Ghanshyam Thori

Economy Notes

Economics
Analysis WTO Discuss the importance of World Trade Organization (WTO) to Indian economy in the light of various opportunities & challenges at the global level. (30 Marks) What is Dumping? Evaluate the remedial measures taken by the Government of India vis--vis WTO provisions regarding dumping? (30 Marks) Discuss the reasons for the failure of the Seattle Millenium talks on the WTO. Discuss some implications of this failure on the Indian Economy. (15 Marks) Various Industrial Sectors - Industrial Policy/Liberalization/Reforms/Disinvestment What are the reasons for Industrial sickness in India? Suggest suitable remedies. (30 Marks) State the comprehensive structural reforms undertaken to improve the Indian Economy since 1991. (30 Marks) India is rapidly emerging as an information technology Superpower. Discuss some aspects of the growth of this sector in the Indian economy. What role can public policy play in further enhancing the growth prospects in this sector? (30 Marks) Discuss the role of public sector during the post-reform period of Indian Economy. (15 Marks) Liberalization of Indian Economy since 1991 has led to excessive consumerism & over production of white goods. Elucidate. (15 Marks) Outline the main objectives & achievements of the policy of disinvestment in India. (15 Marks) Agriculture/Forestry/Environment Comment on the relationship between credit availability & agricultural growth in India. (30 Marks) What is the meaning & aim of social forestry? What are the main weaknesses noticed in Social Forestry Program. (15 Marks) Bring out the main objectives of Rashtriya Krishi Bima Yojana. The scheme is being implemented by which agency. (15 Marks) What are Minimum Support Prices in agricultural products? What are their objectives? (15 Marks) Examine the effect of economic development on environmental degradation in India. (15 Marks) Finance/Taxes/Monetary Matters/Financial Reforms Describe the main sources of Industrial Finance in India. How could India benefit from recent developments in international finance? (30 Marks) What are the major recommendations of the Task Force on direct taxes appointed under the chairmanship of Shri Vijay L Kelkar? (30 Marks) Discuss the economic effects of black money (parallel economy) in Indian Economy. (15 Marks) Discuss the nature & cause of UTI crisis with particular reference to US-64. How does this UTI fiasco affect the investment climate in India?. (15 Marks) What is the role of external financial assistance in the Indian Economy? (15 Marks) What is a Finance Commission? (15 Marks) What are the recommendations of the Narsimham committee regarding the banking sector in India. (15 Marks) Ghanshyam Thori 1 Economy Notes

Ghanshyam Thori

Economy Notes

Point out the measures undertaken towards flexibility in capital account transactions during the recent past. (15 Marks) What are the hurdles faced by the Finance Ministers of India in keeping the fiscal deficit below 3-4 percent of the GDP? Suggest steps to lower fiscal deficit. (15 Marks)

Poverty Discuss the causes & ramifications of hunger in Africa. (30 Marks) How is poverty level measured? Evaluate poverty eradication programs in India. (30 Marks) What is the incidence of poverty in India? How should poverty alleviation programs be constructed? (30 Marks) Examine the effects of Globalization on poverty removal in India. (15 Marks) Planning Write a note on the strategy of planning in India since 1951. (30 Marks) Outline the objectives of 10th Five Year Plan(15 Marks) Main provisions of 9th five year plan (2 Marks) Population Outline the main targets fixed in the National Population Policy 2000. What have been the followup measures to this policy? (30 Marks) Control over growth of population in India is essential for the countrys rapid economic development. Discuss. (30 Marks) Economics Policies & Schemes Recent Current Affairs The main thrust of Export-Import Policy 2002-07 is on creating a framework for enhancing Indias export capability. In the light of this statement outline the salient features of EXIM Policy 2002-07. (UPSC 2002) (30 Marks) With what objectives was the Essential Commodities Act 1955 amended last year? (15 Marks) Explain Mega Food Park Scheme of Government of India. (15 Marks) What is (Revised) Targeted Public Distribution System? What are its main features? (15 Marks) Transport: What ails Indians road transport economy? Suggest measures for remedy. (15 Marks) Miscellaneous: Indian economy represents a paradox of high savings rate with low income & high savings rate with low growth rate. Analyse. (30 Marks) What are the implications of Gender disparities in India? (15 Marks) Examine the functions of the European Free Trade Association. (15 Marks)

Ghanshyam Thori

Economy Notes

Ghanshyam Thori

Economy Notes

Economic Terms
Twin deficit means combination of fiscal deficit & current account deficit. A current account deficit shows the extent to which a country is consuming more than it is producing. The current account is a section in a countrys balance of payments (BOP) that records a country's current transactions. The account is divided into four sections: goods, services, income (such as salaries and investment income) and unilateral transfers (for example, workers remittances). A current account deficit occurs when a country has an excess of one or more of the four factors making up the account. When a current transaction enters the account, it is recorded as a credit, and when a value leaves the account, it is marked as a debit. Basically, a current account deficit occurs when more money is being paid out than brought into a country. When a government's total expenditures exceed the revenue that it generates Fiscal Deficit (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits. A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy. An economic concept developed by A. W. Phillips stating that inflation and Phillips Curve unemployment have a stable and inverse relationship. The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. The concept has been proven empirically and some government policies are directly influenced by it. Indifference Curve A diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of goods. Twin Deficit

As an example, consider the diagram above. This consumer would be most satisfied with any combination of products along curve U3. This consumer would be indifferent between combination Qa1, Qb1, and Qa2, Qb2. Ghanshyam Thori 3 Economy Notes

Ghanshyam Thori Hundi

Economy Notes Hundis refer to financial instruments evolved on the Indian sub-continent used in trade and credit transactions.Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. Hundis, being a part of the informal system have no legal status and are not covered under the Negotiable Instruments Act, 1881. Though normally regarded as bills of exchange, they were more often used as equivalents of cheques issued by indigenous bankers. Badla was an indigenous carry-forward system invented on the Bombay Stock Exchange as a solution to the perpetual lack of liquidity in the secondary market. Under Badla system the share transaction deal could be postponed from one settlement period (generally a week) to next settlement period by paying finance charges i.e. compensation or badla. Rolling settlement has replaced Badla System. Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax revenue collected by governments. The chart below shows the Laffer Curve:

Badla

Laffer Curve

Eurobond

The curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100% (the far right of the curve), then all people would choose not to work because everything they earned would go to the government. Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard. Bond issued in a currency other than the currency of the country or market in which it is issued. Usually, a eurobond is issued by an international syndicate and categorized according to the currency in which it is denominated. A eurodollar bond that is denominated in U.S. dollars and issued in Japan by an Australian company would be an example of a eurobond. The Australian company in this example could issue the eurodollar bond in any country other than the U.S.Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in which to offer their bond according to the country's regulatory constraints. They may also denominate their eurobond in their preferred currency. Eurobonds are attractive to investors as they have small par values and high liquidity 4 Economy Notes

Ghanshyam Thori

Ghanshyam Thori ADR (American Depository Receipt)

Economy Notes

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction. A bank certificate issued in more than one country for shares in a foreign company. GDR The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. Rolling Settlement The process of settling security trades on successive dates so that trades executed today will have a settlement date one business day later than trades executed yesterday. This contrasts with account settlement, in which all trades are settled once in a set period of days, regardless of when the trade took place. When securities are sold and settled on successive business days, they are said to be experiencing a rolling settlement. E.g. T+2 rolling settlement in India. Financial instruments used by investors or hedge funds that are not registered with Participatory the Securities and Exchange Board of India to invest in Indian securities. IndianNotes based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. In many ways, this is similar to an informal ADR process, where brokerages hold on to stocks for foreign investors. However, Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. Regulators fear that hedge funds acting through participatory notes will cause economic volatility in India's exchanges A swap that involves the exchange of principal and interest in one currency for the Currency Swap same in another currency. For example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange. A term that refers to the Bombay Stock Exchange, the major stock exchange in Dalal Street India. The street is home not only the Bombay Stock Exchange but also a large number of other financial institutions. The term "Dalal Street" is used in the same way as "Wall Street" in the U.S., referring to the country's major stock exchanges and overall financial system. These terms are often seen in the financial media. The Dow Jones Industrial Average is a price-weighted average of 30 significant Dow Jones Industrial Average stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896. Often referred to as "the Dow", the DJIA is the oldest and single most watched index in the world. The DJIA includes companies like General Electric, Disney, Exxon and Microsoft. When the TV networks say "the market is up today", they are generally referring to the Dow. Short for Japan's Nikkei 225 Stock Average, the leading and most-respected index Nikkei of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 bluechip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the U.S. In fact, it was called the Nikkei Ghanshyam Thori 5 Economy Notes

Ghanshyam Thori S&P 500

Economy Notes Dow Jones Stock Average from 1975 to 1985 An index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the largecap universe. The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one time the most renowned index for U.S. stocks, but because the DJIA contains only 30 companies, most people agree that the S&P 500 is a better representation of the U.S. market. In fact, many consider it to be the definition of the market. An index of 30 top German Stocks. An index of the leading stocks on the Hong Kong stock market. The FTSE is similar to Standard & Poor's in the United States. They are best known for the FTSE 100, an index of blue-chip stocks on the London Stock Exchange Measures all common stocks listed on the New York Stock Exchange and four subgroup indexes: industrial, transportation, utility and finance. The index tracks the change in the market value of NYSE common stocks, and is adjusted to eliminate the effects of new listings and delistings. The market value of each stock is calculated by multiplying its price per share by the number of shares listed. National Association of Security Dealers Automated Quotation. This is an index of New York Stock Exchange which determines the behaviour of IT & IT related industries. Created in 1971, the Nasdaq was the world's first electronic stock market. The term "Nasdaq" used to be capitalized "NASDAQ" as an acronym for National Association of Securities Dealers Automated Quotation. In recent times, the acronym was dropped, and Nasdaq is now used as a proper noun. The Nasdaq is traditionally home to many high-tech stocks. The big ones include Microsoft, Intel, Dell and Cisco. A stock index endorsed by Standard & Poor's and composed of 50 of the largest and most liquid stocks found on the National Stock Exchange (NSE) of India. It is commonly used to represent the market for benchmarking Indian investments. Similar to other major stock indexes like the S&P 500, companies must meet certain requirements in terms of market capitalization and liquidity before they can be considered for inclusion in the index. Also known as "Nifty 50". CNX stands for the Credit Rating Information Services of India Limited (CRISIL) and the National Stock Exchange of India (NSE). These two bodies own and manage the index within a joint venture called the India Index Services and Products Ltd. (IISL). Without the additional abbreviation to S&P CNX, the index name would be S&P CRISIL NSE Index. As of July 2007, the stocks in the S&P CNX Nifty represented well over 50% of the total market capitalization of all stocks in India's stock exchanges. An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively-traded stocks on the BSE. Initially compiled in 1986, the Sensex is the oldest stock index in India. The next rung of liquid securities after S&P CNX Nifty is the CNX Nifty Junior. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid stocks in India. 6 Economy Notes

