Economy: Compilation Notes - PDF Only
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Maaz Reza khanEconomy: Compilation Notes - PDF Only
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Maaz Reza khanCompilation of
Daily Class Notes
Indian Economy
List of Lectures
1. Fundamentals of Economy
2. Basics of Microeconomics
3. Basics of Microeconomics (Part 02)
4. Basics of Microeconomics (Part 03)
5. Development, Sectors
6. Post Independence Economy 1947 to 1991, LPG Reforms
7. LPG Reforms, Human Capital
8. Unemployment and Poverty
9. Poverty and Informal Sector
10. GDP, Circular Flow
11. Factor Cost vs Market Price
12. Money and Banking
13. Money, and Banking (Part 02)
14. Money and Banking (Part 03)
15. Money, and Banking (Part 04)
16. Money and Banking (Part 05)
17. External Sector
18. Balance of Payment
19. Rural Development
20. Rural Development (Part 02)
Indian Economy
Lecture 01: Fundamentals of Economy
“Economy is technical but not tough.”
Books to be Followed:
● Indian Economic Development - Class XI
● Introductory Microeconomics - Class XII
● Introductory Macroeconomics - Class XII
● NCERT WALLAH - Economy
UPSC Prelims Syllabus:
● Current events of national and international importance.
● History of India and Indian National Movement.
● Indian and World Geography-Physical, Social, Economic Geography of India and the World.
● Indian Polity and Governance-Constitution, Political System, PanchayatiRaj,PublicPolicy,
Rights Issues, etc.
● Economic and Social Development-Sustainable Development, Poverty, Inclusion,
Demographics, Social Sector Initiatives, etc.
● General issues on Environmental ecology, Biodiversity and Climate Change that do not
require subject specialisation.
● General Science.
Need vs Want:
● Need refers to the necessary expenses for humans tolivehealthylives.Example:food,
house, clothing.
● Wantsreferstotheexpensesthatbuyerschoosetobuybutcancomfortablylivewithout.
Example: travel, electronics, dining out.
Scarcity and Choice:
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● Scarcity refers to the basic economic problem that resources (like time, money, raw
materials, etc.)are limitedand cannot meet all human wants and needs.
● Choice arises because of scarcity. Since resources are limited, people and societies must
decide how to allocate these resources and make decisions on what to prioritise, which
meanschoosing one alternative over another.
● Example:Imagineafarmerhasonlyoneacreofland.Theycaneitherplantwheatorcorn
butnotbothbecauseoflimitedland(scarcity).Iftheychoosetoplantwheat,theyforgo
the opportunity to grow corn. This is the choice they make due to scarcity of land.
Opportunity Cost:
● OpportunityCostisthevalueofthenextbestalternativethatisgivenupwhenmaking
a choice. It represents the benefits you could have received by taking an alternative action.
● Example:Ifthefarmerdecidestoplantwheatinsteadofcorn,theopportunitycostisthe
profit or benefits they would have gained from planting corn.
Economy vs Economics:
● The term "economics" originates from the Greek word
"Oikonomia,"which means"household management."
● As a field of study, economics focuses on
decision-making, specifically how to manage unlimited
wants with the limited resources available.
● Essentially, economics examines how scarce resources
areallocatedtoproducegoodsandfulfilltheneedsof
individuals and society.
● On the other hand, the "economy" represents the practical application of economic
theories. It refers to "economics in action" and involves real-world systems like the
Indian Economy or the American Economy, where these principles are implemented.
● There aretwo branches of economicsi.e.
1. Microeconomics
2. Macroeconomics
Microeconomics vs Macroeconomics:
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Microeconomics Macroeconomics
● Micro literally meanssmall. ● Macro literally meanslarge.
● The microeconomicstakesintoaccount ● Undermacroeconomics,theeconomyof
small components of the economy. the countryis considered as a whole.
● It studies economics at the individual ● It studies economics at the aggregate
level. level.
● It studies individual, household, and ● It studies the decisions of the
business decisions. government and countries of the
world.
● It is also calledPrice Theory. ● It is also calledIncome Theory.
● It is useful forindividual investors. ● It is useful for fiscal and monetary
policy decisions.
● The fiscal policyisthepoliciesofthegovernmentwhereasthemonetarypolicyisthe
policies of the Central Bank of Indiai.e. Reserve Bank of India (RBI).
Demand and Supply:
● Demandrepresentstheamountofaproductthatconsumersarereadytopurchaseata
specific price.Forinstance,ifthepriceofapplesdecreases,consumersmaybewillingto
buy more apples, increasing the demand.
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● Supply is the quantity that producers are prepared to sell at a certain price. For
example, ifthepriceofwheatrises,farmersmightbemoreinclinedtoproduceandoffer
more wheat in the market, increasing the supply.
Three Fundamental Questions of Economy:
● What to Produce and How Much to Produce?
○ This question addresses the choice of items to be produced, such as pens, cars,
etc., and the amount of each product
○ It involves the problem ofallocation of resources.
● How to Produce?
○ Underthis,themethodortechniquesofproductioni.e.throughtheuseoflabour
or machines will be decided.
○ AneconomythatlargelyuseslabourfortheproductionofgoodsiscalledaLabour
Intensive Economy.
○ An economy that largely uses machinery for the production of goods is called a
Capital Intensive Economy.
● For Whom to Produce?
○ Itdealswiththeproblemsofdistributionoftotalproductionamongtheowners
of the factors of production.
○ Underthis,whethertheproductswillbeproduced
for the rich or poor will be decided.
Types of Economy:
There are three types of economy:
1. Socialist Economy
2. Capitalist Economy
3. Mixed Economy
Socialist Economy Capitalist Economy Mixed Economy
● Whenthegovernment, ● Whentheindividualor ● When the government
i.e., the public sector the market, i.e., the as well as the
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decidestheproductto privatesectordecides individuals and
be produced, the the product to be market decides the
quantityoftheproduct produced, the quantity producttobeproduced,
produced, the method of the product the quantity of the
of production for the produced, the method product produced, the
product, andforwhom of production for the method of production
the product is product, andforwhom for the product, and
produced, then it is the product is for whom the product
known as theSocialist produced, then it is is produced, then it is
Economy. known as the known as the Mixed
Capitalist Economy. Economy.
● There is government ● There is little ● Ithasfeaturesofboth
interference in the interferencefromthe socialist as well as
economy. government in the capitalisteconomy.
economy.
● Theroleofthepublic ● The role of the ● The role of both the
sectorisseenmorein private sector is seen public and private
the Socialist Economy. more in the Capitalist sectors is seen inthe
Economy. Mixed Economy.
● Examples: North ● Examples:USA,Japan, ● Example: India, etc.
Korea,Venezuela,Cuba, etc.
China, etc.
Capitalist Economy:
● Adam Smith, often known as the "Father of Economics," introduced core ideas for a
capitalist economy in his important book,The Wealth of Nations.
● One of his main ideas is the "invisible hand"concept.Thisconceptsuggeststhatina
free-market economy, when people act out of self-interest, they unknowingly help
improve society's overall economic well-being.
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● Smithexplainedthataspeopleaimforpersonalprofit,theyalsocontributetoaneffective
use of resources.
● In a competitive and open market, the forces ofdemandandsupplynaturallybalance
each other, without needing central planning or government control.
● He believed that self-interest drives economicactivity,leadingtowealthandbenefitsfor
society as people work to fulfill their own needs and wants.
Merits of Capitalist Economy:
● Consumer choices: Consumers have a wide array of goods and services to choose from,
promoting satisfaction and demand-driven production.
● Competition: Firms compete to attract customers, leading to betterqualityproductsand
services at lower prices.
● Betterservices:Businessesprioritisecustomerserviceandefficiencytoretaintheirmarket
share.
● Meritocracy: Opportunities and rewards are largely based on individual skills, effort, and
innovation.
● GDP growth: Capitalist economies often experience higher growth rates due to private
investment and market-driven productivity.
● Technology: Capitalist incentives drive firms to adopt and develop cutting-edge technology.
● Innovation: A profit-driven system encourages constant innovation and improvement of
products.
● ResearchandDevelopment(R&D):CompaniesinvestheavilyinR&Dtostaycompetitive
and capture new markets.
Demerits of Capitalist Economy:
● Exploitationofthepoor:Workersinlow-payingjobsmaybeexploited,lackingfairwages
and benefits.
● Income inequality: Wealth tends to concentrate in the hands of a few, leading to a
significant wealth gap.
● Job insecurity: Employees may face job instability due tothedemandforflexibilityand
cost-cutting measures.
● Profit maximisation: Companies focus on profit overwelfare,sometimescompromisingon
ethics, environment, and social responsibility.
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Indian Economy
Lecture 02: Basics of Microeconomics
Asset vs Liability:
Asset Liability
● Items of valueare called assets. ● Liability refers to thedebtthat an individual
or firm owes.
● Theownershipof assets lies with the owner ● Theburdenof liability lies on individuals or
of individuals or firms. firms that owe it.
● They generaterevenue or incomefor ● They are anexpensefor individuals or firms.
individuals or firms.
● Example:your house, your car, your mobile ● Example:your house loan, your car loan, credit
phone, your share in the stock market, etc are card payments, instalments or EMI of loans,
your assets. etc are your liabilities.
Asset and Liability of Bank:
● Theloansgiven by banks are theassets of the bankas the bank owns that money
(given in the form of a loan) and it is also earning revenue or income, in the form of
interest charged, on that money.
● Thedepositsdone by individuals or firms in banksareliabilities of banksas the banks
owe that money to the individuals or firms and it also has to pay the interest on that
deposit.
Law of Demand:
● As theprice of a good or service decreases, the quantitydemanded increases and
vice-versa, if other things are kept constant.
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● The demand curve isdownward-sloping, indicating aninverse
relationshipbetween price and quantity demanded.
● Example:Generally we have seen that, whenever the price of
products drops during the sale on any online shopping
platform, the product becomes out of stock after some time
due to increased demand for the product. If the price of a
watch decreases from Rs.5000 to Rs.4000, the demand for
the watch among consumers will automatically increase.
● However, this law appliesonly to normal goods.
Law of Supply:
● The supply curve isupward-sloping, demonstrating adirect
relationshipbetween the price and the quantity supplied.
● An increase in price, results in an increase in quantity
supplied.
Market Equilibrium:
● The equilibrium point occurs at theintersection of the
supply curve and the demand curve.At this point, the
quantity of the commodity that consumers are willing to buy equals the quantity producers
are willing to supply. This is known as themarket equilibrium, where there is neither
excess supply (surplus) nor excess demand (shortage).
● For example, at a bakery, market equilibrium is reached when the amount of bread
produced daily is sold out at closing time without leftovers or shortages.
● Price is determinedat the intersection of the supplyand demand curves.
● Setting the price abovetheequilibriumleadstoasurplus,wherethequantitysupplied
exceeds the quantity demanded. To clear inventory, the company must lower the price.
● Conversely,settingthepricebelowequilibriumcausesexcessdemand.Theonlyremedy
is to increase the price. At one point the demand will meet the supply cycle when the
price of the commodity gets adjusted.
Elasticity:
● It refers tohow quantity demanded or supplied respondsto changes in price.
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● If a slight price change results in a substantial shift in quantity demanded, it
indicates high elasticity. Conversely, if a price change has minimal impact on the
quantity demanded, the demand is consideredhighlyinelastic.
● Producersrelyonthisconcepttopredicttheeffectsofpricingstrategies,whilegovernment
finance departments use it to model tax implications.
● The price elasticity of demand is calculated by dividing the change in quantity
demandedbythechangeinprice.Similarly,thepriceelasticityofsupplyisdetermined
bydividing the change in quantity supplied by the change in price.
Firms:
● In layman's language, a firm can be considered to bea factory, a company, or a business.
Types of Firms in a Market:
Monopoly:
● "Mono"referstooneorsingle.Amonopolyexistswhenasinglesellercontrolstheentire
market, eliminating competition.
● Monopolies may form due to legal rights, such as patents, or through government
ownership.
● Inamonopoly,buyershavenoalternativesourcesfortheproductorservice,grantingthe
seller control over pricing and enabling them to capture significant profits. Entry
barriers are extremely highin such markets.
● For example:
○ WhentravellingfromDelhitoChandigarhbytrain,customerscanonlybooktickets
through IRCTC (Indian Railways), which controls the rail services.
○ Similarly,whenapharmaceuticalcompanyisgrantedapatent,italoneispermitted
to produce and sell that drug, reinforcing high entry barriers.
○ Previously, only Coal India Limited had rights to coal mining, but recent policy
changes have opened this sector to private companies.
Oligopoly:
● Inanoligopoly,onlyafewlargefirmsdominatethemarket,likeAirtel,Jio,Vi,andBSNL
in telecom.
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● Unlike a monopoly where a single player rules, competition exists in an oligopoly, and
while there areentry barriers,theyaren’t as restrictiveas in a monopoly.
● This market structure forms when a small number of powerful producers control the
industry, with aduopoly being the simplest example.
● Oligopoliesofteninvolvecomplexproductdifferentiation,barrierstoentry,andconsiderable
price-setting power held by the main players.
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Theory of the Firm in Microeconomics:
● The theory of the firm, amicroeconomicbranch,exploresdiverseorganisationalstructures
within industries and draws insights from these structures.
Types of Firms in Market:
Perfect Competition:
● In a perfectly competitive market,numerous firms produce identical goods.
● No barriersimpede entry or exit.
● Producers and consumers possessperfect market knowledge.
● In this scenario, prices and output levels gravitate towardsequilibrium.
● Real-lifeinstancesofperfectcompetitionarerare,butsomefinancialmarketsandcertain
online commerce sectors align with its principles.
Monopolistic Competition:
● Monopolistic competition involves many producers using product differentiation to
distinguish themselves.
● Despitesimilar products, perceived differences allow short term monopolistic behaviour.
● Consumer awareness of productdistinctionsisessential,andbarrierstoentryorexitare
typicallylower than in oligopolistic markets.
Types of Goods:
Raw Material:
● Goods that are primarily used as inputs in the production or manufacturing of other
goods.
Intermediary Goods:
● Those goods which have undergone processing but are again used as inputs in the
productionof final goods.
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Finished/Final Goods:
● Thosegoodswhichdonotrequirefurtherprocessingandarefitforfinalconsumptionby
the consumer.
● A single product may serve as either an intermediate or afinalgood,dependingonits
use.
● For example, milkcan be used in both ways.
○ As a final good: Milk bought by a household for direct consumption.
○ Asanintermediategood:Milkpurchasedbyabakeryforproducingcakesorother
dairy-based products.
Types of Final Goods:
● Capital Goods:
○ Theyareusedintheprocessofproductionoffinalproductsbuttheythemselves
don't get transformed.
○ They includetools, buildings, vehicles, machinery and equipment.
○ Capital goods arenot intermediate goods.
○ They are durable and wear out gradually. They remain with their
producers/manufacturers for the production of products/services.
● Consumption/ Consumer Goods:
○ Goodslikefoodandclothing,andserviceslikerecreationthatareconsumedwhen
purchasedbytheirultimateconsumersarecalledconsumptiongoodsorconsumer
goods.
Types of Consumer Goods:
● Durable Goods:Goods thatdo not quickly wear outand have alonger lifetimevalue.
● Non Durable Goods:Goods that are consumed in ashort period of time.
Other Types of Goods:
Substitute Goods:
● Substitute goods are pairs of competing goods which, in the opinion of buyers, can
replace each other.For example, if tea is costly, buyers may drink coffee.
● Example:Teaandcoffeearesubstitutegoodsasapersonwilldrinkonlyoneofthemat
a time.
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● Suppose in the above examplethepriceofacupofteaandcoffeeisworthRs10.After
some time, the price of a cup of tea increases to Rs 20. Now according to the law of
demand, if the price of the product increases its demand will decrease therefore the
demand for tea decreases. N
ow people willswitchtocoffeeasitspriceisstilllessthan
tea.Thusthedemandforcoffeewillincrease.Thisshowsthatwiththeincreaseinprice
ofaproduct,itsdemanddecreases,andsimultaneouslythedemandforitssubstitute
product increases.
