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C H A P T E R

By Sukesh Singh Mobile 9899757670

1 Nature and Scopeof Economics

Basics of Micro Economics 1. Th e origin of economics can be traced to Adam Smith book An Inquiry into the Nature and Causes of

Wealth of Nations published in the year 1776. Adam Smith is the father of Economics. At its birth it was called ‘Political Economy’.

2. Economics has been defi ned in four diff erent ways: • Wealth Defi nition: Adam Smith, defi ned economics as a science of wealth-which means

production and consumption of wealth. • Welfare Defi nition: Marshall defi ned the welfare aspect of economics as attainment and use of

material things. He defi ned economics in its normative aspect. • Scarcity Defi nition: Robbins emphasizes that economics is a study of human behaviour, where

there is a relationship between ends and scarce means and that the scarce means have alternative uses. He said economics is neutral between ends. He defi ned economics in its positive aspect.

• Growth Defi nition: Samuelson's defi nition of economics is most comprehensive, relevant and accepted. Th e defi nition includes both the aspects of economics, i.e., distribution of limited resources and problem of economic development.

3. Economics as a Science: Economics is a science where various facts are systematically collected, classifi ed and analyzed. Economics is a social science whose subject matter is man who cannot be controlled and predicted. Physics, Chemistry and Biology are pure sciences where experiments can be conducted in a laboratory under controlled conditions.

4. Economics as an Art: Economics is an art as it has several branches which give practical direction to some economic problems of the society.

5. Economics is a science having both positive and normative sides. Th e role of an economist is not only to explain and explore but also to admire and condemn. Th is role of an economist is essential for healthy and rapid growth of an economy. Positive economics deals with what is, and normative economics deals with what ought to be. Positive economics deals with facts and normative economics deals with ethics.

6. Microeconomics deals with behavior of individual decision making units such as consumers, resource owners, etc. It is also called Price Th eory. Macroeconomics deals with aggregates such as national income, aggregate consumption, etc. It is also called Th eory of Income and Employment. Both micro and macro economics are complementary and should be fully utilized for proper understanding of an economy.

7. Th ere are two methods of constructing an economic theory (a) Deductive method (b) Inductive method.

(a) In the deductive method, the process of reasoning goes from general assumptions to particular predictions. It was adopted by classical economists and is simple. Th e method is more suitable when facts and data are not available. Th is method is called abstract or priori method.

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2 GENERAL ECONOMICS


(b) In the inductive method, the process of reasoning goes from particular facts to general theory. It was popular among modern economists and is more precise, realistic and scientifi c. Th e method is more suitable when facts and data are available.

Deductive and inductive methods are not alternative of each other. Both the methods are needed for constructing an economic theory.

8. Th e central problem is the problem of choice or the problem of economizing. Th e main causes of central problems are:

• unlimited human wants • limited economic resources • alternative uses of resources Th e central problems are: 1. What to produce and how much to produce? 2. How to produce 3. For whom to produce 4. Economic growth 9. All point on Production Possibility curve (PPC) solves the fi rst two problems and points on a higher

PPC solve the problem of economic growth. PPC cannot solve the problem of ‘For whom to produce. • PPC shows various alternative combinations of goods and services that an economy can produce

when the resources are fully and effi ciently employed. • Th e slope of PPC measures opportunity cost of the commodity in terms of alternative opportunity

given up. Since the opportunity cost is increasing therefore PPC is concave to the origin and scarcity of resources gives downward slope to PPC. [Opportunity cost is cost of alternative opportunity given up.]

10. Th ere are three forms of economic system: (a) Capitalistic economy (b) Socialistitc economy (c) Mixed economy. Capitalism is the system that advocates price mechanism to solve the central economic problems.

In a capitalistic economy, prices are determined by the market forces of demand and supply. Th e only aim is profi t maximization and the consumers are free to consume whatever they like. It has faith in liesez fair policy i.e. least interference by the Government.

Socialism is the system where government or public sector owns the factors of production (land, labor, capital and enterprise) and the central planning authority solves central economic problems. Th e aim is to maximize welfare of the society and the consumers can consume only, those goods which are produced by the government.

In a mixed economy, public and private sectors exist side by side. Both price mechanism and central planning authority solves central economic problems. India is a mix economy.


C H A P T E R


Law of Demand and Supply 1. Meaning of Demand: Demand for a commodity refers to the quantity of a commodity which a

consumer is willing and able to purchase at a certain price during any particular period of time. 2. In economics, demand means eff ective desire which means there should be desire to own the good,

suffi cient money to buy it and willingness to spend the money. 3. Th e determinants of demand are (i) price of the good (Pc), (ii) price of related goods (Pr), (iii) income

of the consumers (Y), (iv) tastes and preferences of the consumers (T) and (v) other factors (D) such as size of population, composition of population, distribution of income etc.

4. Th e law of demand states that there is an inverse relationship between price of a commodity and its quantity demanded, ceteris paribus. Th e assumptions of the law of demand are that Pr, Y, T and D are constant.

• Th e demand schedule is a tabular or numerical representation of law of demand. It is of two types:

• Individual demand schedule shows the quantity demanded on the part of a single consumer at various prices per unit of time.

• Market demand schedule shows the aggregate of the quantity. demanded by all the consumers (taken together) at various prices per unit of time.

• Demand curve is a graphical or geometric representation of law of demand. It is of two types-: • Individual demand curve is graphical representation of quantity demanded by a single consumer

at diff erent prices. • Market demand curve is constructed by horizontally or laterally summing all the individual

demand curves at each and every price. 5. Th e demand curve slopes downward because of (i) law of diminishing marginal utility (as given by

Marshall), (ii) income eff ect, (iii) substitution eff ect, (iv) new consumers creating demand and (v) several uses of a commodity.

6. Exception to the law of demand are found in the following cases (i) Giff en goods, (ii) Conspicuous goods or goods of status, (iii) Expectation of a price rise in future, (iv) Demonstration eff ect, (v) conspicuous necessities, (vi) impulsive purchase and (vii) Emergency.