DAX Hang Seng FTSE NYSE Composite Index

NASDAQ

S&P CNX Nifty or Nifty

Sensex

CNX Nifty Junior

Ghanshyam Thori

Ghanshyam Thori CNX 100

Economy Notes

100 most liquid stocks on NSE. It can be said as the combination of S&P CNX Nifty & CNX Nifty Junior. The S&P CNX 500 is Indias first broad-based benchmark of the Indian capital S&P CNX 500 market for comparing portfolio returns vis-a-vis market returns. The S&P CNX 500 represents about 90.30% of total market capitalization and about 80.02% of the total turnover on the NSE as on March 30, 2007. Almost every institutional investor and off-shore fund enterprise with an equity S&P CNX Defty exposure in India would like to have an instrument for measuring returns on their equity investment in dollar terms. To facilitate this, a new index the S&P CNX Defty-Dollar Denominated S&P CNX Nifty has been developed. S&P CNX Defty is S&P CNX Nifty, measured in dollars. Currency Forward A forward contract in the forex market that locks in the price at which an entity can buy or sell a currency on a future date. Also known as "outright forward currency transaction", "forward outright" or "FX forward".In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity and on a specified future date. These contracts cannot be transferred. The first sale of stock by a private company to the public. IPOs are often issued by IPO smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. Greenshoe Option A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option. A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.The term is derived from the fact that the Green Shoe Company was the first to issue this type of option. preliminary registration statement that must be filed with SEBI describing a new Red Herring issue of stock and the prospects of the issuing company. There is no price or issue size stated in the red herring, and it is sometimes updated several times before being called the final prospectus. It is known as a red herring because it contains a passage in red that states the company is not attempting to sell its shares before the registration is approved by the SEBI The process by which an underwriter attempts to determine at what price to offer Book Building an IPO based on demand from institutional investors. An underwriter "builds a book" by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay. The managing or lead underwriter who maintains the books of securities sold for a Book Runner new issue. In other words, this person is the underwriter who "runs" the books. Often the book runner is given credit for the total size of the deal. Deficit financing & spending by a government on public works in an attempt to Pump Priming Ghanshyam Thori 7 Economy Notes

Ghanshyam Thori

Economy Notes revive economy during recession. It can raise the purchasing power of the people & thus stimulate & revive economic activity to the point that deficit spending will no longer be considered necessary to maintain the desired economy activity. World Development Report 2008: Agriculture for Development World Development Report 2007: Development & the next generation World Development Report 2006: Equity & Development World Development Report 2005: A Better Investment Climate for Everyone International Finance Corporation (IFC) International Development Association (IDA) Multilateral Investment Guarantee Agency ICSID International Centre for Settlement of Investment Disputes An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for a minimum period of at least one year. Medical Tourism India (a.k.a. Health Tourism India) is a developing concept whereby people from world over visit India for their medical and relaxation needs. Most common treatments are heart surgery, knee transplant, cosmetic surgery and dental care. India is known in particular for heart surgery, hip resurfacing and other areas of advanced medicine. The government and private hospital groups are committed to the goal of making India a world leader in the industry. The industry's main appeal is low-cost treatment. Most estimates claim treatment costs in India start at around a tenth of the price of comparable treatment in America or Britain. Estimates of the value of medical tourism to India go as high as $2 billion a year by 2012. The Indian government is taking steps to address other infrastructure issues that can serve as a deterrant to the country's growth in medical tourism. The south Indian city of Chennai has been declared India's Health Capital, as it nets in 45% of health tourists from abroad and 30-40% of domestic health tourists.[ ISO 9000 is a family of standards for quality management systems. ISO 9000 is maintained by ISO, the International Organization for Standardization and is administered by accreditation and certification bodies. Some of the requirements in ISO 9001 (which is one of the standards in the ISO 9000 family) would include: a set of procedures that cover all key processes in the business; monitoring processes to ensure they are effective; keeping adequate records; checking output for defects, with appropriate corrective action where necessary; regularly reviewing individual processes and the quality system itself for effectiveness; and facilitating continual improvement The ISO 14000 environmental management standards exist to help organizations 8 Economy Notes

World Development Report Affliates of World Bank

Hedge Fund

Medical Tourism

ISO 9000

ISO 14000 Ghanshyam Thori

Ghanshyam Thori

Economy Notes

minimize how their operations negatively affect the environment (cause adverse changes to air, water, or land), comply with applicable laws, regulations, and other environmentally oriented requirements, and continually improve on the above. ISO 14000 is similar to ISO 9000 quality management in that both pertain to the process (the comprehensive outcome of how a product is produced) rather than to the product itself. The overall idea is to establish an organized approach to systematically reduce the impact of the environmental aspects which an organization can control. Effective tools for the analysis of environmental aspects of an organization and for the generation of options for improvement are provided by the concept of Cleaner Production. Non-factor services refer to all invisible receipts or payments not attributable to Non Factor any of the conventional `factors of production', i.e labour (remittances from Services overseas migrants) and capital (income from investments, interest payments, dividend repatriation). Thus, non-factor services include forex earnings and expenses on account of tourism, shipping/freight and various `miscellaneous' subheads, under which export of software features. WTOs Agreement Amber Box: All domestic subsidies such as market price support - that are considered to distort production and trade. Amber Box subsidies are subject to on Agriculture & WTO reduction commitments. It is deemed to be trade distorting primarily by Subsidies encouraging excessive production. Blue Box: Subsidy payments that are directly linked to acreage or animal numbers, but under schemes which also limit production by imposing production quotas or requiring farmers to set-aside part of their land. These are deemed by WTO rules to be partially decoupled from production and are not subject to WTO reduction commitments. In the EU, they are commonly known as direct payments. These are payments linked to production limiting program. Green Box: subsidies that are deemed not to distort trade, or at most cause minimal distortion and are not subject to WTO reduction commitments. For the EU and US one of the most important allowable subsidies in this category is decoupled support paid directly to producers. Such support should not relate to current production levels or prices. It can also be given on condition that no production shall be required in order to receive such payments. The negotiations Non-Agriculture Market Access (NAMA) are based on the Doha mandate of 2001 that calls for a reduction or elimination in tariff peaks, tariff escalation, high tariffs and non-tariff barriers, particularly on goods that are of export value and therefore of interest to developing countries. NAMA refers to all those products that are not covered by the Agreement on Agriculture or the negotiations on services. In practice, NAMA products include manufacturing products, fuels and mining products, fish and fish products, and forestry products. The NAMA negotiations have been considered important by the WTO as NAMA products account for almost 90% of the world's mechandise exports. The Multilateral Investment Guarantee Agency (MIGA) is a member of the World Bank group. It was established to promote foreign direct investment into developing countries. MIGA was founded in 1988 with a capital base of $1 billion and is headquartered in Washington, D.C. MIGA promotes foreign direct 9 Economy Notes

NAMA

MIGA

Ghanshyam Thori

Ghanshyam Thori

Economy Notes investment into developing countries by insuring investors against political risk, advising governments on attracting investment, sharing information through online investment information services, and mediating disputes between investors and governments. MIGA also requires host country government approval for every project. MIGA tries to work with host governments - resolving claims before they are filed 1 - Creeping Inflation: When prices rise at very slow rate, i.e. creepers speed, it is called creeping inflation. Generally 3% annual rise in prices is considered as creeping inflation. 2- Walking or Trotting Inflation: When inflation is in between 3% to 7%, its regarded as walking or trotting inflation. Some economists have extended the boundary of this type of inflation up to 10% per annum. This type of inflation is considered as a warning signal for the government to take some measures to control the situation. 3- Running Inflation: This type of inflation comes into action when theres a rapid rise in prices and the range of this type lies in between 10% to 20% per annum. This type of inflation is controllable only by strong monetary and fiscal measures, lest it will be turned into hyper inflation. 4- Hyper Inflation or Galloping Inflation: The rise of prices from 20% to 100 % per annum is regarded as hyper inflation or galloping inflation. This case of inflation is un controllable. 5- Demand Pull Inflation: This type of inflation is results as an excess demand. In this case supply remains constant (couldnt be upgraded as per demand). So consequently, the prices go up. 6- Cost Push Inflation: When theres increase in money-wages at speedier rate than that of the rise in the productivity of labour, it results as increased cost of production which furthers the increase in prices. This type of inflation is regarded as cost push inflation. 7- Mixed Inflation: Majority of the economists hold that, inflation is neither completely demand pull nor completely cost push, the actual inflationary process contains the elements of both. Excess demand and increase in money wages operate at the same time, but its not necessary that they start at the same time. 8- Markup inflation: Garner Akley put forward the theory of mark up inflation. In simple words it is an advanced explaination of Mixed inflation. According to Akley First comes demand pull inflation, and it is led by cost push inflation. Markup inflation comes to happen when excess demand increases the prices, which stimulates the production. The increasing production creates excessive demand for the factors of production, and the excessive demand for the factors of production

Inflation Types

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10

Economy Notes

Ghanshyam Thori further raises the prices.

