Q: How do we measure growth and economic development, mention any 2 government measure which can improved growth and development

Economic Growth is a narrower concept than economic development. It is an increase in a country's real level of national output which can be caused by an increase in the quality of resources (by education etc.), increase in the quantity of resources & improvements in technology or in another way an increase in the value of goods and services produced by every sector of the economy. Economic Growth can be measured by an increase in a country's GDP (gross domestic product).

Economic development is a normative concept i.e. it applies in the context of people's sense of morality (right and wrong, good and bad). The definition of economic development given by Michael Todaro is an increase in living standards, improvement in self-esteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring development is the Human Development Index which takes into account the literacy rates & life expectancy which affect productivity and could lead to Economic Growth. It also leads to the creation of more opportunities in the sectors of education, healthcare, employment and the conservation of the environment. It implies an increase in the per capita income of every citizen.

Q; growth is necessary but not sufficient for development , critically examine the statement.

Economic growth is basically defined as an increase of wealth of a nation over time.

Development meanwhile can be described as a social condition within a nation in which the authentic needs of its population are satisfied by the rational and sustainable use of natural resources and systems. Economic growth and development are closely intertwined. In fact, economic growth is but a step in the direction towards development – one of prime significance, indeed a precondition to it, but by no means can it be conceptualized as development itself. For a country to be generally recognized as a developed one, it also needs to be able to provide its citizens with as fair as it is possible a distribution of basic resources and social amenities, such as healthcare and education.

The Gross National Product (GDP) is the primary indicator for measuring economic growth. GDP represents the total value-added in production of goods and services in a year, while GDP per-capita is the economy-wide average. The major draw-back is that GDP leaves out/does not deduct figures associated with environmental consumption/damage, the informal sector and other social costs of economic growth. Linking this to development, it is noteworthy that neither income nor expenditure measures the wellbeing people obtain from goods and services. Thus, GDP, a purely economic indicator, falls short of providing a true picture of a country’s development or lack of it.

The concept of development spans far and beyond the realms of economic wellbeing of individuals. For instance politics, human rights, education and cultural conditions are all social variables that influence development. Thus, based largely on the comparison between GDP and the Human Development Index (HDI), it is argued that growth and development, though interrelated, are actually two different phenomena.

RBI Announces Measures to Improve Liquidity Conditions

Starting with the Mid-Quarter Review of September 2013, the Reserve Bank of India (RBI) began a calibrated withdrawal of exceptional measures undertaken since July 2013. This was done with a view to normalising liquidity conditions. Accordingly, the marginal standing facility (MSF) rate was reduced by 75 basis points from 10.25 per cent to 9.5 per cent. Furthermore, open market purchase operations of Rs. 9,974 crore were conducted today to inject liquidity into the system. On a review of evolving liquidity conditions and in continuation of this calibrated unwinding, it has been decided to:

Q: what has been the role of RBI in strengthening the liquidity of commercial bank in recent times.

Reduce the marginal standing facility (MSF) rate by a further 50 basis points from 9.5 per cent to 9.0 per cent with immediate effect.

Provide additional liquidity through term repos of 7-day and 14-day tenor for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTL) of the banking system through variable rate auctions on every Friday beginning October 11, 2013. The notified amount and tenor of the term repo auctions will be announced prior to the dates of the auctions.

The RBI has also capped the daily support to banks under the central bank's liquidity adjustment facility (LAF) at Rs 75,000 crore.

The RBI had also put up Rs 12,000 crore of government securities for sale through an auction on July 18. However, it managed to sell less than one-fifth of the target, as investors demanded higher interest rates.

Q: what are the quantity weapons available to RBI to regulate commercial banks

By Quantitative Credit Control we mean the control of the total quantity of credit.

Different tools used under this method are:

Bank Rate: The bank rate is the rate at which RBI is prepared to buy or re-discount bills of exchange or commercial papers.