7. Movement along a demand curve (change in quantity demanded) occurs due to change in the price of the good itself other factors remaining constant.

8. Shift of the demand curve (change in demand) occurs due to change in (i) price of other good (ii) income of the consumers (iii) tastes of the consumers etc. price of the commodity remains constant.

• Movement on demand curve can be expansion or contraction of demand whereas change in demand can be increase or decrease in demand.

2 Theory of Demandand Supply


4 GENERAL ECONOMICS


9. Price Elasticity of Demand (Ep) measures percentage change in quantity demanded of a good due a percentage change in its price Th erefore, Ep can be calculated as:

Ep = Percentage change in quatity demanded

Percentage change in price

or, Ep = – ΔQΔP

× PQ

10. Th e major determinants of price elasticity of demand are: (i) Nature of the commodity (ii) Availability of substitutes (iii) Several uses of the commodity (iv) Share of a commodity in consumers budget (v) Time – period (vi) Habit of the consumer. (vii) Tied demand. (viii) Price range. 11. Th ere are fi ve degrees of ep: (i) Perfectly inelastic demand (ep = 0) demand

curve will be vertical line parallel to y-axis. (ii) Inelastic demand (0 < ep < 1) demand curve will

be relatively stipper. (iii) Unitary elastic demand (ep = 1) demand curve

will be like rectangular hyperbola. (iv) Elastic demand (1 < ep < ∞) demand curve will be

relatively fl atter. (v) Perfectly elastic demand (ep = ∞) demand curve will be a horizontal line parallel to x-axis. 12. Measurement of Price Elasticity of Demand: (i) Percentage or proportionate method (ii) Geometric (or point) method. (iii) Total outlay or expenditure method (iv) Arc or mid – value method. (i) In the percentage method, Ep is calculated by the formula:

Ep = – ΔQΔP

× PQ

(ii) In the geometric method, ep at a point on a linear (straight) demand curve is calculated as:

ep = Lower segment of the demand curve

Upper segment of demand curve

(iii) In the total outlay method, the ep is measured on the basis of change in total expenditure

(TE) or total revenue (TR) as a result of change in price of commodity. If – (a) price rises and TE/TR also rises and vice-versa then ep < 1 (b) price rises or falls TE/TR remains constant then ep = 1 (c) price rises and TE/TR falls and vice-versa then ep > 1

(iv) For arc elasticity, the formula is Ep = Q1 – Q2

Q1 + Q2

× P1 + P2

P1 – P2

Check list

Inelastic demand Elastic demand

• Essential goods • Luxurious goods

• Substitute not available • Substitute available

• Single or limited no. of use of the commodity

• Multiple uses of the commodity

• Low share in consumer’s budget

• High share in consumer’s budget

• Short period • Long period

• Habitual consumer • Non-habitual consumer

• Tied demand • Independent demand

• Low & high price range • Medium price range


5THEORY OF DEMAND AND SUPPLY


13. Income Elasticity of Demand measures % ag changes in quantity demanded due to % ag change in income of the consumer.

Th erefore, ey = ΔQΔY

× YQ

(a) If value of ey is between 0 to 1 then good is normal or essential. (b) If ey > 1 then good is luxury and (c) If ey is negative i.e. less than 0 then good is inferior. 14. Cross-Elasticity of Demand (ec): It mea sures% ag changes in the quantity de manded of good x due

to % ag change in price of good y. Th e formula for cal culating ec is:

ec = ΔQx

ΔPy ×

Py

Qx

• When ec = + ∞, goods are perfect substitutes • When ec = +ve goods are substitutes • When ec = 0, goods are totally unrelated • When ec = -ve, goods are complements. 15. Demand Distinctions (A) Producer’s goods and Consumer’s goods (B) Durable goods and Non-durable goods (C) Derived demand and Autonomous demand (D) Industry demand and Company demand (E) Short-run demand and Long-run demand

Th eory of Consumer’s Behaviour 1. Th e logical basis of consumer behaviour has been explained by diff erent theories. Some of the most

important theories of consumer behavior are: (i) Marshall’s Marginal Utility Th eory (ii) Hicks and Allen’s Indiff erence Curve Th eory. 2. Marginal Utility Th eory: • Th e law of diminishing marginal utility states that as the consumer consumes more and more

units of a commodity, its marginal utility falls. • Utility is expected satisfaction to a consumer when he is willing to spend money on a stock of

commodity which has the capacity to satisfy his want. • Marginal utility (MU) is addition made to total utility (TU) as a result of consump tion of one more

unit of the commodity. • When MU is 0, TU is maximum. It is called saturation point. • When MU is falling but positive TU is rising but with diminishing rate. • When MU is negative, TU is falling. • Assumption of the theory (i) Rationality (ii) Cardinality (iii) Measurement in terms of money. (iv) Constant marginal utility of money (v) Independent utility


6 GENERAL ECONOMICS


• Marshall's consumer surplus: Th e amount consumer is willing to pay – Th e amount he actually pays. = Area below the MU curve

and above price of the commodity. 3. Indiff erence Curve Th eory • Assumptions of the theory are: (i) Rationality (ii) Ordinarily (iii) Diminishing marginal rate of substitution (iv) Consistency and transitivity of choice (v) More is better • Indiff erence curve shows diff erent combinations of two goods that gives the same level of

satisfaction to the consumer. • A set of indiff erence curves is called an indiff erence map. • Features of indiff erence curve are: (i) Downward sloping to the right (ii) Convex to the origin (iii) Two indiff erence curve can never intersect each - other. (iv) Higher indiff erence curve represents higher level of satisfaction. (iv) Indiff erence curve can not touch axis. • Budget line shows all the possible combinations of the two goods that can be bought by a

consumer with given income and prices of goods.

• Slope of the budget line is the price ratio of goods, i.e., PX

PY

• Slope of an indiff erence curve is called Marginal Rate of Substitu tion (MRSxy). • A consumer is in equilibrium when he maximises his utility, given income and prices.