Complementary Goods:
● Complementary goods are pairs ofgoods that are interdependent or compatible.
● Example:Breadandbutterarecomplementarygoodsasapersonwillwanttoeatbothof
them together to have a better taste.
● Supposeintheaboveexamplethepriceofbutterincreases,itsdemandwilldecrease.The
demand for breadwillalsodecreaseaspeopleliketoeatthemtogether.Thisshowsthat
withtheincreaseinpriceofaproduct,itsdemanddecreasesandsimultaneouslythe
demand for its complementary product decreases.
Income Elasticity of Demand:
● IncomeElasticityofDemandmeasureshowthequantitydemandedofagoodorservice
changes in response to a change in consumer income.
● It is an important concept in economics, as it helps to classify goods and understand
consumer behaviour.
Types of Goods Based on Income Elasticity (Income Changes):
● Normal Goods:
○ These are goods for whichdemand grows when consumer income rises.
○ For instance, if a person earns more, they might buy more bread, clothes, or
household items.
● Luxury Goods:
○ These a re goods that see an even sharper increase in demand as consumer
income goes up, often more than the rate of income growth.
○ For example, with a significant income rise, a person may buy more designer
clothes, high-end electronics, or luxury cars.
● Inferior Goods:
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○ Itisaneconomictermthatdescribesagoodwhosedemanddropswhenpeople's
incomes rise.
○ Thesegoodsfalloutoffavourasincomesandtheeconomyimproveasconsumers
begin buying more costly substitutes instead.
○ Forexample,cheapcerealsandfoodgrainslikerice(inferiorgoods)willbereplaced
by better quality food items like eggs, milk when income rises.
Law of Demand:
● The Law of Demand statesthat,allelsebeingequal,thequantitydemandedofagood
falls when its price rises and vice versa.
● DeterminantsofDemand:Itincludesprice,consumerincome,tastes/preferences,pricesof
related goods, and future expectations.
● However, there are exceptions to this rule, such asVeblen GoodsandGiffen Goods.
Goods that do not follow the Law of Demand / Types of Goods Based on Price
Changes:
● Veblen Goods:
○ Veblen good is a high quality status product where increase in price leads to
increase in demand.
○ A Veblen good is a type of luxury product for which demand increases as its
price rises, contrary to the typical law of demand.
○ Veblen goods are often associated with status, exclusivity, and prestige, making
them desirable for their high cost.
○ Examplesofveblengoodsincludedesignerhandbags,luxurycars(likeRolls-Royce
or Lamborghini), high-end watches (such a s Rolex or Patek Philippe), and
exclusive jewellery brands.
● Giffen goods:
○ AGiffengoodisalowincome,non-luxuryproductthatdefiesstandardeconomic
and consumer demand theory.
○ Demand for giffen goods rises when the price rises and falls when the price
falls.
○ Examples of giffen goods can includebread, rice, and wheat.
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○ Thesegoodsarecommonlyessentialswithfewnear-dimensionalsubstitutesatthe
same price levels.
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Indian Economy
Lecture 04: Basics of Microeconomics (Part 03)
Types of Goods:
Excludable and Non-Excludable Goods:
● Excludable Goods:
○ A good for which it is possible to prevent consumers who havenotpaidforit
from having accessto it.
○ Examplesare NETFLIX, Paid Parking, Cinema Hall, etc.
● Non-Excludable Goods:
○ The goods which are not excludedamongstthepopulationandeverypersongets
the right to use it because its access is free.
○ Example:Roads, vegetable market, etc.
Rival and Non-Rival Goods:
● Rival Goods:
○ Agoodwhoseconsumptionbyoneconsumerpreventssimultaneousconsumption
by another consumer.
○ Examplesare ATM, Parking space, Chair, etc.
● Non-Rival Goods:
○ These goods can beconsumed or utilised simultaneously.
○ Example:Roads, OTT platforms, social media, public park, etc.
Public and Private Goods:
● Public Goods:
○ These goods areprovided by the government.
○ They are generallynon-excludable and non-rival.
○ Example: Roads, Bridge, School, Hospital, Police Station, Metro, Bus, National
defence, etc.
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● Private Goods:
○ They areowned and operated by private individuals or organisations.
○ Theyaregenerallyexcludableandrival,meaningconsumersneedtopayforthem
and there's a limited supply.
○ When an individual buys an item, that particular item is no longer available to
others. Most consumer goods fall into this category.
○ Example:HDFC ATM, private schools, etc.
Free Rider Problem:
● Whenpeoplebenefitfromresources,goodsorserviceswithoutpayingfromthem,itis
termed as the Free Rider Problem.
● This is more prevalent in the case ofpublic goods.
Total Utility and Marginal Utility:
● Utility in economics means the satisfaction or happiness one gets after using or
consuming something.
● Utility ismeasured in two ways:
○ Total Utility: Total Utility is the total happiness one gets from allthethings
onehas.Example:Supposeanindividualbuys20chocolatesfromashop.Thetotal
utility will measure the total happiness of the child after getting 20 chocolates.
○ Marginal Utility: MarginalUtilitytellshowmuchextrahappinessonegetsfrom
consumingoneadditionalunit.Example:Supposeanindividualbuys20chocolates
fromashop.Themarginalutilitywillmeasurethehappinessofthechildingetting
one more chocolate, i.e, the 21st chocolate.
Law of Diminishing Marginal Utility:
● Thislawsaysthatasapersonconsumesmoreunitsofagoodorservice,theadditional
utility or satisfaction derived from each unitdecreases.
● Example:Threebitesofcandyarebetterthantwobites,butthetwentiethbitedoesnot
add much to the experience beyond the nineteenth one.
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Marginal Rate of Substitution:
● Marginal Rate of Substitution is the rate at which a consumer is willing to trade one
good for another while maintaining the same level of satisfaction.
Law of Diminishing Marginal Rate of Substitution:
● As consumers accumulate more of a particular good, they become less inclined to
trade it for another good.
● Example: Suppose there are two individuals A and B. A has 50 oranges and B has 20
packetsofcoffee.Awantsapacketofcoffeesoheexchangedhis5orangeswithBtoget
it. Now A has 45 oranges andapacketofcoffee.AgainAwantsapacketofcoffee,he
again exchanges his 5 oranges with B to getapacketofcoffee.NowAhas40oranges
and2packetsofcoffee.AgainAwantsapacketofcoffee,butnowhewantstogiveonly
2orangesinexchangeforapacketofcoffeeashealreadyhas2packetsofcoffee.Thus,
therate of substitution is diminishing.
Fixed Cost and Variable Cost:
● Fixed Cost: Fixed cost is the cost that remains constant regardless of the level of
production.Example:Rent, lease payment, etc.
● Variable Cost: Variable cost is the cost that changes with the level of production.
Example:Raw materials, labour, etc.
● TotalProductionCost:TotalProductionCostreferstothecompleteexpenseincurredby
afirminproducingacertainlevelofoutput.Itencompassesbothfixedcostsandvariable
costs.
Total Cost = Fixed Cost + Variable Cost
● Example:
○ Let's consider afactorythatproducesgarments.Thetotalcost(TC)ofproducing
garments involves both fixed and variable costs.
○ Fixed costs could involve the monthly rent for the factory space, which remains
constant regardless of the number of garments produced by the factory.
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○ Variablecostsmightincludethecostofrawmaterialslikeclothwhichincreaseas
more garments are produced.
Production Possibility Frontier:
● Example:Supposeanindividualhasoneacreoflandandwantstoproducewheatandrice
ontheland.Supposethatthemaximumproductionofwheatandriceononeacreofland
is 10 kg and 15 kg respectively. Now there are three choices available before him/her:
○ Choice 1:Produce only rice and not wheat.
Suppose h
e produced 10 kg of rice and 0 kg of wheat (represented by A in the
figure).
○ Choice 2: Produce only wheat and
not rice.
Supposeheproduced15kgofwheat
and 0 kg ofrice(representedbyB
in the figure).
○ Choice 3: Produce both wheat and
rice. Both of them could be
produced equally or unequally (as
the quantity of wheat/rice sown increases, the quantity of rice/wheat sown
decreases)
Suppose he produced 14 kg of wheat and 7 kg of rice (represented by C in the
figure).
● These three choices can be presented on the graph as follows:
○ Case I:PointsontheCurve:Thisispossiblewhenalltheresourcesareutilised
at their utmost capacity by the individual.(RepresentedbyA,B,andCinthe
figure)
○ Case II: Points Inside the Curve: This is possible in case of improper use of
resourcesby the individual. (Represented byEin the figure)
○ CaseIII:PointsOutsidetheCurve:Thepointoutsidethecurveisnotpossibleas
10kgofriceand15kgofwheatisthemaximumproductivityofoneacreofland
with the present resources. (Represented byDin the figure)
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● Production Possibility Frontier refers to thecollectionofallpossiblecombinationsthat
can be produced using given resources.
Budget Line:
● The term budget line refers to a graphical representation of all the potential
combinations of two commodities that can be bought within a certain income and
price.
● The budget Line represents a bundle withthecostequaltoM,whereMistheTotal
Money.
● Example:Suppose an individual has ₹100 to spend on two items: mangoes and coffee.
○ LetP1bethePriceofMangoesandX1bethequantityofmangoespurchased.Let
P2 be the Price of Coffee and X2 be the quantity of coffee purchased.
○ If the mangoes cost ₹2 each and coffee cost ₹ 5 each, the budget line would
show the various combinations you can afford.
○ The first option is to buy 20
sachets of coffee (₹5/coffee) but
omangoes.Thisisrepresentedby
n
Point A (0,20) on the graph.
○ Alternatively, you could buy 50
mangoes (₹2/mango) but no
coffee.ThisisrepresentedbyPoint
B (50,0) on the graph.
○ Or you mightdecidetobuyamix,
like 25 mangoes and 10 coffees,
staying within your budget ₹100. This is represented byPointC(25,10)onthe
graph.
● Thecostofeachcombinationmustbelessthanorequaltotheconsumer’smoneyincome,
i.e.,P1X1+ P2X = M.
2
● BudgetSet:Itisthecollectionofallthebundlesavailabletotheconsumeratmarket
price.
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Normative and Positive Economics:
● PositiveEconomicsexamineswhatis,whatwas,orwhatwillbe,focusingonthe"how"
and "why" behind economic phenomena. It relies on data, facts, and statisticsrather
than personal opinions or subjective judgments.
● Normative economics focuses on what ought to be. It focuses on individual point of
view, personal judgements and perspectives.
Normative Economics Positive Economics
● Make recommendations. ● Connects cause and effects.
● Not based on tested facts. ● Based on tested facts.
● Tells you what should be/have been. ● Tells you what is/ what was.
● Prescriptive and subjective. ● Descriptive and objective.
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Indian Economy
Lecture 05: Development, Sectors
Growth and Development:
Growth Development
● Economic growth only looks at the ● Economic development is the
quantitative aspect. It brings quantitativeandqualitativechangein
quantitative changes in the economy. an economy.
● It is the positive change in the ● It is a positive impact of economic
indicators of the economy. growth.
● Development means different things
to different groups of people. What
one group sees as progress might be
harmful or disruptive to another.
● Economic Growth refers to the ● Economic development refers to
increment in the amount of goods sustained growth which brings about
and services producedby an economy. improvement in the quality of life
and living standards, reduction and
eliminationofpoverty,unemployment
and inequality with the context of a
growing economy.
● Economicgrowthissingledimensional ● Economic development is
in nature asitonlyfocusesonincome multi-dimensional in nature as it
of the people. focuses on both income and
improvement of livingstandardsofthe
people.
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Sectors of Economy:
● Primary Sector:It involvesactivities related to raw materials and natural resources.
○ Example:Agriculture, Farming, Forestry, etc.
○ Steelisusedasarawmaterialforcarmanufacturing.Theextractionofsteelfrom
ironoresothatitcanbetransformedintofinishedproductsandsoldisanactivity
belonging to the Primary sector.
● Secondary Sector: This sector contains activities that involve the processing and
manufacturing of raw materials into finished products.
○ Example:Construction, Manufacturing, etc.
○ The automotive sector uses steel to construct various partsofacarandcarsare
produced in factories. Hence, the automobile industry is an example of the
Secondary Sector because it takestheresourcesobtainedfromthePrimarysector
and makes products for consumers.
● Tertiary Sector: This sector contains activities that provide services to individuals or
businesses.
○ Example:Transportation, Teaching, Banking, etc.
○ Cars sold in auto dealerships are an example of the Tertiary sector because
manufactured goods are sold by the companies to their customers.
Indian Economy On Eve of Independence:
Agriculture Stagnation:
● Zamindari System:
○ ExploitativeStructure:TheBritishsetupasystemwhereZamindars(landowners)
acted as middlemen, collecting rent from farmers for the government. These
Zamindarsweremainlyinterestedincollectinghighrentsandignoredtheneedsof
farmers and land quality.
○ No Incentives for Farmers: Farmers hadnomotivationtoimprovethelandsince
profits went to Zamindars, not back into agriculture. This led to low agricultural
development.
● Low Technological Development:
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○ Minimal Mechanisation: Agriculture still relied onoutdatedtoolsandmethods,as
modern machinery was hardly used, which kept productivity low.
○ Outdated Techniques: Farmers continued to use inefficient traditional methods,
and lack of innovation prevented improvement in yields.
● Lack of Irrigation Facilities:
○ Poor Water Access: Irrigation was underdeveloped, especially indryareas,making
farmers dependent on the monsoon. This made crop yields uncertain.
○ FrequentCropFailures:Withunreliablewatersupply,cropsoftenfailed,leadingto
farmer insecurity and stagnant agricultural production.
● Limited use of Fertilisers:
○ DecliningSoilFertility:Thelackoffertilisersledtonutrientdepletioninthesoil,
causing yields to drop over time.
○ LimitedAccesstoFertilisers:Fertiliserswereeithertooexpensiveorhardtofind
for most farmers, which limited their use and reduced potential productivity.
● Commercialisation of Agriculture:
○ FocusonCashCrops:TheBritishencouragedthegrowthofcashcropslikecotton
andjutetosupplyBritishindustries.Thisshiftreducedthefocusonessentialfood
crops, leading to food shortages.
○ Negative Impact on Food Security: The push towards cash crops disrupted
traditional food crop cultivation, making India vulnerable to famines and food
shortages.
Industrial Sector:
On the eve of independence, India's industrial sector was in a dismal state due to British
colonial policies.Key negative impacts included:
● Deindustrialization:Britishpoliciesactivelydiscouragedthegrowthofmodernindustriesin
India.Traditionalhandicraftsandcottageindustriesweredestroyed,whilelittleeffortwas
made to develop modern industrial infrastructure.
● RawMaterialExporter:IndiawastransformedintoasupplierofrawmaterialsforBritish
industries. This limited the development of Indian manufacturing, which was deprived of
both resources and local demand.
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● Market for Foreign Products: Indian markets were flooded with British-manufactured
goods, often at the expenseoflocalindustries.Britishgoodswerepromoted,whileIndian
goods were taxed, making them less competitive.
● Massive Unemployment: The destruction of traditional industries and handicrafts led to
widespread unemployment and underemployment. Millions of artisans and craftsmen lost
their livelihoods as local industries collapsed.
● LackofCapitalGoodsIndustries:Nofocuswasgiventobuildingcapitalgoodsindustries,
which produce machinery andtoolsessentialforindustrialdevelopment.Asaresult,India
had to rely on imports for such goods, further stunting industrial growth and self-reliance.
Infrastructure:
TheBritishinvestedininfrastructureprimarilyfortheirowneconomicandstrategicbenefitsrather
than for India's development.
