax haven) to invest back to the
home country. Base Erosion and
• The objective of round-tripping is the
conversion of black/illegal money to
Profit Shifting
white/legitimate money. (BEPS)
• Base Erosion and Profit Shifting (BEPS)
Ad Valorem Tax means tax planning methods used by
multinational companies that exploit
• Ad valorem tax (Latin word meaning loopholes and mismatches in tax rules to
"according to value") is a tax in which avoid taxes.
tax amount is levied on the value of a
commodity or transaction. • It is important for developing countries
due to their heavy reliance on
• It is imposed at the time of a transaction, corporate income tax, particularly from
as in the case of a value-added tax (VAT). multinational enterprises.
• The most common ad valorem taxes are • In recent times, MNCs are developing
property taxes levied on real estate. sophisticated tax planning practices
to avoid tax by shifting their incomes/
profits across the borders by exploiting
Specific Tax loopholes and mismatches in tax
regulations, to take advantage of lower
• Specific tax is a fixed amount for each tax rates and, thus, avoiding tax payment
unit of a good or service sold. in the country where the profit is actually
made.
142
• The OECD, under the authority of the methodology to forecast the pricing of
G20 countries, has considered ways to future international transactions of the
revise tax treaties, stricter rules, and to taxpayer well in advance.
share more government tax information • Transfer price means the price at
under the BEPS project, and has issued which transactions are done between
action plans. companies’ part of the same group.
• The BEPS Package provides 15 Action • The key objective of an Advance Pricing
points that equip governments with the Agreement is to provide certainty to
domestic and international instruments
taxpayers so that predictable and
needed to tackle tax avoidance.
foreseeable conditions can be expected
regarding transfer pricing practices.
India and BEPS • India has framed a legal framework

which gives a legally binding agreement
• India’s involvement in the BEPS initiative between the taxpayers and the Central
has been intensive. India has played an Board of Direct Taxes.
active part in working out action plans, • The Finance Act, 2012, introduced
and is also part of various committees, sections 92CC and 92 CD in the IT Act
working groups and task forces that were to provide the legal status for Advance
set up for examining different aspects of Pricing Agreement in India.
these action plans.
• These statutory provisions made effective
• Union Budget 2016 announced an from 1st July 2012, empowered the CBDT
‘equalization levy’ of 6 per cent on to enter into an agreement with any
payments exceeding over Rs. 1 lakh to person, with the approval of Central
online ad services from non-resident Government, determining or specifying
entities. the manner of determination of transfer
• This affected multinational companies pricing in relation to an international
with Indian subsidiaries, like Google and transaction.
Facebook.
• India is the first country to levy such tax,
post the OECD action plan. Tax Regulation
• A tax panel has also recommended
expanding the ambit of this levy to Authority in India
cover a wide range of transactions Central Board of Direct Taxes
including cloud computing, online
marketing, website designing, hosting (CBDT)
and maintenance, platforms for sale of
• The CBDT is a statutory body functioning
goods and services, and online use of or
under the Central Board of Revenue Act,
download of software and applications.
1963.
• CBDT is a part of the Department of
Advance Pricing Revenue in the Ministry of Finance.
• CBDT provides significant inputs for
Agreement (APA) policy and planning of direct taxes, at the
same time, it is also responsible for the
• An APA is an agreement, usually for administration of direct tax laws through
multiple years, between a taxpayer and the Income Tax Department.
CBDT specifying the transfer pricing
143
Central Board of Indirect Taxes April 2005. It is part of State list.
and Customs (CBIC) • The existing General Sales Tax Laws were
replaced by the Value Added Tax Act
• The board functions under Department (2005) and subsequent VAT Rules.
of Revenue, Ministry of Finance.
• Haryana was the first State in the country
• It performs following tasks: to implement the taxation on 1 April 2003.
» Formulation of policy regarding levy
and collection of Central Excise duties, Q.2) Under which of the following
Customs, Central Goods & Services Tax, circumstances may ‘capital gains’ arise?
and Integrated GST. 2012
» Prevention of smuggling and 1. When there is an increase in the sales
administration of issues relating to of a product
Customs, Central Excise, Central Goods
& Services Tax, IGST and Narcotics to the 2. When there is a natural increase in the
extent under CBIC's purview. value of the property owned
3. When you purchase a painting and
• CBIC is the administrative body for its there is a growth in its value due to
subordinate organizations, including the increase in its popularity
Central Revenues Control Laboratory,
Central Excise and Central GST
given below:
Commissionerate’s and Custom Houses.
(a) 1 only
(b) 2 and 3 only
UPSC CSE PRELIMS (c) 2 only
Previous Years (d) 1, 2 and 3
Questions Ans. (b)

• Explanation: Capital gain is an increase
Q.1) Which one of the following is not a
in the value of a capital asset (investment
feature of “Value Added Tax”? 2011
or real estate) which gives it a higher
(a) It is a multi-point destination-based value than the purchase price.
system of taxation
• This gain is not realized until the asset is
(b) It is a tax levied on value addition sold.
at each stage of the transaction in the
• A capital gain may be short-term (one
production-distribution chain
year or less) or long-term (more than one
(c) It is a tax on the final consumption of year) and must be claimed on income
goods or services and must ultimately taxes.
be borne by the consumer
(d) It is basically a subject of the Q.3) A decrease in tax to GDP ratio of a
Central Government and the State country indicates which of the following?
Governments are only a facilitator for
its successful implementation 2015
Ans. (d) 1. Slowing economic growth rates
2. Less equitable distribution of national
• Explanation: The value-added tax (VAT) income
was introduced as an indirect tax from 1
144
Choose the correct code: • According to OECD, base erosion
(a) 1 only and profit shifting (BEPS) refers to tax
avoidance strategies that exploit gaps
(b) 2 only and mismatches in tax rules to artificially
(c) Both 1 and 2 shift profits to low or no-tax locations.
(d) Neither 1 nor 2
Ans. (b) Q.5) What is/are the most likely advantages
of implementing ‘Goods and Services Tax
• Explanation: Tax GDP ratio shows the (GST)’? 2017
tax revenue for a country measured in
1. It will replace multiple taxes collected
terms of GDP. For example, if India’s
by multiple authorities and will thus
tax GDP ratio is 16%, it means that the
create a single market in India.
government gets 16% of its GDP as
tax contribution from the public and 2. It will drastically reduce the ‘Current
entities. Here, tax GDP ratio shows the Account Deficit’ of India and will enable
richness of the government’s exchequer. it to increase its foreign exchange
The government’s ability to spend on reserves.
socio-economic development programs, 3. It will enormously increase the growth
military, salary, pension heads etc., and size of the economy of India and
depends on tax GDP ratio. will enable it to overtake China in the
• Lower tax GDP ratio indicates a less near future.
equitable distribution of national Select the correct answer using the code
income. given below:
(a) 1 only
Q.4) The term ‘Base Erosion and profit (b) 2 and 3 only
shifting’ is sometimes seen in the news in
the context of 2016 (c) 1 and 3 only
(a) mining operation by multinational (d) 1, 2 and 3
companies in resource-rich backward Ans. (a)
areas Explanation: Goods and Service Tax
(b) curbing of the tax evasion by
multinational companies • Goods and Service Tax is a major
economic reform in India after the 1991
(c) exploitation of genetic resources of economic liberalization. GST, proposed
a country by multinational companies to be rolled out from 1st July 2017, will
(d) Lack of consideration of have a four-tier structure with rates
environmental costs in the planning of ranging from 5% to 28%. But regrettably,
development projects a large chunk of the economy, which
Ans. (b) includes real estate, electricity, alcohol,
and petroleum products, is out of GST.
Explanation: Base erosion and profit
shifting (BEPS) • It brings benefits to all the stakeholders
of government, consumers, and industry.
• Base erosion and profit shifting (BEPS) • It will reduce the cost of goods and
refers to corporate tax planning strategies services, boost the economy, and
used by multinationals to "shift" profits make the goods and services globally
from higher–tax jurisdiction to lower–tax competitive.
jurisdiction, thus "eroding" the "tax–base"
of the higher–tax jurisdiction. • GST aims to make India a common
145
market with common tax rates and advertisement services in India can
procedures and remove the economic claim a tax credit in their home country
barriers hence paving the way for an under the "Double Taxation Avoidance
integrated economy at the national level. Agreements".
• By subsuming most of the Central and Select the correct answer using the code
State taxes into a single tax and by given below:
allowing a set-off of prior-stage taxes for (a) 1 only
the transactions across the entire value
chain, it would mitigate the ill effects of (b) 2 only
cascading, improve competitiveness, and (c) Both 1 and 2
improve the liquidity of the businesses. (d) Neither 1 nor 2
• GST is a destination-based tax. Ans. (d)
• It follows a multi-stage collection
mechanism. • Explanation: The government’s decision
to levy an equalization tax of 6% on
• In this, the tax is collected at every stage online advertisement services offered in
and the credit of tax paid at the previous
the country by non-resident entities will
stage is available as a set off at the next
impact users, especially start-ups that
stage of the transaction.
rely almost entirely on the online world to
• This shifts the tax incidence near to popularize their services. Further, as the
the consumer and benefits the industry levy is not introduced as part of the Income
through better cash flows and better Tax Act but as separate legislation under
working capital management. the Finance Bill, global firms that offer
• It will not drastically reduce the ‘Current such services in India cannot claim a tax
Account Deficit’ of India. credit in their home country under the
• It will not enormously increase the growth double taxation avoidance agreements.
and size of the economy of India and will • Finance Minister Arun Jaitley during
not overtake China in the near future. Budget speech said that “In order to
tap on income accruing to foreign
Q.6) With reference to India's decision to e-commerce companies from India,
levy an equalization tax of 6% on online it is proposed that a person making
advertisement services offered by non- a payment to a non-resident (global
resident entities, which of the following advertising platform), who does not have
statements is/are correct? 2018 a permanent establishment, exceeding
in aggregate Rs. 1 lakh in a year, as
1. It is introduced as a part of the Income
Tax Act. consideration for online advertisement
will withhold tax at 6 per cent of gross
2. Non-resident entities that offer amount paid, as equalization levy”.
146
CHAPTER - 10
GOVERNMENT BUDGETING
Budget Rationale of Budget

• It is a quantitative expression of a plan • To ensure transparency in public finance.
of action for a specific time span, as • To ensure accountability of the
well as a tool for planning, execution, government.
and evaluation of the plan of action.
It is also a method for determining the • To ensure advance planning.
most efficient use of a country's total • To ensure financial control of the
resources. Budget can be made for an legislation over the executive.
individual, a group of people, a business,
a government, or just about anything else Stages of Budget
that generates and spends money. In Indian parliament, the budget goes
through 5 steps
• Government budgeting is an essential
element in the planning and control of • Presentation of budget with Finance
the financial affairs of a nation and is Minister’s speech.
made necessarily because income and • Budget debate in general. After this,
expenditure do not occur simultaneously. there is an adjournment of houses for
• The Union Budget of a year is referred a month so that standing committees
can examine the demand for grants.
as the Annual Financial Statement
(AFS) under Article 112 of the Indian • Voting on demand for grants in Lok
Constitution. It is a statement of the Sabha (LS).
government's projected revenues and • Passing of appropriation bills.
expenditures for a given fiscal year.
• Passing of Finance bills.
Objectives of Receipt and

Budget Expenditure
• To stimulate economic growth. • Expenditure and receipts form the two
• Redistribution of Income (Reducing important components of the budget.
inequalities). • Receipt is accrual/receiving of money
• Optimal allocation of resources. to the government by revenue and non-
revenue sources.
• Employment generation and poverty
reduction. • Expenditure is spending made by the
government in the economy.
• Total expenditure and total receipts in
the balanced budget are equal.
147
Budget Receipts
Revenue Receipts Capital Receipts
Tax Non-Tax Recovery Other

Borrowings
Revenue Revenue or loan Receipts
I m a g e 10.1: B u d g e t R e c e ipt s
• Revenue Receipts are further classified

Revenue Budget into:
• The revenue budget includes revenue » Tax revenue

expenditure and revenue receipts. These
receipts and expenditures are related − Tax Revenue include receipts from
to the day to day functioning of the direct and indirect tax.
government. − The direct tax includes income tax,
corporate tax etc while indirect tax
includes GST, Cess, Custom duty etc.
Revenue Receipt
• Non-tax revenue
• These are the government receipts,
which neither create assets nor reduce − Non-tax Revenue include receipts
any liability nor cause any reduction in from the government’s disinvestment
the assets of the government. proceeds from the stake sale in
• They are regular and recurring in nature. various public sector undertakings.
• Essentially, these are current income − Non-tax Revenue will also include
receipts of the government from all the dividend income which the
sources. government receives as a shareholder
of the various public sector
undertakings.
Non-Tax Revenue
Government earns interest on loans

given by it, be it internal lending (state
governments, union territories etc.) or
Interest external lending (outside the country).
Interest receipts from such loans form an
important source of non-tax revenue.
148
Government earns profit from the sale
proceeds of the products of public
Profits and Dividends enterprises.
Government also gets dividends from its
investments in other companies.
It refers to charges imposed by the

government to cover the cost of recurring
services provided by it. Such services
Fees
include both fiscal services (currency
printing etc.) and general services
(community service etc.).
They refer to payments that are imposed

on people for breaking the law.
Fines and Penalties
For example, fine for jumping the signal or
penalty for non-payment of tax.
Government receives grants from

foreign governments and international
organizations.
Grants
Such grants are not a fixed source of
revenue and are generally received during
an emergency such as war, flood, etc.
Revenue Expenditure • It is recurring in nature.

• Broadly speaking, the expenditure which
• All expenditures by the government are does not result in the creation of assets
either of a current kind or compulsive
for the Government of India is treated as
kind.
revenue expenditure.
• Revenue expenditure is expenditure for • Revenue expenditure does not create an
the normal running of the government
asset of the government nor it decreases
departments and various services, interest
any liability.
payments on debt, subsidies, etc.
Revenue Expenditure
The interest payment is the payment

Interest by the government on the internal and
external loans taken by it.
These are paid by the government-to-
Salaries, Pension and Provident Fund
government employees.
Subsidies are incentive forwarded to
Subsidies
sectors by the government.
149
Defence expenditures incurred by the
Defence
government.
Expenditure incurred on maintaining law
Law & order expenditures
and order i.e., on police & paramilitary.
Expenditures on social services include
expenditure on education, health, etc. and
Social services & General services
other social sectors and general services
include tax collection, etc.
Grants are given by the government to
Grants
Indian states and foreign countries.
Revenue Deficit to the growth in the economy through

• It is the gap between the revenue asset creation and thus, should not be
expenditure (consumption expenditure) considered as unproductive.
of the Government (Union or the State • In Union Budget 2011-12 a new
Governments) and its revenue receipts terminology, ‘Effective Revenue Deficit’
(current revenues). has been introduced. It excludes those
Revenue Deficit = Revenue Expenditure - revenue expenditures (or transfers) in the
Revenue Receipt form of grants for the creation of capital
assets.
• It shows the extent of reduction in
assets and/or increase in liabilities of • The FRBM Act was amended in 2012
the government for meeting its current to introduce the concept of Grants for
consumption expenditure. creation of capital assets.
• Generally, the revenue deficit is shown as • The FRBM Act defines grants for creation
a percentage of the GDP for domestic as of capital assets as grants-in-aid given
well as international analysis. to state governments, local bodies,
autonomous bodies, and other scheme
• Elimination of the revenue deficit has implementing agencies by the Central
always been a priority for Union and State Government for the formation of capital
Governments, as revenue deficit may assets which are held by these agencies
divert the resources that otherwise would or governments.
be available for capital investments.
• Thus, Effective Revenue Deficit is the
difference between revenue deficit and
grants for creation of capital assets.
Effective Revenue Deficit
Effective Revenue Deficit = Revenue
• Revenue Budget includes all grants from Deficit - Grants for creation of capital
the Central Government to the states/ assets (GoCA)
Union territories/other bodies as revenue
expenditure, even if such grants are • Effective Revenue Deficit implies that
utilised for asset creation. amount of capital receipts that are being
used for actual consumption expenditure
• Such assets are created by the sub- of the Government.
national governments/bodies and are
owned by them and not by the Union
Government.
Implications of Revenue Deficit
• According to the Ministry of Finance,
such revenue expenditures contribute • It implies the inability of the government
150
to meet its regular and recurring capital is arranged and the areas where
expenditure. capital is spent.
• It implies that the government is
dissaving, i.e., the government is using
savings of other sectors of the economy
Capital Receipt
to meet its consumption expenditure. • Capital receipts are those receipts which
either create liability or cause a reduction
in the assets of the government.
Capital Budget • They are non-recurring in nature.
• Capital receipts are used for investment
• Capital Budget includes capital receipts purposes and supposed to be spent on
and capital expenditure. plan development by a government.
• This shows the means by which the
Capital Receipt
Government grants loans to state

governments or union territories and
Recovery of Loans also externally. Recovery of such loans is
measured as a capital receipt as it reduces
the assets of the government.
Borrowing includes all long-term loans
raised by the government through internal
Borrowings borrowings (inside the country) and
through external borrowings (outside the
country).
These include long term capital accruals
like National Saving Certificates, Post
Other Receipts Office Deposits, Kisan Vikas Patras etc.
They are termed as capital receipts as they
are considered as liability of government.
Capital Expenditure • The Union government defines capital

expenditure as the money spent on
• An expenditure which either creates an the acquisition of assets like buildings,
asset or reduces liability is called capital land, machinery, equipment, as well as
expenditure. investment in shares.
Capital Expenditure
Government grants loans to state

governments or union territories and also
Loan Disbursals by the Government
externally (i.e., foreign countries, IMF,
World Bank, etc.).
151
It consists of only the capital part of the
loan repayment as interest payment
Loan Repayments by the Government
on loans are included in the revenue
expenditure.
Any expenditure that is done on
programmes which are mentioned in the
current (Five Year) Plan of the center or
Plan Expenditure center’s advances to state for their plans
is called plan expenditure. (The plan and
non-plan classification was removed from
2017-18).
This consists of capital expenses for
Capital Expenditures on Defence equipment purchase, modernization of
defence forces.
Government spending on providing public
General Services services like railways, education, health,
etc.
This includes repayment by the government
Other Liabilities of the Government
under Other Receipts (capital receipt).
Capital Deficit Deficit Measurement

• When capital disbursements of the
government exceed capital receipts, it
in India
leads to a Capital deficit.
• The broad measures of deficit Reported
• Capital deficit term is not used in public by the government in India may be
finance or in economics. classified, either in terms of the ‘nature
of transactions’ or on the basis of the
‘means of financing’ them.
• The chart given below provides a list of
different types of deficits that have been
and are being used in India.
On the basis On the basis

of fanancing of type of
transactions
Gross Fiscal
I m a g e 10.2: T y p e of D e f i c it
152
Budget Deficit government.
• Fiscal Deficit is calculated both in
• A budget deficit occurs when a
absolute terms and also as a percentage
government spends more than it collects
of the Gross Domestic Product (GDP) of
by way of revenue.
the country.
• It is the difference between total
• Net fiscal deficit can be calculated by
expenditure (Revenue expenditure and
deducting net domestic lending from
capital expenditure) and total receipts
gross fiscal deficit.
(revenue receipts and capital receipts).
Budget Deficit = Total Expenditure - Total • Implementation of FRBM Act has helped
Receipt the Union and State governments
to reduce their fiscal deficits to a
• From the 1997-98 budget, the practice considerable extent.
of showing budget deficit has been
discontinued in India.
Adverse Impact of Fiscal Deficit
• It increases public debt which increases
Fiscal Deficit future interest liabilities.
• The fiscal deficit is calculated by taking • It deteriorates the fiscal situation of
the difference between revenue receipts government which adversely affect
plus non-debt creating capital receipts developmental expenditure.
and total expenditure including loans,
• It creates inflation as it increases
net of repayments.
aggregate demand in the economy.
Fiscal deficit = Total Expenditure -
(Revenue Receipt + Non debt creating
• It leads to crowding out which refers to
a reduction in private investment due to
capital receipt)
the increase in interest rate as a result of
= Total Expenditure - Total Receipt excessive government borrowing.
except borrowing
• It increases the vulnerability of the
= Net borrowing at home + Borrowing domestic economy to economic shocks
from RBI + Borrowing from abroad because it reduces the government’s
• It calculates the difference between the capacity to intervene in the economy to
government’s consumption expenditure overcome economic shocks.
including repayment of loans and the • It adversely affects the creditworthiness
expected income from tax and non-tax of the domestic government which may
revenues. destabilize the macroeconomic situation
• It also shows the borrowing needs of the of the country.
government from all the sources.
• Thus, if the fiscal deficit is larger, then the Measures to Reduce Fiscal Deficit
government needs to borrow more from
the market or resort to printing more • Reducing Subsidies.
currency. • Reducing Expenditure on General
• Its impact on economic development Administration: Government took
depends on the use of borrowed funds. some austerity measures to reduce this
expenditure like:
• It is the most comprehensive concept
of the budgetary deficit, as it takes into » Reducing five-star hotels meeting.
account the total resource gap of the
153
» Appointed Expenditure Management Monetized Deficit
Commission.
» Better use of technology like video • Monetized Deficit measures the
borrowing of the government from the
conferencing.
central bank (RBI) during the financial
• The tax base should be broadened and year.
exemption and rebate in taxes should be
reduced. Monetized Deficit:
• Tax evasion and tax avoidance should be • In India, it is a new term adopted
effectively checked. since 1997–98. The Monetized Deficit
measures how much the Reserve Bank
• Restructuring and disinvestment of the of India (RBI) assists the government
public sector enterprise.
in its borrowing programme. In other
words, Monetized deficit refers to
the increase in the net RBI credit to
Primary Deficit the central government, such that
• Primary deficit is defined as the fiscal the monetary requirements of the
deficit of current year minus interest government could be met easily.
payments of the government during the • In other words, it means the purchase of
financial year. government bonds by the central bank
• It shows the fiscal situation of the to finance the spending needs of the
government during the current financial government.
year ignoring the impact of the debt • As borrowings from the RBI can be
burden of the past (borrowing by previous both short-term and long-term, thus,
governments). the monetized deficit is the addition of
Primary Deficit = Fiscal Deficit - Interest the net issuance of short-term treasury
Payment bills (T-Bills), dated securities (long-term
borrowings from RBI) and rupee coins
• This value ideally should be negative. possessed exclusively by the RBI, net of
• A shrinking primary deficit indicates Government’s deposits with the RBI.
progress towards fiscal health.
• Monetized Deficit leads to the printing
• If the primary deficit is zero, then fiscal of currency (i.e., increase in M0) which
deficit is equal to interest payment. increases the money supply by multiple
Thus, zero primary deficits mean that magnitudes. So, it is highly inflationary.
the government borrows only to make
• Unlike the , Indian rupee is not considered
interest payments.
a safe haven. Thus, when there is excess
• The Budget document mentions primary supply of the currency, it could lead to a
deficit as a percentage of GDP. fall in rupee value, leading to an outflow
of foreign investment.
154
Term of Financing Type of Financing Type of Deficits
a) Long term financing other
Gross Fiscal deficit (a+b+c+d+e)

than RBI
Long term financing
(a+b)
b) Long term financing from
deficit (b+c)
Monetized
RBI
c) Short term financing from
Taditional budget
deficit (c+d+e)
RBI
Short term financing

d) Long term financing other
(c+d+e)
than RBI
e) Draw down of cash
Deficit Measure Significance
Fiscal Deficit Widely used as a summary indicator of the

macroeconomic impact of the budget in
several industrialized countries.
This measure has been adopted by the
IMF as the principal policy target in their
programs.
In India, the government began to Report
the fiscal deficit only after 1991.
Since the shortfall in receipts over
expenditure must be covered through
borrowing, therefore, Gross Fiscal Deficit,
gives the overall borrowing requirements
of the government over a given financial
year.
And thus shows the net addition to the
level of public debt during a financial year.
155
Monetized Deficit Monetization of deficits, which increases
the money supply, is inflationary if the rate
of growth of money supply is greater than
the rate of increase of the demand for
cash balances arising from the growth of
the economy.
Thus, monetized deficits are an important
indicator of the inflationary impact of the
increase in the government’s budgetary
deficits.
Primary Deficit It excludes the burden of the past debt and
shows the net increase in the government’s
indebtedness due to the current year’s
fiscal operations.
A reduction in the primary deficit is
reflective of the government’s efforts at
bridging the fiscal gap during a financial
year.
Revenue Deficit A positive revenue deficit implies that the
government is resorting to borrowing to
finance current consumption.
Significance of different measures of

deficit
6.6 (% of GDP )
6.1
5.9
6
5.3
4.6 4.9 4.9
4.5
4.5
4.1
3.9 3.8
3.7
3.5 3.5 3.4 3.5
3.2 3.3 3.2
2.6 3.0 2.9
3 2.6 2.7
2.5 2.5 2.4 2.4
2.8 2.1
1.8 1.9 1.9 1.8
1.5 1.5 1.5
1.4
1.8 1.1
0.9 1.0
0.7 0.7
0.4 0.4 0.4 0.4
0
2008-09 2010-11 2012-13 2014-15 2016-17 2018-19 BE 20-21
Fiscal Deficit Revenue Deficit Effective Revenue Deficit Primary Deficit
I m a g e 10.3: D e f i c it T r e n d s in I n di a
156
Deficit Financing Means of Deficit Financing
• The deficit financing by the government
• Deficit financing refers to generating is done in the following ways:
funds to finance the deficit which results
Borrowing from External Sources
from an excess of expenditure over
revenue. • Borrowing from External Sources includes
• Thus, whenever the government borrowing from developed countries and
expenditure exceeds its revenue, then the international institutions like the World
government contemplates the process of Bank, IMF, etc.
deficit financing. • Advantages of External borrowing are:
• It is a temporary arrangement of the » External borrowing brings in foreign
funds through various methods like sale currency and gives government additional
of bonds to borrow the money from the capacity to fulfill its developmental
public or printing new currency. requirements both inside and outside the
• Two important characteristics of deficit country.
financing are: » External borrowing is preferred over
the internal borrowings due to no
» Financing of the budget deficit. ‘crowding out effect’. This reduces private
» This financing is done by the increase in investment due to the increase in interest
money supply. rate as a result of excessive government
borrowing.
Need of Deficit Borrowing from Internal Sources

Financing • Borrowing from Internal Sources includes
borrowing from RBI, General Public, Ad-
• For developing countries such as India, hoc Treasury Bills & government bonds
higher economic growth is a priority. etc.
Higher economic growth requires greater
spending. Since the private sector will
• It hampers the investment prospects
of the private and the corporate sector.
not make such a huge expenditure.
It tends to reduce private spending and
Therefore, the responsibility to raise
leads to “crowding out" effect.
financial resources to finance economic
development rests solely on the
government. Printing new Currency
• Deficit Financing enables the government
to obtain the necessary resources for the
• Printing Currency is the last option for the
government in managing its fiscal deficit.
development plans.
• The biggest drawback of printing
currency is that with it the government
cannot go for the expenditures which are
to be made in the foreign currency and it
increases money supply thus resulting in
inflation.
157
Securities against small savings State Provident Fund
Other Receipts (Internal Debt and Public Account External Debt
Draw Down of Cash Balance Market Borrowings
300000 600000
250000
500000
SOURCES OF FINANCING FD (EXCLUDING
200000
MARKET BORROWINGS
400000
MARKET BORROWINGS)
150000
100000 300000
50000
200000
0
2016-17 2017-18 2018-19 RE 19-20 BE20-21
100000
-50000
-100000 0
I m a g e 10.4: S o u r c e s of D e f i c it F i n a n c i n g
Effect of Deficit Financing classes and businessmen to flourish.

But fixed-income earners suffer during
• The deficit financing by government has inflation.
following effect:
• Deficit financing adversely affects
investment. During high inflation,
Advantage of Deficit Financing employees demand higher wages. If the
wages are increased, it raises the cost
• Deficit financing does not take away of production which demotivates the
money from taxpayer pocket and yet investors.
provides massive resources to the
government.
• In India, deficit financing involves Fiscal Policy
borrowing from the Reserve Bank of India.
Interest payments to the RBI against this • Fiscal policy is the policy that handles the
borrowing come back to the Government use of government revenue collection (taxes
of India in the form of a dividend. or non-tax) and expenditure (spending) to
• Financial resources that government influence a country's economy.
needs to mobilize through deficit financing • Fiscal policy is the guiding force which
are certain and known beforehand. helps the government in deciding how
much money it should spend to support
the economic growth, and how much
Disadvantage of Deficit Financing revenue it must earn, for the smooth
• Rise in inflation because of the increase functioning of the economy.
in the supply of money in the economy. • Fiscal policy, along with monetary policy,
• Decrease in average consumption level plays an important role in managing a
due to higher inflation. country’s economy.
• Increase in income disparities, deficit • Fiscal policy is based on the theories

financing-led inflation helps producing given by British economist John Maynard
Keynes.
158
• Main objectives of Fiscal Policy:
Fiscal Consolidation
» Economic growth: Fiscal policy helps
maintain the economy’s growth rate • Fiscal Consolidation means the policies
so that the government can achieve its undertaken by Governments (national
economic goals. and sub-national levels) to reduce their
» Price stability: It controls the price level deficits and accumulation of debt stock.
of the economy so that when the inflation • Fiscal consolidation is a process in which
is too high, prices can be regulated. the government’s fiscal health improves
which is indicated by lowering of fiscal
• There are two types of fiscal policy: deficit.
» Expansionary Fiscal Policy: • In India, fiscal consolidation or the fiscal
road-map for the government is defined
− It stimulates economic growth in terms of the budgetary targets i.e.,
because the government either fiscal deficit targets and revenue deficit
spends more, cut taxes or both. targets.
− It puts more money into the consumers' • Measures to achieve fiscal consolidation:
hands, so they spend more which
increases the demand. » Improves tax revenue and minimizes tax
avoidance.
» Contractionary Fiscal Policy: » Broadening the tax base and minimizing
tax concessions and exemptions.
− The contractionary fiscal policy goal
is to slow the economic growth and » Better targeting of government subsidies
stamp out inflation. and increasing use of Direct Benefit
Transfer (DBT). This will reduce leakages.
− Government increases the tax and
cut its spending. » Reduction of excessive/unnecessary
expenditure.
Importance of Fiscal Policy in

India Fiscal Responsibility
• In a country like India, fiscal policy helps and Budget
Management
to accelerate the economic growth by
increasing the investment rate in public
as well as private sectors.
• The fiscal policy helps mobilise resources
(FRBM) Act 2003
(through taxation) for financing its
• Fiscal Responsibility and Budget
economic activity.
Management (FRBM) Act was enacted in
• The fiscal policy encourages the 2003.
investment into those productive sectors
• It provides a legal institutional framework
which are considered socially and
for fiscal consolidation.
economically desirable.
• The objectives of the Act are:
» Ensuring Equity in fiscal management.
» Ensuring Macroeconomic stability.
159
» Ensuring better coordination between the expected rate of GDP growth, fiscal
fiscal and monetary policy. situation of the Central Government
» Bringing transparency in the fiscal and the balance of external sector of
operation of the Government. the economy.
• The Government can skip the targets • To instill the fiscal discipline at the state
of fiscal consolidation only in case of level, the 12th Finance Commission
natural calamity, national security and provided incentives to states with the
other exceptional grounds as mentioned help of conditional debt restructuring
by Central Government. and interest rate relief for introducing
Fiscal Responsibility Legislations (FRLs).
• The Finance Minister has to discuss the Every state has implemented their own
reasons for skipping the targets and FRLs.
suggest corrective measures to be taken,
in case of a violation.
• Further, the Act bans borrowing by the Target by FRBM Act 2003
government from the Reserve Bank of
India, thereby, making monetary policy • The FRBM rule specifies a reduction of
independent of fiscal policy. fiscal deficit to 3% of the GDP by 2008-
09
• The Act also mandates the government
to lay before the parliament three policy • Fiscal deficit annual reduction target
statements in each financial year namely of 0.3% of GDP per year by the Central
government.
» Medium Term Fiscal Policy Statement • Revenue deficit to be completely
eliminated by 2008-09.
− It sets out three-year rolling targets
for five specific fiscal indicators in • Revenue deficit has to be reduced by
relation to GDP at Market Prices, 0.5% of the GDP per annum.
namely, • Total Debt to be reduced to 9% of the
(i) Revenue Deficit GDP with an annual reduction of 1% of
(ii) Effective revenue deficit, GDP.
(iii) Fiscal Deficit, • It bans the purchase of primary issues of

the Central Government securities by the
(iv) Tax to GDP ratio RBI after 2006.
(v) Total outstanding Debt as a
percentage of GDP
» Fiscal Policy Strategy Statement Amendments to FRBM Act 2012
• Through Finance Act 2012, Fiscal
− It gives the strategic priorities of Responsibility and Budget Management
Government in the fiscal area for the Act, 2003 was amended. It provided that,
financial year relating to taxation, along with the existing three documents,
lending, expenditure, and investments, Central Government shall table another
administered pricing, borrowings and document, the Medium-Term Expenditure
guarantees. Framework Statement (MTEF).
» Macroeconomic Framework Policy • Amendments to the FRBM Act were
Statement introduced as per the recommendations
of the 13th Finance Commission.
− It contains an assessment regarding • Two important features of the
160
amendment to FRBM Act in the direction Government has to take appropriate
of expenditure reforms are: measures to reduce the:
» Effective Revenue Deficit. » Fiscal deficit to 3% of GDP by 2015.

» Medium Term Expenditure Framework: » Revenue deficit to less than 2% of GDP
It will set a 3-year rolling target for by 2015.
expenditure indicators. » Effective revenue deficit to be eliminated
by 31st of March 2015.
• As per 2012 Amendment, the Central
Significance of FRBM Act:

• It provides an institutional and legal structure for fiscal consolidation. It makes
it mandatory for the Central government to adopt measures to reduce fiscal
deficit, to eliminate revenue deficit altogether and to create revenue surplus in the
forthcoming years.
• The Act makes it mandatory not only for the present government but also for the
future government to follow the fiscal consolidation path.
• The FRBM Act has strengthened the fiscal efficiency of both the federal government
and the states.
• During the pre-subprime crisis era, the Act aided in strict adherence to the path
of fiscal contraction, allowing for enough fiscal space to pursue countercyclical
fiscal policy (strategy by government to counter boom or recession through fiscal
measures). In 2007-08, by implementing the act, the government was able to reduce
the fiscal deficit to 2.7 percent of GDP and the revenue deficit to 1.1 percent of GDP.
Limitations of the FRBM act

• Although there has been a substantial reduction in deficits, this has largely been
due to cuts in vital areas of the economy such as education and health care. The
proportion of GDP spent on development by the Union government has decreased
over time.
• An assessment of state revenue account of the development expenditure indicates
that in almost all sectors of development, there has been a decline in the FRBM
period.
• Also, the government has been seen manipulating the revenue and expenditure
accounts to reach deficit targets, such as cutting capital expenditure and demanding
interim dividends from Public Sector Undertakings (PSUs) in advance etc.
• Further, the FRBM Act overlooks the possible inverse link among the bank credit
(monetary expansion) fiscal deficit (fiscal expansion). That is, if credit growth drops,
fiscal deficit may need to increase and if credit increases, fiscal deficit ought to
drop — this is to ensure adequate money supply to the economy.
• Statistics on bank credit, money supply growth, and GDP establishes that both
money supply growth and credit expansion have significantly decreased in relation
to GDP growth. Therefore, the FRBM Act has not only reduced the fiscal deficit
but also starved the growing economy which has been deprived of much-needed
investment.
161
N K Singh Committee Review − It recommended establishing an
independent Fiscal Council.
of FRBM
− The Council will provide several
• Government of India constituted advisory functions to the government.
the Committee in 2016 to review the
− It will forecast key macro variables
implementation of the FRBM Act under
like real and nominal GDP growth, tax
the Chairmanship of N. K. Singh.
buoyancy, commodity prices.
• Recommendation of the committee:
» Escape Clause
» Public debt to GDP ratio
− The committee recommends fiscal
− It should be considered as a medium- flexibilities to go above or below the
term anchor for fiscal policy. fiscal deficit targets in the form of
− The combined debt-to-GDP ratio scape clauses.
of the Centre and states should − The Committee set 0.5% as escape
be brought down to 60 % by 2023 clause for fiscal deficit target.
(comprising of 40% for the Centre
and 20% for states). » Fiscal consolidation responsibility for
states
» Fiscal deficit
− The Committee observes that the
− The Committee accepted fiscal deficit state government’s fiscal position
as the operating target to bring down is important after greater resource
public debt. transfer to them (Fourteenth finance
− For fiscal consolidation, the centre Commission award).
should reduce its fiscal deficit from − State Government should bring down
the current 3.5% (2017) to 2.5% by their debt target to 20% of GDP from
2023. the current 21%.
» Revenue deficit » Congruence of Fiscal and Monetary

Policy
− The Committee also advised that
the central government should bring − The FRBM Review Committee
down its revenue deficit steadily by observed that both monetary and
0.25% of GDP per annum, to reach fiscal policies must ensure growth
0.8% by 2023, from a projected value and macroeconomic stability.
of 2.3% in 2017.
• Annual targets as recommended by the
» Independent Fiscal Council committee are as follows:
Year Debt/GDP Fiscal Deficit Revenue Deficit
2017-18 47.3 3.0 2.1
162
2018-19 45.5 3.0 1.8
2019-20 43.7 3.0 1.6
2020-21 42.0 2.8 1.3
2021-22 40.3 2.6 1.1
2022-2023 38.7 2.5 0.80
Types of Budget » There is certain expenditure which violates

cost-benefit analysis i.e., Defence, foreign
Zero Based Budgeting relation etc.
• Under Zero Based Budgeting, Ministries » Zero base budgeting is too complex and
have to justify expenditure on every it needs detailed attention and analysis.
project on the basis of its merit (cost- » There is certain expenditure upon which
benefit analysis) annually afresh. the government/parliament does not
• Zero-based budgeting starts from have the power of scrutiny (charged
scratch, rather than a traditional budget expenditure in India).
that is based on previous budgets.
• Zero Base Budgeting was developed by
Peter Pyhrr in the 1970s. India adopted Performance Budget
this in practice in 1997-99. • Performance-based budget is the
• The main benefit of Zero-base budgeting practice of developing budgets in which
are: budget are based on the relationship
between input cost and expected results.
» Efficient resource allocation, as it is based • The major aim of performance budgeting
on cost and benefits.
is to improve the efficiency of public
» Prioritising allocation of resources is expenditure since financial resources are
another feature of ZBB. allocated according to objectives and
» ZBB allows close examination and purposes.
scrutiny of each programme and public • From 2007-08 onwards, the Performance
spending. Budget was merged with the Outcome
» ZBB helps policymakers to achieve more Budget. There is only one document i.e.,
cost-effective delivery of public services. the Outcome Budget.
• Limitations of Zero-base budgeting are:
163
Outcome Budget is more than the expected government
revenues in a specific financial year.
• The Outcome Budget is a report on what • It is best suited for developing countries
various Ministries and Departments have
like India.
done with the outlays provided in the
previous annual budget. • Deficit budget helps create more demand
and boost the economic growth.
• It measures the developmental outcomes
of all government programmes and • Here, the government incurs excessive
whether the money has been spent for expenditure to improve the demand
the purpose it was sanctioned. for goods and services which helps in
reviving the economy.
• In 2005-06 Outcome Budget was
first introduced in India. Since then,
Government has continued to release
annual Outcome Budget Reports with Gender Budget
incremental changes and without • Gender budgeting is a method for
any reference to the previous year’s governments to promote equality
performance. through fiscal policy.
• All Ministries have to prepare outcome • It involves analyzing a budget’s impacts
budgets to make the budgeting target on men and women and allocating
oriented. resources accordingly.
• The rationale behind gender budgeting
arises from the recognition that the
Balanced Budget national budgets affect men and
• A balanced budget is the budget where women differently through the resource
the estimated government expenditure is allocation.
equal to expected government receipts • Women constitute 48% of India’s
in a particular financial year. population, but they fall behind men
• In this, the budget has no budget deficit on many socio-economic indicators
but could have a budget surplus. like education, health, economic
opportunities, skills etc.
• Thus, they require special attention due
Surplus Budget to their vulnerability and lack of access
to resources.
• A surplus budget is the budget in which
the expected government revenues • Since 2005-06, the Expenditure Division
exceed the estimated government of the Ministry of Finance has been issuing
expenditure in a particular financial year. a note on Gender Budgeting every year.
• Surplus Budget is quite rare in modern
economies because of the temptation for
the government to spend more money
Golden Rules of Budgeting
and cut taxes. • The golden rule of budgeting states that
a government must only borrow for its
capital expenditure, not to finance the
Deficit Budget revenue expenditure.
• A deficit budget is the budget in which • In other words, the government should
the estimated government expenditure borrow only to finance investments that
benefit overall economy, and current
164
spending must be covered and funded
by existing taxes. Public Debt or
• The golden rule of budgeting is that the
government's budget should have no
Sovereign Debt
revenue deficit. • Public debt is nothing, but the total
amount borrowed by the government.
• Article 292 of the Indian Constitution
Ways and Means states that the Government of India
can borrow amounts specified by the
Advances (WMA) Parliament from time to time.
• Since the Union government depends
• The Reserve Bank of India (RBI) offers heavily on market borrowing to meet
temporary loan facility to the central its operational and developmental
and state governments. This loan facility expenditure, the study of public debt
is called as Ways and Means Advances becomes key to understand the financial
(WMA). health of the government.
• It was introduced in 1997 to meet the • Debt to GDP ratio is used by investors
mismatches in the receipts and payments to measure a country's ability to make
of the government. future payment on its debt.
• The limits for WMA are decided by the • In India, total Central Government
government in consultation with RBI at Liabilities constitutes the following two
the start of each financial year. categories.
• The WMA are given for 90 days only.
» Internal Debt
• The loans under WMA are currently
charged at the Repo Rate. − Internal debt or domestic debt is the
• If the loan tenure under WMA goes sub-part of the total government
beyond 90 days, it would be considered debt that is owed to lenders within
as an overdraft (such overdraft is charged the country.
at 2% more than the Repo Rate). − It is the money that government
• There are two kinds of Ways and Means borrows from its own citizens.
Advances: − Internal debt constitutes more than
93 percent of the overall public debt.
» Special WMA or Special Drawing Facility
− The major instruments covered under
− It is provided against the collateral of Internal Debt are as follows:
the government securities held by the • Dated Securities
state.
• Treasury-Bills
− The interest rate for SDF is 1% less
• Securities issued against Small
than the Repo Rate.
Saving
» Normal WMA • Market Stabilization Scheme
(MSS) Bonds
− These are unsecured advances
extended at the bank rate. » External Debt
− After exhausting the special WMA
− External debt is owed to foreign
limit, the Government is provided with
creditors.
a normal WMA.
165
− The foreign creditors can be foreign share in total external debt, followed by
governments, International Financial NRI deposit and short-term debt.
Institutions such as the IMF etc. • The share of US dollar denominated debt
− The major instruments covered under has the highest share in external debt
External Debt are as follows: followed by Indian rupee, SDR, Japanese
• Commercial Borrowing Yen and Euro.
• NRI Deposit • Debt to GDP of central government has

been consistently reducing, especially
• Multilateral Debt- debt from after the enactment of the FRBM Act
multilateral institutions like ADB, (2003).
IBRD etc.
• This is an outcome of each fiscal
• Long and Short-Term Debt consolidation attempts as well as
• Commercial Borrowing has the highest relatively strong GDP growth.
60
50
Percent of GDP
40
30
-0
5
-0
6 07 -0
8 09 -1
0 -1
1
-1
2
-1
3
-1
4
-1
5
-1
6 -1
7 18 (P)
- - 9 0 1 2 3 4 5 6 7- 19
04 05 06 07 08 00 2 01 201 01 01 01 01 01 2 01 8-
20 20 20 20 20 2 2 2 2 2 2 1
20
I m a g e 10.5: T r e n d in C e n t r e ’ s D e b t -G dp R ati o
Public Debt the total debt within sustainable levels".

• According to the Fiscal Policy Strategy
Management of the Statement of 2012-13, the government’s
public debt management policy
Union Government revolves around gradual reduction of
in India public debt-GDP ratio.

• This is in line with the objective of
• The overall objective of the debt further decreasing the debt servicing
management policy of Central risk and to create more fiscal space for
Government, which was mentioned developmental activities.
in the Central Government's status • On the financing front, the Government
paper (November 2010) is to “meet the policy focuses on the following
financing needs of Central Government principles:
at the lowest possible long-term
borrowing costs and also to maintain » More reliance on domestic borrowings
over external borrowing,
166
» Market borrowings should be preferred
over instruments which carry administered Fiscal Federalism
interest rates.
» Consolidation of the debt portfolios. • Fiscal federalism deals with the
separation of governmental functions
» Development of a wide and deep market and financial relations among different
for Government securities to improve levels of government.
liquidity in secondary market.
• The objective of fiscal federalism
is to enable the national and sub-
national governments to operate in
Institutions responsible for the
such a way that leads to efficiency in
management of public debt the use of resources and also create
• The Indian Constitution empowers an environment in which all economic
the executive branch of government actors use resources efficiently.
to borrow upon the security of the • The history of fiscal federalism in modern
Consolidated Fund of India. India goes back to the Government of
• RBI as a representative of the Government India Acts of 1919 and 1935.
(of both Union and the States) • While 1919 Act provided for a
implements the borrowing programme. separation of revenue heads between
• RBI draws the required statutory powers the Center and the provinces, the 1935
for debt management from Section 21 Act provided for the sharing of Center’s
of the Reserve Bank of India Act, 1934. revenues and for the provision of
grants-in-aid to provinces.
• While it is obligatory for the Reserve
Bank to manage the public debt of the
Union Government, it manages public
Division of functions and
debt of the various State Governments
by an agreement. resource
• The jurisdiction of various authorities • The Indian Constitution, under Article
responsible for public debt 246 and Seventh Schedule, distributed
management is given below: powers and allotted subjects to the
Union and the states.
» Reserve Bank of India (RBI): Domestic
Marketable Debt which includes cash
• The Indian Constitution has provided
management bills, treasury bills and for a certain division of the powers of
dated securities. taxation between the Union and states,
and also gives the states a share in the
» Ministry of Finance, Office of Aid and resources available to the Centre.
Accounts Division: External debt
• Federal transfers to the states in India
» Ministry of Finance, Budget Division and
are made in three streams, as
Reserve Bank of India: Other liabilities
like deposits, small savings, reserve funds » Devolution of states share in Central
etc. Taxes
» Grants from Central to the states: Further
classified as statutory or non-statutory,
and plan as well as non-plan.
167
− Non-Plan grants: 16
13.91
i. Statutory grants recommended by 11.95
11.88
the Finance Commission to cover 12
9.86
10.85
the gap in revenue.

8
ii. Assistance for relief measures

after natural calamities. 4
− Non-Statutory grants, comprising: 0
i. Plan grants: 2016-17 2017-18 2018-19 RE 2019-20 BE 2020-21
I m a g e 1 0.6 : T ota l T r a n s f e r s to S tat e s & U T ' s

(a) State plan schemes
(b) Central plan schemes
(c) Centrally sponsored schemes
(d) Special schemes for North Finance Commission
Eastern council etc. • The Finance Commission is constituted
» Loans from Centre under Article 280 of the Constitution
by the President of India once in five
a. Plan loans years. It gives recommendations on
b. Non-Plan loans including Ways and centre-state financial relations. Its core
Means Advance responsibilities are:
• Fiscal relations between the union » To evaluate the state of finances of the
government and state governments Union and State Governments.
have experienced significant changes » Recommend the sharing of taxes
in recent years. between them.
• Three landmark changes introduced in » Lay down the principles determining the
union-state fiscal relations since 2015-16: distribution of these taxes among States.
» In January 2015, the Union Government • The First Finance Commission was
abolished the Planning Commission and constituted in 1951 and there have been
established the NITI Aayog in its place. fifteen so far.
» Fundamental changes have been • The Finance Commission is also
introduced in the system of revenue required to recommend on the
transfers from the centre to the states. The measures necessary to strengthen
Centre has devolved higher taxes (from
the Consolidated Fund of a State
32% to 42%) to the states from 2015-16
to augment the resources of the
fiscal year onwards as recommended by
Municipalities and Panchayats in the
the Fourteenth Finance Commission.
State as per the suggestions of the
» The Goods and Services Tax and the Finance Commission of the State.
establishment of the GST Council for
the central and state governments to • The recommendations made by the
deliberate and jointly take decisions. Finance Commission are advisory in
nature and hence, not binding on the
• In terms of absolute amount, and as a Government.
percentage of GDP, total transfers to • In 2017, the 15th Finance Commission was
States have risen between 2014-15 and set up under the chairmanship of N.K.
2019- 20. Singh.
168
Fifteenth Finance Commission • It has suggested the required adjustment
of about 1% because of the changed
Recommendations status of the erstwhile State of J &K into
Vertical Devolution (Devolution of the new Union Territories of Ladakh and
Taxes of the Union to States): Jammu and Kashmir.
• It has proposed that vertical devolution

be held at 41%, as it was in its interim Horizontal Devolution:
Report for 2020-21. It is at the same level On the basis of principles of equity, need
of 42% of the divisible pool as suggested and performance, overall devolution
by the 14th Finance Commission. formula is as follows.
14th FC 15th FC
Criteria
2015-20 2020-21
Income Distance 50 45
Population (1971) 17.5 -
Population (2011) 10 15
Area 15 15
Forest Cover 7.5 -
Forest and Ecology - 10
Demographic Performance - 12.5
Tax Effort - 2.5
Total 100 100
Performance Based Grants and approximately 46% of national income.

Incentives to the States: » Third, administrative and governance
reforms under which it has suggested
• These grants and incentives revolve grants for judiciary, statistics and
around four major themes.
aspirational districts and blocks.
» The 1st is the social sector, where it has » Fourth, it has created a performance-
concentrated on education and health. based incentive mechanism for the
» Second is related to the rural economy, power sector that is not linked to grants
where it has emphasized on agriculture provides States with a substantial
sector and the maintenance of rural additional borrowing window.
roads.
» The economy of rural area plays a vital Fiscal Space for Centre:
role in the country as it encompasses
2/3rd of the country's population, • Total 15th Finance Commission transfers
around 70% of the total workforce and (devolution + grants) comprises around
169
34 percent of estimated Gross Revenue and all moneys received by the Union
Receipts to the Centre, giving adequate Government in repayment of loans shall
fiscal space to meet its resource needs form a consolidated fund named as the
and spending obligations on nationwide 'Consolidated Fund of India' for the Union
development priorities. Government.
• The government cannot withdraw the
money from the Consolidated Fund
Grants to Local Governments:
unless such withdrawal is voted in the
• Along with grants and incentives for Lok Sabha.
municipal public services and local • The CAG (Comptroller and Auditor
government bodies, it incorporates General) of India audits these Funds and
performance-based grants for incubation Reports to the Union/State legislatures
of new cities and health grants to local when proper accounting procedures
government bodies. have not been followed.
• Basic grants for urban local bodies are
only suggested for cities/towns with
populations of less than a million people. Charged Expenditure
For Million-Plus cities, 100% of the grants
are performance-linked with the help of • According to the Article 112 (3) and Article
the Million-Plus Cities Challenge Fund 202 (3) of the Constitution, the following
(MCF). expenditure does not require to be voted
and such expenditure is charged upon
• The sum of MCF is related to how well the Consolidated Fund of India.
these cities perform in terms of improving
air quality and meeting service level • They include:
standards for urban drinking water supply,
sanitation, and solid waste management.
» Salary, allowances and pension for
the President and Governors of States,
Speaker and Deputy Speaker of the Lok
Disaster Risk Management: Sabha, the Comptroller General of India
and Judges of the Supreme and High
• Mitigation Funds should be established Courts.
at both the national and State levels, in » Interest and other debt-related charges
compliance with the provisions of the of the Government and any sums required
Disaster Management Act. The Mitigation to satisfy any court judgment pertaining
Fund should be utilized for those local to the Government.
level and community-based interventions
which decrease risks and encourage
environment-friendly settlements and
livelihood practices. Fiscal Neutrality
• In fiscal neutrality, government's overall
fiscal policy remain neutral with respect
Consolidated Fund of India to aggregate demand in the economy.
• As per Article 266 (1) of the Indian • Fiscal neutrality is a situation where
Constitution, all revenues (tax revenue demand is neither stimulated nor
as well as non-tax revenue) received diminished by fiscal policy.
by the Union government along with • A balanced budget is an example of
all loans raised through issuance of fiscal neutrality, where government
T-bills, external and internal loans expenditure is financed almost exactly by
170
tax revenue. In other words, tax revenue India:
is equal to the government expenditure.
− Under this pillar, the Finance Minister
Twin Deficit announced to cover Agriculture and
• Twin deficit occurs when a country has Allied sectors, farmers’ welfare and
both a current account deficit and a rural India, migrant workers and
fiscal deficit. labour, and financial inclusion.
• It is also called a double deficit. − To deliver adequate credit to our

cultivators, Indian Government has
• India is an example of country with twin enhanced the agricultural credit
deficit. target to Rs. 16.5 lakh crore in FY22.
Likewise, the allocation to the Rural
Infrastructure Development Fund
The Budget 2021-22 expanded from Rs. 30,000 crores to
• Proposals under Budget 2021-22 will Rs. 40,000 crores. The Micro Irrigation
further strengthen the Sankalp of Nation Fund, with a corpus of Rs.5,000 crore
First, Strong Infrastructure, Healthy India, has been formed under NABARD will
Good Governance, Doubling Farmer’s be doubled.
Income, Education for All, Women
Empowerment, Opportunities for youth, » Reinvigorating Human Capital:
and Inclusive Development, among
− The Union Government said that
others. This budget rest on 6 pillars.
the National Education Policy (NEP)
» Health and Wellbeing: There is announced recently has had very
substantial boost in investment in Health good reception, while adding that over
Infrastructure and the Budget outlay for 15,000 schools will be qualitatively
Health and Wellbeing is Rs. 2,23,846 crore strengthened to incorporate all
in BE 2021-22 as compareed to 2020- components of the NEP.
21 BE of Rs. 94,452 crore, an increase of − Budget also announced that 100
around 137 percentage. new Sainik Schools will be set up in
» Physical & Financial Capital, and collaboration with NGOs/private
Infrastructure: schools/states. Budget also proposed
to establish a Higher Education
− Finance Minister stated that for a USD Commission of India, as an umbrella
5 trillion economy, our manufacturing body having 4 separate vehicles for
segment has to grow in double digits accreditation, regulation, standard-
on a continuous basis. setting, and funding.
− To achieve this goal the government − For accessible higher education in
has committed nearly around Rs. 1.97 Ladakh region, Government intended
lakh crore in the next 5 years starting to establish a Central University in
FY 2021-22. Leh.
» Inclusive Development for Aspirational » Innovation and R&D:
171
INNOVATION AND R&D
» Minimum Government and Maximum

Governance: UPSC CSE PRELIMS
− Union government proposed to Previous Years
take various steps to bring reforms
in Tribunals in the last few years for Questions
quick delivery of justice and aims to Q.1) In India, deficit financing is used for
take further measures to rationalize raising resources for: 2013
the performance of Tribunals.
(a) Economic development
− Government also introduced the (b) Redemption of public debt
National Commission for Allied
Healthcare Professionals Bill in the (c) Adjusting the balance of payments
Parliament, with an aim to ensure (d) Reducing foreign debt
effective and transparent regulation
Ans. (a)
of the different 56 allied healthcare
professions. • Explanation: Deficit financing is a
− Government also announced that the practical mechanism for economic
upcoming Census could be the 1st growth that the Indian government has
digital census in the Indian History used to secure the money needed to fund
and for this mission, Rs. 3,768 crores the five-year plans.
allocated in the year 2021-2022.
Q.2) With reference to Union Budget,
which of the following is/are covered under
Non-Plan Expenditure? 2014
172
1. Defence -expenditure (c) Both 1 and 2
2. Interest payments (d) Neither 1 nor 2
3. Salaries and pensions Ans. (c)
4. Subsidies • Explanation: The 14th commission
Select the correct answer using the code has recommended to increase the tax
given below. devolution of the divisible pool to states
to 42 percent for the years 2015 to 2020.
(a) 1 only
This is 10% more compared to 32% target
(b) 2 and 3 only set by 13th financial commission.
(c) 1, 2, 3 and 4 • The 14th commission has recommended
(d) None expansion of Interstate council for
cooperative federalism to identify sector-
Ans. (c)
specific grants to states.
• Explanation: There are two different
elements of expenditure, plan and non-
Q.4) There has been a persistent deficit
plan.
budget year after year. Which of the
• Of these, plan expenditures are estimated following actions can be taken by the
after consultations with each of the government to reduce the deficit? 2016
relevant ministries and the Planning
1. Reducing revenue expenditure
Commission.
2. Introducing new welfare schemes
• Interest payments, subsidies (primarily
on food and fertilisers), wage and salary 3. Rationalizing subsidies
payments to government workers, 4. Expanding industries
grants to governments of States and
Union Territories, police, pensions,
given below.
economic services in different fields,
other general services like tax collection, (a) 1 and 3 only
social services, and grants to foreign (b) 2 and 3 only
governments account for non-plan
(c) 1 only
revenue expenditure.
(d) 1,2,3 and 4
• Non-plan capital expenditure mainly
consists of defence, loans to public Ans. (a)
enterprises, loans to States, Union
• Explanation: Introduction of new welfare
Territories, and foreign governments.
schemes would entail more spending
and it goes just opposite to what we are
Q.3) With Reference to the Fourteenth aiming to do i.e., decrease the deficit.
Commission, which of the following • Different policies to reduce a budget
statements is/are correct? 2015 deficit.
1. It has increased the share of States in 1. Cut government spending
the central divisible pool from 32 per
2. Increase in taxation
cent to 42 per cent
3. Economic growth
2. It has made recommendations
concerning sector-specific grants 4. End tax breaks and subsidies for big
oil, gas, and coal companies.
(a) 1 only
(b) 2 only
173
Q.5) Which of the following is/are Q.6) Consider the following statements:
included in the capital budget of the 2017
Government of India? 2016
1. Tax revenue as a per cent of GDP of
1. Expenditure on acquisition of assets India has steadily increased in the last
like roads, buildings, machinery, etc. decade.
2. Loans received from foreign 2. Fiscal deficit as a per cent of GDP of
governments. India has steadily increased in the last
3. Loans and advances granted to the decade.
States and Union Territories. Which of the statements given above is/
Select the correct answer using the code are correct?
given below. (a) 1 only
(a) 1 only (b) 2 only
(b) 2 and 3 only (c) Both 1 and 2
(c) 1 and 3 only (d) Neither 1 nor 2
(d) 1, 2 and 3 Ans. (d)
Ans. (d)
• Explanation: Tax revenue as a % of GDP
• Explanation: Under Article 112 of the of India has not steadily increased in the
Indian Constitution, the Annual Financial last decade.
Statement (AFS) has to separate • Fiscal deficit as the per cent of GDP of
expenditure of the Government on India has not steadily increased in the
revenue account from other expenditures. last decade.
• Therefore, Government Budget includes
the Revenue Budget and Capital Budget.
Q.7) Consider the following statements
• Capital Budget comprises capital
2018
payments and capital receipts.
1. The Fiscal Responsibility and
• The capital receipts include loans
Budget Management (FRBM) Review
raised by Government from the public,
Committee Report has recommended
known as market loans, borrowings by
a debt to GDP ratio of 60% for the
Government from central bank and
general (combined) government by
other parties through the sale of Treasury
2023, comprising 40% for the Central
Bills and loans obtained from foreign
Government and 20% for the State
Governments and entities, disinvestment
Governments.
receipts and recoveries of loans from the
governments of State and Union Territory 2. The Central Government has domestic
and other parties. liabilities of 21% of GDP as compared
to that of 49% of GDP of the State
• Capital payments comprise capital
Governments.
expenditure on acquisition of assets such
as buildings, machinery, land, equipment, 3. As per the Constitution of India, it
as also investments in shares, etc., and is mandatory for a State to take the
advances and loans granted by the Central Government’s consent for
Union Government to the Governments raising any loan if the former owes any
of State and Union Territory, Government outstanding liabilities to the latter.
companies, Corporations, and other Which of the statements given above is/
parties. are correct?
174
(a) 1 only Q.8) Consider the following statements:
(b) 2 and 3 only 2019
(c) 1 and 3 only 1. Most of India’s external debt is owed by
(d) 1, 2 and 3 governmental entities.
Ans. (c) 2. All of India’s external debt is

denominated in Rs.
• Explanation: The FRBM Review Which of the statements given above is/
Committee (chaired by Mr N.K. Singh) are correct?
introduced a draft Debt Management
and Fiscal Responsibility Bill, 2017 to (a) 1 only
replace the Fiscal Responsibility and (b) 2 only
Budget Management (FRBM) Act, 2003. (c) Both 1 and 2
• Key suggestions of the Committee and (d) Neither 1 nor 2
important features of the draft Bill are
briefly summarised below. Ans. (d)
» Debt to GDP ratio: The Committee • Explanation: The external debt of India
is the overall debt the country owes to
suggested using debt as the primary
foreign creditors.
focus for fiscal policy. Debt to GDP ratio
of 60% should be the target, with a 40% • The debtors can be the Union government,
limit for the centre and 20% limit for the state governments, corporations, or
states. By 2023, the target debt-to-GDP citizens of India.
ratio should be met. • The debt consists of money owed to
» Deviations: The Committee pointed out foreign governments, private commercial
that FRBM Act allows the government banks, or international financial
to deviate from the targets in case of a institutions such as World Bank and the
national security, national calamity or International Monetary Fund.
other exceptional conditions notified by • Commercial borrowings continued to be
it. Permitting the government to notify the largest part of external debt with a
these grounds weakened the 2003 Act. share of 37.4%, followed by NRI deposits
The Committee recommended that (24.1 per cent) and short-term trade credit
grounds in which the government can (19.9 per cent).
deviate from the goals should be clearly
stated, and the government should not be • U.S. Dollar denominated debt continued
permitted to notify other circumstances. to be the largest component of India’s
external debt, followed by the Indian
rupee, SDR, yen and euro.
175
CHAPTER - 11
EXTERNAL SECTOR
• The rise in FOREX reserves was mainly on

External Sector account of an increase in foreign currency
assets(dominated by dollar), which rose
• The external sector of a country’s to $427.949 billion, gold reserves rose to
economy includes all international $28.058 billion, country's reserve position
economic transactions between residents with the IMF increased to $3.703 billion,
of the country (both public and private special drawing rights(SDR) were up to
sector) and the rest of the world. $1.447 billion.
• All economic activities that take place in • Hence, FCA > Gold > Reserve Position
foreign currency fall in the external sector with IMF > SDR.
like import, export, capital account,
foreign investment, the balance of
payment etc.
ECONOMIC
SURVEY
FOREX RESERVES
2019-20 In US $ billion
461.2
424.5 412.9
FOREX Reserve 370.0
• Foreign exchange reserves are the foreign

currency assets held by a country's
central bank (RBI). $
• They are also known as foreign currency
reserves or foreign reserves.
• In the context of India, foreign exchange 2016-17 2017-18 2018-19 2019-20
reserves include:
» Foreign Currency Assets (FCAs)- Largest

I m a g e 11.1: FOREX R e s e r v e s in I n di a
component of the FOREX Reserves
» Gold
» Special Drawing Rights (SDRs) Exchange Rate
» Reserve position of RBI with International
Monetary Fund (IMF) • Exchange rate refers to the value of one
currency calculated in terms of another
• FOREX reserves are used to back currency.
liabilities (meets its foreign obligations) • For example, at present approximately
and influence monetary policy. Rs. 71 is exchanged for the US $ 1. Hence,
• India’s foreign exchange reserves touched the value of one US Dollar is equal to 71
a record high of US$ 461.157 billion, in Indian rupees.
January 2020, according to the RBI data.
176
• Most of countries switched to a floating
Exchange Rate exchange rate in the early 1970s after
System using a fixed exchange rate for decades.