Open Market Operations: Open Market Operations indicate the buying/selling of government securities in the open market to balance the money supply in the economy. During inflation, RBI sells the government securities to the commercial banks and other financial institution. This reduces their cash lending and credit creation capacities. Thus, Inflation can be controlled. During recessions, RBI purchases government securities from commercial banks and other financial institution. This leaves them with more cash balances for lending and increases their credit creation capacities. Thus, recession can be overcome.

Repo Rates and Reverse Repo Rates: When banks require short term money, RBI lends member banks against securities held by them. The rate of interest charged on these loans is called Repo Rate.

Banks keep their surplus money with RBI and earn interest on this. The interest rate on such amount is called Reverse Repo Rate.

Cash Reserve Ratio: Cash reserve Ratio is the amount of funds that the banks have to keep with RBI.

Statutory Liquidity Ratio: Statutory Liquidity Ratio is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers.

Deployment of Credit: The RBI has taken various measures to deploy credit in different of the economy. The certain percentage of bank credit has been fixed for various sectors like agriculture, export, etc.

Q: explain taking any two instruments of as to how inflection can be effetely manage

1. Quantitative or General Methods:

The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control. These methods regulate the lending ability of the financial sector of the whole economy and do not discriminate among the various sectors of the economy. The important quantitative methods of credit control are:

(a) bank rate,

(b) open market operations, and

(c) cash-reserve ratio.

2. Qualitative or Selective Methods:

The methods used by the central bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective methods of credit control. Unlike the quantitative methods, which affect the total volume of credit, the qualitative methods affect the types of credit extended by the commercial banks; they affect the composition rather than the size of credit in the economy. The important qualitative or selective methods of credit control are;

(a) marginal requirements,

(b) regulation of consumer credit,

(c) control through directives,

(d) credit rationing,

(e) moral suasion and publicity, and

(f) direct action.

Q: Discuss the statement that changes in repo rate can insure price stability in economic growth

Repo rate is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Reverse Repo rate is the rate at which RBI borrows money from the commercial banks.

The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy.

Impact of hike in repo rate to common men and economy

This hike in repo rates are passed on by the banks in form of increase in borrowing rate to common men. So, cost of auto, education, home and personal loans will increase correspondingly. Loans to companies for its operations also increases which led to decline in borrowings. These factors penalize Indian industry which has already slowed down.

Q: What has been the reason changes in monitory policy intro by RBI to improve the profitability of commercial bank.

It has been decided to:

Repo Rate

reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect.

Reverse Repo Rate

The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands adjusted to 6.25 per cent with immediate effect.

Marginal Standing Facility Rate

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 8.25 per cent with immediate effect.

Bank Rate

The Bank Rate stands adjusted to 8.25 per cent with immediate effect.

Cash Reserve Ratio

The cash reserve ratio (CRR) of scheduled banks has been retained at 4.0 per cent of their net demand and time liabilities (NDTL).

Q: enumerate 2 important causes of demand pull cost push inflation, why is demand pull inflation is consider better of 2 evils.

Causes of Demand-Pull Inflation:

A quick increase in consumption and investment along with an extremely confident firms

A sudden increase in exports which might lead to a huge under-valuation of your currency

A lot of government spending

The expectation that inflation will rise often leads to a rise in inflation. Workers and firms will increase their prices to ‘catch up’ to inflation

Excessive monetary growth – when they is too much money in the system chasing too few goods. The ‘price’ of a good will thus increase.

Causes of Cost-Push Inflation:

Increase in oil prices

Strength of labor unions, who can push for higher wages

A devaluation of the currency making import prices higher

An increase in commodity prices

An increase in indirect taxation

Productivity slow down, which would lead to production costs.

Q: what are the different phases of trade cycle which of them can monetary policy effectively manage.

There are four main stages in a trade cycle or business cycle.

Growth

GDP is rising

Unemployment is falling

Business are experiencing rising profits

‘Feel good’ factor among the people as their incomes are rising.

Boom

Results from too much spending.

Economy experiences rapid inflation

Factors of production become expensive

Recession

Results from too little spending.