● Military Purpose: The British built extensive rail and road networks to facilitatemilitary
mobilisationacrossIndia,ensuringaquickresponsetosuppressanyuprisings,suchasthe
Revolt of 1857.
● Agriculture: The British promoted commercial agriculture, pushing Indian farmers to
cultivatecashcropslikecotton,jute,indigo,andtea.Railwaysandroadsmadeiteasierto
transport these raw materials from remote areas to ports for export.
● Industrial Supply Chains: Railways and ports facilitated the flow of raw materials like
cotton,iron,coal,andteafromIndiatoBritain.Inreturn,manufacturedgoodsfromBritain
flooded the Indian market. This infrastructure setup supported the colonial economy by
turning India into a supplier of rawmaterialsandamarketforBritishgoods,stifling
India's own industries.
Challenges Faced by Indian Economy:
● Low Agricultural Productivity: Outdated practices, lack of mechanisation, and minimal
irrigation resulted in consistently low agricultural output.
● Problems in Infrastructure: Infrastructure investments were tailored to Britishinterests,
with limited benefits for India's internal economic growth.
● UnderdevelopedIndustrialSector:BritishpoliciesrestrictedIndia'sindustrialdevelopment,
keeping it dependent on raw material exports and foreign imports.
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● Unemployment: The collapse of traditional industriesandinadequatedevelopmentofnew
ones led to massive unemployment and widespread poverty.
● Poverty:Colonialpoliciesconcentratedwealthinthehandsofafew,exacerbatingpoverty
across rural and urban India.
Demography:
● Demography is the statistical study of human populations. It analyses various aspects
suchassize,structure,distribution,andchangesovertimeduetobirth,migration,ageing,
and death.
● India'sfirstcensuswasconductedin1872,butasystematicandcomprehensivecensus
was first completed in 1881.Since then, it has been conductedregularly every ten years.
● Demographic Indicators at the Eve of Independence:
○ Literacy Rate:16% overall, with female literacy at a mere 7%.
○ Life Expectancy:Approximately 32 years.
○ Infant Mortality Rate:218 deaths per 1,000 live births.
○ Healthfacilitieswereseverelyinadequate,withlimitedaccesstomedicalservices
and trained professionals.
○ Frequent outbreaks of diseases were common, partly due to poor sanitation,
malnutrition, and a lack of widespread healthcare infrastructure.
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Indian Economy
Lecture 06: Post Independence Economy 1947 to
1991, LPG Reforms
Post Independence Economy 1947 to 1991:
Planning:
● A plancontainshowtheresourcescanbeeffectivelyutilisedinordertogeneratethe
desired result.
● After gaining independence in 1947, India’s economic planning (from 1947 to 1991) was
strongly influenced by socialist ideas, especially underleaderslikeJawaharlalNehruand
Subhash Chandra Bose.
● During the 1920s and 1930s, many socialist parties emerged in India, inspired by the
SovietUnion’ssuccessinindustrialisingandgrowingitseconomythroughplannedFive
Year Plans.
● To implement a similar approach, IndiasetupthePlanningCommissionin1950,andthe
Five Year Plans became the key strategy for the country’s economic growth and
development.
Objective of Planning in India:
● Growth:
○ Theaimistoenhancethecountry'sproductivecapacity,enablingasustainable
increase in the production of goods and services. This ensures an increase in
national income, employment opportunities, and overall economic prosperity.
● Modernisation:
○ Modernisation involves adopting new technology, enhancingskills,andfostering
progressive social attitudes. This objective not only seeks technological
advancement but also aims atsocietalprogress,improvingproductivityandquality
of life.
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● Equity:
○ Equity ensures that the benefits of economic prosperity are distributed fairly
acrosssociety.Thisobjectiveaddressesregionalandsocialinequalities,intendingto
uplift marginalised communities and improve accesstoresourcesandopportunities
for all.
● Self-Reliance (Atma Nirbhar):
○ Self-reliance aimstoreducedependencyonimports,especiallyincriticalsectors,
to secure economic independence. This objective emphasises building internal
capacity, promoting domestic industries, and fostering resilience against external
shocks.
Equity vs Equality:
● Equality means treating everyone the
same,givingeveryonethesameresourcesor
opportunities withoutconsideringindividual
differences or starting points. However, in
situations where individuals or groups have
varying needs or disadvantages, equal
treatment may not result in fair or equal
outcomes.
● Equity means allocating resources and opportunities based on individual needs,
recognizing that people mayhavedifferentcircumstancesandthatfairnessrequires
adjusting treatment accordingly. In other words, equity aimstoprovideindividualswith
thespecificsupporttheyneedtoreachthesameoutcomes,evenifthismeansdifferent
treatment.
Land Reforms:
LandreformsinIndiaaimedtoimprovethelivesoffarmers,increaseagriculturalproductivity,and
promote social equality.
● Abolition of Intermediaries (Zamindari System):
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○ The government abolished the Zamindari system, removing landlords
(zamindars) who collected rent from farmers. Land was given directly to the
farmerswho worked on it, improving their ownership and reducing exploitation.
● Land Ceiling:
○ Landceilinglawssetamaximumlimitontheamountoflandapersonorfamily
could own. Extra land beyond this limit was taken by the government and
redistributed to landless farmersto promote fairerdistribution.
● Land Consolidation:
○ Land consolidation combined scattered small plots owned by a single farmer
into a larger, continuous plot. This made farming more efficient and increased
productivity.
● Cooperative Formation:
○ Farmerswereencouragedtoformcooperatives,wheretheycouldworktogetherto
poolresources,accessbetterfacilities,andgetfairpricesfortheirproduce.This
helped small farmers by providing them with collective strength and support.
Reasons behind Partial Success of Land Reforms:
● LackofPoliticalWill:Manypoliticalleadersdidnotstronglysupportlandreforms,leading
to weak enforcement.
● Corruption: Corruption in the system allowed landlords to avoid reforms and hold on to
large lands.
● LegalIssues:Complexlegalbattlesandloopholessloweddowntheprocessofredistributing
land.
● Exceptions and L
oopholes: Numerous exemptions in the laws allowed big landowners to
bypass reforms, making implementation weak.
● State-Level Variations: Since land is under the State List, eachstatehaditsapproach,
leading to uneven results. Some states like Kerala, West Bengal, and Punjab saw more
success, while others lagged behind.
Green Revolution:
● TheGreenRevolutioninIndia,introducedduringthe1960s,wasasignificantagricultural
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transformationaimed at achieving food security and self-sufficiency.
● Background:
○ The1962Indo-ChinaWarand1965Indo-PakWarstrainedIndia’sresources,while
two successive droughtsworsened the food scarcitysituation.
○ India was importing wheat from the United States under the PL-480 scheme,
receivinglow-qualitygrain.
○ Prime Minister Lal Bahadur Shastri’s slogan, “Jai Jawan, Jai Kisan”, motivated
both soldiers and farmers, highlighting the importance of self-reliance in food
production.
● Need for the Green Revolution:
○ Food Security: To ensure adequate food supply fora rapidly growing population.
○ Reduction in Dependency: Decrease reliance on foreignnations for food grains.
○ Low Agricultural Productivity: Address stagnant agricultural yields and boost
productivity.
● Key Contributors:
○ NormanBorlaugdevelopedhigh-yieldingvariety(HYV)seeds,initiallyintroduced
in Mexico, which were later adapted for India.
○ Dr.M.S.Swaminathan,knownasthe“FatheroftheGreenRevolutioninIndia,”
led the initiative to bring these advancements to Indian agriculture.
● The Green Revolution refers to the introduction of new agricultural practices,
technologies,andinputstosignificantlyincreasecropyields,particularlyforwheatand
rice, in India.
● Key Components:
○ High-YieldingVariety(HYV)Seeds:Newseedvarietiesweredevelopedtoproduce
higher yields.
○ ImprovedIrrigationFacilities:Large-scaleirrigationprojectsensuredastablewater
supply to support crop growth.
○ Technological Advancements: Use of modern machinery, such as tractors and
harvesters, improved efficiency.
○ Financial Support: Easy accesstocreditandloansenabledfarmerstoadoptnew
technologies.
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○ Fertilisers and Pesticides: Increased availability and usage of chemical fertilisers
and pesticides enhanced crop productivity.
● The Green Revolution led to India’s transition from a food-deficit nation to a
self-sufficient agricultural powerhouse, although it also introduced challengesrelatedto
soil degradation, over-reliance on chemicals, and regional disparities in agricultural
development.
Dominance of Public Sector:
● Thepublicsectorincludesbusinessesandindustriesownedandrunbythegovernment.
These organisations focus on providing essential services to the public rather than
making profits.
● RoleofthePublicSectorinIndia(1947–1991):Between1947and1991,thepublicsector
played a crucial role in India's economic development. This was due to:
○ Socialist Policies Focused on Public Welfare: The government adopted socialist
policies toensurebasicneedsweremetforallcitizens.Thepublicsectorprovided
goods and services that improved the quality of life.
○ Lack of Capital with Private Sector: After independence, private businesses did
nothaveenoughfundstoinvestinlargeindustries.Thegovernmentsteppedinto
build these industries, as they required significant resources.
○ Five-YearPlansandIndustrialPolicy:ThegovernmentintroducedFive-YearPlans
and industrial policies to guide economic development. These policies focused on
uildingindustrieslikesteel,power,andtransportation,whichwerevitalforgrowth
b
and required long-term investment.
Import Substitution:
● Import: The purchase of goods or services from foreigncountries.
● Export: The sale of domestically produced goods orservices to foreign markets.
● Import substitution is a trade and economicpolicythatencouragesdomesticproduction
to reduce reliance on foreign imports. This approach was pursued by India
post-independence, focusing on self-sufficiency and reducing vulnerability to foreign
markets.
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● Benefits of Import Substitution:
○ Employment Generation: Local industries required a workforce, boosting
employment among local people.
○ IndustrialGrowth:Emphasisondomesticproductionledtotheestablishmentand
growth of heavy industries, contributing to the industrial base.
○ Protection from Foreign Competition: By restricting imports, domestic industries
were shielded from competition with foreign firms, fostering initial growth and
resilience.
○ Development of Small-Scale Industries: P
olicies favoured small and medium
enterprises, leading to the growth of local industries and rural employment.
● Negative Effects of Import Substitution:
○ Lack of Competition: With limited foreign competition, many domesticindustries
became complacent, resulting in low-quality products.
○ Low TechnologyandInnovation:Protectionistpoliciesledtoreducedtechnological
advancements, as industries were not incentivized to innovate.
○ Inefficiency and Economic Growth Constraints: The focus onself-relianceoften
led to inefficient production processes, hampering overall economic growth and
p roductivity in the long run.
● India eventually shifted away from import substitution policies with the economic
liberalisation in 1991,allowing greater foreign investmentand trade openness.
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Indian Economy
Lecture 07: LPG Reforms, Human Capital
LPG (Liberalisation, Privatization, Globalization) Reforms of 1991:
The1991LPG(Liberalisation,Privatisation,andGlobalisation)reformswereamajorshiftinIndia’s
economicpolicy,launchedunderPrimeMinisterP.V.NarasimhaRaoandledbyFinanceMinister
Dr. Manmohan Singh. These changes were introduced to tackle a severe forex crisis, withIndia
facing a shortage of foreign currency and risk of default.
● Liberalisation: It refers to the abolition of licence raj and removal of government
restrictionsand allowing businesses to decide what to import or export.
● Privatisation: It refers to the transition from government ownership to privatesector
controlof enterprises.
● Globalisation: It refers to the integration of a country’s economy with the global
economythat helps in greater integration and interdependence.
Impact of LPG Reforms on Service Sector:
The LPG reforms of 1991 significantly transformed India’s service sector, making it one of the
fastest-growing components of the economy.
● Increased Foreign Investment: With relaxed regulations, foreign investorsstartedpouring
capital into services like telecom, aviation, insurance, and hospitality. This boosted job
creation, raised consumption, and brought in international standards.
● Growth in ITandSoftwareServices:Globalmarketaccessandsupportivepoliciesturned
IndiaintoanITpowerhouse.AlargeEnglish-speakingworkforceandcostadvantagesmade
India a leader in IT and Business Process Outsourcing (BPO),drivingexportrevenueand
creating millions of jobs.
● Skilled Workforce Expansion: As multinational companies entered India, the demand for
skilled workers rose. This led to greater investment in education, skill development, and
technical training, especially in IT and finance, creating a globally competitive workforce.
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● Rise in Startups and Entrepreneurship: Simplified business rules encouraged
entrepreneurship, leading to a startup boom in areas like e-commerce, technology,
healthcare, and finance. This fostered innovation and created jobs.
● Financial Sector Growth: The entry of private and foreign banks transformed India’s
financial sector. People gained better access to credit and services, and capital markets
expanded,withincreasedinvestmentfromforeignandretailinvestors,benefitingconsumers
and businesses alike.
Challenges Faced by Industrial Sector Due to LPG Reforms:
The LPG reforms transformed the Indian economy, but they also brought challenges for the
industrial sector, such as:
● Increased Competition from Imports: Opening up the economy allowed foreign goods,
oftencheaperandofbetterquality,intotheIndianmarket.Thisledtointensecompetition
for local industries, especially those lacking advanced technology, reducing demand for
Indian-made products.
● Lack of Infrastructure: Poor infrastructure, like inadequate roads, electricity, ports, and
transport networks, limited industrial growth. These gaps disrupted supply chains, raised
production costs, and made it difficult for Indian industries to compete with foreign
companies, who often had better logistics.
● Inefficiency and Low Technology Adoption: Many Indian industries continued using
outdated equipment and traditionalmethods,makingthemlesscompetitiveinqualityand
cost. With low investment in research and development, innovation and modernization
lagged behind global standards.
Challenges Faced by Agriculture Sector Due to LPG Reforms:
● Increased International Competition: Foreign agricultural productsbegancompetingwith
local produce, making it harder for Indian farmers to sell their goods.
● Insufficient Investment in Irrigation and Fertilisers: There wasn't enough public
investmenttoimproveirrigationandfertiliseraccess,leavingfarmerswithlimitedresources
for better yields.
● ReducedSubsidies:Thegovernmentcutbackonsubsidies,especiallyforfertilisers,raising
costs for farmers.
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● Lower Import Duties: Lower taxes on imported goods made foreign products cheaper,
attracting consumers away from local agricultural products.
Overall Analysis of LPG Reforms:
Positive Impact Negative Impact
● The services sector grew faster. ● Agriculture and industry did not grow
● Better access to global markets. as expected.
● People’s living standards improved. ● Income inequality increased: the rich
● More choices for consumers. got richer, and the poor became poorer.
● Consumers gained benefits like lower ● Developed nations gained more
prices and better quality. compared to developing nations.
Human Capital:
● Human Capital refers to the education, skills, health, and abilities of thepeopleina
country.
● It is a measure of how capable and skilled the workforce is, which affects their
productivity and earning potential.
● Goodhumancapitalboostslabourproductivitybecauseskilledworkerscanusetoolsand
machines more effectively. This leads to higher economic growth, as knowledgeable
workers can make the best use of available resources.
● Example: The US's strong economic growth is partly due to its investment in human
capital, including better education, health, and skills development.
● Indiarecognized the importance ofhuman capitalin economic growth long ago.
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● TheSeventhFive-YearPlansays,“Humanresourcesdevelopment(readhumancapital)
has necessarily to be assignedakeyroleinanydevelopmentstrategy,particularlyina
countrywithalargepopulation.Trainedandeducatedonsoundlines,alargepopulation
can itself become an asset in accelerating economic growth and in ensuring social
change in desired directions.”
Factors Contributing to Human Capital:
● Education:
○ Investing in education turns individuals into valuable human capital.
○ Qualityeducationenhancesaperson’sskillsandknowledge,makingthemmore
productive. Educated individuals can earn more and contribute more to the
economythan uneducated ones.
● Health:
○ Goodhealthboostslabourproductivity.Healthyindividualsworkefficiently,driving
economic growth.