• A fixed exchange rate system may
• An exchange rate system, establishes minimize instabilities in real economic
the way in which the exchange rate is activities by reducing volatility and
determined, i.e., the value of the domestic fluctuations in the currency.
currency with respect to other currencies.
• There are many ways in which the Devaluation
country's exchange rate is determined.
• It refers to the reduction in the value of
the domestic currency in terms of foreign
currency by the central bank.
Floating Exchange Rate System
• Countries that have a fixed exchange
• In Floating or Flexible Exchange rate rate use this monetary policy tool.
system, exchange rate of currencies is
determined based on demand-supply • RBI devalued Rupee three times in 1949,
in the FOREX market relative to other 1966, 1991.
currencies.
• Thus, if the demand for the currency Revaluation
is high and supply is low, the value will
increase. If demand is low and the supply • It refers to an increase in the exchange
is high, this will drive that currency price rate of domestic currency by the central
lower. bank.
• A currency which uses a floating exchange
rate is known as floating currency.
Managed Exchange Rate
• Most of the world's currencies are floating
and include the most widely traded System
currencies: The United States Dollar, the • A managed exchange rate is a hybrid
Swiss Franc, the Euro, the Japanese Yen, or mixture of the fixed and floating
the Pound Sterling, and the Australian exchange rate systems.
Dollar.
• Under this exchange rate, the domestic
• However, even with floating currencies, currency is determined based on demand
central banks often participate in the and supply subject to the central bank
markets to attempt to influence the value intervention in the FOREX market.
of floating exchange rates.
• The central bank cannot fix the exchange
rate, but it can affect currency exchange
rate both directly (by buying and
Fixed Exchange Rate System selling currencies) or indirectly (through
• In the Fixed or Pegged Exchange rate monetary policy).
system, the Exchange Rate of currencies • But in case of extreme fluctuations, the
is determined by the central bank of the central bank under managed floating
country (RBI for India). exchange rate system intervenes in the
• The intention of a fixed exchange rate FOREX market with the objective to
system is to keep a currency's value minimize the fluctuation in the exchange
within a narrow limit. rate of the currency.
177
• India adopted this form in 1993.
• Today most of the economies are
Depreciation
following a managed exchange rate
• It refers to a reduction in the exchange
system for determining the exchange
rate of a currency due to a change in
rate of the currency.
its demand and supply in the FOREX
market.
Wider Band Exchange Rate • Depreciation happens under a flexible

exchange rate system or under a
System managed floating exchange rate system.
• Under this, the central bank (RBI) fixes • For Example, if in previous month 1$ = Rs.
exchange rate bands (lower and upper 40 now 1$ = Rs. 50, hence rupee loses its
limit) for the domestic currency within value in front of a dollar.
which it is permitted to fluctuate.
Impact of Depreciation/
Crawling Peg Exchange Rate Devaluation
System
Positive Impact
• Under this central bank (RBI) fixes the
exchange rate band which is periodically
• It promotes export as it reduces the cost
of a country's exports, rendering them
revised.
more competitive in the global market.
• It is a type of fixed exchange rate system
and is followed in China.
• It discourages import as it increases the
cost of imports, so domestic consumers
are less likely to purchase them, further
strengthening domestic businesses.
Foreign Exchange • It helps in reducing the trade deficit and
Market current account deficit (CAD).
• It promotes inward foreign remittances
• The Foreign Exchange Market (also called and foreign tourism.
as FOREX) is a market where different
currencies can be bought and sold.
Negative Impact
• Foreign Exchange market determines
foreign exchange rates for every currency. • It creates inflation as it increases FOREX
• Foreign exchange markets are made reserve which increases the money supply
up of central banks, commercial banks, and aggregate demand.
brokers, exporters and importers, • It may adversely affect economic
immigrants, investors, tourists. growth as it creates cost-push inflation
• Floating exchange rate system and due to increase in the prices of inflated
Managed exchange rate system used this commodities in terms of domestic
institutional framework for determining currencies.
the exchange rate of the currency. • It increases the burden of external debt
in terms of domestic currencies.
• It deteriorates terms of trade (it measures
the purchasing power of export of a
country in terms of quantity of imports).
178
Reasons for rupee depreciation
in recent years
Exchange Rate in
• Supply of Rupee increased, and demand
India
of the Rupee decreased leading to a
• Exchange rate policy in India has
demand-supply mismatch.
undergone many changes over time
• Increase in crude oil prices which because of the opening of the economy
increases total import cost. India is the as part of the broader macroeconomic
third-largest crude oil importing country reforms and liberalization since the early
in the world. 1990s.
• High Trade Deficit and High Current
Account Deficit (CAD).
70
• The protectionist policy adopted by the

major economies. 60
• A hike in the fed rates (as was observed

twice in 2018), strengthens the US Dollar, 50
which in turn leads to a depreciation of

the Indian currency. 40
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
I m a g e 11.2: E xc h a n g e R at e $ Rs
Government/RBI measures to to
check depreciation of Rupee? • In the post-independence period,

exchange rate policy has been shifted
• Restriction of Imports. from a par value system to a basket-
• Contractionary monetary policy. peg and later to a managed floating
exchange rate system.
• Liberalization of Foreign Investment
Policy. • The Bretton Woods System was finally
ended in 1971 due to dollar crisis in 1960s,
• Sale of the dollar in the FOREX market and the rupee was linked with the pound
by RBI.
sterling.
• Interest rate on NRI deposits increased • It was necessary to overcome the
by RBI.
weaknesses associated with a single
currency peg and to ensure the stability
of the exchange rate. Thus, in September
Appreciation 1975, the rupee was pegged to a basket
of currencies which was continued till the
• It refers to the increase in the value of a early 1990s.
currency due to a change in its demand • The initiation of economic reforms, India
and supply in the FOREX market. moved to a floating currency regime
• Appreciation happens under a flexible which involved the dual exchange rate
exchange rate system or under a system (one official and other market-
managed floating exchange rate system. determined).
• For Example, if in previous month 1$ = Rs. • In March 1993, a unified exchange rate
65 now 1$ = Rs. 50, hence rupee gains its system was introduced in place of the
value in front of a dollar. dual exchange rate system.
179
Effective Exchange differential (inflation rate) between the
domestic and foreign countries, it relates
Rate to the purchasing power parity (PPP)

hypothesis.
• The effective exchange rate takes into • The REER considers the relative inflation
account the value of the domestic levels in two economies and thus
currency against the weighted value of a incorporates the concept of purchasing
basket of foreign currencies. The weights power parity.
reflect the foreign countries’ share in the • An increase in REER implies that exports
domestic country’s trade. become more expensive and imports
• It measures the strength of domestic become cheaper; therefore, an increase
currency with respect to currencies of indicates a loss in trade competitiveness.
major trading partners.
• These are of two types:
Current Account
» Nominal Effective Exchange Rate (NEER)
» Real Effective Exchange Rate (REER) • The current account keep records of
country’s transactions with the rest of
• Nominal Effective Exchange Rate (NEER) the world i.e. tracks the overall inflow
and Real Effective Exchange Rate and outflow of goods, services, transfer
(REER) are utilized to gauge the external payments and investment incomes.
competitiveness of an economy. • It is called as the current account because
goods and services are usually consumed
in the current period.
Nominal Effective Exchange • The current account is a significant
Rate (NEER) indicator of an economy's health.
• Nominal Effective Exchange Rate (NEER) • A positive current account balance

is the weighted average of bilateral (current account surplus) indicates
nominal exchange rates of the home the nation is a net lender to the rest
currency in terms of foreign currencies. of the world thus increases a nation's
net foreign assets. A negative current
• It is the exchange rate of the domestic account balance (current account deficit)
currency with respect to the basket indicates that it is a net borrower from
currencies (36 currencies), weighted by the rest of the world thus it decreases a
the share of the basket country’s trade in nation's net foreign assets.
the domestic country’s trade.
• The current account represents the net
• The nominal exchange rate is the amount income of the country.
of domestic currency needed to purchase
foreign currency. • Current account deficit is shown either
numerically by showing the total
monetary amount of the deficit, or in the
percentage of the GDP of the economy
Real Effective Exchange Rate for the concerned year.
(REER) • The main components of the current
• Real Effective Exchange Rate (REER) account are:
is a weighted average of nominal » Trade in goods (visible balance)
exchange rates adjusted for relative price
» Trade in services (invisible balance)
180
» Investment incomes: It includes which cause the changes in the assets
dividends, interest, and remittances. or liabilities of the residents or its
» Net transfers: It includes International government.
aid etc. • Capital Account includes the following:
» Foreign Direct Investment (FDI),
Current Account Deficit (CAD) » Foreign Portfolio Investment (FPI),
• Current Account Deficit calculates the » External Lending and Borrowing,
difference between inward and outward » Foreign Currency Deposits of banks,
flow of money on account of the trade
» External Bonds Issued by the Central
of goods and services and the transfer of
Government.
money from domestically owned factors
of production abroad. • Capital account shows the change in
• CAD includes the trade deficit along with ownership of assets, both within the
some other important factors like net country and outside.
income and transfer payments. • It gives a summary of the net flow of both
• Lower Current Account Deficit (CAD) private and public investment into an
reflects reduced external indebtedness of economy.
the country making domestic economic Capital Account = Foreign Direct
policy increasingly independent of investment + Foreign Portfolio
external influence. Investment + External Lending and
• Foreign Direct Investment (FDI) provides a Borrowing + Other Investments.
more stable source of financing the CAD • A capital account deficit shows that more
as compared to external borrowings. money is flowing out of the economy
• The primary reasons behind high CAD in along with an increase in its ownership
India are crude oil and gold imports. of foreign assets and vice-versa in case
• The Current Account Deficit can be of a surplus.
checked by boosting exports and
reducing non-essential imports such as
gold, mobiles and electronics. Balance of Payment
(BoP)
3.5
Annual
3.0
2.5
(per cent)
• It is the systematic record of entire

2.0
1.5
1.0 economic transactions of a country/

0.5
resident of a country with the rest of the
0.0
world throughout a financial year.
2009-10 to
Q1:16-17
Q2:16-17
Q3:16-17
Q4:16-17
Q1:17-18
Q2:17-18
Q3:17-18
Q4:17-18
Q1:18-19
Q2:18-19
Q3:18-19
Q4:18-19
Q1:19-20
Q2:19-20
2014-15 to
2018-19
2014-14
• The components of the balance of

I m a g e 11.3: C u r r e n t A c c o u n t D e f i c it as
p e r c e n ta g e o f GDP
payment are:
» Current account: It includes all kinds

Capital Account of current financial transactions of the
economy.
• Capital account records all the » Capital account: It includes all kinds
transactions between the residents of of capital financial transactions of the
the country and the rest of the world, economy.
181
» Official reserve transactions: It is this, every entry shown either as a credit
conducted by the central bank in case of (inflow) or debit (outflow) are made in the
the BoP deficit or BoP surplus. account for every transaction i.e. debit
» Errors and omissions: It refers to the and credit are always equal.
balancing items reflecting the inability • If Balance of Payment is a positive at the
to record all the international financial end of the financial year, the surplus is
transactions automatically transferred to the FOREX
reserves of the country.
• A country's balance of payments tells
you whether it saves enough to pay for
• And if there is any negative outcome, the
same foreign exchange is drawn from the
its imports or not.
country’s FOREX reserves. If the FOREX
• Balance of Payment account is reserves are not capable of fulfilling the
maintained as per the provision of the negative BoP balance, it is known as a
double-entry bookkeeping system. Under BoP crisis.
Balance of
Payment
(BoP)
Current Capital
Account Account
Visible Invisible Investment Loan Bank

Account
Import Export Services Incomes Transfers
I m a g e 11.4: B a l a n c e of P ay m e n t
Importance of BoP
• It helps the government to analyze the
• It provides detailed information related export potential of a particular sector
to the demand and supply of a country's
and formulate policy to support its export
currency.
growth.
• For example, India imports more than it
exports, then this means that there will
be more outflow of foreign currency from
domestic market. Thus, Rupee would be
Convertibility
under pressure to depreciate against
other currencies (other things being • It is a situation in which domestic
constant). currency can be converted into a foreign
currency and vice versa at the prevailing
• It examines all the export and import exchange rate without the government
transactions of goods and services. intervention.
• It can be used to evaluate the country’s • There are two types of convertibility:
performance in international economic
competition. » Current account Convertibility
182
− The freedom to convert domestic • It increases the scope of speculation in
currency into a foreign currency domestic currencies and securities.
with respect to the current account
transaction of BoP.
− Example: Import/Export of goods and Introduction of Convertibility
services, Remittances etc. in India
» Capital Account Convertibility • The budget 1992-93 replaced the fixed
exchange rate system with the Liberalized
− The freedom to convert domestic Exchange Rate Management System
financial assets/liabilities and vice- (LERMS) i.e., dual exchange rate system.
versa.
• The budget 1993-94 replaced the
− Example: FDI, Loans, borrowing etc. LERMS with the managed exchanged
floating rate system. It also introduced
convertibility of Rupee for trade account
Impact of Convertibility/ transactions.
Current Account Convertibility • In August 1994, the government
introduced current account convertibility
Positive Impact [ it is mandatory as per Article 8 of IMF,
• It promotes foreign investment as it in case BoP situation of the member
enables foreign investors to withdraw country is stable].
FOREX at will. • Since 1994 government and RBI has been
• It promotes inward remittances and non- gradually liberalizing capital account
residential deposits. convertibility (CAC) norms i.e.
• It supplements domestic capital » The External Commercial Borrowing
formation which increases output and (ECB) ceiling has gradually been raised.
employment in the economy.
» NRI deposit has been made fully
• It enables domestic investors and convertible.
companies to invest abroad.
» Outward remittance ceilings are
• It enables domestic firms to borrow gradually being raised.
from abroad at a relatively lower rate of
interest.
• It reduces the scope of illegal trade and Committee on Capital Account
financial transactions like smuggling,
hawala etc.
Convertibility
Tarapore Committee (1997)
Negative Impact • The Reserve Bank of India established
Committee on Capital Account
• Flight of capital i.e. withdrawal of huge Convertibility (CAC) or Tarapore
FOREX within a short period of time Committee in 1997 for suggesting a
(South Asian crisis 1997). roadmap on full convertibility of Rupee
• It increases the vulnerability of the on Capital Account.
domestic economy to external shocks. • The key highlights of the Report including
• It increases volatility in domestic financial the preconditions to be achieved for the
markets. full floating of money are as follows:
183
» Gross Fiscal Deficit to GDP ratio to be − Third Phase by 2011.
reduced from a budgeted 4.5% in 1997-
98 to 3.5% in 1999-2000. » The upper limit for External Commercial
Borrowings (ECB) should be raised for
» Inflation rate should remain between automatic approval.
3-5% for the 3-year period between
1997-2000 » NRI should be permitted to invest in
capital markets
» External sector policies should be framed
to raise current receipts to GDP ratio and » NRI deposits should be given tax benefits
reduce the debt servicing ratio from 25% » Existing P-Notes holders should be given
to 20%. an exit route to phase out completely the
» A consolidated sinking fund should be PN notes.
constituted to meet debt repayment » Improvement of the Banking regulation.
needs of the government. The fund
should be financed by increasing RBI's • As of now, the rupee is fully convertible
profit transfer to the government and on the current account, but only partially
disinvestment proceeds of public sector convertible on the capital account.
undertakings. • Tarapore Committee has given the
» Four indicators should be used for following benefits of capital account
evaluating the adequacy of foreign convertibility to India:
exchange reserves to safeguard against
any emergency. Also, a minimum net » Availability of large funds to supplement
foreign asset to currency ratio of 40 per domestic resources and thereby promote
cent should be prescribed by law in the economic growth.
RBI Act. » Improved access to international
financial credit markets and a reduction
in the cost of capital.
Second Tarapore Committee on
Capital Account Convertibility » Incentive for Indians to acquire and hold
international securities and assets
(2006)
» Improvement of the financial system in
• Reserve Bank of India set up the second the context of global competition
Tarapore committee to set out the
framework for Fuller Capital Account
Convertibility in relation to the progress
Foreign Investment
made in economic reforms, the stability • Foreign investment includes capital flows
in the external and country’s financial from one country to another country.
sectors, accelerated growth and • With globalization, more and more
integration with global economy. companies have branches in countries
• Some important recommendations of around the world because of the
the committee are: attractive opportunities for cheaper
production, labour and lower or fewer
» The committee suggested 3 phases for taxes.
adopting the full convertibility of rupee • Foreign investment in a country is a good
in capital account. sign that often leads to the increase of
jobs and income.
− First Phase in 2006-07
− Second phase in 2007-09 • As more foreign investment comes into a
country, it can lead to greater investments
184
because individuals/companies see the Method of FDI
country as economically stable.
• Foreign investments can be divided into: • There are multiple methods through
which foreign direct investor may acquire
» Foreign Direct Investment (FDI) voting power of an enterprise in an
economy:
» Foreign Portfolio Investment (FPI)
» By acquiring shares in an enterprise.
» Mergers and acquisitions
Foreign Direct » Establishing a subsidiary of a domestic
Investment (FDI) company in a foreign country
» Joint ventures with foreign corporations
• The foreign direct investment (FDI) is
an investment made by an individual or
a firm located in one country into the Advantage of FDI
company located in another country.
• FDI supplements domestic capital
• Under FDI, a foreign investor establishes/ formation which creates employment
acquires the business entity in the host and stimulates economic growth in the
country along with the management host country.
rights.
• They bring modern technologies,
• Definition of FDI by the IMF: managerial and entrepreneurial skills,
“An investment through which an marketing strategies etc. along with the
investor acquires lasting and substantial foreign capital in the host country.
management control (at least 10%
• They promote competition by suppressing
equity or voting rights) in the foreign
domestic monopolies.
affiliates”.
• They provide a wide variety of quality
• FDI are usually made in open economies products to people at competitive prices.
which offer a skilled labour and growth It increases the standard of living of
potential for the investors, as opposed to people.
strictly regulated economies.
• They promote industrial diversification in
Components of FDI host countries.
• Foreign direct investment has the • They promote the development of
following component as mentioned by infrastructure by directly investing in
IMF: infrastructure projects as well as by
creating demand for such services.
» Equity Investment: Foreign direct • They provide significant tax revenue to
investor’s purchase of shares of an the host government.
enterprise.
• They promote globalization of the host
» Retained Earnings/Reinvested Earning: economies.
Earnings not distributed as dividends.
• They tend to reduce the factor price
» Intra Company Debt Transfer: Short/ differential across nations i.e., they tend
long-term borrowing & lending between to increase wage rate and decrease
direct investors. interest rate in underdeveloped countries
and developing countries and vice-versa
to developed countries.
185
Disadvantages of FDI participation.
− Major bodies set up to promote and
• They adversely affect domestic
facilitate FDI inflows, such as the
companies especially MSME. It may
Foreign Investment Promotion Board
worsen unemployment in the host
(FIPB).
(developing) countries due to export
substitution and reimports than » Liberalization of Exchange Rate System
employment through additional exports (LERMS)
to host countries.
• It can be the new wave of imperialism − The initiation of economic reforms,
reflected by use of power and economic India moved to a floating currency
influence to dominate smaller countries. regime which involved the dual
exchange rate system (one official
• They may intervene in the domestic and other market-determined).
economic policy of the host government.
− In March 1993, the unified exchange
• They aggravate income and regional rate system was introduced by
inequalities. replacing dual exchange rate system.
• They induce dualism (the sharp difference
between traditional and modern sectors) » Introduction of partial capital account
in the host (developing) countries. convertibility (CAC).
• They repatriate huge FOREX reserves » Foreign Exchange Regulation Act (FERA)
in various forms like high dividend, was replaced by the Foreign Exchange
interest, royalties etc. In the long run, they Management Act (FEMA) in 1999.
deteriorate the current account deficit » Press Note 18 was abolished in 2005
(CAD) of host (developing) countries.
• They promote excessive consumerism by − Under PN18, the foreign investor
indulging in excessive advertisement and having joint ventures in India needed
superficial product differential. No Objection Certificate from their
Indian joint venture partner for
• It leads to escalation in prices of assets investing any business in India.
which may lead to local resentment
(Asset Price Bubble). » FDI in Multibrand Retail 2012
− Allowing 100% FDI ownership in
India’s FDI Policy single-brand retail trading and up to
51% FDI in multi-brand retail.
• FDI policy comes under the Ministry of
Industry and Commerce (Department
for Promotion of Industry and Internal Recent FDI Reform
Trade (DPIIT)).
• The 1991 Balance of Payment (BoP) crisis • In the coal sector, 100% FDI under
led to major reform in FDI policy. Some of automatic route for coal mining along
them are as follows: with the activities associated with
processing infrastructure will attract
» New Industrial Policy,1991 international players to create an efficient
and competitive coal market.
− Industrial licensing was abolished • 100% FDI under automatic route has
except for a few important sectors. been allowed in contract manufacturing
− Many sectors are open to foreign to give a big boost to domestic
186
manufacturing. • During Q2 2019-20, India received
• In single-brand retail trading (SBRT), the the maximum FDI equity inflows from
definition of 30 per cent local sourcing Singapore, followed by Mauritius,
norm has been relaxed and online sales Netherlands, USA, and Japan.
permitted without prior opening of brick • An increase in net FDI inflow also gives
and mortar stores. a more stable source of funding than
• 100% FDI is allowed in the Defence the Current Account Deficit and in
industry; wherein 49% is allowed under that sense provides greater stability
automatic route and beyond 49% to the improvement in BoP position as
through Government route. compared to other capital inflows.
• 100 % FDI is permitted for insurance

intermediaries.
Foreign Portfolio
India and FDI
Investment (FPI)
• As per the Department for Promotion of • Foreign Portfolio Investment (FPI) is
Industry and Internal Trade (DPIIT), FDI the investment by non-residents in
equity inflows in India stood at US$ 446.11 Indian financial assets including shares,
billion during March 2000 to September government bonds, corporate bonds,
2019, indicating that the government's convertible securities, infrastructure
efforts and initiatives to improve ease of securities etc.
doing business climate and relaxation in • The class of investors who make an
FDI norms is yielding results. investment in these securities are known
• Data for Q2 2019-20 indicates that as Foreign Portfolio Investors.
the service sector attracted the • Foreign Portfolio Investor (FPI) was
highest FDI equity inflow, followed by created based on the recommendation
the telecommunications sector, and of K. M. Chandrasekhar Committee
computer software and hardware. by merging the existing three investor
40.0
classes
35.0
» FII (Foreign Institutional Investor)
» Sub Accounts
30.0
» Qualified Foreign Investors (QFI)
• Foreign Portfolio Investment (FPI) is more
25.0
20.0
liquid than foreign direct investment
because FPIs can be sold off quickly and
15.0 FPIs are seen as short-term attempts to
make money, rather than a long-term
10.0 investment in the economy.
Apr-Nov: 19-20
Apr-Now: 18-19
2018-19
2017-18
2016-17
2015-16
2014-15
• Portfolio Investment by any single

investor or investor group cannot exceed
10% of the equity of an Indian company,
I m a g e 11.5: FDI I n f l ow s in I n di a beyond which it will now be treated as
FDI.
187
Net FDI inflows Net FPI infows
15.0
10.0
(US$ billon)
5.0
0.0
Q1:17-18
Q2:17-18
Q3:17-18
Q4:17-18
Q1:18-19
Q2:18-19
Q3:18-19
Q4:18-19
Q1:19-20
Q2:19-20
-5.0
-10.0
I m a g e 11.6: FDI & FPI I n f l ow
• An increase in net FPI inflows improves and QFIs to be merged into FPIs.
the BoP position and arises on account » Portfolio investments to be defined as
of cross-border transactions involving investment made by any single investor
debt or equity securities, other than those or group of investors, which shall not
included in direct investment or reserve surpass 10% of the equity of an Indian
assets. company or a firm. Any investment
• Portfolio investment is generally referred beyond the limit of 10% to be termed as
to as “hot money” because of its tendency FDI.
to flee at the first signs of trouble in the » The aggregate investment threshold
economy or improvement in investment of FPIs to be 24 % (being the present
attractiveness elsewhere in the world. default aggregate limit for FIIs, which
can be increased by the company up to
the sectoral cap).
Committee on Rationalization » Know Your Client ("KYC") checks are
of Roots of Portfolio based on risk categorization of FPI.
Investment
− Low Risk (Category I): Government
• To rationalize/harmonize, and thereby, and Government-related entities.
ease the entry routes for various foreign − Medium Risk (Category II): Regulated
portfolio investors into India, SEBI set entities such as Banks, Asset
up a Committee in 2014 under the Management Companies, Broad-
Chairmanship of K.M. Chandrasekhar. Based Funds such as Mutual Funds
• The major recommendations of the etc.
committee are as follow: − High Risk (Category III): All other FPIs
» A new investor type, "Foreign Portfolio not qualified to be included in the
Investor" ("FPI"), by replacing FIIs and above two Categories to be included
QFIs. Existing FIIs, their sub-accounts in Category III (High Risk) FPI.
188
» FPIs under the Category III to be not » SEBI should do away with the additional
allowed to issue Offshore Derivative Know Your Customer (KYC) requirements
Instruments ("ODI")/Participatory Notes for the beneficial owner in case of
("PN"). government related FPI’s.
» The panel also recommended that the
new rules should be equally applied to
HR Khan Committee on the investors using participatory notes
Foreign Portfolio Investment (P-notes).
• SEBI constitutes H R Khan Committee in » The committee recommended that

erstwhile PIOs (Person of Indian Origin)
2014 to review FPI norms and concerns
should not be subjected to any restrictions
raised by the investors.
and clubbing of investment limits should
• The major recommendations of the be allowed for well-regulated and publicly
committee are as follow: held FPIs that have common control.
» NRIs, overseas citizens of India and » Time for compliance with new norms
resident Indians should be permitted to should be extended by six months after
hold stakes in the non-controlling nature they are finalized and also the non-
in FPIs and there should be no restriction compliant investors should be given
on them to manage non-investing FPIs or further 180 days to wind down their
SEBI-registered offshore funds. existing positions.
» NRIs will be permitted to invest as FPIs » The panel also recommended for
if the single holding is under 25% and changes in the norms for identifying the
group holding under 50% in a fund, senior managing officials of FPIs and for
according to the panel. beneficial owners of listed companies.
Difference Between FDI vs FPI

Basis for Foreign Direct Investment (FDI) Foreign Portfolio Investment
Comparison (FPI)
Definition FDI is the investment made by FPI referred to as investing in

the foreign investors to gain the financial assets of a foreign
a substantial interest in the country, such as bonds, stocks
company located in a different etc.
country.
Role of investors Active Passive
Type Direct Investment Indirect Investment
Investment Invests in financial & non- Invests only in financial assets.

financial assets.
Term Long term investment Short term investment
Volatility Stable Highly Volatile
189
− It is a custom, duty or a tax imposed
Foreign Trade on products that move across borders.
− It includes Import duty, Export duty
• Foreign trade includes all imports and
etc.
exports to and from India.
• At the level of Central Government, » Non-Tariffs barriers
it is administered by the Ministry of
Commerce and Industry. − These are non-tariff restrictions
such as government regulation and
• The inflow of goods is called as import policies with respect to overall trade.
trade whereas the outflow of goods is
called as export trade. − It includes Quotas, Subsidies, Sanitary
and Phytosanitary requirements etc.
• The trade balance is the gap between the
monetary value of exports and imports − A number of times Alphonso mangoes
in the economy, it is one of the most from Maharashtra are rejected by
significant macroeconomic indicators. European countries on grounds
of not meeting the Sanitary and
Phytosanitary requirements.
Foreign trade Policy
There are various types of foreign trade
policy. Export Promotion
Schemes
Free Trade Policy
• Duty Drawback Schemes:
• It is a trade policy with least restriction
on trade i.e. trade takes place without » Under this scheme, custom/excise duty
barriers such as quotas, tariff, and foreign paid by exporters of selected products is
exchange controls. partially or wholly reimbursed.
• Thus, under free trade, goods and services • Export Promotion Capital Goods
flow freely between countries. (EPCG)
• Free trade implies absence of
governmental intervention on » Under this scheme, exporters can import
international trade among different capital goods at zero or concessional
countries of the world. custom duty subject to an export
obligation.
• It is also termed as outward-oriented
trade policy. • Focus Market Scheme
Protectionist Trade Policy » Exporters are provided duty credit scripts
• It is a trade policy with a restriction on equivalent to 3% of Free on Board (FOB)
trade through various trade barriers. value of exports if they are exporting to
selected destinations/countries.
• It is always termed as inward-oriented
trade policy. • Focus Product Scheme
• Trade barrier: Government policy to
restrict trade. It includes: » Under this exporter of selected labour
intensive product (e.g. handicraft) are
» Tariff Barriers provided duty credit script equivalent to
2% of FOB value of exports.
190
− Focus Product Scheme (FPS)
India’s Medium- − Focus Market Scheme (FMS)
Term Export Policy: − Market Linked Focus Product Scheme
Foreign Trade
(MLFPS)
− Agri. Infrastructure incentive scheme
Policy, FTP (2015-20) − Vishesh Krishi Gramin Upaj Yojna
(VKGUY)
• It was announced on 1st April 2015 by the
Ministry of Industry and Commerce. » The scheme provides incentives in the
form of duty credit scrip (entitles the
• It seeks to enhance the competitiveness bearer to receive something in return) to
of export by adopting systemic reforms
the exporter to compensate for his loss
rather than incentivizing exports through
on payment of duties.
subsidies.
» The incentive is paid as a percentage of
• It seeks to focus on higher-value addition the realized FOB value (in free foreign
and technology in future with a focus on
exchange) for notified goods sold in
quality and standard.
notified markets
• It seeks to rectify the inverted duty
structure. It is a situation in which higher • Service Exports from India Scheme
custom duties are imposed on imports of (SEIS)
input/raw material vis-a-vis on import of
finished or final goods. » The Government has also introduced the
Service Exports from India Scheme (SEIS)
• It is drafted in consonance with other under the Foreign Trade Policy (FTP)-
initiatives of the government like Make 2015-20. It replaced the earlier scheme
in India, Ease of doing business, Digital 'Served from India Scheme’ under Foreign
India, Skill India etc. Trade Policy, 2009-15.
Objective » The key objective is to make our services
globally competitive in terms of price.
• To increase India’s Share in world export
to 2% to 3.5% by 2020. » These SEIS scrips are transferable and
can also be used for payment of a
• To double the export of goods and
number of Central taxes/duties including
services by 2020.
the basic customs duty.
• Export Promotion Capital Goods (EPCG)

Features
» Under this scheme, the export obligation
• Merchandise Exports Incentive Scheme has been reduced to 75%.
(MEIS)
• Trade Facilitation
» The Government of India has introduced
the Merchandise Exports Incentive » Online filling of document/application in
Scheme (MEIS), which replaced five a 24*7 environment.
other incentive schemes of Foreign Trade
Policy 2009-14.
» CA/CS can file digitally signed documents.
» The schemes which are replaced by the » Exporter/Importers profiles will be
created to eliminate multiple submission
MEIS scheme are:
of the document.
191
» The FTP to be reviewed after two and » Promoting exports of goods and services.
half years instead of annual reviews. » Promoting investment from domestic
and foreign sources.
Critical Appraisal of FTP Policy » Creation of employment opportunities.
(2015-20) » Development of infrastructure facilities.
• Subsidies have been reduced. • SEZ can be set up by:

• Gave more flexibility to exporters and » Public/State government or its agencies
importers.
» Private/Joint sector
• Aligned with Make in India.
» Foreign agency
• According the SEZ Act there are four types
Special Economic of SEZs in India, classified according to
their size:
Zones (SEZ)
» Multi-sector (1,000+ hectares).
• A special economic zone is a region » Sector-specific (100+ hectares).
in the country that is subject to unique
economic rules and regulations that
» Free Trade & Warehousing Zone (FTWZ)
(40+ hectares).
differ from other regions of the same
country. » Tech, handicraft, non-conventional
energy, gems & jewellery (10+ hectares)
• Traditionally the biggest deterrents to
foreign investment in India have been • Presently, 351 SEZs are notified, out of
high tariffs and taxes, red tape and which 232 SEZs are operational.
strict labour laws. The SEZ regulations
were made conducive to foreign direct
Reverse Special
investment (FDI).
• These areas have developed
infrastructure, liberal economic policy,
and concession tax rates for the firms.
Economic Zones
• SEZ Policy was introduced to India in (R-SEZ)
2000. Prior to SEZ introduction, India
relied on export processing zones (EPZ) • Reverse SEZ is an import-oriented area,
which failed to make an impact on located outside the country’s border in
foreign investors. order to get cheap, import duty-free/
exempt raw materials.
• To instill confidence in investors and
highlight the Government's commitment • Under this, Indian chemical and Petro-
to a stable SEZ policy regime. In May chemical companies will set up plants
2005, parliament passed The Special in other countries which have abundant
Economic Zones Act, 2005. and cheap feedstock for importing back
their output.
• The key objectives of the SEZ Act 2005
include: • The Ministry of Chemical and Fertilizers
is exploring options to set up R-SEZ in
» Creation of additional economic Iran, Myanmar.
activities.
• The 1st R-SEZ is proposed to be
192
established in the Chabahar Port area of • The IFSC in GIFT City (IFSC-GIFT) will
Iran. be developed as a global financial
• Objective: To ensure the supply of and information technology services
cheap industrial chemicals for the hub which be at par with globally
domestic chemical, petrochemical, and benchmarked financial centres such
fertilizer industry in order to enhance its as London, Hong Kong, Singapore, and
competitiveness and increase its export Dubai.
potential. • An IFSC strives to bring those types of
financial services and transactions to India
which are currently performed outside
International India by overseas financial institutions
and overseas branches/subsidiaries of
Financial Service Indian financial institutions.
• IFSC has been designated as a 'deemed
Centre (IFSC) foreign territory' for all practical purposes
which would have the same ecosystem
• Financial center that caters to clients as other offshore locations, but which is
outside their own jurisdiction are called as physically on Indian soil.
international (IFCs) or offshore Financial
• Any financial institution (or its branch) set
Centers (OFCs).
up in the IFSC is
• All such centres are ‘international’ in
the sense as they deal with the flow of » Treated as a non-resident Indian located
finance and financial products/services outside of India,
across borders. » Expected to carry out business in such
• An IFSC is therefore a jurisdiction that foreign currencies and with such entities,
provides world-class financial services to regardless of resident or non-resident,
non-residents as well as residents, up to which will be decided by the Regulatory
the extent permissible under the current Authority,
rules and regulations, in a currency other » No other regulations shall apply to a
than the domestic currency of the place unit located in IFSC, subject to certain
where the IFSC is situated. provisions.
• The objective of IFSC are:
• The financial regulators such as the
» To increase tax revenue. Reserve Bank of India (RBI), Securities
and Exchange Board of India (SEBI), the
» To create a high-value job.
Department of Financial Services and the
» To create an avenue for financial Insurance Regulatory and Development
globalization. Authority of India (IRDAI) issued the
following regulations and guidelines to
operationalize IFSC-GIFT in India under
GIFT City the provisions of the SEZ Act.
• Gujarat International Finance Tec-
Globalization
City (GIFT City) multi-services special
economic zone (SEZ) has established
the first International Financial Service
Centre in India (IFSC) under the provisions • It refers to the integration of an economy
of SEZ Act 2005 (SEZ Act), SEZ Rules with the world economy. It is achieved
2006 in Gandhinagar, Gujarat. by removing the restriction on the flows
193
of goods and service, foreign capital,
technology transfer and movement of a Other Terms
natural person across the nations.
J-Curve Effect
• It is a multidimensional concept, i.e. it
includes integration of nations in terms • It refers to a phenomenon wherein the
of social, cultural and political etc. trade balance of a country worsens
following the depreciation of its currency
before it improves mainly because higher
Advantage prices on imports will be greater than the
reduced volume of imports.
• It enables the allocation of resources on
the basis of comparative advantage of • It has a short-run effect.
various nations. Each country specializes
in the production of these commodities
in whose it is most efficient. It increases Free on Board (FOB)
productivity and production at the global
level.
• Free on Board (FOB) takes into account
cost incurred on export/import till the
• It enables economic entities to specialize port of loading.
and achieve economies of scale (benefit
of large-scale production).
• Cost Insurance Freight (CIF) takes into
account cost incurred on export/import
• Globalization enables worldwide until the port of destination.
access to cheap raw materials, labour,
technology, and this enables firms to be
cost-competitive in their own markets Hard Currency
and in overseas markets.
• Globalization has increased flows of inward • Hard currency or strong currency is any
investment between countries, which has globally traded currency that serves as a
resulted in benefits for recipient countries. reliable and stable store of value.
• It is a currency that everybody trusts
because they expect it will maintain its
Disadvantage value and not suffer from frequent, sharp
exchange rate fluctuations.
• During the globalization process,
multinational companies have become
• Hard currencies are widely accepted
across the world since it is stable,
more powerful and influential.
convertible, and enjoys the confidence of
• The threat of loss of jobs in domestic investors, traders, and tourists.
markets because of unfair, free trade
and structural changes arising from
• Basically, the economy with the large and
diversified exports which are compulsive
globalization.
imports for other countries will create
• The over-standardization of products high demand for its currency in the world
through global branding chain of and become the hard currency.
multinationals is a common criticism of
globalization.
• Some of the best hard currencies of the
world today are, Euro (€), Japanese Yen
• Globalization has made the economies (¥) and Pound Sterling (£).
of the world interdependent on each
other. Failure of economy of one country
creates ripples in number of countries.
194
Soft Currency high-interest rates.
• It is often referred to as tight money
• Soft currency is very sensitive and because it occurs in periods when central
fluctuates more often. Such currencies
banks are tightening monetary policy.
react very sharply to the economic and
political development of a country. • When a government issues bonds, the
money which flows from the public to the
• It is also referred as weak currency due to government or the money in the economy,
its unstable nature.
in general, is called dear currency.
• Soft currency is easily available in any
economy in its FOREX market.
• For example, the rupee is a soft currency
in the Indian FOREX market.
UPSC CSE PRELIMS
Previous Years
Hot Currency Questions
• Hot Currency is the flow of funds (or Q.1) Consider the following actions
capital) from one country to another in which the Government can take: 2011
order to earn a short-term profit. 1. Devaluing the domestic currency.
• Hot Currency continuously shifts from 2. Reduction in the export subsidy.
countries where interest rates are low to
Which of the above action/actions can help
those countries where interest rates are
in reducing the current account deficit?
higher.
(a) 1 only
• Such sudden withdrawal of foreign
currency from the market adversely (b) 2 only
impacts the exchange rate and potentially (c) Both 1 and 2
impact a country's balance of payments
(d) Neither 1 nor 2
• As international investors run behind
Ans. (a)
profits, they substantially gain from
higher interest rates in different markets. Explanation: Devaluation means
deliberate reduction in the value of a
country's currency. If currency is devalued,
Cheap Currency the price of imported goods then increases,
therefore, the quantity demanded of
• Cheap Currency refers to money in which imports falls. Currency devaluation makes
loans and advances are made available the exports cheap, thus consequently
on the low-interest rate and on easy exports are increased, and FOREX also
terms. rises.
• If a Government starts re-purchasing its Protectionism: This policy is enforced by
bonds before their maturities (at full- imposing direct controls on imports by
maturity prices) the money which flows enforcing barriers against imports or by
into the economy is known as the cheap providing assistance to exporters.
currency. Specific measures taken to implement
the policy is increasing tariffs of quotas,
subsidies to domestic firms, Reduction in
Dear Currency the export subsidy, discrimination against
imports and favouritism of domestic
• Dear money is hard to obtain because of
firms. This then reduces imports and may
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improve the current account. Yet this policy Foreign Direct Investment in India? 2012
leads to retaliation, resulting in decreased 1. Subsidiaries of companies in India
exports and domestic industries may
become uncompetitive as they have no 2. Majority of foreign equity holding in
incentive. The short-term gains will then be Indian companies
eroded away proving that this policy is not 3. Companies exclusively financed by
an effective long-term solution. foreign companies
Reduce domestic consumption and 4. Portfolio investment
spending on imports (e.g. tight fiscal Select the correct answer using the codes
policy/higher taxes). given below:
(a) 1, 2, 3 and 4
Q.2) Both Foreign Direct Investment (FDI) (b) 2 and 4 only
and Foreign Institutional Investor (FII)
are related to investment in a country. (c) 1 and 3 only
Which one of the following statements (d) 1, 2 and 3 only
best represents an important difference
Ans. (d)
between the two? 2011
(a) FII helps bring better management • Explanation: FDI can be made in a
skills and technology, while FDI only number of ways, such as opening of a
brings in capital subsidiary or associate company in a
foreign country, controlling or acquiring
(b) FII helps in increasing capital an interest in an existing foreign company,
availability in general, while FDI only or by way of a merger or joint venture
targets specific sectors with a foreign company.
(c) FDI flows only into the secondary • FDI is an investment done by a firm
market, while FII targets primary market or individual located in one country
(d) FII is considered to be more stable into business interests located in other
than FDI country.
Ans. (b) • Mostly, FDI takes place when an investor
establishes foreign business operations
• Explanation: FDI is an investment by or acquires foreign business assets,
a parent company in other businesses
comprising establishing ownership or
located in foreign countries. On the
controlling interest in a foreign company.
other hand, FII is an investment made by
an investor in the markets of a foreign • FDIs are distinguished from portfolio
nation. investments in which an investor merely
purchases equities of foreign-based
• It is much easier for FIIs to enter and exit companies.
the stock market which is not the case
with FDI.
• Foreign Direct Investment targets a Q.4) Consider the following statements:
specific enterprise. The FII increasing 2012
capital availability in general. The price of any currency in the
• The Foreign Direct Investment is more international market is decided by the
stable than Foreign Institutional Investor 1. World Bank
as FDI gives long term returns. 2. demand for goods/services provided
by the country concerned
Q.3) Which of the following would include 3. stability of the government of the
196
concerned country • The current account involves transactions
4. economic potential of the country in in goods, services, investment incomes
question and current transfers.
Which of the statements given above are • The capital account includes transactions
correct? in financial instruments and central bank
reserves.
(a) 1, 2, 3 and 4
• The current account is incorporated in
(b) 2 and 3 only calculations of national output, while the
(c) 3 and 4 only capital account is not.
(d) 1 and 4 only • If a country cannot pay its import bills
Ans. (b) through export earnings, then import
bills are paid though FOREX reserves.
• Explanation: Price of any currency in • This condition is generally called as a
the global market is determined by the balance of payment deficit, using the
demand for goods/services produced by narrow definition of the capital account
the country. that excludes central bank reserves.
• If the demand for the commodity is high,
then the currency would be strong. The
Q.6) Which of the following constitute
current depreciation of the Indian Rupee
Capital Account? 2013
is due to rising oil prices.
1. Foreign Loans
• The stability of the government in the
concerned country plays an important 2. Foreign Direct Investment
role in determining the prices of currency. 3. Private Remittances
4. Portfolio Investment
Q.5) The balance of payments of a country Select the correct answer using the codes
is a systematic record of 2012 given below.
(a) all import and transactions of a (a) 1, 2 and 3 only
country during a given period normally
a year (b) 1, 2 and 4 only
(b) goods exported from a country (c) 3 and 4 only
during a year (d) 1, 2 and 3
(c) the economic transaction between Ans. (b)
the government of one country to
another • Explanation: The two key components
of a nation's balance of payment are the
(d) capital movements from one country capital account and the current account.
to another
• Whereas the current account reflects a
Ans. (a) nation’s net income, the capital account
• Explanation: The balance of payments reflects the net change in ownership of
is a record of all transactions between assets.
parties in one country and the rest of the • Thus, it is clear that private remittances
world over a specified time period, such are part of the current account.
as a quarter or a year.
• On the other hand, foreign Loans, FII
• The balance of payments categorizes (Foreign Institutional Investor) and FDI
transactions in two accounts: the current Foreign Direct Investment are part of the
account and the capital account.
197
capital account. (b) 2 and 3
• Remittances fall under Current Account. (c) 1 and 3
(d) 1, 2 and 4
Q.7) Which one of the following Ans. (c)
groups of items are included in India’s
foreign-exchange reserves? 2013 • Explanation: The two key components
of a nation's balance of payment are the
(a) Foreign-currency assets, Special capital account and the current account.
Drawing Rights (SDRs) and loans from
foreign countries • Whereas the current account shows a
nation’s net income, the capital account
(b) Foreign-currency assets, gold
reflects the net change in ownership of
holdings of the RBI and SDRs
assets.
(c) Foreign-currency assets, loans from
• Thus, it is clear that private remittances
the World Bank and SDRs
are part of the current account.
(d) Foreign-currency assets, gold
• On the other hand, foreign Loans, FII
holdings of the RBI and loans from the
(Foreign Institutional Investor) and FDI
World Bank
Foreign Direct Investment are part of the
Ans. (b) capital account.
• Explanation: Foreign-exchange reserves • Remittances fall under the Current
(also known as FOREX reserves) are, in Account.
a strict sense, only the foreign-currency
deposits held by central banks of the Q.9) Convertibility of rupee implies: 2015
country and monetary authorities
(excluding gold). (a) being able to convert rupee notes
into gold
• But, in popular usage it also comprises
gold reserves, special drawing rights (b) allowing the value of the rupee to be
(SDRs) and reserve status of International fixed by market forces
Monetary Fund (IMF) because this total (c) freely permitting the conversion of
figure, which is generally more accurately rupee to other currencies and vice versa
termed as official reserves or official
(d) developing an international market
international reserves or international
for currencies in India
reserves, is more readily available and
also arguably more meaningful. Ans. (c)
Explanation:
Q.8) With reference to Balance of • Rupee convertibility refers to a
Payments, which of the following mechanism in which any sum of rupee
constitute the Current Account? 2014 can be converted into any other currency
1. Balance of trade without the need to specify the intent of
the foreign exchange.
2. Foreign assets
3. Balance of invisibles
• Non-convertibility is typically specified
in terms of transactions for which foreign
4. Special Drawing Right exchange cannot be legally purchased
Select the correct answer using the code (for example, the import of consumer
given below. goods) or transactions that are regulated
and authorized on a case-by-case basis
(a) 1 only
(like regulated imports etc.).
198
Q.10) The problem of international liquidity • Increasing government expenditure
is related to the non-availability of: 2015 contributes to the rise of fiscal deficit.
(a) goods and services
(b) gold and silver Q.12) Which one of the following is not
the most likely measure the Government/
(c) dollars and other hard currencies
RBI takes to stop the slide of Indian
(d) exportable surplus rupee? 2019
Ans. (c) (a) Curbing imports of non-essential
goods and promoting exports
• Explanation: The concept of
international liquidity is related with (b) Encouraging Indian borrowers
international payments. These types to issue rupee denominated Masala
of payments arise out of international Bonds
trade in goods and services and also (c) Easing conditions relating to external
in connection with capital movements commercial borrowing
among one country and another.
(d) Following an expansionary monetary
• International liquidity refers to the policy
commonly accepted official means of
Ans. (d)
settling imbalances in international
payments which is basically dollars and Explanation: To prevent the slide of the
hard currencies. rupee against the dollar, we need to
improve inflow of FOREX and increase
its supply and control domestic currency
Q.11) In the context of India, which money supply.
of the following factors is/are
contributor/contributors to reducing • Is a correct step as it will bring more
the risk of a currency crisis? 2019 FOREX.
1. The foreign currency earnings of India’s • Is a correct step as it will bring more
IT sector FOREX through FPI.
2. Increasing the government expenditure • Is a correct step as it will bring more
3. Remittances from Indians abroad FOREX through Debt.
Select the correct answer using the code • Is not a correct step, as it increases money
given below. supply.
(a) 1 only
Q.13) With reference to Foreign Direct
(b) 1 and 3 only
Investment in India, which one of
(c) 2 only the following is considered its major
(d) 1, 2 and 3 characteristic? 2020
Ans. (b) (a) It is the investment through capital
instruments essentially in a listed
• Explanation: If there is foreign exchange company.
inflow through the earning of India’s IT
(b) It is a largely non-debt creating
sector then, the risk of currency crisis risk
capital flow.
is not much
(c) It is the investment which involves
• Similarly, remittances from Indians
debt-servicing.
abroad reduces the risk of a currency
crisis. (d) It is the investment made by
199
foreign institutional investors in the (d) 1, 3 and 4 only
Government Securities. Ans. (d)
Ans. (b)
• Explanation: Statement 1 is correct:
• Explanation: A non-debt creating capital Merchandise trade deficit is the largest
flow is the one in which there is no direct part of India’s current account deficit.
repayment obligation for the residents. As per RBI’s statistics, during April-
FDI is basically a non-debt creating August 2019- 2020, India’s Merchandise
capital flow. exports was around USD 133.14 billion, as
compared to about USD 210.39 billion of
imports during the same time period.
Q.14) With reference to the international
trade of India at present, which of the • Statement 2 is not correct: Commodity-
following statements is/are correct? wise structure of imports between 2011-12
and 2018-19 indicates that imports of iron
1. India's merchandise exports are less
and steel, organic chemicals, industrial
than its merchandise imports.
machinery have recorded positive growth
2. India's imports of iron and steel, rates as % of share in imports.
chemicals, fertilizers, and machinery
• Statement 3 is correct: Net services
have decreased in recent years.
(service exports - service imports) of India
3. India's exports of services are more has been in surplus. During April-August
than its imports of services. 2019- 2020, India’s Service exports was
4. India suffers from an overall trade/ around USD 67.24 billion, as compared to
current account deficit. about USD 39.25 billion of imports during
the same time period.
given below: • Statement 4 is correct: Trade deficit
or Current Account Deficit (CAD) is the
(a) 1 and 2 only
shortfall between imports and exports.
(b) 2 and 4 only According to Economic Survey 2019-20,
(c) 3 only CAD of India was around 2.1% in 2018-19,
and 1.5% of GDP in H1 of 2019-20.
200
CHAPTER - 12
ECONOMIC PLANNING
Planning are owned by the state.