Economy Notes

Disinflation & Deflation

9- Stagflation: Stagflation is a situation, whereby economy faces stagnation of output and unemployment along with a high rate of inflation. This situation is also known as inflationary recession. Disinflation is a decrease in the rate of inflation. Being how much prices are increasing per unit of time, it can be expressed using the word disinflation: The slowing of the rate of inflation per unit of time. For example in one month the rate of inflation could be was 4.4% and in May the rate of inflation was 4.0%. In this instance the price of goods and services is still increasing; however, it is increasing at a slower rate, 0.4% less, than a month before. It should not be confused with deflation, which is an overall decrease in prices. Disinflation is generally considered to be a very positive state for the economy. Over the last twenty years North America has seen steady disinflation, and many credit this with the strong growth during this period. While disinflation is generally perceived as positive, it is not good for the effect to go so far as deflation, which is generally perceived to be a very negative state for an economy. Deflation is a decrease in the general price level over a period of time. Deflation is the opposite of inflation. For economists especially, the term has been and is sometimes used to refer to a decrease in the size of the money supply (as a proximate cause of the decrease in the general price level). The latter is now more often referred to as a 'contraction' of the money supply. During deflation the demand for liquidity goes up, in preference to goods or interest. During deflation the purchasing power of money increases.Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression, although not all episodes of deflation correspond to periods of poor economic growth historically. The platform where communication technology and information technology are merged to suit core needs of banking is known as Core Banking Solutions. Here computer software is developed to perform core operations of banking like recording of transactions, passbook maintenance, interest calculations on loans and deposits, customer records, balance of payments and withdrawal are done. This software is installed at different branches of bank and then interconnected by means of communication lines like telephones, satellite, internet etc. It allows the user (customers) to operate accounts from any branch if it has installed core banking solutions. This new platform has changed the way banks are working. Now many advanced features like regulatory requirements and other specialised services like share (stock) trading are being provided. The Self Employment Scheme For Ex-servicemen (SEMFEX-II) has been in operation since 1988. The scheme has been specially designed to provide a comprehensive package of credit for encouraging ex-servicemen, disabled service personnel, war widows and widows of ex-servicemen to undertake agricultural and allied activities or to set up non-farm units in rural areas to earn their livelihood for leading a dignified life. Scheme has been formulated Jointly by the DGR (Directorate General Resettlement) and Khadi and Village Industries Commission (KVIC) & launched 11 Economy Notes

Core Banking Solution

SEMFEX II

SEMFEX III Ghanshyam Thori

Ghanshyam Thori

Economy Notes in 1991. Scheme is operative in rural areas. Village Industries within the purview of KVIC are only financed. Loan is available for individual Ex-Servicemen and Co-operatives. Individual projects can be financed upto Rs 10.00 Lakhs by KVIC/KVIBS. Upper loan limit is Rs 25.00 Lakhs. Its objective is to promote FDI into India by undertaking investment promotion activities in India and abroad by facilitating investment in the country through international companies, non-resident Indians and other foreign investors. It identifies sectors & countries in which & from which more & more of foreign investment is required & can be channelized. Foreign Investment Promotion Council. Its a body of experts to target specific countries & specific sectors to attract FDI by projecting Indias image as an attractive destination. Government of India has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, to provide a pro-active one stop after care service to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agencies to find solution to their problems. FIPB & FIIA are the two agencies promoting foreign investment in India. India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following, which require prior approval of the Government:1. Sectors prohibited for FDI 2. Activities/items that require an industrial license 3. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field 4. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted 5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed. FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors. FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the 12 Economy Notes

Foreign Investment Promotion Board (FIPB) FIPC Foreign Investment Implementation Authority (FIIA)

FDI Policy in India

Automatic Route

FDI Requiring Government Approval Ghanshyam Thori

Ghanshyam Thori Prohibited Sectors for FDI

Economy Notes recommendations of Foreign Investment Promotion Board (FIPB). The extant policy does not permit FDI in the following cases: i. Gambling and betting ii. Lottery Business iii. Atomic Energy iv. Retail Trading v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations) With progressive liberalization and deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. At present, industrial license is required only for the following: 1. Industries retained under compulsory licensing 2. Manufacture of items reserved for small scale sector by larger units 3. When the proposed location attracts locational restriction The following industries require compulsory license: I Alcoholics drinks II Cigarettes and tobacco products III Electronic aerospace and defense equipment IV Explosives V Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and diisocynates of hydro carbon and derivatives An Engel curve is the relationship between the amount of a product that people are willing to buy and their income. An Engel curve is shown below.

Industries Requiring Compulsory Licensing

Engel Curve

Engels Law (UPSC 2007) Lorenz Curve & Gini Coefficient

Engel's law is an observation in economics stating that, with a given set of tastes and preferences, as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises. In other words, the income elasticity of demand of food is less than 1. The law was named after the statistician Ernst Engel. A Lorenz curve shows the degree of inequality that exists in the distributions of two variables, and is often used to illustrate the extent that income or wealth are distributed unequally in a particular society.

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Economy Notes

Ghanshyam Thori

Economy Notes

The Gini coefficient is the area between the line of perfect equality and the observed Lorenz curve, as a percentage of the area between the line of perfect equality and the line of perfect inequality.A Gini coefficient is a summary numerical measure of how unequally one variable is related to another. The Gini coefficient is a number between 0 and 1, where perfect equality has a Gini coefficint of zero, and absolute inequality yields a Gini coefficint of 1. Trickle Down Theory (UPSC 2007) Tight Money or Dear Money Soft Money or Cheap Money Soft Currency An economic theory given by Simon Kuznet which states that investing money in companies and giving them tax breaks is the best way to stimulate the economy. Proponents of this theory believe that when government helps companies, they will produce more and thereby hire more people and raise salaries. The people, in turn, will have more money to spend in the economy. A situation in which money or loans are very difficult to obtain in a given country. If you do have the opportunity to secure a loan, then interest rates are usually extremely high. Also known as "dear money". Credit available at low rate of interest. Another name for "weak currency". The values of soft currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency. Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currency to a currency such as the U.S. dollar. A currency, usually from a highly industrialized country, that is widely accepted around the world as a form of payment for goods and services. A hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid in the forex market.Another criterion for a hard currency is that the currency must come from a politically and economically stable country. The U.S. dollar and the British pound are good examples of hard currencies. Stock market investor who invests in IPO in the hope of selling it immediately upon listing and making a profit. Bad money puts good money out of circulation. It was given by Sir Thomas Gresham. 14 Economy Notes

Hard Currency

STAG Greshams Law Ghanshyam Thori

Ghanshyam Thori Balance of Payments

Economy Notes The balance of payments, (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). The components of balance of payments are: 1. Current Account 2. Capital Account 3. Financial Account 4. Net Errors and Omissions 5. Official reserves The current account is the sum of net sales from trade in goods and services, net factor income (such as interest payments from abroad), and net unilateral transfers from abroad (such as foreign aid, gifts). Positive net sales to abroad corresponds to a current account surplus; negative net sales to abroad corresponds to a current account deficit. Trade in goods is also known as trade in visibles or tangibles, Trade in services is also known as trade in invisibles or intangibles. The capital account "records the international flows of transfer payments relating to capital items". It therefore records a country's inflows and outflows of payments and transfer of ownership of fixed assets (capital goods). Examples of such goods could be factories and so on. The financial account is the net change in foreign ownership of domestic financial assets. If foreign ownership of domestic financial assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a financial account surplus. On the other hand, if domestic ownership of foreign financial assets has increased more quickly than foreign ownership of domestic assets, then the domestic country has a financial account deficit. The accounting entries in the financial account record the purchase and sale of domestic and foreign assets. These assets are divided into categories such as Foreign Direct Investment (FDI), Portfolio Investment (which includes trade in stocks and bonds), and Other Investment (which includes transactions in currency and bank deposits). Net Errors & Omissions only exists to correct any possible errors made in accounting for the three other accounts. These errors are common to occur due to the complexity of the calculations. The official reserves account records the current stock of reserve assets (and often simply referred to as foreign exchange reserves) available to and controlled by the country's authorities for financing of international payment imbalances, foreign exchange intervention and other uses. The Multi Fibre Arrangement (MFA) (a.k.a. Agreement on Textile and Clothing (ATC)) governed the world trade in textiles and garments from 1974 through 2004, imposing quotas on the amount developing countries could export to developed countries. It expired on 1 January 2005. The MFA was introduced in 1974 as a short-term measure intended to allow developed countries to adjust to imports from the developing world. Developing countries have a natural advantage in textile production because it is labor intensive and they have low labor costs. 15 Economy Notes

Multi Fibre Agreement (MFA)

Ghanshyam Thori

Ghanshyam Thori Indias ExportImport Policy (2002-07)

Economy Notes HIGHLIGHTS OF EXIM POLICY 2002-07 (as amended upto 31.3.2003) Service Exports

Duty free import facility for service sector having a minimum foreign exchange earning of Rs.10 lakhs. The duty free entitlement shall be 10% of the average foreign exchange earned in the preceding three licensing years Agro Exports Corporate sector with proven credential will be encouraged to sponsor Agri Export Zone for boosting agro exports. The corporates to provide services such as provision of pre/post harvest treatment and operations, plant protection, Status Holders Duty-free import entitlement for status holders having incremental growth of more than 25% in FOB value of exports (in free foreign exchange). This facility shall however be available to status holders having a minimum export turnover of Rs.25 crore (in free foreign exchange). The duty free entitlement shall be 10% of the incremental growth in exports and can be used for import of capital goods, office equipment and inputs for their own factory or the factory of the associate/supporting manufacturer/job worker. Hardware/Software To promote growth of exports in embedded software, hardware shall be admissible for duty free import for testing and development purposes. Gem & Jewellery Sector Diamond & Jewellery Dollar Account for exporters dealing in purchase/sale of diamonds and diamond studded jewellery. Nominated agencies to accept payment in dollars for cost of import of precious metals from EEFC account of exporter. Gem & Jewellery units in SEZ and EOUs can receive precious metal i.e. Gold/Silver/Platinum prior to exports or post exports equivalent to value of jewellery exported. This means that they can bring export proceeds in kind against the present provision of bringing in cash only. Export Clusters Upgradation of infrastructure in existing clusters/industrial locations under the Department of Industrial Policy & Promotion (DIPP) scheme to increase overall competitiveness of the export clusters Removal of Quantitative Restrictions Import of 69 items covering animal products, vegetables and spices, antibiotics and films removed from restricted list. Special Economic Zones Scheme Sales from Domestic Tariff Area (DTA) to SEZs to be treated as export. This would now entitle domestic suppliers to Drawback/DEPB benefits, CST exemption and Reduction in penal interest rate from 24 percent to 15 percent for all old cases of default under Exim Policy. Indian Tax System The government of India imposes a progressive income tax on taxable. The Income Tax department is governed by the Central Board for Direct Taxes (CBDT. The individual income tax is a progressive tax with three brackets. No income tax is applicable on income up to INR 110,000 per year. (INR 145,000 for women and INR 195,000 for senior citizens). The highest bracket is 30%, with a 10% surcharge (tax on tax) for incomes above Rs. 10 lakh (INR 1 million). All income 16 Ghanshyam Thori Economy Notes

Ghanshyam Thori

Economy Notes taxes are subject to 3% education cess, applicable on the tax paid. Business income is taxed at a flat rate of 33% for Indian companies and 40% for foreign companies.[8] Dividends are income tax free to shareholders. Instead, companies are charged a 15% dividend distribution tax. Long term capital gains is exempted from tax provided securities transaction tax paid. For sales of shares in recognized stock exchanges, long term (held above 1 year) capital gains are not taxed, and short term (less than 1 year of holding) gains are charged 10% tax provided the Securities Transaction Tax has been paid. All other short term gains are clubbed with income in the year the gains occur. Since April 01, 2005, most of the State Governments in India have replaced sales tax with VAT. Taxes Levied by Central Government Direct Taxes Tax on Corporate Income Capital Gains Tax Personal Income Tax Tax Incentives Double Taxation Avoidance Treaty Indirect Taxes Excise Duty Customs Duty Service Tax Securities Transaction Tax Taxes Levied by State Governments and Local Bodies Sales Tax/VAT Other Taxes A trade barrier is a general term that describes any government policy or regulation that restricts international trade. The barriers can take many forms, including: Import duties Import licenses Export licenses Import quotas Tariffs Subsidies Non-tariff barriers to trade Voluntary Export Restraints Local Content Requirements Non-tariff barriers to trade are trade barriers that restrict imports but are not in the usual form of a tariff. Some of the common examples are anti-dumping measures and countervailing duties, which, although they are called "non-tariff" barriers, have the effect of tariffs but are only imposed under certain conditions. Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. Countervailing duties (CVDs) are a means to restrict international trade. They are imposed when a foreign country subsidizes its exports, hurting domestic producers. 17 Economy Notes