○ Poorhealth,ontheotherhand,reducesproductivity,hindersjobopportunities,and
affectsoverallhumancapital.Forinstance,pollutioninDelhicanmakepeoplesick,
reducing their ability to work at full potential.
● On-the-Job Training:
○ On-the-job training isgiven before an individual starts working in a new role.
○ For example, IAS officers are trained atLBSNAAbeforeworkingintheirassigned
districts.
○ This trainingimproves skills and efficiency, enhancing productivity.
● Migration:
○ Migration is when pe ople move to new places for better opportunities. For
example, skilled workers like doctors and engineers migrate to other countries for
better jobs.
○ Migration increases growth opportunities for individuals, such as when college
graduates move to cities like Delhi or Mumbai in search of better employment.
○ Unemployment in rural areas often leads to migration to urban areasin India.
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Physical vs Human Capital:
Physical Capital Human Capital
● The physical capitalconsistsofallthe ● The human capital encompasses
human-madeobjectsthatafirmbuys (includes) skills,collectiveknowledge,
or invests in and uses to produce good health, and abilities within the
goods and services. individuals of a society.
● Example: It includes all the raw ● Example: Education, Health, Skills, etc.
materials, land, factory, machinery,
etc. required to set up the factory.
● It istangiblei.e. can be touched. ● It isintangiblei.e. cannot be touched.
● The physical capital can be separated ● Thehumancapitalisinseparablefrom
from its owner. its owner.
● The value of the physical capital ● The human capital can depreciate
decreases with time due to wear and with time but can appreciate with
tear. This is known asdepreciation. continuous effort.
Example: Suppose a car purchased Example: You have studied economics
today for Rs 10 lakh would get resold lecturetodaybutifyoudonotreviseit
after two years only with Rs 5 lakh thenaftersometimeyouwillforgetit.
due to the depreciation of the Thiswouldresultinthedepreciationof
machinery. knowledge. But suppose if you revise
the lecture daily and then apply it in
y our daily life thenthiswouldimprove
your knowledge.
● The physical capital is highly mobile ● The human capital is less mobile i.e.
i.e. the movement of physical capital movement of human capital from one
from one country to another is easier. country to another is a little difficult.
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Example: Suppose you want to go to
the US then you would need to go
through the lengthy process of VISA
clearance.
Impact of Human Capital on Economy:
● Higher Income Generation: As human capital improves, people gain bettereducationand
skills, leading to higher-paying jobs. This boosts individual incomes and contributes to
overall economic growth.
● Health-Related Productivity: Good health is a key part of human capital. Healthy
individualsaremoreproductiveandcanworkregularly,whichdriveseconomicgrowth.Poor
health reduces productivity and limits investment in skills and education.
● Innovation through Latest Developments: A country with strong human capital
encourages innovation. Educated people are more likely to understand and adapt to new
technologies like 5G, AI, and robotics, which drives progress and economic growth.
● Decent Standard of Living: Quality education, health, and skills improve an individual's
standard of living. When a population has better skills and health, it leads to improved
quality of life and greater economic growth.
● Societal Progress: A well-educated and skilled society creates a peaceful and stable
environment for investment. It promotes innovation, social equality, productivity, and
harmony, all of which support long-term economic growth.
Human Capital vs Human Development:
● Human Capital: Thisfocusesonusingeducationandhealthtoincreaseproductivity.
Peopleareseenasameanstoimproveoutput.Investmentineducationandhealthis
valuable only if it boosts productivity.
● Human Development: This emphasises that education and health are key to
well-being. People should be able to make choicestheyvalue,likebeingeducatedand
healthy, even if it doesn't directly increase productivity. It sees people as ends in
themselvesand believeseveryone has a right to basic education and healthcare.
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Challenges Related to Human Capital in India:
● Financial Constraints: The government lacks sufficient funds to invest in improving
education, healthcare, and overall human development.
● Poor Quality of Public Services: Public schools and hospitals offer lower qualityservices
compared to private ones. Private facilities are often better but cost more.
● Affordability: While private services arebetter,theyareexpensiveandnotaffordablefor
all. Higher education and advanced healthcare can be out of reach for many people.
● Social Disparities: The caste system creates inequalities, limiting opportunities for
backward groups like Scheduled Castes and Scheduled Tribes. Manycannotaffordquality
education and healthcare.
● Access to Services in Remote Areas: It is difficult to provide good healthcare and
education to tribal communities living in forests, far from urban centres.
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Indian Economy
Lecture 08: Unemployment and Poverty
Unemployment:
● TheIndian Governmentdefines unemployment as a situation in whichall those who,
owing to lack of work,are not working but either
seek workthrough employment exchanges,
intermediaries, friends, or relatives or by making
applications to prospective employers or express their
willingness or availability for work under the prevailing
condition of work and remunerations.
● Unemployment is said to exist whenpeople who are
willing to work at going wages, cannot find jobs.
● Theunemployment rate in Indianormally lies
between5-6%.
● Butpost-COVID-19 lockdownthe ratehikedat a
tremendous rate due to the loss of jobs for many people during the lockdown. The rate of
unemployment fell as India eased lockdown post covid.
There arethree sources of data on unemploymentinIndia:
1. Reports of Census of India,
2. National Statistical Office’s (NSO) Reports of Employment and Unemployment Situation,
Annual Reports of Periodic Labour Force Survey (PLFS), and
3. Directorate General of Employment and Training data of Registration with Employment
Exchanges.
Types of Unemployment:
1. Structural Unemployment
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2. Technological Unemployment
3. Cyclical Unemployment
4. Frictional Unemployment
5. Disguised Unemployment
6. Seasonal Unemployment
Seasonal Unemployment:
● Under seasonal unemployment, the individuals are
employed for some time period of the year
whereas he/she remainsunemployed for the
other periodof the year.
● Example:
○ There is a tourist rush during the summer months in the southern States and
during the winter months in the hill stations. The people employed in the
hospitality industry at these places remain unemployed during the other months
when there is no tourist rush.
○ The people engaged in agricultural work remain employed during the sowing and
reaping season of crops and remain unemployed during other months. There are no
employment opportunities in the village for all months of the year. When there is
no work to do on farms, people go to urban areas and look for jobs.
Cyclical Unemployment:
● Abusiness cyclerefers to apattern of
expansion and contraction of economic
activityin an industry or a country over time,
characterised by fluctuations in gross domestic
product (GDP), employment levels, and other
economic indicators.
● Generally, the rate ofunemployment is lower
during the expansionist phaseof the business
cycle whereas the unemployment rate increases during the contractionist phase of the
business cycle.
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● Unemployment due to the contractionist phaseof the business cycle is known as
Cyclical Unemployment. Typically marked by a recession, these contractions slow economic
growth throughout the economy, and employment rates fall.
Frictional Unemployment:
● The individual is called frictionally unemployed during the
time gap between his old and new jobs,during which he is
unemployed and is looking or searching for a job.That is
why it is also known asSearch Unemployment.
Disguised Unemployment:
● When more people are engaged in a job than what is
actually needed for the work,it is called Disguised Unemployment. It is also
known asHidden Unemployment.
● The additional workers do not contribute to any increase in output, implying that
theirmarginal productivity is zero.
● Example: Suppose a farmer has four acres of land and he actually needs only
two workers and himself to carry out various operations on his farm in a year,
but if he employs five workers and his family members such as his wife and
children, this situation is known as disguised unemployment.
Structural Unemployment:
● Themismatch between skills required by an employerand those possessed by the
individualis known as the Skill Gap. The
unemployment caused due to the skill gapis
Structural Unemployment.
● Example: Suppose there is a computer engineer who
studies coding languages such as C, C++, etc. but
firms in the market are looking to employ those
individuals who have knowledge about artificial
intelligence, cloud computing, 5G, etc. Thus there is
a gap between the supply (skills an individual
possesses) and demand (skills demanded by the employer) of labour in the
market.
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Technological Unemployment:
● Thereplacement of humans with machinesin the age of artificial intelligence, robotics,
etc. resulting in the loss of jobs for many people is known as Technological Unemployment.
Poverty:
● Earlierpoverty was defined onlyon the basis of money. This was aunidimensional
approach.
● But now the definition of poverty hasevolvedand it has becomemultidimensional.
● Poverty is a multidimensional phenomenon wherea personlacks the essential resources
to meet the basic standards of living.
● Poverty means hunger, lack of shelter, clean water, and sanitation facilities. It also means
a lack of a regular job at a minimum decent level. Above all, it means living with a sense
of helplessness.
Causes of Poverty:
● Historical Factors:
○ India was once prosperous, butBritish colonial rule led to economic decline. The
British ruined traditional industries, discouraged new ones, and forced many to leave
cities and depend on village economies. This led to widespread poverty.
○ After independence, India's economic growth remained slow, and rapid population
growth further reduced per capita income, keeping poverty levels high.
○ Gandhibelieved true freedom for India would come only when even the poorest
could live free from suffering.
● Population Growth:
○ India’s population has now reached about 140 crore,putting immense pressure on
limited resourcesand increasing unemployment.
or instance,Bengaluru, designed for about 10 lakh people, now hosts over 1 crore,
○ F
leading to traffic and infrastructure issues.
● Income Inequality:
○ Although India’s economy is growing,wealth is concentratedwith the rich, while
the poor get poorer.
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○ Unequal land distribution and weak land reformshave prevented wealth from
reaching rural areas, which could have significantly improved the lives of the rural
poor.
● Corruption:
○ Corruptiondiverts funds meant for development,reducingthe effectiveness of
anti-poverty programs and deepening poverty in many areas.
● Social Factors:
○ Social divides based on religion, caste, and regional conflicts weaken society
and hinder economic progress.
○ Areas facing social unrest often suffer from low investment and high
unemployment.
● Low Agricultural Growth:
○ TheGreen Revolutionboosted food production, butit primarilybenefited large
farmers.
○ Small farmers, lacking fundsfor seeds, fertilisers, and other inputs, often fall into
debt.
○ This debt traps them in poverty, and economic hardships lead tohigh farmer
suicide ratesin India each year.
● Underdeveloped Human Capital:
○ Lack of investment in education and healthcare keeps skills and productivity
low, limiting income and job opportunities.
● Inflation:
○ High inflation reduces the purchasing powerof people, especially the poor, making
it harder for them to afford basic needs and escape poverty.
Absolute vs Relative Poverty:
Absolute Poverty Relative Poverty
● Absolute poverty is a state in which a ● Relative poverty is a state in which a
person isunable to meet basic needs person isunable to enjoy normal
for living. comforts of lifewhich are enjoyed by
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a large number of people in society.
● Example: A person living on the ● Example: An engineer earning 12 lakh
roadside not able to afford food, per annum will consider himself
clothing, and shelter which are basic relatively poor in front of billionaire
necessities of life is considered to be Mukesh Ambani, who is the richest
living in Absolute Poverty. person in India.
Poverty Line:
● The poverty line is theminimum income level neededto meet basic needslike food,
clothing, and shelter. People earning below this line are considered poor.
● Individuals or families whoseincome falls below the poverty lineare classified asBelow
Poverty Line (BPL).They often need government assistancefor basic needs.
● Those whoseincome is above the poverty lineare classified asAbove Poverty Line (APL)
and are generally better able to meet their basic needs independently.
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Indian Economy
Lecture 09: Poverty and Informal Sector
Poverty Estimation:
After the independence of India, various committees were formed by the Government to determine
the estimation of poverty or poverty line.
● Alagh Committee: The Committee was constituted in1979and headed byY.K. Alaghto
carry out surveys and determine the poverty line for rural and urban areas.
○ The committee recommended that thepoverty line shouldbe defined on the
basis of calorie intake.
○ The people consumingless than 2400 calories in ruralareas or less than 2100
calories in urban areaswill be considered poor. Thecalorie intake limit is set high
for rural areas because more physical work is involved in rural lifestyles than in
urban areas.
● Lakdawala Committee:The
Committee was formed by the
Government in1993.
○ The committee defined the
poverty line not onlyon the
basis of calorie intakebut
also onshelter and clothing.
○ The poverty line was
different for different
Statesbecause the level of
inflation was not the same in
all States.
● Tendulkar Committee:It was formed by the Government in2005, headed bySuresh
Tendulkar.
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○ It includedexpenditures on health and education, which were previously excluded,
recognizing them as essential components of poverty.
○ It tried to define poverty on the basis of expenditure done by the people.
○ Those people whosemonthly per capita expenditureisless than Rs 1000 in
urban areas (Rs 33 per day) and less than Rs 816 in rural areas (Rs 27 per
day)will be considered poor.
○ Monthly per capita expenditure means the expenditure incurred by an individual per
month.
○ Based on the above poverty estimation method, approximately21.9% of people live
Below Poverty Line in India.
● Rangarajan Committee:Headed byDr C. Rangarajan,the committeewas formed in2014.
○ It included expenditures done onconsuming proteins,fats, etc.
○ It defined the poverty line on the basis of monthly family expenditure.
○ Those families whosemonthly family expenditureisless than Rs 7035 in urban
areas (Rs47 per person per day) and less than Rs 4860 in rural areas (Rs 32
per person per day)will be considered as poor.
○ Monthly family expenditure means the expenditure of a family per month. The
family here includes an average of 5 members.
○ According to this poverty estimation method, approximately29.5% of people are
poor in India.
Formal vs Informal Sector:
Formal Sector Informal Sector
● The organisations or firms in the ● The firms or organisations in the
Formal Sectorfollow certain rules and Informal Sectordon't followany rules
regulationsin their administration. or regulations in their administration.
● All thepublic sector establishments
andthoseprivate sector
establishmentswhichemploy 10 hired
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workers or moreare calledformal
sector establishmentsand those who
work in such establishments areformal
sector workers.
● Peopleenjoy certain benefitslike ● Peopledon't enjoysocial security
social security, higher wages, regular benefits, get lower wages, have no job
income, job security, etc. security, etc.
● Example: engineers employed in ● Example: farmers, agricultural labourers,
company, etc. owners of small enterprises, casual
labourers, etc.
● In2011-12, about6%of people were ● In2011-12, about94%of people were
employed in the formal sector. About employed in the informal sector.
20 percent of the formal sector and 30
percent of informal sector workers are
women.
● There is aslight difference between the formal andorganised sectors.
○ In an organised sector, the firms or organisations apply all the acts, rules, and
regulations introduced by the government.
○ Whereas in the formal sector, the firms may apply certain acts and may not
apply certain acts of the government.
Need for Employment in the Formal Sector:
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There is a need to create more jobs in the formal sector rather than the informal sector to get rid
of the problem of unemployment. The major reasons are:
● Social Security:
○ In the formal sector, people enjoy certain social security benefits likematernity
leave(a woman gets paid leave of approximately sixmonths during pregnancy and
childbirth),health benefits,etc., which are not available in case of the informal
sector.
● Higher Income Generation:
○ The people get higher wages in the case of the formal sector as compared to the
informal sector. Thus people are able to have adecentstandard of livingand be
able toafford basic health and education.
● Labour Rights:
○ In the formal sector, the employed individual enjoys certain labour rights granted by
thelabour lawsintroduced by the government likejob security, forming trade
unions, bargains with employers for better wages,etc.
● Gender Equality:
○ There aremore opportunities for womenin the formalsector.
○ It is generally seen that females are paid less than males for doing the same work
in the informal sector. But in the formal sector, themales and females get equal
wages for the same work done.
● Skill Upgradation:
○ In the formal sector, employed individuals gettrainingat frequent intervalsto
upgrade their skills and thus increase their efficiency in the work.
This also helps in theimprovement of human capital.
○
Factors of Production:
● The variousinputs required to produce any goods orservicesare called the factors of
production.
● Essentially there arefour key requirementsto produce any goods or services, which
include:
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1. Land and Other Natural Resources:This will includelandand other natural
resources likewater, minerals, coal, etc. obtainedfrom the earth.
2. Labour:This includes theworkforcewhich contributesto production generally
through their skills.