• It is also known as Directive Planning or
Authoritative Planning.
• Economic activities of any modern
society are directed towards satisfying
human requirements with limited/scarce
resources and the economic planning Indicative Planning
helps in allocation of scarce resources • In indicative planning, the government
to satisfy human wants in a manner that set time-bound targets for the economy
brings maximum satisfaction. and seeks to achieve them by providing
• Thus, economic planning refers to the "act incentive and disincentive to economic
with a purpose, to choose, and choice is entities.
the essence of economic activity”. • It is also known as soft planning, facilitator
• Planning has appeared as an important planning or planning by inducement.
function of the modern government and • This planning is usually followed in the
involves its purposive intervention to capitalist economy.
affect socially desired changes in the
structure and course of the economy. • India by initiating Economic reform in
1991 started following indicative planning
before the reform India was following
Types of Planning imperative planning.
• Corresponding to the political ideologies

and institutional framework of the Objectives of
country, varied planning types are
observed in the world.
Planning
• Some of them are as follows: • The long-term objectives of planning in
India have been more or less the same
in most of the plans and these objectives
Imperative Planning are interconnected with one another:
• In imperative planning economic » Economic Growth:
decisions are made through a central
planning authority instead of a market − The most important objectives of
system. This type of planning lays down all the plans is to raise the level of
objective and policy framework for each national and per capita income in
sector of the economy which is followed real terms.
rigidly.
» Self-Reliance:
• Under this planning, it is the responsibility
of the state to provide required supplies − It implies a reduction in the
like raw material, machines, manpower dependence on foreign aid and
and entrepreneurs as all the resources concessional foreign capital as the
201
donor country can have political National Planning Committee
influence on the decision-making
process of the recipient country. • In 1938 the NPC (National Planning
Committee) was set up under the
− The planners realize that self-reliance
chairmanship of Jawaharlal Nehru.
is a vital requirement for economic
growth and accordingly have aimed • Its objective of planning for development
at making India self-reliant. “was to ensure an adequate standard of
living for the masses, i.e., remove poverty.
» Employment Generation: • It advocated industrialization and setting
− One of the aims of planning has been up heavy industries that were essential for
to provide jobs to the unemployed and setting other industries and for making
efficiently utilize India’s demographic India self-reliant.
dividend.
» Promotion of Social Justice: The Gandhian Plan

− It includes removal of poverty and • It was formulated by S. N. Agarwala in
reduction in inequalities of income and 1944, which aim to create self-contained
wealth by redistribution measures. villages.
• It emphasized the economic
decentralization with more focus on rural
Evolution of development by developing the cottage
industries.
Economic Planning
in India The Bombay Plan
• Thinking on economic planning started • In 1944 Eight Industrialists of Bombay
quite early in India i.e. immediately after working together prepared “A Brief
the Russian Revolution. Memorandum Outlining a Plan of
Economic Development for India”.
• There were several plan proposals
submitted by Individuals as well as • This plan aimed doubling the per capita
political parties and economic groups income in fifteen years and tripling the
for the development of the national national income during same period.
economy. • The Bombay Plan was not officially
accepted, yet many of the ideas of the
plan were inculcated in other plans which
The Visvesvaraya Plan came later.
• In 1934, M. Visvesvaraya had published a

book titled “Planned Economy in India”,
in which he presented the first blueprint
People Plan
of Indian planning. • People’s plan was drafted by M. N. Roy.
• He laid a plan to shift labour from • The plan was inspired by the ideals of
agriculture to industries and double up Marxist socialism and advocated the
National income in 10 years. need for providing the people with the
‘basic necessities of life’.
• Nationalization of all agricultural
202
production and other production with the responsibility of making the
methods were the main features of this assessment of all resources of the
plan. country, augmenting deficient resources,
formulating plans.
Sarvodaya Plan
First Five-Year Plan (1951-56)
• Sarvodaya Plan was drafted by Jai
Prakash Narayan in 1950. • The First Plan was based on the Harrod-
• Sarvodaya plan was inspired by Domar Model.
Gandhian Plan and Sarvodaya Idea of • The influx of refugees from Western and
Vinoba Bhave. Eastern Pakistan, severe food shortages
• Major ideas of the plan were highly & high inflation were some of the
similar to the Gandhian Plan like the challenges in front of the country at the
emphasis on agriculture, agri-based onset of the first five-year plan.
small and cottage industries, self-reliance • The Plan focused on agriculture, price
and almost no dependence on foreign stability, power, and transport.
capital and technology, land reforms • An important feature of the first plan was
and decentralized participatory form of the spread of community development
planning. projects throughout the country with the
objective of raising the level of living of
the people through improved agricultural
Five Year Plans in efficiency.
India • The plan was successful primarily

because of good harvests during the last
two years of the plan.
• They are centralized and integrated
national economic development • Objectives of rehabilitation of refugees,
programmes. food self-sufficiency & control of prices
were more or less achieved.
• After the independence, First FYP was
launched in 1951, under the socialist
influence of first Prime Minister Pandit
Nehru.
Second Five Year Plan (1956-61)
• The process started with establishment • The second plan was conceived in an
of Planning Commission in March 1950 in atmosphere of economic stability.
pursuance of declared objectives of the • The Second Plan was based on the
Government to Mahalanobis two-sector (consumer's
goods and producer’s goods) model,
» Promote a rapid increase in the standard which emphasizes the physical aspects
of living, of planning and investment.
» Efficient utilization of the resources of the • The Plan was focused on rapid
country, industrialization by developing heavy &
» Increasing production and basic industries.
» Creating employment opportunities for • It advocated huge imports through
all. foreign loans and accorded lower priority
to agriculture.
• The Planning Commission was invested
203
• Acute shortage of FOREX led to the Three Annual Plan (1966-69)
pruning of development targets, the
prices were increased by about 30% as • Fourth Plan was postponed due to the
compared to the earlier Plan & the 2nd failure of the third plan. The Third Plan
FYP was only moderately successful. was failed due to the devaluation of rupee
(to boost exports) along with inflationary
recession. Three Annual Plans were
Third Five Year Plan (1961-66) launched in place of five year plans.
• These three annual plans (1966–67, 1967–
• It was felt that the first two Five Year 68 and 1968–69) came under the Plan
Plan had moved the Indian economy
Holiday scheme.
into the "take-off stage". Consequently
the basic goal of the Third Five Year Plan • Prevailing agricultural crisis and serious
was to make India self-reliant and self- food shortage made it necessary for
generating economy. the government to focus on agriculture
during the Annual Plans. During these
• The plan aimed to: plans, a whole new agricultural approach
» Achieve more than 5% growth rate in was implemented.
national income. • The Green Revolution experiment in India
» Achieve self-sufficiency in food grains started in 1966.
production. • It included the distribution of high-
» Expand basic industries like chemicals, yielding varieties of seeds on wide scale,
steel; power and fuel etc. extensive use of chemical fertilizers,
reaping the benefits of irrigation and soil
» Generate substantial employment conservation.
opportunities in the country.
• These Annual Plans helped the economy
» Provide greater equity of opportunity. to absorb the shocks generated during
» Reduce economic disparities among the the Third Plan which paved the path for
masses. the planned growth in coming years.
• On the basis of the experiences obtained

from the first two plans (agricultural Fourth Five Year Plan (1969-74)
production was seen as a limiting factor
in economic development of the country), • Refusal of supply of essential equipment
agriculture was given highest priority to and raw materials from the allies during
support the exports and industry. the Indo-Pak war resulted in twin
objectives of:
• The Plan was a complete failure
in achieving the targets due to » Growth with stability
the unforeseen events like Chinese
aggression in 1962, Indo-Pak war in 1965, » Progressive achievement of self-reliance
severe drought of 1965-66. for the Fourth Plan.
• Due to conflicts with China and Pakistan, • The basic strategy of the Fourth Plan has
the resources meant for socio-economic been called the Gadgil strategy.
development were diverted towards
defence sector. Thus socio-economic
• The main emphasis was on the growth
rate of agriculture to enable other sectors
sectors were suffered due to shortfalls of
to move forward.
resources.
• Implementation of Family Planning
204
Programmes to control the population and when Janta Party came to the power
was amongst the major targets of the in 1978, the Plan was terminated.
Plan.
• The Indian fourth five-year plan laid its
emphasis on the "Weaker Sections" of Rolling Plan (1978-80)
society but still did not have an integrated
• The Janata Party government shelved the
plan for providing for minimum or basic
Fifth Five-Year Plan and launched Sixth
needs.
Five-Year Plan (1978–1983) emphasizing
• First 2 years of the plan saw record on employment, in contrast to the
agricultural production. But in last three Nehru Model which the Government
years of the plan production was declined criticized for the concentration of power
due to the failure of monsoon. and authority, increasing inequality
• The influx of refugees from Bangladesh & for exacerbating poverty. But, the
before and after Indo-Pak war of 1971 government survived for only 2 years.
was the major problem along with • The Congress Government returned to
price situation deteriorating to crisis power in 1980 and launched a different
proportions and the plan is considered plan aimed at directly attacking the
as a big failure. problem of poverty by creating conditions
of an expanding economy.
Fifth Five Year Plan (1974-79)

• The final draft of the fifth plan was
Sixth Five Year Plan (1980-85)
drafted and launched by D. P. Dhar in • The objective of "Improving the quality of
the backdrop of economic crisis resulting life of people" i.e., with a special reference
from run-away inflation caused by a hike to the socially and economically deprived
in oil prices and failure of the Government section of the population through a
takeover of the wholesale trade in wheat. minimum needs programmes.
• It proposed to achieve two main • In the Sixth Five Year Plan, the
objectives: Minimum Needs Programme had eight
components, namely:
» Removal of poverty (Garibi Hatao)
» Attainment of self-reliance » Elementary education
» Rural Health
• High growth rate, better distribution
of income and significant growth in » Rural Water Supply
the domestic savings were seen as key » Rural Roads
instruments for economic growth. » Rural electrification
• Because of high inflation, the Plan outlay » Environmental improvement of urban
proved to be completely wrong and the slums
original public sector outlay had to be
increased. » Housing assistance to rural landless
labourers
• After the imposition of national
emergency in 1975, the focus shifted to the » Nutrition
implementation of 20 Point Programme
of Prime Minister.
• The Plan focused on Increase in national
income, modernization of technology,
• This FYP was relegated to the background ensuring a continuous decrease in poverty
205
and unemployment through schemes condition and to undertake a yearly
like TRYSEM, NREP, IRDP, controlling average growth of 5.6% through the
population growth etc. introduction of fiscal & economic
• Broadly, the sixth Plan could be reforms including liberalization under the
considered as a success as most of the leadership of PM P V Narasimha Rao.
targets were achieved though during the • The major suggestions which this plan
last year (1984-85) many regions of the suggested are as follows:
country were gripped with severe famine
situations and agricultural output was less » Re-definition of the state’s role in the
than the record output of previous year. economy,
» Market-based Economy with a greater
role for the private sector,
Seventh Five Year Plan (1985- » Increase investment in the infrastructure
90) sector,
• The aims of the Seventh Plan: » Subsidies need restructuring and
refocusing,
» Accelerating food production, » Decentralized planning,
» Boosting employment opportunities, and » Special emphasis on ‘co-operative
» Raising the productivity with focus on federalism’,
‘food, work & productivity’. » Greater focus on ‘agriculture’ and other
‘rural activities’
• The Jawahar Rojgar Yojana (JRY) was
launched in 1989 with the motive to • Some of the key economic outcomes
create wage-employment for the rural achieved during the eighth plan were:
poor.
• The plan became successful as the GDP » Rapid economic growth (highest annual
grew at 6% against the targeted 5% growth rate was 6.8 %).
growth. » The high growth of agriculture & allied
sectors, and manufacturing sector.
» Growth in exports and imports,
Eighth Five Year Plan (1992-97) development in trade and improvement
• The plan was postponed by 2 years in current account deficit.
because of political uncertainty at
• The high growth rate was achieved
the Centre. Balance of Payment crisis,
even though the share of the public
widening budget deficits, rising debt
sector in total investment had declined
burden, inflation and recession in
considerably to about 34 %.
industry were the key challenges during
the launch of the plan.
• The Eighth Plan (1992–97) was launched Ninth Five Year Plan (1997-
in a typically new economic environment.
This was the first plan which went on 2002)
for introspection of the macroeconomic • The Ninth Plan (1997–2002) was launched
policies which the country had been when there was an all-round ‘slowdown’
pursuing for many decades. in the economy led by the South East
• The plan undertook strong policy Asian Financial Crisis (1996–97).
measures to deal with the bad economic • The Plan prepared under the United
206
Front Government focused on Growth wage rate, reduction in maternal & infant
with Social Justice and Equality. mortality rates, cleaning of major polluted
• The key objective of the Ninth Plan was to rivers, access to potable drinking water,
reduce historical inequalities and boost etc.
the economic growth in the country. • The Tenth Plan focused on regional
• Ninth Plan predominantly focused on approach rather than a sectoral approach
the private sector (Indian as well as to bring down regional inequalities.
foreign) for the economic growth and • Governance was considered a factor of
development. development & agriculture was declared
• The state was envisaged to act a facilitator as the prime moving force of the economy.
& involve itself with social sectors like • The Tenth Five Year Plan sought to
health, education, law, and order etc. increase the role of states in planning
and creation of infrastructure where with greater involvement of Panchayati
private sector participation was likely to Raj Institutions.
be limited due to lack of resources. • State-wise break up of targets for
• It gave priority to agriculture sector & growth and social development sought
rural development to generate adequate to achieve balanced development of all
productive employment and eradicate states.
poverty.
• Social sectors of the economy got the
strong support which helped in complete Eleventh Five Year Plan (2007-
elimination of poverty. 2012)
• The issue of fiscal consolidation became • The Eleventh Plan was aimed “Towards
a top priority of the governments for the
Faster & More Inclusive Growth” after
first time, which resulted in:
UPA formed the government at the
» Sharp decline in the revenue deficit of Centre on the plank of helping Aam
the government, including center, states, Aadmi (common man).
and the PSUs • India had emerged as one of the fastest-
» Cutting down subsidies, interest, wages growing economies by the end of the
etc. Tenth Plan.
» Decentralized planning with greater • The savings and investment rates were
reliance on states and the PRI (Panchayati increased, the industries had responded
Raj Institution). well to face competition in the global
economy and foreign investors were
looking forward to invest in India.
Tenth Five Year Plan (2002- • The broad vision for 11th Plan involved
several interrelated components like
2007)
• Recognising that economic growth can’t » Rapid growth for reducing poverty &
be the only objective of the national creating employment opportunities for
plan, the Tenth Plan had set ‘monitorable masses.
targets’ for a few key indicators of » Access to essential services in education
development besides 8 % growth target. & health, especially for the poor people
• The targets were improvement in literacy, » Employment opportunities using the
reduction in gender gaps in literacy and National Rural Employment Guarantee
207
Programme (NREGP). the help of improved health, education,
» Environmental sustainability. nutrition, skill development, information
technology etc. and development of
» Reduction of gender inequality etc. institutional capabilities, infrastructure
such as power telecommunication, roads,
• The Eleventh Plan kick started well with transport etc.
the first year achieving 9.3% growth rate,
however the growth decelerated to 6.7% • Monitorable Targets of the Plan are as
in 2008-09 following the global sub- follows:
prime crisis.
» Economic Growth
• However, the second bout of a global
slowdown in 2011 caused by the sovereign − Real GDP Growth Rate of 8.0 percent.
debt crisis in Europe along with domestic
− Agriculture Growth Rate of 4.0
factors such as tight monetary policy
percent.
and supply-side bottlenecks, resulted in
a deceleration of growth to 6.2 percent − Manufacturing Growth Rate of 10.0
in 2011-12. percent.
• As a result, GDP grew at 8% during the » Poverty and Employment:
Eleventh Plan, which was lower than the
target but performed well as compared − Decrease Head-count ratio of
to the Tenth Plan achievements. consumption poverty by 10% over
• Since the period saw two global crises the preceding targets by the end of
of 2008 and 2011, the 8% growth can be Twelfth Plan.
considered as satisfactory. − Create 5 crore new work opportunities
in sectors other than agriculture and
provide skill certification by enhancing
Twelfth Five Year Plan (2012- skill sets of workforce.
2017) » Education:
• The Twelfth Plan started at a time when
the global economy was going through − Increase Mean Years of Schooling to
a second financial crisis, fueled by the 7 years.
sovereign debt crisis of the Eurozone in − Improve access to higher education
the last year of the Eleventh Plan. The by creating 20 Lakh additional seats
crisis affected all countries including for each age group to meet the skill
India. needs of the various sectors.
• The broad vision and aspirations of the − Eliminate social and gender gap in
12th Plan are reflected in the subtitle: school enrolments.
‘Faster, Sustainable, and More Inclusive
Growth’. » Health
• Poverty alleviation, promoting equality − Reduce MMR to 1 and IMR to 25 per
and regional balance, empowering 1,000 live births and improve Child
people, reducing inequality are some Sex Ratio (0–6 years) to 950.
of the mechanisms through which
inclusiveness is to be achieved. − Reduce Total Fertility Rate to 2.1.
• Sustainability comprises ensuring − Reduce under-nutrition among
environmental sustainability, children of 0–3 years’ age group to
development of human capital with half of the NFHS-3 levels.
208
» Environment and Sustainability − Connect all villages with all-weather
roads.
− Increase the forest cover by 1 million
hectares every year.
− Upgrade all national and state
highways to the minimum two-lane
− 30,000 MW of additional renewable standard.
energy capacity
− Increase rural tele-density to 70 per
− Reduce emission intensity of GDP up cent.
to 20% to 25% reduction over 2005
levels by 2020.
− Ensure 40 litre per capita per day
(lpcd) piped drinking water supply to
» Infrastructure, Comprising Rural at least 50% of the rural population,
Infrastructure and 50% gram panchayats achieve
Nirmal Gram Status.
− Increase investment in infrastructure
sector as a percentage of GDP to 9 • Table below show Every Five-year plan
%. growth target set by particular five-year
plan and the growth achieved during
that plan.
Target Growth Actual Growth
First Five-Year Plan (1951-56) 2.1% 3.6%
Second Five-Year Plan (1956-61) 4.5% 4.3%
Third Five Year Plan (1961-66) 5.6% 2.8%
Fourth Five Year Plan (1969-74) 5.7% 3.3%
Fifth Five Year Plan (1974-79) 4.4% 4.8%
Sixth Five Year Plan (1980-85) 5.2% 5.7%
Seventh Five Year Plan (1985-90) 5.0% 6.0%
Eight Five Year Plan (1992-97) 5.6% 6.8%
Ninth Five Year Plan (1997-2002) 6.5% 5.4%
Tenth Five Year Plan (2002-2007) 8% 7.6%
Eleventh Five Year Plan (2007-12) 9% 8%
Twelfth Five Year Plan (2012-17) 8% 6.8%
209
Twenty Point alleviation, employment generation
in rural areas, education, housing,
Programme protection of environment, family welfare

& health and many other programmes
having a bearing on the quality of life,
• The Twenty Point Programme (TPP) was particularly in rural areas.
initiated by the Government of India in
1975. • TPP was restructured in 1982 and 1986. As
new policies and programmes have been
• The primary objective of the 20-Point launched it has been finally restructured
Programme was poverty alleviation and in 2006 and it has been in operation at
to improve the quality of life of the poor present.
and the underprivileged population.
• The programmes/schemes covered under
• The Programme was meant to provide TPP-2006 are as under:
a thrust to schemes relating to poverty
1. Poverty Eradication 11. Women Welfare

2. Power to People 12. Child Welfare
3. Support to Farmers 13. Youth Development
4. Labour Welfare 14. Improvement of Slums
5. Food Security 15. Environment Protection and
6. Housing for All Afforestation
7. Clean Drinking Water 16. Social Security
8. Health for All 17. Rural Roads
9. Education for All 18. Energization of Rural Area
10. Welfare of Scheduled Castes, 19. Development of Backward Areas

Scheduled Tribes, Minorities and OBCs 20. IT Enabled e-Governance
• Twenty Point Programme (TPP)-2006

originally consisted of 20 Points and 66 Planning
items being monitored individually by
Central Nodal Ministries concerned. Commission
• From 1st April 2008, Sampoorna • Government of India passed a resolution
Grameen Rojgar Yojana (SGRY) has been in March 1950 to establish the Planning
merged with National Rural Employment Commission in pursuance of the
Guarantee Act, thus, SGRY has been Government’s objectives to promote a
dropped from the list of 66 items and rapid increase in the standard of living
only 65 items are now monitored under of the people by efficient utilization of
TPP-2006 since 2008-09. the resources of the country, raising the
• For the purpose of ranking, the production and offering employment
performance of States on a monthly basis opportunities to all.
in respect of 20 identified parameters • The responsibilities of the Planning
has been evaluated. Commission were
210
» Assessment of all the resources of the Development Council (NDC) or the
country. Rashtriya Vikas Parishad was constituted
» Drafting plans for the most effective to strengthen and mobilize the overall
and balanced utilization of resources effort and resources of the country
and deciding priorities while allocating in support of the plan, to encourage
resources. common economic policy in all important
spheres, and to ensure the balanced and
» Augmenting deficient resources. rapid development of all sectors and
regions of the country.
• Planning Commission's work was three
dimensional: • This Council, which was re-constituted
on October 7, 1967, is the main decision-
» Frame policy direction and suggest making authority in India related to area
required programmes/schemes. of development matters.
» Influence the resource allocation • NDC is a constitutional body with
through the budget. representation from both the Union and
» Monitor and record the performance on States.
a standard framework for comparative • This Council is headed by the Prime
analysis of all the states from time to Minister and all Union Cabinet Ministers,
time. State Chief Ministers, representatives of
Union Territories are its members.
• The Prime Minister acted as the ex-officio
• The functions of NDC are:
chairman of the Planning Commission,
which works under the overall guidance » To prescribe guidelines for the drafting
of the NDC (National Development of the National Plan and assessing
Council). Pandit Nehru, being the Prime resources for the Plan.
Minister, was the first Chairman of the
Planning Commission. » To consider the National Plan as drafted
by the Planning Commission.
• The Deputy Chairman and the full-time
members of the Commission give advice » To consider important matters of socio-
and guidance to the subject Divisions economic policy affecting national
for the formulation of Five-Year Plans, development.
Annual Plans, State Plans, Monitoring » To review the working of the Plan
Plan Programmes, Projects and Schemes. periodically and to recommend measures
• The National Development Council necessary for achieving the aims and
co-ordinates between the Planning objectives of the National Plan.
Commission and the various States.
• It is a platform not only for discussion of
• The Planning Commission was replaced plans and initiatives, but also economic
with NITI Aayog on 1st January, 2015. and social matters of national importance
are discussed in this forum before policy
formulation.
National • The NDC ordinarily meets twice a year.
Development • It is a democratic platform where the
States can openly put forward their views
Council (NDC) and opinions. No resolution is passed by
the Council.
• On 6th August 1952, the National
211
NITI (National Functions of
NITI Aayog
Institution for
Transforming India)
DESIGN POLICY
FOSTER COOPERATIVE
& PROGRAMME
FEDERALISM
FRAMEWORK
Aayog MONITORING AND

ACT AS A
RESOURCE CENTRE
EVALUTION
& KNOWLEDGE HUB
• It is the non-statutory and extra-
constitutional body set up on 1st I m a g e 12.1: F u n c ti o n s of N ITI A ayo g
January, 2015 by replacing the Planning
Commission.
» To develop mechanisms to design
• NITI Aayog is the premier policy ‘Think credible plans at the village level and
Tank’ for the Government of India, which aggregate these plans progressively at
provide both directional and policy inputs. higher levels of government that is at the
• At the core of NITI Aayog’s creation are state level and ultimately at the national
two hubs: level.
» To frame strategic and long-term policy
» Team India Hub: leads the engagement and programmes and initiatives and
of states with the Central government monitor their progress and their efficacy.
» Knowledge and Innovation Hub: builds » To offer a forum for resolution of inter-
NITI Aayog think-tank capabilities. sectoral and inter-departmental issues
to accelerate the implementation of the
development agenda.
Objectives » To actively oversee and analyse the
• Objectives of the NITI Aayog are: implementation of programmes and
various initiatives
» To develop a shared vision of national » Technology up-gradation and capacity
developmental priorities, sectors and building for the implementation of
strategies with the active participation programmes and initiatives.
of States for achieving the national
objectives.
» To nurture cooperative federalism Composition of NITI Aayog
through structured support mechanisms
and initiatives with the States on a • The NITI Aayog will comprise the
continuous basis, identifying that strong following:
States make a strong nation.
» Chairperson: Prime Minister of India.
» Governing Council includes the Chief
Ministers of all the States and Lt.
Governors of Union Territories.
» The full-time organizational structure
will comprise of, in addition to the
Chairperson:
− Vice-Chairperson: Will be appointed

by the Prime Minister.
212
− Chief Executive Officer: appointed by • NITI Aayog recommended closure of
the PM for a fixed term and he should sick PSUs, strategic disinvestment of
be qualified to be appointed as the other CPSUs and pushed for reforms in
Secretary to the Government of India. the Medical Council of India and the
− Members: Full-time. University Grants Commission.
− Part-time members: Maximum of two • In April 2017, the Governing Council of

from leading universities, research NITI Aayog approved the Three Year
organizations and other relevant Action Plan agenda aimed at changing
organizations in an ex-officio capacity the expenditure pattern by allocating a
on the rotational basis. larger proportion of resources to high
priority sectors, like health, education,
− Ex Officio members: Maximum of agriculture, rural development, defence,
four members of the Central Council roads and railways.
of Ministers which will be nominated
by the PM. • Three sub-groups of Chief Ministers
were formed on Centrally Sponsored
» Regional Councils will be set up to Schemes (CSS), Skill Development and
solve specific issues and contingencies Swachh Bharat.
impacting more than one state or a • The Atal Innovation Mission was
region. launched by NITI to seed innovations to
teach young minds new skills.
− These will be established for specific
time period.
− Prime Minister is empowered to NITI Aayog vs Planning
convene Regional Councils and will
include Chief Ministers (CMs) of States
Commission
and Lt. Governors of Union Territories • NITI Aayog is a Planning Commission
(UTs) in the region. with an expanded scope but without its
− These are chaired by the Chairperson financial powers.
of the NITI or any other person • The financial powers like designing
nominated by him. the schemes and programmes, setting
sectoral priorities, estimating the grants
» Specialists, practitioners and experts with to State development programmes (other
relevant domain knowledge are invited than tax devolution), and influencing
to NITI as special invitees nominated by the annual allocations according to the
the Prime Minister priorities etc. now directly come under
the Ministry of Finance, Budget Division/
Department of Expenditure.
NITI Aayog role till now • Planning Commission’s influence and
• The NITI Aayog framed the Make in India impact were measured, felt, and perceived
Strategy for Electronics sector, National through annual plan allocations,
Energy Policy, a Model Land Leasing discretionary grants. But, NITI Aayog does
Law. not have the same ability to influence the
annual allocations and influence on the
• Prepared a detailed Roadmap for annual budget proposals.
Revitalizing Agriculture sector, designed
a Developmental Strategy for North East • Like the planning commission, NITI
region and Hilly areas and undertook an Aayog is also without legal support or
appraisal of the Twelfth Five Year Plan. any constitutional foundation.
213
NITI Aayog Planning Commission
Full time and Part-time Members. Only Full-Time Members.
Chief Ministers represented directly in Chief Ministers were represented through

the Governing Council. NDC.
Fund Transfers to States is through

Finance Ministry. It has no financial Used to transfer funds to states.
powers.
Increased flexibility to states in designing

and implementing development Imposition of central sponsored schemes.
programmes.
Prepared national agenda for

Prepared five-year Plans.
development.
Achievements of » Self-reliance refers to the lack of

dependence on external assistance.
Economic Planning » India has made tremendous achievement
towards self-reliance in food grain
in India production, basic industries etc.
• Increase in National Income and Per • Development of Social Infrastructure

Capita Income:
» Social infrastructure includes such
» During the planning period, national services as education, health facilities,
income has increased manifold. etc. In this area also, five-year plans are
able to achieve desired success.
• Development of Basic and Capital
Goods Industries:
» With the adoption of the Nehru- Failure of Economic

Mahalanobis model of development
during the Second Five Year Plan, some
Planning in India
basic and capital goods industries such
• Inequality in Distribution of Income and
as iron and steel industry witnessed
Wealth.
spectacular growth.
• Failure to control inflation.
• Development in Agriculture: • Regional Imbalance.
» Agricultural productivity has also marked • Inadequate Development of
an upward trend during the plan period. Infrastructure.
» The production of food-grains which • Increase in Unemployment.
was 510 lakh tones in 1950-51 increased • Standard of Living of masses have not
to 176.4 million tonnes in 1990-91 and improved substantially.
further to 283.37 million tonnes in 2018-19.
• Huge Amount of Deficit Financing.
• Self-Reliance:
214
− Grants and loans from a foreign
Resource government.
Mobilization » Multilateral Assistance from International

Institutions.
• It refers to the policy, mode, means of
raising funds by the government for
various plan programmes/projects.
• The objective of the resource mobilization
Economic Planning
is the optimal utilization of the resources. Strategy
• Means of resource mobilization:
• Indian planning strategies can be divided
» Internal Resource into two phases: the pre-reform phase
era and post-reform phase era.
» External Resource
13.1. Internal Resource Pre 1991 Phase/Pre-reform

Phase
• Internal resources can be defined as the
economic resources that are present • During the pre 1991 phase, India followed
within the territory of any country. the Inward-looking economic planning
strategy.
• Internal Resources includes:
• Following strategies are followed during
» Balance from Current Revenue (BCR) 1951-91 phase:
− It is the access of the Revenue Receipt » Heavy Reliance on Public Sector

of government over its non-planned
» Regulated Expansion of Private Sector
expenditure.
» Protection of Small-Scale Industry and
− BCR = Revenue Receipt-Non Planned Cottage Industries
Expenditure.
» Restriction on Foreign Capital
» Additional Resource Mobilization » Adherence to Centralized Planning
− It includes revenue collected from
surcharge, cess etc. Post-1991 Phase/Post-reform
» Surplus of public sector Phase
» Borrowing and Miscellaneous capital • India's Economic planning strategy
receipt witnessed a shift toward market
» Deficit Financing economies in the year 1991.
• Main changes under NEP (new economic
policy) are:
External Resource
» Reorientation of Fiscal policy and
• External Resource means a generation monetary policy according to market.
resource located outside the country.
» Foreign capital in the form of FDI and FII
• External Resources includes: are encouraged.
» Bilateral Assistance » Import trade restrictions are at a
215
minimum, while export promotion has
been accorded a high priority. Amartya Sen Vs
» Direct participation of the government is
restricted only to strategic industries like
Jagdish Bhagwati
atomic energy etc. Debate
» Convertibility of Indian Rupee.
• The debate on economic policy between
» Sustainable development.
Amartya Sen and Jagdish Bhagwati is
between economic growth and economic
development.
Amartya Sen Jagdish Bhagwati
Economic growth is just a means. Economic growth is crucial for achieving

social ends.
Achieve intervention of government . Supported LPG (market-oriented

approach).
Bottom-Up Approach (rejected trickle- Top-Down Approach.

down completely).
First redistribution and then growth. First growth and then redistribution.
Kerala and Sri-Lanka model supported. Gujarat Model supported.
Gujarat Model » Strengthening of Road Network through

PPP model
• The period from 2002-03 to 2011-12 during » State Public sector enterprises were
which Gujarat experienced a quantum
strengthened.
jump in its growth rate.
• The policies followed by the Gujarat
government are: Kerala Model
» Business Friendliness • It is characterized by achievements in
» Economic Freedom social indicators such as healthcare,
education, low infant mortality and low
» Good Governance (e-Governance) birth rate, high life expectancy, developing
productive social infrastructure instead
− Inter-departmental Coordination.
of materialistic infrastructure.
− Stable tenure of bureaucrats
• The policies followed for development
» Infrastructure Development are:
» Power Reform » High spending on Social Service like
» Restructuring of Irrigation sector (drip Health, Education etc.
irrigation and minor dam construction) » Land Reforms.
216
» Effective Decentralization to empower Fixed Planning
the local bodies.
» Promotion of Trade. • In Fixed Planning, the terms targets/
objective of economic planning are
» Rule of left domination, people awareness. seldom changed i.e. it remains fixed.
» Work of missionaries.
Rolling Plan/Continuous
Other Terms Planning
Centralized Planning • In Rolling Planning, a medium-term plan
is prepared annually i.e. every year targets
• In centralized planning, the whole and policies are determined for the next
economy is administered by a single four to five years and assessment is made
planning authority of the central of previous four to five years.
government.
• There are three types of rolling plans:
» Short term: One year (like annual budget).
Decentralized Planning » Medium term: Four to Six years (specific
• In Decentralized Planning, plans are targets and policies)
developed and implemented at different » Long Term: Ten to Thirty years (Broad
levels i.e., from the national to sub- policies and strategies)
national to the village level.
• India followed the rolling plan from 1978-
80.
Democratic Planning
• In Democratic Planning, people/
Perspective Planning
representatives of various sections/
sectors are involved in all the stages of • Perspective Planning takes into account
preparation and implementation of the the implication of the medium-term
plan. targets and policies of a plan over a
period of 10-30 years.
Physical Planning
Comprehensive Planning
• In Physical Planning, resources are
estimated and allocated in physical • Comprehensive Planning encompasses
terms like manpower, natural resource, all the sectors of the economy.
stock of capital etc.
Partial Planning
Financial Planning
• In Rolling Planning, policies are prepared
• In Financial Planning, resources are for selected sectors of the economy.
estimated and allocated in money terms.
• For example, Tax revenue, Profit of PSU
etc.
217
UPSC CSE PRELIMS substitution of basic and capital goods
industries.
Previous Years 2. The Fourth Five-Year Plan adopted the

objective of correcting the earlier trend
Questions of increased concentration of wealth and
economic power.
Q.1) The main objective of the
12th Five-Year Plan is: 2014 3. In the Fifth Five-Year Plan, for the first
time, the financial sector was included as
(a) inclusive growth and poverty an integral part of the Plan.
reduction
(b) inclusive and sustainable growth given below.
(c) sustainable and inclusive growth to (a) 1 and 2 only
reduce unemployment
(b) 2 only
(d) Faster, sustainable and more
inclusive growth. (c) 3 only
Ans. (d) (d) 1, 2 and 3

Ans. (a)
• Explanation: The objective of the Twelfth
Five Year Plan was to achieve “faster, • Explanation: Rapid industrialization, with
sustainable and more inclusive growth”. particular emphasis on the development
• For this purpose, it sought to achieve10% of basic and heavy industries, is one of
in the manufacturing sector and 4% the objectives of the 2nd Five-year plan.
growth in the agriculture sector. • Nationalization of 14 major Indian Banks
• The total budget of the plan had been was a key during the 4th five years plan.
estimated at Rs.47.7 lakh crore which was This boosted the confidence of the
135% more than that for the 11th Plan people in the banking system.
(2007-12). • Fifth Five-year plan was proposed to
achieve two main objectives: Removal of
poverty' (Garibi Hatao) and Attainment
Q.2) The Government of India has of self-reliance
established NITI Aayog to replace the
2015
(a) Human Rights Commission Q.4) Atal Innovation Mission is set
up under the: 2019
(b) Finance Commission
(a) Department of Science and
(c) Law Commission Technology
(d) Planning Commission (b) Ministry of Labour and Employment
Ans. (d) (c) NITI Aayog
• Explanation: NITI Aayog replaced the (d) Ministry of Skill Development and
erstwhile Planning Commission. Entrepreneurship
Ans. (c)
Q.3) With reference to India’s Five-Year • Explanation: The Atal Innovation Mission
Plans, which of the following statements (AIM) is a flagship initiative of the NITI
is/are correct? 2019 Aayog to promote innovation and
1. From the Second Five-Year Plan, there entrepreneurship across the country at
was a determined thrust towards universities, schools, MSME and industry
218
levels and research institutions. regions it was increased from Rs. 37273
in 2004 -05 to Rs. 101755 in 2011 -12, while
for urban regions it was increased from
Q.5) With reference to the Indian economy
Rs. 120419 in 2004 -05 to Rs. 282515 in
after the 1991 economic liberalization,
2011 -12.
consider the following statements: 2020
• Statement 2 is not correct: According
1. Worker productivity (Rs. per worker at to 2011 Census, around 68.8 percent of
2004 -05 prices) increased in urban areas population of India and 72.4 percent
while it decreased in rural areas. of workforce resided in rural regions.
2. The percentage share of rural areas in But over the years, steady transition to
the workforce steadily increased. urbanization has led to a decrease in the
rural share in the workforce, from 77.8
3. In rural areas, the growth in non -farm
percent in 1993 -94 to 70.9 percent in 2011
economy increased.
-12.
4. The growth rate in rural employment
• Statement 3 is correct: Around 2/3rd
decreased.
of rural income is now generated in
Which of the statements given above is/ non -agricultural activities. Non -farm
are correct? economy has increased in rural regions.
(a) 1 and 2 only The total share of agriculture in rural
economy has decreased from 57% in
(b) 3 and 4 only
1993 -94 to 39% in 2011 -12.
(c) 3 only
• Statement 4 is correct: After 2004 -05,
(d) 1, 2 and 4 only the rural regions have observed negative
Ans. (b) growth in employment in spite of high
growth in output. The growth rate of
• Explanation: Statement 1 is not correct: rural employment was 1.45% during 1994
The absolute level of income per worker -2005, which dropped to -0.28 percent
i.e. worker productivity has grown for between 2005 -12.
both rural and urban regions. For rural
219
CHAPTER - 13
INDUSTRIES
Introduction policy are:
» Acceptance of the importance of both

• Industrial development has been a private and public sectors,
major factor in economic development. » Division of the industrial sector,
Thus, the industrial development of the
country will be guided and fostered by » Role of small and cottage industries, and
the industry policy. » Other important features of the industrial
• Before 1947 the industrial base of the policy.
economy was very small and the industries
were based with many problems like
• It classified industries into 4 categories:
shortage of raw materials, deficiency of » Strategic Industries (Public Sector): These
capital, poor industrial relations, etc. industries comes under exclusive State
• The government of India launched the Monopoly. Ex: arms and ammunition,
process of industrial development after atomic energy etc.
independence in 1947. » Basic / Key Industries: These industries
run with government control included
coal, iron and steel, aircraft manufacture,
Evolution of ship building etc.
Industrial Policies of » Important Industries: Some of the

Important industries controlled by the
India private sector. Such important industries
include heavy chemicals, sugar, cotton
Industrial Policy Resolution of textile and woolen industry etc. (But
in still in these industries, the central
1948 government, in consultation with state
• The Industrial Policy Resolution of government, will have general control on
year 1948 marked the beginning of the them).
evolution of the Indian Industrial Policy. » Other Industries: All Other Industries
• The Resolution emphasized the economic which were not incorporated in the
importance of securing a continuous above three categories are open for the
increase in production and its equitable private sector with many of them having
distribution and pointed out that the the provision of compulsory licensing.
State must play a progressively active
role in the development of Industries.
• This policy states that India is a mixed Industrial Policy Resolution of
economy with overall responsibility of the 1956
government for planned development
of industries and their regulation in the • The Industrial Policy Resolution was the
national interest. first comprehensive statement of the
strategy for Industrial development in
• The main features of the 1948 industry India.
220
• The Industrial Policy Resolution of nature and scope of the economy till
1956 gave priority to the role of the 1991.
State to assume a principal and direct
responsibility for industrial development.
• The main aim of this policy was: Industrial Policy Resolution of
1969
» To fast-track economic growth and boost
the process of industrialization. • The aim of this licencing policy was to
» To reduce disparities in income and address shortcomings in the licencing
wealth and the removal of regional policy developed by the Industrial Policy
disparities through the development of of 1956.
regions with a low industrial base. • Major changes after Industrial Policy
» Promotion of village and small-scale Resolution of 1969:
industries.
» The Monopolistic and Restrictive Trade
• Industries were reclassified into three Practices (MRTP) Act was passed. The
categories. Act envisioned to regulate the trading
and commercial practices of the firms
» Schedule 'A' and check monopoly and concentration
of the economic power.
− It consisted of 17 industries prominent » The firms having assets of 25 crores or
among them were arms & ammunition, more were placed under requirement of
atomic energy, air transport, railway taking consent from the Government of
etc. India prior to any expansion, greenfield
− Development of these sectors was the project, and takeover of other companies
exclusive responsibility of the State. (as per the MRTP Act). Such companies
were known as the ‘MRTP Companies’.
» Schedule 'B' The upper limit (known as the ‘MRTP
limit’) for such kind of companies was
− It consisted of 12 industries prominent reviewed upward to ‘50 crore in 1980 and
among them were Machine tools, ‘100 crores in 1985.
chemicals, drug, pharmaceuticals,
antibiotics, fertilizers etc. » To redress the prohibited and restricted
practices of trade, the Government did
− Though industries of this schedule set up an MRTP Commission.
were supposed to be developed &
owned primarily by the State, private
sector enterprise was also expected
to supplement the efforts of the State.
Industrial Policy Resolution of
1973
» Schedule 'C'
• Indian Policy Statement of 1973 identified
− Residual industries were left open to high priority industries with investment
the private sector enterprise. These from large industrial houses and foreign
industries were heavily controlled companies were permitted.
through licensing provisions. • Industrial Policy Resolution of 1973
− This is considered as the most introduced following major changes:
important industrial policy of India
as it decided not only the industrial » A new classificatory word i.e. core
expansion but structured the very industries was formed. The industries
221
of fundamental importance for the with investment in fixed capital up to
development of industries were placed Rs. 15 lakh.
in this category like iron and steel,
coal, cement, crude oil, oil refining and » Large Scale Industries
electricity.
− Basic industries which are crucial for
» The idea of ‘joint sector’ was developed providing infrastructure as well as for
which allowed partnership between the the development of small and village
centre, state and the private sector while industries, like steel, non-ferrous
setting up some industries. metals, cement, oil, refineries.
» Some industries were put under the − Capital goods industries for fulfilling
Reserved list in which only the small or the machinery requirement of basic
medium industries could be set up. Ex: industries as well as small scale
Coal and lignite, Mineral oils etc. industries.
» To regulate foreign exchange, the Foreign − High technology industries where
Exchange Regulation Act (FERA) was production has necessarily to be on a
passed in 1973. large scale and which help agricultural
» Limited permission for foreign and industrial development such as
investments was given to the fertilizers, petro-chemical industries
Multinational Corporations (MNCs) etc.
and they were allowed to set up their
subsidiaries in the country.
» Public sector undertakings were given
the task of controlling the economy.
By keeping these industries under
government control, it was easy to check
Industrial Policy Resolution of the concentration of economic power in
1977 the hands of a few individuals or groups.
• Indian Policy Statement was announced » To achieve equal distribution,
by George Fernandes, the then union employment-oriented planning was to
industry minister of the parliament. replace production-oriented planning.
• The main focus of the Industrial Policy • The IPR of 1977 failed to make an impact
statement of 1977 was on effective because though the policy tried to be
promotion of small, cottage and village different, there was no radical change
industries. from the previous policies.
• The highlights of this policy are:
» Small-Scale and Cottage industries: Industrial Policy Resolution of
Small sector was classified into three
categories:
1980
• The Industrial Policy of 1980 reiterated
− Cottage & household industries its faith in the ideology of the Industrial
producing wage goods with vast self- Policy Statement of 1956.
employment potential.
• The Industrial Policy Statement of 1980
− Tiny sector with investment in placed the thrust on the promotion
machinery and equipment up to Rs. of competition in the domestic
1 lakh. market, technological upgrading, and
− Small scale industries with investment modernization of industries.
up to Rs.10 lakh and ancillary units • Some of the socio-economic objectives
222
of the policy are: » Modernization and the profitability
characteristics of the public sector
» Maximum production and achieving undertakings were emphasized.
higher productivity
» The agriculture sector was looked with
» Higher employment generation a new scientific approach with many
» Correction of regional imbalances Technology Missions being launched by
the Government.
» Promotion of export-oriented industries
• These industrial provisions were
• The most important initiatives of the envisioned towards liberalizing the
policy were as given below:
economy without any slogan of ‘economic
» Foreign investment via the technology reforms’.
transfer route was allowed again. • The industrial policies conjoined with the
» The ‘MRTP Limit’ was revised upward overall micro-economic policy followed
to `50 crore to promote the setting of by the Government was more dependent
bigger companies. on foreign capital.
» Industrial licensing was simplified. • When the economy was unable to meet
industrial efficiency, it became difficult
» It extended the provision of automatic for India to repay external borrowings.
expansion to more industries.
• Finally, at the end of 1980s India was in
• The 1980 Industrial Policy Statement the grasp of a severe balance of payment
opened up new vistas for the private crisis with a higher rate of inflation (above
sector to expand its activities and even 13 %) and higher fiscal deficit (above 8
set up industries the sector reserved for %).
the State in 1956 Resolution. • The deep crisis put the economy in a
financial crunch which made India opt
for a new way of economic management
Industrial Policy Resolution in the coming times.
1985 & 1986
• The industrial policy resolutions New Industrial Policy, 1991
announced in year 1985 and 1986 were of
very much similar kind. • India faced a severe balance of payment
crisis in June 1991. In 1990 and 1991, there
• The main highlights of the policies are: were several inter-connected events
» Foreign investment was more simplified which were growing in unfavourable
with further industrial areas being open ways for the Indian economy.
for their entries.
» Because of the Gulf War (1990–91), the
» The ‘MRTP Limit’ was revised upward to higher prices of oil were exhausting
`100 crore,promoting the idea of bigger India’s foreign reserves.
companies.
» Sharp drop in the private remittances
» The provision of industrial licensing was from the overseas Indian workers,
simplified. Compulsory licensing now particularly from the Gulf region in the
remained for 64 industries only. wake of the Gulf War.
» High-level attention on the sunrise » Inflation was peaking closely to 17 %.
industries such as telecommunication,
» Gross fiscal deficit of the central
computerization, and electronics.
223
government reaching 8.4 % of the GDP. − A Special Empowered Board was
» By the June 1991, India’s foreign exchange also established to negotiate with a
had declined to just two weeks of import number of large international firms
coverage. and agree direct foreign investment
in select areas.
• As a result of the BoP crisis, the
initial phase of reforms focused on » Foreign Technology Agreement
macroeconomic stabilization, with
− Bureaucratic clearance was no longer
subsequent phases focusing on industrial
required for an Indian entrepreneur
policy, foreign investment policy, trade
for his commercial technology
and exchange rate policies, financial and
relationship with his foreign supplier.
tax reforms, and public sector reforms.
− It was expected that the Indian
• The new industrial policy, proclaimed industry would not only absorb
by the Government on July 23, 1991, had
foreign technology efficiently,
initiated a bigger process of economic
but competitive pressure would
reforms in the country, focusing towards
induce them to invest much more in
the structural readjustment naturally
indigenous R&D activity.
obliged to ‘fulfil’ IMF conditionalities.
• In pursuit of these objectives, government » Public Sector Undertakings
decided to take a series of initiatives in
respect of the policies relating to the − The public sector has been central to
following areas: the philosophy of development.
− Introduced competition by inviting
» Industrial licensing private sector participation in the
public sector dominated sector.
− Under new policy, industrial licensing
was abolished for all industries, − Disinvested government holdings to
except those specified irrespective of bring market discipline to the output
the level of investment. of public enterprises and to get out of
places where government presence is
− Only 18 industries needed a
not expected.
compulsory license. Subsequently,
this was further liberalized and only 6 − Due to the policy initiative and
industries such as Alcohol, Electronic governments decision to get out of
equipment and defence equipment, the sectors which could be entrusted
Tobacco product, Industrial to the private sector, number of
explosives, Hazardous chemicals, industries reserved for the public
Drugs and Pharmaceuticals. sector was cut down to three which
include defence equipment, Atomic
− The objective was to provide
energy, Railway transport.
impetus to the attainment of fullest
entrepreneurial and industrial » Monopoly and Restrictive Trade
potential. Practices Act
» Foreign Investment − The objective of the Act was the
prevention of concentration of
− Direct foreign investment was
economic power in a few hands which
approved up to 51% foreign equity in
may be detrimental to the objective
high priority industries. There were 34
of social justice. But the present form
industries in this category.
of implementing the Act resulted in
224
inhibiting industrial growth.
− The Act was to be restructured so as
National
to minimize government interference
in investment decisions of the large
Manufacturing
companies. Policy 2011
− Restrictions on mergers, acquisitions,
amalgamations, and takeovers were • The Indian government decided to
also sought to be liberalized in the implement the National Manufacturing
light of the new wave of liberalization. Policy in order to effect quantitative and
qualitative change in the manufacturing
sector. It includes:
Positive of New Industrial Policy,
1991 » Raise manufacturing sector growth to 12-
14% over the medium term for making it
• The end of licence-permit raj. the engine of growth for the economy.
• Foreign investment and foreign » It seeks to increase the share of
technology were supposed to encourage manufacturing in India's GDP to 25% by
the investment environment in the country 2022.
and boost the competitive environment » Rise the rate of job creation in
by shaking the complacency of Indian manufacturing sector to create 100
business. million additional jobs by 2022.
• Removal of the Threshold limits of assets » Creation of appropriate skill sets in the
in respect of MRTP Companies and rural migrant and urban poor to make
dominant undertakings. Giving them free growth inclusive.
hand for growth.
» Enhance the global competitiveness
• Role of the public sector was redefined, of Indian manufacturing through
and attention was paid to increase its appropriate policy support.
efficiency and productivity.
» The policy envisages the establishment of
National Investment and Manufacturing
Criticism of New Industrial Policy, Zones (NIMZ) armed with world-class
1991 infrastructure that would be autonomous
and self-regulated which would be
• New Economic Policy (NEP) was criticized developed in partnership with the private
for promoting 'jobless growth'. sector.
• Neglect of agriculture was another area
of major weakness in the NEP.
• The following industry will be given
special attention:
• Liberalization of imports might offset
export growth leading to an adverse » Employment intensive industries:
impact on BoP position. Sufficient support will be given to promote
• The possible reverse flow of dividends, and strengthen employment-intensive
royalties, and remittance of profit might industries to ensure job creation.
result in the outflow of foreign exchange » Capital Goods: A special focus will be
creating pressure. given to machine tools; heavy electrical
equipment; heavy transport, earth
moving and mining equipment.
» Industries of strategic importance:
225
The launch of programmes to develop Zones (NIMZs) are one of the main
national capabilities to make India a components of the 2011 National
major force in sectors such as aerospace, Manufacturing Strategy. NIMZs are
shipping, and others would be justified if broad areas of developed land with the
the country had a strategic requirement. required eco-system for fostering world-
» Small and Medium Enterprises (SME): class manufacturing.
The SME sector accounts for around 45 • These helps to meet the increasing
percent of manufacturing production, demand for creating world-class urban
40 percent of total exports, and provides centres in India, while will also absorb
self-employment and job opportunities surplus labour by providing them with
across a wide range of geographies. gainful employment opportunities.
» Public Sector Enterprises: Public Sector • These NIMZs are managed by Special
Undertakings, particularly those in Purpose Vehicle (SPVs), which ensure:
Defence and Energy sectors, continue
to play a major role in the growth of » Zone master planning.
manufacturing as well as of the national » Pre-clearances for the establishment of
economy. industrial units to be established within
» Industries where India enjoys a the zone.
competitive advantage: India's broad » Other functions as defined in the various
domestic market, combined with its sections of this policy.
strong engineering base, has resulted in
indigenous expertise and cost-effective • To allow the NIMZ to function as a self-
manufacturing in the automotive, governing and autonomous body, it will
pharmaceutical, and medical equipment be declared by the State Government as
industries. Instruments which are to be an Industrial Township.
used to achieve the objectives are as • The Department of Industrial Policy and
follow: Promotion (DIPP) will act as the nodal
» Rationalization and simplification of agency for the central government in
business regulations. matters pertaining to the NIMZs.
» Simple and expeditious exit mechanism
for the closure of sick units while
protecting labour interests. Land For NIMZ
» Industrial training and skill up-gradation • Size of land for NIMZ: An NIMZ would
measures. have an area of minimum 5000 hectares
» Incentives for SMEs. in size.
» Financial and institutional mechanisms • Availability of land: The State Government
for technology improvement, including will be responsible for the selection of land
green technologies. suitable for the development of the NIMZ
including land acquisition if necessary.
The land may constitute:
National Investment » Government-owned land.

& Manufacturing » Land under existing industrial areas/
estates/sick and defunct units, including
Zones (NIMZs) PSUs, to be purchased by the State
Government.
• National Investment & Manufacturing
226
Ownership Difference between SEZ vs
• It is up to the State Government to choose NIMZ?
the model that it believes will work best. • NIMZs vary from SEZs in terms of
• It may include: scale, level of infrastructure planning,
governance mechanisms related to
» Keep the ownership with the state regulatory procedures, and exit policies.
government itself. SEZs are focused on the concept of
» Handover the ownership to a state industrial growth in partnership with
government undertaking. States and focuses on manufacturing
growth, the advancement of exports and
» Have joint ownership with a private employment generation.
partner.
• NIMZs are based on the principle of
» Adopt any other appropriate model. industrial growth in partnership with
States and focuses on manufacturing
growth and employment generation.
Administration
• A Special Purpose Vehicle, a developer,
the State Government, and the Central Make in India
Government would make up the
administrative framework of NIMZ. • The Make in India initiative launched by
• An NIMZ will be notified by the Central the Government in 2014 to encourage
Government, by notification in the companies to manufacture their
Official Gazette. products in India and ensure dedicated
investments into manufacturing.
• Any SPV must be a legal entity with the
NIMZ as its name. This SPV will act as a • It was launched by the Department of
business. Industrial Policy and Promotion (DIPP),
Ministry of Commerce and Industry.
• The SPV's CEO would be a senior
government official from the central or • Objectives of Scheme:
state level.
» Improving the competitiveness of the
The cost of master planning for the private and public sector firms operating
NIMZ would be covered by the central in the country.
government.
» Facilitating integration into the global
value chains.
Number of NIMZ? » Enhance Ease of Doing Business
» Enhance skill development
• So far, three NIMZs have received
final approval: Prakasam (Andhra » Providing employment
Pradesh), Sangareddy (Telangana), and
Kalinganagar (Odisha), and 13 NIMZs • It is an international marketing approach
have received in-principle approval. based on the Singapore model to
enhance the competitiveness of the
• Aside from these, the Delhi Mumbai manufacturing sector by promoting FDI,
Industrial Corridor (DMIC) project has imposing ease of doing business, labour
eight Investment Regions that have been reform etc.
designated as NIMZs.
• The Make in India programme is vital
227
for India's economic growth because it India's Ease of Doing Business ranking
seeks to tap into the country's existing by removing unnecessary laws and
talent pool, build new job opportunities, regulations, simplifying bureaucratic
and motivate the secondary and tertiary procedures, and making the government
sectors. more transparent, sensitive, and
• The programme also aims to improve accountable. The focus of the Make in
India programme is on 25 sectors.
These include:
Pharmaceuticals
Automobiles Aviation Chemicals IT & BPM
Defence Electrical Food Textiles and

Construction
Manufacturing Machinery processing Garments
Media and
Ports Leather Wellness Mining
Entertainment
Tourism and Automobile Renewable

Railways Biotechnology
Hospitality Components Energy
Electronics
Space Thermal power Roads Highways
Systems
• Its goals include reducing the number

What did the of points of contact between businesses
government and government agencies, establishing

single-window programmes, and lowering
do to promote enforcement costs. eBiz – India’s first
Government-to-Business (G2B) portal,
manufacturing? has been developed by Infosys in a public
private partnership model.
Ease of doing business • Invest India is India’s official agency
dedicated to investment promotion and
• Government has initiated reforms in the
facilitation. It is a not-for-profit, single-
area such as starting a business, dealing
window facilitator, set up for prospective
with construction permits, registration
overseas investors and to those aspiring
of property, power supply, paying taxes,
Indian investors desiring to invest in
enforcing contracts, and resolving
foreign locations, and acts as a structured
insolvency.
mechanism to attract investment.
• The Department of Industrial Policy Invest India is essentially an Investment
and Promotion's eBiz initiative aims to Promotion Agency in India. Invest India,
provide comprehensive Government- set up in 2009, is a non-profit venture
to-Business (G2B) services to businesses under the Department for Promotion of
with accountability, pace, and certainty. Industry and Internal Trade, Ministry of
228
Commerce and Industry, Government of Fund account portable, hassle-free, and
India. universally accessible.
• Stable and predictable tax regime i.e. » Apprentice Protsahan Yojana: Will
avoiding litigation, retrospective taxation support manufacturing units mainly and
etc. other establishments by reimbursing
• Easing of environmental clearance 50% of the stipend paid to apprentices
norms. during the first two years of their training.
» Revamped Rashtriya Swasthya Bima
150 Yojana: Introducing a Smart Card for the
workers in the unorganized sector seeded
100
with details of two more social security
schemes.
India Rank
50
Factories (Amendment) Bill, 2014

• The Factories (Amendment) Bill, 2014 was
0
2014 2015 2016 2017 2018 2019
Year
I m a g e 13.1: I n di a E a s e o f D o i n g B u s i n e s s
aims to change the 1948 Factories Act.
Ranking • The Act seeks to ensure appropriate
safety measures and promote the health
and welfare of factory workers
Labour Reforms
• It proposes to grant the state government
Pandit Deendayal Upadhyay the authority to allow women to work at
Shramev Jayate Karyakram night in a factory or group of factories
that meet certain requirements. The
• It was launched in October 2014 by the Bill seeks to impose restrictions on the
Government of India. employment of pregnant women and
• The foremost objective of the scheme persons with disability in certain works or
is to provide a conducive environment processes.
for industrial development and promote • Norms of hiring and firing were liberalized.
ease of doing business through the
introduction of several labour reforms.
• The five main schemes launched under Skill Development
this are:
Ministry of Skill Development and
» A dedicated Shram Suvidha Portal: Entrepreneurship (MSDE)
The portal allots Labour Identification
Number (LIN) to nearly 6 lakh units and • A separate dedicated ministry for skill
allow them to file online compliance for development has been established in
16 out of 44 labour laws. 2014 i.e. Ministry of Skill Development
and Entrepreneurship (MSDE).
» An all-new Random Inspection Scheme:
Utilizing technology to eliminate human • The Ministry is in charge of coordinating
discretion in the selection of units for all skill development efforts across the
Inspection and uploading of Inspection country, bridging the gap between
Reports within 72 hours of inspection demand and supply of skilled manpower,
mandatory. developing a vocational and technical
training system, skill up-gradation, the
» Universal Account Number: Enables 4.17 development of new skills, and creative
crore employees to have their Provident
229
thinking, not only for existing jobs but • Features:
also for new jobs.
» Corporate Social Responsibility (CSR)
• Its functional arms, the National Skill
Development Agency (NSDA), the • The companies having annual turnover
National Skill Development Corporation of over Rs. 1000 crore or net worth of Rs.
(NSDC), the National Skill Development 500 crore or more or net profit of Rs. 5
Fund (NSDF), and Sector Skill Councils, crore or more in any financial year has
assist it in these initiatives (SSCs). to constitute a CSR committee consisting
of at least three directors out of which
one director should be an independent
Sector Skill Council (SSC) director.
• Sector Skill Councils are set up as • Such companies have to spend at least
autonomous industry-led bodies by 2% of the average net profit of the
NSDC. preceding 3 years on CSR activities.
• They create Occupational Standards
and Qualification bodies, develop » Directors:
competency framework, conduct Train
• At least one-third of the directors in all
the Trainer Programs, conduct skill gap
listed companies should be independent
studies, and Assess and Certify trainees
directors.
on the curriculum aligned to National
Occupational Standards developed by • There should be at least one female
them. director in the prescribed company (not
all companies).
• New Skill Development programmes
have been initiated like Pradhan • In all listed companies, at least one
Mantri Kaushal Vikas Yojana, National director must be resident director i.e.
Apprenticeship Promotion Scheme, Deen stayed in India for at least 182 days in a
Dayal Upadhyaya Grameen Kaushalya year.
Yojana etc. • Duties of directors are also prescribed in
Companies Act 2013.
Companies Act 2013 » Auditing and accounting norms

• A National Financial Reporting Authority
• The Companies Act 2013 replaced the should be established to supervise and
Indian Companies Act, 1956. regulate the accounting standard of the
• The Companies Act, 2013 seeks to bring companies.
corporate governance and regulation • Mandatory rotation of auditors i.e.
practices in India at par with the global individual auditors could be appointed
best practices. for not more than five years and audit
• Objective: firms could be appointed for not more
than 10 years.
» It seeks to create a more friendly • Auditors cannot provide any other service
environment and improve corporate
to the company.
governance norms, increase transparency,
enhance the accountability of corporates » Investor Protection
and auditors and to protect the interest
of the investor, especially small investors. • The class-action suit provision was
introduced for the first time. Under this, a
230
shareholder, creditor, or any stakeholder primarily owned by the government and
can sue a company on behalf of managed by a Chairman and Managing
a particular class of shareholder/ Director appointed by the government.
stakeholder. On the boards of public sector companies,
• Exit option to be provided to minority government candidates serve the
shareholders during the reorganization government's interests.
of the company. • The audit of public sector undertakings
is done by the Comptroller and Auditor
» National Company Law Tribunal (NCLT) General (CAG) of India while that of
public sector enterprises is done first
• The National Company Law Tribunal by Chartered Accountants and the
would replace the Board for Industrial supplementary audit is done by the
and Financial Reconstruction (BIFR) and Comptroller and Auditor General of India.
Company Law Board (CLB).
Evolution of Public Sector

Public Sector Enterprises
Enterprise/ • Indian industry was underdeveloped
Undertakings when the country gained independence
in 1947, necessitating a major policy drive.
• The word Public Sector Undertaking, • The Second Five-Year Plan (1956-61)
or Enterprise refers to a Government and the Industrial Policy Resolution
Company. of 1956 established the framework
for India's public sector undertakings/
• Government Company is described enterprises, which were expected to play
under Section 2 (45) of the Companies a significant role in preventing economic
Act, 2013 as any company in which not power concentration, reducing regional
less than fifty-one percent of the paid-up disparities, and ensuring that planned
share capital is held by the: development serves the common good.
» Central Government, or • Initially, the public sector was limited
to core and strategic industries such as
» State Government or Governments, or irrigation projects (e.g. Damodar Valley
» Partly by the Central Government and Corporation), fertilizers and chemicals
partly by one or more State Governments. (e.g. Fertilisers And Chemicals Travancore
» Includes a company which is a subsidiary Limited), communication networks
company of such a Government (e.g. Indian Telephone Industries), and
company. heavy industries (e.g. Indian Telephone
Industries) (e.g. Bhilai Steel Plant,
• The word "public sector undertakings" Hindustan Machine Tools, Bharat
applies to government-run companies Heavy Electricals, Oil and Natural Gas
that charge fees for their services. Railways, Commission etc.).
Posts, and Security Undertakings, for • Subsequently the Government
example, are typically wholly owned and nationalized several banks (starting with
operated by the government. nationalization of the Imperial Bank of
• On the other hand, Public sector India which was renamed State Bank
enterprises, are companies registered of India in 1955) and foreign companies
under the Companies Act, 1956, that are (Jessop & Co, Braithwaite & Co, Burn &
231
Co.). this government use to fix the prices of
• Later, Public Sector companies the product of PSU.
started manufacturing consumer
goods (e.g. Modern Foods, National
Textile Corporation etc.) and providing Reforms in PSU
consultancy, contracting, and
• New Industrial Policy 1991:
transportation services.
• Reviewing the role of the public sector, the » The changes made by the Industrial
Industrial Policy Resolution 1991 reduced Policy 1991 on PSUs were manifold:
the number of industrial undertakings to
just six areas which included strategic − Sectors where the PSUs to be
industries like atomic energy, defence, concentrated,
coal, mineral oils, and railway transport − Removal of reservation for PSUs in
etc. Efforts were made to divest non- most sectors,
strategic public sector industries and
− PSU restructuring by adopting
to increase private participation in
market-oriented practices,
the equity of profitable public sector
industries. − Selling of loss-making PSUs,
− Reduction of government ownership
through disinvestment.
Objective of PSU
• Voluntary Retirement Scheme (VRS)
• To create an industrial base with
diversification in different sectors. » Under this Employee of PSU were
• Employment generation and to create an encouraged to seek premature
employee model. retirement.
• Accelerate economic growth. » It is also called the Golden Handshake