Equilibrium is reached at the point of tangency between indiff erence curve and budget line. Condition for consumer equilibrim is:

MRSXY = PX

PY ...(1)

Or MUX

MUY =

PX

PY ...(2)

And Diminishing MRS

Supply 1. Defi nition of Supply: Supply of a commodity at a given price is the quantity of the commodity which

is actually off ered for sale per unit of time 2. Th ere is diff erence between supply and stock. Supply is that part of stock which is actually brought in

the market for sale. 3. Th e major factors aff ecting supply of a good are: (i) Price of the good (Px) (ii) Price of related goods (Pr) (iii) Prices of the factors of production (Pf) (iv) State of technology (T) (v) Government policy (G) etc.


7THEORY OF DEMAND AND SUPPLY


4. Th e law of supply states that there is a direct relationship between price and quantity supplied of a commodity, other things remaining constant.

5. Th e supply schedule shows the diff erent quantities of a commodity supplied by a fi rm within a given period of time at diff erent prices.

6. Th e data of supply schedule is plotted on price-quantity axes to derive the supply curve. 7. Movement along a supply curve occurs due to changes in the price of good (PX) itself. 8. Shift of the supply curve occurs due to changes in factors aff ecting supply other than commodity’s is

own price. 9. Movement on supply curve can be expansion or contraction in supply whereas shift of supply curve

can be increase or decrease in supply. 10. Th e concept of Elasticity of supply (ES) was developed by Marshall. Elasticity of supply is defi ned as

the responsiveness of quantity supplied of a commodity due to change in its own price. Symbolically,

ES = + ΔQΔP

× PQ

11. Th ere are fi ve degree of ES: (i) Perfectly inelastic supply (ES = 0) (ii) Inelastic supply (0 < ES < 1) (iii) Unitary elastic supply (ES = 1) (iv) Elastic supply (1 < ES < ∞) (v) Perfectly elastic supply (ES = ∞). 12. Methods of measurement of elasticity of supply – • Percentage method –

es = % change in quantity supplied

% change in price

• Point elasticity method –

es = dqdp

× pq

• Arc method -

Es = q1 – q2

q1 + q2

× P1 + P2

P1 – P2

13. Diagrammatic Method - Th e rule is that • if the supply curve passes through the point of origin, es is equal to unity, • if the supply curve intercepts the x-axis, es is less than unity and • if supply curve intercepts the y-axis, es is greater than unity. • if sypply curve is a vertical line parallel to y-axis es is equal to zero. • if sypply curve is a horizontal line parallel to x-axis es is equal to infi nite.


C H A P T E R


Th eory of Productions 1. Production means creation or addition of utilities which can be form utility, time utility, place utility,

knowledge utility and possession utility. 2. Th ere are four factors of production namely, land, labour, capital and organisation. 3. Land: • Land is a primary factor which includes besides physical territory, all natural resources such as

water, soil, climate, wind, sea, etc. • Features of land are: (a) Its supply is perfectly inelastic. (e) It is a free gift of nature. (b) It is imperishable (indestructible). (f ) It is immobile. (c) It is a passive factor. (g) It has heterogeneous use. (d) It has perfectly inelastic supply (when taken as a whole). 4. Labour: Labour is any physical or mental exertion undertaken to create or produce goods or services. Features

of labour are: (a) It is perishable. (f ) It is an active factor. (b) It is inseparable from a labourer. (g) Labour is a man, not a machine. (c) He sells his services and not himself. (h) All labourers are not equally effi cient. (d) Supply curve of labour is backward bending. (i) Labour is mobile. (e) Labour is a live factor of production. (j) Individual labour has weak bargaining power. 5. Capital is defi ned as man made goods that are used for further production of wealth. It is produced

means of production. 6. Capital formation or investment is defi ned as the surplus of production over consumption in an

accounting year which is further used for production. • Signifi cance of capital formation lies in the following points: (a) It determines the growth rate of an economy. (b) It increases production. (c) It raises productive capacity. (d) It raises employment opportu nities. • Th ere are three stages of capital formation which are inter-related. Th ese are: Stage I: Creation/Generation of Savings Stage II: Mobilisation of Savings Stage III: Investment of Savings. 7. Entrepreneur: • Entrepreneur is the person who organises. manages and coordi nates all factors of production . • Functions of an entrepreneur are: (a) Initiating a business enterprise and resource coordination (b) To take advantage of changes in a dynamic economy (c) To bring about innovations (d) To bear uncertainties. 8. Production function is the process of getting the maximum output from a given quantity of inputs in

a particular time period. It establishes physical input-output relationship.

3 Theory of Productionand Cost


9THEORY OF PRODUC TION AND COST


• Th ere are two types of production function: (a) Short-run production function: where some factors are in fi xed supply. (b) Long-run production function: where all factors are in variable supply. 9. Law of variable proportions • Th e three concepts of production total, average and marginal product. • Total product is aggregate of the quantity of a good produced by a fi rm with the given inputs

during a specifi ed period of time, i.e. TP = ΣMP

• Average product is the amount of output per unit of the variable factor employed, i.e. AP = TPQ

• Marginal product is the change in total product resulting from the employment of one more unit

of variable factor, i.e. MP = ΔTPΔQ

• TP curve starts from the origin. Initially it rises with an increasing rate, then rises at a decreasing rate, reaches its maxi mum and then starts falling.

Both AP and MP curves are graphically derived from the TP curve. Both AP and MP curves are inverted-U shaped. Th ey have special relationship which are as follows:

(a) When AP is rising, then MP > AP. (b) When AP is at its maximum then MP = AP. (c) When AP is falling then MP<AP. Law of variable proportions states that ‘when total output of a commodity is increased by adding

units of a variable factor, while the quantities of other inputs are held constant, the increase in total production i.e. marginal product becomes, after some point, smaller and smaller’. Th e three product curves are drawn to graphically illustrate the law of variable proportions. Th e three stages are partitioned into increasing, diminishing and negative returns. A rational producer will always operate in Stage II. In this stage both AP and MP are declining but positive. Th e reason for diminishing returns is optimal use of fi xed factor and imperfect substitution between factors. Th e law is applicable in short run.