3. Physical Capital:It includesfixed capital, whichwill beused in production over
many years, likemachines, tools,etc. It also includesworking capital, which will
beconsumed during the production process,likemoney in hand, raw materials,
etc.
4. Human Capital:It includesentrepreneur, who bringall the other factors of
production i.e. land, labour, and physical capital for production.
● Example: The essential requirement for the processof making a chair will be:
1. wood and a place i.e. land (land + natural resources),
2. labour,
3. money and tools like axe, etc. (physical capital),
4. design or idea to how to make a chair (human capital)
Stock vs Flow Variable:
Stock Variable Flow Variable
● It represents quantity at aspecific ● It represents a change in quantityover
point in time. a certain time period.
● Example:Bank balance of an individual ● Example:Monthly income of an
measured at a specific date and time. individual measured over a period of one
month.
● It isstaticin nature. ● It isdynamicin nature.
NOTE:
● CY - Calendar Year: Refers to a period starting fromJanuary 1and ending on
December 31. It is the regular yearly cycle we allfollow.
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● FY - Financial Year: Refers to a period starting fromApril 1and ending onMarch 31of
the next year. It is used by governments and businesses for accounting and tax purposes.
● Q1 - Quarter 1: Refers to the first three months ofthe financial year, fromApril to
June.
● Q2 - Quarter 2: Refers to the second three monthsof the financial year, fromJuly to
September.
● Q3 - Quarter 3: Refers to the third three months ofthe financial year, fromOctober to
December.
● Q4 - Quarter 4: Refers to the last three months ofthe financial year, fromJanuary to
March.
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Indian Economy
Lecture 10: GDP, Circular Flow
Circular Flow of Income:
● The circular flow of income is an economic model that reflects how money or income
flows through the different sectors of the economy.
● A simple economy assumes thatthere exist only two sectors, i.e., Households and Firms.
○ Householdsareconsumersofgoodsandservicesandtheownersofthefactorsof
production (land labour, capital, and enterprise).
○ However,thefirmproducesgoodsand
servicesand sells them to households.
● In the figure, the two arrows on the top
represent the goods and services market.
○ The uppermost arrow, going from the
householdstothefirms,representsthe
spending the households undertake to
buygoodsandservicesproducedbythe
firms.
○ Thesecondarrowgoingfromthefirms
to the households is the counterpart of the arrowabove.Itstandsforthegoods
and services which are flowing from the firms to the households. This flow is
what the households are getting from the firms, for which they are making the
expenditures.
● The two arrows at the bottom of the diagram similarly represent the factors of
production market.
○ ThelowermostarrowgoingfromthehouseholdstothefirmssymbolisestheFactor
servicesthatthehouseholdsarerenderingtothefirms.Usingtheseservicesthe
firms are manufacturing the output.
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■ The households provide services to thefirmsintheformofland,labour,
physical capital, and human capital.This is calledFactor Services.
○ The arrow above this, going from the firms to the households, represents the
paymentsmadebythefirmstothehouseholdsfortheservicesprovidedbythe
latter.
■ Thefirmsinreturngiverent(forland),wages(forlabour),interest(for
physical capital), and profit (for human capital) to the household for
their services. This is calledFactor Payment.
● Householdsspendtheirincomeongoodsandservicesproducedbyfirms.Firmspayincome
to factors of production.
● Thecircular flow of income between households and firms continues year after year.
Gross Domestic Product (GDP):
● GDPreferstothefinalmarketvalueofgoodsandservicesproducedwithinaneconomy
(or domestic territory) in a particular time period.
● The value ofgoodsandservicesimportedfromabroadwillnotbeincludedintheGDP
of India as it is not produced inside the territory of India.
● ThevalueofgoodsandservicesexportedabroadfromIndiawillbeincludedintheGDP
of India as it is produced on the territory of India.
● Thedomestic territory of a country includesits:
○ area within political border,
○ embassies, consulates, and military establishments all over the world (the Indian
embassyintheUS,UK,etc,althoughlocatedintheUSandUK,willbeconsidered
as its domestic territory),
○ ships, aircraft, etc. run by the countrymen,
○ territorial waters up to 12 nautical miles in theoceanfromthelandboundaryof
the country,
○ fishingvessels,oilrigs,andfloatingplatformsoperatedbynationalsininternational
waters.
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Additional Information:
● For the purpose of calculating the GDP of a country, its domestic territory will not
include the offices of international organisationslocated within its political border.
Methods to Calculate Gross Domestic Product (GDP):
There arethree methodsto calculate a country's GDP:
1. Expenditure Method
2. Income Method
3. Value Addition Method
Expenditure Method:
● Under this method, the GDP of a country is determined by calculating the expenditure
incurred in producing the goods and services in a country.
● TheexpendituremethodcalculatestheGDPbymeasuringthespendingfirmsreceivefor
final goods and services produced.
● This method includes the following things for the calculation of GDP:
1. ConsumptionExpenditure(C):Thisdenotestheexpenditureincurredbyindividuals
and fi
rms for the consumption of goods (like pens, cars, etc.) and services (like
restaurants, etc.)
2. Investment Expenditure (I): This denotes the expenditureincurredbyindividuals
and firms for the purpose of investment like buying machines, land, etc.
3. Government Expenditure (G): This denotes the expenditure incurred by the
Government.
4. NetExports(NX):Exportsareadded,astheywereproducedinsidethedomestic
territory of a country, whereasimportsaresubtracted,astheywereproducedin
the foreign country i.e. outside the domestic territory of a country.
NX = X - M
Here,X denotes Exports, andM denotes Imports.
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GDP at Market Price = C + I + G + NX
Income Method:
● Revenuerelatedtogoodsandservicesmadeinacountryaredistributedamongthefactors
of production.
● Under this method,theGDPofacountryisdeterminedbycalculatingtherevenue(rent,
wages, profit, and interest) obtained by producing goods and services in exchange for
providing factors of production (land, labour, physical capital, and entrepreneurship) in a
country.
● The income method calculates the GDP by summing up all factor payments (wages,
interest, profit, rent).
● This method includes the following things for the calculation of GDP:
1. Rentreceived in exchange forland
2. Wagesreceived in exchange forlabour
3. Profitreceived in exchange forphysical capital
4. Interestreceived in exchange forentrepreneurship
Value Addition Method:
● This method is also called theProduction Method or Gross Value Addition Method.
● Example:Supposeafarmerhasasackofwheat
worthRs100.Thiswheatisprocessedintoflour
inafactoryandbecomesworthRs200,adding
avalueofRs100atthisstage.Againthisflour
isusedtomakebreadsworthRs300,addinga
value of Rs 100 at this stage. Thus in this
whole process from wheat to bread, there isa
value-additionofworthRs200(Rs.100+100)
by all the firms.
● Thenetcontributionmadebyafirmiscalled
itsvalue added.
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○ If we include depreciation in value added then the measureofvalueaddedthat
we obtain is calledGross Value Added.
○ If we deduct the value of depreciation from gross value added we obtain Net
Value Added.
● Underthismethod,theGDPofacountryisdeterminedbyaggregatingthevalueaddedin
the production of goods and services by all the firms in a country.
● This method measures the GDP by calculating the aggregate value of final goods and
services produced by all firms.
● Through this method, we get theGDP at Factor Cost.
Net Domestic Product (NDP):
● Thewearandtearlossesincurredinaproductduetoitsuseastimepassesbyiscalled
depreciation.
Net = Gross - Depreciation
● The NDP represents the Gross Domestic Product (GDP) of a country minus depreciation.
NDP = GDP - Depreciation
Gross National Product (GNP):
● Under Gross Domestic Product (GDP), we focus on where the goods and services are
being produced - whether within the domestic territory of a country or in a foreign
country, whereas under GNP, we focus upon who produces the goods and services -
whether nationals or foreigners.
● GNP represents the value ofallthefinalgoodsandservicesthatareproducedbythe
normalresidentsofacountry,includingincomeearnedbydomesticfactorsofproduction
abroad minus income earned by foreign factors of production within the country.
● It is calculated asGDP plus net factor income from abroad.
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● GNP refers to all the economic output produced by a nation’s normalresidents,whether
they are located within the national boundary or abroad.
GNP = GDP + Income earned by nationals of a country abroad - Income earned by
foreigners
within a country
NetFactorIncomefromAbroad(NFIA)= Incomeearnedbynationalsofacountryabroad
-
Incomeearnedbyforeigners
within a country
GNP = GDP + NFIA
Net National Product (NNP):
● NNP is obtained by subtracting depreciation from GNP.
● Depreciation does not contribute to anyone’s income, so it is deductedtoobtainamore
accurate measure of income.
Net National Product (NNP) = Gross National Product (GNP) - Depreciation
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Indian Economy
Lecture 11: Factor Cost vs Market Price
Tax vs Subsidies:
Tax Subsidies
● Taxes arecharges imposed by the ● A subsidy is abenefit given to
governmenton individuals’ and firms’ individualsand firms by the
income and revenue. government.
Production Taxes and Subsidies:
● Production Taxes:
○ These taxes arecharged on the act of producing goodsor services, regardless of
how much is made.
○ They are fixed costs that businesses must pay to start or continue production.
○ Example:Registration fees for starting a businessor environmental taxes for
manufacturing.
● Production Subsidies:
○ These arefinancial supports given to businesses toencourage the production of
certain goods, often in industries the governmentwants to promote.
○ The subsidy is typically fixed,not based on how muchis produced.
○ Example:Government subsidies for electric vehiclemanufacturers.
Product Taxes and Subsidies:
● Product Taxes:
○ These taxes arecharged on the sale or consumptionof specific goods and
depend on the amountbought or consumed.
○ Example:GST, excise duty, and sales tax, which are based on the price and
quantity of the product.
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● Product Subsidies:
○ These subsidies aregiven to consumers to reduce thecost of specific products,
often based on how much is bought or used.
○ Example:LPG subsidies, where the government helpsreduce the cost of each
cylinder purchased.
Factor Cost vs Market Price:
Factor Cost Market Price
● Factor cost refers to the variouscosts ● Market price represents thefinal value
(rent, wages, interest, and profit) of goods and servicesthat customers
linked to factors of production(land, pay in the market.
labour, physical capital and human
capital).
● It represents theprice of goods at the ● It represents the price of goodsin the
factorywhere it is being produced. market.Therefore, itincludes tax and
Therefore, itdoes not include tax and subsidies.The taxes get added to the
subsidies. factor cost and subsidies get
subtracted from the factor cost.
Market Price = Factor Cost + (Indirect Tax - Subsidies)
Market Price = Factor Cost + Net Indirect Tax
Basic Price:
● Basic price refers to the price of a good or servicebefore any indirect taxes(like sales
tax) are added orsubsidiesare subtracted.
● It's calculated by adding thefactor costand adjusting forproduction taxesand
production subsidies.
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Basic Price = Factor Cost + Production Tax - Production Subsidies
Market Price = Basic price + Product Tax - Product Subsidies
Nominal vs Real GDP:
Nominal GDP Real GDP
● Nominal GDP is the total value of ● Real GDP evaluates goods and services
goods and services produced in an at constant(base-year) prices,
economy atcurrent market prices. allowing for a comparison of production
volumes across different years.
● Itdoes not account for changes in ● Real GDP helpseliminate the impact
pricesover time. of price changes, making it a useful
tool for assessing actual changes in
economic production.
● It isdifficult to analyseeconomic ● Economic growth can beanalysed
growth. easily.
● Example: Suppose a firm produces ● Example: For the same example,
shoes. In the month of October, it keeping the base price constant at Rs.
produced 50 units of shoes, the price 200 per shoe, the Real GDP for the
was Rs 200 per shoe. The Nominal month of October wasRs 10,000
GDP for October month wasRs 10,000. (50*200), and for the month of
In the month of November, the firm November wasRs 1200(6*200).
produced 6 units of shoes at a price of
Rs 2000 per shoe. Therefore nominal
GDP in the month of November wasRs
12,000.
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● The above example shows that theGDP ● The above example shows that theGDP
of a country will also increase if of a country will only increase if
there is some increase in the price of there is an increase in the production
the goods, even though there is a of goods and services and is not due
decrease in the production of goods. to the increase in the price of goods
This does not reflect the true picture of and services.This will reflect the true
the economy. picture of the economy.
TheGross Domestic Product (GDP)of a country is calculatedby theNational Statistics
Office (NSO), which functions under theMinistry ofStatistics and Programme
Implementation (MoSPI)in India.
Purchasing Power Parity (PPP):
● Purchasing Power Parity (PPP) is thecomparison oftwo currencies to purchase the
same basket of commodities.
● It reflects the exchange rate at which a country’s currency may be translated into
another’s to purchase the same amount and quality of goods.
● India is the3rd largest economyin the world in termsof GDP at PPP whereas it is the
5th largest economyin the world in terms of GDP atMarket or Nominal Exchange Rate.
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Economy
Lecture 12: Money and Banking
Issues with GDP Measurement
● Inequal Distribution of Wealth:
○ GDP does not reflect income inequality. For instance, according totheOxfamreport,the
top 1% of the population owns more than 40% of the wealth.
● Household Work Excluded:
○ Unpaid domestic work, primarily done by women, is not included in GDP calculations,
despite its significant contribution to the economy.
● Volunteer Work Excluded:
○ Contributions fromvolunteerworkarenotconsideredinGDP,eventhoughtheyaddvalue
to society.
● Barter Exchange Excluded:
○ Barter transactions, still prevalent invillages,arenotincludedinGDPcalculationsdueto
the lack of monetary exchange.
● Externalities Not Counted:
○ GDP does not account for externalities, which are unintended side effects of economic
activities. These can be positive or negative:
■ Negative Externalities: For example, GDP includes a factory's earnings but does not
account for the environmental damage caused by the factory.
■ Positive Externalities: For example, GDP includes the earnings of a n educational
institute but does not reflect the number of successful candidates produced by it.
Note:
TheNationalSampleSurveyOffice(NSSO)mergedwiththeCentralStatisticalOffice(CSO)to
form the National Statistical Office (NSO) in 2019.
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Evolution of Money:
● Barter System: Initially, people exchanged goods and services directly throughbarter.Barter
system is a method of exchanging goods and services without using money.
○ Issues in Barter System:
■ Doublecoincidenceofwants:ThismeanswhatI’vetoofferisthesamethingyouare
looking for.
■ Problem of a Common measurement problem: Difficult toestablishconsistentvalue
for different goods.
■ Highsearchandtransactioncosts:Findingtradepartnerstakessignificanttimeand
effort.
■ High storage costs:Storing goods, especially perishables, can be costly and inefficient.
■ Fungibility issues: Fungibility is the right to exchange aproductorassetwithother
products or assets of the same kind.
■ Discourages division of labour: Specialization is hindered without a standardized
medium of exchange
● Commodity Money: Early forms of money included items like beads, coffee beans, and
seashells. Commodity money is one which has intrinsic value.
○ Issues in Commodity Money:
■ It could be perishable, with its value changing over time.
■ There could be issues with the supply of commodities.
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■ It may be non-uniform in shape and size.
● Metallic Money: The establishment of a central authority facilitated the transition from
commodity money to metallic money. The metallic money has intrinsic value. Kings issued
coinstodemonstratetheirsuperiority.Thiserasawtheuseofmetallicmoney,whichincluded
both full-bodied coins and token coins.
● Paper Money:Paper Money does not have any intrinsic value.
Function of Money:
● Medium of Exchange: Money acts as an intermediary, eliminating the need for a double
coincidence of wants, thus simplifying transactions. It acts as a medium of exchange.
● UnitofAccount:Moneyestablishesacommonunitofaccount,allowingindividualstocompare
the value of goods and services easily. It acted as a common measure.
● LowerStorageCosts:Money,unlikeperishablegoods,doesnotrequirephysicalstorageandis
easier to manage.
● StandardofDeferredPayment:Thestandardofdeferredpaymentisafinancialprinciplethat
a llows for payments to be made at a future date. Money helps us to settle down debt.