Scheme.
• Reduce regional disparities.
• Export Promotion and import substitution. • Dismantling of APM
• To generate resources for the government. » Price of most of the products of PSU was
deregulated.
• Participation in Share Market

Cause of Losses of PSU
» PSUs were permitted to raise funds from
• Lack of autonomy and accounting.
the public through issue of IPO and get
• Excessive Social overhead cost like listed in the stock exchange.
developing infrastructure, amenities to
employers etc. • Navratna Scheme 1997
• Inappropriate location, technology, » In 1977, the government launched the
product etc. Navratna scheme to recognize and assist
• Investment decision was based on social Central Public Sector Enterprises (CPSEs)
welfare rather than economic welfare. with competitive advantages in their
• Overstaffing. quest to become global behemoths.
• Trade Union interference. » Government provided significant

autonomy to such PSUs like to invest
• Administrative Price Mechanism: Under
232
up to Rs. 100 crore or up to 15% of their − An average annual net profit of more
net worth in India/abroad, entering into than Rs.2500 crore during the last 3
collaboration, establishing joint ventures years.
etc. − Significant global presence or
international operations.
• Miniratra Scheme 1997:
» The Government introduced the
• The Maharatna CPSEs can invest
Rs. 5000 crores or 15% of net worth
Miniratna scheme in 1997 in pursuance of
whichever is lower in one project without
the policy to make the public sector more
government permission.
efficient and competitive and to grant
enhanced autonomy and delegation of
powers to the profit-making public sector
enterprises. Disinvestment
» Eligibility conditions are:
• Disinvestment refers to government
− Category I: CPSEs should have selling its equity holding in Public
made a profit in the last three years Enterprises to public or private parties,
continuously, and the pre-tax profit financial institutions, and mutual funds
should have been Rs. 30 crores or etc.
more in at least one of the three years • The disinvestment policy, at initial stage,
and positive net worth. had stated a limited sale of equity for
− Category II: CPSEs should have the purpose of raising some resources
made a profit for the last three years to reduce budgetary gaps and providing
continuously and should have a market discipline to the performance of
positive net worth. public enterprises.
• Maharatna Scheme
Objectives of Disinvestment
» The Government introduced the
Maharatna scheme in December 2009 • Modernization and up-gradation of
with the objective to delegate enhanced public sector enterprises.
powers to the Boards of identified large
• To reorient public investment i.e. to
sizes Navratna CPSEs to facilitate further
transfer public investment from non-
expansion of their operations, both in
strategic to strategic areas.
domestic as well as global markets.
• Improve the efficiency of an enterprise
» Eligibility conditions are: and can convert the sick unit into
− Having a Navratna status. productive units.
− Listed on the Indian stock exchange, • Increase transparency and accounting to

with a minimum prescribed public the general public.
shareholding under SEBI regulation. • Releasing huge amounts of scarce public
− Average annual turnover of more resources locked up in nonstrategic PSU
than Rs.20,000 crore during the last for development in areas much higher
three years. on social priority, such as public health,
family welfare, education, social and
− An average annual net worth of more essential infrastructure.
than Rs.10,000 crore during the last
three years.
233
Process of Disinvestment of Disinvestment Policy. The UPA
Government promised to:
• Government initiated the process
of disinvestment in 1991 under New » Devolve complete managerial control
Industrial Policy 1991. and commercial autonomy to successful,
profit-making companies operating in a
• Initially, the disinvestment process only
competitive environment they will not be
involved financial institutions.
privatized.
• In 1992, the Government created a
committee on disinvestment under C.
» Navratna companies can raise resources
from the capital market.
Rangarajan which recommended that a
disinvestment fund should be constituted, » Efforts will be made to renovate and
and the government should go for restructure sick PSEs.
strategic disinvestment (management » It favoured the sale of small proportions
control is also transferred). of Government equity through IPO/FPO
• In 1996, the Disinvestment commission without changing the character of PSEs.
(a permanent body to advise the » It also established the formation of the
government) was set up. ‘National Investment Fund’, where the
• In the 1998-99 Budget Address, it proceeds from disinvestment of CPSEs
was revealed that the Government's would be channelized. 75% of the
shareholding in CPSEs would be reduced annual income of NIF would be used to
to 26% on a case-by-case basis, with the finance selected Social Sector Schemes-
exception of strategic CPSEs, where the education, health, employment, and the
Government would maintain majority rest 25% to meet the capital investment
ownership. Workers' rights were to be requirements of profitable and revivable
safeguarded at all times. On March 16, CPSEs.
1999, the government categorized PSEs
into Strategic and Non-Strategic areas • On 5th November 2009, the Government
for this reason. approved the following action plan
for disinvestment in profit-making
Disinvestment in India: government companies:
• In 1999, the Department of » Already listed profitable CPSEs (not

Disinvestment was established as a meeting the required shareholding of
separate department and later it was 10%) would be made compliant by
renamed as Ministry of Disinvestment the government's "Bid for Sale," or by
in 2001. The Department of the CPSEs issuing new shares, or a
Disinvestment was transferred to the combination of both.
Ministry of Finance in 2004.
» Unlisted CPSEs with no cumulative losses
• The Department of Disinvestment and a net profit in the previous three
has been retitled as Department years are eligible to be listed.
of Investment and Public Asset
» The government will maintain at least 51
Management (DIPAM) from 14th
percent equity and management control
April 2016. It has been made the
in all cases of disinvestment.
nodal department for the strategic
stake sale in the PSUs (Public Sector » Every disinvestment cases will be handled
Undertakings). on a case-by-case basis.
• In 2004, as the Government changed, • Since 2014, the government has adopted
there was a change in the viewpoint a disinvestment strategy that involves
234
minority stake sales as well as strategic including 2 PSU banks and one general
disinvestment. insurance company, in 2021-22 Budget.
• The government has approved the The figure is lower than the budgeted
strategic disinvestment of 33 central amount of Rs. 2.10 lakh crore for CPSE
public sector undertakings 'in principle' disinvestment in 2020-21. However, in
so far (CPSEs). 2020-21 the government has raised less
than 3 percent of budgeted revenues
• NITI Aayog, a think tank, has been from disinvestment process.
tasked with defining such PSUs based on DisinvestmentTarget Acheived
national security, sovereign functions at 100,000
arm's length, market imperfections, and 75,000

public interest parameters.
• During 2014-19, the government received
50,000
Rs. 2,79,622 crore from public sector 25,000
undertakings (PSUs), compared to Rs. 0
1,07,833 crore in 2004-14. 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
Year
I m a g e 13.2: D i s i n v e s t m e n t T a r g e t and
Acheiments
Some of the major Disinvestment done:
• During 2009-20, some of the
major disinvestment took place in National Investment Fund
companies such as NHPC Ltd., Oil
India Ltd., NTPC Ltd., SJVN, NMDC, • The Cabinet Committee on Economic
SJVN, EIL, CIL, MOIL, etc. with the Affairs (CCEA) approved the creation
help of public offers. of a National Investment Fund (NIF) in
January 2005.
• Finance minister in 2021 said that
Disinvestment of Air India and Pawan • The fund's aim was to raise disinvestment
Hans would be completed in 2021-22. proceeds from central public sector
enterprises and invest them in order to
• On 01 February 2021, during the generate earnings while not depleting
budget (2021-22) presentation in the corpus, with the earnings going to
the Lok Sabha, the Finance Minister selected Central social welfare schemes
publicized that two public sector
banks (PSBs) and one general • It was held outside consolidated fund of
insurance company are anticipated India.
to be disinvested this year. • In 2013, CCEA decided that the entire
• The government will develop a disinvestment proceeds will be credited
National Asset Monetisation Pipeline to the existing ‘Public Account’ under
and Dashboard, according to the the head NIF and they would remain
Finance Minister, with the aim of there until withdrawn/invested for the
monetising government properties. approved purpose.
• Assets of Railway, NHAI, Railways, • The allocations out of the NIF will be
Airports Authority of India (AAI), decided in the annual Government
HPCIL and GAIL will be Monetized. Budget.
• The broad investment objectives are:
• The Union Government budgeted Rs. 1.75 » Investment in social sector programmes
lakh cr from stake sale in public sector that support education, health care, and
companies and financial institutions, jobs.
235
» Capital investment in sustainable and and service businesses. It also describes
revivable public sector companies that medium businesses for the first time and
yield sufficient returns in order to extend tries to combine the three levels of these
and diversify their capital base. businesses, namely micro, small, and
medium.
• The Act also offers for a statutory
consultative mechanism at the national
level with a balanced representation of
Micro, Small and all sections of stakeholders, particularly
Medium Enterprises
the three classes of enterprises and with
a wide range of advisory functions.
Development
(MSMED) Act 2006 Definition of Micro, Small and
Medium Enterprises in India
• In 2006, the Micro, Small, and Medium
Enterprises Growth (MSMED) Act was
• Micro, small, and medium enterprises as
per the MSMED Act, 2006 are defined
enacted to resolve policy concerns
based on their investment in plant and
affecting MSMEs, as well as the sector's
machinery (for manufacturing enterprise)
coverage and investment ceiling.
and on equipment for enterprises
• The Act seeks to help these companies providing or rendering services.
expand and compete by establishing
the first-ever legal structure for
• The present ceilings on investment for
enterprises to be classified as micro, small
understanding the idea of "enterprise,"
and medium enterprises are as follows:
which encompasses both manufacturing
Existing and Revised Definition of MSMEs
Existing MSME Classification

Criteria: Investment in plant & Machinery or Equipment
Classification Micro Small Medium
Mfg. Enterprises Investment<Rs. 25 Lac Investment<Rs. 5 cr. Investment<Rs. 10 cr.
Services Enterprise Investment<Rs. 10 Lac Investment<Rs. 2 cr. Investment<Rs. 5 cr.
Revised MSME Classification

Composite Criteria: Investment & Annual Turnover
Classification Micro Small Medium
Manufacturing & Investment<Rs. 1 cr. Investment<Rs. 10 cr. Investment<Rs. 20 cr.
Services and and and
Turnover<Rs. 5 cr. Turnover<Rs. 50 cr. Turnover<Rs. 100 cr.
236
Contribution of MSME Sector provided through various mechanism
some of them are as follows:
• Over the last five decades, the Micro,
Small and Medium Enterprises (MSME) » Mudra Bank
sector has emerged as a highly vibrant » Priority Sector Lending (PSL)
and competitive sector of the Indian
economy. » Through various government schemes
like the Credit Guarantee Fund Scheme
• MSMEs not only play a critical role for Micro and Small Enterprises, Prime
in providing significant employment Minister’s Employment Generation
opportunities at a lower capital cost Programme and Credit Linked Capital
than large factories, but also help in the Subsidy Scheme.
industrialization of rural and backward
areas, thereby reducing regional
imbalances and assuring food security. Fiscal Support
• The Sector consisting of 36 million units, • Lower rate of 25 % Corporate Tax
as of today, provides employment to over
extended to companies with an annual
80 million persons.
turnover up to Rs. 400 crore from the
• The Sector through more than 6,000 earlier cap of up to Rs. 250 crore.
products contributes about 8% to GDP.
• For the MSME sector, Rs. 350 crore has
• MSME contributes 45% to the total been allocated for FY 2019-20 under
manufacturing output and 40% to the the Interest Subvention Scheme, for 2%
exports from the country. interest subvention for all GST registered
MSMEs, on fresh or incremental loans.
• Doubling the exemption threshold under
Problem in MSME Sector the goods and services tax (GST) to Rs.
• Problem in raising funds (limited access 40 lakh annual turnover will reduce the
to formal credit and they have to pay burden on small and medium enterprises
high interest). (SMEs).
• Obsolete Technology. • Price and Preference Purchase Scheme:

Under this, preference is granted to
• Non-Professional management/ products manufactured by small scale
entrepreneurship. industry in the government purchase
• Inadequate infrastructure in rural and programme (up to 15% higher price than
semi-urban areas. other sectors).
• Dependence on local sources of raw
material. Technical and Industrial Support
• Marketing problem: No brands and High
per unit advertisement cost. • Small Industries Development
Corporations (SIDCO) are state-owned
• Competition from large scale industry. companies or agencies in the states of
• No availability economies of scale. India which were established in 1954 for
the promotion of small-scale industries.
It provides technical, managerial,
Measures taken by Government marketing support etc., to small scale
industries.
Financial Support
• The Government of India founded the
• Financial support to MSME sector is National Small Industries Corporation
237
(NSIC) Ltd. in 1955 to encourage, economy.
assist, and foster the growth of small- • Our 1st five-year plan was based on the
scale industries in the country. The Harrod-Domar growth model.
Corporation's key responsibilities are to
promote help and facilitate the growth of • Harrod-Domar growth model states that
micro and small businesses in the region, economic growth rate can be calculated
primarily on a commercial basis. It offers as:
a wide range of support services to Economic Growth Rate =
Investment Rate (IR)
micro and small companies, catering to Incremental Capital Output Ratio
their unique needs in areas such as raw
material sourcing, product marketing,
credit rating, technology acquisition, Stages of Capital Formation
and the implementation of modern
management practices, among others. • Stages of capital formation include the
following stages:
• District Industries Centre (DIC) was
established in 1979 to provide support to » Saving: Saving is disposable income
MSME, skill development and technical minus consumption.
issues etc.
» Finance: Mobilization of saving of
household investment by firms through a
Reservation of item for Small Scale financial institution.
Industry (SSI) » Investment: Expenditure on capital
goods.
• In 1967, 47 items were reserved for the
small-scale industry. These items were
increased to 900 by 1990.
Component of Investment
• The main objective of the reservation
was to eliminate competition from large • Component if Investment includes:
scale industry.
» Fixed Investment: Fixed investment is the
• Abid Hussain Committee on Reservation accumulation of physical assets such as
of Items (1997) recommended to stop machinery, land, buildings, installations,
reservation for small scale industry. vehicles, or technology.
• As of today, there are 836 items reserved » Inventories or Stocks: It includes raw
for exclusive manufacture in the small- material, semi-finished goods, unsold
scale sector. goods.
» Valuables: It includes commodities like
Capital Formation Gold, Silver etc.
or Investment Determinant of Investment

• It refers to the process of increase in the • The determinant of investment are as
physical stock of capital like machinery, follows:
equipment, factory, etc.
• It is the most important determinant of » Interest rates
economic growth because it increases
− Investment is inversely related to
production, productivity, and the
interest rates. If interest rates increase,
productive capacity of the future of an
238
the opportunity cost of investment Index of Industrial Production
rises.
(IIP)
» Expected return on the investment • The Central Statistical Office (CSO),
− Businesses require a return on their Ministry of Statistics and Programme
investment in order to cover their Implementation, compiles and publishes
cost. In terms of the entire economy, the all-India Index of Industrial Production
the amount of business profits is a (IIP) monthly.
good indication of the potential for • It analyses short-term changes in the
investment. amount of production of a basket of
industrial products over a given period in
» Saving comparison to a chosen base period.
− Household and corporate savings • The Central Statistics Office (CSO)

provide a flow of funds into the revised the base year of the all-India
financial sector, which means that Index of Industrial Production (IIP) from
funds will be available for investment. 2004-05 to 2011-12 on 12 May 2017.
• Total number of item groups has been
» Government Policy enlarged from 399 under 2004-05 series
to 407 under the 2011-12 series. Each
− Public policy can have substantial item group may encompass several sub-
effects on the Investment. industries.
− Government taxation policy with • Revisions in the IIP are required to
respect to corporate profits, capital maintain representativeness of the items
gains affect the demands for capital. and producing entities and also address
issues relating to the continuous flow of
production data.
Types of Capital Formation • The revised IIP (2011-12) not only reflects
There are two types of capital formation the changes in the industrial sector but
also aligns it with the base year of other
• Physical Capital formation
macroeconomic indicators like the Gross
» It refers to investments made in the form Domestic Product (GDP) and Wholesale
of sophisticated tools, machinery etc. Price Index (WPI).
» It directly affects the production process. • Total number of item groups has been
enlarged from 399 under 2004-05 series
• Human Capital formation to 407 under the 2011-12 series. Each
item group may encompass several sub-
» Human capital formation implies industries.
additions to the skills, knowledge of the
• Electricity, crude oil, cement, steel,
individuals.
refinery products, coal, natural gas, and
» It indirectly affects the production fertilizers are the eight important core
process. industries that include around 40% of
» Its formation can lead toward the weight of items included in the Index
improvement in physical capital. of Industrial Production
• Industrial production for the purpose of
IIP is separated into three sectors:
239
Sector Number of Item Groups Weight (%)
Mining 1 14.373%
Manufacturing 405 77.633%
Electricity 1 7.994%
Total 407 100%
• The IIP is used for policy purposes by » Crude Oil: Total Crude Oil Production.
public bodies, including government » Natural Gas: Total Natural Gas
agencies/departments such as the Production.
Ministry of Finance and the Reserve Bank
of India. » Refinery Products: Total Refinery
Production (in terms of Crude
Throughput).
Index of Eight Core » Fertilizer: Urea, Ammonium Sulphate

(A/S), Calcium Ammonium Nitrate (CAN),
Industries Ammonium chloride (A/C), Diammonium
Phosphate (DAP), Complex Grade
• The Monthly Index of Eight Core Fertilizer and Single superphosphate
Industries (ICI) is a production volume (SSP).
index that aims to provide an early » Steel: Production of Alloy and Non-Alloy
indicator of production efficiency of Steel only.
"core" industries before the Central » Cement: Production of Large Plants and
Statistics Office publishes the Index of Mini Plants.
Industrial Production (IIP).
» Electricity: Actual Electricity Generation
• These industries are likely to impact of Thermal, Nuclear, Hydro, imports from
general economic activities as well as Bhutan.
industrial activities.
• These eight types of industries account • The Index is gathered and released
for nearly around 40 percent in the Index by the Office of the Economic Adviser
of Industrial Production (IIP). (OEA), Department of Industrial Policy &
Promotion (DIPP), Ministry of Commerce
• Components covered in these eight
& Industry, Government of India.
industries for the purpose of compilation
of index are as follows • The all-India Index of Industrial
Production (IIP) has had its base year
» Coal: Coal Production excluding Coking changed from 2004-05 to 2011-12 by
coal. the Central Statistics Office (CSO),
Ministry of Statistics and Programme
Implementation.
240
Industry Weight Source
Coal 10.33 Office of the Coal Controller, Kolkata
Crude oil 8.98 Ministry of Petroleum and Natural Gas
Natural Gas 6.88 Ministry of Petroleum and Natural Gas
Refinery Products 28.04 Ministry of Petroleum and Natural Gas
Fertilizers 2.63 Ministry of Chemicals and Fertilizers
Cement 5.37 Ministry of Commerce and Industry
Electricity 19.87 Central Electricity Authority.
Steel 17.92 Joint Plant Committee, Kolkata
ASI vs IIP
Annual Survey of • Annual Survey of Industries (ASI) on yearly
Industries (ASI) basis and Index of Industrial Production
(IIP) on a monthly basis.
• The Annual Survey of Industries (ASI) • The ASI has been conducted under the
is India's primary source of industrial Collection of Statistics Act since 1959
statistics, providing data on key aspects whereas IIP is compiled on the basis
of the country's registered manufacturing of data sourced from 14 ministries/
sector. administrative departments.
• ASI is widely regarded as the most
detailed and trustworthy source of
structured manufacturing sector data,
offering disaggregated industry-specific
UPSC CSE PRELIMS
information on production, investment, Previous Years
jobs, and costs. It does not refer to
unorganized, unregistered, or informal Questions
companies. Q.1) Why is the Government disinvesting
• ASI is the main survey conducted by the its equity in the Central Public
Central Statistics Office (CSO) Industrial Sector Enterprises (CPSEs)? 2011
Statistics (IS) wing. It ensures timely 1. The Government intends to use the
dissemination of statistical information revenue earned from the disinvestment
to assess and evaluate the dynamics in mainly to pay back the external debt.
composition, growth, and structure of the
organized manufacturing sector. 2. The Government no longer intends to
retain the management control of the
• The ASI extends to the entire country. CPSEs.
• It covers all factories registered under Which of the statements given above is/
Sections 2 of the Factories Act, 1948. are correct?
(a) 1 only
241
(b) 2 only infrastructure.
(c) Both 1 and 2 • The Central Government will provide
(d) Neither 1 nor 2 an enabling policy framework,
provide incentives for infrastructure
Ans. (d) development through appropriate
• Explanation: Following the 1991 financing instruments, and encourage
economic liberalization and structural state governments to use the policy's
reforms, disinvestment of a percentage instruments.
of the government's shares in public • In coordination with concerned Central
enterprises became a policy choice. Government agencies as well as the
States, the Department has begun
implementing the strategy.
Q.2) What is/are the recent policy
initiative(s) of the Government of India to
promote the growth of the manufacturing Q.3) If the interest rate is decreased in an
sector? 2012 economy, it will: 2014
1. Setting up of National Investment and (a) decrease the consumption
Manufacturing Zones expenditure in the economy
2. Providing the benefit of ‘single window (b) increase the tax collection of the
clearance’ Government
3. Establishing the Technology Acquisition (c) increase the investment expenditure
and Development Fund in the economy
Select the correct answer using the codes (d) increase the total savings in the
given below: economy
(a) 1 Only Ans. (c)
(b) 2 & 3 Only • Explanation: Interest rates influence the
(c) 1 & 3 Only public's appetite for goods and services,
(d) 1, 2 & 3 and thereby aggregate investment
expenditure. Lower interest rates
Ans. (d) stimulate more investment spending,
• Explanation: In order to bring about which gives the economy a boost in
a quantitative and qualitative change periods of weak economic growth.
and to give the necessary impetus to the • Lower interest rates minimize the cost
manufacturing sector, the Department of borrowing, enabling companies
has notified the National Manufacturing and households to spend more. Lower
Policy (NMP) with the objective of interest rates often enable banks to lend
enhancing the share of manufacturing to businesses and households, allowing
in GDP to 25% and creating 100 million them to spend more.
jobs over a decade or so.
• The policy is based on the principle of Q.4) In the Index of Eight Core Industries,
industrial growth in partnership with the which one of the following is given
States. the highest weight? 2015
• Government is focusing on enhancing (a) Coal Production
India's rank in Ease of Doing Business,
(b) Electricity generation
by implementing single window
clearances, use of ICT and creating basic (c) Fertilizer Production
242
(d) Steel Production index is an index created by Simeon
Ans. (b) Djankov at the World Bank Group. The
academic research for the Report was
• Explanation: The Eight Core Industries done jointly with professors Oliver Hart
comprise 40.27 per cent of the weight of and Andrei Shleifer.
items included in the Index of Industrial • Higher rankings (a low numerical
Production (IIP). Coal, Crude, Oil Natural, value) indicate better, usually simpler,
Gas Refinery Products, Fertilizers, Steel, regulations for businesses and stronger
Cement, Electricity. protection of property rights.
Q.5) The substitution of steel for wooden Q.7) Recently, India’s first ‘National
ploughs in agricultural production is Investment and Manufacturing Zone’
an example of 2015 was proposed to be set up in 2016
(a) labour-augmenting technological (a) Andhra Pradesh
progress
(b) Gujarat
(b) capital-augmenting technological
progress (c) Maharashtra
(c) capital-reducing technological (d) Uttar Pradesh
progress Ans. (a)
(d) None of the above • Explanation: Andhra Pradesh is set to
Ans. (b) house India’s first national investment
and manufacturing zone after the state
• Explanation: “Capital” in an economic assured the Centre of availability of 2500
context means machinery or capital acres (10 sq km) of land in one place in
goods which can be employed to produce Prakasam district.
other goods.
• The imminent final approval for the NIMZ,
• Substitution of steel can be considered which is expected to give a fillip to Prime
as the substitution of a lesser machine by Minister’s Make in India campaign, comes
a better machine. four years after the concept was mooted
• This encourages steel production. Hence, to boost manufacturing in the country
it is capital-augmenting technological and two years after the Department of
progress. Industrial Policy and Promotion gave an
in-principle nod to Andhra Pradesh in
this regard.
Q.6) India’s ranking in the ‘Ease of Doing
Business Index’ is sometimes seen in the
news. Which of the following has declared Q.8) Which of the following have
that ranking? 2016 occurred in India after its liberalization of
(a) Organization for Economic economic policies in 1991? 2017
Cooperation and Development (OECD) 1. The share of agriculture in GDP
(b) World Economic Forum increased enormously.
(c) World Bank 2. The share of India’s exports in world
trade increased.
(d) World Trade Organization (WTO)
3. FDI inflows increased.
Ans. (c)
4. India’s foreign exchange reserves
• Explanation: The ease of doing business increased enormously.
243
Select the correct answer using the codes of acquiring and raising the number of
given below: persons who have the skills, education,
(a) 1 and 4 only and experience that are essential for the
country's economic and political growth.”
(b) 2, 3 and 4 only It is thus related to investment in man
(c) 2 and 3 only and his development as a creative and
(d) 1, 2, 3 and 4 productive resource.
Ans. (b) • As a result, human capital formation

refers to investments in schooling,
• Explanation: The share of agriculture in health care, and the training of staff in
GDP has decreased. So the 1st statement specialized skills.
is wrong. • While the accumulation of physical
• The share of India’s exports in world trade capital is significant in the phase of a
increased. country's economic development, it is
• FDI inflows increased. Ex: Foreign direct becoming increasingly clear that the
investment in India increased from US growth of tangible capital stock is heavily
$ 129 millions in 1991-92 to US $ 40,885 dependent on human capital creation,
million in March, 2005. which must be given due consideration.
• India’s foreign exchange reserves

increased enormously. Q.10) In spite of being a high saving
economy, capital formation may not result
in a significant increase in output due
Q.9) Consider the following statements: to: 2018
Human capital formation as a
concept is better explained in terms (a) weak administrative machinery
of a process, which enables: 2018 (b) illiteracy
1. individuals of a country to accumulate (c) high population density
more capital. (d) high capital-output ratio
2. increasing the knowledge, skill levels Ans. (d)
and capacities of the people of the
country. • Explanation: Capital output ratio is the
amount of capital needed to produce one
3. accumulation of tangible wealth.
unit of output. For example, suppose that
4. accumulation of intangible wealth. investment in an economy, investment is
Which of the statements given above is/ 32% (of GDP), and the economic growth
are correct? corresponding to this level of investment
is 8%.
(a) 1 and 2
(b) 2 and 4 only
• The growth of a nation is impossible
without sufficient resources, either in the
(c) 2 only form of physical capital or in the form of
(d) 1, 3 and 4 human capital.
Ans. (b) • The quicker the speed of economic
development, the higher the rate of
• Explanation: The word "human capital capital accumulation. Capital formation
production" refers to the development involves both saving and investment.
of abilities and skills within a country's Savings, on the other hand, are not the
population. Human capital creation, same as hoarding.
according to Harbison, is “the process
244
• Savings must be mobilized in banks and as part of its social capitals? 2019
financial institutions before they can be (a) The proportion of literates in the
used for investment. And, by taking out population
loans from these banks and financial
institutions, merchants, entrepreneurs, (b) The stock of its buildings, other
and farmers invest these community infrastructure, and machines
savings in capital goods. This is the (c) The size of population in the working
method of capital development. age group
• Increase in the amount of real savings, (d) The level of mutual trust and
Mobilization of savings through financial harmony in the society
and credit institutions, and Investment Ans. (d)
of savings are the three phases in the
capital creation process. Economic Explanation: Social capital broadly refers
growth would be unlikely if a nation has to those factors of effectively functioning
high savings but low technology and social groups that include such things as
productivity. interpersonal relationships, a shared sense
of identity, a shared understanding, shared
norms, shared values, trust, cooperation,
Q.11) In the context of any country, which and reciprocity.
one of the following would be considered
245
CHAPTER - 14
FINANCIAL INCLUSION
Financial Inclusion Various aspects of Financial

Inclusion
• The objective of financial inclusion is • The goal of financial inclusion is making
mainly to provide finance on easy terms sure that everyone has access to a
to the vulnerable and weaker sections variety of relevant financial services and
of the society to facilitate investment that they are able to understand and use
and economic growth in the country. them.
Financial inclusion (FI) enables improved
and better social development, in an • The Government of India, the Reserve
equitable manner across the country. Bank of India, and the National Bank
for Agriculture and Rural Development
• It enables empowerment of the under- (NABARD) have all taken steps to achieve
privileged and poor, including women, extensive financial inclusion.
with the aim of enabling them to make
better financial choices by being self- • Some of the important initiatives includes
sufficient and well-informed. SHG-Bank Linkage Programme, Kisan
Credit Cards (KCC), the opening of No-
• The attempt to expand access to the Frills Accounts, mobile banking, Pradhan
formal financial sector of which financial Mantri Jan Dhan Yojna (PMJDY) etc.
inclusion is a part is a continuous process.
Financial Inclusion: Significance of Financial

• It is described as the delivery of various Inclusion
banking services at an affordable • Financial inclusion facilitates good
cost, particularly to the vast sections financial decision making through
of disadvantaged and low-income financial literacy and skilled advice, as
group. well as access to financial services for
• It is the process of ensuring affordable all, particularly vulnerable groups such
access to different financial services as women, minorities, refugees, and the
and a timely and sufficient amount of elderly micro-entrepreneurs and low-
credit to disadvantaged populations income groups at an affordable cost
such as poorer sections and low- so as to enable them to Manage their
income groups. finances on everyday basis confidently,
securely, and effectively.
• Facilities related to Credit, savings,
insurance, and payments and remittance, • Plan for the future to defend themselves
are among the financial services listed against short-term fluctuations in
by the Rangarajan Committee; financial income and spending, as well as to build
inclusion refers to universal access to a capital and benefit from financial sector
wide variety of financial services at a fair developments.
cost, according to the committee. • Dealing successfully with financial
distress reduces their vulnerability to the
unexpected.
246
• Financial inclusion and various financial Cooperative Banks
services for poor and low-income citizens,
and micro and small enterprises are all • A cooperative bank is a financial
essential and integral components of the institution that is owned and operated
financial sector, according to the United by its shareholders, who are also the
Nations Capital Development Fund bank's clients. It offers a wide variety of
(UNCDF), which invests in LDCs. Each standard banking and financial services.
has its own competitive advantages The States Cooperative Societies Act
and presents the market with a business governs co-operative banks in India.
opportunity. They are also controlled by the Reserve
Bank of India (RBI) under two laws:
Financial » Banking Regulations Act, 1949,

» Banking Laws (Co-operative Societies)
Intermediaries Act, 1955.
• A financial intermediary is an institution − The problem of rural credit was the

impetus for India's co-operative
that serves as a middleman among two
movement, which began with the
parties in a financial transaction, like a
passage of the Co-operative Societies
commercial bank, investment banks,
Act in 1904.
mutual funds and pension funds.
• They mobilize the saving of households − The aim of this law was to create
cooperative credit societies to
for investment in firms. Hence, they
encourage saving, self-help and
promote capital formation.
cooperation among farmers, artisans
• Types of financial intermediaries are as etc.
follows:
» Banks: It includes commercial banks, Features of Cooperative Banks

cooperative banks, regional rural banks,
local area banks. • All the co-operative banks share common
features:
» Development financial institution (DFI):
It includes institutions like SIDBI, NABARD, » Customer Owned Entities: Co-operative
NHB etc. bank members are both customer and
» Non-Banking Financial Institution owner of the bank.
(NBFI)/Non-Banking Financial » Democratic Member Control:
Companies (NBFC): It includes insurance Cooperative banks are owned and
companies, mutual benefit company, etc. operated by their owners, who elect
the board of directors democratically.
According to the cooperative concept of
Banks "one person, one vote," members typically
have equal voting rights.
• We have already discussed banks and » Profit Allocation: A large portion of a
their evolution in detail in module no 6. company's annual profit, benefits, or
• So in this topic, we will discuss other types surplus is normally set aside as reserves. In
of banks. certain cases, a portion of this benefit will
be allocated to co-operative members,
subject to legal and legislative limits.
247
Structure of co-operative accounting for the majority of co-
operative institutions.
banks in India
Cooperative Bank in India » Long-Term Co-operative Bank Structure
Urban Rural − At the highest level, there are State
Cooperative Agriculture and Rural
Short term Structure Long term Structure
Development Banks (SCARDBs).
Three tier structure Two tier structure
− At the district or block level, Primary
I m a g e 14.1: S t r u c t u r e o f c o - o p e r ati v e Banks
Co-operative Agriculture and Rural
• Rural Co-operative Banks (RCBs) Development Banks (PCARDBs).
» Short-Term Co-operative Bank Structure • Urban Co-operative Banks (UCBs) are

either scheduled or non-scheduled.
− A State Co-operative Bank works at Scheduled and non-scheduled UCBs are
the top level (i.e. works at the state again of two kinds- multi-state and those
level). operating in a single state.
− Central Co-operative Bank works at
the Intermediate Level (i.e., District
Co-operative Banks ltd. works at Role of Co-operative Banks in
district level). India
− Primary co-operative credit societies • The co-operative banks play an
at the base level (At village level): important role in India both in rural
Primary Agricultural Credit Societies and urban financing. The table below
(PACS) are the backbone of the co- illustrates their significance.
operative credit system in India,
Co-operative banks in India finance rural Co-operative banks in India finance

areas urban areas
• Self-employment
• Farming
• Industries
• Cattle
• Small scale units
• Milk
• Home finance
• Hatchery
• Consumer finance
• Personal finance
• Personal finance
Land Development Bank » State,

• These are cooperative banks which » Central,
provide medium and long term credit to » Primary level and they meet the long-
the agricultural sector. term credit necessities of the farmers for
• The Land development banks are developmental issues.
structured in 3 levels namely.
• The primary land development banks in
248
the state's districts and tehsil areas are the introduction of better agricultural
overseen by the state land development methods like improved seeds, chemical
banks, which are all registered under the fertilizers, modern implements, etc.
Co-operative Societies Act.
• LDBs get their working capital from
share capital, loans, and debentures,
Disadvantages of Cooperative
as well as borrowings from State Bank Banking
of India, commercial banks, and State • Primary credit societies' organisational
Cooperative Banks. NABARD oversees and financial constraints severely restrict
land development banks. their ability to offer sufficient credit to
• These institutions do not take deposits the rural population.
from the general public. • Cooperative Banks are losing their
luster due to expansion of Scheduled
Commercial Bank and adoption of
Advantages of Cooperative Banking technology.
• Cooperative Banking provides an • Political Interference to raise their vote
effective alternative to the traditional bank and, in most cases, have their
credit system. members elected to the board of directors
• Cooperative Banking encourages saving to achieve unfair advantages.
and investment. • Regional Disparities- the cooperatives
• It provides cheap and easy credit to in northeast states and in states like
people in rural areas. West Bengal, Bihar, Odisha are not as
developed as the ones in Maharashtra
• Cooperative societies have helped in and Gujarat.
Difference between Commercial bank and Cooperative bank

Parameter Commercial Banks Cooperative Banks
Under the co-operative

Registration Under Companies Act 1956 societies act of state
government
Financial Inclusion, provide

Objective Profit Making credit at concessional rate
rural sector, weaker section etc.
Provide value-added Provide only basic banking

Services
service service
Government, NABARD/RBI, and

Source of fund Public deposits
very less public deposit.
State Government, RBI,

Regulator RBI
NABARD
249
Structure Unified Structure Three-tier structure
Short, medium and long

Loan Short term
term
Priority Sector Lending Applies Not Applies
into the RRBs to recapitalize them. The

Regional Rural Banks (RRB) amalgamation process proceeded in the
same way.
• RRBs (Regional Rural Banks) are financial
institutions that provide credit to farmers
and other rural businesses. RRB Amendment Act, 2015
• Regional Rural Banks were founded in
1976 as a result of the recommendations
• The Regional Rural Banks (Amendment)
Act of 2015 took effect on 4th February,
of the Narasimham Working Group (1975)
2016.
and the Regional Rural Banks Act.
• On October 2, 1975, the Prathama • Authorized capital:
Grameen Bank became the first Regional » The Act raises the amount of authorized
Rural Bank. capital to Rs. 2,000 crore and states that
• In India, there are currently 56 RRBs. it cannot be reduced below Rs. 1 crore.
• RRBs' key goals are to provide credit and • Shareholding:
other services to agricultural labourers,
artisans, small and marginal farmers,and » The Act allows RRBs to collect capital
small entrepreneurs in rural areas, with from sources other than the federal and
the aim of closing the credit gap in rural state governments, as well as sponsor
areas, reducing regional imbalances, and banks, as long as the central government
increasing rural jobs generation. and the sponsor bank have a joint
• Priority sector lending has been extended shareholding of at least 51 percent.
to RRBs in the same way as it has to » Furthermore, if the state government's
commercial banks. shareholding in the RRB falls below 15%,
• RRBs have a 50:35:15 shareholding the central government must consult with
pattern among the three sponsoring the state government in question.
entities: central government, sponsoring
bank, and state government, respectively. • Tenure:
• In 2010, a committee chaired by K.C. » The Act stipulates the term of office of a
Chakrabarty reviewed the financial director (excluding the Chairman) to be
status of all RRBs and recommended three years.
that 40 of the 82 RRBs be recapitalized.
• The remaining RRBs, according to the • Board of Directors:
Committee, are capable of achieving the
required amount of CRAR on their own.
» The Act raises the occupancy of directors
to three years from the present two years.
• Accepting the committee's suggestions, The Bill also statuses that no director can
the central government and other hold office for a total period of exceeding
shareholders began pouring funds six years.
250
• Government Limit: bank credit (NBC) as applicable to other
domestic banks.
» According to the Act, the Central
government can increase or decrease
• In 2014, RBI has allowed LABs to be
converted into small finance banks
the shareholding limit of the central
subject to them meeting the prescribed
government, State government,
eligibility standards.
or sponsoring bank in the RRB by
notification, after consulting with the
state government and sponsoring bank.
Development
Local Area Banks (LABs) Financial Institution
• They are small private banks that were (DFI)
created as low-cost structures to provide
effective and competitive financial • These are a special type of financial
intermediation services in a restricted institution that provides finance and
geographic area, mainly in rural and technical assistance to various sectors
semi-urban areas, with three contiguous of the economy to promote economic
districts. development.
• LABs were developed to allow local • These are not permitted to accept
institutions to mobilise rural savings deposits from the public.
while also making them available for • They raise funds from RBI, government,
investments in the local region. and through the issue of their bonds to
• LABs were established in August 1996, the general public.
following an announcement made by • They provide finance in the following
the then-Finance Minister in the Union forms:
Budget.
• A minimum capital of Rs. 5 crores was » Provision of medium and long term loans.
needed for LABs. » Refinance i.e. process by which one loan
• The promoters of the bank may include is replaced by another loan, in most cases
private individuals, trusts, corporate with more favorable terms.
entities, and societies with a minimum » Guarantee against the loan (this is also
capital contribution of Rs. 2 crores. called credit enhancement).
• The area of operation of LAB is restricted » Subscription, for example, shares and
to a maximum of three geographically debenture of the company.
contiguous districts and are allowed to
open new branches only in its area of
» Underwriting: Under this, a Financial
institution guarantees to purchase a
operation.
certain percentage of share of an initial
• Since LABs are being established public offer (IPO) of a company in case it
in district towns, their activities are remained under-subscribed by the public.
focused on the local customers with Underwriting commission is charged for
lending largely to agriculture and allied such guarantee.
activities, agro-industrial activities,
small scale industries,activities related • They also provide technical assistance to
to trade and the non-farm sector. LABs preparation of project Reports, evaluation
are also required to observe the priority of investment projects, provision of
sector lending goals set at 40% of net technical advice, management of
251
services and marketing information. Bank of India Act, 1964. It was granted
• Different types of development financial autonomy in 1976.
institution are: • It is a top institution in the field of
industrial finance.
» For industry: IFCI, ICICI, IDBI, SIDBI etc.
• In 2003, the IDBI was converted into a
» For foreign trade: EXIM universal bank.
» For agriculture: NABARD • On 21st January, 2019, LIC of India
» For Housing: National Housing Bank completed the acquisition of a 51 percent
controlling stake in IDBI Bank, making it
the bank's majority shareholder.
Industrial Credit and
Investment Corporation of Small Industries Development
India Limited (ICICI) Bank of India (SIDBI)
• ICICI was founded in 1955 on the • Small Industries Development Bank of
initiative of the World Bank, the Indian
India (SIDBI) was set up on 2nd April 1990
government, and representatives from
under the Small Industries Development
the Indian business community.
Bank of India Act, 1989, it was granted
• The main goal was to establish a autonomy in 1998.
development financial institution that
• It performs as the Principal Financial
would provide medium- and long-term
Institution for Development, Promotion,
project financing to Indian companies.
Financing of the Micro, Small and
• ICICI transformed its business in the 1990s Medium Enterprise (MSME) sector. In
from a development financial institution addition to this SIDBI also coordinates
that only provided project finance to various functions of institutions engaged
a diversified financial services group in similar activities.
that provided a wide range of products
• It is headquartered in Lucknow and
and services both directly and through
operates under the Department of
subsidiaries.
Financial Services, Government of India.
• ICICI Bank was established in 1994 as a • It runs a refinance programme known as
wholly-owned subsidiary of ICICI Limited,
Institutional Finance in order to increase
an Indian financial institution.
and sustain money supply to the MSE
• In 2002, ICICI Ltd was merged with ICICI market.
Bank Ltd. This ‘reverse merger’ converted
• SIDBI offers Term Loans to Banks,
it into the first universal bank of India
Small Finance Banks, and Non-Banking
(financial institution undertakes various
Financial Companies through this
types of financial business).
scheme.
• SIDBI loans directly to MSMEs in addition
Industrial Development Bank to refinancing activities.
of India Limited (IDBI) • With 16.73 percent of the shares, State

Bank of India is the largest individual
• The Industrial Development Bank of India shareholder in SIDBI, followed by the
(IDBI) got established as a Development Government of India and the Life
Financial Institution (DFI) on 1st July, Insurance Corporation of India.
1964, under the Industrial Development
252
Export-Import Bank of India 12,580 crore as of 31st March, 2019.
(EXIM) • Due to this change in the share capital
composition between the Government
• Export-Import Bank of India is a financial of India and the Reserve Bank of India,
institute in India, established in 1982 NABARD is now entirely owned by the
under Export-Import Bank of India Act Government of India. NABARD, as a
1981. Development Bank, is mandated to
• It aims for financing, facilitating and provide and regulate credit and other
promoting foreign trade of India. facilities in rural areas for the promotion
and growth of agriculture, small scale
• It is a wholly owned Government of India manufacturing, handicrafts and other
entity.
types of rural crafts, cottage and village
• EXIM Bank extends Lines of Credit industries, and other allied economic
(LOCs) to overseas financial institutions, activities, with the aim of fostering
regional development banks, sovereign integrated rural development and
governments and other entities overseas, ensuring rural prosperity.
to enable buyers in those countries to
import developmental and infrastructure
projects, equipment, goods and services National Housing Bank (NHB)
from India, on deferred credit terms.
• Export Development Fund (EDF)
• National Housing Bank (NHB), is an apex
financial institution for housing which
facility, a special fund, was established
was set up on 9th July, 1988 under the
by GoI under the Exim Bank Act and
National Housing Bank Act, 1987.
administered by Exim Bank, to sanction
loans in the interest of international trade • NHB was established with the aim
towards meeting strategic objectives. of serving as a primary agency for
promoting housing finance institutions at
• Exim Bank-issued India’s first USD
both the local and regional levels, as well
denominated Green bonds.
as providing financial and other support.
Its headquarters are in New Delhi.
National Bank for Agriculture • NHB has been established

and Rural Development » For making housing credit further
(NABARD) affordable.
• The agricultural credit functions of RBI » To regulate the actions of housing finance
and the refinance functions of the then companies.
Agricultural Refinance and Development » To promote a sound, healthy, viable and
Corporation were transferred to NABARD cost-effective housing finance system to
on July 12, 1982. This is how NABARD cater to all segments of the population.
formed.
• It was constituted on the recommendation
of Committee to Review the Arrangements Non-Banking
For Institutional Credit for Agriculture
and Rural Development (CRAFICARD) Financial Institution
under the Chairmanship of B. Sivaraman.
• It was set up with a capital of Rs. 100
(NBFC)
crore and had a paid-up capital of Rs.
• It is an institution that is registered under
253
the Companies Act, 1956 and is involved offers you Insurance or financial
in the business of loans and advances, compensation for everything else in life
the acquisition of stocks/shares/
securities/bonds/debentures delivered
by the government or a local authority, Life Insurance Corporation of India
or other marketable securities of a similar (LIC)
nature, leasing, hire-purchase, insurance,
and chit business. But it does not consist • On June 19, 1956, the Life Insurance
of any institution whose main business Corporation Act was passed, and the LIC
is that of agriculture activity, industrial was established on September 1, 1956.
activity, sale or purchase any goods • The state-owned Life Insurance
(other than securities) or providing any Corporation of India was formed by the
services and sale/purchase/construction merger of over 245 insurance companies
of the immovable property. and provident societies.
• NBFC include a heterogeneous group • The goal of the Life Insurance Corporation
of financial institutions: Insurance of India (LIC) was to spread life insurance
companies, microfinance institutions much more widely, especially in rural
(MFI), Hedge funds, venture capital funds, areas, with the goal of reaching all
Collective investment scheme, Nidhi/Chit insurable persons in the country and
funds etc. giving them with adequate financial
• Features of NBFCs: cover at a reasonable cost.
• Since its inception, the Life Insurance
» NBFC cannot accept demand deposits. Corporation of India has held a monopoly
» NBFCs do not form part of the payment in the Indian life insurance market.
and settlement system and cannot issue
cheques drawn on itself.
General Insurance Corporation
» Deposit insurance facility of Deposit
Insurance and Credit Guarantee
(GIC)
Corporation is not available to depositors • General Insurance Corporation (GIC) was
of NBFCs. established in 1973 by nationalizing the
existing private sector general insurance
company.
Insurance Sector • It was created under the provision
of Companies Act, 1956 as a private
Insurance Companies company limited by shares.
• These are financial institutions which • GIC was formed with the aim of
raise funds from the public through the controlling, superintending, controlling,
sales of insurance policies. and carrying on the business of general
• Insurance companies corpus is invested insurance.
in security markets by asset management • It had four subsidiaries:
companies.
» National Insurance Company Limited.
• There are two types of insurance firms:
» The New India Assurance Company
» Life insurance: Life insurance covers Limited.
provided financial compensation in case » The Oriental Insurance Company Limited.
of death or disability.
» United India Insurance Company Limited.
» General Insurance: General insurance
254
• In March 2002 the GIC was withdrawn was constituted on April 19, 1999, by the
from holding company status of the Government of India.
four public sector general insurance • The Insurance Regulatory and
companies. Now these four companies Development Authority (IRDA) Act, 1999
are directly owned by the Government of vested the IRDA with the responsibility of
India regulating and developing the business
of insurance and reinsurance in India.
Insurance Reforms • Important functions of IRDA are:
• The Government of India formed a » To control, ensure, and encourage the

committee in 1993, chaired by R. N. orderly development of the insurance
Malhotra, former Governor of the Reserve industry.
Bank of India (RBI), to provide suggestions » To impose regulations on insurance
for reforms in the insurance sector. companies' accumulation of funds.
• The aim was to add to the changes » To resolve disagreements between
already underway in the financial sector. insurers and intermediaries. To frame
• Some of the major recommendations of regulations on the protection of
the committee are as follow: policyholders' interests.
» Insurance companies to be given greater • The IRDA has set up the grievance
freedom to operate. redressal cell to take up the complaints
of the policyholder.
» Private companies with at least paid-up
capital of One Billion to be allowed to
enter the insurance sector.
Micro Insurance
» No company must be allowed to deal
with both Life and General Insurance as • IRDA regulates micro-insurance
a single entity. policies, which are a special category of
insurance policies designed to encourage
» Foreign companies may well be permitted insurance coverage among economically
to enter the insurance sector but only in
disadvantaged sections of society.
collaboration with Indian companies.
• The IRDA Micro-insurance Regulations,
» Industry must be opened up to the 2005 describe and permit micro-
competition in order to improve customer
insurance. Micro-insurance is described
services and increase the coverage of the
as a general insurance policy (which
insurance industry.
may cover health, belongings, house,
» It also proposed the setting up of an tools, personal injury contracts, pets, and
independent regulatory authority- the so on) or a life insurance policy with a
IRDA, to deliver greater autonomy to fixed amount of Rs. 50,000 or less. They
insurance companies to improve their can be completed either in groups or
performance and enable them to individually.
function independently.
• Micro- insurance business is completed
by means of the following intermediaries
in India:
The Insurance Regulatory
Development Authority (IRDA) » Non-Government Organizations
» Self-Help Groups
• The IRDA, as an autonomous body, which
255
» Micro-Finance Institutions Micro Finance and Indian
• In the Union Budget 2015-16, government- Economy
sponsored micro insurance was launched • There are four important Microfinance
for the disadvantaged units of society. models predominant in India.
» The Pradhan Mantri Suraksha Bima • Microfinance has become a movement
Yojna (PMSBY) covers an accidental in India. At the same time it has become
death risk of Rs. 2 lakh for only Rs. 12 an exceptional instrument of capability
per year (i.e. Rs. 1 per month). It would enhancement and empowerment.
protect all people between the ages of 18
and 70 who have a savings account for » Firstly, it has added millions of individuals
accidental injury or death. to the banking sectors by developing the
habit of thrift and saving.
» For the age group of 18-50, the Pradhan
Mantri Jeevan Jyoti Bima Yojana » Secondly, it aids in poverty alleviation.
(PMJJBY) will cover both natural and » Thirdly, it encourages group and
accidental death risks of Rs. 2 lakh for a individual activities which delivers
premium of Rs. 330 per year (less than livelihood on a regular basis.
Rs. 1/day). i.e., it would protect all people
» Fourthly, with the help of Micro Finance,
between the ages of 18 and 50 who
financial inclusion is possible with the
have a savings account for death from
common effort of Bank, Micro-Finance
any cause. This scheme is available via
Institutions and NGO’s etc.
the Life Insurance Corporation of India
(LIC of India) or other life insurance firms » Fifthly, it empowers women in all three
willing to sell life insurance on similar important domain i.e. economically,
terms. socially, and Politically.
Micro Finance Need for Microfinance

• Microfinance seeks to help economically
• Microfinance, also known as micro- disadvantaged households to achieve
credit, is a form of banking service higher levels of wealth formation and
that provides financial services to low- income protection at the household and
income individuals or unemployed or community level.
groups who would otherwise be unable
to obtain them. It is small-scale financial
• Poor women can become economic
agents of change by having access to
intermediation, inclusive of savings,
financial services and then receiving
credit, insurance, business services and
financial resources.
technical support provided to the needy
borrower. • Women become economically self-
sufficient, contribute directly to their
• Microfinance is vital because it provides
families' well-being, take a more active
resources and access to capital to the
position in decision-making, and are
financially underserved, such as those
better prepared to confront systemic
who are unable to obtain checking
gender inequality.
accounts, lines of credit, or loans from
traditional banks. Without microfinance,
these groups would have to rely on
moneylenders.
256
Parameter Micro Finance Bank
Size of Loan Small size of credit Large size of credit
Duration of loan Short duration Medium/large duration
Emphasis on Saving as well

Saving Focus on loan only
as loan
Nature of organization Social organization form Commercial organization form
Micro Finance • MUDRA Bank will refinance Micro-

Finance Institutions through a Pradhan
Institution (MFI) Mantri Mudra Yojana, with a corpus of
Rs. 20,000 crore made available from
• The informal institutions that undertake the shortfalls of Priority Sector Lending.
microfinance activities are referred to as There is also a credit guarantee corpus
Microfinance Institutions (MFIs). of Rs.3,000 crore for guaranteeing loans
given to micro-enterprises in the Union
• Micro Finance Institution means any
Budget 2015-16.
entity (irrespective of its organizational
form), which provides microfinance • It was launched on 8 April 2015 and was
services in the form and way as may be converted as a wholly-owned subsidiary
prescribed but does not include: of SIDBI and renamed as MUDRA (SIDBI)
(i) a banking company. Bank.
(ii) a co-operative society. • The MUDRA Bank is primarily responsible
for –
• In the 1990s, the savings, grants and soft
loans were the main sources of funds, » Developing policy guidelines for the
whereas in the late 2000‘s commercial micro/small enterprise financing industry,
loans and equity are the main source of as well as registering and regulating MFI
funding to the sector. organizations.
• The exhibit again depicts that the » MFI organizations are accredited and
MFIs have been transformed from a rated.
developmental tool to viable business » Establishing responsible lending policies
and finally as an attractive asset class. to avoid indebtedness and to ensure
proper client security principles and
recovery methods.
Micro Units Development » Creating a standardized set of covenants
Refinance Agency (MUDRA) for last-mile lending to micro and small
Bank businesses.
• The Micro Units Development Refinance » Promoting appropriate technological

strategies for the final mile.
Agency (MUDRA) Bank is a microfinance
refinancing institution. » Creating and implementing a Credit
257
Guarantee System to provide loan carry out the Scheme's development and
guarantees to micro-enterprises. refinancing activities, as well as serve as
Creating a good architecture of Last Mile a regulator for the microfinance sector in
Credit Delivery to micro businesses under general.
the scheme of Pradhan Mantri Mudra • PMMY's mission is to provide grants to
Yojana. small businesses that are not corporations.
Loan offerings under PMMY
• MUDRA Bank operates through regional
level financing institutions who in turn » Shishu: covering loans up to Rs. 50,000/-
connects with last-mile lenders like Micro given with no collateral, at 1% rate of
Finance Institutions (MFIs), Small Banks, interest/month repayable over a period
Primary Credit Cooperative Societies, Self of 5 years.
Help Groups (SHGs), NBFC (other than
MFI) and such other lending institutions. » Kishor: cover loans above Rs.50,000/-
and up to Rs. 5 lakh.
• In lending, MUDRA gives priority to
enterprises set up by the under-privileged » Tarun: cover loans beyond Rs. 5 lakh to
sections of the society particularly those Rs. 10 lakh.
from the scheduled caste/tribe (SC/ST)
groups, first-generation entrepreneurs
• Approach of PMMY
and existing small businesses. » Enterprises in the smallest segment must
receive at least 60% of the funding.
MUDRA Bank's partner intermediaries
must strive to adhere to the following
Pradhan Mantri general framework:
MUDRA Yojana − First-time entrepreneurs, young
(PMMY)
entrepreneurs (those under 30 years
old), and women entrepreneurs will
be welcomed, with special schemes
• The Union Government launched the
being planned for them.
Pradhan Mantri MUDRA Yojana (PMMY)
on April 8, 2015, to provide loans up to − Cash flow-based lending would
Rs. 10 lakhs to non-farm small/micro- be prioritized over security-based
enterprises and non-corporate. lending. Collateral securities, among
other things, must be avoided.
• All banks, including Public Sector Banks,
Private Sector Banks, Regional Rural − Repayment commitments shall be
Banks (RRBs), State Co-operative Banks, flexible and framed in light of the
Urban Co-operative Banks, Foreign entrepreneur's company cash flows.
Banks, and Non Banking Finance
Companies (NBFCs)/Micro Finance
Institutions (MFIs), are required to lend
to non-farm sector income-generating
Collective
activities with a value of less than Rs.10
lakh under the PMMY.
Investment Scheme
• These loans are categorized as MUDRA (CIS)
loans under PMMY.
• A Collective Investment Scheme (CIS) is
• The government has established a new an investment scheme in which many
institution called MUDRA (Micro Units people pool their money to invest in a
Growth & Refinance Agency Ltd.) to
258
specific asset(s) and share the profits registered under section 620A of the
based on an arrangement reached Companies Act, 1956 (Section 406 of the
before the money was pooled. new Companies Bill 2012, as approved by
• SEBI regulates CISs under the SEBI Lok Sabha).
(Collective Investment Scheme) • Nidhis are also classified as Non-Banking
Regulations, 1999. Financial Companies (NBFCs). Since
• A licensed Collective Investment Nidhis are classified as NBFCs, RBI has
Management Company is allowed to the authority to issue directives to them
raise funds from the general public for a about their deposit acceptance activities.
specific Scheme and then sell “units” to • Under the new provisions, Nidhi
the public (which are essentially shares companies are mandatory to apply to
of that Scheme provided in proportion to the Union government for updating of
the contribution made by the investor). their status or declaration as ''Nidhi
These units are required by means of law Company'' in ''Form NDH-4''.
to be listed on a stock exchange platform.
Chit Funds/Chitty/
Nidhi (Mutual
Kuri
Benefit Society)
• It is a kind of saving scheme where
• Nidhi refers to any mutual benefit society a specified number of subscribers
that has been designated as a Nidhi contribute payments in installment over
Company by the Central Government. a defined period.
They are mutual benefit societies since • The periodic collection is provided to a
their transactions are limited to members member of the chit funds who is chosen
only, and membership is limited to based on a previously agreed-upon
individuals. criterion.
• The members' contributions are the • The beneficiary is normally chosen by
primary source of funds. The loans are a bidding process, a lot drawing, or, in
usually secured and are provided to some cases, an auction or a tender.
members at reasonably low rates for
purposes such as house building or • In any case, each chit fund member is
repairs. guaranteed a turn before the second
round begins, and any member becomes
• When compared to the organized eligible for periodic selection once more.
banking sector, the deposits mobilized by
Nidhis are small, and they were formed • Chit funds are basically savings accounts.
primarily to encourage members to They come in a different variety of forms
practice thrift and save. and sizes, and there is no one-size-fits-all
approach. Chit fund business is controlled
• The companies doing Nidhi business, viz. under the Central Act of Chit Funds Act,
borrowing from members and lending 1982 and the Rules framed under this Act
to members only, are known under by the several State Governments for this
different names like Nidhi, Benefit Funds, purpose.
Permanent Fund, Mutual Benefit Funds
and Mutual Benefit Company. • Since the Central Government has not
developed any operating rules for them,
• Nidhi's are companies controlled by the state governments must register and
Ministry of Corporate Affairs (MCA) and regulate chit funds according to their
259
own rules. enabling them to provide
• Chit funds are functionally included in » Various Payments/remittance services to
the RBI's classification of non-banking
low-income households, migrant labour
financial companies as miscellaneous
workforce, small businesses, other types
non-banking companies (MNBC). The
of unorganized sector entities, and other
RBI, on the other hand, has not developed
users through high volume-low value
a separate regulatory structure for them.
deposits and payments/remittance
• The Chit Funds (Amendment) Bill, 2019: services using a secured technology-
• It seeks to amend the Chit Funds Act, based platform.
1982. » Payment Banks are differentiated or
• Features: restricted banks. The Payment Bank
cannot set up subsidiaries to undertake
» Names: The Bill inserts additional names non-banking financial services activities
for chit fund such as ‘fraternity fund’ and (hire purchase, leasing etc.) nor can it
‘rotating savings and credit institution’. undertake lending business.
(chit, chit fund, and kuri are the existing
name in ate act). • Since liquidity is the most important
requirement for such banks, they will be
» Participation of subscribers: As per the bound by the Reserve Bank of India's
act, a chit can be drawn in the presence reserve requirement regulations (CRR,
of at least two subscribers. The Bill seeks SLR etc.).
to allow these subscribers to join via
video-conferencing. • For operational and liquidity
management purposes, payment banks
» Foreman’s commission: Under the Act, would be expected to invest at least 75%
the ‘foreman’ is responsible for managing of their "demand deposit balances" in
the chit fund. The Bill seeks to increase Statutory Liquidity Ratio (SLR) qualifying
the commission from 5% to 7% of the Government securities/treasury bills
chit amount. with maturities up to one year and keep
» Aggregate amount of chits: The Bill no more than 25% in current and time/
increases limits of amount of chit funds. fixed deposits with other scheduled
From one lakh to three lakh rupees for commercial banks.
chits conducted by individuals, and for • Payment banks must have a minimum
every individual in a firm or association paid-up equity capital of Rs. 100 crore,
with less than four partners. And from six with the promoter contributing a
lakh to18 lakh rupees, for firms with four minimum of 40% of the paid-up equity
or more partners. capital for the first five years of operation.
» Application of the Act: The bill allows the • The Payments Bank will be formed as
state governments to specify the base a public limited company under the
amount over which the provisions of the Companies Act of 2013 and will be
act will apply. licensed under Section 22 of the Banking
Regulation Act of 1949.
• The proposal for the establishment of
Payment Banks payments banks stemmed from the Report
of the Committee on Comprehensive
• Payment Banks is a new set of banks Financial Services for Small Businesses
licensed by the Reserve Bank of India, with and Low-Income Households (Chairman:
the aim to promote financial inclusion by Nachiket Mor) submitted in January 2014.
260
Small Finance Bank Net Bank Credit (ANBC) to sectors
eligible for Reserve Bank classification as
(SFB) priority sector lending (PSL), with at least