10. Law of Returns to Scale It is a long-run law. • It states that 'when all factors of production are increased in the same proportion, output will

increase, but the increase may be at an increasing rate or constant rate or decreasing rate'. • Th e three stages of law of return to scale are increasing, constant and decreasing. • Reason behind increasing returns to scale is economies of scale which can be internal or

external, division of labour and specialization of activities. • Reason behind decreasing returns to scale is diseconomies of scale which can also be internal

or external. • Constant returns to scale operates when economies and diseconomies are counter balanced. 11. Production Optimization • It refers to cost minization. It explains producer’s equilibrium through isoquant and iso-cost lines. • A producer will be in equilibrium when isoquant is tangent to iso-cost line. • Isoquants have technique similar to indiff erence curve of theory of consumer’s behaviour.

Th eory of Cost 1. Defi nition: Cost theory helps to determine the supply curve, which together with the demand curve,

determines equilib rium price and quantity.


10 GENERAL ECONOMICS


2. Opportunity Cost vs. Outlay Cost: Opportunity cost is defi ned as the cost of alternative opportunity given up or forgone. It is also called alternative cost or transfer earnings. Outlay cost is actual expenditure of fi rms.

3. Explicit Cost vs. Implicit Cost: Explicit cost is the actual money expenditure incurred by a fi rm in the production process. It is also called direct cost or money cost. Implicit cost is the cost of factors owned by the fi rm and used by the fi rm in its own production process. It is also called imputed cost.

4. Direct Cost vs. Indirect Cost: Direct cost can be traced to a particular product. Indirect cost cannot be traced to a particular product.

5. Accounting Cost vs. Economic Cost: Accounting costs are explicit cost or actual cash payments. Economic cost is accounting cost plus implicit cost.

6. Short-Run Cost Curves (a) Short- run Total Costs - • Total Cost is inverse-S shaped starting from the level of fi xed cost. • TFC is horizontal line parallel to X axis • TVC is inverse S-shaped curve starting from origin • Semi-variable cost is the cost which have a fi xed element and a variable element • Stair-step cost which remain fi xed over a certain range of output and suddenly jump to a

higher level when output goes beyond a given limit. (b) Short-run Average Costs - • AFC, is fi xed cost per unit of output produced. AFC curve has a is a rectangular hyperbola

shape. • AVC is variable cost per unit of output produced. It is U shaped due to law of variable

proportion. • AC is also called average total cost (ATC). It can be obtained in two ways:

ATC = TCQ

or ATC = AFC + AVC. ATC is U-shaped curve. Th e reason behind its shape is the law

of variable proportions. (c) Marginal Cost - MC is addition made to TC (or TVC) when one more unit of output is Produced.

MC = ΔTCΔQ

. MC is the slope of the TC curve at each and every point. MC curve is U-shaped refl ecting

the law of variable proportions. (MCn = TCn – TCn–1)

MC is independent from TFC. It is function of variable cost and can also be calculated as

MC = ΔTVCΔQ

(d) Relationship between AC and MC • When AC is falling, MC is below it. • When AC is rising, MC is above it. • When AC is minimum MC = AC. 7. Long run average Cost (LAC) curve is an envelope curve. It is also known as planning curve.

It envelopes infi nite short run AC curves. Each point on LAC gives the minimum cost per unit for corresponding level of output.

8. LAC curve is ‘U’ shaped curve because of operation of law of returns to scale. 9. According to modern approach LAC curve is ‘L’ shaped curve because modern approach believes

technological advancement is possible during production process over the period of time.


C H A P T E R


Meaning and Types of Markets 1. Defi nition: A market is a complex set of activities by which potential buyers and sellers interact to

determine the price and quantity of a good or service. 2. Value and Price: Price is the value of good in terms of money and value is economic worth of a good

expressed in relation to another good. 3. Market Structures: On the basis of the area • Local Market • Regional Market • National market • International Market On the basis of time • Very short period Market or Market Period Market • Short-period Market • Long Period Market • Very Long Period Market or secular Period Market On the basis of Nature of Transactions • Spot Market • Future Market On the basis of Regulation • Regulated Market • Unregulated Market On the basis of volume of business • Wholesale Market • Retail Market On this basis of competition • Perfect Competition • Monopoly • Monopolistic Competition • Oligopoly • Duopoly 4. Revenue is the money payment received by a fi rm from the sale of a commodity. • TR is the total or aggregate of proceeds to the fi rm from the sale of all the units of a commodity. It

is given as: TR = P × Q.

• AR is revenue per unit of output sold and is always equal to price. i.e., AR = P = = =P QTRAR P

Q Q

x

4 Price Determination in Different Markets




• MR is the addition made to TR when one more unit of unit of output is sold. It is given as

MR = ΔTRΔQ

. or MRn = TRn – TRn-1.

MR = AR (1 – 1e)

5. Th ere are two basic principle governing all market conditions, fi rms should produce Only if: (a) TR ≥ TVC or AR ≥ AVC (b) MC = MR and MC must be rising.

Determination of Price 1. Equilibrium price is that price at which demand and supply equals each other and quantity demanded

and supplied at that price are regarded as equilibrium quantity. 2. Shifts in demand and supply curves takes place due to changes in factors other than the price of the

commodity. 3. A change in demand, supply remaining constant, leads to a change in the equilibrium price. If demand

increases, both equilibrium price and quantity will rise. If demand decreases, both equilibrium price and quantity will fall.

4. A change in supply, demand remaining constant, leads to a change in the equilibrium price and quantity. If supply increases, price will fall and quantity will rise and if supply decreases, price will rise and quantity will fall.

5. If both demand and supply change, the new equilibrium price may rise, fall or remain constant. (for detail see the topic simultaneous change in demand and supply in text book of Author).