Banking System:
● A banking system offers financial services to people. These services include managing
payments, giving loans, accepting deposits,and helping with investments.
● Banks pay interest to customers on their deposits and charge interest on the loans they
provide.Deposits are a bank's liability,while theloans it gives out are considered itsassets.
Reserve Bank of India (RBI):
● The Reserve Bank of India (RBI) is the central bank of the country and serves as the
regulator of the banking sector, overseeing the functioning of banks nationwide.
● It was established on April 1, 1935, under the provisions of the Reserve Bank of India Act,
1934.
● TheRBIGovernor,alongwithfourDeputyGovernors,isappointedbytheCentralGovernment.
The current Governor of the Reserve Bank of India is Shri Shaktikanta Das.
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Functions of the Reserve Bank of India (RBI)
● Currency Issuance: The RBI holds the exclusive authority to issue currency notes in India,
except for one-rupee notes and coins, which are issued by the Ministry of Finance.
● Banker to the Government: The RBI serves as the banker to both the Central and State
Governments. Its responsibilities include maintaining government accounts, managing public
debt, and providing financial advice.
● Banker to Commercial Banks: The RBI accepts deposits from commercial banks and holds
them as reserves. It provides financial assistance to the commercial banks.
● RepresentationinInternationalFinancialMeetings:TheRBIrepresentsIndiaininternational
financial forums and meetings, ensuring the country's interests are addressed globally.
● Lender of Last Resort (LOLR): The RBI acts as the lender of last resort for the banking
system. In times of financial crises or liquidity shortages, it provides emergency funding to
banks.
● Foreign E
xchange Management: The RBI monitors and manages the exchange rate by
interveningintheforeignexchangemarkettoreducevolatility.Itbuysorsellsforeigncurrency
to stabilise the rupee's value, impacting trade balance, inflation, and economic growth.
Note: Fiscal policy is a government's use of spending and taxation, while monetary policy is a
central bank's use of tools to manage the money supply
Terms Used in Monetary Policy
● Inflation:
○ A sustained rise in the prices of goods and services is called inflation. It reduces the
purchasing power of money.
Example:Lastyear,₹100couldbuy1kgofapples,butthisyear,thesame₹100canbuy
only ½ kg of apples.
● Deflation:
○ Deflationistheoppositeofinflation,wherethereisacontinuousdeclineinthepricesof
goods and services.
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Practice Questions:
Q1.Consider the following situation:
In 2005, a country produced 100 motorbikes at a cost of ₹1,000permotorbike,resultingina
GDP at current prices of ₹1,00,000.
In2010,thesamecountryproduced100motorbikesat₹2,000permotorbike,raisingitsGDPto
₹2,00,000.
What can you infer from this situation?
a) The real GDP of the country is the same in 2010 as it was in 2005.
b) The standard of living of the people of the country has increased between 2005 and
2
010.
c) The real GDP of the country has increased from 2005 to 2010.
d) The given data is not sufficient to calculate the real GDP.
Q2.The most appropriate measure of economic growth is:
a) Gross Domestic Product (GDP) of a country
b) Net Domestic Product (NDP)
c) Net National Product (NNP)
d) Per Capita Real Income
Q3.In India, which one of the following is responsible for maintaining price stability?
a) Department of Consumer Affairs
b) Expenditure Management Commission
c) Financial Stability and Development Council
d) Reserve Bank of India
Q4.Which principle needs to be followed for the Barter System to operate effectively?
a) Law of Supply
b) Law of Diminishing Returns
c) Newton’s Law of Motion
d) Double Coincidence of Wants
Q5.Which of the following isnotincluded in the assets of a commercial bank in India?
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a) Loans
b) Deposits
c) Investments
d) None of these
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Indian Economy
Lecture 13: Money, and Banking (Part 02)
Inflation:
● Inflation is the rise in general price levels over time, eroding purchasing power,
impacting savings, investments, consumption, and influencing economic growth and
policies.
● Moderate inflation, ideally2-6%, supports economic growth and stability.
Disinflation:
● Disinflationisatemporaryslowdownininflation'space,indicatingamarginalshort-term
decline in the inflation rate. Unlike inflation ordeflation,whichreflectpricemovement
direction, disinflation focuses on the changing rate of inflation.
● Note: For example, high demand causes inflation, while decreasing demand leads to
disinflation.
Cash Reserve Ratio (CRR):
● It is the minimum percentage of a bank's Total Demand and Time Liabilities (DTL)
(adjusted for certain exemptions) thatScheduledCommercialBanks(SCB)isobliged
to deposit with theCentral Bank (RBI)in theform of cash.
● RBIdoes not pay any interestonCRRbalances maintained bySCBs with RBI.
● Increasing CRRreduces thelending capacity of the Bank.
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Statutory Liquidity Ratio (SLR):
● It is the percentage of Net Demand and Time Liabilities(NDTL)ofSCBs(Scheduled
Commercial Banks)that are to be kept with them only, in the form of:
○ Cash,or
○ Gold,valued at a price not exceeding the current market price or
○ RBI approved securities.
● IncreasingCRRandSLRhelpscontrolinflation,whiledecreasingthemboostsgrowth,or
GDP.
● Bankscanearn interest.
Note:
● Government securitiesaredebt instrumentsissued bygovernments to borrow funds.
Repo Rate:
● It is the interest rate at which the central bank of a country lends money to
commercial banks.
● The central bank in India i.e. the Reserve Bank of India (RBI) uses the Repo rate to
regulate liquidity in theeconomy.Inbanking,thereporateisrelatedtothe‘repurchase
option’or‘repurchaseagreement'.Whenthereisashortageoffunds,commercialbanks
borrow money from the central bank which is repaid according to the repo rate applicable.
● This monetary policy is used by the central bank to control inflation or increase the
liquidity of banks. The government increases the repo rate when they need to control
prices and restrict borrowing.
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● On the other hand, the repo rate is decreased when there is a need to infuse more
moneyinto the market and support economic growth.
Reverse Repo Rate:
● Thisistheratethecentralbankofacountrypaysitscommercialbankstoparktheir
excess funds in the central bank.
● TheReversereporateisalsoamonetarypolicyusedbythecentralbank(whichisRBIin
India)to regulate the flow of money in the market.
Open Market Operation (OMO):
● Open market operation is an operation which is conducted by RBIinIndiafromtimeto
timeto absorb or inject liquidity into the system.
● Under OMO, RBIsales and purchases of government securities.
● The objective of OMO is toregulate the money supplyin the economy.
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Indian Economy
Lecture 14: Money and Banking (Part 03)
Monetary Policy Committee:
● The Monetary Policy Committee of RBI is a statutory body constituted as per Section
45ZB under the RBI Act of 1934 by the Central Government.
● It decides the RBI's benchmark interest rates to maintain price stability while keeping in
mind the objective of growth.
Composition of Monetary Policy Committee:
● This committee is composed of 6 members.
● Three members of the committee are from RBI:
○ The RBI governor is the chairman of the Monetary Policy Committee.
○ The Deputy Governor of RBI is in charge of the monetary policy committee.
○ An officer of the Central Bank to be nominated by the RBI board.
● The other three members are nominated by the government who are experts in finance,
economics, etc.
● All decisions taken in this committee are by voting.
● The quorum of monetary policy should be 4 members.
● The Governor of RBI has a casting vote when there is an incidence of a tie.
● There are a minimum of 4 meetings that should be conducted in a year.
● The monetary policy is answerable to the government when the inflation rate is outside
the 2% to 6% limit for 6 months.
Bank Rate:
● The Bank Rate is the long-term interest rate at which RBI lends to banks without
requiring any collateral.
Marginal Standing Facility:
● A Marginal Standing Facility (MSF) is a window for banks to borrow from the Reserve
Bank of India in an emergency situation at a penal rate (More interest).
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Qualitative Tools:
● The qualitative tools of monetary policy encompass mechanisms such as consumer credit
regulation, guidelines, margin requirements, and ethical persuasion.
● The qualitative tools are:
○ Moral Suasion: It persuades banks to follow RBI policy through informal
communication.
○ Margin Requirement: It is a qualitative method of credit control adopted by the
central bank to stabilize the economy from inflation or deflation.
➢ The margin requirement refers to the difference between the current value
of the security offered for the loan (called collateral) and the value of
the loan granted.
○ Direct Action: RBI takes action against banks if they don’t fulfill the conditions
and requirements of RBI. RBI may refuse to rediscount their papers, give excess
credits, or charge a penal rate of interest over and above the Bank rate, for
credit demanded beyond a limit.
○ Priority Sector Lending: Priority Sector Lending (PSL) mandates banks to allocate
specific credit percentages to sectors like agriculture, MSMEs, education, health,
and others, ensuring financial inclusion and equitable economic development.
Liquidity:
● Liquidity refers to the ease with which can be converted into cash.
● For Example: Cash > Watch > Home (in terms of liquidity).
○ Demand Deposit: A demand deposit is money in a bank account, withdrawable
anytime. For Example: Saving, and Current Accounts.
○ Time Deposit: A time deposit is a bank deposit held for a fixed period, offering
higher interest. For Example: Fixed Deposit, and Recurring Deposit.
● Note: Demand deposits are highly liquid, while time deposits are less liquid.
Money Supply:
● The Reserve Bank of India controls the money supply in the economy.
● Four measures are used by RBI to calculate the supply of money in an economy:
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○ M1: Cash/coins with public + Demand liability with bank + Other deposits with RBI
○ M2: Cash/coins with public + Demand liability with bank + Post office deposits +
Other deposits with RBI
○ M3: Cash/coins with public + Demand liability with bank + Time liabilities with
bank + Other deposits with RBI
○ M4: Cash/coins with public + Demand liabilities with bank + Post office deposits +
Time liabilities with bank + Other deposits with RBI
Liquidity Order:
● Liquidity order: M1 > M2 > M3 > M4.
● Narrow Money:
○ M1 and M2 are combinedly called narrow money.
● Broad Money:
○ M3 and M4 are combinedly called broad money.
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Indian Economy
Lecture 15: Money, and Banking (Part 04)
Legal Tender:
● The money that theother person is under compulsion to accept is called legal tender.
Coins are limited legal tender in India.
● After demonetization, thegovernment declared ₹500 and ₹1000 notes invalid.
Modern Forms of Money:
NEFT (National Electronic RTGS (Real time Gross IMPS (Immediate Payment
Fund Transfer): Settlement): Service):
● Primarily designed for ● Primarily caters to ● Primarily designed for
retail customers. businesses and retail customers.
● Transfer range:₹1 to high-value ● Transfer range:₹1 to
a maximum(varies by transactions. ₹5 lakh.
bank). ● Minimum transfer ● Settles transactions
● Operates inscheduled amount:₹2 lakh. instantly inreal-time.
batches. ● Settles transactions
instantly inreal-time.
Fiscal Policy:
● Policy by the governmentwhichinvolvesadjustment of spendinglevel, andtax rates is
called Fiscal policy.
Budget:
● TheGovernment Budgetis anannual financial statementthatcontains the
Government’sestimated receipts and expenditures.
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● The Government is mandated to form a budget underArticle 112of the Indian
Constitution.
● The money received by the government is calledReceiptwhereas the money spent by the
government is calledExpenditure.
● The budget hasfour components:
○ Revenue Receipt
○ Capital Receipt
○ Revenue Expenditure
○ Capital Expenditure
Note:
● Capital Receipt:Funds received that create a liabilityor reduce assets.Example:Loan
from a bank, sale of land.
● Revenue Receipt:Funds received during regular businessoperations without liabilities.
Example:Taxes, interest on savings.
● Capital Expenditure:Spending to acquireor enhance long-term assets.Example:Buying
machinery, Loans are given, and land purchase.
● Revenue Expenditure:Spending for dailyoperations or maintenance of assets.Example:
Salaries, repairs, raw material purchase.
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Receipts:
Capital Receipts: Revenue Receipts:
● Arises from a change inassets or ● Does not affectassets or liabilities.
liabilities. ● Recurring and regular in nature.
● It is typicallynon-recurringin nature. ● Includestaxes, fees, and interest on
● Includesloans, disinvestment, and loans.
other capital transactions.
Expenditure:
Capital Expenditure: Revenue Expenditure:
● It is typicallynon-recurringin nature. ● Recurring in nature.
● Arises from a change inassets or ● It hasno impacton assets or
liabilities. liabilities.
● It includesinfrastructure creation. ● It includesexpenses necessary for the
normal functioning of government
departments and services,
salaries/pensions to government
employees, and subsidies.
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Indian Economy
Lecture 16: Money and Banking (Part 05)
Functions of Budget:
● Redistribution Function:
○ It is defined as the government’s role in
altering the distribution of income to achieve
a distribution considered ‘fair’ by society.
Budget helps take money from those who have
it in excess and redistribute it among those
who need it.
○ This is achieved through the government’s
interventions like transfers and tax collections, which affect the personal
disposable income of households. This ensures income distribution in a fair
manner.
● Allocation Function:
○ Budget helps allocate money where it is needed in time.
○ The budget helps ensure the allocation of funds pending on defense and
infrastructure.
○ The Government provides certain goods and services, called public goods like
national defense, government administration, etc., that cannot be provided by the
market mechanism.
○ The broken link between producers and consumers, due to the absence of a
payment process, necessitates government intervention to provide such goods. The
financing of public goods is done by the Government through the budget, allowing
usage without any direct payment.
● Stabilization Function:
○ It refers to the government’s intervention to correct fluctuations in income,
employment, and overall economic stability by either expanding or reducing
aggregate demand, based on the prevailing economic conditions.
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○ During hard times or emergencies, the government comes forward to help the
people of the country by launching different social schemes.
○ This ensures economic growth during times of economic stress. Example: During
the COVID-19 pandemic, the Government launched the Pradhan Mantri Garib
Kalyan Yojana to help the country's needy people.
Types of Budget:
● Surplus Budget: When the government’s income is
greater than spending then it is called Surplus
Budget.
● Deficit Budget: When the government’s spending is
greater than income then it is called Deficit Budget.
● Balanced Budget: When both spending and income of
the government are equal then it is called Balanced Budget.
Note:
● Income > Spending → Surplus Budget
● Income < Spending → Deficit Budget
● Income = Spending → Balanced Budget
Types of Tax:
● Direct Tax: The direct tax is a type of tax that an individual or organization pays
directly to the government. The burden of tax and the responsibility of paying the tax
lies on the same individual.
○ Example: The income tax (imposed on the income of individuals) and corporate
tax (imposed on the profit of business) are examples of direct tax as the taxes
levied and paid by the same individuals.
● Indirect Tax: The indirect tax is levied on the consumption of goods and services.
○ The burden of tax and the responsibility to pay the tax lies on different
individuals. The taxes are levied and paid by the different individuals.
➢ Example: The Goods and Services Tax (GST) is an example of an indirect
tax.
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2
○ Example: Suppose you went to a restaurant to eat some food. Now a tax rate of Rs
18% is imposed on you in the bill of the restaurant. Here the tax is paid out of
your pocket but the responsibility to collect the tax lies on the restaurant owner
who in turn will pay the tax to the Government on your behalf. The tax is levied on
you but ultimately paid by the restaurant owner.
● Progressive Tax: In progressive taxation, higher income attracts higher tax rates. The
income tax imposed on the income of individuals is an
example of progressive taxation as the tax rate
increases with the increase in income.
○ Example: In the graph, it is shown that there is
no taxation imposed on individuals earning
between $0 to $10000, a 15% tax rate is
imposed on individuals earning between $10000
to $20000, a 25% tax rate is imposed on
individuals earning between $20000 to $30000
and so on. Here, the individual who gets high
incomes pays a higher proportion of their income as tax. A progressive tax is a tax
where the tax rate increases with an increase in the taxpayer’s income.
● Regressive Tax: A regressive tax is a type of tax that is assessed irrespective of income
i.e. same tax rates will be imposed on every individual irrespective of whether the person is
rich or poor.