50% of their loan portfolio consisting of
• It is a private financial institution intended advances and loans of up to Rs. 25 lakh.
to further the objective of financial
inclusion by primarily undertaking basic
banking activities of acceptance of
deposits and lending to un-served and
National Strategy
underserved sections. for Financial
• The concept of SFB was also one of
the suggestions in the 2009 Report, A
Inclusion (2019-24)
Hundred Small Steps, of the Committee
on Financial Sector Reforms headed by • This is an initiative of the Reserve Bank
Raghu Ram Rajan. of India (RBI) which seeks to promote
financial inclusion across all Tier 2 to Tier 6
• Resident professionals/individuals with urban centres in India. Financial inclusion
10 years of experience in banking and not only promotes economic growth but
finance and companies and societies also helps in poverty alleviation.
controlled and owned by residents
will be eligible to set up small finance • This policy was launched in 2019 and
banks. Existing Micro Finance Institutions it seeks to drive economic growth
(MFIs), Non-Banking Finance Companies through various financial services and
(NBFCs), and Local Area Banks (LABs) also reduce the dependence on cash in
that are retained and controlled by India (presently the Cash to GDP Ratio is
residents can also choose for conversion expected to hit 14-15%).
into small finance banks. • Amongst others:
• The minimum capital for SFBs has been » it seeks to enforce behavioural changes
set at Rs. 100 crore, with a 40 percent
and educate the consumers on various
initial investment from the promoters,
financial services,
which must be reduced to 26 percent
over a 12-year term. Foreign Investment is » making consumers understand their
permitted as in the case of other private rights and responsibilities,
sector commercial banks. After the SFBs » making insurance available to all the
reaches the net worth of Rs.500 crore, beneficiaries of the Jan Dhan Yojana
listing of its shares on a stock exchange scheme,
will be compulsory within 3 years of
reaching that net worth.
» increasing number of banking outlets
which will ensure that individuals have
• SFBs are full-fledged banks in contrast access to banking services in a radius
to payments banks formed around the of every 5 kms or a location which has
same time. about 500 households in the hilly areas
• Therefore, they are subject to all prudential by March 2020 and
regulations and norms and regulations of » ensuring all adults have access to
RBI as applicable to existing commercial financial services through mobile phones
banks such as maintenance of Statutory by 2024.
Liquidity Ratio (SLR) and Cash Reserve
Ratio (CRR) • Various NBFC’s, Central and State
• They must extend 75% of their Adjusted Government, NGOs amongst others
have been made as stakeholders for the
261
success of this scheme. It stated that this will speed up the process
• The strategy also hopes to make the of financial inclusion in the country,
Public Credit Registry, fully operational » For the first time in governance, it
by 2022 (it was set up on the basis of discussed the possibility of high telecom
the YM Deosthalee committee report of density and latest communication
the RBI and it contains all information technology based on the internet being
related to credit mechanisms, consumer used to increase the rate of financial
behaviour and the credit scores). inclusion in the country.
» It also recognized the role of Micro-
Financial institutions in the process of
Recommendations financial inclusion.
of the Second
Administrative Poverty
Reforms • It is a social as well as a multidimensional
phenomenon. As stated by the World
Commission on Bank, “poverty is pronounced deprivation
in wellbeing.”
Financial Inclusion • Amartya Sen in his capability approach
perhaps provided the broadest meaning
• The Second Administrative Reforms to well-being. According to him, well-
Commission was set up in 2005 and was being originates from a capability to
headed by M Veerappa Moily. function in society.
• Amongst its various recommendations, its • Poverty occurs when people lack key
recommendations on financial inclusion capabilities because of insufficient
paved the way for better governance in income or inadequate education, or poor
the nation. health or a sense of powerlessness, or
• The following are its recommendations the absence of rights such as freedom
with respect to financial inclusion: of speech or insecurity, or low self-
confidence.
» A differentiation had to be made and
• The Human Development Report (2010)
the special needs of the poor had to be
introduced the Multidimensional Poverty
catered to. This would involve innovative
Index (MPI) which is grounded in the
financial strategies which are tailor
capability approach and an innovative
made for the benefit of the poor and
effort to complement the income-based
developing new products related to
poverty indices.
banking, insurance savings and loans,
• It comprises an array of dimensions
» It critiqued banks and other public
from participatory exercises among
sector banks for having narrow policies
poor communities and an emerging
that hampered the functioning of the
international consensus. The MPI shows
Self-Help Groups (SHG’s) in terms of its
the share of the population that is multi-
utilization of various loans. It limited the
dimensionally poor adjusted by the
utilization of loans,
intensity of deprivation with respect to
» It recommended the extension of the health, education and living standards.
Regional Rural Banks to areas that
• The poverty line in India is income-based.
hitherto remained as non-banking areas.
262
• In 1978, the poverty line was initially fixed • The poverty line basket, or PLB, is a set
in terms of income/food requirements. It of products and services needed to meet
was specified that the calorie standard basic human needs.
for a typical individual in rural zones was • The poverty ratio, also known as the
2400 calorie and was 2100 calorie in headcount ratio, is the percentage of the
urban areas. population living in poverty (HCR).
Poverty: • Poverty estimation in India is now
• Poverty is one of the major important carried out by NITI Aayog’s task force
and pressing problems facing through the calculation of poverty line
Indian Economy today. It is a socio- on the basis of the data collected by the
economic issue that goes beyond the National Sample Survey Office (NSSO)
boundaries of the economic arena under MOSPI (the Ministry of Statistics
and covers other types of aspects like and Programme Implementation).
the inability to participate in social Note: Recently, the Ministry of Statistics
and political life. Poverty, however, and Programme implementation
is multidimensional in nature. Apart (MoSPI) passed an order to merge the
from the income approach to poverty, Central Statistics Office (CSO) and
there are other ways to conceptualize National Sample Survey Office (NSSO)
poverty, i.e., deprivation in other into the National Statistical Office
areas such as literacy, schooling, (NSO).
life expectancy, child mortality,
malnutrition, safe water and sanitation • From 1999-2000 onwards, the NSSO
switched to an MRP (Mixed Reference
Period) method which measures
Relative vs. Absolute Poverty consumption of five low-frequency items
(education, clothing, footwear, durables
• Absolute poverty is when household
and institutional health expenditure) over
income is below a certain level, which
the previous year, and all other items over
makes it impossible for the person
the previous 30 days.
or family to meet basic needs of life
including food, shelter, safe drinking • Fishers Price Index is used on all India
water, education, healthcare, etc. poverty line baskets to generate the state
• Relative Poverty: It is defined from specific rural and urban poverty lines.
the social perspective that is living
standard compared to the economic
standards of population living in History of poverty estimation
surroundings. Hence, it is a measure in India
of income inequality.
• The process and methodology of
estimating poverty and the identification
Poverty Line, Poverty Line of BPL households have been a matter of
argument.
Basket and Poverty Ratio
• Dadabhai Naoroji's book, "Poverty and
• The traditional method of determining the Un-British Rule in India," contains one
poverty is to establish a minimum of the earliest estimates of poverty. Based
expenditure (or income) needed to buy a on 1867-68 rates, he devised a poverty
basket of goods and services necessary line ranging from Rs. 16 to Rs. 35 per
to meet basic human needs, which is capita per year. He suggested a poverty
referred to as the poverty line. line focused on the cost of a subsistence
263
diet of "rice or flour, dhal, mutton, onions, estimating poverty, headed by YK Alagh,
ghee, vegetable oil, and salt." established a poverty line for rural and
urban areas based on nutritional needs.
The nutritional criteria and associated
Alagh Committee (1979) consumption expenditures are based
on the task force's recommended price
• In 1979, a task force set up by the
levels for 1973-74.
Planning Commission for the purpose of
Minimum consumption expenditure (Rs

Area Calorie
per capita/month)
Rural 2400 49.1
Urban 2100 56.7
Lakdawala Committee (1993) estimation techniques in 2005, chaired

by Suresh Tendulkar, to resolve the
• In 1993, an expert group chaired by DT deficiencies of the previous methods.
Lakdawala was established to study
poverty estimation methods and made • It recommended four major changes
the following recommendations:
» A shift away from calorie consumption-
» Consumption expenditure should based poverty estimate;
be calculated based upon calorie » A uniform Poverty Line Basket (PLB) in
consumption as earlier. rural and urban India, a reform in the
» State-specific poverty lines should price adjustment procedure to address
be constructed, and these should be spatial and temporal problems with price
updated using Consumer Price Index adjustment, and the inclusion of private
of Agricultural Labour (CPI-AL) in rural health and education expenditure when
regions and the Consumer Price Index calculating poverty.
of Industrial Workers (CPI-IW) in urban » The Committee suggested using Mixed
regions. Reference Period (MRP) based estimates,
» Discontinuation of ‘scaling’ of poverty rather than Uniform Reference Period
approximations based on National (URP) based estimates that were utilized
Accounts Statistics. in earlier procedures for estimating
poverty.
This means that the consumption habits of • It calculated consumption of the

the poor are reflected in the CPI-IW and following products: pulses, milk, edible
CPI-AL baskets of goods and services. oil, non-vegetarian items, vegetables,
cereal, dry fruits, fresh fruits, sugar,
spices, and salt, other food, intoxicants,
Tendulkar Committee (2009) fuel, clothes, footwear, education,
entertainment, medical (non-institutional
• The Planning Commission formed and institutional), personal & toilet goods,
another expert group to study poverty other goods, other services, and durables.
264
• The Tendulkar Committee computed new rather than indices derived from the CPI-
poverty lines for urban and rural areas of AL for rural areas and CPI-IW for urban
each state. areas, as was done previously.
• It concluded that all India poverty line • The main criticism of the poverty line
was Rs. 446.68 per capita per month in computed by Tendulkar Committee is
rural regions and Rs. 578.80 per capita that, since it is so short, it risks excluding
per month in urban regions in 2004-05. many deserving people from government
• The Committee also proposed a new assistance.
method of updating poverty lines, which • National poverty lines (in Rs. per capita
uses the consumption basket of people per month) for the years 2004-05, 2009-
near to the poverty line to account for 10 and 2011-12
shifts in prices and consumption trends,
Year Rural Urban
2004-05 446.7 578.8
2009-10 672.8 859.6
2011-12 816.0 1000.0
Rangarajan Committee • The Rangarajan committee increased

the regular per capita expenditure for
• In the year 2012, the Planning Commission the rural poor to Rs. 32 from Rs. 27 and
established a new expert board on poverty for the urban poor to Rs. 47 from Rs. 33,
estimation, chaired by C Rangarajan with bringing the poverty line for rural India to
the following key objectives: Rs. 972 and for urban India to Rs. 1,407,
respectively.
» To deliver an alternate technique to
estimate poverty levels, and • Instead of Mixed Reference Period
(MRP) it recommended Modified Mixed
» To analyses whether poverty lines should Reference Period (MMRP).
be fixed solely in terms of a consumption
basket or if other criteria are also relevant. • Poverty Threshold defined as persons
spending below ₹47 a day in cities and
₹32 in villages be considered poor. Based
30
30.9
29.5 on this methodology, the Rangarajan
25.4 26.4
committee estimated that the number of
21.9
20
poor was 19% higher in rural areas and
13.7 41% more in urban areas than what was
10
estimated using the Tendulkar committee
formula.
0
Rural Urban Overall
• The Rangarajan Committee
Tendulkar Rangrajan
recommendations are yet to be decided,
I m a g e 14.2: P ov e r t y L i n e but the Tendulkar poverty line remains
265
the official poverty line and is used to
calculate official poverty figures in 1993-
94, 2004-05, and 2011-12.
Parameter Tendulkar Committee C. Rangarajan Committee
Rural poverty line per

month, 4080 4860
family of five-person
BPL (below poverty line in

27 37
crore)
Only Calorific value of

Calorie Expenditure Calorie protein fat
expenditure
Calorie in rural areas 2400 2155
Calories in urban areas 2100 2090
Set up in 2005 2012
Per capita monthly Monthly expenditure of

Poverty estimation method
expenditure family
Eliminating Poverty • Employment-intensive growth in

• 80% of the Indian poor are in rural regions. manufacturing and services that grow
Their livelihood directly or indirectly rests faster create jobs to which underemployed
on the performance of agriculture. farmers can migrate.
• But agriculture characteristically grows • Effective Implementation of all the things
slowly for the success of Make in India
» Limited livelihood opportunities at the » Infrastructure (especially power, roads

local level. and ports).
» Subsistence incomes for small and » Ease of Doing Business (including trade
marginal farmers. facilitation).
» Credit access for MSMEs
• Modernize agriculture & accelerate
agricultural growth » More flexible labour laws
• Generate job opportunities in industry » Reform of the Land Acquisition Law
& services for farmers wishing to exit » A Modern Bankruptcy Law
agriculture
» Skill Development
266
I m a g e 14.3: W ay s of S u s ta i n e d R a pid G r ow t h
• Making Social Programs more effective • The NSSO defines following three broad
like Midday Meal Scheme, the National Status
Food Security Act 2013, MGNREGA etc. i) Working (engaged in economic
• Jan Dhan Yojana, Aadhaar, Mobile (JAM) activity) i.e. ‘Employed’
trinity could play a vital role in widening ii) Seeking or available for the work i.e.
the reach of government to the vulnerable ‘Unemployed’
sections.
iii) Neither seeking nor available for the
work.
Unemployment • Individuals with broad activity statuses of

I or ii) are classified as being in the labour
• Unemployment is described as "a force, whereas those with activity status iii)
situation in which an individual is are classified as being outside the labour
physically and mentally capable of force. Thus labour force constitutes both
working at the current wage rate but is employed and unemployed.
unable to find jobs." • In other words, the Labor force (also
• Since its establishment in 1950, the called the workforce) is the entire
National Sample Survey Organization number of people employed or seeking
(NSSO) has been measuring jobs and employment in a nation or region
unemployment in India. • The unemployment rate is the % of the
labour force that is without work.
8
Unemployment Rate
Unemployed rate = Unemployed Workers * 100

Total Labour Force
4
• Types and forms of unemployment are as

0
follows:
Jan-18
Jul-18
Oct-18
Jan-19
Jul-19
Oct-19
Dec-19
Apr-18
Apr-19
I m a g e 14.4: U n e m p l oy m e n t R at e i n i n di a
Structural Unemployment
• Structural unemployment is the situation
267
in which a country is unable to provide • Such unemployment can be seen and
a job to all job seekers because the counted in terms of the number of
resources available in the country are such persons. Hence, it is called open
limited. unemployment.
• It can happen because investment has
failed to keep pace with growth in the
labour force.
Cyclical Unemployment
• The solution is a major investment in new • It is a result of the business cycle, where
industries, training of workers, or large unemployment rises during recessions
scale migration from depressed regions. and declines with economic growth.
• India’s unemployment is basically • Associated with the downswing and
structural in nature. It is related with the depression phases of the business cycle,
inadequacy of productive capacity to it is to be found in capitalist or market-
create enough jobs for all those who are oriented developed economies.
able and willing to work. • Falling income lowers the demand for
goods and services. As a result, the
economy produces less than it is capable
Disguised Unemployment of, aggravating further the employment-
• It is a condition where more people are income situation.
working than is necessary. And if some
are removed, output is unaffected.
Frictional Unemployment
• People are apparently engaged in
agricultural activities in Indian villages, • Frictional unemployment happens due to
for example, where the majority of the improper adjustment between the supply
unemployment is in this type. of labour and demand for labour.
• This type of unemployment characterizes
developed economies as they push
Underemployment towards further development. At a higher
• It is a condition in which people who are level of development, many changes
working but contribute less to production take place in the industrial structure of
than they are capable of. these economies, with old industries,
contracting and dying out, and new
• For example, a diploma holder in industries coming up.
engineering who, due to a lack of suitable
employment, begins selling shoes may • Individuals by choice go unemployed as
be considered underemployed. they expect better job prospects than
what are available to them and which
they consider below their qualification
Open Unemployment and less remunerative.
• In such situation, it is necessary that
• Under this category, all those who have
workers move from industry to industry.
no work to do fall in this.
In between the time of leaving and
• They are able to work and also willing to joining, the time for which the workers
work, but there is no work for them. get no work is a period of unemployment,
• This unemployment is in the nature of known as frictional unemployment.
involuntary idleness.
268
Seasonal Unemployment − Economic growth could not create
many jobs in India.
• Seasonal unemployment is the
unemployment caused by seasonal » Increase in Labour Force
variations in production or demand or
both. − Over the years, the mortality rate
has declined rapidly without a
• When the workers engaged in a particular
corresponding fall in birth rate and
work or occupation, get employment only
the country has, thus, registered an
for a limited period and remain idle for
unprecedented population growth.
the remaining period, it is called seasonal
unemployment. It is very common in − This was naturally followed by an
Indian agriculture. equally large expansion in the labour
force.
Demographic Unemployment » Inappropriate Technology

• Demographic unemployment occurs − In India, while capital is a scarce
when the number of new workers entering factor, labour is available in abundant
the labour force through the natural quantity.
increase or inward migration exceeds the − Under these circumstances, the
number leaving the workforce. country should have labor-intensive
• Demographic unemployment is, to techniques of production not only in
a great extent, similar to structural industries but also in agriculture.
unemployment and is very common in − In western countries, where capital is
India. It is so because the rate of growth in abundant supply, use of automatic
of population in India is much higher machines is both rational and
than that of employment opportunities. justified, while in India, on account of
the abundance of labour, this policy
results in large unemployment.
Technological Unemployment
• Technological unemployment is the » Inappropriate Education System
unemployment caused by technical
progress; the skills of particular types of
− The education system in India is
defective and it does not aim at the
worker are made redundant due to the
development of human resources.
changes in the methods of production,
usually by substituting machines for − The curriculum and syllabus taught in
manual services. schools and colleges, is not as per the
current requirements of the industries.
Causes of Unemployment in India

Consequences of Unemployment In
• Important causes of unemployment in India
India may be summarized as follows:
• Unemployment is the root of a number of
» Jobless Growth social and economic problems. Some of
the vital problems are as under:
− Economic growth is usually expected
to generate employment. » Poverty
− However, in India, most of the
economic growth has been jobless. − Poverty is the immediate consequence
269
of unemployment because when − Solution to the problem of
a person is unemployed, he earns unemployment lies in enlarging the
nothing and becomes poor. opportunities for work. This needs to
be completed to clear the backlog of
» Income Inequalities unemployment and to provide jobs
to the large additions being made to
− Unemployment causes income labour-force.
inequalities also.
− The work to be expanded has to
− Indian economy is beset with gross be both in the sphere of wage-
economic inequalities. There are employment and self-employment.
inequalities in income, consumption
etc. − The ultimate avenue of more
employment has to be found in the
» Under–Utilization of Resources industrial sector, as also in the service
sector.
− An important economic consequence
of unemployment is that a lot of » Raising Capital Formation
resources available in the country
remain under-utilized. − It is also necessary that the
accumulation of capital is stepped
− India has vast natural resources, up.
but we are unable in utilizing these
resources to the desired Extent. − It helps employment expansion in
two principal ways: One, it becomes
» Social Problems possible to maintain the existing
activities, as also to expand the
− Unemployment is the cause of a current activities and to set up new
number of social problems, mainly ones.
because of two reasons: firstly, an − Secondly, capital formation directly
unemployed person has nothing generates employment in the capital
to do. He has no work to engage goods sector. This also provides
with. This situation causes dispute, capital goods for the production of
misunderstanding, quarrels, etc. consumer goods and services.
− Secondly, an unemployed person has
no source of income. In most of the » Appropriate Mix of Production
cases, such persons fail to provide Techniques
required food, clothes, shelter,
medicines, etc. for themselves and • It is also necessary to choose such
their family. It forces them to do what a combination of capital-intensive
they do not like to do and should not and labor-intensive technologies of
do. It causes crimes of theft, dacoity, production may generate maximum
robbery etc. employment.
• Labour-intensive activities such as
cottage/household activities and also
Remedial Measures many agricultural operations, provide
employment but capital-intensive
• The measures that can help us in technologies, are, by and large, more
eradicating or minimizing Unemployment: employment-creating, labour when
employed in capital intensive industries,
» Expanding Volume of Work give rise not only to capital goods but
also generate employment in industries
270
which provide inputs to them. − Wealth inequality measures inequality
• Hence, the right mix of technologies which by calculating disparities in wealth
may provide maximum employment at a instead of income.
higher wage rate and provide a surplus
» Social Inequality
for further investment.
− Social disparity arises when a society's
» Special Employment Programmes wealth is distributed unequally.
− Till the economy matures to a level − In India, one of the most distinctive
where everyone finds the job as types of social inequity occurs
described above, it is necessary, as an within the domains of gender and
interim measure, to undertake special caste, where people from the most
employment programmes for those disadvantaged parts of these social
who do not get benefit from this type groups are specifically impacted in
of growth in the short run. terms of their opportunities, access
− The need for supplement programmes to basic necessities, and overall
is all the more important for poor potential. Both these categories are
people, residing mostly in rural areas deeply intertwined and inequality
and small towns. in one often affects the inequality in
another.
− Specific employment programmes
to suit specific group of people and
specific areas.
Measure of Inequality
Lorenz Curve
Inequality • The Lorenz curve is basically a graphical
representation of income inequality or
• Inequality refers to the difference in wealth inequality developed by American
income/expenditure levels of various economist Max Lorenz in 1905.
sections of the society.
• It is generally used to depict income
• The United Nations describes inequality distribution, where it indicates what
as “the state of not being equal, especially percentage (y percent) of total income
in status, rights and opportunities”. the bottom x percent of households
• Inequality can be broadly classified in to: have. The x-axis shows the percentage
of families, while the y-axis shows the
» Economic Inequality percentage of income.
• If the x-value is 45 and the y-value is 14.2,
− Most predominant forms of economic the bottom 45 percent of the population
inequality measured are those
owns 14.2 percent of the overall income
of income inequality and wealth
or capital.
inequality.
• A straight line at an angle of 45 from
− Income inequality is the inequality the start on the graph indicates perfect
in and disparity in the incomes
equality. The curve below this line shows
commanded by the top percentile of
inequality. The greater the inequality, the
the population in comparison to the
greater will be the degree of curvature.
bottom percentiles.
271
Remedial measure by
100%
government to reduce
A inequality
Cumulative share of income earned

• Land reform.
)
e
re
eg
• Poverty alleviation and employment
D
5
(4
generation programmes.
y
lit
ua
• Other development programmes like

Eq
of
ve rural development programme, skill

ne
ur
C
Li
development, education, health and

n
re
Lo
B social security programme etc.

• Nationalization of banks and financial
institutions.
100%
Cumulative shareof people from lowest to highest incomes • Promoting financial inclusion.
I m a g e 14.5: L o r e n z C u r v e
• Promotion of MSME.
• Progressive taxation and progressive
Gini Coefficient government expenditure.
• Gini Coefficient is an arithmetic measure
of inequality based on Lorenz curve.
• Corrado Gini, an Italian statistician, UPSC CSE PRELIMS
founded it in 1912.
• A Gini coefficient of zero denotes true
Previous Years
equality, with all values being equal (for
example, where everyone has the same
Questions
income). Q.1) Microfinance is the provision of
financial services to people of low-
income groups. This includes both the
consumers and the self-employed.
Cause of Inequality The service/services rendered under
• Difference in ownership of land and micro-finance is/are: 2011
wealth. 1. Credit facilities
• Institution of private property and 2. Savings facilities
inheritance loss.
3. Insurance facilities
• Scarcity of capital.
4. Fund Transfer facilities
• Inadequate infrastructure particularly Select the correct answer using the codes
social infrastructure like school etc.
given below the lists:
• Leakage in government developmental (a) 1 only
expenditure.
(b) 1 and 4 only
• Difference in access to education and
training. (c) 2 and 3 only
• Inheritance difference in ability of (d) 1, 2, 3 and 4
individuals. Ans. (d)
• Difference in access to credit facilities. • Explanation: Microfinance is a source
272
of financial services for small businesses for all. The idea of inclusive growth
and entrepreneurs lack access to banking envisions bringing these marginalized
and associated services. parts of society into the mainstream of
• The two key mechanisms for the delivery society so that they can profit from faster
of financial services to such clients are: economic growth.
• Inclusive growth means economic growth
» Relationship-based banking for small that creates employment opportunities
businesses and individual entrepreneurs; and helps in reducing poverty.
and
• It entails vulnerable people getting access
» Group-based models, where several to basic health and education facilities.
entrepreneurs come together to apply It entails ensuring equal opportunity
for loans and other services as a group. for all, as well as inspiring people
through education and skill growth. It
• For some, microfinance is a movement also encompasses an environmentally
whose object is “a world in which as sustainable growth mechanism that
many poor and near-poor households strives for good governance and aids in
as possible have permanent access to the development of a gender responsive
variety of high-quality financial services, society.
comprising not just credit but also
insurance, savings, and fund transfers.” • Increased job opportunities are critical
because they are a vital condition for
raising people's living standards.
Q.2) Which of the following can aid in
furthering the Government’s objective
• The Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA),
of inclusive growth? 2011
one of India's largest social safety nets,
1. Promoting Self-Help Groups has improved people's living standards
2. Promoting Micro, Small and Medium and reduced migration to a large extent.
Enterprises • Apart from that, the government
3. Implementing the Right to Education has launched a number of flagship
Act programmes, such as the Sarva Siksha
Abhiyan (SSA), the National Rural Health
Mission (NRHM), and Bharat Nirman,
given below:
to improve education, health, and
(a) 1 only infrastructure, thereby making growth
(b) 1 and 2 only more inclusive.
(c) 2 and 3 only
(d) 1, 2 and 3 Q.3) In India, which of the following have the
highest share in the disbursement of credit
Ans. (d) to agriculture and allied activities?2011
• Explanation: The agenda for inclusive (a) Commercial Banks
growth was envisioned in the Eleventh (b) Cooperative Banks
Plan document, which aimed to achieve
not only faster growth but also a growth (c) Regional Rural Banks
process that ensured a broad-based (d) Microfinance Institutions
improvement in the quality of life of
Ans. (a)
people, particularly the poor, SCs/STs,
other backward castes (OBCs), minorities, • Explanation: Commercial Banks have
and women, as well as equal opportunity the highest share in the distribution of
273
credit to agriculture and allied activities. • Explanation: The Government has
strengthened the district as the unit of
planning in almost all Centrally sponsored
Q.4) The basic aim of the Lead
programmes.
Bank Scheme is that: 2012
• The government has also consciously
(a) big banks should try to open offices
structured the flagship programmes in a
in each district
manner that strengthens decentralized
(b) there should be stiff competition management with the help of local
among the various nationalized banks institutions.
(c) individual banks should adopt • In the Sarva Shiksha Abhiyan and the
particular districts for intensive National Rural Health Mission (NRHM),
development District level Plans are being prepared
(d) all the banks should make intensive and funded.
efforts to mobilize deposits • In the National Rural Employment
Ans. (c) Guarantee Programme, village
panchayat level plans are prepared
• Explanation: Lead Bank Scheme (LBS)
and aggregated at the District level as
was introduced in 1969, based on the
a District Plan and funds released to
recommendations of the Gadgil Study
executing agencies which happen to be
Group. The basic idea was to have
largely the panchayats.
an “area approach” for focused and
targeted banking. • Likewise in the urban regions, under
JNNURM, 63 cities have evolved medium-
• Districts were the units for area
term development plans for the cities
approach and each district could be
and have been supported with Central
allotted to a specific bank which will
Government funds. Each district planning
perform the role of a Lead Bank.
committee has a crucial role in building a
thoughtful vision for its district through a
Q.5) Which of the following can be said participative and inclusive process.
to be essentially the parts of Inclusive
Governance? 2012 Q.6) Disguised unemployment generally
1. Permitting the Non-Banking Financial means 2013
Companies to do banking (a) A Large number of people remain
2. Establishing effective District Planning unemployed
Committees in all the districts (b) Alternative employment is not
3. Increasing government spending on available
public health (c) Marginal productivity of labour is
4. Strengthening the Mid-day Meal zero
Scheme (d) Productivity of workers is low
Choose the correct answer: Ans. (c)
(a) 1 and 2 only
• Explanation: Disguised unemployment
(b) 3 and 4 only exists where part of the labour force
(c) 2, 3 and 4 only is either left without work or is working
in a redundant manner where worker
(d) 1, 2, 3 and 4
productivity is essentially zero.
Ans. (c)
• It is unemployment that does not impact
274
aggregate output. Ans. (a)
• An economy demonstrates disguised • Explanation: Small finance banks can
unemployment when productivity is low play an important role in the supply of
and too many workers are filling too few credit to micro and small enterprises,
jobs. agriculture and banking services in
unbanked and under-banked regions
Q.7) Which of the following grants/ in the country, the RBI has decided to
grant direct credit assistance to rural licence new “small finance banks” in the
households? 2013 private sector.
1. Regional Rural Banks • While permitting small banks, however,
the issues relating to their size, capital
2. National Bank for Agriculture and Rural requirements, the area of operations,
Development exposure norms, regulatory prescriptions,
3. Land Development Banks corporate governance and resolution
Select the correct answer using the codes need to be suitably addressed in the light
given below: of experience gained.
(a) 1 only • The goals of setting up of small finance

banks (SFB) will be to further financial
(b) 1 and 2 only inclusion by:
(c) 1 and 3 only
» Provision of savings vehicles, and
(d) 1, 2 and 3
» Supply of credit to small and marginal
Ans. (c)
farmers, micro and small industries, small
• Explanation: NABARD doesn’t give business units, and other unorganized
“direct” credit assistance. sector entities, with the help of high
technology-low-cost operations.
• It provides credit via intermediaries such
as Microfinance companies, cooperative
society, RRB. Q.9) In a given year in India, official
• Therefore, 2 is false. poverty lines are higher in some States
than in others because 2019
(a) poverty rates vary from State to
Q.8) What is the purpose of setting up of
State
Small Finance Banks (SFBs) in India? 2017
(b) price levels vary from State to State
1. To supply credit to small business units
(c) Gross State Product varies from
2. To supply credit to small and marginal
State to State
farmers
(d) quality of public distribution varies
3. To encourage young entrepreneurs
from State to State
to set up business particularly in rural
areas. Ans. (b)
Select the correct answer using the code • Explanation: In 2005, an expert group
given below: to review methodology for poverty
(a) 1 and 2 only estimation, headed by Suresh Tendulkar,
was constituted by the Planning
(b) 2 and 3 only
Commission to address the following
(c) 1 and 3 only three shortcomings of the earlier
(d) 1, 2 and 3 technique:
275
(i) consumption patterns were linked borrowings
to the 1973-74 poverty line baskets 2. Opening up to more foreign banks
(PLBs) of goods and services, whereas
there were substantial changes in the 3. Maintaining full capital account
consumption patterns of the poor since convertibility
that time, which were not reflected in Select the correct answer using the code
the poverty estimates. given below:
(ii) there were problems with the (a) 1 only
adjustment of prices for inflation, (b) 1 and 2 only
both spatially (across regions) and (c) 3 only
temporally (across time). (d) 1, 2 and 3
(iii) earlier poverty lines assumed Ans. (a)
that education and health would be
provided by the State and formulated
• Explanation: If some global financial
crisis occurs in the future, lesser exposure
poverty lines accordingly.
to the foreign financial markets is likely
• It suggested four major changes: to provide some immunity to India.
(i) A shift away from calorie consumption- • Statement 1 is correct: Short -term
based poverty estimation. borrowings would lead to the onus of
(ii) A uniform poverty line baskets (PLB) paying back the debt and could result in
across rural and urban part of India. stressful circumstances for the borrowing
economy/India.
(iii) A change in the price adjustment
process to correct spatial and temporal • Statement 2 is not correct: Opening up
issues with price adjustment; and to more foreign banks would lead to an
enhanced exposure to the international
(iv) Incorporation of private expenditure economy, and hence the risk will be
on health and education while increased.
estimating poverty.
• Statement 3 is not correct: Currency
• The Committee proposed using Mixed convertibility implies to a condition in
Reference Period (MRP) estimates rather which a currency can be converted into
than Uniform Reference Period (URP) a foreign currency, and vice -versa at
estimates, which were previously used in the prevailing exchange rate without
poverty estimation methods. any government interference. In India,
• It calculated consumption of cereals, we cannot completely convert rupees
pulses, milk, edible oil, non-vegetarian to dollars - There are restrictions to the
products, vegetables, fresh fruits, dry same.
fruits, sugar, salt & spices, other foods, • Now, capital account convertibility is the
intoxicants, petrol, education, medical choice to convert national currency into
(non-institutional and institutional), a foreign currency, and vice -versa with
entertainment, personal & toilet goods respect to capital account transactions
clothes, footwear, other goods, other of the Balance of Payments (BOPs)
services, and durables. accounts. It could also be the freedom to
convert domestic financial assets (such
Q.10) If another global financial crisis as rupees)/liabilities into foreign assets/
happens in the near future, which of the liabilities and vice -versa. Therefore, It
following action/policies are most likely is riskier, as the overseas investors can
to give some immunity to India. withdraw all their money at once which
1. Not depending on short- term foreign is known as capital flight.
276
CHAPTER - 15
GLOBAL ECONOMIC INSTITUTIONS
International institution of the international monetary

system.
Financial Institutions • The IMF is an organization consists

of 189 member nations, which are
• International financial institutions working to promote global monetary
provide financial support and technical cooperation, assure financial stability,
assistance for economic and social facilitate international trade, promote
development in developing nations high employment as well as sustainable
and uphold international economic economic growth and reduce poverty
cooperation and stability. around the world.
• Examples of International Financial • IMF targets to tackle the crises in the

institutions are the International system by motivating nations to acquire
Monetary Fund (IMF), World Bank Group, sound economic policies and monitoring
the African Development Bank, the Asian their fidelity to such policies; it is also
Development Bank etc. temporary to provide financing to address
the balance of payments problems.
• IMF engages in three types of activities:
Bretton Woods » It monitors economic developments,

financial developments as well as the
Institutions policies, together in its member countries
as well as at the global level, offers policy
• The World Bank and the International advice to its members.
Monetary Fund (IMF) are also known as » It lends to member countries facing
The Bretton Woods Institutions. balance of payments problems, and
• In July 1944, the Institutions were also support economic adjustment
structured at a meeting of 43 countries in and reforms aimed at correcting the
Bretton Woods in New Hampshire in the underlying problems.
USA. » It provides the governments as well as
• Their targets were to support rebuilding central banks of its member countries
the shattered postwar economy and with technical assistance and training in
to promote international economic its areas of expertise.
cooperation.
• Headquartered in Washington, D.C.
• Most resources for IMF loans are served
by member countries, principally through
International their payment of quotas.
Monetary Fund (IMF) • Quota subscriptions are a primary

component of the IMF's financial
• In 1945, IMF was established by resources. Each member country of the
international treaty as the central IMF is allotted a quota, based broadly on
its relative position in the world economy.
277
• All member nations of the IMF are • Generally, the governors are member
not sovereign states, and therefore all countries’ finance ministers or
"member nations" of the IMF are not development ministers.
participants of the United Nations. • They come together once in a year at
the Annual Meetings of the Boards of
Governors of International Monetary
World Bank Fund as well as the World Bank Group.
• The World Bank Group President is a
• The World Bank is an international chairperson meetings of the Boards of
financial institution that supports with Directors and looks after the management
loans as well as grants to the governments of the Bank.
of poorer countries for the purpose of
pursuing capital projects.
• The Board of Executive Directors elect
the president for a five-year, renewable
• The World Bank was formed at the 1944 term.
Bretton Woods Conference, along with
the International Monetary Fund (IMF). Objective of the World Bank
• Originally, it provided loans to help • To supply long-run capital to member
rebuild countries wrecked by World War countries for economic reconstruction
II. Eventually, the focus shifted from the and development.
reconstruction to the development, with • Focusing on social development, gover
a heavy emphasis on infrastructures nance and institution-building as the
such as dams, electrical grids, irrigation major elements of equitable growth.
systems, roads, etc.
• It helps in inducing long term capital for
improving the balance of payments and
thereby balancing international trade.
Organization
• To promote capital investment in member
• The World Bank is similar to a cooperative nations by the following ways:
of 189 member countries.
• These member countries like shareholders » To provide guarantee on capital
are constituted by a Board of Governors, investment.
who are the topmost policymakers at the » Provide loans for productive activities on
World Bank. considerate conditions.
The World Bank Group
IBRD IDA IFC IBRD IBRD

The International Bank The International The International The Multilateral The International
for Reconstruction and Development Finance Corporation Investment Guarantee Centre for Settlement
Development Association Agency of Investment Disputes
I m a g e 15.1: WORLD BANK GROUP
278
• The World Bank Group is an advanced − The Multilateral Investment Guarantee
family of five international organizations. Agency (MIGA) is international
financial institution which provides
» International Bank for Reconstruction political risk insurance as well as the
and Development (IBRD) credit enhancement guarantees.
− It finances only sovereign − The guarantees support investors
governments directly or projects protect foreign direct investments
backed by sovereign governments. against political and non-commercial
risks in developing countries.
− IBRD focuses its services on middle-
income countries or countries where − MIGA was formed in 1988 as an
the per capita income ranges from investment insurance facility to
$1,026 to $12,475 per year. encourage confident investment in
developing countries
− These countries include Indonesia,
India, and Thailand etc. which are » International Center for Settlement of
among the fast-growing economies Investment Disputes (ICSID)
and are also home to 70% of world
poverty. − ICSID is international adjudication
institution structured in 1966 for
» International Finance Corporation (IFC) legal dispute resolution as well as
conciliation between international
− IFC is the largest global development investors.
institution aimed exclusively on the
private sector in developing countries. − The ICSID does not direct arbitration
or conciliation proceedings itself but
− It is a private-sector arm of the World only provides institutional as well as
Bank Group, to advance economic procedural support to conciliation
development by investing in for- commissions, tribunals, and other
profit and commercial projects for committees which conduct such
poverty reduction and promoting matters.
development.
» International Development Association

(IDA) India and World Bank
− The World Bank's part IDA helps the • India is an associate of four of the five
integrant of the World Bank Group which
world's poorest countries.
are
− IDA supports a range of development 1. International Bank for
activities that pave the way toward Reconstruction and Development -
equality, economic growth, job IBRD,
creation, higher incomes, and better
living conditions. 2. The International Development
Association (IDA),
− IDA's work covers primary education,
basic health services, clean water 3. The International Finance
and sanitation, agriculture, business Corporation (IFC), and
climate improvements, infrastructure, 4. The Multilateral Investment
and institutional reforms. Guarantee Agency (MIGA).
» Multilateral Investment Guarantee • India is not a part of ICSID (International

Agency (MIGA) Centre for Settlement of Investment
279
Disputes). which became effective from 1st Jan
• The World Bank (mainly through IBRD 1948.
and IDA) is providing funds to the India • It remained in the operation until the
for various development projects. signature by 123 nations in Marrakesh
• India is one of the founder countries of on 14 April 1994, of the Uruguay Round
IBRD, IDA and IFC. Agreements which established the World
Trade Organization (WTO) on 1 January
• India also has the executive director in 1995.
the Board of Directors of IBRD/IFC/IDA/
MIGA. • GATT supported establish a strong as
well as prosperous multilateral trading
• The Executive Director from India is a system that became much more liberal in
representative of the whole constituency the rounds of trade negotiations. But until
Bangladesh, Bhutan, and Sri Lanka along 1980s the system required a thorough
with India. overhaul. This resulted into the Uruguay
Round, and ultimately to the WTO.
World Bank Reforms

• In April 2010, the World Bank Group World Trade
permitted the General Capital Increase
as well as the Selective Capital Increase Organization
for IBRD, after which the voting power
of the Developing Countries in IBRD will • The World Trade Organization i.e. WTO
increase by 3.13% and will reach 47.19% is the one and only global international
of the total voting power at IBRD. organization dealing with the rules of
trade amongst the nations.
• India’s voting power will increase to
2.91% from 2.77% and India will move • The WTO supports a forum for negotiating
on to become 7th largest shareholder agreements targeted at decreasing
in IBRD from the present 11th largest obstacles to international trade as well
shareholder. as ensuring a level playing field, therefore
subscribing to the economic growth and
the development.
General Agreement • Also, the WTO supports a legal as well

as the institutional framework for the
on Tariffs and Trade implementation and monitoring of
the agreements, as well as for settling
- GATT disputes arising from their interpretation
and application.
• GATT came into the action on 1 January
1948. • The WTO currently constitutes of 164
members, of which 117 are developing
• 'The General Agreement on Tariffs and countries.
Trade (GATT)' is a legal agreement
amongst those countries whose
overall determination was to promote
international trade by reducing or WTO Guiding Principles
eliminating trade barriers such as tariffs • Pursuit of open borders i.e. opening of
or quotas. national markets to international trade.
• In October 1947, 23 countries including • Guarantee of Most-Favoured-Nation
India signed an agreement in Geneva,
280
principle i.e. non-discriminatory WTO Organization
treatment by and among members.
• Commitment to transparency in the • The Secretariat is located in Geneva,
Switzerland.
course of its activities.
• Encouraging development and economic • Final decisions in the WTO are generally
taken by consensus of the entire
reform.
membership.
• Predictability - Countries to adopt stable
and transparent policy.
• Ministerial Conference
• Increase in fair competition. » The highest institutional body, that is
the Ministerial Conference, which meets
roughly every two years.
WTO Functions
• General Council
• WTO's main activities are:
1. Negotiation of the reduction or » A General Council leads the organization's
elimination of problems to trade business in the intervals between
(import tariffs, other barriers to trade) Ministerial Conferences.
as well as agreeing on rules governing » Representative of all countries, regular
the conduct of international trade meetings once in a year headed by
(e.g. antidumping, subsidies, product Directorate General.
standards, etc.) » It serves as a secretariat of WTO.
2. Applications related to various
trades such as trade in goods, • Trade Policy Review Body (TPRB)
trade in services, trade-related
intellectual property (IP) rights, » It conducts a review of trade policies of
etc. are administer and monitor by each member country after two year to
WTO's rules ensure compliance of WTO norms by the
members.
3. Monitor and review the trade
policies of our members and ensure • Dispute settlement Body
transparency of regional as well as
the bilateral trade agreements » It serves as the court of WTO.
4. Settle the disputes between • Appellate Authority
the members related to the
interpretation as well as the » Its decision is final and binding.
application of the agreements
5. Build capability of developing • The Twelfth Ministerial Conference
country government officials in the (MC12) is set to be held in Nur-Sultan,
matter of international trade Kazakhstan, in June 2020.
6. Assist the process of accession of • English, French and Spanish are the three
some 30 countries who are not yet official languages of the WTO.
members of the organization
7. Conducting economic research and
collecting and disseminating trade Agreements of WTO
data in support of the WTO's other Trade Related Intellectual Property
main activities Rights (TRIPS)
281
• The Agreement on TRIPS is a worldwide 1990 and managed by the WTO.
legal agreement allying all the member • The TRIPS agreement established
countries of the World Trade Organization intellectual property law into the
(WTO). multilateral trading system for the
• It records minimum standards for the first time that remains the most
direction by the national governments of comprehensive multilateral agreement
many forms of the intellectual property on intellectual property to date.
(IP) as claimed to the nationals of other • TRIPS also specifies enforcement
WTO member nations. procedures, remedies, and dispute
• TRIPS was moderated at the end of the resolution procedures.
Uruguay Round of the General Agreement • It includes:
on Tariffs and Trade (GATT) from 1989 to
• Copyright rights • Geographical indications

• Industrial designs • Trademarks
• Layout of Integrated Circuit • Trade Secrets
• Patent • Trade names
Trade-Related Investment Measures competitive.

(TRIMs) • As per the provisions of the Agreement,
• The Agreement on Trade-Related 1. Developed countries would complete
Investment Measures (TRIMs) rules that their reduction commitments within
are applicable to the domestic regulations 6 years, i.e., by the year 2000.
a country applies to foreign investors, 2. Commitments of the developing
often as part of industrial policy. countries would be completed
• The objective of TRIMs is to ensure fair within 10 years, i.e., by the year 2004.
treatment of investment in all member 3. The least developed countries are
countries. not required to make any reductions.
• It has two-components: 4. The WTO Agreement on Agriculture
contains provisions in 3 broad areas
» Tariffication: Tariffication is basically all of agriculture and trade policy viz.
non-tariff barriers such as quotas etc. market access, domestic support,
need to be abolished and converted into and export subsidies.
an equivalent tariff.
» Market Access
» National Treatment: Under this member
countries cannot impose a restriction on − This constitutes tariffication, tariff
foreign firms beyond a certain limit. reduction and access opportunities.
Agreement on Agriculture (AoA) − Ordinary tariffs constituting those
• The WTO Agreement on Agriculture resulting from their tariffication are
conceived in 1995, represents a significant to be reduced by an average of 36%
step towards reforming agricultural with a minimum rate of reduction of
trade and making it fairer and more 15% for each tariff item over a 6-year
period.
282
− Developing countries were Protection of plant varieties and Farmers
maintaining Quantitative Restrictions Rights Act, 2001.
due to balance of payment problems
were allowed to offer ceiling bindings
Aggregate Measure of Support (AMS)
instead of tariffication.
− Members countries to provide • The AMS means the annual level of
preferential market access to subsidies expressed in monetary terms
agriculture product to tariff-rate considering for an agricultural product
quota. It should be at least 5% of in benefit of the producers (product
domestic consumption. specific) of the basic agricultural product
as well as the non-product specific
» Domestic Support support supplied in favour of agricultural
producers in general.
− It includes the use of subsidies and
other support programmes that
• It covers all the support/subsidies or a
product-specific which does not qualify
directly stimulate production and
for the exemption.
distort trade.
− Trade distorting subsidies to be • According to the WTO norms, the AMS
can be provided up to 10 % of a country’s
maintained within the limit.
agricultural GDP for developing
− Aggregate Measure of Support (AMS) countries.
comes under domestic support.
• While the limit is 5% for a developed
» Export Subsidies economy. This limit is called the de
minimis level of support.
− The Agreement consists of the
provisions regarding members
Green Box Subsidy
commitment to lower the Export
Subsidies. • It includes non-trade distorting subsidies
− Developed countries are needed to or minimal trade-distorting subsidies i.e.
lower their export subsidy expenditure these are decoupled (or separated) on
by 36% and volume by 21% in 6 years, production.
in equal installment (from 1986 –1990 • For example, subsidy on research and
levels). development, environment protection,
− For developing countries, the regional development, disease control,
percentage cuts are 24% and direct cash transfer to farmers etc.
14% respectively in equal annual
installment over 10 years. Amber Box
» Patenting of Plant Varieties • It includes trade-distorting subsidies i.e.
linked with the production.
− To protect plant varieties by three
methods namely
• For example, Subsidies on input, fertilizers,
seeds, pesticide, procurement subsidies
• Patent. like MSP, etc.
• Union for the conservation of the • The ceiling for AMS:
New Varieties of Plant (UPOV)
» Developed Countries: up to 5% value of
• Sui Generis domestic output.
» India chooses Sui-Generis and passed » Developing Countries: up to 10% of value
283
of domestic output. − Foreign companies abroad include
MNCs.
Blue Box » Mode 4 (Movement of Natural Person)
• It is also known as Amber box with a − Individual traveling from their native
condition.
place to supply services in other
• It includes trade-distorting subsidies countries.
which are not included in AMS under
− For example, Job Visa etc.
certain condition.
• For example, subsidies that require
farmers to limit production. Non-Agricultural Market Access
(NAMA)
General Agreement on Trade in • NAMA refers to the trade liberalization
Services (GATS) rules about major non-agricultural goods
under WTO.
• GATS is an agreement of the World Trade
Organization (WTO) that came into • It covers laws for the trading of items
action in January 1995 as an outcome of like manufacturing and other industrial
the Uruguay Round negotiations. goods, mining, jewellery, forestry etc.
• The agreement was created to extend the

multilateral trading system to the service Agreement on Anti-Dumping Duties
sector, similarly, the General Agreement
on Tariffs and Trade supported such • It prescribes the process of estimation
system for merchandise trade. of the extent of dumping and norms
and dealing with the imposition of Anti-
• GATS objective is establishing a sound dumping duties.
multilateral framework or principles and
rules for trade in services. Major achievements of WTO:
• All members of the WTO are parties to • Now overall combined share of global
the GATS. Under this, members have to trade of WTO members exceeds 90%
liberalize trade-in service in a progressive of the total international trade.
manner.
• After the establishment of WTO,
• According to GATS services are classified dollar value of global trade has nearly
into: quadrupled, while the real volume of
international trade has expanded
» Mode 1 (Cross Country Supply) by 2.7 times. Important reason for
− Services supplied from one country to this is that the average tariffs have
another. almost halved from 10.5 percent to
6.4 percent during this period of time.
− For example, BPO, KPO etc.
• The predictable market situations
» Mode 2 (Consumption Abroad) given by the WTO combined with
improved communication has
− Consumer/firms making use of service enabled the growth of global value
in another country. chains (GVCs). Trade within these
− For example, Tourism. GVCs today accounts for around 70%
of overall merchandise trade.
» Mode 3 (Commercial Presence)
284
Doha Ministerial Conference − Underdeveloped Countries (UDC) can
specify certain products as special
2001 products.
• It started in November 2001 at Qatar, − Imports of such products can
Doha with the purpose of lowering trade be restricted to protect rural
barriers and facilitating more trade in the development (mainly village and
world. cottage industries).
• The Round is called semi-officially as
the Doha Development Agenda as a • Duty-free, quota-free market access by
fundamental objective is to improve developed countries to least developed
the trading prospects of developing countries (LDC).
countries. • Agricultural subsidies to be eliminated
• The work programme provides about 20 by developed countries i.e. to be kept in
areas of trade. AMS.
• Main issues of Doha Development Round: • Labour issue to be taken by ILO i.e. WTO
would not take into account suo-moto by
» Implementation Issue itself.
• Singapore Issues to be taken up after
− These issues are concerns of concluding DDA (Doha Development
developing countries which are Agenda) which was introduced by the USA
related to inconsistency in WTO and European Union and deals with trade
norms. and competition policy and transparency
in government procurement.
» Relaxation in TRIPS
− Scope of compulsory licensing
increased. Bali Ministerial Meet and Bali
− Scope of geographical Indication Package (Trade Facilitation
increased. and Peace Clause), 2013
» Special and Differentiated Treatment • The Bali Package is a trade agreement
(S&DT) structured from the Ninth Ministerial
Conference of the World Trade
− S&DT to be made effective and Organization in Bali, Indonesia in 2013.
operational.
• It is targeted at lowering global trade
− Under S&DT certain unilateral barriers as well as the first agreement
concessions are provided to resulting from the WTO that is endorsed
Underdeveloped countries (UDC) by all its members.
under WTO provision/agreements.
• The accord consists of the provisions for
» Special Safeguard Mechanism (SSM)
» Increasing import tariffs as well as
− Under this, developing countries can agricultural subsidies, with the intent
impose restrictions on the import of of making it easy going for developing
agricultural commodities in case of a countries to trade with the developed
surge in import/fall in price. nations in global markets.
» Developed countries would scrap hard
» Special Products import quotas on agricultural goods from
the developing world and alternatively
285
would only be permitted to charge tariffs pharmaceuticals sector. This
on amounts of agricultural imports determination would help in maintaining
exceeding specific limits. affordable as well as the accessible
» Acceptance of trade facilitation - The TFA supply of generic medicines.
(trade facilitating Agreement) targets • Nairobi Ministerial Meet also dealt with
to lower red-tape as well as streamline the rules on fisheries subsidies.
customs. It will be legally binding which
would require some expense and a
Factors affecting the working of WTO
certain level of technology.
» ‘Peace clause’ was agreed at. Peace • Trade war is going on among China and
clause gave countries 4-year times to US despite both being a participant
adjust to the limit and avoid sanctions. of WTO. This negates the core non-
discriminatory principle of WTO. China
» Note: Later on, the Peace Clause and US have levied counter-productive
was made permanent. It was agreed
duties, condemning each other of
to provide perpetual protection to
damaging their domestic interests.
public stockholding programmes of a
developing member countries for food • EU, Trans-Pacific Partnership (TPP),
security purposes. Association of South East Asian
Countries (ASEAN), North American
Union etc., are some important platforms
that provide more liberal and seamless
Nairobi Ministerial Meet, 2015
access of member’s markets to fellow
• The Tenth World Trade Organization member countries. This runs counter
Ministerial Conference was held at to goals of WTO which seeks to set up
Nairobi, Kenya in 2015. an international rule-based system of
• The results of the Conference which trading with nominal barriers.
is referred to as the 'Nairobi Package' • The Doha Round of negotiations is
contains Ministerial Decisions on formally not completed.
agriculture, cotton, issues related to least • The two major areas that have impacted
developed countries (LDCs) as well. implementation by developing nations
• These cover: have been the TRIPS and the Sanitary and
Phytosanitary (SPS) measures agreements.
» Special Safeguard Mechanism (SSM) for
• Dispute settlement mechanism of
developing countries
WTO is going through a crisis and It is
» Public stockholding for food security struggling to hire new members to its
purposes understrength Appellate Body that hears
» Commitment to scrap export subsidies appeals in trade. In 2019, More than 20
for farm exports, developing nations met in New Delhi
to discuss various ways to prevent the
» Measures related to cotton WTO’s dispute resolution system from
collapsing because of the logjam in these
• Decisions were made concerning
appointments.
preferential treatment to LDCs in the
area of services as well as the criteria • While the international trade landscape
determining if exports from LDCs may has altered significantly over the past
benefit from the trade preferences. 25 years, WTO guidelines have not kept
pace. The Covid-19 pandemic hastens
• It extended the provision to avert
the shift to e-commerce, guidelines to
'evergreening' of patents in the
286
regulate online trade will be more crucial
than ever. BRICS
• Technical functioning is now wholly
• BRICS is the acronym for an alliance
insufficient to meet the main challenges
of five important emerging national
to the strategic relevance of the WTO in
economies: Brazil, Russia, India, China,
the 21st century. The organization has
and South Africa. It's headquarter is at
failed to respond, adapt, or deliver in
Shanghai, China.
critical areas.
• The acronym BRIC was created by
Goldman Sachs in 2001 to mark the
Few important suggestions to improve emerging powers, side by side the United
the functioning of WTO States, the five largest economies of the
• Every members of WTO will have to world in the 21st century.
accept the operative assumption of a • In 2006, BRIC countries initiated their
rules-based order steered by a market dialogue and from 2009, those take place
economy, competition, and the private at annual meetings of heads of state and
sector. the government.
• Launch negotiations to address the • In 2011, with South Africa joined the
intertwined issues related to market group. The BRICS reached its absolute
access and agricultural subsidies. composition, incorporating a country
• A credible trading system needs a dispute from the African continent.
settlement system that is accepted by • Unlike the European Union, these
every members of WTO. countries are not a political alliance or a
• The COVID 19 pandemic has seen formal trading association, instead, they
significant downward trends in are a powerful economic block owing to
international trade. A conducive trade low production and labour costs.
policy can facilitate global trade with • BRICS collectively representing about
the help of imports and exports through 42% of the world's population, 23% of
reduced tariffs and non-tariff barriers global GDP, 30% of the territory, and 18
and dedicated lanes for release and % of world trade.
clearance of goods. • In 2006, from the beginning of their
• Some of the other important dialogue, these countries have sought to
recommendations are: Closure of DOHA establish fairest international governance,
Round and permanent solution to one that would be more suitable to their
peace clause, appointment to Dispute national interests.
Settlement Body (DSB) by majority rather • This aim would be achieved by means
than reverse consensus mechanism and of the rectification of the International
launch serious negotiations to restore the Monetary Fund quota system which
balance etc. included, for the first time Brazil, Russia,
India, and China amongst the top ten
largest shareholders.
287
I m a g e 15.2: BRICS M e m b e r s
New Development Bank (NDB) President to the Bank.