Trade Barrier

Non Tariff Trade Barriers

Countervailing Duty (UPSC 2007) Ghanshyam Thori

Ghanshyam Thori Incremental Capital Output Ratio

Economy Notes

The Incremental Capital-Output Ratio (ICOR), is the ratio of investment to growth which equals to 1 divided by the marginal product of capital. The higher the ICOR, the lower the productivity of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used. The Clearing Corporation of India Ltd. (CCIL) was set up in 2001 for providing CCIL exclusive clearing and settlement for transactions in Money, GSecs and Foreign (UPSC 2007) Exchange. Securitization & Reconstruction of Financial Assets & Enforcement of Security SARFAESI Act Interests. Enacted in 2002 to empower banks to sell the assets pledged by the 2002 borrower without prior permission of the court to recover Non-Performing Assets (NPA). Price of a good that is specified by a governmental or some other nonmarket Administered agency. Wage price controls and rent controls are examples of administered prices. Price Most favoured nation (MFN), is a status awarded by one nation to another in MFN international trade. It means that the receiving nation will be granted all trade (UPSC 2007) advantages - such as low tariffs - that any other nation also receives. In effect, having MFN status means that one's nation will not be treated worse than anyone else's nation. Merit goods are goods and services where the social benefits exceed the private Merit Goods benefits. With merit goods - the state is concerned with maximising the (UPSC 2007) consumption of certain goods which it deems to be desirable; goods and services where the social benefits exceed the private benefits, e.g. Education and Healthcare are assumed to generate positive externalities. Trying to win business from rivals other than by charging a lower PRICE. Methods Non-price include ADVERTISING, slightly differentiating your product etc. competition Government policy for dealing with monopoly. Antitrust laws aim to stop abuses Antitrust of market power by big companies and, sometimes, to prevent corporate mergers and acquisitions that would create or strengthen a monopolist. The idea that a country should be self-sufficient and not take part in international Autarky trade Capital Adequacy The ratio of a BANKs CAPITAL to its total ASSETS, required by regulators to be above a minimum (adequate) level so that there is little RISK of the bank going Ratio bust. How high this minimum level is may vary according to how risky a banks activities are. Beta measures the sensitivity of the price of a particular asset to changes in the Beta market as a whole. A conference held at Bretton Woods, New Hampshire, in 1944, which designed the Bretton Woods structure of the international monetary system after the second world war and set up the IMF and the world bank. It was agreed that the exchange rates of IMF members would be pegged to the dollar, with a maximum variation of 1% either side of the agreed rate. Rates could be adjusted more sharply only if a country's balance of payments was in fundamental disequilibrium. In August 1971 economic troubles and the cost of financing the Vietnam war led the American president, Richard Nixon, to devalue the dollar. This shattered confidence in the fixed exchange rate system and by 1973 all of the main currencies were floating freely, at rates set mostly by market forces rather than government fiat. Ghanshyam Thori 18 Economy Notes

Ghanshyam Thori Capital Flight

Economy Notes When CAPITAL flows rapidly out of a country, usually because something happens which causes investors suddenly to lose confidence in its economy.This is often associated with a sharp fall in the EXCHANGE RATE of the abandoned countrys currency. In any period, the economies of countries that start off poor generally grow faster than the economies of countries that start off rich. As a result, the NATIONAL INCOME of poor countries usually catches up with the national income of rich countries. The dominant theory of economics from the 18th century to the 20th century, when it evolved into NEO-CLASSICAL ECONOMICS. Classical economists, who included Adam SMITH, David RICARDO and John Stuart Mill, believed that the pursuit of individual self-interest produced the greatest possible economic benefits for society as a whole through the power of the INVISIBLE HAND. They also believed that an economy is always in EQUILIBRIUM or moving towards it. In the 1920s and 1930s, John Maynard KEYNES attacked some of the main beliefs of classical and neo-classical economics, which became unfashionable. In particular, he argued that the rate of interest was determined or influenced by the speculative actions of investors in BONDS and that wages were inflexible downwards, so that if demand for labour fell, the result would be higher UNEMPLOYMENT rather than cheaper workers. It shows how countries can gain from trading with each other even if one of them is more efficient it has an ABSOLUTE ADVANTAGE in every sort of economic activity. Comparative advantage is about identifying which activities a country (or firm or individual) is most efficient at doing. A market in which an inefficient firm, or one earning excess profits, is likely to be driven out by a more efficient or less profitable rival. An economic side-effect. Externalities are costs or benefits arising from an economic activity that affect somebody other than the people engaged in the economic activity and are not reflected fully in PRICES. For instance, smoke pumped out by a factory may impose clean-up costs on nearby residents; bees kept to produce honey may pollinate plants belonging to a nearby farmer, thus boosting his crop. Mathematics and sophisticated computing applied to ECONOMICS The efficient market hypothesis says that the PRICE of a financial ASSET reflects all the INFORMATION available and responds only to unexpected news. A measure of the responsiveness of one variable to changes in another. Economists have identified four main types. PRICE ELASTICITY measures how much the quantity of SUPPLY of a good, or DEMAND for it, changes if its PRICE changes. If the percentage change in quantity is more than the percentage change in price, the good is price elastic; if it is less, the good is INELASTIC. INCOME elasticity of demand measures how the quantity demanded changes when income increases. Cross-elasticity shows how the demand for one good (say, coffee) changes when the price of another good (say, tea) changes. If they are SUBSTITUTE GOODS (tea and coffee) the cross-elasticity will be positive: an increase in the price of tea 19 Economy Notes

Catch Up Effect

Classical & Keynesian Economics

Comparative Advantage Contestable Market Externality

Econometrics Efficient Market Hypothesis Elasticity

Ghanshyam Thori

Ghanshyam Thori

Economy Notes will increase demand for coffee. If they are COMPLEMENTARY GOODS (tea and teapots) the cross-elasticity will be negative. If they are unrelated (tea and oil) the cross-elasticity will be zero. Elasticity of substitution describes how easily one input in the production process, such as LABOUR, can be substituted for another, such as machinery. A deposit in dollars held in a BANK outside the United States. Such deposits are often set up to avoid taxes and currency exchange costs. They are frequently lent out and have become an important method of CREDIT CREATION. A means by which some countries try to defend their currency from speculative attack. A country that introduces a currency board commits itself to converting its domestic currency on demand at a fixed EXCHANGE RATE. To make this commit ment credible, the currency board holds RESERVES of foreign currency (or GOLD or some other liquid ASSET) equal at the fixed rate of exchange to at least 100% of the value of the domestic currency that is issued. Unlike a conventional CENTRAL BANK, which can print MONEY at will, a currency board can issue domestic notes and coins only when there are enough foreign exchange reserves to back it. When a GOVERNMENT announces that the EXCHANGE RATE of its currency is fixed against another currency or currencies. The total of all the money coming into a country from abroad less all of the money going out of the country during the same period. This is usually broken down into the current account and the capital account. The current account includes: visible trade (known as merchandise trade in the United States), which is the value of exports and imports of physical goods; invisible trade, which is receipts and payments for services, such as banking or advertising, and other intangible goods, such as copyrights, as well as crossborder dividend and interest payments; private transfers, such as money sent home by expatriate workers; official transfers, such as international aid. The capital account includes: long-term capital flows, such as money invested in foreign firms, and profits made by selling those investments and bringing the money home; short-term capital flows, such as money invested in foreign currencies by international speculators, and funds moved around the world for business purposes by multinational companies. These short-term flows can lead to sharp movements in exchange rates, which bear little relation to what currencies should be worth judging by fundamental measures of value such as purchasing power parity. As bills must be paid, ultimately a country's accounts must balance (although because real life is never that neat a balancing item is usually inserted to cover up the inconsistencies). A measure of OUTPUT reflecting the costs of the factors of production used, rather than market prices, which may differ because of indirect tax and subsidy. The ingredients of economic activity: land, labour, capital and enterprise. 20 Economy Notes

Eurodollar Currency Board

Currency Peg Balance of Payments

Factor Cost Factors of Production Ghanshyam Thori

Ghanshyam Thori Fiscal Neutrality

Economy Notes When the net effect of taxation and public spending is neutral i.e. neither stimulating nor dampening demand. The term can be used to describe the overall stance of fiscal policy: a balanced budget is neutral, as total tax revenue equals total public spending. One of the two instruments of macroeconomic policy; monetary policy's side-kick. It comprises public spending and taxation, and any other government income or assistance to the private sector (such as tax breaks). It can be used to influence the level of demand in the economy, usually with the twin goals of getting unemployment as low as possible without triggering excessive inflation. What a CENTRAL BANK does to control the MONEY SUPPLY, and thereby manage DEMAND. Monetary policy involves OPEN-MARKET OPERATIONS, RESERVE REQUIREMENTS and changing the short-term rate of interest. It is one of the two main tools of MACROECONOMIC POLICY, the side-kick of FISCAL POLICY, and is easier said than done well. The RBI uses the interest rate, Open Market Operations (OMO), changes in banks' CRR and primary placements of government debt to control the money supply. OMO, primary placements and changes in the CRR are the most popular instruments used. Under the OMO, the RBI buys or sells government bonds in the secondary market. By absorbing bonds, it drives up bond yields and injects money into the market. When it sells bonds, it does so to suck money out of the system. The changes in CRR affect the amount of free cash that banks can use to lend reducing the amount of money for lending cuts into overall liquidity, driving interest rates up, lowering inflation and sucking money out of markets. Primary deals in government bonds are a method to intervene directly in markets, followed by the RBI. By directly buying new bonds from the government at lower than market rates, the RBI tries to limit the rise in interest rates that higher government borrowings would lead to. Hawala (also known as hundi) is an informal value transfer system based on performance and honor of a huge network of money brokers which are primarily located in the Middle East, Africa and Asia. In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, or hawaladars. A customer approaches a hawala broker in one city and gives a sum of money to be transferred to a recipient in another, usually foreign, city. The hawala broker calls another hawala broker in the recipient's city, gives disposition instructions of the funds (usually minus a small commission), and promises to settle the debt at a later date. Merging with another firm just like yours, for example, two biscuit makers becoming one. Contrast with VERTICAL INTEGRATION, which is merging with a firm at a different stage in the SUPPLY chain. Horizontal integration often raises ANTITRUST concerns, as the combined firm will have a larger market share than either firm did before merging. Money that is held in one currency but is liable to switch to another currency at a moments notice in search of the highest available RETURNS, thereby causing the first currencys EXCHANGE RATE to plummet. Earmarking taxes for a specific purpose. It may be a clever way to get around 21 Economy Notes