GDP is falling

Demand in the economy will fall leading to closure of firms and unemployment

Slump

High level of unemployment.

Business will rapidly close down creating serious consequences for the economy.

Q: What are the different roles to be performed by government in mixed economy.

A. to regulate, promote, police, and serve the economy while still allowing as much free enterprise as possible

B. to control all or most aspects of economic activity within the society

C. to stay completely out of the economy so that the law of supply and demand can work without interference

D. to reward those who produce goods and services for the betterment of society.

Q: Explain the concept of inequality of income in detail, Is taxation an ideal tool to remove inequality

The unequal distribution of household or individual income across the various participants in an economy. Income inequality is often presented as the percentage of income to a percentage of population. For example, a statistic may indicate that 70% of a country's income is controlled by 20% of that country's residents.

It is often associated with the idea of income "fairness". It is generally considered "unfair" if the rich have a disproportionally larger portion of a country's income compared to their population.

Tax policy is a powerful tool that governments use. In the case of income tax, the government taxes those earning higher incomes at higher rates, while those below a threshold are exempt from paying income tax. Wealth tax is also levied on wealth above a certain threshold. The government may also use taxes on items that are

consumed by the rich such as taxes on consumption in five-star hotels.

Q: What are the keynes chain solution to lift the economy from the depression of 1930. Can same tool be applied to improve recession in India

An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the Depression. Subsequently, the term “Keynesian economics” was used to refer to the concept that optimal economic performance could be achieved – and economic slumps prevented – by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered to be a “demand-side” theory that focuses on changes in the economy over the short run.

1. Revenue Deficit:

The excess of expenditure on revenue account over receipts on revenue account measures revenue deficit.

Receipts on revenue account include both tax and non-tax revenue and also grants. Tax revenue is net of States’ share as al so net of assignment of Union Terri Tory taxes to local bodies. The non-tax re venue includes interest receipts, dividends and profits, and non-tax receipts of Union Territory’s Grants include grants from abroad also.

Expenditure on revenue account includes both Plan and Non-Plan components. Thus, the Plan component includes Central Plan and Central Assistance for States and Union Territory Plans.

Non- Plan expenditure includes interest payments, defence expenditure on revenue account, subsidies, debt-relief to farmers, postal services, police, pensions, other general services, social services, economic services, non-plan revenue grants to States and Union Territories, expenditure of Union Territories with legislature, and grants to foreign governments.

Revenue deficit means dissavings on government account and the use of the savings of other sectors of the economy to finance a part of the consumption expenditure of the government.

An important objective of fiscal policy should be to ensure surplus in the revenue budget so that the government also contributes to raising the rate of saving in the economy.

In 2008-09, revenue deficit of the central government is at Rs. 2, 41,273 crore (Revised estimates) as compared to Rs. 52,569 crore in the previous year. In percentage terms, the revenue deficit is 4.5 per cent (RE) of the gross domestic product in 2008-09, registering an increase of 3.4 per cent from the previous year.

2. Capital Deficit:

The excess of capital disbursements over capital receipts measures the capital deficit.

Capital Deficit = Expenditure on Capital Account – Capital Receipts

Plan capital disbursements include those on Central Plan and Assistance for States and Union Territories. Non-Plan Capital disbursements include defence expenditure on Capital account, other non-plan capital outlay, loans to public enterprises, States and Union Territory Governments, foreign governments and others; and non-plan capital expenditure of Union Territories without legislature. The items of capital receipts include recoveries of loans extended by the centre itself, but only net receipts of loans raised by it.

It may be noted that receipts on account of sale of 91 days treasury bills and drawing down of cash balances do not form a part of capital receipts. However, net receipts on account of sale of 182 days and 364 days treasury bills and sales proceeds of government assets are included in capital receipts.

3. Fiscal Deficit:

Fiscal deficit is the difference between revenue receipts plus certain non-debt capital receipts and the total expenditure including loans net of repayments.

Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-debt Capital Receipts)

In short, fiscal deficit indicates the total borrowing requirements of the government from all sources. This may also be called Gross Fiscal Deficit (GFD). It measures that portion of government expenditure which is financed by borrowing and drawing down of cash balances.

It should be noted that in India, borrowings are net amounts (that is, gross borrowings less repayments). Similarly, loans extended by Government of India are included on the expenditure side of capital account while ‘recoveries’ are included on the receipts side. Therefore, the amount of loans and advances by Government of India is also reduced.

It is often stated that fiscal deficit measures an addition to the liabilities of Government of India. In 2008 -09, fiscal deficit was at a figure of Rs. 3, 26,515 crore (RE) which is 6.1 per cent of Gross Domestic Product.

Fiscal deficit was of the order of 4 per cent of gross domestic product (GDP) at the beginning of 1980s, and was estimated at more than 8 per cent in 1990-91. The growing fiscal deficit had to be met by borrowing which led to a mammoth internal debt of the government.

The servicing of this debt has become a serious problem. Public debt in India is mostly subscribed to by commercial banks and financial institutions. A judicious macro-management of the economy requires a progressive reduction in the fiscal deficit and revenue deficit of the government.

4. Primary Deficit:

It is simply fiscal deficit minus interest payments. In the 2008-09 budget, primary deficit was shown at a figure of Rs. 1, 33,821 crore (Revised estimates).

This measure is also referred to as Gross Primary Deficit (GPD). Measures of deficit described above (except capital deficit) include payments and receipts of interest. These transactions, however, reflect

a consequence of past actions of the government, namely, loans taken and given in years prior to the one under consideration.

Exclusion of interest transactions would, therefore, enable us to see the way the government is currently conducting its financial affairs. Accordingly, Primary deficit is defined as Fiscal Deficit less net interest payments, (that is less interest payments plus interest receipts).

Net primary deficit is obtained by subtracting ‘Loans and Advances’ from net fiscal deficit. It is also equal to Fiscal Deficit less interest payments plus interest receipts less loans and advances.

The primary deficit which was 4.3 per cent of GDP during 1990-91 came down to 1.5 per cent of GDP during 1997-98 and in the revised estimates for the year 2008-09 it was 2.5 per cent of GDP.

5. Monetised Deficit:

Besides ways and means advances, the Reserve Bank of India also supports the government’s borrowing programme. Monetised deficit indicates the level of support extended by the Reserve Bank of India to the government’s borrowing programme.

Monetised deficit is defined as net increase in net Reserve Bank of India credit to central government. The rationale for this measure of deficit flows from the inflationary impact which a budgetary deficit exerts on the economy.

Since borrowings from Reserve Bank of India directly add to money supply, this measure is termed monetised deficit. It is obvious that monetised deficit is only a part of fiscal deficit.

measure to reduce fiscal deficit.

Government has imposed economy measures like rationalization of expenditure and optimization of available resources with a view to improve macroeconomic environment. These include a ban on holding of meetings and conferences at five star hotels, restrictions on foreign travel and ban on creation of Plan and Non-Plan posts. Ministries/Departments have been advised that posts that have remained vacant for more than a year shall not be revived except under very rare and unavoidable circumstances and after seeking clearance of the Department of Expenditure.

Apart from the measures indicated above, the Government has taken the following steps to contain fiscal deficit:

i) Government has reverted back to the path of fiscal consolidation with gradual exit from the expansionary measures in calibrated manner. The reduction in fiscal deficit from 5.9 per cent of GDP estimated in RE 2011-12 to 5.1 per cent of GDP in BE 2012-13 is designed with a mix of reduction in total expenditure as percentage of GDP and improvement in gross tax revenue as percentage of GDP.

ii) Government has also introduced “Medium-term Expenditure Framework Expenditure Statement”, setting forth a three-year rolling target for expenditure indicators with a view to undertaking a de-novo exercise for allocating resources for prioritized schemes and weeding out other that have outlived their utility. It would also encourage efficiencies in expenditure management.

iii) Government will also endeavour to contain the expenditure on Central subsidies.