○ A regressive tax is imposed on goods and services. The Goods and Services Tax
(GST) is an example of a regressive tax as the same tax rate is imposed on every
individual buying the same product.
○ Example: Suppose a packet of Parle G biscuit is worth Rs 5 in which its
manufacturing cost is Rs 4 and a tax of Rs 1 is imposed on it. Any individual
whether rich or poor, will pay the same tax on buying a packet of this biscuit that
other consumers pay irrespective of their income levels. Thus, a regressive tax
system levies the same percentage on products or goods purchased regardless of the
buyer's income.
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○ A regressive tax does not increase with an individual's earnings or income level.
Rather, the percentage of tax paid by individuals decreases as their income
increases.
● Proportional Tax: In a proportional tax rate, the tax rate happens to be a particular
portion of the profits of individuals.
○ The graph represents that as the income increases the progressive tax increases,
the proportional tax remains the same as the income increases, and the
regressive tax decreases as the income increases.
Types of Deficit:
● A government deficit arises when the
government spends more than its revenue
collections.
● There are three types of deficits:
○ Revenue Deficit
○ Gross Fiscal Deficit
○ Primary Deficit
Revenue Deficit:
● Revenue Deficit is the excess of the government’s revenue expenditure over revenue
receipts.
● It only accounts for transactions affecting the current income and expenditure of the
government.
● A revenue deficit indicates government dis-saving, utilizing savings from other economic
sectors to finance part of its consumption expenditure, thereby necessitating borrowing for
both investment and consumption requirements.
Note:
● Revenue Deficit = Revenue Expenditure - Revenue Receipt
Gross Fiscal Deficit:
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● Gross Fiscal Deficit is the difference between total government expenditure and total
receipts, excluding borrowings. This shows the borrowings of the Government therefore
it is a crucial indicator of the financial health of the public sector and economic
stability.
● A significant share of revenue deficit in fiscal deficit implies a large portion of borrowing
is used for consumption expenditure rather than investment.
Note:
● Gross Fiscal Deficit = Total Expenditure - Total Income
● Total Expenditure = Revenue Expenditure + Capital Expenditure
● Total Income = Revenue Receipt + (Capital Receipt - Loans/Borrowings of the
Government)
● Non-Debt Capital Receipt = Capital Receipt - Loans/Borrowings of the Government
Primary Deficit:
● Primary Deficit shows the interest payment done by the present Government for the
loans borrowed by the previous Governments.
● The Government uses this to show its current performance separate from the effect of
bad policies adopted by the previous Governments.
Note:
● Primary Deficit = Gross Fiscal Deficit - Interest Payment on Previous Loans
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5
Indian Economy
Lecture 17: External Sector
Goods and Services Tax (GST):
● Prior to GST, different tax rates were imposed by different States on goods and services.
This created confusion among people.
● The Central Government decided to introduce GST on 1st July 2017 to promote the notion
of One Nation, One Tax, One Market.
● The Goods and Services Tax (GST) is a comprehensive single indirect tax imposed on
the supply of goods and services from the manufacturer or service provider to the
consumer, applicable throughout India.
● The GST was introduced in the country through the 101st Constitutional Amendment Act,
of 2016.
● It replaced or subsumed all the indirect taxes, like Entertainment Tax, Excise duty,
Luxury tax, Services tax, etc., imposed by different States on goods and services.
● It is a destination-based consumption tax. A consumption/ destination-based tax is
levied at the time of consumption of goods or services. It is a tax we pay for using goods
or services. Example: A good produced in Maharashtra is being sold in Bihar. Thus, GST will
be levied in Bihar where goods and services are consumed.
● The GST comprises three taxes:
○ Central GST (CGST): It is levied and collected by the Central Government.
○ State GST (SGST): It is levied on transactions within the States.
○ Integrated GST (IGST): It is levied on inter-state transactions.
● Five standard GST rates are applied: 5%, 12%, 18%, and 28% on all goods and/or
services.
● Special provisions exist for five petroleum products, including alcoholic liquor for human
consumption, which are not subsumed in GST.
Note:
● Article 368 of the Indian Constitution details the procedure for amending the
Constitution.
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GST Council:
● The GST Council decides the different tax rates imposed on goods and services.
● Article 279A establishes the GST Council to harmonize indirect taxes across Indian
states. GST council is a constitutional body.
● It consists of representatives from the Central and State Governments. The Chairperson
of the GST Council is the Union Finance Minister.
● The decisions in the Council are taken through voting and for any decision to be passed, it
needs a 3/4th (75%) majority.
● The voting power of the Central Government and State Governments are 1/3rd
(33.33%) and 2/3rd (66.66%) respectively.
Crowding In and Crowding Out:
● Crowding In: When proper government spending results in increased participation of
the private sector spending, it is termed as Crowding In Effect.
○ The government spending on its capital creation like infrastructure, machinery, etc.
increases the confidence of the private sector to enter and invest more in the
economy.
● Crowding Out: When increased government spending leads to a decrease in private
sector participation, it is termed the Crowding Out Effect.
○ Sometimes the Government spends more than its income on capital creation. In
this case, the Government finances its spending through borrowing from the banks
and private players, which decreases the borrowing capacity of the private sector
(as there is less money available with the banks or individuals to give loans to the
private sector). This reduces the investment of the private sector in the economy.
Open Economy and Closed Economy:
● Closed Economy: A closed economy is an economy that does not export/import goods and
services to/from other countries of the world.
○ No country in the world can be completely called a closed economy in this era of
globalization.
● Open Economy: An open economy is one which interacts with other countries of the
world by trading in goods, services, and financial assets.
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○ An open economy is an economy that exports/imports goods and services to/from
other countries of the world.
○ India is an example of an open economy. The introduction of LPG (Liberalization,
Privatization, Globalization) reforms in 1991, opened the Indian economy to the
world for trade and commerce. These reforms ushered in a new era of economic
liberalization for India, making the country more attractive to foreign investment
and private enterprises by scrapping many of the restrictions that had been
imposed throughout the 20th century.
Depreciation and Appreciation:
● Depreciation: Suppose today $1 is equal to Rs 84. This means that a dollar can be bought
by giving Rs 84. Now after one day $1 becomes equal to Rs 100. This means that now for
buying a dollar we will pay Rs 100, more than earlier. This shows that the rupee has
become weak against the dollar or the demand for the rupee has decreased in the
international market, which is called the depreciation of the rupee.
○ The change in market forces i.e. demand and supply which makes foreign currency
costlier is called depreciation.
● Appreciation: Suppose today $1 is equal to Rs 84. This means that a dollar can be bought
by giving Rs 84. Now after one day $1 becomes equal to Rs 60. This means that now for
buying a dollar we will pay Rs 60, less than earlier. This shows that the rupee has become
strong against the dollar or the demand for rupees has increased in the international
market, which is called the appreciation of the rupee.
○ The change in market forces i.e. demand and supply which makes foreign currency
cheaper is called appreciation.
Note:
● Devaluation: A government reduces its currency's value against foreign currencies.
● Revaluation: A government increases its currency's value against foreign currencies.
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3
Indian Economy
Lecture 18: Balance of Payment
Balance of Payments (BoP):
● Export means selling a product made in our country to
another country of the world. Example: Shoes produced
in India are sold in the USA.
● Import means selling a product in our country that was
made in some other country of the world. Example:
Shoes made in the USA are being sold in India.
● The BoP records transactions between residents of a
country and the rest of the world over a specified
period of time.
● BoP includes two types of accounts:
○ Current Account
○ Capital Account
Current Account:
● The current account records transactions
based on the trade of goods, services,
and transfer payments.
● The current account has two components:
visible and invisible.
● Visible: Trade in goods, including exports
and imports. This account includes:
○ Trade in Goods: This includes the
export and import of goods. The purchase of foreign goods or imports decreases
the domestic demand for goods and services in our country whereas selling goods to
foreign countries or exports increases the domestic demand for goods and services
in our country. The difference between the value of exports and imports of goods
within a specified time period is called the Balance of Trade (BoT).
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➢ A balanced BoT occurs when the value of exports equals the value of
imports.
➢ A Surplus BoT (Trade Surplus) arises when a country exports more goods
than it imports.
➢ A Deficit BoT (Trade Deficit) arises when a country imports more goods
than it exports.
● Balance on Invisibles: It is the difference between the value of exports and imports of
invisibles within a specified period. Invisible trade refers to an international transaction
that does not involve tangible goods, but services, such as consultancy services, insurance,
banking, intellectual property, international tourism, etc. In other words, it is the import
and export of services between countries. Invisibles encompass services, transfers, and
flows of income occurring between different countries.
○ Trade in Services: This includes the export and import of services. Examples:
Banking, transport, computer and information services, etc.
○ Income: Earnings from foreign investments, such as interest, and profits, and
payments on investments made by foreign entities in the domestic economy.
○ Transfer Payments: This includes receipts received ‘for free’ by residents of a
country without the provision of any goods or services in return. It comprises gifts,
remittances (money sent by our relatives from other countries into our country),
and grants (giving loans for free i.e. at no interest rate and the loan is not taken
back) from either the government or private citizens living abroad.
● Current Account Surplus: When exports (receipt of foreign currency) of goods, services,
and transfer payments are more than imports (payment of foreign currency) of goods,
services, and transfer payments then it is called Current Account Surplus.
● Current Account Deficit: When imports of goods, services, and transfer payments are
more than exports of goods, services, and transfer payments then it is called a Current
Account Deficit.
● Balanced Current Account: When imports of goods, services, and transfer payments are
equal to exports of goods, services, and transfer payments then it is called a Balanced
Current Account.
Current Account Surplus Balanced Current Account Current Account Deficit
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Receipts > Payments Receipts = Payments Receipts < Payments
Capital Account:
● The capital account records international
transactions of assets in various forms of
wealth i.e. in the form of investment, external
commercial borrowing, and external assistance.
● This account includes:
○ Investment: It is of two types:
➢ Foreign Direct Investment (FDI):
Foreign Direct Investment is where
the foreign investors invest in the companies of our country with the
long-term motive and start acquiring a role in the management of the
companies. Example: India allows FDI in railway infrastructure, insurance,
etc.
➢ Foreign Portfolio Investment (FPI): Foreign Portfolio Investment allows
foreign investors to invest in the companies of our country with the motive
of earning short-term gains. Example: A foreign investor buys the shares
of Reliance Industries for one week and when the price of shares increases,
he/she sells the shares in the share market.
○ External Commercial Borrowing: External Commercial Borrowing is an instrument
that helps Indian firms and organizations raise funds from outside India in foreign
currencies. This includes short-term loans taken by individuals from foreign
countries.
○ NRI Accounts: Facilitates savings, income remittances, and investments by
non-resident Indians.
● The capital account is in balance when capital inflows (like receipt of loans from abroad,
sale of assets or shares in foreign companies) are equal to capital outflows (like repayment
of loans, purchase of assets or shares in foreign countries).
● The surplus in the capital account arises when capital inflows are greater than capital
outflows, whereas a deficit in the capital account arises when capital inflows are lesser
than capital outflows.
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Capital Account Surplus Balanced Capital Account Capital Account Deficit
Inflows > Outflows Inflows = Outflows Inflows < Outflows
Note:
● RBI maintains Balance of Payments.
● When the rupee depreciates, Indian exports become cheaper for foreign buyers,
boosting export demand. Conversely, when the rupee appreciates, Indian exports
become costlier, reducing demand (exporter loss), or When the rupee depreciates,
Indian imports become costlier as more rupees are needed to buy foreign goods.
Conversely, when the rupee appreciates, imports become cheaper as fewer rupees are
required (Importer benefit).
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Indian Economy
Lecture 19: Rural Development
Exchange Rate System
An exchange rate regime refers to the method by which a country manages its currency in relation
to foreign currencies. It determines how the value of the domestic currency is set against other
currencies and is crucially linked to a country's monetary policy. Exchange rate regimes can broadly
be classified into three categories:
1. Fixed Exchange Rate System
2. Flexible Exchange Rate System
3. Managed Floating Exchange Rate System
Fixed Exchange Rate System
● In a fixed exchange rate system, the value of a country's currency is set and maintained at
a fixed rate against a foreign currency or a basket of foreign currencies.
● The government or central bank is responsible for maintaining this fixed rate by managing
the supply and demand of the currency through various means, such as intervening in the
foreign exchange market.
● The government or central bank sets a fixed exchange rate. For instance, if 1 US Dollar
(USD) is set to equal 50 Indian Rupees (INR), this rate remains constant.
● The central bank intervenes in the foreign exchange market to maintain the fixed rate. If
the demand for the domestic currency increases, the central bank sells the domestic
currency and buys foreign currency to keep the rate stable. Conversely, if the demand
decreases, the central bank buys the domestic currency and sells foreign currency.
● To maintain the fixed exchange rate, the central bank must hold substantial foreign
currency reserves. These reserves are used to influence the currency's value and counteract
any market pressures that could change the exchange rate.
Advantages of Fixed Exchange Rate System
● Stability: Provides stability in international prices, which is beneficial for international
trade and investment.
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● Predictability: Reduces exchange rate risk, making it easier for businesses to plan and
forecast.
● Inflation Control: Helps in controlling inflation by imposing discipline on domestic monetary
policies.
Disadvantages of Fixed Exchange Rate System
● Reserves Requirement: Requires substantial foreign exchange reserves to maintain the fixed
rate.
● Loss of Monetary Policy Autonomy: Limits the central bank's ability to use monetary
policy for domestic economic objectives.
● Risk of Currency Crises: If the fixed rate is perceived as unsustainable, it can lead to
speculative attacks and currency crises.
Flexible Exchange Rate System
● In a flexible exchange rate system, also known as a floating exchange rate system, the
value of a country's currency is determined by the forces of supply and demand in the
foreign exchange market.
● This system operates without direct intervention from the government or central bank.
Instead, the exchange rate fluctuates freely based on economic factors such as trade
balances, interest rates, inflation rates, and foreign investment.
● The exchange rate is set by the market through the continuous buying and selling of
currencies. Factors such as trade flows, capital flows, and speculation influence the demand
and supply of the currency.
● Exchange rates adjust automatically in response to changes in demand and supply. For
example, if the demand for the domestic currency increases, its value will appreciate.
Conversely, if the demand decreases, its value will depreciate.
Appreciation And Depreciation
● Rupee Appreciation: Suppose the current exchange rate is 1 USD = 80 INR. If the demand
for Indian Rupees (INR) increases, perhaps due to higher foreign investment or increased
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exports, the value of the rupee will rise. The new exchange rate might become 1 USD = 60
INR, indicating that the rupee has appreciated.
● Rupee Depreciation: Conversely, if the demand for Indian Rupees (INR) decreases, maybe
due to higher imports or capital outflows, the value of the rupee will fall. The new exchange
rate might become 1 USD = 100 INR, indicating that the rupee has depreciated.
Advantages of Flexible Exchange Rate System
● Monetary Policy Autonomy: A flexible exchange rate system allows the central bank to
focus on domestic economic objectives without the need to maintain a fixed exchange rate.
● Automatic Correction: Exchange rates in a flexible system adjust automatically based on
market forces. This automatic adjustment helps correct trade imbalances. For instance, a
trade deficit will cause currency depreciation, making exports cheaper and imports more
expensive, thereby reducing the deficit over time.
● Easy Maintenance and Less Costly: Unlike fixed exchange rate systems, a flexible system
does not require large reserves of foreign currency to defend the exchange rate. This
reduces the costs associated with maintaining foreign currency reserves and eliminates the
need for frequent central bank interventions in the foreign exchange market.
Disadvantages of Flexible Exchange Rate System
● Volatility: Exchange rates can fluctuate widely and unpredictably in a flexible exchange rate
system. This volatility creates uncertainty for businesses and investors engaged in
international trade and investment, making financial planning and risk management more
challenging.