Price – Output Determination under Diff erent Forms of MarketPerfect Competition 1. Perfect competition is a market situation where large number of sellers are selling homogeneous

product to large number of buyers at uniform price. 2. In perfect competition price is determined by the industry which individual fi rm has accept as given

and constant. Th us, fi rms under perfect competition is price taker. 3. Short-run equilibrium of a fi rm – Conditions for equilibrium – (i) MC = MR and (ii) MC must be rising 4. In short run following three situations can take place – a. Supernormal or abnormal profi ts when price (AR) > ATC b. Normal profi ts when price (AR) = ATC and c. Losses when price (AR) < ATC 5. In the long – run, adjustment process takes place and all fi rms earn just normal profi ts at the minimum

point on LAC curve where SAC = LAC = SMC = LMC = P = AR = MR

Monopoly 1. Monopoly is a market situation where single seller is selling the product having no substitute available

in the market to large number of buyers at same or diff erentiated prices. 2. In short-run following three situations can take place – a. Supernormal or abnormal profi ts when price (AR) > ATC b. Normal profi ts when price (AR) = ATC and c. Losses when price (AR) < ATC 3. In a long-run monopolist can continue to enjoy super-normal profi ts because entry-exit is restricted.


13PRICE DE TERMINATION IN DIFFERENT MARKE TS


Pricing under Discriminating Monopoly: 1. Discriminating monopoly is a situation where the monopolist charges diff erent prices from diff erent

buyers for same product. 2. Conditions necessary for price-discrimination: a. Seller should have some monopoly power, b. Seller must be in a position to divide his total market in two or more than two sub-markets, c. Th ere should be eff ective separation of the market and d. Elasticity of demand should be diff erent in diff erent sub-markets. 3. Objective of Price discrimination: a. To earn maximum profi t b. To dispose of surplus stock c. To enjoy the economies of scale d. To capture foreign markets e. To secure equity through pricing 4. Degrees of price discrimination (given by A.C. Pigou): a. First degree-entire consumer surplus will be withdrawn b. Second degree a part of consumer surplus will be withdrawn c. Th ird degree price varies according to location or by customer segment

Pricing under Monopolistic Competition: 1. Monopolistic competition is a market situation where large number of sellers are selling slightly

diff erentiated products to large number of buyers and price charged by diff erent sellers for their product is diff erent.

2. In short-run following three situations can take place – a. Supernormal or abnormal profi ts when price (AR) > ATC b. Normal profi ts when price (AR) = ATC and c. Losses when price (AR) < ATC 3. In the long-run due to free entry and exit adjustment will take place and only normal profi ts will be

earned. But, at equilibrium level fi rm will have excess capacity i.e. fi rm will be in equil. before optimum level of output.

Pricing under Oligopoly 1. Oligopoly is a market situation where few sellers (2 to 10) are selling slightly diff erentiated or identical

products to large number of buyers. 2. Th e demand curve is not defi ned as there are action-reaction patterns among fi rms. Th ere is no general

theory of pricing under oligopoly. 3. Sweezy’s Kinked demand curve model - It is based on the assumption that fi rms match price cuts

but not price rises. It rationalises price rigidity in oligopolistic market. It shows that even if cost changes, prices charged for the commodity does not change.

Distinguishing features of major types of markets

Assumption Market types

Pure competition Monopolistic competition

Oligopoly Monopoly

Number of sellers Many Many A few (2 to 10) One

Product diff erentiation None Slight None to substantial Extreme

Price elasticity of demand of a fi rm Infi nite Large Small Small

Degree of control over price None Some Some Very considerable


C H A P T E R


Nature of India EconomyIndia as an Underdeveloped EconomyIndia is an underdeveloped economy as it has the features of an under-developed economy- 1. Dominant agriculture sector. 2. High poverty level 3. High population growth rate 4. Low standard of living 5. Backward production techniques 6. Low human development 7. High income inequality

India as a Developing EconomyIndia has some other features which show improvement in its conditions and development in the economy. Th ese features make India a developing country. Th ese are: 1. Rise in national income. 2. Rise in per capita income. 3. Improvements in occupational structure. 4. Improvements in sectoral distribution of domestic product. 5. Growing capital base. 6. Improvement in social overhead capital. 7. Development in banking and fi nancial institution.

India is a Mixed EconomyIndia is not only developing, it also has features of a mixed economy like: 1. Private ownership of means of production. 2. Role of market mechanism. 3. Economic planning. 4. Public sectors co-exist with private sector.

Role of Diff erent Sectors In IndiaRole of AgricultureAgriculture is the backbone of Indian economic system and economic activity. Th e role of agriculture can be clearly seen from the following: (a) Agriculture constitutes signifi cantly in national income (14% of NY in 2011-12).

5 Indian Economy – A Profi le


15INDIAN ECONOMY – A PROFILE


(b) It provides employment to a large labour force (53% in 2011-12). (c) It provides the basis for industrial development. (d) Agricultural sector contributes in export earnings (12% in 2011-12). (e) It fulfi ls daily requirements of people of the country. (f ) A large portion of country’s trade and services depends upon agricultural operation.

Growth of Agriculture Period 1. Th ere has been rise in both production and productivity due Green Revolution (HYVP). Green

revolution is also known as wheat revolution. It was started in 1966. 2. Agriculture has become diversifi ed. 3. Modem methods of agriculture like tractors, HYV (High Yielding Varieties) seeds etc. are used. 4. Land reforms have been imple mented. 5. Other developments like availability of fi nance, have taken place.

Problem of Agricultural Sector in India 1. Slow and uneven growth. 2. Not so modem agriculture. 3. Slow progress of land reforms. 4. Problems relating to fi nance. 5. Problems relating to warehousing and marketing.

Industry Role of Industry in IndiaIndustrialization plays an important role in the economic development of a country. Industrially well developed economies are economically prosperous. Role of industrialization lies in: 1. Meeting ever-rising demand. 2. Raising people’s income. 3. Share in GDP (30% of GDP in 2011-12). 4. Key to high volume of exports (2/3rd of export earning). 5. Leads to self-sustaining development. 6. Promotes regional balance. 7. Provides employment (21.5% of labour force in 2009-10). 8. Leads to modernisation. 9. Helps to modernise agriculture.