• Headquarter of NDB is in Shanghai.
• At the Fortaleza Summit (2014) (in
Brazil Important institutions), the • NDB’s Articles of Agreement specify that
New Development Bank (NDB) was all members of the United Nations could
established and the Contingent Reserve be members of the bank, however the
Arrangement (CRA) was announced. share of the BRICS nations can never be
less than 55% of voting power.
• K. V. Kamath from India was is the first
elected president of the NDB.
• NDB aims to authenticate cooperation
among BRICS as well as will support
the efforts of multilateral and regional
financial institutions for global
development and thus adding to
collective commitments for achieving
the target of strong, sustainable, and
balanced growth.
• The Bank shall have an initial sanctioned
capital of US$ 100 billion.
• The early contributed capital shall be
equally shared amongst the founding
members and shall be US$ 50 billion.
I m a g e 15.3: S h a r e h o l di n g S t r u c t u r e of the
• India shall represent by giving the first ND B
288
• Unlike the World Bank, which assigns attended the OECD Ministerial Council
votes based on capital share, in the New Meetings.
Development Bank each participant
country will be assigned one vote, and
none of the countries will have veto History
power.
• In 1948, the US-financed Marshall Plan
for the reconstruction of a continent
Organization for ravaged by the war was regulated by
the Organization for European Economic
Economic Co- Cooperation (OEEC).
• It paved the way for new era of cooperation
operation and by making individual governments
Development
recognize the interdependence of their
economies, that was to change the face
(OECD) of Europe.
• Motivated by the success as well as the
expectation of carrying its work ahead on
• It is an intergovernmental economic
the global stage, Canada as well as the
organization of 36 member nations that
US joined OEEC members in signing the
discuss as well as develop economic and
new OECD Convention on 14 December
social policy.
1960.
• It was founded in 1961 to stimulate
economic progress and world trade.
• From 1949, it has been headquartered in
the Château de la Muette in Paris, France.
Asian Development
After the Marshall Plan ended, the OECD
focused on economic issues.
Bank (ADB)
• It comprises democratic countries that • The Asian Development Bank (ADB) is a
support free-market economies. regional development bank constituted
on 19 December 1966, which is
• The OECD has 37 countries that are its
headquartered in Manila, Philippines.
members. They account for around 80%
of world trade and investment, giving it a • ADB was conceptualized in the early
pivotal role in addressing the challenges 1960s as a financial institution which
facing the world economy. was supposed to be Asian in character
and advance the economic growth and
• India participates in selected OECD
cooperation in one of the poorest regions
Committees and their subsidiary bodies.
in the world.
Indian ministers and officials have also
289
I m a g e 15.4: AD B M e m b e r s
• The Asian Development Bank provides

assistance to its developing member Asian Infrastructure
countries, the private sector, and public-
private partnerships through grants, Investment Bank
loans, technical assistance, and equity
investments to promote development. (AIIB)
• It has 68 shareholding members • It is a multilateral development bank with
including 49 from the Asia and Pacific a task to improve economic and social
region. outcomes in Asia.
• The ADB was designed similar to the • Headquartered in Beijing, it began
World Bank and has a closed weighted operations in January 2016 and have
voting system where votes are distributed now grown to 102 approved members
in accordance with members' capital worldwide.
subscriptions. • 100 billion s is the Authorized Capital
• Japan holds the largest proportion of Stock of the bank.
shares at 15.677%, closely followed by the • The distributed shares are based on the
United States with 15.567% capital share. size of each member country's economy,
• China holds 6.473%, India holds 6.359%, whether they are an Asian or Non-Asian
and Australia holds 5.812%. Member.
• India started availing of ADB’s assistance • Objective:
in 1986 in sectors like Industry, transport,
energy, agriculture, and human » To invest in sustainable infrastructure as
development. well as the other productive sectors in
Asia and beyond.
» To promote regional cooperation and
partnership in addressing development
challenges.
» To encourage private investment in
projects, enterprises and activities
290
contributing to economic development nonmembers.
in the region. • For example, Free Trade Agreement
between India and ASEAN.
• The Asian Infrastructure Investment Bank
(AIIB) investments in India with total in-
country financing stands at USD2.9
Customs Union (CU)
billion.
• A customs union is a free-trade
agreement, where members apply a
Regional Trade common external tariff (CET) schedule to
imports from nonmembers.
Agreement (RTA) • For example, Southern African Customs
Union (SACU).
• A regional trade agreement (RTA) is a
treaty between two or more governments
that define the rules of trade for all Common Market (CM)
signatories.
• CM is a customs union, in which, the
• It aims to encourage the free movement movement of factors of production is
of goods and services across the borders relatively free amongst member countries
of its members.
• For example, BENELUX (Belgium-
• Example of RTA is the European Union Netherland- Luxemburg).
(EU), Asia-Pacific Economic Cooperation
(APEC) etc.
Economic Union (EU)
Types of Regional Trade • An economic union is a common market, in

which, the member countries coordinate
Agreement (RTA) macro-economic and exchange rate
• Various types of RTA are as follows: policies.
• For example, European Union (EU).
Preferential Trade Agreement (PTA)
Other Agreement
• A preferential trade agreement (PTA) is
an agreement that provides preference • Comprehensive Economic Co-operation
to certain products from the participating Agreement (CECA)/Comprehensive
nations. Economic Partnership Agreement (CEPA)
• This is done by lowering the tariffs but
» These are bilateral agreement to promote
not by abolishing them completely.
trade cooperation among member
• For example, SAPTA by SAARC countries. countries.
» These include liberalization of trade
Free Trade Agreement (FTA) policy, investment norms, movement of
labour etc.
• A free trade agreement i.e. FTA is » CECA include only "tariff reduction/
a preferential arrangement, where limination in a phased manner on listed/
members lower tariffs on trade by all items except the negative list and
between themselves while maintaining tariff-rate quota (TRQ) items.
their own tariff rates for trade with
291
» Also CEPA covers the trade in services Trans-Pacific Partnership (TPP)
and investment and other areas of
economic partnership. • TPP is a suggested free trade agreement
among 11 Pacific Rim economies.
• The United States was included initially
Advantages of RTA but it withdrew from TPP in January 2017.
• Lowered or Eliminated Tariffs. • The prevailing countries negotiated
a new trade agreement known as
• Trade promotion that leads to better Comprehensive and Progressive
resource allocation. Agreement for Trans-Pacific Partnership,
• Regional Trade Agreement are more which integrates most of the provisions
flexible, and their terms are mutually of the TPP and which entered into force
beneficial. on 30 December 2018.
• Increased Foreign Direct Investment • The 11 countries are Australia, Brunei,
(FDI) investment adds capital to expand Canada, Chile, Japan, Malaysia, Mexico,
local industries and boost domestic New Zealand, Peru, Singapore, Vietnam.
businesses. • The TPP targets to achieve extensive
liberalization of both goods and services,
as well as entails complete coverage of
Mega Regional Trade trade in services, investment, government
Agreement procurement, non-tariff measures and
many regulatory topics.
• Mega-regionals are deep integration
partnerships among the nations or
regions with a principal share of world
trade as well as the FDI.
Transatlantic Trade and
Investment Partnership (TTIP)
• Along with increasing the trade links,
the deals target to improve regulatory • The TTIP negotiations which were
compatibility as well as supply a launched in June 2013, aim for a far-
rules-based framework for ironing out reaching trade agreement between the
differences in investment and business US and the EU.
climates. • The goal was to abolish the trade barriers,
• The two most significant mega-regional alignment, compatibility and possible
trade agreements are the Trans-Pacific harmonization of regulations and
Partnership (TPP) and the Transatlantic standards governing the goods, services,
Trade and Investment Partnership (TTIP). investment, and public procurement
markets.
292
I m a g e 15.5: T TIP and TPP M e m b e r s
Regional Comprehensive Japan, New Zealand, and South Korea.

Economic Partnership (RCEP) • RCEP negotiations were formally
established in November 2012 at the
• RCEP is a recommended free trade ASEAN Summit in Cambodia.
agreement in the Asia-Pacific region
• These nations account for approximately
among the ten-member province of the
half of the global population, contribute
Association of Southeast Asian Nations
over a quarter of world exports, and make
shortly called as ASEAN, namely Brunei,
up nearly around 30% of international
Cambodia, Indonesia, Laos, Malaysia,
Gross Domestic Product (the value of all
Myanmar, the Philippines, Singapore,
goods and services produced in a year).
Thailand, and Vietnam, and five of
ASEAN's FTA partners—Australia, China, • India, which is also ASEAN's FTA partner,
opted out of RCEP in November 2019.
I m a g e 15.6: RCEP M e m b e r s
293
India and RCEP Rajamohan, the RCEP can be a stepping-
stone to Act East Policy of India, however
• There is fear that some of the Indian at a time of increasing protectionism
domestic sectors may be hit by cheaper and the China-US trade war, opening
alternatives from other RCEP nations. our market to China (through RCEP) can
Apprehensions have been expressed prove to be very disastrous, given the
that cheaper products of Chinese would structural issues in the Indian market.
“flood” India. Therefore, it is crucial that India focuses
• Industries such as dairy and steel have on resolving the structural issues in the
demanded protection. The textile industry, domestic market, before finalizing the
which has already raised concerns about RCEP negotiations.
growing competition from neighbouring • India needs to work on various reforms
countries with cheaper and more efficient and policies to prepare the economy for
processes, fears the deal would impact it facing international competition. This
negatively. can be done by Reforming Labor laws,
• Issue of Dairy Products: India is the Easing land acquisition and Bridging
largest producer and consumer of Infrastructure deficit etc.
milk and milk products in the world.
Various dairy products from Australia
and New Zealand would have been
dumped into the Indian markets causing
UPSC CSE PRELIMS
massive losses to the Indian farmers and
producers. India would have had to cut
Previous Years
duties by almost 86% on dairy products Questions
from these nations.
Q.1) With reference to Trade - Related
• Trade Deficit: Many of the Free Trade Investment Measures (TRIMS), which of
Agreements signed amongst India and the following statements is/are correct?
the ASEAN, South Korea and Japan have
been to the disadvantage of India. The 1. Quantitative restrictions on imports by
nation has run huge amounts of trade foreign investors are prohibited.
deficits with these nations. With respect 2. They apply to investment measures
to China, India has over USD 50 Billion related to trade in both goods and
trade deficit and China refuses to address services.
these concerns.
3. They are not concerned with the
• Non-acceptance of Auto-trigger regulation of foreign investment.
Mechanism: To deal with imminent Select the correct answer using the code
increase in imports, India had been given below:
seeking an auto-trigger mechanism.
Auto-trigger Mechanism would have (a) 1 and 2 only
permitted India to raise tariffs on products (b) 2 only
in instances where imports cross a certain (c) 1 and 3 only
threshold. But other nations in the RCEP
were against this proposal. (d) 1, 2 and 3
Ans. (c)
• Explanation: Statement 1 correct: The
Way forward TRIMs Agreement prohibits certain types
of measures that violate the national
• According to many experts like Shri treatment (Article III) and quantitative
294
restrictions requirements (Article XI) of the trade in goods that distort or restrict
General Agreement on Tariffs and Trade trade. (TRIMs is a multilateral agreement
(GATT) 1994. The list of TRIMs decided on trade in goods, and not services).
to be inconsistent with these articles • Statement 3 is correct: TRIMs Agreement
comprises measures which involve: stipulates that certain types of measures
accepted by Governments to regulate
» Certain levels of local procurement by an
and control FDI can cause trade-
enterprise (“local content requirements”)
restrictive and distorting effects. But this
» Restrict the value and volume of imports agreement is only concerned with the
such an enterprise can purchase. trade effects of investment measures. It is
not expected to deal with the regulation
• Statement 2 is not correct: Under of investment as such and does not
the Agreement on Trade - Related affect directly on WTO members’ ability
Investment Measures of the World to regulate and place restrictions upon
Trade Organization (WTO), members of the entry and establishment of foreign
WTO have decided not to apply certain investment.
investment measures with respect to
295
CHAPTER - 16
AGRICULTURE AND FOOD MANAGEMENTS
Regardless of whether it is pre- workforce in the country is engaged in

independence or post-independence, agricultural and allied sector activities
agriculture remains the most important (Census 2011) and accounts for 16.5% of
field of the Indian economy. The vast the country’s Gross Value Added (GVA)
number of people who depend on it for for the year 2019-20 (at current prices).
their survival, demonstrates this point • According to the Land Use Statistics 2014-
emphatically. 15, the country's total geographical area
is 328.7 million hectares, with 140.1 million
hectares of reported net sown area and
Situation of 198.4 million hectares of gross cultivated
Agriculture in India area at 142 percent cropping rate. The

net sown area accounts for 43% of the
total geographical area. There are 68.4
• Agriculture plays a vital role in India’s million hectares of net irrigated land.
economy. Around 54.6% of the total
(Rs. in Crore)
Years
Item
2014-15 2015-16 2016-17 2017-18 2018-19** 2019-20***
GVA in Agriculture
20,93,612 22,27,533 24,96,358 26,70,147 27,75,852 30,47,187
and Allied Sectors
Percent to total
18.2% 17.7% 17.9% 17.2% 16.1% 16.5%
GVA
I m a g e 16.1: S h a r e of A g r i c u lt u r e in GVA
• There has been a continuous decline in five years’ (2013-14 to 2017-18) average
the share of agriculture and allied sectors production of food grain.
in the total GVA of the country from 18.2 • Total production of rice during 2018- 19
percent in 2014-15 to 16.5 percent in is estimated at a record 116.42 million
2019-20. A decline in share of agriculture tonnes. Production of rice has raised by
and allied sectors in GVA is an expected 3.66 million tonnes as compared to the
outcome in a fast growing and structurally production of 112.76 million tonnes during
changing economy. 2017-18.
• According to the Fourth Advance • Production of wheat, estimated at a
Estimates for 2018-19, total food grain record 102.19 million tonnes, is higher
production in the country is estimated by 2.32 million tonnes as compared to
at 284.95 million tonnes which is higher wheat production of 99.87 million tonnes
by 19.20 million tonnes than the previous achieved during 2017-18.
296
• Entire oilseeds production in the country
during 2018-19 is estimated at 32.26 million
tonnes which is higher than the production
of 31.46 million tonnes during 2017-18.
Crops Area (Lakh hectare) Production (Million Tonnes) Yield (kg/hectare)
2016-17 2017-18 2018-19* 2016-17 2017-18* 2018-19* 2016-17 2017-18 2018-19*
Rice 439.9 437.7 437.9 109.7 112.8 116.4 2494 2576 2659
Wheat 307.9 296.5 291.4 98.5 99.9 102.2 3200 3368 3507
Nutri/Coarse
250.1 242.9 219.8 43.8 47.0 42.9 1750 1934 1954
cereals
Pulses 294.5 298.1 290.3 23.1 25.4 23.4 786 853 806
Food-grains 1292.3 1275.2 1239.4 275.1 285.0 284.9 2129 2235 2299
Oilseeds 261.8 245.1 255.0 31.3 31.5 32.3 1195 1284 1265
Sugarcane 44.4 47.4 51.1 306.1 379.9 400.2 69001 80198 78248
Cotton 108.3 125.9 126.6 32.6 32.8 28.7 512 443 386
Jute & Mesta 7.6 7.4 7.3 10.9 10.0 9.8 2585 2435 2403
I m a g e 16.2: A g r i c u lt u r e P r o d u c ti o n & Y i e l d
• Animal Rearing − The entire Livestock population is

around 535.78 million in the country
» Animal rearing consists of rearing of indicating a growth of about 4.6%
cows, buffaloes, goats, camels, pigs, over Livestock Census-2012.
ships, etc., besides directly supporting to
the national income and socio-economic
− Overall Bovine population (Cattle,
Buffalo, Yak and Mithun) has displayed
development of the country.
an increase of around 1%.
» Some of the major significance: It is more
inclusive in nature, improve family income » Livestock sector has expanded at
and produces gainful employment in a compound annual growth rate of
the rural area, especially supports the around 7.9% during last five years.
small and marginal farmers, landless Indian Government has launched a new
labourers and women and delivers cheap Central Sector Scheme “National Animal
nutritional food etc. Disease Control Programme (NADCP) for
» The livestock sector alone contributes control of Foot & Mouth Disease (FMD)
close to around 25.6% of value of output and Brucellosis”. This program envisages
at current prices of overall value of output complete control of FMD by 2025 with
in agriculture, fishing & forestry sector. vaccination and its eventual eradication
by 2030.
» 20th Livestock Census Report (2019)
297
CATTLE BUFFALOES SHEEP GOATS
199.07
192.49
190.90
148.88
140.54
135.17
109.85
108.70
105.34
74.26
71.56
65.07
2007 2012 2019
I m a g e 16.3: A n i m a l R e a r i n g in I n di a
• Milk production: understand the cropping seasons of India.

• India continues to be the leading India has three major crop seasons.
producer of milk in the world. • Kharif season: It is mainly grown during
• Milk production in the country was the monsoon season and harvested
Around 187.7 million tonnes in 2018-19 during the onset of monsoon. Main crops
and registered a growth rate of about of this season are rice, maize, jowar, bajra,
6.5% over the previous year. cotton, sesamum, groundnut, etc.
• The per capita availability of milk has • Rabi season: It starts with the onset of
attained a level of 394 grams/day during winter and harvested in the summers.
2018-19. Main crops of this season are wheat,
barley, jowar, gram and oil seeds such as
linseed, rapeseed, etc.
Cropping Seasons of • Zaid season: It refers to summer crops
and mainly includes fruits and vegetables.
India Recently, some pulses have also been
grown during this season.
There are specific special terms used to
Cropping Season Major Crops Cultivated
Northern States Southern States
Kharif Rice, Cotton, Bajra, Rice, Maize, Ragi,

June-September Maize, Jowar, Tur Jowar, Groundnut
Rabi Wheat, Gram, Rapeseeds Rice, Maize, Ragi,
October-March and Mustard, Barley Groundnut, Jowar
Zaid Vegetables, Fruits, Rice, Vegetables,
April - June Fodder Fodder
298
Note:The terms ‘kharif’ and ‘rabi’ originate » The other objective of the land reforms
from Arabic language where kharif means in India was related to the issue of socio-
autumn and rabi means spring. economic inequality in the country.
The high inequality in land ownership
not only had a negative impact on the
Land Reforms in economy; but it was badly intertwined
with the caste system in India and the
India social respect and status, by the society
at large.
The official stance and emphasis on land
reforms in India have been changing over − The agrarian system, which had
the time in wake of the emerging issues, inequitable ownership of the
which may be seen in the following two commodity, i.e., land to gain money,
phases. was inherited by more than 80% of the
population. On rational grounds and
with a public welfare approach, the
Phase-1 government decided to restructure
land ownership in the economy.
• This phase commenced just after
Independence. All economies were − As it attempted to abolish the
agrarian until they were industrialized; country's age-old agrarian system,
the only difference being the time span. the aim of land reforms drew a lot of
The first thing developed countries did socio-political attention. It became
after developing political regimes was such a contentious issue in India that
to complete agrarian reforms in a time- land reforms were dubbed a "poor
bound manner. Since land remains the name," with the government seizing
primary source of income for the majority land and allotting it to the landless
of people in an agrarian economy, masses.
agrarian reforms that were successfully
» The third objective of land reforms
implemented benefited the greatest
in India was highly contemporary in
number of people, thus improving their
nature, which did not get enough socio-
economic circumstances.
political attention—it was the objective
• At the time of independence, India of increasing agricultural production for
had inherited an inequitable agrarian solving the inter-related problems of
system and was a traditional agrarian poverty, malnutrition and food insecurity.
economy. Land reforms would be a To realize the purposes of land reforms, the
big plank of independent India, and government took three main steps which
the Indian National Congress pledged had many internal sub-steps:
to implement them as part of the
agrarian reforms in 1935. Land reform • Abolition of Intermediaries: Under this
in India had three aims, similar to those step, the age-old exploitative land tenure
sought by other economies in the past: systems of the Zamindari, Mahalwari and
Removing institutional discrepancies Ryotwari were fully abolished.
of the agrarian structure inherited from • Tenancy Reforms: Under this broader step,
the past which obstructed increasing three inter-related reforms protecting the
agricultural production, such as, the size land-tenants were affected.
of agricultural land, land ownership, land
inheritance, tenancy reforms, abolition of » Security of tenure so that a sharecropper
intermediaries, introduction of modern can feel secure about his future income
institutional factors to agriculture, etc. and economic security.
299
» Ownership rights to tenants so the successful programme.
landless masses (i.e., the tenants, the • Rampant corruption in public life, political
sharecroppers) can get the final rights to hypocrisy, and leadership failure in the
the land they plough, “land to the tillers”. Indian democratic system.
• Reorganization of Agriculture: This step
had many interconnected and logical Discouraging Achievements of Land
provisions in the direction of rational Reforms:
agrarian reforms: • Tenancy reforms provided tenants
with rights, but only on 4 per cent of
» Redistribution of land among the landless the total operated areas in the country
poor masses following the promulgation (14.4 million hectares of operated area
of timely ceiling laws—the move failed by 11 million tenants by 1992).
miserably with a few exceptions, such
• Redistribution of ownership rights of
as West Bengal, Kerala, and a portion of
land took place, but only up to 2 per
Andhra Pradesh.
cent of the total operated area in the
» Consolidation of land could only be country (less than 2 million hectares
succeeded in the Green Revolution among the 4.76 million people by
regions. 1992).
» Cooperative farming, which had a high • Taken together, the whole process
socio-economic moral base, was only of land reforms could benefit only
used by the big farmers to save their 6 per cent of the operated area of
lands from the draconian ceiling laws. the country with a negligible socio-
economic positive impact.
Reasons for the

PHASE 2
Failure of Land The second phase of land reforms can be
Reform: traced to the process of economic reforms.
Economic reforms exposed the economy
The whole attempt of land reforms in India to the new and emerging realities, such as,
is considered a big failure by majority of land acquisition and leasing, food-related
experts. Many consider the issue of land issues and the agricultural provisions of
reforms in India as the most complex the World Trade Organization (WTO). We
socio-economic problem of human history. see a shift (Economic Survey 2012–13) in
Out of the many reasons forwarded by the the thinking of the Government of India
experts responsible for the failure of the towards the issue of land reforms—a clear
land reforms in India, the following three three step policy appears to be emerging:
could be considered the most important
ones: • Mapping land carefully and assigning
conclusive title,
• Land in India is considered a symbol of
social prestige, status and identity unlike • Devising a fair but speedy process of
the other economies which succeeded land acquisition, and
in their land reform programmes, where • Putting in place a transparent and
it is seen as just an economic asset for effective land leasing policy.
income earning. Finer points of this phase can be summed
• Lack of political will, which was required up in the following way:
to affect land reforms and make it a
300
• Leasing seemed to be a better choice
in face of farmer’s opposition seen in Green Revolution
recent times in different states towards
attempt at land acquisition. Again, if the • It is the implementation of modern
country needs to attract investment from agricultural methods that became known
the organized private sector (domestic as the Green Revolution (GR) in the early
or foreign), land leasing seems a better 1960s—first for wheat and then for rice
option than land acquisition. in the following decade. It revolutionized
the very conventional concept of food
• Corporate farming has not taken place production by increasing efficiency by
in the country in a big scale, especially
more than 250 percent.
in the areas of food grains production,
which India needs to ensure food security • By the early 1960s, the Green Revolution
and compete in the global grain market, had centered on the use of the High
in particular, and the agri-market in Yielding Variety (HYV) of seeds grown by
general. This has become even more US agro-scientist Norman Borlaug while
important in the wake of the Right to conducting research in Mexico on a British
Food given to a large segment of the Rockfellor Foundation Scholarship.
population. • He said that the new wheat seeds he
• Giving primacy to ‘leasing’ will solve produced in vitro increased productivity
several problems: by more than 200 percent. The seeds
had been successfully tested and were
» It will keep land ownership in the hands being used by farmers in food-insecure
of the existing farmers; countries like Mexico and Taiwan by 1965.
» It will prevent mass landlessness and
unemployment among the farmers;
» Farmers will get a permanent source of
Components of the Green
income (in the meantime, they might be Revolution
imparted skills and be provided better The Green Revolution was built on the
employment in industries) and timely and sufficient supply of many
» It will make land easily available for use inputs/components. A brief review on the
of public and private purposes. Green Revolution is given below:
• The recent emphasis on the promotion

of the ‘manufacturing sector’ and ‘smart The HYV Seeds
cities’ are hugely dependent on smoother
and speedier process of land acquisition. » These seeds were popularly termed as
Without expanding the industrial sector the ‘dwarf’ variety of seeds. With the
to its optimum levels, the agriculture help of repeated mutations, Mr. Norman
sector can emerge as a remunerative Borlaug had been able to develop a seed
profession—the country needs to migrate which was raised in its nature of nutrients
the extra labour force of the agriculture supplied to the different parts of the
sector to industry, smoothly. wheat plant— against the leaves, stem
• The issue of land acquisition is to establish and in favour of the grain.
a logical equation with ‘environmental
• This caused the plant to become dwarfed
issue’, in order to make the process of
and the grain to become heavier,
development sustainable.
resulting in a high yield. These seeds were
non-photosynthetic, which meant they
301
weren't reliant on sunlight to produce the suitable for this new type of farming
desired results. were area-specific (Haryana, Punjab,
and western Uttar Pradesh were the only
ones in India), the harvested crops had to
Chemical Fertilizers be stored in the region before they were
dispersed throughout the country.
• The seeds were meant to improve
productivity if they got enough nutrients
• Again, the countries which went for Green
Revolution were food-deficient and
from the soil. Traditional compost does
needed the new yield to be distributed
not provide the amount of nutrients they
throughout the country and a proper
need because it has a low concentration
chain of marketing, distribution and
of nutrients and requires a larger area for
transport connectivity was necessary.
sowing, which means it will be shared by
All these peripheral infrastructures were
more than one seed. As a result, high-
developed by the countries going for
concentration fertilizers were needed,
the Green Revolution with softer loans
which could only be applied to the
coming from the World Bank—India
targeted seed—the only alternative was
being the biggest beneficiary.
chemical fertilizers such as urea (N),
phosphate (P), and potash (K).
Some important outcomes of GR
• One of the most important impacts of
Irrigation Green Revolution (GR) was on raising
• Controlled means of water supply was the production and productivity of
needed for controlled crop growth and cereal crops, especially wheat and
adequate fertilizer dilution. It imposed rice.
two major requirements: first, the region • After the implementation of the
of such crops must be free of floods, and Green Revolution, total food grains
second, an artificial water source must production reached to 284.95 million
be built. tonnes in 2018-19 from merely 82
million tonnes in 1960-61 (GOI, 2019)
thereby recording 3.5 times increase
Chemical Pesticides and Ger- in food grains in last seven decades.
micides • Economic empowerment of farmers
with increase in production of
• Since the new seeds were less accustomed
food grains and other agricultural
to local pests, germs, and diseases
commodities, incomes of farmers had
than the existing indigenous varieties,
also increased.
pesticides and germicides became
important for achieving desired results • Reduced India’s dependence on other
and yield protection. countries for supply of food grains
and other agricultural commodities.
• The commercial crops like sugarcane,
Credit, Storage, Marketing/ cotton, jute, oilseeds also achieved a
Distribution significant increase in its production,
relatively later than food grains. Since
• In order for farmers to be able to use 1960-61 sugarcane production has
the Green Revolution's new and more been increased more than 3.5 times
expensive inputs, they needed simple and while cotton production recorded
affordable credit. Since the farmlands about 5 times increase.
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» But a time arose when the government
Negative Impact and other government agencies started
of the Green doing studies and surveys focused

around the ecological and environmental
Revolution problems.
The Green Revolution had its positive and − The following are the most important
negative socio-economic and ecological amongst them:
impacts on the countries around the world. − Degraded soil fertility: It was as a
result of farmers' repeated cropping
• Socio-Economic Impact
patterns, as well as overexploitation
» Food production grew to the point that of the land; lack of a suitable crop
many countries became self-sufficient in combination and crop intensity, etc.
food (wheat in the 1960s, rice in the 1970s) − Water table on the verge of
and some also became food exporting collapsing: Since the new HYV seeds
countries (self-sufficiency in food must required a disproportionately large
not be confused with food security). amount of water for irrigation—5
» However, the difference in farmers' tonnes of water were required to
income increased inter-personal as produce 1 kg of rice—the new HYV
well as inter-regional differences and seeds were introduced.
inequalities in India.
• Environmental Degradation:
» It is large farmers, who owned 10 hectares
or more land, who were benefitted the » Pesticides and herbicides have degraded
most from the Green Revolution as they the atmosphere by increasing pollution
had financial resources to buy better levels in soil, water, and air as a result of
seeds, fertilizers, and other required improper and unregulated use of chemical
inputs. Small and marginal farmers could fertilizers, pesticides, and herbicides. It
not get much benefits resulting in rise of is largely due to deforestation and the
socio-economic disparities. expansion of agriculture in ecologically
» Negative consequences included a rise sensitive areas in India.
in malaria cases due to water-logging, a » Green Revolution heartland like Punjab
change in balanced cropping patterns in and Haryana are almost devoid of forest
favour of wheat and rice, driving pulses, cover with around 3% of forest area in
oilseeds, corn, and barley to the margins, both while UP is having slightly more
and so on. than 5% area under forest as forests
have been cleared to bring more lands
• Ecological Impact under cultivation.
» The Green Revolution's (GR) most • Toxic level in food chain: The toxic level in
damaging negative effect was on India's food chain has risen to the point that
the climate. When the newspapers, nothing created in the country is suitable
academics, scientists, and for human consumption. Essentially,
environmentalists raised concerns about unrestricted usage of chemical pesticides
it, neither the governments nor the and weedicides, as well as their industrial
general public (let alone the farmers in development, had contaminated the soil,
the GR area, who were not educated water, and air to such an alarming degree
enough to understand the GR's side that the entire food chain has become a
effects) were persuaded. victim of high toxicity.
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Second Green Revolution
• To see the negative impact of Green Revolution, new agriculture policy was
launched which aims at sustainable agriculture. It is popularly known as ‘second
Green Revolution’ or ‘EverGreen Revolution’.
• The Government, from time to time, also launched many other kind of programs in
furtherance of Second Green Revolution For example, “Bringing Green Revolution in
Eastern India” (BGREI) program in 2010-11 as a sub scheme of Rashtriya Krishi Vikas
Yojana.
• BGREI program was launched with aim of enhancing agricultural production in
seven states of Eastern India - Jharkhand, Odisha, West Bengal, Assam, Bihar,
Chhattisgarh, and eastern Uttar Pradesh.
• Recently, PM of India has also spoken about bringing Second Green Revolution to
India.
• Almost entire current policy of government can be covered under the category
of second Green Revolution. It aims at R&D, biotechnology revolution, information
technology revolution, biotechnology revolution, R&D and targeting of specific
crops etc.
• Some of the important government schemes aiming towards second Green
Revolution are Pradhan Mantri Krishi Sinchayee Yojana, National Mission for
Sustainable Agriculture, Paramparagat Krishi Vikas Yojana (PKVY), Rashtriya Krishi
Vikas Yojna and Soil Health Card.
Food Management season for specific crops. If the Market

Price for the commodity falls below the
announced minimum price due to bumper
• Since independence, the government production and market glut, government
has made managing enough food in the agencies purchase the entire quantity
domestic market a top priority. When the offered by the farmers at the announced
country entered the WTO, a new need minimum price.
emerged for generating surplus and
competing with the rest of the world, so » The MSPs are fixed at incentive level, to
that the agricultural sector could benefit fulfil the following purposes:
from globalization as well. The challenges
− To induce more investment by farmers
of food management in the country are
in the farm sector,
discussed in this segment.
− To motivate farmers to adopt improved
• Minimum Support Price (MSP) crop production technologies, and
» The Minimum Support Price (MSP) is − To enhance production and thereby
a method of market intervention used farmers income.
by the Indian government to protect
agricultural producers from a sharp • The Market Intervention Scheme (MIS)
drop in farm prices by providing a • The Market Intervention Scheme (MIS)
guaranteed price to keep farmers from is similar to the Minimum Support Price
having to sell their land. On the basis of (MSP), which is introduced at the request
the Commission for Agricultural Costs of state governments for the procurement
and Prices' recommendations, MSPs are of perishable and horticultural goods
announced at the start of the sowing when Market Prices decline. The scheme
304
is implemented when there is a 10% rise grains’.
in demand or a 10% decrease in ruling » To make the food grains affordable to
rates over the previous normal year. the consumers, the issue prices for food
The MIS proposal is accepted based grains are set lower than the total cost of
on a particular request from state/UT procurement and distribution—the gap
governments, if the states/UTs are willing converts into the ‘food subsidy'.
to bear a 50% loss (or 25% in the case of
North-Eastern states) in the event of its • Buffer stock
implementation.
• Procurement Prices » India has a policy of keeping a minimum
inventory of food grains (only wheat and
» The Indian government declared a rice) to ensure that food is available at
‘procurement price' for wheat in 1966–67, reasonable prices in the country all year.
which was marginally higher than the The key supply from here goes to the
MSP (the purpose being security of food TPDS (the PDS was restructured in 1997
procurement for requirement of the PDS). as the Targeted PDS) and, on occasion,
to the Open Market Selling to review
» The MSP was announced before
rising rates.
sowing, and the procurement price was
announced before harvesting, with the » The Buffer Stocking norms (of 2005) are
intention of motivating farmers to sell a revised in the backdrop of increased
little more and grow a little more. However, requirement of food grains to run the
this increased price was insufficient to TPDS in the last few years and with the
act as a reasonable incentive for farmers. coming into force of the National Food
Security Act (NFSA).
» It would have been preferable if it had
been revealed prior to sowing rather than
after harvesting. As a result, since fiscal
year 1968–69, the government has only Farm Subsidies
declared the MSP, which is also known as
the successful procurement price. • Subsidies to farmers are an important
part of the government's budget.
• Issue Price Agricultural or farm subsidies account for
approximately 40% of overall budgetary
» The price at which the government expenditure in developed countries, but
allows offtake of food grains from the FCI they are much lower (around 7.8% of
(the price at which the FCI sells its food GDP) and of a different type in India.
grains). The FCI has been fetching huge
losses in the form of food subsidies. • Direct farm subsidies: These are the
types of subsidies that pay farmers
» The food grains procured are transported direct cash benefits in order to make
to the godowns of the FCI located their goods more competitive in global
across the country (counted in the buffer markets. Agriculture, farm, and fisheries
stock). From here they head to the sale subsidies account for a significant portion
counters—to the TPDS or Open Market of the annual budgets of developing
Sale. countries (the United States and Europe).
» The transportation, storage, the cost Direct farm subsidies are advantageous
of maintaining the FCI carriage losses, because they provide the farmer with the
etc., make the food grains costlier (the requisite buying power and can greatly
additional expenses other than the MSP increase the rural poor's standard of
is known as the ‘economic cost of food living. They also aid in preventing the
305
misappropriation of public funds by the produce, that is known as a direct
assisting in the proper identification of subsidy.
beneficiaries. • The World Trade Organization (WTO)
has set some limits on the amount
Issues related to Direct Subsidies: of direct and indirect subsidies that
• Cash can be mismanaged by the developing and developed countries can
cultivators and diverted to non- farm provide because these subsidies distort
requirements. free market forces, which have their own
consequences.
• Lack of awareness amongst the
cultivators can hamper the overall
growth in agriculture.
• Cultivators will be open to the volatile WTO and
market structure and can be conned
by the middle man in the procedure.
Agricultural
• Indirect farm subsidies: These farm subsidies (AMS)
subsidies include lower credit rates,
farm loan forgiveness, reduced irrigation • The WTO refers to government subsidies
and electricity bills, fertilizer, seed, and to the agricultural sector (i.e., domestic
pesticide subsidies, as well as investments support) as Aggregate Measure of
in agricultural research, environmental Support (AMS).
assistance, and farmer training, among • It is measured in terms of subsidies for
other things. These subsidies are also both goods and inputs. The WTO believes
provided to increase the competitiveness that product subsidies such as minimum
of farm products on the global market. support rates and non-product subsidies
such as credit, fertilizers, irrigation,
Issues related to Indirect Subsidies: and electricity would minimize farming
• It can lead to crop centric cultivation production costs and give such countries
with distorted cropping pattern. an unfair advantage in their access to
the global market. Such subsidies are
• Mostly not very successful in reaching referred to as "distortions" in world trade.
the target beneficiaries due to the
various loopholes such as corruption • Such subsidies are not permitted in one
and identification etc. sense because they are subject to a de
minimis limit set by the provisions, which
• Can be misused for political gains is 5% and 10% of total agricultural output
during elections. in developed and developing countries,
• Can lead to regional disparity and respectively.
sometimes biased towards large farm
holders.
The Boxes: In WTO terminology,
• Exploitation of natural resources such agricultural subsidies have been identified
as ground water. by ‘boxes' that have been given the colours
• The subsidies provided on the fertilizers as of traffic lights—green (means permitted),
‘input’ subsidies are in the form of indirect amber (means to be reduced), and red
subsidies. But if the government does not (means to be eliminated/forbidden).
incentivize the farmer by an effective • Amber box
cost reduction in prices of the fertilizers,
but provides direct cash incentives after » All subsidies which are supposed to
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distort production and trade fall into the see it as a crucial means of moving away
amber box, i.e., all agricultural subsidies from distorting the amber box subsidies
except those which fall into the blue and without causing too much hardship.
green boxes. » Others want to set limits or reduction
» These policies include minimum support commitments on it while some advocate
prices (also known as MSP in India) for moving these subsidies into the amber
agricultural goods, as well as any other box.
assistance specifically related to output
quantities (as power, fertilizers, pesticides, • Green Box
irrigation, etc.).
» Agricultural subsidies that cause limited
» Under the WTO provisions, these subsidies to no trade distortions are placed in the
are subject to reduction commitment to green box. They must not have any kind
their minimum level—to 5 per cent and of price support.
10 per cent for the developed and the
developing countries, respectively, of » This box essentially covers all government
their total value of agricultural outputs, expenditures that aren't aimed at a
per annum accordingly. specific commodity, as well as all direct
income support programmes for farmers
» It means, the subsidies directly related to that aren't tied to current production or
production promotion above the allowed price levels.
level (which fall in either the blue or green
box) must be reduced by the countries to » This is a wide category that encompasses
the prescribed levels. all government subsidies, such as public
food storage, pest and disease control,
» In the existing negotiations, various research and extension, and some direct
proposals deal with issues like deciding payments to farmers that do not stimulate
the amount by which such subsidies production, such as agricultural reform,
should be reduced further, and whether environmental conservation, regional
to set product-specific subsidies or to growth, crop and income insurance, and
continue with the present practice of the so on.
‘aggregate’ method.
» The green box subsidies are allowed
• Blue Box without limits, provided they comply with
the policy specific criteria. It means, this
» This is the amber box with strings box is exempted from the calculation
attached. The parameters are set up in under subsidies under the WTO provisions
such a way that distortions are minimized. because the subsidies under it are not
Any subsidy that would usually be in the meant to promote production, thus do
amber box is moved to the blue box if it not distort trade. That is why this box is
allows farmers to achieve a certain level called ‘production neutral box’.
of output. These subsidies are simply
such direct payments (i.e., direct set-
aside payments) provided to farmers by
the government as part of assistance
Food Security
programmes to promote agriculture,
• By the late 1980s, India had achieved
rural growth, and other activities.
food self-sufficiency, though food security
» At present there are no limits on spending remained a concern. Food protection
on subsidies in the blue box. In the refers to the availability of food at
current discussions, some nations want reasonable prices to all people at all
to keep blue box as it is because they times and without interruption. Though
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India’s GDP growth has been impressive distribution, making food grains available
and the agricultural production has also to the disadvantaged sections of the
increased over the past few decades, population at fair prices.
hunger and starvation still persist among Despite enhanced availability in the
the poorer sections of the population. PDS and high inflation in Food grains,
Two vital things need consideration dependence on the PDS is reducing. This
regarding India’s food security: could be only due to two reasons:
• Enhancing its food production • Food grains are not made available
• Strengthening supply chain timely by the PDS, and/or
Because of the high rate of malnutrition • Quality of the PDS food grains are inferior
and the volatility of agricultural prices, in comparison to their counterparts in the
India has one of the most extensive food open market.
security programmes in the world. There are certain anomalies in India’s food
management under the PDS which need
• There are entitlement feeding immediate attention:
programmes such as the Integrated
Child Development Scheme (ICDS: which • The percentage distribution of the
includes all children under the age of six, economic cost of wheat and rice has been
pregnant women, and nursing mothers). rising fast. The pooled cost of food grains
• Mid-Day Meal Schemes (MDMS), (MSP plus the Bonus which are offered
by the individual states) accounts for two
• Food security is ensured by food subsidy thirds of the economic cost of wheat and
programmes such as the Targeted rice. This has made the economic cost of
Public Distribution System (through food grains to the Food Corporation of
which the National Food Security Act India (FCI) increase over the years.
is implemented), Annapurna (10 kgs of
free food grain for destitute poor), and • Increasing costs of labour, fertilizers,
job programmes such as the Mahatma pesticides and other inputs have made
Gandhi National Rural Employment production of crops costlier over the
Guarantee Scheme (100 days of time. This forced the government to keep
employment at minimum wages). on increasing the MSPs of the crops, too.
• Over the time, several discrepancies
seeped into the PDS, such as,
PDS & Food Subsidy » High operation costs,
• The Public Distribution System (PDS, » High levels of leakages,

which was renamed Targeted PDS in » High administrative costs,
1997) aims to ensure food security by » Corruption, and
distributing food grains to the BPL
population on a timely and affordable » Mismanagement.
basis, as this group cannot afford to pay
Market Prices for their food. • According to the assessment of an expert
group established in 2009, PDS suffers
• This includes the government's from nearly around 61 percent error of
procurement of food grain at MSP, the exclusion and 25 percent inclusion of
building up and maintenance of food beneficiaries, i.e. the misclassification of
stocks, their preservation, and timely the poor as non-poor people and vice
versa.
308
• Subsidies created some other problems the government exchequer. PDS poses
too. Firstly, subsidies brought distortions even higher challenge when domestic or
in the market, which hamper the international prices are on the rise and
domestic as well as the external interests the government is forced to raise the
and secondly, caused a heavy drain on MSPs of crops.
Suggestions of Shanta Kumar Committee:

• Decrease the number of beneficiaries under the Food Security Act—from the
current 67% to 40%.
• Permit private companies or organizations to procure and store food grains.
• Stop bonuses on MSP given by states to cultivators and implement cash transfer
system so that food subsidy and MSP amounts can be directly assigned to the
cultivators account and food security beneficiaries.
• Food Corporation of India should involve itself in full-fledged grains procurement
only in those states which are poor in procurement process. In the case of those
states which are doing well, such as Haryana, Punjab, Chhattisgarh, Madhya
Pradesh, Andhra Pradesh, and Odisha, the states should do the procurement.
• Abolishing levy rice: Under levy rice policy, government purchases certain percentage
of rice (differs from 25 to 75 % in states) from the mills compulsorily, which is called
levy rice. Mills are permitted to sell only the remainder quantity in the open market.
• Deregulate fertilizer sector and give cash fertilizer subsidy of Rs. 7,000 per hectare
to cultivators.
• Outsource of stocking of grains: This committee calls for establishment of negotiable
warehouse receipt (NWR) system. In the new system, cultivators can deposit their
produce in these registered warehouses and get 80 % of the advance from bank
against their produce based on MSP.
• Clear and transparent liquidation strategy for buffer stock: Food Corporation of
India should be provided greater flexibility in doing business; it should offload extra
stock in open market or export, as per need.
» It will cover up to 75 per cent rural and

National Food 50 per cent urban population (around
Security Act two thirds of the total population) with

uniform entitlement of 5 kg food-grains
per month at highly subsidized prices of
• The law was enacted by the Parliament Rs. 3, Rs. 2 and Rs. 1 per kg for rice, wheat
in December 2013, the Parliament had and coarse grains, respectively. The
passed the motion. It was a landmark poorest of poor households continue to
move to ensure food and nutritional receive 35 kg food grains per household
stability in India. It is India's most per month under the Antyodaya Anna
ambitious and largest social welfare Yojna at the same subsidized prices.
programme which offers legal rights to
around 82 crore people for subsidized » It provides for a special emphasis on
food grains. The following are the nutritional support for women and
program's major highlights: children, with pregnant women and
lactating mothers receiving a maternal
309
bonus of at least Rs. 6,000 in addition consumer.
to receiving healthy meals as per the • It includes all activities involved in
prescribed nutritional norms. Children moving agricultural produce through
aged 6 months to 14 years will be able to time (storage), space (transport), form
take home rations or hot cooked food in (processing) and transferring ownership
accordance with dietary guidelines. at various levels of marketing channels.
» For the purpose of issuing ration cards, the Under its present form, agricultural
eldest woman of eighteen years of age or marketing in India is not uniform. There
older will be the head of the household; is considerable regional variation in
if she is not present, the eldest male methods of marketing. These processes
member will be the head of the household. can be divided into three categories:
The Act also includes provisions for PDS
reforms such as doorstep delivery of » Traditional Marketing Methods: This
food grains, the use of information and generally start with sale by farmer and
communication technology (ICT) such involve many intermediaries at different
as end-to-end computerization, the use levels from rural markets to terminal
of ‘Aadhaar' for beneficiary recognition, markets. Close to 50% of the agricultural
and the diversification of commodities produce in India is sold via these channels.
under the TPDS, among other things. » Cooperative based marketing: In this
» The Act establishes a redress process method, agri-products are directly
at the state and district levels, with purchased from farmers through
appointed officers. States will be able marketing network of NAFED (National
to use existing machinery for District Agricultural Cooperative Marketing
Grievance Redressal Officers (DGROs) Federation of India Limited), thus
and State Food Commissions if they eliminating middlemen.
want to avoid spending money on a new
redressal system. − Over the course of time, there have
been numerous successful cooperative
» It also provides for penalty on public marketing models like Anand Pattern
servants or authority, if found guilty Cooperatives (APC), Chicory contract
of failing to comply with the relief farming coordination in Jamnagar,
recommended by the DGRO. Gujarat and Kerala Horticulture
Development Program (KHDP).
• To guarantee transparency and
accountability, provisions have been » Emerging models of agricultural
made for the publication of PDS data, marketing: With the emergence of new
social audits, and the formation of inputs and technologies in the market,
Vigilance Committees. several innovative marketing methods
have evolved over the time, like
Agricultural − National Agriculture Market

(e-NAM): It is a pan-India electronic
Marketing trading portal which networks the
existing APMC mandis to create a
• Agricultural marketing can be defined unified national market for different
as the commercial functions involved agricultural commodities.
in transferring agricultural products − Commodity and Futures markets: To
consisting of farm, horticultural and create exchanges and trading options
other allied products from producer to to assist and better price discovery for
310
farmers. E.g. National Spot Exchange Company’s e-choupal.
Limited (NSEL). − Apart from these, there are some
− Private sector initiatives: Several start- other methodologies like Farmer
ups and businesses created innovative Producer Organizations (FPOs) and
pilot solutions for agricultural Contract Farming.
markets. For example, Indian Tobacco
Agricultural Produce Market Committee (APMC)

Agricultural Produce Market Committee (APMC) is a statutory market committee
constituted by a State Government in respect of trade in certain notified agricultural or
horticultural or livestock products, under the Agricultural Produce Market Committee
Act issued by that state government.
APMCs are intended to be responsible for:
• Ensuring transparency in pricing system and transactions taking place in market
area;
• Providing market-led extension services to farmers;
• Ensuring payment for agricultural produce sold by farmers on the same day;
• Promoting agricultural processing including activities for value addition in
agricultural produce;
• Publicizing data on arrivals and rates of agricultural produce brought into the
market area for sale; and
• Setup and promote public private partnership in the management of agricultural
markets
Since the State APMC Acts created fragment markets for agricultural commodities
and curtailed the freedom of farmers to sell their produce other than through the
commission agents and other functionaries licensed by the APMCs, the Ministry of
Agriculture (GoI) developed a Model APMC Act, 2003 and has been pursuing the state
governments to modify their respective Acts along its line.
The Model APMC Act provides the following new things:
• Direct sale of farm produce by the farmer to contract farming sponsors;
• Setting up ‘special markets’ for ‘specified agricultural commodities’— mostly
perishables;
• Permits private persons, farmers and consumers to establish new markets for
agricultural produce in any area;
• A single levy of market fee on the sale of notified agricultural commodities in any
market area;
• Replaces licensing with registrations of market functionaries, which would allow
them to operate in one or more different market areas;
• Establishment of consumers’ and farmers’ markets to facilitate direct sale of
agricultural produce to consumers;
• Creation of marketing infrastructure from the revenue earned by the APMCs;
311
• Provides some freedom to the farmers to sell their produce directly to the contract
sponsors or in the market set up by private individuals, consumers or producers;
• Increases the competitiveness of the market of agri-produce by allowing common
registration of market intermediaries.
Different issues faced by these charge commission fees on transactions

between buyers and farmers.
markets
» Even the model APMC Act treats the
• Institutional difficulties like licensing APMC as an arm of the state and the
barriers for owning a shop or godowns, market fee, as the tax levied by the state,
very high incidence of market charges (as rather than fee charged for providing
large as 15% in some cases) and absence services. This is a crucial provision which
of standardized grading mechanism of acts as a major impediment to creating
agricultural produce. national common market in agricultural
• Infrastructural difficulties like limited commodities.
access of Agricultural Produce Markets » Removal of this provision will pave the
in some areas in the country, faulty way for creating competition and a
Infrastructure in Agricultural Markets national common market for agricultural
(like Cold Storage facilities) and poor commodities.
economic viability of agricultural
infrastructure projects. • Other issues:
• Market information system issues like
absence of real time informational
» Limited public investment: Public
expenditure on agricultural marketing
channels creating lag in demand signals,
sub-sector ranges 4-5 % of the total
information to farmers is limited to major
public expenses on agriculture, while
commodities and poor awareness among
expenditure on marketing infrastructure
farmers regarding new channels of
development has been less than 1 %.
information (like SMS based advisories).
• Issues related to APMCs
» As per the Economic Survey 2014–15, the Recent Reform
APMCs of the states levy multiples fees The Government of India recently passed
of substantial magnitude which are non- three Acts with an aim to reform agriculture
transparent and hence work as a source in India
of political power.
• The Farmers Produce Trade and
» They charge a market fee from buyers, Commerce (Promotion and Facilitation)
and they also charge a licensing fee from Act, 2020
the commissioning agents who mediate
between buyers and farmers.
• The Farmers (Empowerment and
Protection) Agreement on Price
» They also charge small licensing fees Assurance and Farm Service Act, 2020
from a whole range of functionaries
(warehousing agents, loading agents, etc.).
• The Essential Commodities (Amendment)
Act, 2020.
» In addition, commissioning agents
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THE FARMERS' PRODUCE levy for sale of agri-produce under the
new legislation.
TRADE AND COMMERCE
• The bill also includes a proposal for
(PROMOTION AND an electronic exchange in transaction
FACILITATION) ACT, 2020 network to ensure a smooth electronic
trade.
Main provisions:
• Farmers will be able to trade at farm gate,
• It will also promote barrier-free inter-state cold storage, warehouses, processing
and intra-state trade and commerce plants, and other locations, in addition to
beyond the physical premises of markets mandis.
notified under State Agricultural Produce
Marketing legislations. • Farmers will be able to participate in
direct selling, removing intermediaries
• Farmers will not be charged any cess or and achieving maximum price realization.
Clarification with respect to some doubt regarding the provision of the bill:
• Procurement at Minimum Support Price will continue, farmers can sell their produce
at MSP rates, the MSP for Rabi season would be announced soon.
• Mandis will not stop functioning, trading will continue here as before. Under the
new system, farmers will have the option to sell their produce at other places in
addition to the mandis.
• The e-NAM trading system will also continue in the mandis.
• Trading in farm produce will increase on electronic platforms. It will result in greater
transparency and time saving.
The Farmers (Empowerment the burden of market unpredictability

from the farmer to the sponsor. Farmers
and Protection) Agreement would be protected from Market Price
on Price Assurance and Farm fluctuations due to previous price
Service Act, 2020 determination.
Important provisions: • It will also give farmers access to new

technology, better seed, and other
• The new law would allow farmers to inputs, as well as lower marketing costs
compete on an equal footing with and increase farm income.
processors, wholesalers, aggregators, • With specific deadlines for redress, an
large retailers, exporters, and others. effective dispute resolution process has
Farmers get price guarantee right before been established.
they plant their crops. Farmers will be
entitled to a higher selling price over and • Stimulus to research and new technology
above the minimum price in the event in agriculture sector.
of a higher Market Price. • It will shift
313
Clarification with respect to some doubt regarding the provision of the bill
• The farmer will have full power in the contract to fix a sale price of his choice for the
produce. They will receive payment within maximum 3 days.
• 10000 Farmer Producer organizations are being formed throughout the country.
These FPOs will bring together small farmers and work to ensure remunerative
pricing for farm produce.
• After signing contract, farmer will not have to seek out traders. The purchasing
consumer will pick up the produce directly from the farm
• In case of dispute, there will be no need to go to court repeatedly. There will be local
dispute redressal mechanism.
THE ESSENTIAL • The price rise will be determined based

on the price in effect for the previous 12
COMMODITIES (AMENDMENT) months, or the average retail price for the
ACT, 2020 previous five years, whichever is lower.
Important provisions of the bill:
• Food regulation: The Act stipulates that Issues related to the new reforms
the central government can only regulate
• Against the Principle of Cooperative
the supply of certain food products, such
federalism: The provisions of the new
as cereals, pulses, potatoes, onions,
reforms are viewed as against the spirit
edible oilseeds, and oils, in exceptional
of cooperative federalism enshrined in
circumstances. These include (i) war, (ii)
the Indian Constitution, because matters
drought, (iii) unusual price increases, and
of trade and agriculture being the part
(iv) severe natural disasters.
of subjects on the State list, have caused
• The Essential Commodities Act of resentment in many States.
1955 gave the federal government the
• Farmers fear that the newly proposed
authority to classify those commodities
reforms will end the MSP regime. They
as essential (such as food, fertilizers, and
fear that promoting tax-free private
petroleum products). The manufacture,
trade outside the APMC mandis will make
procurement, delivery, exchange, and
these notified markets unviable, which
commerce of such vital commodities
could lead to a decline in government
may be controlled or prohibited by the
procurement itself.
federal government.
• Lack of statutory backing in the acts
• Stock limit: Any stock cap on agricultural for the MSP is a main point of concern,
produce must be based on price
particularly for cultivators from Haryana
increases, according to the Act. Only if
and Punjab, where around 65% of wheat
the following conditions are met, will a
(2019) is procured at MSP by the Food
stock cap be imposed:
Corporation of India (FCI) and state
» A 100% increase in retail price of agencies.
horticultural produce; and • Various mandis across the country
» A 50% increase in the retail price of non- bring in revenue for the governments of
perishable agrarian food items. states. The deviation of agricultural trade
towards private mandis could lead to the
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loss of states’ incomes. land. Rainwater management activities
• The lack of ability of the small and and programmes are severely limited in
marginal cultivators to recognize the terms of resources. This limits a farmer's
terms of the contract may lead to the ability to plant several crops at the same
exploitation of such farmers. time, resulting in wasteful land use.
• Critics expect that the easing of • Ineffective extension delivery systems