● Speculation: The currency can be subject to speculative attacks where investors buy or sell
large amounts of the currency to profit from anticipated changes in the exchange rate.
Such speculation can lead to large and sudden fluctuations in the exchange rate, potentially
destabilizing the economy.
● Inflation Risk: Depreciation of the currency in a flexible exchange rate system can lead to
higher prices for imported goods and services.
● Trade Shocks: Sudden changes in the exchange rate can have significant impacts on a
country's trade. An appreciated currency can make exports more expensive and less
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competitive in the global market, while a depreciated currency can make imports more
expensive, affecting domestic consumption and production costs.
Managed Floating Exchange Rate System
● A managed floating exchange rate system, also known as a dirty float, combines elements
of both fixed and flexible exchange rate systems. Under this system, the exchange rate is
primarily determined by market forces, but the central bank intervenes occasionally to
stabilize the currency and prevent excessive volatility. This approach allows for a degree of
flexibility while also providing mechanisms to avoid drastic fluctuations in the exchange
rate.
● During normal economic conditions, the exchange rate is allowed to float freely based on
the supply and demand dynamics in the foreign exchange market.
● When the exchange rate experiences excessive volatility or deviates significantly from a
desired range, the central bank intervenes. This intervention can be through buying or
selling the domestic currency or implementing monetary policies to influence the exchange
rate.
● To strengthen the currency (when it's depreciating too much), the central bank buys the
domestic currency using its foreign exchange reserves.
● To weaken the currency (when it's appreciating too much), the central bank sells the
domestic currency, increasing its supply in the market.
Advantages of Managed Floating Exchange Rate System
● Reduced Volatility: Central bank interventions help to smooth out excessive fluctuations in
the exchange rate. This creates a more stable environment for businesses and investors
engaged in international trade and investment, reducing uncertainty.
● Monetary Policy Flexibility: The central bank retains the ability to focus on domestic
economic objectives while also managing the exchange rate. This dual focus allows for
balanced economic policies that can address both internal and external economic
challenges.
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● Crisis Management: During times of economic crisis or significant external shocks, the
central bank can intervene to stabilize the currency. This capability helps to prevent panic
and maintain confidence in the country's currency and economy.
Disadvantages of Managed Floating Exchange Rate System
● Resource Intensive: Frequent interventions can deplete foreign exchange reserves and
require significant financial resources. Maintaining large reserves for potential intervention
can be costly and may divert resources from other economic priorities.
● Potential for Mismanagement: The effectiveness of the system depends on the central
bank's ability to accurately gauge when and how to intervene. Poorly timed or executed
interventions can exacerbate exchange rate volatility and undermine economic stability.
● Market Distortions: Interventions can sometimes distort market signals and lead to
inefficiencies. This can result in misallocation of resources and hinder the proper
functioning of the foreign exchange market.
Rural Development
Agricultural Diversification
Agricultural diversification refers to the process of expanding the variety of agricultural products
and activities. This can be achieved through two main approaches:
1. Moving from Farming to Allied Activities: Engaging in activities such as animal
husbandry, aquaculture, horticulture, and agroforestry.
2. Changing Cropping Patterns: Implementing multiple cropping systems or growing a variety
of crops in a single season to enhance productivity and reduce risk.
Need for Diversification
● Reducing Farmer Suicides: Diversification can mitigate the economic risks associated with
farming, providing a more stable income for farmers. According to the National Crime
Records Bureau (NCRB), nearly 10,000 farmers commit suicide every year. Diversification
can help reduce financial stress and prevent such tragedies.
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● Reducing the Risk of Crop Failure: Diversifying crops and activities reduces dependency on
a single crop, spreading the risk across different agricultural enterprises. This approach
safeguards farmers against the total loss of income due to crop failure caused by pests,
diseases, or adverse weather conditions.
● Providing Year-Round Employment: Engaging in multiple agricultural activities can ensure
continuous employment throughout the year, rather than just during the main cropping
seasons. Reduces seasonal unemployment and disguised unemployment, leading to a more
stable and productive workforce.
● Women Empowerment: Diversification often includes activities such as dairy farming,
poultry, and horticulture, which can involve and benefit women. Empower women by
providing them with opportunities to participate in and benefit from agricultural activities,
improving their economic status and social standing.
● Doubling Farmers' Income: By diversifying their agricultural activities, farmers can tap into
multiple sources of income, enhancing their overall earnings. Contributes to the goal of
doubling farmers' income, as promoted by various agricultural policies and initiatives.
Organic Farming
Organic farming is a method of agriculture that emphasizes the use of natural processes and
materials to maintain soil fertility, control pests, and promote ecological balance. It avoids the use
of synthetic chemical inputs such as fertilizers, pesticides, and genetically modified organisms
(GMOs).
Benefits of Organic Farming
● Environmental Sustainability: Organic farming practices reduce pollution, conserve water,
reduce soil erosion, and increase soil fertility.
● Health Benefits: Organic produce is free from synthetic chemicals and pesticides, which
can have harmful effects on human health. Consumers benefit from healthier food options,
potentially leading to reduced health risks associated with chemical exposure.
● Economic Push: Sikkim has become a fully organic state, which has boosted its economy
by attracting eco-tourism and increasing the value of its agricultural products. Organic
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farming can enhance economic opportunities for farmers by opening up new markets and
increasing the demand for organic products.
● Soil Fertility: Organic farming practices, such as crop rotation, composting, and green
manure, enhance soil structure and fertility.
● Increase in Agricultural Exports: The global demand for organic products is increasing,
providing opportunities for farmers to access international markets. Farmers can achieve
higher profits by exporting organic produce, which is often sold at a premium price.
● Labour Intensive: Organic farming requires more manual labor for practices such as
weeding, composting, and pest management. It Creates more employment opportunities in
rural areas, supporting rural economies and communities.
Challenges of Organic Farming
● Land Availability: A significant percentage of farmers, about 86%, are small and marginal
with less than 2 hectares of land. Small landholdings make it difficult for these farmers to
afford the transition to organic farming, which can be costly initially.
● Preparation Time: Converting conventional farmland to organic farming requires a
significant transition period to eliminate chemical residues and build up organic matter. This
longer preparation time can delay the benefits and profitability of organic farming.
● Low Initial Yield: During the transition period and in the initial years, organic farming
often produces lower yields compared to conventional farming. Lower yields can affect
farmers' income and food security in the short term, making the transition difficult.
Food Security
● Food security refers to a situation where all individuals have reliable access to sufficient,
safe, and nutritious food necessary for a healthy and active life.
● Historically, India faced significant food shortages and relied heavily on food imports,
particularly wheat from countries like the USA.
● In the 1960s, Prime Minister Lal Bahadur Shastri coined the slogan "Jai Jawan Jai Kisan,"
which emphasized the importance of both military and agricultural strength.
● This led to the launch of the Green Revolution under Prime Minister Indira Gandhi. The
Green Revolution introduced high-yielding crop varieties, modern agricultural techniques, and
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increased use of fertilizers, which greatly boosted food production and reduced the reliance
on imports.
Dimensions of Food Security
● Availability: Availability refers to ensuring that an adequate supply of food is produced and
made available within the country. This involves factors such as agricultural productivity,
food imports, and the effective management of food stocks. Policies and practices that
enhance agricultural output, such as the Green Revolution, and maintaining strategic grain
reserves, have played a major role in addressing food availability.
● Accessibility: Accessibility ensures that food is within the physical and economic reach of
all individuals. This involves creating infrastructure for transportation, market distribution,
and efficient food distribution systems. Programs like the Public Distribution System (PDS)
aim to make food accessible to marginalized communities, ensuring that even the most
vulnerable populations have access to basic food supplies.
● Affordability: Affordability ensures that food is economically accessible to everyone,
particularly those from low-income groups. This dimension focuses on making food prices
manageable and ensuring that even the poorest sections of society can purchase sufficient
food. Initiatives like food subsidies, Minimum Support Prices (MSP), and public food
programs contribute to making food affordable.
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8
Indian Economy
Lecture 20 : Rural Development (Part 02)
Marginal Propensity to Consume (MPC):
● MPC is thechange in consumption per unit change inincome.
Marginal Propensity to Save (MPS) :
● MPS is thechange in savings per unit change in income.
MPC + MPS = 1
Paradox of Thrift/Saving :
● Paradox of thrift occurs when anincrease in overallsavings ratein an economydoes not
necessarily lead to an increase in overall higher savingsof the country.
Money Supply:
● M0 (Reserve Money/ High powered money) :It coverscurrency in circulation, bankers
deposits with RBI and other deposits with RBI.
● M1, M2-They are also called Narrow Money.
● M3, M4- They are also called Broad Money.
National Income:
● It represents thetotal income earned by a country'sresidents and businesses,
accounting for depreciation.
National Income = Net National Product (NNP) at Factor Cost
Personal Income :
● Personal income includes all the income received by householdin a year.
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Personal Income= National Income - Undistributed Profit - Corporate tax - Interest
Payment by the household + Interest Payment to the household + Transfer Payment.
UPSC Prelims PYQs:
Que. Consider the following statements: (2021)
Other things remaining unchanged, market demand for a good might increase
1. price of its substitute increases
2. price of its complement increases
3. the good is an inferior good and the income of the consumer increases
4. its price falls
Which of the above statements are correct?
(a) 1 and 4 only
(b) 2, 3 and 4
(c) 1, 3 and 4
(d) 1, 2 and 3
Ans : A
Sub-Theme: Functions of Money Market
Statement 1 is correct:In the case of Substitutegoods, demand for a good usually moves in
the direction of the price of its substitutes. Since tea is a substitute for coffee, if the price of
coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to
go up.
Statement 2 is incorrect:Goods that are consumedtogether are called Complementary goods
such as tea and sugar, pen and ink etc. Since pen and ink are used together, an increase in the
price of pens is likely to reduce the demand for ink and a decrease in the price of ink is likely
to increase the demand for pens. Similar is the case with other compliments. With the increase
in the price of complement, demand reduces.
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Statement 3 is incorrect:Inferior goods are thosegoods demanded for which move in the
opposite direction as the income of the consumer. As the income of the customer increases, the
demand for inferior goods falls, and as the income decreases, the demand for them rises. E.g.
coarse cereals.
Statement 4 is correct:As per Law of demand, Whenthe price of the commodity decreases,
demand for it rises.
Que. A rise in the general level of prices may be caused by: (2013)
1. An increase in the money supply
2. A decrease in the aggregate level of output
3. An increase in the effective demand
Select the correct answer using the codes given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Ans : D
Sub-Theme: Inflation
There are several factors that can contribute to a rise in overall prices, including an influx of
money into the economy, a decrease in the total amount of goods and services being produced,
an uptick in demand for those goods and services, an increase in people's earnings, and a rapid
expansion of the population.
● Statement 1 is correct:An increase in the money supplywill cause Inflation.
● Statement 2 is correct:A decrease in output willcause Inflation.
● Statement 3 is correct:An increase in demand willcause Inflation.
Que. Which of the following measures would result in an increase in the money supply in the
economy? (2012)
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1. Purchase of government securities from the public by the Central Bank.
2. Deposit of currency in commercial banks by the public.
3. Borrowing by the government from the Central Bank.
4. Sale of government securities to the public by the Central Bank.
Select the correct answer using the codes given below:
(a) 1 only
(b) 2 and 4 only
(c) 1 and 3
(d) 2, 3 and 4
Ans : C
Sub-Theme: Money Supply
Statement 1 is correct:The Central Bank pays investorsholding bonds. If the Central Bank
buys Government securities (or corporate bonds) people who are holding the bonds have more
money to spend. Banks see illiquid assets become liquid. Therefore, in certain circumstances, this
can lead to an increase in the money supply.
Statement 2 is incorrect:Deposit of currency in commercialbanks by the public does not
increase, instead decreases the supply of money in the market.
Statement 3 is correct:Borrowing by the governmentfrom the Central Bank leads to the
release of money to the Central Bank which eventually releases money in the market via loans
etc.
Statement 4 is incorrect:Sale of the government securitiesto the public by the Central Bank
leads to more flow of money in the market.
Que. In India, which one of the following is responsible for maintaining price stability by
controlling inflation? (2022)
(a) Department of Consumer Affairs
(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India
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Ans : D
Sub-Theme: Monetary Policy
In India, the responsibility for maintaining price stability and controlling inflation lies with the
Reserve Bank of India (RBI). The RBI is the central bank of India and is responsible for
regulating the supply of money in the economy through various monetary policy measures such
as adjusting interest rates, controlling the reserve ratios of banks, and buying or selling
government securities in the open market
Que. Which of the following is not included in the assets of a commercial bank in India? (2019)
(a) Advances
(b) Deposits
(c) Investments
(d) Money at call and short notice
Ans : B
Sub-Theme: Banking mechanism
Bank Assets:
● A bank places its funds in assets to earn profits.
● The assets include investments, money at call and short notice, loans and advances and
bills discounted and purchased.
● Additionally, it covers the cash in hand with the banks and also the cash held with the
RBI.
● The liabilities include deposits (both time and demand) and borrowings.
Que. Which one of the following statements correctly describes the meaning of legal tender
money? (2018)
(a) The money which is tendered in courts of law to defray the fee of legal cases.
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(b) The money which a creditor is under compulsion to accept in settlement of his claims.
(c) The bank money in the form of cheques, drafts, bills of exchange etc.
(d) The metallic money in circulation in a country.
Ans : B
Sub-Theme: Money as a legal tender
Legal tender is any official medium of payment recognized by law which the creditor is obligated
to accept towards repayment of a debt.
Que. Which of the following statements is/are correct regarding the 'Monetary Policy Committee
(MPC)? (2017)
1. It decides the RBI's benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only
Ans : A
Sub-Theme: Inflation Targeting/Banking and NBFCs
Statement 1 is correct:MPC determines the policyinterest rate, which is required to achieve
the inflation target.
Statement 2 is incorrect:As per the provisions ofthe RBI Act, Members of the Monetary
Policy Committee is a six-member body of which three Members will be from the RBI and the
other three Members of MPC will be appointed by the Central Government.
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Statement 3 is incorrect:The Governor of the ReserveBank of India is the ex-officio
Chairperson of MPC.
Que. With reference to Indian economy, consider the following: (2015)
1. Bank rate
2. Open market operations MP
3. Public debt
4. Public Revenue.
Which of the above is/are components/components of Monetary Policy?
(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4
Ans : C
Sub-Theme: RBI Monetary Policy
The monetary policy tool is implemented by the RBI through open market operations, bank rate,
CRR, SLR, the repo rate, reverse repo rate.
Statement 1 is correct:The bank rate is the rateof interest at which RBI charges while
lending loans to a commercial bank.
Statement 2 is correct:The Open market operationsare conducted by the RBI by way of sale
and purchase of Government Securities (G-Secs) to adjust liquidity in the market.
Statements 3 and 4 are incorrect:Public Revenue anddebt are not part of monetary policy.
These are related to fiscal policy.
Que. The terms 'Marginal Standing Facility Rate' and 'Net Demand and Time Liabilities', sometimes
appearing in news, are used in relation to: (2014)
(a) Banking operations
(b) Communications networking
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(c) Military strategies
(d) Supply and demand of agricultural products
(a) Sub-Theme: Banking functions
Ans : A
Sub-Theme : Banking Operations
● Marginal standing facility (MSF) is a window for banks to borrow 37/42 Reserve Bank
of India in an emergency when interbank liquidity dries up completely.
● The difference between a bank's total demand and time liabilities (deposits) of a bank
and its deposits in the form of assets held by another bank is represented by the term
"Net Demand and Time Liabilities".
Que. In the context of Indian economy, 'Open Market Operations' refers to: (2013)
(a) Borrowing by scheduled banks from the RBI.
(b) Lending by commercial banks to industry and trade.
(c) Purchase and sale of government securities by the RBI.
(d) None of the above.
Ans : C
Sub-Theme: Monetary Policy
Open Market Operations: It is the purchase and
sale of securities by the RBI.
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