Fiscal Policy

Monetary Policy

Hawala/Hundi

Horizontal Integration

Hot Money Hypothecation Ghanshyam Thori

Ghanshyam Thori

Economy Notes public hostility to paying more in TAXATION. If people are told that a specific share of their INCOME TAX will go to some popular cause, say education or health, they may be more willing to cough up. When a few FIRMS dominate a market. Often they can together behave as if they were a single MONOPOLY, perhaps by forming a CARTEL. Or they may collude informally, by preferring gentle NON-PRICE COMPETITION to a bloody PRICE war. Because what one firm can do depends on what the other firms do, the behaviour of oligopolists is hard to predict. When they do compete on price, they may produce as much and charge as little as if they were in a market with PERFECT COMPETITION. A change in the DEMAND for a good or service caused by a change in the INCOME of consumers rather than, say, a change in consumer tastes. Contrast with SUBSTITUTION EFFECT. When the SUPPLY or DEMAND for something is insensitive to changes in another variable, such as PRICE. Products that are less in demand as consumers get richer. For NORMAL GOODS, DEMAND increases as consumers have more to spend. Adam Smiths term for the ability of the free market to allocate FACTORS OF PRODUCTION, goods and SERVICES to their most valuable use. A description of what happens to UNEMPLOYMENT when the rate of GROWTH of GDP changes, based on empirical research by Arthur Okun The shape of the trend of a countrys trade balance following a DEVALUATION. A lower EXCHANGE RATE initially means cheaper EXPORTS and more expensive IMPORTS, making the current account worse (a bigger DEFICIT or smaller surplus). After a while, though, the volume of exports will start to rise because of their lower PRICE to foreign buyers, and domestic consumers will buy fewer of the costlier imports. Eventually, the trade balance will improve on what it was before the devaluation. If there is a currency APPRECIATION there may be an inverted J-curve. Corrupt, thieving GOVERNMENT, in which the politicians and bureaucrats in charge use the powers of the state to feather their own nests. Let-it-be ECONOMICS: the belief that an economy functions best when there is no interference by GOVERNMENT. Buying a company using borrowed MONEY to pay most of the purchase PRICE. The DEBT is secured against the ASSETS of the company being acquired. Short for London interbank offered rate, the rate of INTEREST that top-quality BANKS charge each other for loans. When MONETARY POLICY becomes impotent. Cutting the rate of INTEREST is supposed to be the escape route from economic RECESSION: boosting the MONEY SUPPLY, increasing DEMAND and thus reducing UNEMPLOYMENT. But KEYNES argued that sometimes cutting the rate of interest, even to zero, would not help. People, BANKS and FIRMS could become so RISK AVERSE that they preferred the LIQUIDITY of cash to offering CREDIT or using the credit that is on offer. In such circumstances, the economy would be trapped in recession, despite the best efforts of monetary policymakers Goods and SERVICES that have a high ELASTICITY of DEMAND. When the PRICE of, say, a Caribbean holiday rises, the number of vacations demanded falls 22 Economy Notes

Oligopoly

Income Effect Inelastic Inferior Goods Invisible Hand Okuns Law J Curve

Kleptocracy Laissez Faire Leveraged Buyout LIBOR Liquidity Trap

Luxuries Ghanshyam Thori

Ghanshyam Thori

Economy Notes sharply. Likewise, demand for Caribbean holidays rises significantly as AVERAGE INCOME increases, certainly by more than demand for many NORMAL GOODS. Contrast this with necessities, such as milk or bread, which people usually demand in quite similar quantities whatever their income and whatever the price. The extent to which the value and impact of a tax, tax relief or SUBSIDY is reduced because of its side-effects. For instance, increasing the amount of tax levied on workers pay will lead some workers to stop working or work less, so reducing the amount of extra tax to be collected. However, creating a tax relief or subsidy to encourage people to buy life insurance would have a deadweight cost because people who would have bought insurance anyway would benefit. Probably the most successful programme of INTERNATIONAL AID and nation building in history. It was named after General George Marshall, an American secretary of state, who at the end of the second world war proposed giving aid to Western Europe to rebuild its war-torn economies. How much it costs to change PRICES. Just as a restaurant has to print a new menu when it changes the price of its food, so many other FIRMS face a substantial outlay each time they cut or raise what they charge. Such menu costs mean that firms may be reluctant to change their prices every time there is a shift in the balance of SUPPLY and DEMAND, so there will be STICKY PRICES and the market for their OUTPUT will be in DISEQUILIBRIUM. The Internet may sharply reduce menu costs as it allows prices to be changed at the click of a mouse, which may improve EFFICIENCY by keeping markets more often in EQUILIBRIUM. Created by Economist Arthur Okun. The sum of a countrys INFLATION and UNEMPLOYMENT rates. The higher the score, the greater is the economic misery. Changes in the MONEY SUPPLY have no effect on real economic variables such as OUTPUT, real INTEREST rates and UNEMPLOYMENT. If the CENTRAL BANK doubles the money supply, the PRICE level will double too.Today few economists think that pure monetary neutrality exists in the real world, at least in the short run. A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos). The money market is used by a wide array of participants, from a company raising money by selling commercial paper into the market to an investor purchasing CDs as a safe place to park money in the short term. The money market is typically seen as a safe place to put money due the highly liquid nature of the securities and short maturities, but there are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper. Markets in SECURITIES such as BONDS and SHARES. Governments and companies use them to raise longer-term CAPITAL from investors, although few of the millions of capital-market transactions every day involve the issuer of the 23 Economy Notes

Deadweight Cost/Loss

Marshall Plan

Menu Cost

Misery Index UPSC - 2001 Monetary Neutrality

Money Market

Capital Market

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Ghanshyam Thori

Economy Notes

security. Most trades are in the SECONDARY MARKETS, between investors who have bought the securities and other investors who want to buy them. Contrast with MONEY MARKETS, where short-term capital is raised. Commercial Paper An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue. CD is a savings certificate entitling the bearer to receive interest. A CD bears a Certificate of maturity date, a specified fixed interest rate and can be issued in any denomination. Deposit CDs are generally issued by commercial banks. The term of a CD generally ranges from one month to five years. A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restricts holders from withdrawing funds on demand. Although it is still possible to withdraw the money, this action will often incur a penalty. A short-term credit investment created by a non-financial firm and guaranteed by a Bankers bank. Acceptances are traded at a discount from face value on the secondary Acceptance market. Banker's acceptances are very similar to T-bills and are often used in money market funds. A form of short-term GOVERNMENT DEBT. Treasury bills usually mature after Treasury Bills three months. They are used for managing fluctuations in the governments shortrun cash needs. Most government borrowing takes the form of longer-term BONDS. Repos are classified as a money-market instrument. They are usually used to raise Repo short-term capital. A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. Call Money Call Money is a money market instrument. A market that consists of the borrowing Market/Call of money by brokers and dealers for the purpose of meeting their credit needs. Money Along with day-to-day loans, call money loans play a significant role in interbank money dealings and between banks and money market dealers. Generally these loans are made on a short term basis. A market dominated by a single buyer. Monopsony One of two main sorts of MARKET FAILURE often associated with the provision Moral Hazard of INSURANCE. The other is ADVERSE SELECTION. Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for. Adverse Selection When you do business with people you would be better off avoiding. This is one of two main sorts of market failure often associated with insurance. Insurance will often not be profitable when buyers have better information about their risk of Ghanshyam Thori 24 Economy Notes

Ghanshyam Thori

Economy Notes

claiming than does the seller. Shorthand for the way in which a change in spending produces an even larger Multiplier Effect change in INCOME. Nash Equilibrium An important concept in GAME THEORY, a Nash equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players. Once a Nash equilibrium is reached, nobody has any incentive to change their strategy. It is named after John Nash, a mathematician and Nobel prize-winning economist. When an economy is growing too fast and its productive CAPACITY cannot keep Overheating up with DEMAND. It often boils over into INFLATION. The common tendency of PRICES in FINANCIAL MARKETS initially to move Overshooting further than would seem strictly necessary in response to changes in the fundamentals that should, in theory, determine value. One reason may be that in the absence of perfect INFORMATION, investors move in herds, rushing in and out of markets on rumour. A situation in which nobody can be made better off without making somebody else Pareto Efficiency worse off. When CAPACITY is fixed and DEMAND varies during a time period, it may Peak Pricing make sense to charge above-AVERAGE PRICES when demand peaks. Because this will divert some peak demand to cheaper off-peak periods Permanent Income Over their lives, people try to spread their spending more evenly than their INCOME. What if somebody unexpectedly comes into money, say by winning the Hypothesis lottery? The permanent income hypothesis suggests that people will save most of any such WINDFALL GAINS. Reality may be somewhat different. A fall in the PRICE level increases the REAL VALUE of peoples SAVINGS, Pigou Effect making them feel wealthier and thus causing them to spend more. This increase in DEMAND can lead to higher employment. A measure of the responsiveness of DEMAND to a change in PRICE. If demand Price Elasticity changes by more than the price has changed, the good is price-elastic. If demand changes by less than the price, it is price-inelastic. Favourite example in GAME THEORY, which shows why co-operation is difficult Prisoners to achieve even when it is mutually beneficial. Two prisoners have been arrested Dilemma for the same offence and are held in different cells. Each has two options: confess, or say nothing. There are three possible outcomes. One could confess and agree to testify against the other as state witness, receiving a light sentence while his fellow prisoner receives a heavy sentence. They can both say nothing and may be lucky and get light sentences or even be let off, owing to lack of firm evidence. Or they may both confess and probably get lighter individual sentences than one would have received had he said nothing and the other had testified against him. The second outcome would be the best for both prisoners. However, the RISK that the other might confess and turn state witness is likely to encourage both to confess, landing both with sentences that they might have avoided had they been able to cooperate in remaining silent. In an OLIGOPOLY, FIRMS often behave like these prisoners, not setting PRICES as high as they could do if they only trusted the other firms not to undercut them. As a result, they are worse off. When a firms SHARES are held privately and not traded in the public markets. Private Equity Private equity includes shares in both mature private companies and, as VENTURE Ghanshyam Thori 25 Economy Notes