Pattern of Industrial Development since Independence Important changes have taken place in 1. Development of infrastructure. 2. Reach and development. 3. Expansion of public sector. 4. Building up of capital goods industry. 5. Growth of non-essential consumer industries. 6. Diversifi cation of private sector. 7. Growth of small scale sector.




Problems of Industrial Development in India 1. Sectoral imbalances 2. Regional imbalances 3. Industrial sickness 4. Growth of big industrial houses 5. Higher cost of industrial products 6. Inadequate employment generation 7. Industrial dependence on the government 8. Poor performance of the public sector 9. Underutilisation of capacity 10. Increasing capital – output ratio.

ServicesMeaning: Th e services sector is the tertiary sector of an economy.

Role of Service Sector 1. It’s share in GDP was more than 56% (2011-12). 2. It generated employment for 25% (2009-10) of working population. 3. It gives support to other sectors of the economy.

Growth of Services Sector during Plan ning Periods 1. Th e average growth target for service sector in 11th plan was 9.4% and actual growth rate in this plan

was little less than 10%. 2. 12th plan targets a growth rate of 9% for this sector. 3. India has the 3rd largest scientifi c and technical manpower in the world.

Problems of Service Sector 1. Infrastructure problem. 2. Problem of tourism. 3. Lack of support system. 4. Inadequate economic reform.

National Income in IndiaDiff erent concepts of National Income and Output 1. GDPMP 2. GDPMP

3. NNPMP 4. NDPMP

5. NDPFC 6. GDPFC

7. GNPFC 8. NNPFC

Th ere are three methods of measuring NI: 1. Income Method 2. Value Added or Product Method 3. Expenditure Method


17INDIAN ECONOMY – A PROFILE


Problems in Estimation of National Income (NY) IndiaTh e procedure of estimating NY is complex and diffi cult in a developing country like India. Some diffi culties in estimation of NY in India are: (i) Inadequate and unreliable data, (ii) Diffi cult diff erentiation between economic and non-economic activities, (iii) Conceptual diffi culties, (iv) Double counting (v) Scattered and unorganised production, (vi) Unreliable data collecting agencies, (vii) No data on backward areas, and (viii) Lack of data on subsidiary jobs.

Analysis of Indian Economy as seen from the National Income Data 1. Standard of living is low 2. Unequal distribution of income 3. Large regional disparities 4. Share of tertiary sector is growing 5. Importance of private sector is growing 6. Expenditure on food is increasing.

Basic Understanding of Tax System in IndiaPublic Revenue in IndiaTh e various sources of public revenue are tax revenue and non-tax revenue. 1. Tax revenue can be of two kinds: Direct taxes and indirect taxes. 2. Merits of Direct taxes are: (a) Progressive (b) Elasticity (c) Certainty (d) Social objective 3. Demerits of Direct taxes are: (a) Discourages work (b) Tax evasion (c) Limited coverage (d) Arbitrary (e) Poor maintenance of accounts (f ) Inconvenience 4. Merits of Indirect tax are: (a) Diffi cult to evade (b) Convenience (c) Equality (d) Promotes social welfare (e) Good amount of revenue (f) Wide coverage




5. Demerits of Indirect tax are: (a) Regressive (b) Lack social consciousness (c) Uneconomical (d) Uncertain

Indian Tax SystemIndian tax system fulfi lls the Canon (principle) of equality, convenience and certainty. It is infl exible, leads to tax evasion, complicated, uneconomical, inelastic, unproductive, and ineffi cient; reduce savings, raises inequalities and unemployment.

MODVAT, CENVAT and VAT • MODVAT was introduced in India in the Union Budget 1986-87 to overcome the cascading eff ect of

taxes. • CENVAT was introduced in the Union Budget 2000-01. • VAT was introduced in 1999 and implemented in April 2005 in some states. At present VAT is

applicable in all states and union teritories.

Service TaxService tax is a form of indirect tax imposed on specifi ed services called taxable services. Introduced in the year 1994-95, service tax network has expended to cover many services over the year.


C H A P T E R


PopulationTheory of PopulationCoale and Hoover states that every country passes through three stages of demographic transition –

Stage 1 - high birth rate and high death rate ⇒ actual growth of population is Low.

Stage 2 - high birth rate and low death rate ⇒ actual growth of population is very high. Th is stage is known as stage of population explosion.

Stage 3 - low birth rate and low death rate ⇒ actual growth of population is low. Population even remain stable in this stage.

Evaluation of India’s Population TrendsAccording to the theory of Demographic Transition, India is passing through the second stage of population explosion from 1921 with high birth rate and declining death rate. If same rate of change will continue in future then India’s population will stabilize in 2045-50. Year 1921 known as year of great divide in India’s population growth.

India’s Population Growth and its Eff ects on Economic Development Population growth is a major obstacle to economic development due to the following reasons: 1. Declining land-man ratio (per capita availability of land declined to 0.17 hectare now from 0.33 hectare

in 1951). 2. Low per capita income ($1420 in 2011). 3. Falling savings and investment. 4. Shortage of food (463 gm per capita in 2011-12). 5. Rising unemployment and under - employment (10% of labour force). 6. Housing and environment problems.

Demographic Profi le of India

Features As per census – 2011 (Prov.)Size of population 121.02 cr.

Growth rate of population 1.62%

Density of population 382 person per sq km.

Sex composition 940 females per 1,000 males.

Male population 62.37 cr.

Female population 58.65 cr.

Life expectancy 63.5 yearsLiteracy rate 74%

Illiteracy rate 26%

6 Select Aspects of Indian Economy




Age Composition (a) Working age group (15 to 64 years) 63% (b) Non Working age Group (below 15 years and above 64 years) 37%

PovertyAbsolute and Relative PovertyIn India the concept of absolute poverty is used and in developed countries the concept of relative poverty is used.

Concept of Poverty and Poverty Line 1. Poverty is a socio-economic problem. 2. Poverty is that situation in which an individual fails to earn income suffi cient to buy him minimum

means of subsistence. 3. Poverty line is formed by minimum per capita consumption expenditure. At present in rural areas if

a person has daily consumption of calories is less than 2400 and in urban areas if a person has daily consumption of calories is less than 2100 then person will be regarded as living below the poverty line.