regulation of various food items would have also resulted in large yield gaps. In
lead to exporters, processors and traders India, yield gaps exist on two levels. For
hoarding farm produce at the time of starters, there is a disconnect between
harvest season, when prices are normally best scientific and best field practices.
lower, and releasing it later when prices The second divide is between the best
rise. This could damage food security. field practices and the average farmer's
practices.
• There exist significant yield gaps both
Some suggestions and way forward amongst and within states. Yield gaps
• Empowering State Farmers Commissions: have been found to exist in even highly
Rather than selecting for heavy productive states such as Punjab. Closing
centralization, the focus should be on these gaps provides an opportunity
empowering cultivators with the help of to enhance productivity and incomes
State Farmers Commissions suggested significantly. This further implies that
by the National Commission for Farmers, states with low productivity (or large
to bring about a speedy government yield gaps) have significant potential
response to issues. for catch-up growth in their productivity
levels.
• Develop better Agricultural Infrastructure
to Strengthen Competition: Government • Demand side factors favour the expansion
should massively fund the expansion of of area under fruits and vegetables, and
the APMC market system, make attempts livestock products. These enterprises
to remove trade cartels, and give farmers also offer better income. Staple crops
good roads, logistics of scale and real (cereals, pulses and oilseeds) occupy 77
time information. per cent of the total Gross Cropped Area
(GCA) but contribute only 41 per cent
• Consensus Building: The Union to the output of the crop sector. High
government should reach out to those Value Crops (HVCs) contribute an almost
opposing the Bills, involving farmers, similar amount to total output as staples
explain to them the requirement for do, but they occupy only 19 per cent of
reform, and get them on board. the GCA. Diversification into the fruits
and vegetables segment is also likely to
benefit small and medium farmers more
Modernizing Agriculture than large ones, according to research.
Present Situation: • New development initiatives intended
at modernizing agriculture have been
• The current production levels of the
introduced in recent years. The Pradhan
majority of crops are well below the
Mantri Krishi Sinchai Yojana (PMKSY)
global average. Low irrigation, the use of
aims to increase irrigation coverage
low-quality seeds, a lack of acceptance
while also encouraging efficient water
of improved technologies, and a lack
use. In the last four years, the area
of awareness about better agricultural
under micro irrigation has increased
practices are the main causes. Water
2.5 times. The Soil Health Card (SHC)
stress affects nearly 53% of cropped
315
scheme is currently in its second cycle, modernizing trade and commerce in
which will focus on job creation and agriculture is needed.
entrepreneurship development through • Lack of sufficient capital affects both
local entrepreneurship models. In the production and marketing; low scale is a
second cycle, 3.76 crore SHCs have been severe constraint on the implementation
distributed so far. of improved practices both in the input
and export market.
Important Objectives:
Increasing income and employment Solution/Way Forward:
by a paradigm shift that ensures food
security while maximizing value addition Productivity and efficiency
in agriculture by modernizing agricultural
• Increase irrigation coverage: By 2022-
technology, increasing productivity,
23.3, irrigation coverage must be
efficiency, and crop diversification.
increased to 53% of gross cropped area
Constraints: (GCA). Increased coverage by micro
irrigation should be the priority.
• The key cause of low crop and livestock
productivity is the use of obsolete and • Increase adoption of hybrid and
ineffective technologies. improved seeds: States must take the
lead through the following measures:
• Given the high proportion of small and
marginal farmers in Indian agriculture, » Seed development plans that are
affordability becomes a major barrier to dynamic are needed. This could be
farmers adopting new technology. determined by crop area (each season
• There are many bottlenecks preventing separately), seed rate per hectare used,
on-farm implementation of public-sector desired/targeted seed replacement rate,
technology. and crop-specific seed requirements.
Crop-by-crop requirements should be
• Agricultural research in the country is calculated based on historical patterns,
constrained by resource inadequacy,
new variety introductions, and the
regulations, and intellectual property
substitution of low-yielding varieties.
rights (IPR).
• Farmers are confused by several private • Increase Variety Replacement Ratio
and public outlets providing contradictory (VRR): To increase production, phase
details. out old seed varieties and replace them
with hybrid and improved seeds. Through
• There is a large gap between the demand
farmer participatory plant breeding
for and availability of agricultural skills,
and farm varietal trials beginning in the
preventing diversification, precision
third year of seed production, the Indian
agriculture adoption, and on-farm post-
Council of Agricultural Research (ICAR)
harvest value addition.
and State Agricultural Universities (SAUs)
• India has not caught up to the rest of the should grow climate resilient varieties of
world in terms of technology, resulting in crops suitable for the country's 128 agro-
the dominance of inefficient development climatic zones.
methods at the farm level, such as flood
irrigation. To modernize agriculture in
• Improve seed testing facilities: Both
staff and technological skills are required
India, a renewed emphasis on on-the-
to improve seed testing facilities. To
ground absorption of technology, market
maintain the quality of test results, regular
intelligence, skills and extension, and
performance monitoring is required.
316
• Reorient fertilizer subsidy policy: The in extension delivery because each KVK
new asymmetric fertilizer subsidy policy owns about 50 acres of land.
needs to put secondary and micro- • Market-led extension: Prioritize
nutrients into the same nutrient-based extension services that provide farmers
subsidy (NBS) network as phosphorus (P) with information on (i) crop selection, (ii)
and potash (K). crop demand and supply, (iii) commodity
• Control pesticide use: Align the pesticide expected price, and (iv) infrastructure
regulatory system with food safety laws to facilities for storage, transportation, and
ensure widespread adoption. Extension marketing of produce.
activities should be strengthened to • Prioritize value added extension services
ensure that best practices meet the to reduce post-harvest losses by
average farmer. transforming raw agricultural produce
• Custom hiring centres: Madhya Pradesh's to processed goods. This allows for
custom hiring centre model has proven increased price realization, which helps
to be effective in hastening the rate of farmers earn more money.
farm mechanization. This model, which
employs rural youth and encourages
entrepreneurship, should be replicated Diversification: promotion of
throughout the country.
high value crops (HVCs) and
• Investment subsidies for micro-
irrigation: Rather than providing power
livestock
and water subsidies, the DBT mode can High value crops
be used to provide investment subsidies
for micro-irrigation. • Encourage diversification to HVCs:
Create an incentive system to encourage
• Liquid fertilizer subsidies: A targeted farmers to switch from cereal crops to
subsidy on liquid fertilizers should be HVCs. Every year, the area planted with
given to promote fertigation with micro- fruits and vegetables needs to grow by
irrigation. 5%.
• Practice of hybrid technology in the
Strengthening extension systems vegetables: Vegetables can be shifted
to hybrid varieties. Hybrids currently
• Agriculture Technology Management cover 10% of the cropped area in the
Agency (ATMA) and Krishi Vigyan vegetable sector. Shifting to hybrids has
Kendras (KVKs) collaboration: To develop the potential to boost yields by 1.5 to 3
Strategic Research Extension Plans, the times and increase income significantly.
ATMA programme needs to be reoriented
• Create regional production belts: Similar
to incorporate bottom-up preparation
to the cluster-based approach, regional
at the district and block levels (SREP).
production belts for HVCs should be
This program's success is contingent on
developed and funded through the
more decentralization and autonomy.
Mission on Integrated Development
Subject matter specialists at KVKs can
of Horticulture (MIDH). Make SHCs a
use ATMA's block action plans to direct
requirement in these areas.
their research.
• Fruit rootstocks: Rootstock technology
• Public-private partnership in KVKs:
has demonstrated the ability to double
One of ATMA's guiding principles is to
production while remaining resistant to
promote PPP in extension delivery. KVKs
climate change. Efforts should be made
should incubate private sector projects
to standardize and encourage the use of
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rootstocks for fruit production. Development of Food
• Strengthen the demand for organic Processing and Technology:
products: It is proposed that targeted
efforts be made to build a market for • For decades, researchers have been
niche products. The Spice Board should working in the area of food technology.
brand spices that are exclusive to a state Nicolas Appert's invention of the canning
in order to promote the development of process in 1810 was a watershed moment.
organic spices. Food preservation methods were greatly
influenced by canning. Later, in 1864,
• Promote indigenous cattle breeding with
Louis Pasteur's study on wine spoilage
exotic breeds: To combat inbreeding,
and his explanation of how to prevent
indigenous cattle breeding with exotic
spoilage was an early attempt to
breeds should be encouraged. This would
scientifically ground food technology.
result in greater gene coverage, less
Pasteur studied the processing of alcohol,
diseases, and greater climate change
vinegar, wines, beer, and milk sourness in
resistance.
addition to wine spoilage. He invented
• Promote and grow bull mother farms: the method of pasteurization, which
By using multiple ovulation and embryo involves processing milk to kill disease-
transfer technologies, these farms can causing organisms. Pasteurization was
dramatically boost milk production a major step forward in ensuring food's
by providing farmers with cattle with microbiological protection.
increased milk potential.
• Food technology was first developed to
• Village-level procurement systems: meet the needs of the military. World
To promote dairy in states, bulk milk wars, space travel, and increasing market
chillers and facilities for high-value milk demand for a variety of goods all led to
conversion are required. At the village the growth of Food Technology in the
level, the private sector should be twentieth century. Products like instant
encouraged to establish a value chain for soup mixes and ready-to-cook things
HVCs and dairy products. like meals were designed specifically for
working women's needs.
• In addition, the food industry was
Food Processing forced to concentrate on health issues.
People began integrating food items/
• A well-developed food processing sector preparations from various regions and
with a higher level of processing reduces countries into their diets as their food
wastage, improves value addition, tastes and choices shifted. The desire to
promotes crop diversification, ensures a eat seasonal foods throughout the year
better return to farmers, promotes jobs, has grown. Using new methods, food
and increases export incomes. technologists attempted to provide food
• This segment is also capable of that was both safer and fresher.
addressing critical issues such as food • In the 21st century, food technologists
security, food inflation, and providing are challenged to produce foods
wholesome, nutritious food to the world's suitable for health and other changing
population. needs of consumers. Food technology
has provided a vast variety of safe and
convenient foods. In developing countries
this rapidly expanding and developing
field, has been helpful in improving food
318
security and has opened avenues for • Food derivatives: In the food industry,
employment at all levels. components of foods may be purified
from raw materials, such as sugar from
sugarcane or oil from oil seeds. In certain
Basic concepts in food cases, the derivative or portion may
be further refined, such as when oil is
processing methods to prevent converted to vanaspati (the process is
food spoilage are: called hydrogenation).
» Application of heat • Functional foods: These are foods that
can improve human wellbeing, such as
» Removal of water moisture
probiotics and lycopene.
» Lowering of temperature during storage
• Medical foods: These are foods that
» Reduction of pH are used in the nutritional treatment of
» Controlling the availability of oxygen illnesses, such as low sodium salt and
lactose–free milk for lactose intolerant
people.
Processed foods can be
classified on the basis of Status of Food Processing
extent and type of processing Sector
as follows:
• At 2011-12 rates, the industry accounted
• Minimally processed foods: These for approximately 8.83 percent and 10.66
are processed as little as possible to percent of Gross Value Added (GVA)
preserve the freshness of the ingredients. in the Manufacturing and Agriculture
Cleaning, trimming, shelling, chopping, sectors, respectively, in 2017-18.
slicing, and storage at low temperatures
• This industry employs almost 7 million
(refrigeration) are the most common
people.
procedures.
• Processed food exports totaled $35.30
• Preserved foods: The methods of billion in 2018-19, accounting for around
storage used do not significantly alter
10.69 percent of India's total exports.
the character of the commodity, such as
frozen peas and vegetables, dehydrated • Harvest and post-harvest losses of major
peas and vegetables, and canned fruits agricultural harvest totaled Rs.92,651
and vegetables. crore at the national level, based on
production data from 2012-13 at 2014
• Manufactured foods: In these items, the wholesale prices.
raw product's original characteristics
are lost, and certain basic preservation • India is a leading producer of food grains
techniques are used, which also include in the world. It is the top producer of milk,
the use of salt, sugar, oil, or even chemical pulses, ginger, bananas, guavas, papayas
preservatives. Pickles, jams, marmalades, and mangoes. Additionally, India ranks
squashes, papads, and wadis are some second in the world in the production
examples. of rice, wheat and several other fruits
& vegetable. However, India’s share in
• Formulated foods, such as bread, cookies, world export of food product is a meagre
ice cream, cakes, and kulfi, are made by
2.31 per cent.
combining and processing individual
ingredients to produce reasonably shelf-
stable food items.
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Constraints in the growth of agencies of the federal and state
governments. Their issue is exacerbated
the sector: by a lack of understanding and an
Some of the specific problems faced by effective information sharing and advice
food processors are: platform.
• The key reasons for higher wastages, • Setting up food processing units
higher production costs, and lower necessitates multiple clearances.
value added in the food processing • Sector-specific entrepreneurship
sector have been described as a lack of development training and incubation
effective supply chain infrastructure and services are two fields where the sector's
insufficient expansion of processing and growth is being stifled.
storage capacity commensurate with
agriculture production.
• A number of research institutes are
undertaking R&D for product, process, and
• Perishable goods, such as meat, fish, technology improvement & development.
and fruits and vegetables, have a higher There is a need for coordinated action on
rate of wastage and account for a small research and dissemination of research
percentage of total food production. Loss output to the industry.
minimization in the perishable segment
will necessitate significant investments
in farm gate infrastructure, storage and Way Forward/Solution:
cold chain infrastructure, and processing Given the need for wastage reduction,
capacity expansion. value addition and the high employment
• Despite being a major producer of potential of the sector, there is a need to
agricultural commodities, India's level substantially step up the allocations, given
of food processing and value addition the importance of the sector in terms of its
remains poor, reducing our productivity, contribution to the economy.
export output, and farmer income.
• Government initiative convergence:
• One of the major reasons for higher To establish successful procurement
agri produce wastage, especially in linkages, processing facilities, retail chains,
perishable segments, is a significant gap and export operation, coordination is
in Cold Chain capability. Individual food needed between the initiatives of the
processors cannot afford to invest in cold Ministry of Agriculture, Food Processing,
chain infrastructure because it requires a and Commerce. This will help to create
large upfront cost with a long payback synergies between various initiatives
period. such as the agriculture ministry's
• Inadequate linkage between processors, Rashtriya Krishi Vikas Yojana (RKVY),
exporters, and bulk purchasers and the Ministry of Commerce's viability gap
farmers, resulting in a mismatch between funding for cold chain and warehousing
industry needs and farmer availability infrastructure growth, and the Ministry
of agri-produce. The problem is often of Food Processing Industries' Pradhan
exacerbated by legal requirements Mantri Kisan Sampada Yojana.
governing product storage and • Promote the production of export-
movement restrictions. oriented clusters: The Agricultural and
• In the absence of an exclusive supportive Processed Food Export Development
platform at the state level, processors Authority (APEDA) has long advocated for
have trouble obtaining benefits under the creation of export-oriented clusters
programmes enforced by various with shared infrastructure. A functional,
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end-to-end cold chain system, as well as centrally sponsored National Mission on
processing facilities, should be included Food Processing).
in these clusters.
• Regulatory frameworks to address
Some Important Recent Government
rejections in export markets: To reduce
the rate of rejection in the export sector, Initiatives Related to Agriculture:
regulatory frameworks for the use • Pradhan Mantri Krishi Sinchai Yojana
of pesticides, growth hormones, and (PMKSY):
antibiotics for marine produce must be
established and enforced effectively. » During the 2015-16 fiscal year, the
• Warehouse modernization: Pledge Pradhan Mantri Krishi Sinchayee Yojana
financing at warehouses through (PMKSY) was launched with the slogan
negotiable warehouse receipts (NWR) "Har Khet Ko Paani" to provide end-to-
must be embraced and popularized as end irrigation supply chain solutions,
a viable alternative source of capital. including water sources, distribution
Guidelines for warehouse-based post- networks, and farm level applications.
harvest loans and e-NWR trading should » The PMKSY focuses on creating sources
be established by the Department for assured irrigation as well as protective
of Agriculture and Farmers' Welfare irrigation by harnessing rainwater at the
(DACFW). micro level, using "Jal Sanchay" and "Jal
• Infrastructure status for agriculture Sinchan."
value chains: Warehousing, packhouses, » PMKSY is made up of the following
ripening chambers, and cold storages, elements:
including those set up at the village
level, should all be given complete − Ministry of Jal Shakti is implementing
infrastructure status so that they can the Accelerated Irrigation Benefit
benefit from the tax breaks that come Program (AIBP).
with it. − Har Khet ko Pani (PMKSY): Ministry
• Connect production and processing: of Jal Shakti is implementing this
Fruit and vegetable collection centres programme.
at the village level should be connected − The Department of Land Resources is
to larger processing units. Engage the implementing PMKSY-Watershed.
private sector actively in the development
of processing facilities near rural periodic • National Mission for Sustainable
markets (RPMs). Agriculture (NMSA):
• Food processing: The food processing
industry should be given more attention » The National Mission on Sustainable
in order to improve value addition Agriculture (NMSA) is one of the eight
in vegetable and fruit crops. The missions outlined in the National Action
government's focus has now turned to Plan on Climate Change (NAPCC),
supporting "agripreneurs." As a result, the with the aim of supporting sustainable
agricultural sector will rapidly modernize. agriculture through climate change
adaptation measures.
• There is also a necessity for greater
involvement of state governments » The main focus is on improving agriculture
for better outreach, supervision and productivity, especially in rainfed areas,
monitoring (keeping this in view, with an emphasis on integrated farming,
government has already launched soil health management, and resource
conservation synergy. In addition,
321
NMSA has set a goal to meet national − It provides e-marketing platform at
and international obligations to the national level and supports creation of
Sustainable Development Goals (SDG) infrastructure to enable e-marketing.
and Intended Nationally Determined − This innovative market process is
Contribution (INDC). revolutionizing agriculture markets
» Rainfed agriculture, soil health by ensuring better price discovery.
management, organic farming, and other It brings in transparency and
NMSA components play an important competition to enable farmers to
role in achieving the SDGs and INDC. get improved remuneration for their
» NMSA is a programmatic intervention produce moving towards ‘One Nation
that focuses on conservation agriculture One Market’.
in order to make the farm sector more
» iMandi:
effective, healthy, profitable, and climate
responsive by promoting location-specific − It is the initiative launched by IFFCO
integrated/composite farming systems, and it is in line with the Digital India
soil and moisture conservation initiatives, initiative to encourage rural digital
holistic soil health management, and revolution.
mainstreaming rainfed technologies.
− This Social Commerce app intends to
» One of the components of Rainfed Area benefit the cultivators and to bring
Development is NMSA. the digital revolution to rural India
with the support of digital technology.
• Soil Health Card Scheme:
» Export Inspection Council (EIC):
» Launched in 2015, the scheme has been
introduced to assist State Governments − To promote ease of agricultural exports
to issue Soil Health Cards to all farmers from India, the Indian government
in the country. introduced digital initiatives by Export
» The Soil Health Cards provide information Inspection Council (EIC).
to farmers on nutrient status of their − For this, three portals have been
soil along with recommendation on developed to decrease transaction
appropriate dosage of nutrients to be time and cost in an effective
applied for improving soil health and its and transparent manner: Single
fertility. Laboratory for Accreditation and
Approvals, for Safe Food Export
• Paramparagat Krishi Vikas Yojana Traceability, and for Monitoring Export
(PKVY):
Alerts from importing regulators.
» Paramparagat Krishi Vikas Yojana is » Meghdoot:
implemented with a view to promote
organic farming in the country. − The Indian government has launched
» To improve soil health and organic matter this mobile application with the
content and increase net income of the intention to further the Digital India
farmer so as to realize premium prices. initiative, and bring technology to
cultivators.
• Important e-technology to assist the − This app will assist farmers by providing
farmers:
various forecast information relating
» National Agriculture Market (e-NAM) to humidity, rainfall, temperature,
wind speed and direction, and how to
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take care of the crops and livestock. for agriculture and agro-based industries
along the entire value/supply chain. It is
» KisanSuvidha and PusaKrishi Mobile expected to reduce wastage of agriculture
App: produce, increase the processing level,
enhance the export of the processed
− This application gives different foods, enable availability of hygienic
information with respect to Market and nutritious food to consumers at
Prices, pesticides, fertilizers, seeds, affordable prices.
weather, and agricultural machinery,
etc. » The scheme components are: Mega
Food Parks, Integrated Cold Chain and
− It distributes information related to Value Addition Infrastructure, Creation/
the latest technologies developed Expansion of Food Processing &
by the Indian Agricultural Research Preservation Capacities, Infrastructure
Institute (IARI). for Agro-processing Clusters, Creation
of Backward and Forward Linkages,
• Pradhan Mantri Kisan Sampada Yojana:
Food Safety and Quality Assurance
» PMKSY provides subsidy-based support Infrastructure, Human Resources and
to create robust modern infrastructure Institutions, and Operation Greens.
Farmer Groups Self Help Groups Individual farmers
Field collection
Centers
CC CC CC CC CC CC CC CC CC CC CC CC
Primary Processing
PPC PPC PPC Centers: Pre-cooling,
Grading, Pulping,
Sorting, waxing,
Packing, Temporary
storage
Central Processing
Importer
Value added Product
Centers: Pulping,
Mega Aseptic Packing,
Fresh Products
Chamber, Cold
Exporter Food Park storage QC lab,

Logistics center etc.
Domestic sales
CPC Domestic
Retail sales
I m a g e 16.4: M e g a F o o d P a r k
• Pradhan Mantri Fasal Bima Yojana » The government approved a dedicated

(PMFBY): Rs. 5,000 crore fund to bring more land
• Pradhan Mantri Fasal Bima Yojana area under micro-irrigation as part of its
(PMFBY) is the government sponsored objective to boost agriculture production
crop insurance scheme that integrates and farmers income.
multiple stakeholders on a single » The fund has been set up under NABARD,
platform. which will deliver this amount to states on
• Micro Irrigation Fund (MIF): concessional rate of interest to promote
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micro-irrigation, which currently has making agriculture more productive,
a coverage of only 10 million hectares sustainable, profitable, and climate
as against the potential of 70 million resilient by promoting location-
hectares. specific integrated/composite
farming systems, soil and moisture
conservation measures, comprehensive
National Mission for soil health management, efficient
water management practices, and
Sustainable Agriculture mainstreaming.
(NMSA)
• The NMSA, launched in 2011–12, aims at
enhancing food security and protection Under NMSA following ten
of resources such as land, water, deliverables are monitored:
biodiversity and genetic resources by I) Area under organic farming,
developing strategies to make Indian
agriculture more resilient to climate ii) Production of Bio-fertilizers,
change. iii) Precision Irrigation,
• Following are the impacts of Climate iv) SRI/Direct Seeded Rice from
Change on Indian Agriculture: Transplantation,
» Indian agriculture, with two-third rain- v) Crop diversification,
fed area remains vulnerable to various vi) Additional Area under plantation in
vagaries of monsoon, besides facing Arable land,
occurrence of drought and flood in many
vii) Climate Resilient Varieties (CRV)
parts of the country. Natural calamities
Identified/Released,
such as drought and flood occur
frequently in many parts of the country. viii) Identification of genotypes of crops
with enhanced CO2 fixation potential and
» Climate change will aggravate these less water consumption & Nutrients,
risks and may considerably affect food
security through direct and indirect ix) Climate Resilient genotypes with greater
effects on crops, soils, livestock, fisheries adaptation to drought, flood, salinity, and
and pests. Building climate resilience, high temperature,
therefore, is critical. x) Coverage of milch animals under ration
• From 2014-15, the National Mission balancing programme and
for Sustainable Agriculture (NMSA) xi) Establishment of bypass protein feed
has been operational, with the aim of making unit.
324
I m a g e 16.5: N ati o n a l M i s s i o n s U n d e r NA PCC
Some important scheme/initiative National Food Security Mission (NFSM) for

related to NMSA inter alia stress tolerant/climate resilient
varieties of food grains.
One of the Missions under the National
Action Plan for Climate Change (NAPCC)
is the National Mission for Sustainable
Agriculture (NMSA), which involves UPSC CSE PRELIMS
programmatic approaches such as Soil
Health Card (SHC),
Previous Years
• Paramparagat Krishi Vikas Yojana Questions
(PKVY),
Q.1) In India, which of the following can
• Mission Organic Value Chain be considered as public investment in
Development for North Eastern Region agriculture?
(MOVCDNER),
• Rainfed Area Development (RAD), 1. Fixing Minimum Support Price for
• National Bamboo Mission (NBM) and agricultural produce of all crops
Sub-mission on Agro Forestry (SMAF). 2. Computerization of Primary Agricultural
These and other programmes including Credit Societies
Prime Minister Krishi Sinchayee Yojana 3. Social Capital development
(PMKSY) are ensuring judicious use of natural
4. Free electricity supply to farmers
resources. Assistance is provided under
5. Waiver of agricultural loans by the
325
banking system can sell the produce to the government
6. Setting up of cold storage facilities by the at the MSP. It will also prevent the price
governments. from going up (indirectly)- The price will
shoot up only when the production is less,
however if the production will rise, then
Select the correct answer using the code the prices will not be very high.
given below. • Option 2 is correct: Even Though factors
(a) 1, 2 and 5 only such as climatic shocks determine rice
(b) 1, 3, 4 and 5 only prices and production in the short run,
(c) 2, 3 and 6 only the future scenario of rice prices must
(d) 1, 2, 3, 4, 5 and 6 be based on long-term estimates of rice
Ans. (c) demand and supply. Trading results in an
increased demand in the global markets,
• Explanation: Here, Public Investment which also impacts the price of rice in
implies to the formation of either physical India.
infrastructure or intangible capital.
Therefore, in this context, investment • Option 3 is correct: Low stock levels
is understood as either infrastructure constrain the capability to buffer the
-related capital as presented in options price rise causing from other factors.
2 and 6 or social capital as mentioned in • Option 4 is correct: Subsidies lower the
option 3. Loan waivers and subsidies are costs for the ultimate consumer.
not investments.
Q.2) Which of the following factors/
policies were affecting the price of rice in 1. In the case of all cereals, pulses and
India in the recent past? oilseeds, the procurement at Minimum
Support Price (MSP) is unlimited in any
1. Minimum Support Price State/UT of India.
2. Government's trading 2. In the case of cereals and pulses, the
3. Government's stockpiling MSP is fixed in any State/UT at a level to
which the Market Price will never rise.
4. Consumer subsidies
Select the correct answer using the code are correct?
given below.
(a) 1 only
(a) 1, 2 and 4 only
(b) 2 only
(b) 1, 3 and 4 only
(c) Both 1 and 2
(c) 2 and 3 only
(d) Neither 1 nor 2
(d) 1, 2, 3 and 4
Ans. (d)
Ans. (d)
• Explanation: Statement 1 is not correct:
• Explanation: Option 1 is correct: MSP Though the government announces
results in a deviation of stocks from MSP for 23 crops, effective MSP linked
the open market, therefore, driving up procurement takes place mostly for rice,
the price for the ultimate consumers. In wheat, and cotton. The procurement is
addition to this, MSP prevents the prices also limited to a few states. Because of
from going down (directly). Price will not limitations on the procurement side (both
go lower than the MSP. The cultivator state-wise and crop wise) and even after
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having an open-ended procurement at cultivation and production, and Market
MSP, all cultivators do not obtain benefits Prices for the determination of MSPs.
of an increase in MSP. MSP fixed for each crop is uniform for the
• Statement 2 is not correct: CACP entire country. But there is no instance
considers numerous factors like the of MSP being fixed in any State/UT at a
productivity of crops, the cost of level to which the Market Price will never
rise.
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CHAPTER - 17
INFRASTRUCTURE
Introduction/ Types of
Definition Infrastructure
At times, the infrastructure is divided into
• Infrastructure implies to the basic two categories: economic and social.
systems and services that a nation or
organization requires in order to function • Economic: Infrastructure associated
appropriately. with energy, transportation and
• Infrastructure is the lifeline of an economy. communication are included in this
Whatever the primary driving force of category. Economic Infrastructure
an economy is, whether it is primary, is directly linked with the economic
secondary, or tertiary, a suitable level of development of a country or an
infrastructure is needed for growth and organization. it includes the basic
development. amenities and services that directly
influence and benefits the production
• In a labor rich country like India, process economy distribution.
infrastructure itself is a huge employment
provider. • Social: Those related to education,
health and housing are included in this.
• Infrastructure supports the key areas of Indirectly, social infrastructure aids the
manufacturing and agricultural activity, country's economic growth. For example,
as well as domestic and international the education sector does not directly
trade and commerce. contribute to a country's economic
• These services consist of roads, railways, development. However, it helps indirectly
ports, airports, dams, power plants, oil by providing students with high-quality
and gas pipelines, telecommunication education, resulting in the development
facilities, the country's educational of physicians, scientists, engineers, and
system, which includes schools and technologists.
colleges, health system, which includes
hospitals, sanitary system, which includes
clean drinking water facilities, and
monetary system, which includes banks,
Importance/
insurance, and other financial institutions. Relevance of
• There are three sectors which are
considered as the infrastructure, Infrastructure:
universally around the world
namely power, transportation, and • Infrastructure is the supporting framework
communication. that enables a new industrial economy to
operate efficiently.
• Modern agriculture relies heavily on
it for the efficient and large-scale
transportation of seeds, pesticides,
fertilizers, and produce through modern
328
highways, railways, and shipping facilities. infrastructure is available.
• Agriculture has become increasingly • On the other hand, small businesses
reliant on insurance and banking services are distributed across the economy and
in recent years as a result of the need to must rely on the availability of general
operate on a large scale. infrastructure facilities. As a result,
• It should be stressed that good constructing general infrastructure
infrastructure is crucial not just for faster facilities aids small businesses in
economic growth but also for inclusive competing efficiently with large-scale
growth. When we talk about sustainable firms, and being labor-intensive, creates
development, we mean that the benefits a large number of job prospects for
of growth are shared by the majority of a employees. This will aid in the reduction
country's people. As a result of inclusive of poverty in developed countries.
development, poverty will be alleviated, • In addition to the obvious correlation
and income inequality will be reduced in between water and sanitation and
the country. health, the quality of transportation
• Micro, small, and medium enterprises and communication systems will affect
(MSME) are distributed across the access to health care. Improvements
economy, and their development and in water supply and sanitation have a
growth necessitate access to high-quality, significant impact by reducing morbidity
dependable infrastructure facilities in (meaning the likelihood of being ill)
order to compete effectively with large- from major waterborne diseases and
scale enterprises, which can also develop reducing the incidence of disease when it
some of their own infrastructure, such occurs. Air pollution and transportation-
as small power plants or generators. related safety hazards have an effect
Furthermore, large-scale companies on morbidity, particularly in densely
may position themselves near ports and populated areas.
transportation hubs where the requisite
Government Public Private

Initiatives and Partnerships
Schemes (PPP)
Growth Drivers
International
Infrastructure Investment
Needs (FDI & FII)
Housing
Development
I m a g e 17.1: G r ow t h drivers for Infrastructure
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THE STATE OF of oil equivalent (kgoe), compared to
1860 kgoe globally. In 2015, per capita
INFRASTRUCTURE IN INDIA energy consumption in the United States
ENERGY and China was 6800 kgoe and 2170 kgoe,
respectively.
• There are both industrial and non- • In the power sector, India's total installed
commercial energy sources. Coal,
capacity is about 334 GW, with 62 GW
petroleum, and energy are industrial
of renewable energy. Energy-related sub-
sources since they can be purchased and
sectors continue to face difficulties.
sold. Firewood, farm waste, and dried
dung are also non-commercial energy • In terms of energy supply, India is still
sources. Since they are found in nature/ heavily reliant on petroleum imports
forests, they are non-commercial. to meet its needs. In 2017, we imported
about 82 percent of crude oil and 45
• Solar energy, wind energy, and tidal power percent of natural gas.
are some examples of non-conventional
energy sources. Since India is a tropical • There are still approximately 16000 km of
country, it has virtually unlimited capacity gas pipeline networks in use today.
for generating all three forms of energy if • In the coal industry, the government only
appropriate cost-effective technologies recently approved commercial mining
are used. in 2018. Furthermore, power companies,
especially state government utilities,
continue to face financial difficulties.
Some of the Important objectives/

targets of Government
The government's new energy policies seek
to "provide affordable, secure, renewable,
and modern energy to all." It also expects
to pass through the following checkpoints
along the way:
• By 2022, produce 175 GW of renewable
energy potential.
• By 2022-23, cut oil and gas imports by ten
I m a g e 17.2: C o n s u m pti o n o f E l e c t r i c it y by
percent.
S e c to r s i n I n di a (2017-18) • Continue to reduce GDP-based emission
intensity in a way that will assist India in
achieving its 2030 INDC target.
Present status:
• As of 2020, Coal dominates India's
energy mix, accounting for around 75.9 Constraints:
of total energy consumption, led by
renewable energy (17.1%), Gas and Oil • The constraints on achieving the
(3.8% and nuclear energy (3.2%). India is milestones set for 2022-23 can be divided
the world's third-largest user of energy. into two broad categories: overall energy
In 2017, however, its per capita energy sector and sub-sector specific.
consumption was about 625.6 kilograms • Overall energy Subsidies and taxes:
330
» Various subsidies and taxes distort the Solution/Way forward:
energy market and encourage the use of
inefficient fuels over efficient fuels, as well • Promote smart grid and smart meters.
as making Indian exports and domestic • All PPAs, including those with state-
output uncompetitive since energy taxes owned power companies (GENCO’s),
are not covered by the GST, and therefore should be competitively bid. To promote
no input credit is provided. flexible capacity for peak demand and
intermittency, a capacity market should
be created.
Solution/way forward: • AT&C losses may be minimized by
• Oil, natural gas, electricity, and coal privatizing state delivery utilities and/or
should be subjected to GST to allow for using a franchisee model.
input tax credit. • Discoms in rural areas which use
• To ensure a level playing field, all sources a franchisee model for their retail
of energy should have the same GST rate. business and set minimum performance
requirements, such as the use of
• End-consumers should be given all decentralized generation and storage
types of subsidies as practical subsidies, systems for local reliability and resilience.
allowing them to select the most
appropriate and cost-effective energy • Regulatory bodies must be strengthened
source for them. even further and made fully autonomous.
• Instead of offering separate subsidies
for fertilizers, energy, crop insurance,
Power and other products, an upfront subsidy
per acre of land through Direct Benefit
• Inefficient plants are still working, whereas Transfer (DBT) could be considered for
more modern plants are underutilized. agriculture.
• Distribution Companies (DISCOMs) use • Encourage the use of solar pumps for
load shedding to mitigate losses as the agricultural purposes. The farmer's
difference between average cost of supply surplus power should be purchased by
(ACS) and average revenue realized (ARR) local utilities.
remains due to high aggregate technical
and commercial (AT&C) losses. • DISCOMs may be fined for load shedding.
• Although legally independent, Regulatory • Ensure effective enforcement of a cap on
Commissions are unable to fully regulate cross subsidy and open access. It is also
DISCOMs and fix rational tariffs. essential to remove high open access
charges.
• Unmetered power supply to farming
provides no incentive to farmers to use • Actively encourage cross-border electricity
electricity efficiently. exchange in order to maximize the use of
current and future generation assets.
• There is a lot of hidden demand because
of unreliable supply and load shedding. • Introducing performance-based rewards
into the tariff system is a good idea.
• Owing to their poor financial health,
state power utilities are unable to invest • To control power demand, 100 percent
in system upgrades, and the industrial/ metering, net metering, smart meters,
business tariff and cross-subsidy regime and metering of electricity supplied to
have harmed the productivity of the agriculture must be enforced.
industrial and commercial sectors.
331
Oil & Gas encourage compressed natural gas
(PNG) in rural areas.
• There is no nondiscriminatory access • Create strategic reserves through various
to the gas pipeline network for private
policy options.
and public sector firms, and the lack of
market-driven gas prices for old fields
discourages further development.
Coal
• The gas pipeline infrastructure is also
inadequate. • Land for coal mining is becoming scarce,
and there is a move toward expanding
Solution/Way forward: opencast mining while discouraging
• Ensure a single carrier and unrestricted underground operations, including
access to gas pipelines. for higher-quality coal reserves. This
exacerbates the land scarcity problem.
• Land can be leased by the government
to oil marketing companies (OMCs) for • There is no demand for coal that is
energy crops, similar to how ‘solar parks' competitive.
can be extended to biofuels.
• Separate the Petroleum and Natural
Gas Regulatory Board (PNGRB) Solution/way forward:
developmental and legislative roles. • Full comprehensive exploration as quickly
• Ensure that the National Gas Grid is up as possible using exploration-cum-
and running as soon as possible. mining leases based on a production/
revenue sharing model.
• Promote city gas delivery so that natural
gas can be piped in (PNG). • Make it the duty of concerned state
governments to provide the land required
• Review contract terms and provide the
for mining.
necessary flexibility to render stranded
oil and gas assets operational. • Commercial coal mining should be
operationalized as soon as possible.
• Enhance production from ONGC and
OIL's existing fields with cutting-edge
technology within a system of production
enhancement contracts. Renewable energy
• Take into account consumer rates for • High energy prices cause old power
blocks that are not viable due to low gas purchase agreements (PPAs) to be
prices. reneged on, eroding their sanctity. This
• Provide for shared infrastructure for creates confusion about power use,
evacuation of oil and gas from small and putting future investments at risk.
scattered onshore and offshore fields. • Generating flexibility and balance
• 2G bio-ethanol ventures should be criteria for renewable energy integration
designated as a "priority area." are emerging as major issues.
• The government should provide 2G • In the production of biomass power, there

ethanol project developers/technology are supply chain problems.
partners with feasibility gap funding/
financial assistance.
Solution/Way forward:
• Declare regasified liquefied natural gas
(R-LNG) as a transportation fuel and • Provide a method for balancing the
332
power grid at a low cost (gas-based, energy consumption norms.
hydro or storage). • It is necessary to ensure greater
• Renewable purchase obligations (RPOs) participation of energy service
should be strictly followed, and interstate companies (ESCOs) through the use of
renewable energy purchases should be appropriate financing models with a risk
made simpler. sharing mechanism, especially by public
• The costs of balancing interstate sector banks.
transmission systems (ISTS) linked power • States should incorporate the second
plants should be socialized over the edition of the Energy Conservation
entire grid, on the lines of the point of Building Code (ECBC) into their building
connection (PoC) or a similar mechanism, codes and ensure that it is implemented
by central level agencies like the Central more quickly.
Electricity Regulatory Commission or the • Encourage the use of LED lighting
National Load Dispatch Centre. in government buildings and the
• In rural areas, decentralized renewable replacement of old appliances with
energy combined with the discoms' grid five-star appliances. Lower-income
will provide reliability. households and small businesses should
• Solar PV + biomass hybrid renewable be the priority of the UJALA (Unnat Jyoti
energy systems should be investigated. by Accessible LEDs for All) programme.
Subsidies for consumers are required to It is suggested that the number of
encourage commercial biogas. appliances protected by the Standards
and Labelling (S&L) programme be
increased.
Energy efficiency • Expand and deepen the Perform,
Achieve, and Trade (PAT) programme;
• Restricted technological capacities, high make Energy Saving Certificate trading
initial capital investment, and industry under the PAT scheme more successful
and policy concerns have all hindered by enforcing stringent penalties against
energy conservation efforts. defaulters.
• Energy efficiency investments are • BEE should develop cluster-specific
unattractive for investors due to high programmes for energy intensive
transaction costs (which include industries in the MSME sector to
appointing suitable consultants and implement energy efficient technologies.
vendors for execution) in relation to
• For new power plants, the Forum
project size, particularly in the micro,
of Regulators and State Electricity
small-scale, and medium-scale enterprise
Regulatory Commissions (SERCs) should
(MSME) market.
set lower heat rate standards. Plants
that consume more than the threshold
amount of energy should be phased out
Solution/Way forward: over time.
• State designated agencies (SDAs) should • Encourage people to use public
be more empowered and equipped transportation. Electric public
with sufficient resources to enforce EE transportation networks may be
related programmes. The Bureau of transformed in a timed manner. Expand
Energy Efficiency (BEE) should release a the corporate average fuel efficiency
white paper on its 5-year plan on energy requirements (CAFE) to include other
efficiency in different sectors and define vehicle segments besides passenger cars.
333
UDAY scheme
Without improving the performance of the electricity distribution companies (DISCOMs)
of the state governments efforts towards 100 per cent village electrification, 24x7 power
supply and clean energy cannot bear fruit. For financial and operational turnaround
of DISCOMs and to ensure a sustainable permanent solution to the problem, the UDAY
(Ujwal DISCOM Assurance Yojana) was launched by the GoI, in November 2015.
The salient features of the scheme are as given below:
• States shall take over 75 per cent of the DISCOM debt—50 per cent in 2015–16 and
25 per cent in 2016–17. This will reduce the interest cost to 8–9 per cent, from as high
as 14–15 per cent.
• GoI will not include the debt taken over by the states in the calculation of fiscal
deficit of the States in the financial years 2015–16 and 2016–17.
• States will issue non-SLR including SDL (State Development Loan) bonds in the
market or directly to the respective banks and Financial Institutions (FIs).
• DISCOM debt not taken over by the State shall be converted by the Banks and FIs
into loans or bonds with interest rate not more than the bank’s base rate plus 0.1
per cent. Alternately, this debt may be fully or partly issued by the DISCOM as State
guaranteed DISCOM bonds at the prevailing market rates which shall be equal to
or less than bank base rate plus 0.1 per cent.
• States to take over the future losses of DISCOMs in a graded manner.
• States accepting UDAY and performing as per operational milestones will be
given additional/priority funding through Deendayal Upadhyaya Gram Jyoti
Yojana (DDUGJY),Integrated Power Development Scheme (IPDS), Power Sector
Development Fund (PSDF) or other such schemes of Ministry of Power and Ministry
of New and Renewable Energy. States not meeting operational milestones will be
liable to forfeit their claim on IPDS and DDUGJY grants.
• Such States shall also be supported with additional coal at notified prices and, in
case of availability through higher capacity utilization, low-cost power from NTPC
and other Central PSUs.
• UDAY is optional for all States. However, States are encouraged to take the benefit
at the earliest as benefits are dependent on the performance. [By March 2017, most
of the states/UTs had joined the scheme.]
• Present Situation:
Roadways/Surface
» In India, the road transport sector
Transport accounts for the bulk of passenger and
freight movement.
• India has the world's second largest » The total number of registered vehicles in
road network, with around 52.32 lakh
India increased from 58.9 million in 2001-
kilometers of National Highways, State
02 to 182.4 million in 2012-13, a CAGR of
Highways, and other roads. The country's
almost 11% during this time. Access to
NHs cover a total distance of 1,00,475 km
and the efficiency of public transit, on the
and carry about 40% of all traffic.
other hand, must continue to improve.
334
» Increased use of personal vehicular existing length of the NH network is
transportation in urban areas causes 1.22 lakh km, which is 2.2 per cent of
traffic congestion, longer travel times, and the country’s entire road network of
higher levels of air and noise pollution. 56.03 lakh km. The existing NH length
» Expansion of the public transport fleets with 4-lane and above NH standards is
has been hampered by the short supply 27,658 km (22.59 per cent), and that with
of vehicles. The total demand for buses single/intermediate lane (SL/IL) width is
was approximately 3.40 lakh in FY 2017, 32,395 km (26.46 per cent); the remaining
while the availability/supply was only 62,379 km (50.95 per cent) is of 2-lane
about 1 lakh. NH standard. Further, national and
state highways are already overstrained,
• Some of the government objective: carrying more than 65 per cent of the
Enhancing connectivity and internal road traffic. National highways carry 40
and external trade needs improving the per cent of India’s total road traffic.
coverage and efficiency of roads and » Inadequate funds for maintenance of
highways. We should reach the following existing infrastructure: The annual outlay
targets by 2022-23. earmarked for maintenance and repair
• Expand the road network to improve of national highway stretches is only
connectivity: about 40 per cent of the funds required.
This is one of the main reasons for the
» Complete 24,800 km of Bharatmala inability to take up timely maintenance
Phase-I roads by 2021-22, including 2,000 interventions.
km of coastal and port connectivity » Accidents and safety concerns: Road
roads. safety is a major issue in the country
» Finish Phase I of the Pradhan Mantri with nearly 400 road related deaths
Gram Sadak Yojana (PMGSY), with being recorded daily. In 2013, India had
quality assurance at each point. an accident death rate of 18.9 for every
» Raise the length of national highways 100,000 people, higher than other South
(NHs) from 1.22 lakh km to 2 lakh km by Asian countries such as Bangladesh (11.6),
2022-23. Mauritius (12.2) and Sri Lanka (13.7).9 At
least a part of the fatalities is because of
− Increase the width of single/ the poor quality of roads.
intermediate lane (SL/IL) highways » Cost escalation for roads: Delays in
and reduce the length of SL/IL acquiring land can affect project costs as
highways to less than 10% of total the average cost of land has escalated
length by 2022-23, down from 26.46 from Rs. 0.80 crore per hectare during
percent now. 2012-13 to Rs. 3.20 crore per hectare
during 2017-18.
» Improve the regulatory framework for
roads to achieve better compliance, • Solution/Way forward
seamless connectivity, road safety and
quality. » Increase connectivity by expanding the
» As a signatory to the Brasilia Declaration, road network
reduce the number of road accidents and
− Improve State/UT Public Works
fatalities by 50 per cent by 2020.
Departments (PWDs) implementation
• Constraints: capacity through institutional
strengthening and training.
» Capacity of existing highways: The − By 2022-23, each city with a population
335
of more than 1 million people would management systems.
need a dedicated Metropolitan Urban − Develop new materials/techniques
Transportation Authority. for construction.
» Improve road maintenance and safety » Increase the capacity and reach of
public transport
− Implement a maintenance
management framework to protect − Improve public transportation,
NH properties (MMS). Set aside rural transportation, and last-mile
money from the Central Road Fund connectivity by transforming state
(CRF) for upkeep. road transport undertakings (SRTUs).
− India should begin by allocating − Additional funding for public
10% of its annual budget to road transportation and the creation
and highway maintenance in order of interoperable systems will help
to achieve the developed world expand the reach and capacity of
standard of allocating 40% to 50% public transport.
of the budget to road and highway
maintenance. » Expand the reach of the electronic toll
− Incorporate harsh penalties for low collection (ETC) system
operations and maintenance (O&M)
efficiency into contracts in all contract − Make the ‘FASTag' charging system
modes. more effective.
− Work with stakeholders and
» Streamline land acquisition concessionaires (for PPP toll plazas)
» Skill development to ensure that all toll plazas are
equipped with the required ETC
− Develop road construction vocational infrastructure.
training courses in Industrial Training
Institutes (ITIs). » Complete targets for rural connectivity
− Collaborate with original equipment
manufacturers and other stakeholders
to create commercial vehicle driver Railways
training centres (DTCs).
− Introduce technologically advanced • Indian Railways (IR) constantly faced
approaches such as the automated number of challenges. For speedy
driving testing system to ensure capacity creation, IR recognizes the
stringent testing of driving skills importance of enhancing project
before issuing driving licenses. execution capabilities. Considering the
enormity of the resources required for
» Increase emphasis on research and plan investment in rail infrastructure, and
development given the limitation of public resources,
efforts are on by IR to generate sufficient
− Set aside 0.1 percent of the Ministry of internal surplus, and tap innovative
Road Transport Highways operating methods of financing, to meet these
budget for research and development. needs.
− Create a national transportation data • The focus is on prioritizing investments
centre for applied road analysis. in vital areas like dedicated freight
− Enhance R&D on IT-enabled traffic corridors, high speed rail, high capacity
rolling stock, last mile rail linkages and
336
port connectivity, and attracting private • By 2022-23, achieve “100 percent”
and FDI investments to supplement electrification of broad-gauge track, up
available resources. from 40% in 2016-17.
• Increase freight and mail/express train
average speeds to 50 km/hr (from around
Present situation: 24 km/hr in 2016-17) and 80 km/hr (from
around 60 km/hr), respectively.
• The Indian Railways (IR) is the fourth
largest network in the world in terms of • Increase the capability of current railway
route km (67,368 km in Financial year infrastructure.
2017). • By 2022-23, increase infrastructure
• It is also the world's largest passenger construction speed from 7 km/day to 19
(1,150 billion passenger kilometers in km/day.
Financial year 2017) and fourth largest • By 2022-23, achieve “100 percent”
freight (620 billion net-tonne kilometers electrification of broad-gauge track, up
in Financial year 2017) railway system. from 40% in 2016-17.
In Financial year 2017, 13,329 passenger
trains carried over 22.24 million • Increase freight and mail/express train
passengers a day, almost the entire average speeds to 50 km/hr (from around
population of Australia, and 1.1 billion 24 km/hr in 2016-17) and 80 km/hr (from
tonnes of freight was transported. around 60 km/hr), respectively.
• Despite its extensive reach and the

substantial growth in freight load,
the modal share of railways in the
Constraints:
transportation of surface freight has • Congested networks: Over-stretched
declined from 86.2 per cent in 1950-51 infrastructure with 60 per cent plus routes
to 33 per cent in 2015, in part due to a being more than 100 per cent utilized,
shortfall in carrying capacity and lack of leading to a lessening in average speed
price competitiveness. of passenger and freight trains.
• Because passenger and freight traffic • Organizational structure: Delays in
in India share the same tracks, we have decision making, insufficient market
not been able to substantially increase orientation and long project approval
speed or capacity in relation to global durations lead to slow turnover times and
benchmarks. delays in the implementation of railways
• Railway spending as a percentage of projects.
total transportation spending dropped • Internal capital generation: Low non-
from 56 percent in 1985-90 (7th plan) to fare revenues and high freight tariffs have
30 percent in 2007-12. (11th plan). resulted in a freight share that is less than
ideal. The decline in the share of railways
has been attributed to the lower relative
Important government cost of transporting freight by road. Low
and stable passenger segment prices
objective: have also led to low internal resource
• Increase the capability of current railway generation.
infrastructure. • Protection and poor service delivery: In
• By 2022-23, increase infrastructure recent years, there have been a range
construction speed from 7 km/day to 19 of incidents and safety problems in the
km/day. IR. Train and station cleanliness, train
337
departure/arrival delays, food quality, their manufacture and maintenance to
and ticket booking difficulties are all ensure the safety of users in compliance
major concerns. with the General Rules of IR.
• Efficiency of terminals: Poor terminal • Separate suburban commuter transit
facilities lengthen loading and unloading
from the rest of the network and create
times. Eighty per cent of railway loads
a light rail system in all major urban
come from terminals. The functioning of
areas under the jurisdiction of local
terminals needs to be strengthened to
governments.
improve rail freight.
• Rationalize fare structures and subsidies,
• Economies of scale: The shortage of and monetize assets to generate
scale economies especially impact
revenues:
management quality and system
accountability. » Reconsider IR's pricing model in order
to keep the passenger and freight
segments viable. Tariffs for freight should
Solution/Way forward: be comparable with those for road
transport.
• Better use of existing infrastructure to
address congestion » Using railways to monetize land resources,
especially by developing non-railway
• Boost capacity efficiency by prioritizing revenues such as retail or other activities.
ongoing projects. These ventures will
produce more revenue if they are » Invest in infrastructure, modernize
completed on time. Simultaneously, we stations, and lease space to private
must preserve and update the current players to boost retail revenues from
network to ensure that supply meets railway stations.
demand.
• Enhance safety of trains to reduce
• Ensure that the dedicated freight accidents and modernize stations:
corridors (DFCs) and the Mumbai-
Ahmedabad High Speed Rail (MAHSR) » In 2017-18, the government formed the
are completed on time, especially by Rashtriya Rail Sanraksha Kosh (RRSK) to
completing land acquisition for the DFCs resolve critical safety issues.
in a timely manner.
» To avoid collisions, remove level crossings
• Ease organizational rigidity through and cattle crossings, and fence railway
structural reforms: tracks in areas with high levels of traffic.
» Consider allowing the private sector to » Implement the 22 suggestions of Dr.

own and operate freight terminals, as well Kakodkar's High-Level Safety Review
as locomotives and rolling stock, under Committee.
a straightforward, neutral (non-railway) » By-pass crossings and grade separations
and equitable regulatory framework. should be upgraded and kept in good
This would boost efficiency while also working order.
attracting private investors and players.
• Enhance the ease of doing business:
» Consider transferring coach and
locomotive manufacturing and repairs » Set up an independent homologation
to private players. However, since human and standardization agency to adopt
safety is involved in the case of coaches new railway technology and improve
and wagons, IR should continue to have the speed and reliability of the railway
regulatory and technical control over network.
338
» An internationally accepted liability
regime for domestic and international Civil aviation
transportation and (ii) common carrier
status to all rail-based service providers. • Airport infrastructure development
continues to be a matter of concern.
» Ensure that there are no interim Upgradation of many airports, including
amendments to tariff and non-tariff
construction of new terminals, for
regulations to improve legitimacy.
improving air navigation services the
» To increase asset efficiency and Airport Authority of India (AAI) installing
utilization, use technology to plan and the new ATS automation system.
route freight industry.
180
158.4
160
134.9
Number of Passengers (Million)
140
115.8
120 103.7
98.9 97.9
100 88.9
71.6 77.4
80 68.4
60
40
20
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
International Passengers Domestic Passengers Total Passengers
I m a g e 17.3: C i v i l A v i ati o n S tati s ti c s
Present situation: • India is also catching up with other

leading aviation markets in terms of
• In 2014, India's civil aviation sector market penetration.
contributed USD8.9 billion to the
• Domestic passenger traffic amplified at
country's GDP, supporting 1.31 million
a CAGR of almost 10 per cent between
direct, indirect, and induced aviation
2007- 08 and 2016-17 and international
employment.
passenger traffic grew at a CAGR of 8.07
• In 2016, China's domestic air travel per cent during the same period.
demand was twice that of the United
States.
• The Ministry of Civil Aviation's regional Important government
connectivity scheme, UDAN, is a 10-year objectives:
initiative to facilitate sustainable regional
development and make flying accessible • Make travel more affordable so that
to the general public. It will improve domestic ticket sales can rise from 103.75
access to the country's under served and million in 2016-17 to 300 million by 2022.
unserved airports. • Increase air cargo handling from 3.3
339
million tonnes in 2017-18 to 6.5 million • High cost to passengers and of air cargo:
tonnes in 2018-19.
» Tariff determination: All airports must
• Raise the maintenance, repair, and move from a single to a hybrid structure,
overhaul (MRO) industry from USD 1.8
according to the Ministry of Civil Aviation.
billion to USD 2.3 billion in 2017.
While this is advantageous because it
• Boost airport capacity by more than encourages infrastructure investment, it
five times in order to accommodate one increases airline and passenger prices.
billion annual trips.
» Taxes on aviation turbine fuel (ATF):
• By means of the Regional Connectivity ATF is relatively expensive in India due
Scheme, Ude Desh Ka Aam Naagrik, to high taxes and a lack of competition
increase the availability and affordability among providers. Since it is not part of
of regional air connectivity and revive/ the GST network, there are regional price
upgrade 56 underserved airports and 31 differences. Because of high central and
underserved helipads (RCS-UDAN). state taxes, the price of aviation fuel in
• Ensure that airport tariffs, fuel taxes, India may be up to 60% higher than in
landing fees, passenger facilities, freight ASEAN and Middle Eastern countries.
fees, and other fees are calculated in a India has a 45 percent fuel cost as a
timely, equitable, and transparent manner. proportion of operating costs, compared
to a global average of 30 percent.
» Incidence of GST on Aircraft Leases and
Constraints: Spare Parts: GST of 5 per cent is applied
on aircraft lease rentals; GST ranges
• Infrastructure and capacity: between 5 per cent and 28 per cent on
aircraft engines and spare parts. This
» As India's civil aviation sector grows, also raises costs for the sector.
airspace, parking bays, and runway
slots will become increasingly scarce in • Aviation safety: Despite the fact that
the coming years, especially at metro the amount of aviation safety violations
airports. in 2017 (337) is down from 2016 (442), the
» Capacity and infrastructure constraints overall number remains large.
could reduce efficiency and safety while
also having a negative impact on the
economy. Solution/Way forward:
• Skilled workers: • Enhance aviation infrastructure
» According to a Ministry of Civil Aviation » Complete the planned airports under the
Report, Indian aviation could sustain UDAN initiative as soon as possible. The
1.0 to 1.2 million jobs directly by 2035. rehabilitation of 50 under-served and
This means that over the next ten years, un-served airports/airstrips is scheduled
approximately 0.25 million people would to be completed.
need to be educated. » In addition to completing two new
» Shortage and gaps in availability of airports in Delhi and Mumbai by 2022, the
industry-recognized skills, from airline infrastructure capacity of the world's ten
pilots and crew to maintenance and busiest airports should be substantially
ground handling personnel, could increased.
constrain the growth of different
segments of the sector. • Increase investment in the sector
340
through financial and infrastructure benchmarks.
support: » Strengthen regulatory capacity with
respect to public private partnerships and
» Increase aircraft parking infrastructure
streamline the judicial review process to
and facilities at metro airports.
ensure timely implementation of DGCA’s
» Create additional parking hubs at decisions.
suitable locations, accessible through
short haul flights, to accommodate
» Meet the regulatory and security
requirements prescribed by the
additional aircraft.
International Civil Aviation Organization
» Monetize vacant real estate near AAI (ICAO) at all times. Additional skilling
airports in every major centres of traffic of personnel may be required for this
to increase non-aeronautical revenues. and the DGCA should adequately build
the capabilities of its staff to ensure
• Address shortage of skilled manpower: compliance.
» Promote cooperation between original • Prioritize Aviation Safety:
equipment manufacturers (OEMs),
industry, and educational institutions » Shift the attention to preventing and
to teach the most up-to-date concepts avoiding injuries and incidents.
in the aviation industry, such as
management principles, aviation
» Security breaches should be viewed with
zero tolerance.
information technology, and so on.
» Establish a manufacturing ecosystem in » For an effective aviation safety oversight
scheme, the DGCA should be granted
the country by establishing long-term
autonomy.
plans for advanced research in aviation
technologies. » For all aviation-related transactions,
requests, and grievances, the DGCA
» Facilitate greater involvement of the
should develop a single-window system.
private sector in sponsoring aviation
institutions, industrial training, and R&D
projects.
• Promote Air Cargo growth:

Ports, Shipping, and
» Using the National Air Cargo Community
Inland Waterways
System (NACCS) network, create an Present situation:
integrated digital supply chain or e-cargo
gateway. • Ports and Shipping:
» Promote "Fly-from-India" by creating » India has a 7,500-kilometer coastline,
trans-shipment hubs. Ease the regulatory making it one of the world's largest
environment for airports. peninsulas, and ports handle roughly
» Deregulate the aviation industry even 90% of the country's foreign trade by
further and help India increase passenger volume and 70% by value. On India's
and freight traffic. coast, there are 12 major ports and 205
minor ports.
» Adopt a consistent model for assessing
tariffs in order to reduce passenger costs. » Despite this, roads and railways remain
the most popular modes of cargo
» Consider putting aviation turbine fuel transportation.
(ATF) under the GST umbrella to match
taxation and pricing systems with global » Despite being the most cost-effective
341
and efficient mode, water transport programme, emphases on modernizing
accounted for 6 per cent of freight and developing ports, enhancing
transport in India in 2016-17. port connectivity, supporting coastal
3.5
3
communities, and stimulating port-linked
3
in Industrialization.
2.5
» Sagarmala intends to reduce the logistics
Rs/Tonne Km
1.5
1.5 costs for foreign and domestic trade,
1
leading to an overall cost savings of INR
35,000 to INR 40,000 crore annually by
0.5 0.3
0.15
2025. It moreover aims to double the
0
Road Rail WaterwaysP ipelines share of water transportation in the
I m a g e 17.4: V a r i o u s M o d e s of T r a n s p o r tati o n modal mix.
» The Ministry of Shipping’s Sagarmala
Port Modernizatio
n Port Connectivity Port-led Coastal
Capacity New road/rail Industrializatio
n Community
augmentation conectivity Industrial clusters Development
New ports Up-gradation of Coastal Economic Skill development
Efficiency roads/railway Zones Coastal tourism
improvement Coastal shipping Maritime clusters projects
Inland water Development of
transport fishing harbours,
Logistics parks fish processing
centres
I m a g e 17.5: P o r t L e d D e v e l o p m e n t
• Inland waterways: NWs through the Central Road Fund

(CRF).
» Inland Water Transport (IWT) transports
less than 2% of India's organized freight
» The ministry is augmenting the capacity
of NW-l under the 'Jal Marg Vikas' project.
and very little passenger traffic.
» The annual freight volumes carried
on inland waterways using National Important government
Waterways (NW-1, NW-2, and NW-3) and
Goa Waterways was 21.91 MMT in 2016- objectives
17. Moreover, Maharashtra Waterways • Increase the proportion of freight
alone transported over 33.29 MMT. The transported by coastal and inland
Inland Waterways Authority of India waterways from 6% in 2016-17 to 12% by
(IWAI) is responsible for developing and 2025.
maintaining fairway, navigational aids,
and terminal infrastructure. • By 2022-23, raise port handling capacity
to 2,500 million metric tonnes (MMT).
» The government is also proposing to fund
342
• By 2022-23, reduce turnaround times at and multiplicity of charges imposed by
major ports from 3.44 days (2016-17) to shipping lines.
1-2 days (global average). • Capital for inland vessels: At present, the
• Increase inland waterway throughput cost of capital is very high and makes
from 55.20 MMT in 2016-17 to 60-70 MMT IWT freight uncompetitive. It is tough to
by 2022-23. attract capital for building inland vessels,
• Increase the minimum usable depth to as it is a significant investment.
increase inland water transport capability. • Technical issues in inland waterways:
The varying and limited depths due to
the meandering and braiding of alluvial
Constraints: rivers and the erosion of their banks
causing excessive siltation, lack of cargo
• Roads (54 per cent) continue to be earmarked for IWT, non-mechanized
the dominant mode of transporting navigation lock systems and insufficient
cargo, followed by rail (33 per cent). unloading facility at terminals hinder the
Transportation of cargo through use of IWT by shippers.
waterways (shipping and inland water)
• Inland waterway regulatory issues:
accounts for a minuscule modal share (6
Ferries Acts from different years regulate
per cent) despite it being the most cost
cross-ferry movement, which can pose
effective and efficient mode.
an obstacle to inland navigation because
• Drought levels: Due to insufficient depth, the legislation may not take safety into
most Indian container handling ports are account.
unable to accommodate large container
vessels; mother vessels must dock at
ports with a minimum drought depth of Solution/Way forward:
18 meters. With foreign trade preferring
more economically viable mother vessels, • Open up India’s dredging market
a port's capacity to become a hub port is
harmed by shallow drought. » The government needs to open up the
dredging market to attract more players,
• Connectivity to ports: Weak hinterland especially foreign players, to increase
connectivity between production centres
and sustain draught depth at ports in
and gateway ports often leads to higher
order to attract large vessels and allow
costs and delays because of sub-optimal
them to become hub ports.
mode choices.
» At the moment, the Indian dredging
• Transshipment port: A large percentage market is served by the Dredging
of containers in India are currently
Corporation of India (DCI) and a small
transshipped through other ports, such as
number of private vendors, limiting
Colombo (just south of India), Singapore
competition.
(East), Dubai and Salalah (West) due to
the absence of a transshipment port in » If the government takes steps like
the country. This has led to additional consolidating dredging contracts
costs and delays due to the feeder through cohorts of ports and removing,
voyage from India to the hub port. at least temporarily, the right of first
refusal granted to Indian vendors, foreign
• Charges by the shipping lines: The players would be attracted to the market.
business practices of shipping lines have
played a key role in the present negative • Expedite the implementation of
perception of sea transport. A long Sagarmala
pending concern has been the high rate
343
» Expedite the accomplishment of Address technical and
various projects under Sagarmala,
especially those aimed at improving port regulatory constraints in inland
connectivity, setting up coastal economic waterways to ease movement
zones (CEZs) and establishing new ports. of inland vessels
» The setting up of a single window facility
for cargo clearance and putting in
• CCEA, led by the Hon’ble Prime Minister
approved the implementation of the Jal
place fully mechanized cargo handling
Marg Vikas project (JMVP) to augment
infrastructure will be critical to increase
the capacity of National Waterway-1
throughput.
(NW-1) with technical assistance and
• Ease the business environment around investment support from the World Bank
shipping and ports at a cost of INR 5369.18 crore. It should
be ensured that the project is completed
» The Indian government needs to rethink by March 2023.
its import policy on a "Free on Board" • From a regulatory standpoint, detention
basis (FoB policy) in order to balance risk of a vessel without a valid reason should
between importers and exporters. not be allowed.
» Enhance technology use in ports • A clear directive needs to be issued for
and, wherever feasible, draw lessons security of inland vessels, crew, and
from successful global ports such as cargo.
Rotterdam, Felixstowe and Singapore to
improve efficiency. • Strengthen existing Inland Water
Transport Directorates or Maritime
• Enhance last mile connectivity to inland Boards or set them up in states where
waterways they do not exist to ease the IWT business
and to ensure efficient regulation and
» IWT should be integrated to multi- facilitation of IWT for cargo movement.
modal/inter-modal connectivity. Inland
terminals with proper road and/or rail
connectivity and seamless transfer of
goods from one mode to the other are
Smart Cities
important for an efficient logistics supply
• The GoI has launched the Smart Cities
chain.
Mission with the collaboration of
» Procure floating terminals and cranes states and UTs for urban development.
and place them suitably so that access The purpose of the mission is to drive
to roads is possible. economic growth and improve the quality
of life of people by enabling local area
• Facilitate access to capital for inland development and harnessing technology,
vessels especially technology that leads to smart
outcomes.
» Inland vessel financing could be included
in priority sector lending by banks. • The Mission targets promoting cities
that provide core infrastructure and give
» Categorizing inland vessels as
a decent quality of life to its citizens, a
infrastructure equipment would make it
clean and sustainable environment and
easier to access resources for a sector
application of ‘smart’ solutions. The
with high capital and maintenance costs.
smart city includes the following core
infrastructure development:
344
» Adequate water supply » Safety and security of citizens, particularly
» Assured electricity supply Women, children, and the elderly; and
» Sanitation, including solid waste » Health and education

management
• Strategy: The strategic components of
» Efficient urban mobility and public area-based development in the mission
transport are:
» Affordable housing, especially for the
poor
» City improvement (retrofitting)
» Robust IT connectivity and digitalization » City renewal (redevelopment)
» Good governance, especially