Ghanshyam Thori

Economy Notes CAPITAL, in newly started businesses. As it is less liquid than publicly traded EQUITY, investors in private equity expect on average to earn a higher EQUITY RISK PREMIUM from it. TAXATION that takes a larger proportion of a taxpayers INCOME the higher the income is A tax that takes a smaller proportion of INCOME as the taxpayers income rises, for example, a fixed-rate vehicle tax that eats up a much larger slice of a poor persons income than a rich persons income. Impossible to predict the next step. EFFICIENT MARKET THEORY says that the PRICES of many financial ASSETS, such as SHARES, follow a random walk. Policies to pump up DEMAND and thus boost the level of economic activity. Monetarists fear that such policies may simply result in higher INFLATION. The RISK of damage being done to the health of the FINANCIAL SYSTEM as a whole. A constant concern of BANK regulators is that the collapse of a single bank could bring down the entire financial system. This is why regulators often organise a rescue when a bank gets into financial difficulties. The RISK that remains after DIVERSIFICATION, also known as market risk or undiversifiable risk. It is systematic risk that determines the RETURN earned on a well-diversified portfolio of ASSETS. When you buy an ASSET you become exposed to a bundle of different RISKs. Many of these risks are not unique to the asset you own but reflect broader possibilities, such as that the stockmarket average will rise or fall, that INTEREST rates will be cut or increased, or that the GROWTH rate will change in an entire economy or industry. Residual risk, also known as alpha, is what is left after you take out all the other shared risk exposures. Exposure to this risk can be reduced by DIVERSIFICATION. Contrast with SYSTEMATIC RISK. Protection from the rough seas of REGULATION. Laws and regulations often include a safe harbour clause that sets out the circumstances in which otherwise regulated FIRMS or individuals can do something without regulatory oversight or interference. SUPPLY creates its own DEMAND. So argued a French economist, Jean-Baptiste Say, and many classical and neo-classical economists since. KEYNES argued against Say, making the case for the use of FISCAL POLICY to boost demand if there is not enough of it to produce FULL EMPLOYMENT. A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialism and Democracy" (1942) to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. Eg. A smaller company eventually taking over an old behemoth by leveraging its new & efficient processes. Short for special drawing rights. Created in 1967, the SDR is the IMF's own currency. Its value is based on a portfolio of widely used currencies. You can think of SDRs as an artificial currency used by the IMF and defined as a "basket of national currencies". The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries' governments The proportion of the required quota of currency that each International Monetary Fund (IMF) member country must provide to the IMF, but can designate for its 26 Economy Notes

Progressive Taxation Regressive Tax Random Walk Reflation Systemic Risk

Systematic Risk Residual Risk

Safe Harbour

Says Law

Creative Destruction

SDR

Reserve Tranche Ghanshyam Thori

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Economy Notes own use. The reserve tranche portion of the quota can be accessed by the member nation at any time, whereas the rest of the member's quota is typically unaccessible. Because IMF member nations have many different national currencies, the IMF denominates its members' quotas in terms of special drawing rights (SDRs), which is essentially a specified basket of major international currencies. A certain proportion of a member country's quota is specified as its reserve tranche. The member country can access its reserve tranche funds at its discretion, and is not under an immediate obligation to repay those funds to the IMF. Member nation reserve tranches are typically 25% of the member's quota. Turning a future cashflow into tradable, BOND-like SECURITIES. Creating such ASSET-backed securities became a lucrative business for financial FIRMS during the 1990s, as they invented new securities based on cashflow ranging from future mortgage and credit-card payments to BANK loans, movie revenue and even the royalties on songs by David Bowie (so-called Bowie-bonds). Securitisation has many benefits, at least in-theory. Issuers gain instant access to MONEY for which they would otherwise have to wait months or years, and they can shed some of the RISK that their expected revenue will not materialise. The amount of community spirit or trust that an economy has gluing it together. The more social capital there is, the more productive the economy will be. Petrol-pump PRICES do not change every time the oil price changes, and holiday prices and standard hotel rates are fixed for months. Sticky prices are slow to change in response to changes in SUPPLY or DEMAND. As a result there is, at least temporarily, DISEQUILIBRIUM in the market. The fast-growing developing economies of Asia, at least before their crisis in the late 1990s. Tobin tax, a (so far unimplemented) proposal to reduce speculative cross-border flows of CAPITAL by levying a small tax on foreign exchange transactions. The PRICES assumed, for the purposes of calculating tax liability, to have been charged by one unit of a multinational company when selling to another (foreign) unit of the same firm. FIRMS spend a fortune on advisers to help them set their transfer prices so that they minimise their total tax bill. For instance, by charging low transfer prices from a unit based in a high-tax country that is selling to a unit in a low-tax country, a firm can record a low PROFIT in the first country and a high profit in the second. Payments that are made without any good or service being received in return. Much PUBLIC SPENDING goes on transfers, such as pensions and WELFARE benefits. Private-sector transfers include charitable donations Functional unemployment occurs when people change from one job to another & there is an interval. This can happen even in a situation of full employment. Structural unemployment happens when jobs exist for qualified persons but the unemployed do not have the matching qualifications. It also occurs when labour is available, but factors of production are missing. Basically Indias unemployment is structural in nature, related to the inadequacy of productive capacity to create enough jobs for all those willing to work. Not only is the productive capacity much below the needed quantity, it is also found increasing at a low rate. This type of unemployment is not a temporary phenomenon. It is chronic & is the result of backwardness & low rate of economic development 27 Economy Notes

Securitization

Social Capital Sticky Prices

Tiger Economies Tobin Tax Transfer Pricing

Transfers Unemployment Forms

Ghanshyam Thori

Ghanshyam Thori

Economy Notes Cyclical unemployment arises out of cycles of recession. The main cause is the slackness in business activities. This type is generally witnessed in developed countries. Seasonal Unemployment: Generally, seasonal unemployment is confined to the agricultural sector because nature predominates in agriculture. The demand for agriculture labour increases at the time of sowing & harvesting which provides employment for 6-8 months and for the remaining period most of the agricultural workers remain unemployed. Disguised unemployment is when people are employed but their marginal productivity is zero i.e. if a part of the labour is withdrawn the total production will remain unchanged. Technological Unemployment: When the introduction of new technology causes displacement of workers, it is called technological unemployment. When unemployed people who receive benefits, either from the GOVERNMENT or from private CHARITY, are deterred from taking a new job because the reduction or removal of benefit if they do will make them worse off. Also known as the POVERTY TRAP, it can be addressed, to an extent, by continuing to pay benefit for a while to unemployed people returning to work. One way to keep TAXATION fair. Vertical equity is the principle that people with a greater ability to pay should hand over more tax to the GOVERNMENT than those with a lesser ability to pay. Physical EXPORTS and IMPORTS, such as coal, computer chips and cars. Also known as merchandise trade. Contrast with INVISIBLE TRADE. EXPORTS and IMPORTS of things you cannot touch or see: SERVICES, such as banking or advertising and other intangibles, such as copyrights. Invisible trade accounts for a growing slice of the value of world trade. The difference between basic pay and total earnings. Wage drift consists of things such as overtime payments, bonuses, PROFIT share and performance-related pay. It usually increases during periods of strong GROWTH and declines during an economic downturn. An institution created with the IMF at BRETTON WOODS in 1944 and opened in 1946. The World Bank has three main branches: the International Bank for Reconstruction and Development (IBRD), the International Development Agency (IDA) and the International Finance Corporation (IFC). Producing OUTPUT at the minimum possible cost. When the gains made by winners in an economic transaction equal the losses suffered by the losers. It is identified as a special case in GAME THEORY. Most economic transactions are in some sense positive-sum games. But in popular discussion of economic issues, there are often examples of a mistaken zero-sum mentality, such as PROFIT comes at the expense of WAGES, higher PRODUCTIVITY means fewer jobs, and IMPORTS mean fewer jobs here. Shorthand for comparisons of the INTEREST RATE on GOVERNMENT BONDS of different maturity.

Poverty Trap or Unemployment Trap Vertical Equity Visible Trade Invisible Trade Wage Drift

World Bank

X-efficiency Zero Sum Game

Yield Curve Free Trade Area vis--vis Common Market (UPSC 2006) Ghanshyam Thori

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Economy Notes

Ghanshyam Thori

Economy Notes

Forward Currency Market (UPSC 2006) Offshore Currency Market (UPSC 2006) Agri-Trade (UPSC 2006) CEMA Bloc (UPSC 2006) Crude Prices (UPSC) Gandhian Economy (UPSC) Second Green Revloution (UPSC) Kasturba Gandhi Balika Vidyalaya Yojana (UPSC) Euro-Control (UPSC) Blue tooth (UPSC) MFN Status to India by Pakistan (UPSC) The Notion of development of Underdevelopment (UPSC) Green Gross Domestic Product (Green GDP) is an index of economic growth with Green GDP the environmental consequences of that growth factored in. (UPSC) Terms of reference of Abid Hussain Committee (UPSC) Agreement on Agriculture (AOA) of WTO (UPSC) SLR CRR The reverse repo rate is the rate at which banks park their short-term excess Repo Rate Ghanshyam Thori 29 Economy Notes

Ghanshyam Thori

Economy Notes liquidity with the RBI, while the repo rate is the rate at which the RBI pumps in short-term liquidity into the system

Reverse Repo Bank Rate Minimum Alternate Tax (UPSC) CENVAT MODVAT Scheme of 1986 (UPSC) VAT (UPSC) Objectives of Plant Varieties Rights Act 2002 (UPSC) How is HDI for Life Expectancy measured? (UPSC) Objectives of 12th Finance Commission (UPSC)

The Finance Commission is constituted to define financial relations between the Center and the States. Under the provision of Article 280 of the constitution, the President appoints a Finance Commission for the specific purpose of devolution of non-plan revenue resources. The functions of the Commission are to make recommendation to President in respect of: 1. The distribution of net proceeds of taxes to be shared between the union and the states and the allocation of share of such proceeds among the states. 2. The principles which should govern the payment of grant-in-aid by the Center to States. 3. Any other matter concerning financial relations between the Center and the States.