4. Now to measure poverty URP and MRP approach is used. 5. Th e planning commission is the nodal agency for extimating the poverty in India at national and state

level.

Rate of Poverty 1. Th e planning commission constituated a committee under chairmanship of Suresh D Tendulkar for

estimating poverty in India. 2. In 2009-10, 20.9% of urban population and 33.8% of rural population lived below the property line. In

same period all India rate is 29.8% (MRP Method).

Extent of Poverty 1. Poor states are Orissa, Bihar, Madhya Pradesh and Assam. 2. Rich states are Punjab, Haryana and Delhi.

Rural Poverty Urban Poverty

1. Unequal distribution of land. 2. Failure to implement land reforms. 3. Low education level. 4. Low level of employment and high level of disguised

unemployment. 5. Low level of productivity, saving, investment and income. 6. Low status of women. 7. High birth rate arid death rate.

1. Presence of educated unemployment, i.e., failure to get job for even one per-son in a family.

2. Inequalities in the distribution of urban property.3. High level of migration from rural areas.4. Low rate of growth of industrialization.5. Low rate of growth of income, saving investment and

capital formation.

Special Programmes to Fight Poverty and Unemployment

Programme Starting Year

1. The Mahatma Gandhi National Rural Employment Gaurantee Scheme 2006 (Selected districts) 2008 (whole India)

2. Swarnjayanti Gram Swarozgar Yojana (SGSY) [Now restructured as National Rural Livelihoods Mission (NRLM)]

April – 1999

3. Swarna Jayanti Shahari Rozgar Yojana (SJSRY) Dec. – 1997


21SELEC T ASPEC TS OF INDIAN ECONOMY


Unemployment Meaning and Type of Unemployment 1. Unemployment is a situation where person is fi t and willing to work at current wage rate but not getting

the job. 2. Types of unemployment (a) Voluntary unemployment (b) Frictional unemployment (c) Structural unemployment (d) Technological unemployment (e) Cyclical unemployment (f ) Chronic unemployment (g) Seasonal unemployment (h) Casual unemployment (i) Disguised unemployment

Measurement of Unemployment Th ree concepts of measuring unemploy ment are: (a) Usual Status (US) (b) Current Weakly status (CWS) (c) Current Daily status (CDS)

Magnitude of Unemployment Unemployment rate was 6.6% (CDS) in 2009-10.

Causes of Unemployment 1. Faulty employment planning. 2. Emphasis on capital intensive projects. 3. Excessive use of foreign technology. 4. Lack of fi nancial resources. 5. Slow growth process of the country. 6. Increase in labour force with rise in population.

Infrastructural ChallengesEnergy 1. Sources of energy are non-commercial (23%) and commercial (77%). 2. Commercial Sources of electricity, water, oil, coal, gas and radioactive elements. 3. Central Government operates through NTPC, NHPC and NPCIL. 4. State government operates through SEBs. 5. Problems of energy sector are: (a) Rising oil import bill (b) Rising oil prices (c) Shortage of supply (d) Inability to cover up transmission and distribution (T&D) losses (e) Sick SEBs (f ) Operational ineffi ciency 6. Plant Load Factor (PLF) measures the operational effi ciency of a thermal plant.




Transportation 1. Means of transport-railways, road transport, water transport and air transport. 2. India has world’s forth largest Railway. 3. Lengthwise, Indian Roads are the one of the largest in the world. 4. Water transport can be inland and shipping. Shipping can be coastal and overseas. 5. India has a long coast line of 7,517 kms, 12 major ports and 200 minor ports. 6. Kandla is the top traffi c handler port of India. 7. Air transport has three segments operational, infrastructural and developmental. 8. Greenfi eld airports are at Hyderabad Bangalore and Goa. 9. International green fi eld airport is at Kochi. 10. India has become the 9th largest civil aviation market in the world as passenger handling capacity

increased to over 220 million in 2011 and cargo handling capacity to 3.3MT in 2011.

Communication 1. Main means of communication are Postal sources and telecommunication. 2. India’s postal service is the largest in the world and established in 1837. 3. India’s telephone network is 2nd largest in the world. 4. Th ere are 935 million connections (Basic & Mode) by October 2012. 5. BSNL and MTNL are two PSUs in telecom sector. 6. TRAI is Telecom Regulatory Authority of India and 7. National Internet Exchange of India (NIXI) ensure safety of internet traffi c. 8. Tele density is of 76.75%. (Rural areas 40.6% & Urban areas 159%) in October 2012.

Health: Th e following table shows trends in health care development in India since Independence—

Trend in Health Care Development

1951 1981 2011

Health centers 725 57,353 1,76,820

Dispensaries + Hospitals 9,209 23,555 38,832

Beds 1,17,198 5,69,495 11,75,374(2008 year)

Nursing personal 18,054 1,43,887 18,94,968 (2010 year)

Doctors (Modern) 61,800 2,68,700 9,22,177

Education: Due to constant eff orts of govt. there has been some increase in literacy ratio. India, now, has the one of the largest education system in the world. 84 % of rural habitation in India, now have primary school located with a distance of 1 km Technical Education including management education has increased since Independence. Th ere have been several programmes launched for improving education:

Programme Started in the Year

National Policy on Education (NPE) 1986

National Literacy Mission (NLM) (For adult education) 1998

Sarva Shiksha Abhiyan (SSA) 2001 – 02

National programme for Education of Girl at Elementary Level (NPEGEL) 2001 – 02

Kasturba Gandhi Balika Vidyalaya (KGBV) 2004 – 05

Prarambhik Shiksha Kosh (PSK) 2004 – 05

Right to Education (RTE) Act 2009

Rashtriya Madhyamik Shiksha Abhiyan (RMSA) 2009




• Th ere are 35,539 colleges providing general education. • Th ere are 690 universities.