» City extension (greenfield development)
e-Governance and citizen participation » A pan-city initiative in which smart
solutions are applied.
» Sustainable environment
Pradhan Mantri Awas Yojana -Urban

• This initiative was launched in 2015 by the Ministry of Housing and Urban Affairs,
in which affordable housing will be given to the urban poor people with a goal of
building 20 million affordable houses by 31st March 2022.
• It provides central support to Urban Local Bodies (ULBs) and other types of
implementing agencies with the help of States/UTs.
• Eligibility criteria: Every statutory towns as per Census 2011 and towns notified
subsequently would be qualified for coverage under the scheme.
• Provisions:
» Credit Linked Subsidy.
» Affordable Housing in Partnership.
» In-situ Rehabilitation of existing slum dwellers utilizing land as a resource with the
help of private participation.
» Subsidy for Beneficiary-led individual house construction/enhancement.
• The initiative encourages women empowerment by offering the ownership of
houses in the name of female members of family or in joint name.
Present situation: of integration between different

infrastructural elements of the projects.
• The Government of India has so far As of 14 May 2018, projects worth INR
selected 99 cities with an outlay of INR 4,800 crores have been completed and
2.04 lakh crore. works worth more than INR 20,000
• These cities have started implementing crores are underway, as per the Ministry
projects such as smart command and of Housing and Urban Affairs’ Smart City
control centres, smart area-based MIS portal.
development, smart roads, solar rooftops,
intelligent transport systems and smart
parks. Important objective:
• These projects have the unique feature Leverage the ‘Smart Cities’ concept in
select urban clusters to:
345
• Drive job creation and economic growth. • A solid spatial plan that serves as an
• Significantly improve efficiencies in overarching structure for smart city
service delivery. planning and implementation.
• By 2022-23, use technology to encourage • Ingenious strategies for amplifying the

inclusive, sustainable, and participatory voices of urban poor, slum dwellers,
growth. refugees, and other marginalized people.
• A digital strategy and road-map, or a
digital master plan.
Constraints: • Decision-making based on data
The key operational challenge areas in for service delivery and resource
the Smart City Mission include the non- sustainability.
availability of the following: • Human resources with the necessary skills
• For successful implementation, an to manage different functional domains
operational framework for inter-agency are available.
collaboration, including special purpose • Financing smart cities and ensuring
vehicles (SPVs). the financial viability of urban local
governments.
Four paradigms to leverage Smart Cities Mission
Engagement
Leveraging
Environment Economy
SCM
Equity
I m a g e 17.6: F o u r pa r a di g m s to l e v e r a g e S m a r t C iti e s M i s s i o n
• Economy and citizen participation.
» Scaling area-based development: − The federal government might think

about moving the lessons learned
− Existing area-based development from such neighborhood-based
initiatives must be evaluated for their development initiatives to other cities.
effect on living conditions, economic States should also be encouraged to
growth, investments, job creation, create state-level missions for other
cities.
346
Mobility: and service delivery. Once the
information that flows through the
− A centralized metropolitan "systems of systems" is captured, the
transport authority, or an integrated whole becomes greater than the sum
institutional framework for planning of its components, according to a
and organizing mobility regulation, is digital transformation roadmap.
required.
− In addition, the digital transformation
− Land-use and transportation planning roadmap will build on the significant
should be incorporated in spatial work done in cities on geographic
plans to promote more mixed-use information systems (GIS) and apply
growth that boosts economic activity, these for geo-locating, mapping,
decreases travel time, and enhances and publishing public assets in the
environmental quality. city such as parks, playgrounds,
− Public transportation, including public toilets, bus stops, streetlights,
current intermediate and para-transit manholes, water and sewerage lines,
systems, requires special attention, storm water drains, power lines, and
especially in smaller cities. so on, and linking these for grievance
redressal.
» Achieving desired service delivery levels:
• Equity
− Complementary missions such as
the Atal Mission for Rejuvenation » Inclusive development:
and Urban Transformation (AMRUT),
Swachh Bharat Mission (SBM), and − Cities must ensure that urban poor
Housing for All provide funds for and slum dwellers, including recent
the provision of basic services and refugees, have access to city facilities
infrastructure (HFA). and subsidies, as well as financial
inclusion, through the Jan Dhan
− A policy is needed that mandates Yojana. To determine if benefits
measurable outputs and outcomes
meet the targeted poor, a dedicated
for all infrastructure and utility
benchmark may be considered.
investments in cities.
− Cities should set aside a single-
» Digital transformation roadmap: window facility for the urban poor
to access basic facilities like water,
− Traditional approaches overlook the sanitation, and sewerage, as well as
importance of human interactions affordable housing in the form of
among people, with city infrastructure dormitory and rental housing.
(such as highways, bridges, and
parks), and with the environment.
− Urban poor communities and
slums, benefitted by area-based
These interactions involve data and
development (ABD) or pan city
knowledge, and digital technology
proposal (PCP) solutions, should
has the ability to recognize and
be mapped in conjunction with
capture the meaning hidden in them.
improvements in parameters such as
− Cities must implement a digital access to public assets and reducing
transformation roadmap that service deficit including in the areas
includes both hard infrastructure and of education and health.
software applications in order to take
advantage of internet access and its • Environment
diverse applications in governance
347
» Resilient cities: one such model. Institutionally, there is
need to leverage information to achieve
− It is strongly recommended that India better interagency coordination within
should mainstream the resilient cities ULBs and with SPVs.
approach and integrate it with service
levels as indicated in the chapter
on Approach to Sustainability in our
National Building Code 2016. Logistics Sector
− The resilient cities strategy should » Logistics is the backbone of supply
also align with the 11th Sustainable chain (management of flows of goods
Development Goal (SDG), which from the point of origin to the point of
focuses on the long-term development consumption). It includes transportation,
of cities and communities. inventory management, warehousing,
− Environmental protection should be materials handling, packaging, and
viewed as a separate objective that integration of information.
can be calculated as part of service » Government has identified the action
quality. In this regard, the Ministry of points to develop this sector in an
Housing and Urban Affairs (MoHUA) integrated way. These action points
has the authority to issue model are—adopting new technology,
guidelines. improved investment, skilling, removing
bottlenecks, improving inter-modal
• Engagement
transportation, automation, single
» More than 20 smart command and control window system for giving clearances,
centres are under implementation and an and simplifying processes.
equal number are under tendering. About
six of these centres have been completed
in Vishakhapatnam, Kakinada, Surat, Present situation:
Nagpur, Vadodara, and Ahmedabad,
• The logistics industry in India employs
with nearly all of them using open-source
over 22 million people (as of 2016).
codes.
The logistics sector's value grew at a
» There is need to use the information compound annual growth rate (CAGR) of
available in these centres to develop 7.8% between 2011-12 and 2015-16.
urban data observatories with a flexible
• However, existing logistics costs in India
architecture and continue open source
are high relative to other countries.
accessibility. The purpose of such
Logistics costs have been estimated at 14
observatories is to serve as a decision
per cent of India’s GDP relative to 9 per
support mechanism for policy makers
cent of GDP in the United States, 11 per
and to engage citizens.
cent in Japan, 12 per cent in Korea and
» The MoHUA guidelines should 14.9 per cent in China.
institutionalize the need for regulation
• Recognizing the importance of logistics
around data observatories and make
for exports and development, the
them open source in nature (by limiting
government has included it in the
private ownership of such data), while at
infrastructure subsector's harmonized
the same time protecting the privacy of
master list.
citizens.
• This will ease access to credit and simplify
» The data observatory incubated by the
the approvals process for building
National Institute of Urban Affairs offers
infrastructure in the sector.
348
• The government has also created a that are not available to private players
new Logistics Division in the Ministry of such as container train operators or
Commerce and Industry that will focus foreign vessel owners, leading to limited
on the integrated development of the competition, capacity underutilization
logistics sector. and other inefficiencies.
• Interoperable technology across modes:
The lack of interoperability of software
Important objectives of systems used by the authorities governing
Government: different modes of transport leads to
inefficiencies as it increases transit time
• Achieve multi-modal cargo movement and the need for manual intervention
that meets global logistics requirements. when switching modes.
• Reduce the cost of logistics to less than • Border compliance and document
10% of GDP, down from the current level processing time: India’s average border
of 14%. compliance time (including customs
• Boost the logistics market to USD215 regulations and mandatory inspections)
billion by 2020, up from USD160 billion for exports is 106 hours and for imports
now. 264 hours. India’s document processing
time (including documentary compliance
• Increase the number of jobs in the for various agencies including regulators)
logistics sector to 40 million by 2022-23,
is an average of 38 hours for exports and
up from around 22 million in 2016.
61 hours for imports.
Constraints:
• Cost of logistics: Logistics costs are • Tariff policies need to be rationalized.
still high due to difficulties securing The Railways chapter provides details
funding, underdeveloped infrastructure, on rail freight while the Civil Aviation
inadequate connectivity, and an chapter highlights the need to determine
unfavourable modal mix. air cargo tariffs in a consistent manner
• Lack of Coordination: Transportation, across airports.
warehousing, freight forwarding, and • Improve the efficiency of warehouses and
value-added logistics make up the bulk their operations, especially to optimize
of the logistics market. Each of these is food storage.
subject to various forms of regulatory
regulation, adding to the system's • Establish an overarching body
complexity. Duplicate procedures are that maintains a repository of all
normal when several entities are involved. transportation data. Setting up multi-
modal logistics parks will help address
• Warehousing capacity and fragmented issues related to underdeveloped
structure: Handling and warehousing infrastructure, an unfavourable modal
facilities are still largely un-mechanized mix and connectivity.
with manual loading, unloading,
and handling in the case of many • There is no level playing field for private
commodities. container train operators (CTOs) vis-à-
vis the Container Corporation of India
• Competition and underutilized (CONCOR). Providing shared space at
capacity: There is no level playing field CONCOR terminals to private CTOs
as the public sector is provided benefits will help utilize the infrastructure better.
349
Similarly, opening up port terminals to movement (commercial risk)—made the
private players at a fee will enhance road projects economically unviable.
capacity utilization.
• BOT-ANNUITY:
• To increase efficiency and ensure
compatibility, we should gradually » This was an improvement over the BOT-
adopt international standards, especially TOLL model, which sought to reverse
in operations, and adopt global private companies' declining interest in
benchmarking on unit load devices road projects by reducing risk for private
such as containers and pallets. While players.
this will require changes in the overall
infrastructure of ships, ports, and railways, » Apart from sharing project costs, the
it will help realize savings in cost, time, private player was to build, maintain,
and accounting. and operate road projects without being
responsible for collecting traffic tolls.
» The private players were offered a fixed
PPP models amount of money annually (called
‘annuity’) as compensation—the party
• Managing adequate amount of fund for
bidding for the minimum ‘annuity’ used
infrastructure development has been
to get the project. Toll collection was the
always a challenge for India. In reform
responsibility of the Government.
era, the government evolved the idea of
public private partnership (PPP) for the » This was different from the previous
sector aimed at attracting investments model (BOT-TOLL) in one sense— private
from the private sector (domestic as well players were not having any commercial
as foreign). A brief review of the major risk (traffic)—but they remained very
PPP models (few of them are non-PPP much exposed to other risks (land
models, too). acquisition delays, inflation, cost over-
runs, construction). Even this model, over
• BOT-TOLL:
the time proved to be unviable for the
» The ‘Build-Operate- Transfer-Toll’ was private sector due to the leftover risks
one of the earliest models of PPP. Other they were exposed to.
than sharing the project cost (with the
• EPC MODEL:
Government), the private bidder was to
build, maintain, operate the road, and » The PPP model which was seen to be
collect toll on the vehicular traffic. a better way out to promote the infra
» The bid was given to the private projects were visibly failing by the year
company offering to share maximum toll 2010 and Government was unable to
revenue to the government. The private attract the private players towards the
party used to cover “all risks” related to— road sector. It was in this backdrop that the
land acquisition, construction (damage), Engineering-Procurement-Construction
inflation, cost over-runs caused by (EPC) Model was announced.
delays and commercial. The government » In this model, project cost was fully
was responsible for only regulatory covered by the Government (it means,
clearances. it was not a PPP model and was like
» Due to inherent drawbacks, this model normal contracts given to the bidders)
proved to be unsustainable for the together with majority of the risks—land
private bidder—undue delay in land acquisition, cost over-runs due to delay,
acquisition due to litigation, cost inflation and commercial.
over-runs and uncertainties in traffic » The private developers were supposed
350
to design, construct and hand over operation, toll collection, and commercial,
the road projects to the government— while the risks of inflation and cost
maintenance, operation and toll overruns are shared in proportion to the
collection being the government’s project cost sharing.
responsibilities. » However, the private sector is still exposed
» Contract was given to the private player to construction and maintenance risks
who offered to construct roads at the (delays from the government side in
quality levels. It means, the private clearances and land acquisition have
player in this model was only exposed to chances to enhance the degree of risks
the construction-related risks which is a private players are exposed to).
normal risk involved in any contract given » But generally, this is the best PPP model
by the government to the private party. for the time being, which is devoid of
» EPC Model could have been a temporary most of the flaws of past. Private sector
way out to develop road projects as it was has shown good response to this model.
fully funded by the government—reform By early 2018, this model was notified by
era had aimed to attract investment the Government for other infra sectors
from the private players by evolving a too.
‘business model’ for the road sector—
need was to develop a new PPP model. • Swiss Challenge Model:
In this backdrop we see the government
coming up with a new PPP model for » Government of India, for the first time,
the road projects—the Hybrid Annuity announced the use of this model for
Model. redevelopment of railway stations in
the country (by late 2015). This is a very
• HAM: flexible method of giving contracts (i.e.,
public procurement) which can be used
» The Hybrid Annuity Model (HAM) is a in PPP as well as non- PPP projects.
cross between the EPC and the BOT- » In this, one bidder is asked by the
ANNUITY models. The cost of the project government to submit the proposal for
is split 40:60 between the government the project which is put in public domain.
and the private player in this model. Afterwards, several other bidders submit
» The private player is responsible for their proposals aimed at improving
building and handing over the roads to and beating the original (first) bidder—
the government, which will raise tolls (if finally an improved bid is selected (called
desired)—maintenance is the private counter proposal). If the original bidder is
player's responsibility until the annuity not able to match the counter proposal,
period ends. The government pays a the project is awarded to the counter
fixed amount of economic compensation bidder. Government has made it an
(called annuity, similar to the BOT online method.
ANNUITY model of the past) to a private » Though, the Government of India used this
player for a set period of time (normally model for the first time, this has already
15 years, though it is flexible). been used by several states by now—
» The contract is awarded to the private Karnataka, Andhra Pradesh, Rajasthan,
player who offers the lowest annuity (in Madhya Pradesh, Bihar, Punjab, and
bidding). The government covers the Gujarat—for roads and housing projects.
majority of the major risks in this model, In 2009, the Supreme Court sanctioned
including land acquisition, clearances, the method for award of contracts.
351
UPSC CSE PRELIMS (d) Telecommunication and
transportation infrastructure
Previous Years Ans. (a)
Questions • Explanation: Public Key Infrastructure is

a technology for authenticating devices
Q.1) In India, the term "Public Key and users in the digital space. The basic
Infrastructure is used in the context of concept is to have one or more trusted
(a) Digital security infrastructure parties digitally sign documents certifying
(b) Food security infrastructure that a specific cryptographic key belongs
(c) Health care and education to a particular device and user.
infrastructure
352
PREVIOUS
YEAR
QUESTIONS
353
1. Explain intra-generational and inter- 9. It is argued that the strategy of
generational issues of equity from inclusive growth is intended to meet
the perspective of inclusive growth the objectives of inclusiveness and
and sustainable development. 2020 sustainability together. Comment
on this statement. 2019
2. Define potential GDP and explain its

determinants. What are the factors 10. Enumerate the indirect taxes which
that have been inhibiting India from have been subsumed in the Goods and
realizing its potential GDP? 2020 Services Tax (GST) in India. Also, comment
on the revenue implications of the GST
introduced in India since July 2017. 2019
3. What are the main constraints in
transport and marketing of agricultural
produce in India? 2020 11. The public expenditure management
is a challenge to the government of
India in the context of budget-making
4. What are the challenges and during the post-liberalization period.
opportunities of food processing sector Clarify it. 2019
in the country? How can income of the
farmers be substantially increased by
encouraging food processing? 2020 12. How can biotechnology improve the
living standards of farmers? 2019
5. Explain the meaning of investment

in an economy in terms of capital 13. How far is the Integrated Farming
formation. Discuss the factors to System (IFS) helpful in sustaining
be considered while designing a agricultural production? 2019
concession agreement between a
public entity and a private entity. 2020
14. Elaborate on the impact of the
National Watershed Project in
6. Explain the rationale behind the Goods increasing agricultural production from
and Services Tax (Compensation to water-stressed areas. 2019
States) Act of 2017. How has COVID-19
impacted the GST compensation fund
and created new federal tensions? 2020 15. Elaborate on the policy taken by
the government of India to meet the
challenges of the food processing
7. What are the major factors responsible sector. 2019
for making rice-wheat system a
success? In spite of this success how has
this system become bane in India? 2020 16. How was India benefited from the
contributions of Sir M.Visvesvaraya and
Dr. M. S. Swaminathan in the fields of
8. Do you agree with the view that water engineering and agricultural
steady GDP growth and low inflation science respectively? 2019
have left the Indian economy in
good shape? Give reasons in support
of your arguments. 2019 17. What are the reformative steps taken
by the government to make food grain
distribution system more effective? 2019
354
18. How are the principles followed brought about changes in cropping
by the NITI Aayog different from patterns in recent past? Elaborate
those followed by the erstwhile the emphasis on millets production
Planning Commission in India? 2018 and consumption. 2018
19. Comment on the important changes 27. What do you mean by Minimum Support
introduced in respect of the Long- Price (MSP)? How will MSP rescue the
term Capital Gains Tax (LCGT) and farmers from the low income trap? 2018
Dividend Distribution Tax (DDT) in
the Union Budget for 2018-2019. 2018
28. Among several factors for India’s
potential growth, savings rate is
20. With growing energy needs should India the most effective one. Do you
keep on expanding its nuclear energy agree? What are the other factors
programme? Discuss the facts and fears available for growth potential? 2017
associated with nuclear energy. 2018
29. Account for the failure of manufacturing

21. Access to affordable, reliable, sector in achieving the goal of labour-
sustainable and modern energy is the intensive exports rather than capital-
sine qua non to achieve Sustainable intensive exports. Suggest measures
Development Goals (SDGs). Comment for more labour-intensive rather than
on the progress made in India in capital-intensive exports. 2017
this regard. 2018
30. What are the salient features of

22. How would the recent phenomena ‘inclusive growth’? Has India been
of protectionism and currency experiencing such a growth process?
manipulations in world trade affect Analyze and suggest measures for
macroeconomic stability of India? 2018 inclusive growth. 2017
23. Sikkim is the first ‘Organic State’ in India. 31. One of the intended objectives of
What are the ecological and economical Union Budget 2017-18 is to ‘transform,
benefits of Organic State? 2018 energize and clean India’. Analyse the
measures proposed in the Budget 2017-
18 to achieve the objective. 2017
24. Assess the role of National Horticulture
Mission (NHM) in boosting the production,
productivity and income of horticulture 32. Examine the developments of Airports
farms. How far has it succeeded in in India through Joint Ventures under
increasing the income of farmers? 2018 Public-Private Partnership (PPP) model.
What are the challenges faced by the
authorities in this regard. 2017
25. Examine the role of supermarkets in
supply chain management of fruits,
vegetables and food items. How do they 33. “Industrial growth rate has lagged
eliminate number of intermediaries? 2018 behind in the overall growth of Gross-
Domestic-Product(GDP) in the post-
reform period” Give reasons. How
26. How has the emphasis on certain crops far the recent changes in Industrial
355
Policy are capable of increasing the budgeting in the Indian context? 2016
industrial growth rate? 2017
41. What are ‘Smart Cities? Examine their

34. What are the major reasons for relevance for urban development
declining rice and wheat yield in in India. Will it increase rural-
the cropping system? How crop urban differences? Give arguments
diversification is helpful to stabilize the for Smart Villages’ in the light of
yield of the crop in the system? 2017 PURA and RURBAN Mission. 2016
35. Explain various types of revolutions, took 42. Justify the need for FDI for the
place in Agriculture after Independence development of the Indian economy.
in India. How these revolutions have Why there is gap between MOUs signed
helped in poverty alleviation and food and actual FDIs? Suggest remedial
security in India? 2017 steps to be taken for increasing
actual FDIs in India. 2016
36. What are the reasons for poor

acceptance of cost effective small 43. How globalization has led to the
processing unit? How the food processing reduction of employment in the formal
unit will be helpful to uplift the socio- sector of the Indian economy? Is
economic status of poor farmers? 2017 increased informalization detrimental
to the development of the country? 2016
37. How do subsidies affect the cropping

pattern, crop diversity and economy 44. What is water-use efficiency? Describe
of farmers? What is the significance of the role of micro-irrigation in increasing
crop insurance, minimum support price the water-use efficiency. 2016
and food processing for small and
marginal farmers? 2017
45. What is allelopathy? Discuss its
role in major cropping systems of
38. Pradhan Mantri Jan-Dhan Yojana irrigated agriculture. 2016
(PMJDY) is necessary for bringing
unbanked to the institutional finance
fold. Do you agree with this for financial 46. Given the vulnerability of Indian
inclusion of the poorer section of the agriculture to vagaries of nature, discuss
Indian society? Give arguments to the need for crop insurance and bring
justify your opinion. 2016 out the salient features of the Pradhan
Mantri Fasal Bima Yojana (PMFBY). 2016
47. Discuss the role of land reforms in
39. Comment on the challenges for agricultural development. Identify the
inclusive growth which include careless factors that were responsible for the
and useless manpower in the Indian success of land reforms in India. 2016
context. Suggest measures to be taken
for facing these challenges. 2016
48. The nature of economic growth in India
in described as jobless growth. Do you
40. Women empowerment in India needs agree with this view? Give arguments
gender budgeting. What are the in favour of your answer. 2015
requirements and status of gender
356
49. Craze for gold in Indians have led 56. What are the impediments in marketing
to a surge in import of gold in recent and supply chain management in
years and put pressure on balance of industry in India? Can e-commerce help
payments and external value of rupee. in overcoming these bottlenecks? 2015
In view of this, examine the merits
of Gold Monetization Scheme. 2015
57. Capitalism has guided the world
economy to unprecedented prosperity.
50. “Success of ‘Make in India’ programme However, it often encourages
depends on the success of ‘Skill India’ shortsightedness and contributes
programme and radical labour reforms.” to wide disparities between the
Discuss with logical arguments. 2015 rich and the poor. In this light,
would it be correct to believe and
adopt capitalism driving inclusive
51. In what way could replacement of growth in India? Discuss. 2014
price subsidy with Direct Benefit
Transfer (DBT) change the scenario
of subsidies in India? Discuss 2015 58. While we found India’s demographic
dividend, we ignore the dropping
rates of employability. What are
52. There is a clear acknowledgement we missing while doing so? Where
that Special Economic Zones (SEZs) will the jobs that India desperately
are a tool of industrial development, needs come from? Explain. 2014
manufacturing and exports. Recognizing
this potential, the whole instrumentality
of SEZs requires augmentation. Discuss 59. The right to fair compensation
the issues plaguing the success of SEZs and transparency land acquisition,
with respect to taxation, governing rehabilitation and resettlement
laws and administration. 2015 act, 2013 has come into effect from
1 January 2014. What implication
would it have on industrialisation and
53. How can the ‘Digital India’ programme agriculture in India? 2014
help farmers to improve farm productivity
and income? What steps has the
Government taken in this regards? 2015 60. National urban transport policy
emphasizes on moving people instead
of moving vehicles. Discuss critically
54. Livestock rearing has a big potential the success of various strategies of the
for providing non-farm employment government in this regard. 2014
and income in rural areas. Discuss
suggesting suitable measures to
promote this sectors in India. 2015 61. Explain how private public partnership
agreements, in longer gestation
infrastructure projects, can transfer
55. In view of the declining average size unsuitable liabilities to the future. What
of land holdings in India which has arrangements need to be put in place
made agriculture non-viable for a to ensure that successive generations’
majority of farmers, should contract capacities are not compromised? 2014
farming and land leasing be promoted
in agriculture? Critically evaluate
the pros and cons. 2015 62. Normally countries shift from
agriculture to industry and then later to
357
services, but India shifted directly from reach and serve rural clients? 2014
agriculture to services. What are the
reasons for the huge growth of services
vis-a-vis industry in the country? Can 69. With a consideration towards the
India become a developed country strategy of inclusive growth, the new
without a strong industrial base? 2014 companies bill, 2013 has indirectly
made CSR a mandatory obligation.
Discuss the challenges expected in
63. Foreign direct investment in the defence its implementation in right earnest.
sector is now said to be liberalised. Also discuss other provisions in the
What influence this is expected to have bill and their implications. 2013
on Indian defence and economy in
the short and long run? 2014
70. What are the reasons for introduction
of Fiscal responsibility and Budget
64. Examine the impact of liberalization Management (FRBM) act, 2003?
on companies owned by Indian. Discuss critically its salient features and
Are the competing with the MNCs their effectiveness. 2013
satisfactorily? 2014
71. What is meaning of the term tax-

65. Discuss the impact of FDI entry into expenditure? Taking housing sector
multi-trade retail sector on supply chain as an example, discuss how it
management in commodity trade influences budgetary policies of the
pattern of the economy. 2014 government. 2013
66. Though India allowed foreign direct
investment (FDI) in what is called 72. Discussion the rationale for introducing
multi brand retail through joint Good and services tax in India.
venture route in September 2012, the Bring out critically the reasons for
FDI even after a year, has not picket delay in roll out for its regime. 2013
up. Discuss the reasons. 2014
73. Adaptation of PPP model for

67. There is also a point of view infrastructure development of the
that agriculture produce market country has not been free from
committees (APMCs) set up under the criticism. Critically discuss the
state acts have not only impeded the pros and cons of the model. 2013
development of agriculture but also
have been the cause of food inflation 74. India needs to strengthen measures
in India. Critically examine. 2014 to promote the pink revolution in food
industry for better nutrition and health.
Critically elucidate the statement. 2013
68. “In the villages itself no form of credit
organisation will be suitable except the
cooperative society.”: All Indian rural 75. Establish the relationship between land
credit survey. Discuss this statement reform, agriculture productivity and
in the background of agriculture elimination of poverty in Indian Economy.
finance in India. What constrain and Discussion the difficulty in designing
challenges do financial institutions and implementation of the agriculture
supplying agricultural finances? How friendly land reforms in India. 2013
can technology be used to better 76. Food security bill is expected to
358
eliminate hunger and malnutrition 77. What are the different types of
in India. Critically discuss various agriculture subsidies given to farmers
apprehensions in its effective at the national and state levels?
implementation along with the Critically analyze the agriculture
concerns it has generated in WTO. 2013 subsidy regime with the reference
to the distortions created by it. 2013
359
KEY HIGHLIGHTS OF ECONOMIC SURVEY
2020-21
The Economic Survey for the Year 2020-21 6. A public investment programme
was presented by Union Finance Minister in cantered around the National
both Houses of the Parliament. It is normally Infrastructure Pipeline (2019-25) was
presented a day before the Union Budget. initiated to lead the recovery process.
This was in accordance with the
principles of Keynesian economics.
The key highlights of this Economic Year for
the year 2020-2021 is the following:
State of the Economy in 2020-
21: A Macro View
Saving Lives and Livelihoods
1. COVID-19 pandemic has severely
amidst a Once-in-a-Century impacted the global economy due to
Crisis the lockdown and social distancing
1. Saving lives was the most important norms implemented across the world.
task for the government in view of the Global economic output is estimated
growing COVID-19 pandemic which has to fall by 3.5% in 2020 (IMF January
resulted in more than 1 crore cases in 2021 estimates).
India. A lockdown was initiated to this 2. Governments and central banks across
effect which resulted in a downward the world have devised various methods
spiral of the economy, which by many such as interest rate reductions, fiscal
estimates is expected to experience stimulus amongst others to revive the
a GDP contraction of about 7% economies.
(according to a study by the SBI).
3. India adopted a four-pillar strategy of
2. GDP growth will recover from the containment, fiscal, financial, and long-
temporary shock caused by the term structural reforms.
pandemic and is expected to rebound
4. The monetary and fiscal policies
this Financial Year (2021-2022).
announced by the government and the
3. India’s strategy ensured that the RBI has yielded benefits to the tune of
COVID-19 curve flattened after the Rs. 27.1 Lakh crores.
month of September. As PM had
5. According to the NSSO estimates, after
indicated “Jaan hai toh Jahaan hai”.
contracting about 7% in FY 2020-2021,
4. Various Supply Chain infrastructure the Real GDP for FY 2021-22 is expected
problems were tackled and reforms to grow at 11% and the Nominal GDP
were undertaken as part of the reforms to 15%. As the vaccines are rolled out,
undertaken under the Aatmanirbhar economic activities are expected to be
Bharat Abhiyan. normalised.
5. The initiatives of the government and 6. Government consumption and
the RBI also enhanced the demand side net exports cushioned the growth
of the economy which had remained from diving further down, whereas
muted due to the economic crisis and investment and private consumption
the lockdown throughout the nation. pulled it down.
360
7. The recovery in second half of FY2020- 16. Strong services exports and weak
21 is expected to be powered by demand leading to a sharper
government consumption, estimated to contraction in imports (merchandise
grow at 17% YoY. imports contracted by 39.7%) than
8. Exports expected to decline by 5.8% exports (merchandise exports
and imports by 11.3% in the second half contracted by 21.2%)
of FY21 17. FOREX reserves increased to a level so
9. India expected to have a Current as to cover 18 months’ worth of imports
Account Surplus of 2% of GDP in FY21, in December 2020
a historic high after 17 years. 18. External debt as a ratio to GDP
10. Agriculture set to cushion the shock of increased to 21.6% at end-September
the COVID-19 pandemic on the Indian 2020 from 20.6% at end-March 2020.
economy in FY21 with a growth of 3.4%.
It is expected to lead the economic
recovery process, even as other sectors Does Growth lead to Debt
such as manufacturing and service Sustainability?
sector have been severely impacted by
the pandemic. • Growth leads to debt sustainability in the
Indian context but not necessarily vice-
11. Industry and services estimated to versa:
contract by 9.6% and 8.8% respectively
during FY21 » Debt sustainability depends on the
12. India remained a preferred investment ‘Interest Rate Growth Rate Differential’
destination in FY 2020-21 with FDI (IRGD), i.e., the difference between the
pouring in amidst global asset shifts interest rate and the growth rate.
towards equities and prospects
of quicker recovery in emerging − In India, interest rate on debt is less
economies. than growth rateby norm, not by
exception.
13. Net FPI inflows recorded an all-time
monthly high of US$ 9.8 billion in • Negative IRGD in India is not due to
November 2020, as investors’ risk lower interest rates but much higher
appetite returned. India remained growth rates. This prompts a debate on
a bright spot amongst emerging fiscal policy, especially during growth
economies as it continued to receive slowdowns and economic crises.
copious amounts of FII.
• Growth causes debt to become
14. Reignited inter and intra state sustainable in countries with higher
movement and record-high monthly growth rates; such clarity about the
GST collections have marked the causal direction is not witnessed in
unlocking of industrial and commercial countries with lower growth rates.
activity. These are considered as some
• During pandemic like situations, higher
of the green shots of the improving
fiscal deficit is witnessed. Nations with
economy.
higher fiscal deficit who also experience
15. The external sector provided an higher growth rates have not much to
effective cushion to growth with India worry about.
recording a Current Account Surplus of
3.1% of GDP in the first half of FY21.
361
Does India’s Sovereign and socio-economic outcomes vis-à-vis
economic growth and socio-economic
Credit Rating Reflect Its outcomes, is different in India from that
Fundamentals? No! in advanced economies.
• The fifth largest economy in the world • Inequality and Per Capita Incomes have a
has never been rated as the lowest rung similar relationship in India as compared
of the investment grade (BBB-/Baa3) in to the rest of the world.
sovereign credit ratings: • It is only economic growth that will led
to poverty alleviation and reduction in
» Reflecting the economic size and thereby inequalities.
the ability to repay debt, the fifth largest
economy has been predominantly rated • Expanding the overall pie: redistribution
AAA. in a developing economy is feasible only
if the size of the economic pie grows.
− China and India are the only
exceptions to this rule. China was
rated A-/A2 in 2005 and now India is It is generally estimated that a GDP growth
rated BBB-/Baa3 of 1% leads to a poverty reduction of 1.5%.
• India’s sovereign credit ratings do not

reflect its fundamentals: Healthcare takes centre stage,
• Credit ratings map the probability finally!
of default and therefore reflects the • COVID-19 pandemic emphasized the
willingness and ability of borrower to importance of healthcare sector and
meet its obligations: its inter-linkages with other sectors.
• India has never defaulted in the past and It has showcased how a health crisis
the size of its foreign exchange reserves transformed into an economic and social
are enough to satisfy analysts of its crisis.
credentials. • National Health Mission (NHM) played a
• Sovereign credit rating changes for critical role in mitigating inequity as the
India have no or weak correlation with access of the poorest to pre-natal/post-
macroeconomic indicators. natal care and institutional deliveries
increased significantly.
• Sovereign credit ratings methodology
should be made more transparent, less • Emphasis on NHM in conjunction with
subjective and better attuned to reflect Ayushman Bharat should continue.
economies’ fundamentals. • An increase in public healthcare spending
• The PM has in the past reiterated the from 1% to 2.5-3% of GDP can decrease
importance for nations, especially in the the out-of-pocket expenditure from 65%
BRICS grouping to have a separate rating to 35% of overall healthcare spending.
agency that can correctly identify issues • A regulator for the healthcare sector must
and provide a more accurate analysis of be considered given the market failures
various issues. stemming from information asymmetry.
• Telemedicine needs to be harnessed
Inequality and Growth: to the fullest by investing in internet
connectivity and health infrastructure.
Conflict or Convergence?
• The relationship between inequality
Process Reforms
362
• India over-regulates the economy the inception of the Global Innovation
resulting in regulations being ineffective Index in 2007, ranking first in Central
even with relatively good compliance and South Asia, and third amongst lower
with process. middle-income group economies.
• Increase in complexity of regulations, • India’s gross domestic expenditure on
intended to reduce discretion, results in R&D (GERD) is lowest amongst top ten
even more non-transparent discretion. economies. It is at less than 1% of the
• The solution is to simplify regulations GDP.
and invest in greater supervision which, • The government sector contributes a
by definition, implies greater discretion. disproportionately large share in total
• Discretion, however, needs to be balanced GERD at three times the average of top
with transparency, systems of ex-ante ten economies.
accountability and ex-post resolution • The business sector’s contribution
mechanisms. to GERD, total R&D personnel and
• The above intellectual framework has researchers is amongst the lowest when
already informed reforms ranging from compared to top ten economies.
labour codes to removal of onerous • This situation has prevailed despite
regulations on the BPO sector. higher tax incentives for innovation and
access to equity capital.
• India’s business sector needs to
Regulatory Forbearance an significantly ramp up investments in
emergency medicine, not staple R&D.
diet! • Indian resident’s share in total patents
• During the Global Financial Crisis, filed in the country must rise from the
regulatory forbearance helped borrowers’ current 36% which is much below the
tide over temporary hardship. average of 62% in top ten economies.
• Banks exploited the forbearance window • For achieving higher improvement in

for window-dressing their books and innovation output, India must focus
misallocated credit, thereby damaging on improving its performance on
the quality of investment in the economy. institutions and business sophistication
innovation inputs.
• Forbearance represents emergency
medicine that should be discontinued at
the first opportunity when the economy JAY Ho! PM‘JAY’ Adoption and
exhibits recovery, not a staple diet that
gets continued for years. Health outcomes
• An Asset Quality Review exercise must • Pradhan Mantri Jan Arogya Yojana (PM-
be conducted immediately after the JAY) is the ambitious program launched
forbearance is withdrawn. by Government of India in 2018 to provide
healthcare access to the most vulnerable
sections demonstrates strong positive
Innovation: Trending Up but effects on healthcare outcomes in a
short time.
Needs Thrust, Especially from
• PM-JAY is being used significantly for
the Private Sector high frequency, low-cost care such
• India entered the top-50 innovating as dialysis and continued during the
countries for the first time in 2020 since COVID-19 pandemic and the lockdown.
363
• Causal impact of PM-JAY on health environment and other facilities.
outcomes by undertaking a Difference- − Inter-State disparities declined across
in-Difference analysis based on National rural and urban areas as the laggard
Family Health Survey (NFHS)-4 (2015-16) states have gained relatively more
and NFHS-5 (2019-20) is following: between 2012 and 2018
» Enhanced health insurance coverage: • Improved access to the ‘bare necessities’
The proportion of households that had has led to improvements in health
health insurance increased in Bihar, indicators such as infant mortality and
Assam and Sikkim from 2015-16 to 2019- under-5 mortality rate and also correlates
20 by 89% while it decreased by 12% with future improvements in education
over the same period in West Bengal. indicators.
» Decline in Infant Mortality rate: from • Thrust should be given to reduce variation
2015-16 to 2019-20, infant mortality rates in the access to bare necessities across
declined by 20% for West Bengal and by states, between rural and urban and
28% for the three neighbouring states. between income groups.
» Decline in under-5 mortality rate: Bengal • The schemes such as Jal Jeevan Mission,
saw a fall of 20% while, the neighbours SBM-G, PMAY-G, etc., may design
witnessed a 27% reduction. appropriate strategy to reduce these
» Modern methods of contraception, gaps.
female sterilization and pill usage went • A Bare Necessities Index (BNI) based
up by 36%, 22% and 28% respectively in on the large annual household survey
the three neighbouring states while the data can be constructed using suitable
respective changes for West Bengal were indicators and methodology at district
negligible. level for all/targeted districts to assess the
» While West Bengal did not witness any progress on access to bare necessities.
significant decline in unmet need for
spacing between consecutive kids, the
neighbouring three states recorded a Fiscal Developments
37% fall.
• India adopted a calibrated approach
» Various metrics for mother and child care best suited for a resilient recovery of
improved more in the three neighbouring its economy from COVID-19 pandemic
states than in West Bengal. impact, in contrast with a front-loaded
large stimulus package adopted by many
countries.
Bare Necessities • Expenditure policy in 2020-21 initially
aimed at supporting the vulnerable
• Access to the ‘bare necessities’ has
sections but was re-oriented to boost
improved across all States in the country
overall demand and capital spending,
in 2018 as compared to 2012
once the lockdown was unwound.
− It is highest in States such as Kerala, • Monthly GST collections have crossed
Punjab, Haryana and Gujarat while the Rs. 1 lakh crore mark consecutively
lowest in Odisha, Jharkhand, West for the last 3 months, reaching its highest
Bengal and Tripura. levels in December 2020 ever since the
− Improvement in each of the introduction of GST.
five dimensions viz., access to • Reforms in tax administration have
water, housing, sanitation, micro- begun a process of transparency and
364
accountability and have incentivized tax • Total merchandise imports declined by
compliance by enhancing honest tax- (-) 29.1% to US$ 258.3 billion during April-
payers’ experience. December, 2020 from US$ 364.2 billion
• Central Government has also taken during the same period last year.
consistent steps to impart support to the • Trade balance with China and the US
States in the challenging times of the improved as imports slowed.
pandemic. • Net services receipts amounting to US$
External Sector 41.7 billion remained stable in April-
September 2020 as compared with US$
• COVID-19 pandemic led to a sharp 40.5 billion in corresponding period a
decline in global trade, lower commodity year ago.
prices and tighter external financing
conditions with implications for current • Resilience of the services sector was
account balances and currencies of primarily driven by software services,
different countries. which accounted for 49% of total services
exports.
• India’s FOREX reserves at an all-time
high of US$ 586.1 billion as on January • Net private transfer receipts, mainly
08, 2021, covering about 18 months’ worth representing remittances by Indians
of imports. employed overseas, totalling US$ 35.8
billion in H1: FY21 declined by 6.7% over
• India experiencing a Current Account the corresponding period of previous
Surplus along with robust capital inflows year.
leading to a BoP surplus since Q4 of
FY2019-20. • At end-September 2020, India’s external
debt around US$ 556.2 billion, a decrease
• Balance on the capital account is of US$ 2.0 billion (0.4%) as compared to
buttressed by robust FDI and FPI inflows: end-March 2020.
− Net FDI inflows of US$ 27.5 billion • Improvement in debt vulnerability
during April-October, 2020: 14.8% indicators:
higher as compared to first seven
months of FY2019-20 − Ratio of FOREX reserves to total and
short-term debt (original and residual)
− Net FPI inflows of US$ 28.5 billion during
April-December, 2020 as against US$ − Ratio of short-term debt (original
12.3 billion in corresponding period of maturity) to the total stock of external
last year. debt.
− Debt service ratio (principal
• India to end with an Annual Current repayment plus interest payment)
Account Surplus after a period of 17 increased to 9.7% as at end-
years. September 2020, compared to 6.5%
• India’s merchandise trade deficit as at end-March 2020
was lower at US$ 57.5 billion in April-
December, 2020 as compared to US$ • Rupee appreciation/depreciation:
125.9 billion in the corresponding period
− in terms of 6-currency nominal
last year.
effective exchange rate (NEER) (trade-
• In April-December, 2020, merchandise based weights), Rupee depreciated by
exports contracted by 15.7% to US$ 4.1% in December 2020 over March
200.8 billion from US$ 238.3 billion in 2020; appreciated by 2.9% in terms
April-December, 2019: of real effective exchange rate (REER)
365
− in terms of 36-currency NEER (trade- Prices and Inflation
based weights), Rupee depreciated by
2.9% in December 2020 over March • Headline CPI inflation:
2020; appreciated by 2.2% in terms of
− Averaged 6.6% during April-
REER.
December, 2020 and stood at 4.6% in
• RBI’s interventions in FOREX markets December, 2020, mainly driven by rise
ensured financial stability and orderly in food inflation (from 6.7% in 2019-20
conditions, controlling the volatility and to 9.1% during April-December, 2020,
one-sided appreciation of the Rupee. owing to build up in vegetable prices).
• Initiatives undertaken to promote − CPI headline and its sub groups

exports: witnessed inflation during April-
October 2020. It was driven by
− Production Linked Incentive (PLI) substantial increase in price
Scheme. momentum due to the initial
disruptions caused by COVID-19
− Remission of Duties and Taxes on lockdown.
Exported Products (RoDTEP)
− Moderated price momentum by
− Improvement in logistics infrastructure November, 2020 for most sub groups,
and digital initiatives.
coupled with positive base effect
helped ease inflation.
Money Management and • Rural-urban difference in CPI inflation
Financial Intermediation saw a decline in 2020:
• Accommodative monetary policy during • During April-December, 2019 as well
2020: Repo Rate cut by 115 bps since as April-December, 2020-21, the major
March 2020. driver of CPI-C inflation was the food
and beverages group:
• RBI undertook various conventional and
unconventional measures like: » Contribution increased to 59% during
April-December, 2020, compared to
− Open Market Operations. 53.7% during April-December, 2019
− Long Term Repo Operations.
− Targeted Long Term Repo Operations. • Thali cost increased between June 2020
and November 2020, however a sharp fall
• Gross Non-Performing Assets ratio of in the month of December reflecting the
Scheduled Commercial Banks decreased fall in the prices of many essential food
from 8.21% at end-March, 2020 to 7.49% commodities. Concept of Thalinomics
at end-September, 2020. was given in the previous Economic
Survey.
• The monetary transmission of lower
policy rates to deposit and lending rates • Steps taken to stabilize prices of food
improved during FY2020-21. items:
• The recovery rate for the Scheduled » Banning of export of onions.
Commercial Banks through IBC (since its
inception) has been over 45%
» Imposition of stock limit on onions.
» Easing of restriction on imports of pulses.
• Gold prices:
366
» Sharp spike as investors turned to gold as • The financing considerations will
a safe haven investment amid COVID-19 therefore remain critical especially as the
induced economic uncertainties. country steps up the targets substantially.
» Compared to other assets, gold had • The goal of jointly mobilizing US$
considerably higher returns during 100 billion a year by 2020 for climate
FY2020-21. financing by the developed countries has
remained elusive.
• Consistency in import policy warrants
attention:
• Despite overall growth in the global
bond markets, green bond issuance in
» Increased dependence on imports of the first half of 2020 slowed down from
edible oils poses risk of fluctuations in 2019, possibly as a result of the on-going
import prices. COVID-19 pandemic.
» Imports impacting production and prices • International Solar Alliance (ISA)
of domestic edible oil market, coupled launched two new initiatives, ‘World
with frequent changes in import policy of Solar Bank’ and ‘One Sun One World
pulses and edible oils, add to confusion One Grid Initiative’, which are poised
among farmers/producers and delay to bring about solar energy revolution
imports. globally.
Sustainable Development and Agriculture and Food

Climate Change Management
• India has taken several proactive steps to • India’s Agricultural (and Allied Activities)
mainstream the SDGs into the policies, sector has shown its resilience amid
schemes and programmes. the adversities of COVID-19 induced
lockdowns with a growth of 3.4% at
• Localisation of SDGs is crucial to any constant prices during 2020-21 (first
strategy aimed at achieving the goals advance estimate).
under the 2030 Agenda.
• The share of Agriculture and Allied
» Several States/UTs have created Sectors in Gross Value Added (GVA) of the
institutional structures for implementation country at current prices is 17.8% for the
of SDGs. year 2019-20 (CSO-Provisional Estimates
of National Income, 29th May, 2020).
• Sustainable development remains core • Total food grain production in the
to the development strategy despite
country in the agriculture year 2019-20
the unprecedented COVID-19 pandemic
(as per Fourth Advance Estimates), is 11.44
crisis.
million tonnes more than during 2018-19.
• Eight National Missions under National • The actual agricultural credit flow was
Action Plan on Climate Change (NAPCC)
₹13,92,469.81 crores against the target of
focussed on the objectives of adaptation,
₹13,50,000 crores in 2019-20. The target
mitigation and preparedness on climate
for 2020-21 was ₹15,00,000 crores and a
risks.
sum of ₹ 9,73,517.80 crores was disbursed
• India’s Nationally Determined till 30th November, 2020:
Contributions (NDC) states that finance
is a critical enabler of climate change » 1.5 crore dairy farmers of milk cooperatives
action. and milk producer companies were
targeted to provide Kisan Credit
367
Cards (KCC) as part of Prime Minister’s » Over 200 LMT of food grains were
AatmaNirbhar Bharat Package after the provided amounting to a fiscal outgo of
budget announcement of February 2020. over Rs. 75000 Crores.
» As of mid-January 2021, a total of 44,673 • Aatmanirbhar Bharat Package: 5 kg per
Kisan Credit Cards (KCCs) have been
person per month for four months (May
issued to fishers and fish farmers and an
to August) to approximately 8 crores
additional 4.04 lakh applications from
migrants (excluded under NFSA or state
fishers and fish farmers are with the
ration card) entailing subsidy of Rs. 3109
banks at various stages of issuance.
crores approximately.
• The Pradhan Mantri Fasal Bima Yojana
covers over 5.5 crore farmer applications
year on year.
Industry and Infrastructure
• The broad-based recovery in the IIP
» Claims worth Rs. 90,000 crores paid, as resulted in a growth of (-) 1.9 % in Nov-
on 12th January, 2021. 2020 as compared to a growth of 2.1 %
» Speedy claim settlement directly into the in Nov-2019 and a nadir of (-) 57.3 % in
farmer accounts through Aadhar linkage. Apr-2020.
» 70 lakh farmers benefitted and claims • Further improvement and firming up in
worth Rs. 8741.30 crores were transferred industrial activities are foreseen with
during COVID-19 lock down period. the Government enhancing capital
expenditure, the vaccination drive
• An amount of Rs. 18000 crores have been and the resolute push forward on long
deposited directly in the bank accounts pending reform measures.
of 9 crore farmer families of the country
• Aatma Nirbhar Bharat Abhiyan with a
in December, 2020 in the 7th installment
stimulus package worth 15 % of India’s
of financial benefit under the PM-KISAN
GDP announced.
scheme.
• India’s rank in the Ease of Doing Business
• Fish production reached an all-time high
(EoDB) Index for 2019 has moved upwards
of 14.16 million metric tons during 2019-20:
to the 63rd position in 2020 from 77th in
» GVA by the Fisheries sector to the national 2018 as per the Doing Business Report
economy stood at ₹2,12,915 crores (DBR):
constituting 1.24% of the total national
» India has improved its position in 7 out of
GVA and 7.28 % of the agricultural GVA.
10 indicators.
• Food Processing Industries (FPI) sector » Acknowledges India as one of the top 10
growing at an Average Annual Growth improvers, the third time in a row, with an
Rate (AAGR) of around 9.99 % as improvement of 67 ranks in three years.
compared to around 3.12 % in Agriculture » It is also the highest jump by any large
and 8.25 % in Manufacturing at 2011- country since 2011.
12 prices during the last 5 years ending
2018-19. • Government has announced a
• Pradhan Mantri Garib Kalyan Anna Production-Linked Incentive (PLI) Scheme
Yojana: in the 10 key sectors under the aegis of
AatmaNirbhar Bharat for enhancing
» 80.96 crore beneficiaries were provided food India’s manufacturing capabilities and
grains above NFSA mandated requirement exports:
free of cost till November, 2020.
368
» To be implemented by the concerned policy reforms to engage private players
ministries with an overall expenditure and attract innovation and investment.
estimated at Rs.1.46 lakh crores and with
sector specific financial limits.
Social Infrastructure,
Services Sector Employment and Human
• India’s services sector contracted by Development
nearly 16 % during H1: FY2020-21, during • The combined (Centre and States) social
the COVID-19 pandemic mandated sector expenditure as % of GDP has
lockdown, owing to its contact-intensive increased in 2020-21 compared to last
nature. year.
• Key indicators such as Services • India’s rank in HDI 2019 was recorded at
Purchasing Managers’ Index, rail freight 131, out of a total 189 countries:
traffic, and port traffic, are all displaying
a V-shaped recovery after a sharp decline » India's GNI per capita (2017 PPP $) has
during the lockdown. increased from US$ 6,427 in 2018 to US$
6,681 in 2019.
• Despite the disruptions being witnessed
globally, FDI inflows into India’s services » Life expectancy at birth improved from
sector grew robustly by 34% Y-o-Y during 69.4 years in 2018 to 69.7 years in 2019.
April-September 2020 to reach US$ 23.6
billion. • The access to data network, electronic
devices such as computer, laptop, smart
• The services sector accounts for over 54 phone etc. gained importance due to
% of India’s GVA and nearly four-fifths online learning and remote working
of total FDI inflow into India. during the pandemic.
• The sector’s share in GVA exceeds 50% • Major proportion of workforce engaged
in 15 out of 33 States and UTs, and is as regular wage/salaried in the urban
particularly more pronounced (greater sector during the period of January
than 85%) in Delhi and Chandigarh. 2019-March 2020 (quarterly survey of
• Services sector accounts for 48% of total PLFS).
exports, outperforming goods exports in • Government’s incentive to boost
the recent years. employment through AatmaNirbhar
• The shipping turnaround time at ports Bharat Rozgar Yojana and rationalization
has almost halved from 4.67 days in and simplification of existing labour
2010-11 to 2.62 days in 2019-20. codes into 4 codes.
• The Indian start-up ecosystem has been • Low level of female LFPR in India:
progressing well amidst the COVID-19
pandemic. India being home to 38 » Females spending disproportionately
unicorns, it added a record number of 12 more time on unpaid domestic and care
start-ups to the unicorn list last year. giving services to household members
as compared to their male counterparts
• India’s space sector has grown
(Time Use Survey, 2019).
exponentially in the past six decades:
» Need to promote non-discriminatory
» Spent about US$ 1.8 billion on space practices at the workplace like pay
programmes in 2019-20. and career progression, improve work
» Space ecosystem is undergoing several incentives, including other medical
369
and social security benefits for female • Wages under Mahatma Gandhi NREGA
workers. increased by Rs.20 from Rs.182 to Rs.202
w.e.f. 1st April, 2020.
• Under PMGKP announced in March,
2020, cash transfers of up to Rs.1000 to
existing old aged, widowed and disabled India’s fight against COVID-19:
beneficiaries under the National Social
Assistance Programme (NSAP). • Initial measures of lockdown, social
distancing, travel advisories, practicing
• An amount of Rs. 500 each was transferred hand wash, wearing masks reduced the
for three months digitally into bank spread of the disease.
accounts of the women beneficiaries
under PM Jan Dhan Yojana, totalling • As part of its self-reliance campaign
about Rs. 20.64 crores. or Aatmanirbharta, the country is now
manufacturing its own devices such as
• Free distribution of gas cylinders to about surgical instruments, PPE suits, vaccines
8 crore families for three months. and more.
• Limit of collateral free lending increased • World’s largest COVID-19 vaccination
from Rs. 10 lakhs to Rs. 20 lakhs for 63 drive commenced on 16th January, 2021
lakh women SHGs which would support using two indigenously manufactured
6.85 crore households. vaccines.
370
REFERENCES
1. https://www.indiabudget.gov.in/economicsurvey/ 11. https://www.thehindu.com/business/
2. https://www.rbi.org.in/ 12. https://indianexpress.com/
3. https://finmin.nic.in/ 13. Indian Economy by Mishra and Puri
4. h t t p s : // p i b . g o v . i n / P r e s s R e l e a s e P a g e . 14. Development Economics by H L Ahuja

aspx?PRID=1693231
15. Macroeconomics by H. L. Ahuja

5. NCERT Class IX: Economics.
16. Indian Economy by Datt and Sundaram

6. NCERT Class X: Understanding Economic
Development.
17. Economic and Political Weekly
7. NCERT Class XI: Indian Economic Development.

18. Budget 2020 and 2021
8. NCERT Class XII: Introductory Microeconomics.

19. Economic Survey 2020-21
9. NCERT Class XII: Introductory Macroeconomics
10. https://www.livemint.com/
371
AUTHOR'S NOTE
This book tries to exhaustively cover the complete syllabus of UPSC CSE Preliminary &
Mains examination in an integrated approach for “Economy”. The purpose is to enable
the learners to correctly approach and solve the questions asked and thereby achieve
top ranks in UPSC CSE Examination.
Despite being exhaustive, we have tried to be as precise and accurate as we can to

supplement your smart study. We have tried to include recent events within and outside
India relevant for the CSE examination and present it in a manner in which UPSC
examination demands. The current issues have been linked with the static portion of the
syllabus (wherever possible) so as to develop a better understanding and have a better
grasp over the subject. The aim is to ensure that learners develop a knack of identifying
important subjects and topics from newspapers and magazines thereby saving their
precious time that usually gets wasted in reading the irrelevant stuff.
All this will not only prepare learners for the examination but also give a better
understanding of events happening around us in the society, polity, economy, global
affairs and prepare them for the challenges that they will have to tackle after clearing
the examination.
However, there is always scope for further improvement. It may so happen that learners
might have some suggestions about further improving the quality of the book. Such
suggestions would not only help us in assisting better but also the future learners to
do well. Any such suggestions would be welcome and can be communicated at
[email protected]
Vinod Subramanian, Rahul Patil, Suraj Singh have contributed to the creation of the
content in the book. With their profound experience in the field of UPSC and in the field,
they were responsible for selection of topics, content creation and editing of the content
in the notes.
We wish you all the success in your efforts towards UPSC CSE Examination.
Team UNACADEMY
UPSC | Economy
372
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220 246 277 296

328 353 360

Economics allocation of various natural resources

• Microeconomics focuses on the actions

I m a g e 1.1: T h e s e c to r a l c o n t r i b u ti o n to GDP (%)

Economies based Agrarian Economy

GDP • At the time of independence, India was

Primary Secondary Tertiary

National Income financial year.

Gross Domestic » Final Goods: Final Goods can be further

Farmer Chips company

Production Value 100 200

Intermediate Good Used 0 50

Total GDP when 100 + 200 = 300

Total GDP when only Final

• In other words, it is the cost of the good

Different uses of the concept A- Income earned by the normal

Difference between GDP and GNP

The focus on GNP is on production by

Net National Cost

2014-15 100 9 2 1 2-1 = 1 10 1000 900

2015-16 100 9 3 1 2-1 = 1 11 1100 900

• From January 2015 Government of India NFIA D

I m a g e 2.1: D i a g r a m m ati c r e p r e s e n tati o n o f

• Nominal GDP is GDP calculated at

2011-12 100 10 10 1000 1000 100 1000

2012-13 100 15 10 1500 1000 150 1000

2013-14 100 22.5 15 2250 1500 150 1500

Nominal Income Real Income Disposable Income

National Income or NNP at Personal Disposable Income

Base year Reference value =100

• The base year is changed periodically to “New GDP Series”

• GDP at Market Prices = GVA at basic

Measurement of National Income

Product/Value added Expenditure Method Income method

I m a g e 2.3: M e t h o d for Measurement of N ati o n a l I n c o m e

Product or Value-Added in production, therefore the following

Total production Value 100 200

Intermediate Goods Used 0 50

GVA (Gross Value Added) = (Production

Income method Items not included

• Domestic Income can be calculated both

• Explanation: A closed economy is one • Explanation: Note: You will be able to

I m a g e 2.4: R e a l GDP g r ow t h r at e f r o m 2004 to 2014

ECONOMIC GROWTH AND

Difference between Economic growth and

Economic growth is a narrower concept. It refers to

Economic development is a 'Multidimensional'

It is a Quantitative Concept. It is both Quantitative and Qualitative Concept.

It is a short term process. It is a long term process.

• Real GDP is not a satisfactory measure of

of Economic » It is based on the value but does not

NEW = GNP + Value of Housewives Services +

» Life Expectancy at birth

Human » Life Expectancy Index (LEI): Measures

DIMENSION Long & healthy life Knowledge A decent standard of living

DIMENSION Life Expectancy Index Education Index GNI Index

Human Development Index (HDI)