Contribution of Primary, Secondary & Tertiary Sector in Indias GDP (UPSC) Objective of SEBI (UPSC) Deficit Financing (UPSC) Plan Holiday (UPSC) Competition Act Ghanshyam Thori

When national planning is given a break. During plan holiday, only annual plans are implemented. The reason is that the state would not be in a position to make financial commitments for more than a year. Eg. in India it was adopted during 1966-1969 & from 1990-1992. The act provide for establishment of a Commission to prevent practices having 30 Economy Notes

Ghanshyam Thori 2002 (UPSC) FRBM Act

Economy Notes adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried. The revenue deficit as a ratio of GDP should be brought down by 0.5 per cent every year and eliminated by 2007-08; The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every year and brought down to 3 per cent by 2007-08; The total liabilities of the Union Government should not rise by more than 9 per cent a year; The Union Government shall not give guarantee to loans raised by PSUs and State governments for more than 0.5 per cent of GDP in the aggregate;

Buy back of Shares (UPSC) Why was Janashree Bima Yojana Introduced (UPSC) Agriculture Insurance Corporation Govt Policy on Child Labour Objectives of National Health Policy 2002 (UPSC) Operation Blackboard Scheme Differential Rate of Interest Scheme (UPSC) Major items of expenditure on Indias Revenue Account (UPSC) Pradhan Mantri Gram Sadak Yojana Ghanshyam Thori

The scheme provides life insurance protection to the rural and urban poor persons below poverty line and marginally above the poverty line. The premium under the scheme is Rs.200/-per annum per member. 50% of the premium i.e. Rs.100/- will be contributed by the member and/or Nodal Agency/State Government and the balance 50% will be born by the Social Security Fund. Agriculture Insurance Company of India Limited (AIC) has been formed by the Government of India in 2002-03 to subserve the needs of farmers better and to move towards a sustainable actuarial regime, it was proposed to set up a new Corporation for Agriculture Insurance. GIC (35 %) & NABARD (30%) hold 65 % stake in the company

The scheme of Operation Blackboard was launched in 1987 in pursuance of National Policy on Education, to provide minimum essential facilities to all primary schools in the country. It was formulated with an assumption that the improvement in school environment would increase the enrolment rate, retention rate and attainment levels of primary school children. Government of India had formulated in March, 1972 a scheme for extending financial assistance at concessional rate of interest @ 4% to selected low income groups for productive endeavours initially by public sector banks and then by private sector banks also. The scheme known as Differential Rate of Interest Scheme (DRI) is now being implemented by all Scheduled Commercial Banks.

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Economy Notes

Ghanshyam Thori (UPSC) Peak Rate of Custom Duty (UPSC) OGL Union budget 2008-09 has kept it unchanged at 10 %.

Economy Notes

Open General License. Being a signatory of WTO, by year 2003, India has to put most of the items under Open General License (OGL) for import which means these items can be freely traded.

SEZ (UPSC) RBIs Automatic Route in FDI (UPSC) Objectives of Annapurna Scheme (UPSC) Sampoorna Gramin Rojzar Yojana (UPSC) Union Budget 2002-03 recommended some services to be taxed. Name any 4. (UPSC) Dumping (UPSC) The Tarapore committee set up by the Reserve Bank of India (RBI) in 1997 to go Capital Account into the issue of CAC defined it as the freedom to convert local financial assets into Convertability foreign financial assets and vice versa at market determined rates of exchange. (UPSC) CAC has 5 basic statements designed as points of action: 1. All types of liquid capital assets must be able to be exchanged freely, between any two nations, with standardized exchange rates. 2. The amounts must be a significant amount (in excess of $500,000). 3. Capital inflows should be invested in semi-liquid assets, to prevent churning and excessive outflow. 4. Institutional investors should not use CAC to manipulate fiscal policy or exchange rates. 5. Excessive inflows and outflows should be buffered by national banks to provide collateral. Current account convertibility allows free inflows and outflows for all purposes Current Account other than for capital purposes such as investments and loans. In other words, it Convertibility of allows residents to make and receive trade-related payments receive dollars (or Rupee any other foreign currency) for export of goods and services and pay dollars for (UPSC) import of goods and services, make sundry remittances, access foreign currency for travel, studies abroad, medical treatment and gifts etc. In India, current account Ghanshyam Thori 32 Economy Notes

Ghanshyam Thori

Economy Notes convertibility was established with the acceptance of the obligations under Article VIII of the IMFs Articles of Agreement in August 1994.

Sex Ratio of India (UPSC) Ad Valorem & Specific Duties (UPSC) Zero Based Bugeting (UPSC) CRISIL (UPSC) Providing Industry Status to Agriculture (UPSC) Operation Flood (UPSC) Couple Protection Ratio (UPSC) HDI & Gender Related Development Index (UPSC) Green GNP (UPSC) Hard Currency & Soft Currency (UPSC) Misery Index (UPSC) Per Capita Income (UPSC) Objectives of Social Security (UPSC) Parallel Economy (UPSC) Command Area Development (UPSC) Objectives of NABARD (UPSC) Ghanshyam Thori

Zero-based Budgeting requires that a program be justified from the ground up each fiscal year. ZBB is especially encouraged for Government budgets because expenditures can easily run out of control if it is automatically assumed what was spent last year must be spent this year

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Economy Notes

Ghanshyam Thori

Economy Notes

11th Finance Commission (UPSC) Census Definition of Urban Areas (UPSC) Objectives of New Economic Policy of GoI (UPSC) Rao-Manmohan model of development (UPSC) Mid-day Meal Scheme (UPSC) A memorandum of understanding (MOU or MoU) is a document describing a MoU bilateral or multilateral agreement between parties. It expresses a convergence of will between the parties, indicating an intended common line of action. M1 - Consists of currency with the public (ie notes & coins in circulation minus Monetary cash with the banks) plus demand deposits with the bank (deposits which can be Aggregates withdrawn without notice) plus other deposits with RBI (usually negligible). Also called narrow money M2 - M1 + saving deposits + Certificate of Deposits (CDs) + term deposits maturing within a year. M3 - M2 + term deposits with maturity more than a year + term borrowing of banking system. Also known as broad money. Over & above the monetary aggregates the Reddy Committee also recommended Liquidity Liquidity aggregates which includes Aggregates L1 M3 + all Deposits with the Post Office Savings Banks (excluding National Savings Certificates) L2 L1 + Term Deposits with Term Lending Institutions and Refinancing Institutions (FIs) + Term Borrowing by FIs+ Certificates of Deposit issued by Financial Institutions; and L3 L2 + Public Deposits of Non-Banking Financial Companies Mode 1 - Cross border trade, this is defined as delivery of a service from the Mode of Services territory of one country into the territory of other country. No one actually moves Under GATT E.g. Postal Services, Telecom Services. Mode 2 - Consumption abroad - this mode covers supply of a service of one country to the service consumer of any other country through temporary relocation of consumer. E.g. Education abroad, Tourism etc. Mode 3 - Commercial presence - which covers services provided by a service supplier of one country in the territory of any other country. E.g. Banks, Hospitals owned by Foreign Firms. Mode 4 - Presence of natural persons - which covers services provided by a service supplier of one country through the presence of natural persons in the territory of any other country. E.g. Doctors, IT Professionals etc. Ghanshyam Thori 34 Economy Notes

Ghanshyam Thori Revenue Deficit (UPSC) Budget Deficit Fiscal Deficit (UPSC) Difference between revenue expenditure & revenue receipts

Economy Notes

Primary Deficit Monetized Defict Ways & Means Advances Imperative Planning Indicative Planning Perspective Planning Rolling Plan

Difference between total expenditure & revenue receipts Budget deficit plus non debt creating capital receipts. Fiscal Deficit = Total Expenditure Revenue Receipts Non Debt Creating Capital Receipts (E.g. Disinvestment, Recorvery of NPAs, Sale of Assets etc). Therefore if Total Expenditure is more, it will lead to positive fiscal deficit which is bad beyond a certain point. Fiscal deficit Interest Payments. Deficit Financing through printing currency. Vajiram Notes. Type of planning where the central planning authority decides about every aspect of the economy and the targets set & the processes delineated to achieve them are to be strictly followed. This type of planning is mainly practiced in socialist economies. A system of planning in which the state sets the broad parameters and goals for the economy. The state only broadly indicates the targets to be achieved. It was adopted in India since the 8th Five Year plan & is based on the model being practiced by many developing countries. It is planning for a long period of time usually 15-20 years. As a highly specialized tasks it is operationalized through 5 year plans & annual plans. Under the technique of rolling plans, there are three plans. First, there is plan for the current year which includes the annual budget. Second, there is aplan for a fixed number of years say three or four or five. It is changed every year in keeping with the requirements of the economy. Third there is a perspective plan for 10, 15 or 20 years. Millenium Development Goals (MDGs to be achieved by 2015) 1. Eradicate extreme poverty and hunger 2. Achieve universal primary education 3. Promote gender equality and empower women 4. Reduce child mortality 5. Improve maternal health 6. Combat HIV/AIDS, malaria, and other diseases 7. Ensure environmental sustainability 8. Develop a global partnership for development

FERA FEMA Violation of FERA was a criminal offence. Violation of FEMA is a civil wrong. Offences under FERA were not compoundable. Offences under FEMA are compoundable. Penalty was 5 times the amount involved. Penalty is 3 times the sum involved. Citizenship was a criteria to determine residential Stay in India for more than 182 days is the status of a person under FERA. criteria to decide residential status. 35 Ghanshyam Thori Economy Notes

Ghanshyam Thori There was only one Appellate Authority namely Foreign Exchange Regulation Appellate Board.

Economy Notes There are two appellate authorities namely 1. Special Director (Appeals) and 2. Appellate Tribunal for Foreign Exchange.

Topics to be covered from here only Social Progress Indicator which is defined at the individual level in 3 dimentions. 1. Longevity of life 2. Consumption of private goods 3. Access to public goods such as clean water, sanitation, safety, transport etc Genuine Progress Indicator. It includes more than 20 aspects of our economic GPI life that GDP ignores. The value of activities that add to human progress are added and those which reduce progress are subtracted from the measure. The later set of activities include crime, defense expenditure, degradation of resources etc. The World Banks environmentally sustainable development division has Green Index developed this index which attached dollar value to each of the below mentioned components: 1. Produced assets 2. natural resources 3. human resources It then estimates the true estimate of the countrys wealth taking into account all such resources which do not always show up on traditional economic indicator. Self Sufficiency & Self Self sufficiency refers to a situation where a country would be producing all the goods it requires. Imports are completely ruled out. Reliance Self reliance is a situation where the country has the capacity to pay for its imports. Rupee Payment Area Consists of those countries where rupee was used as a vehicle currency i.e. for transaction. It includes mainly soviet union countries where the loan is repaid only through exports & not in terms of payment of cash. Is loan raised from rupee payment area countries which has to be serviced Rupee Debt through exports. 1. Multilateral Assistance Components of 2. Bilateral Assistance External Debt of 3. IMF India 4. NRI Deposits (Long Term) 5. Export Credit 6. ECBs 7. Rupee Debt 8. Short Term Debt. A situation where inflation pushes income into higher tax brackets bracket Fiscal Drag creep. The result is increase in income taxes but no increase in real purchasing power. This is a problem during periods of high inflation. Government gains due to higher tax collections & the economy suffers as growth is dragged down SPI Ghanshyam Thori 36 Economy Notes

Ghanshyam Thori

Economy Notes due to less demand. In high growth & high inflation economies (i.e. overheated), fiscal drag acts as automatic stabilizer as it acts naturally to keep the demand stable. Excise duty is imposed on the manufacturer of excisable products and is levied on a wide variety of commodities manufactured in India. This duty is an important source of revenue for the central government. Rates vary depending on the type of commodity, and even for the same type of commodity the rates often differ depending on circumstances such as end-use and taxability of inputs. Although generally ad valorem, the rates may also be specific or a combination of ad valorem and specific. Customs duties are levied on commodities imported into India. However, drawbacks may be available if the imported items are reexported or used in manufacture for export. Customs duty is also imposed on the value of certain exports. Customs duties, particularly on imports, may be a significant cost factor in an Indian project due to the generally high rates of duties, unless corresponding drawbacks are available upon export. Bonus Issue: An offer of free additional shares to existing shareholders. A company may decide to distribute further shares as an alternative to increasing the dividend payout. Also known as a "scrip issue" or "capitalization issue". New shares are issued to shareholders in proportion to their holdings. For example, the company may give one bonus share for every five shares held. No new funds are raised with a bonus issue. Rights Issue: Issuing rights to a company's existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period. Rights are often transferable, allowing the holder to sell them on the open market. Primary Sector The primary sector of the economy extracts or harvests products from the earth. Types of industry in the primary sector are: 1. Farming - the production of food 2. Mining mining metals and minerals 3. Fishing catching and gathering food from seas, rivers and lakes 4. Forestry growing and managing forests for wood production In India, primary sector accounted for 16.6% of the GDP in 2007, employed 60% of the total workforce and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a significant role in the overall socio-economic development of India Secondary Sector: The secondary sector processes the raw materials from the primary sector. This means that they take the raw materials and make them into finished items. Types of industry in the secondary sector are: 1. Food and drink - processing raw foodstuffs, such as making wheat into bread. 2. Manufacturing cars

Excise Duty

Custom Duty

Bonus & Rights Issue

Primary Secondary & Tertiary Sector

Ghanshyam Thori

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Economy Notes

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Economy Notes 3. Building In India secondary sector accounts for 27.6% of the GDP and employ 17% of the total workforce. Tertiary Sector: The tertiary sector of the economy is the service industry. This sector provides services to the general population and to businesses. Activities associated with this sector include retail and wholesale sales, transportation and distribution, entertainment (movies, television, radio, music, theater, etc.), restaurants, clerical services, media, tourism, insurance, banking, healthcare, and law. In India it provides employment to 23% of work force, and it is growing fast, growth rate 7.5% in 19912000 up from 4.5% in 195180. It has the largest share in the GDP, accounting for 55% in 2007 up from 15% in 1950.

Informal/Unorganized For statistical purpose, the informal sector is regarded as a group of production units, which form part of the household sector as household enterprises or Sector in India equivalently, unincorporated enterprises owned by households. On the other hand the unorganised sector refers to those enterprises whose activities or collection of data is not regulated under any legal provision or do not maintain any regular accounts. In the unorganised sector, in addition to the unincorporated proprieties or partnership enterprises, enterprises run by cooperative societies, trust, private and limited companies are also covered. The informal sector can therefore, be considered as a sub-set of the unorganised sector. India: About 370 million workers constituting 92% of the total workforce in a country were employed in the unorganized sector as per NSS Survey 19992000. It plays a vital role in terms of providing employment opportunity to large segment of the working force in the country and contributes to the national product significantly. The contribution of the unorganised sector to the net domestic product and its share in the total NDP at current prices has been over 60%. Social security primarily refers to social welfare service concerned with social protection, or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Constitution on Social Security: Matters relating to Social Security are listed in the Directive Principles of State Policy and the subjects in the Concurrent List. The following social security issues are mentioned in the Concurrent List (List III in the Seventh Schedule of the Constitution of India) Item No. 23: Social Security and insurance, employment and unemployment. Item No. 24: Welfare of Labour including conditions of work, provident funds, employers liability, workmens compensation, invalidity and old age pension and maternity benefits. Ghanshyam Thori 38 Economy Notes

Social Security in India

Ghanshyam Thori

Economy Notes Part IV Directive Principles of State Policy Article 41 - Right to work, to education and to public assistance in certain cases The State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want. Article 42 - Provision for just and humane conditions of work and maternity relief. The State shall make provision for securing just and humane conditions of work and for maternity relief. Discuss various schemes of Government: Footloose industry is a general term for an industry that can be placed and located at any location without effect from factors such as resources or transport. These industries often have spatially fixed costs, which mean that the costs of the products do not change despite where the product is assembled. Diamonds and computer chips are some examples of footloose industries. The "buffer stock scheme" is an economic term, referring to the use of commodity storage for economic stabilization. Specifically, commodities are bought and stored when there is a surplus in the economy and they are sold from these stores when there are shortages in the economy. The stock of commodities stored act as a buffer against price volatility. India maintains buffer stocks of wheat, rice, sugar, edible oil etc to maintain price stability. Current Position (May 2008): India purchased 20.5 million tonnes of wheat in 2008 from local farmers and is within sight of a record wheat buffer stock this year. The buffer stock is maintained by Food Corporation of India. A likely record crop of 76.78 million tonnes in 2008, a result of better seeds and favourable weather conditions, have helped the government build large buffer stocks at a time it is battling inflation ruling at 3-year highs. Depleted buffer stocks forced India to order expensive imports of 7.3 million tonnes over the last two years. As of 2008, India consumes around 12.5 million tonnes (mt) of edible oils annually, but the production is estimated to be just 7.24mt. The Integrated Wasteland Development Programme (IWDP) launched in 1989 under the aegis of the National Wasteland Development Board also aimed at the development of wastelands on watershed basis. Its objective are 1. To facilitate/ attract resources from financial institutions, banks, corporate bodies including users industries and other entrepreneurs for development of wastelands in non forest areas belonging to central and state governments, Panchayats, village communities, private farmers etc. 2. To promote group of farmers belonging to different communities namely, big, small, marginal and SC/ST for bringing wasteland under productive use. 3. To facilitate production and flow of additional biomass including farmforestry products used as raw materials inputs for different types of industries.

Footloose Industries

Buffer Stock

Edible Oil Position of India Integrated Wasteland Development Program

Ghanshyam Thori

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Economy Notes

Ghanshyam Thori

Economy Notes 4. To facilitate employment generation through land development and other allied land based and related activities including plantations. With the objective of promoting greater exports of fresh and processed agricultural produce from the country the Government of India (GoI) has announced the creation of Agri Export Zone (AEZ). The scheme is implemented by the Ministry of Commerce, GoI, through APEDA (the Agriculture and Processed Food Export Development Authority), New Delhi the nodal agency for AEZ. The AEZ is expected to give a focus and direction for exports of key agricultural produce with potential from the country. It involves a detailed action plan for the development of a specified geographic area /s for effecting systematically greater exports of a specific produce. Under the AEZ all aspects of agriculture such as production, research, development, extension, post harvest management and marketing are addressed in a focused manner for successful implementation. Tariff reduction formula in the area of Non Agriculture Market Access that takes into account the interests of developing countries by incorporating each countrys average tariff. The Girard Formula is a variation of Swiss Formula. Apart from Commercial papers, corporates also have access to another market called Inter-corporate deposits (ICD) market. An ICD is an unsecured loan extended by one corporate to another. This market allows fund surplus corporates to lend to other corporates. MBs are those who manage & underwrite new public issues floated by companies to raise fund from public. They also provide advisory services to corporate clients on fund raising. An investor who invests in a business looking for higher return than possible from traditional investments. They invest their own money unlike a venture capitalist who invests public money. Non Banking Financial Company. NBFCs registered with RBI have been classified as (i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC) NBFCs are doing functions akin to that of banks, however there are a few differences: (i) a NBFC cannot accept demand deposits; (ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and (iii) deposit insurance facility is not available for NBFC depositors unlike in case of banks National Securities Depository Limited, the first and largest depository in India, established in August 1996 and promoted by institutions of national stature responsible for economic development of the country has since established a national infrastructure of international standards that handles most of the securities held and settled in dematerialised form in the Indian capital market Promoted by BSE, Federation of Indian Stock Exchanges & the regional stock exchanges. The BSE IndoNext would help the investors to reach the BSE 40 Economy Notes

Agri-Export Zones

Girard Formula Inter Corporate Deposits Merchant Banks Angel Investor NBFC

NSDL

Indonext Ghanshyam Thori

Ghanshyam Thori

Economy Notes IndoNext traded scrips in addition to the network of BSE, also through the network of about 7,000 members of RSEs, who cater to the investors in the far flung areas of the country and, thus, contribute to the development of the capital market. An organization that registers, monitors, matches & guarantees the trades of its members & carries out the final settlement of all future transactions. The National Securities Clearing Corporation is the clearing house for the NSE. Gild is a bond issued by the government. It is issued by the central bank of a country on behalf of the government. In India, RBI issues the treasury bills or gilts. Gild Edged market is a the market for government securities. National Commodity & Derivatives Exchange Limited is the national level online multi commodity exchange. It offers futures trading in both agricultural & non agricultural commodities. Forward Markets Commission which is the regulatory authority of forward markets, overseen by he Ministry of Consumer Affairs & Public Distribution. RBI introduced system of PDs in government securities market in 1995 with the objective to strengthen the infrastructure in the government securities market in order to make it more vibrant, liquid & broad based. It is a dimension of market liquidity & refers to the ability of the market to handle large trading volumes without significant impact on prices. For example, if the market for a stock is "deep", there will be a sufficient volume of pending orders on both the bid and ask side, preventing a large order from significantly moving the price. The fraction of overall market that is participating in the markets up or down move. The great the breadth, the more the companies are participating. The GDP deflator is arrived at by dividing the GDP at current prices by GDP at constant prices in terms of base year prices (1993-94). This indicates how much growth in GDP is due to price rise & how much due to increase in output. Selling surplus land or machinery of an industrial undertaking to convert the idle or under utilized asset into cash. Ratio of a countrys debt service (repayment of principle & interest) as a ratio of its total export earnings. The price of a commodity when it is loaded on to the ship, truck or airplane. It includes only the cost of production & transport charges upto the port of embarkation but does not include insurance or freight. Five conditions that prospective members of EU had to meet before they were allowed entry into European currency union. The ratio of labour force to the active population aged (15-65). Payments made with o expectation of a return of goods or services. E.g. charity, pension.

Clearing House Gilt NCDEX

FMC Primary Dealers Market Depth

Market Breadth GDP Deflator Asset Stripping Debt Service Ratio Free on Board Maastricht Convergence Participation Rate Transfer Payments

Ghanshyam Thori

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Economy Notes