2011-12

• Th ere are several national institutions on technology known as Indian Institute of Technology. • Th ere are 30 National Institute of Technology (NIT) • Th ere are eleven operational Indian Institutes of Management (IIMs) which are centers of excellence

in management education.

Infl ationType of Infl ationInfl ation is a situation of persistent upward movement in prices, leading to fall in purchasing power of money.

There are two types of infl ation -Demand pull infl ation and cost-push infl ation. Demand-pull infl ation arises when there is an excess of demand for good and services than supply. Th e main reasons for demand-pull infl ation. (a) Increase in population, (b) Increase in money supply (c) Increase disposable income of the consumer, (d) Increase in public expenditure.

Cost-push infl ation occurs when there is rise in price due to rise in cost of production. Its causes are: (a) Higher wage rates, (b) Higher profi t margins, (c) Higher taxes (d) Fall in the availability of basic inputs, (e) Administered higher prices of inputs.

Combined eff ect of demand pull infl ation and cost push infl ation is called stagfl ation. Stagfl ation is situation where there is stagnation (recession) plus infl ation.

Review of Price Trends in India WPI (Wholesale Price Index) is the most preferred method because it covers all commodities, is available on weekly basis and is computed on all-India basis. In 2011-12 average infl ation rate was 9.14%.CPI (Consumer Price Index) is more realistic than WPI to measure infl ation. In India WPI is used to measure Infl ation.

General Causes of Infl ation in India Various causes of infl ation are outlined below: (a) Increase in public expenditure (b) Defi cit fi nancing (c) Erratic agriculture growth (d) Agricultural price policy of the government (e) Inadequate rise in Industries production (f) Upward revision of administered price etc.

Measures to Check Infl ation 1. Monetary measures 2. Fiscal measures 3. Other measures.




Budget and Fiscal Defi cit in IndiaMeaning of Budget 1. Th e fi scal year starts from 1st April to 31st March of next year. 2. Article 112 of the Constitution of India says that the annual fi nancial statement will be placed before

both the Lok Sabha and Rajya Sabha. Generally, Finance Minister of India presents Union Budget on 28th of Feb. each year.

3. Budgetary Defi cit = Total Expenditure – Total Receipts 4. Fiscal Defi cit = Budgetary Defi cit + Borrowings and other liabilities. 5. Fiscal defi cit was 4.8%of GDP in 2010-11. Th e Budget 2011-12 estimated reduction in fi scal defi cit to

4.6% GDP. 6. Originally, budget defi cit was calculated to show RBI lending to the Government. In 1997, the practice

of RBI lending to government through ad hoc freasury bills was given up. 7. To restore fi scal descipline Fiscal Responsibility and Budget Management (FRBM) Bill was

introduced in the year 2000 and FRBM Act was passed in 2003.

Balance of PaymentsBalance of Trade and Balance of Payments 1. BOT is the merchandised balance which refers to diff erence in the value of exports and imports of

goods. 2. BOP is record of transactions relating to exchange of goods and services and unilateral transfer. 3. BOP account is divided into current and capital Account 4. BOP will always balance in an accounting sense. 5. Current account defi cit as percentage of GDP in 2010-11 was 2.8. 6. Asia and ASEAN (Assocation of South East Asian Nations) have become India’s major trade

partners in place of Europe and USA.

External Debts in IndiaAs we know no country is self-suffi cient, therefore, it has to rely on other countries and international organisations for fi nancial assistance. India is no exception. Ever since, independence. India is also relied on other countries and international orgs. for external assistance.

External assistance to India is in two forms-

Grants

Do not involve any repayment

obligations.

Require repayment with interest

Loans




• Capacity to repay principal with interest of a country is called debt-service ratio. • Debt repayment capability of country depends upon the level exports by the country. • Th e main source of external assistance to India is world Bank, International Monetary Fund,

International Development Association, U.S.A. U.K., Japan etc. • 90% external assistance to India in the form of loans. • Presently the grant element in ext. assistance to India is appx. 13% (Sept. 2012). • At end of March 2012 external debt was nearly `17,50,000 cr. • Th e Ext. debt was 20% of GDP at end of March 2012. • Debt-service ratio was 6% in 2011-12. • India has 4th position in top ten debtor countries of the world (2011). • India’s exports of goods as a percentage of GDP (2011-12) works out to be around 16.5%.


C H A P T E R


Economic Reforms in India 1. Due to crisis prevailing in the country in 1990-1991, economic reforms were introduced in 1991. 2. New Industrial Policy (NIP) 1991 was announced and economic reforms were introduced in all major

sectors namely Industrial Sector, Financial Sector, External Sector and Taxation. 3. Th e main thrust was liberalisation of economy and allowing the market to grow with minimum

restriction. 4. Th e results have been rewarding. We have come a long way. But still a lot needs to be done to achieve

better results.

Liberalization It means relaxation of previous government’s restrictions usually in areas of social and economic policies.

Privatization Privatization is defi ned as the transfer of assets or service functions from public to the private ownership or control and the opening of hitherto closed areas to private sector entry.

Disinvestment Disinvestment is the sale of a part of equity holdings held by the government in any PSUs to private investor.

GlobalisationMeaning and Parameters of GlobalisationGlobalization means integrating the economy of a country with the world economy by free fl ow of goods and services, capital, technology, people culture, etc. so that, world at large should be treated as a single global village.

Main Organization for Facilitating Globalization 1. International Monetary Fund (IMF) IMF was set up in July 1946 and started its operation in March

1947. Starting from initial membership of 31 countries its current membership is 188 countries. It basically functions as a short-term credit institution and that too for current account transactions only.

2. Th e World Bank or International Bank of Reconstruction and Development (IBRD) IBRD is also called World Bank and it began its operation in 1945. Its current membership is 188

countries. World Bank consists of IDA, IFC, MIGA and ICSID. Its function is to provide long-term investment loan at reasonable rates.

7 Economics Reforms in India


27ECONOMICS REFORMS IN INDIA


IDA (Established in 1960) MIGA (Created in 1988) ICSID (Founded in 1966) IDA is soft lending arm of the World Bank because it provides interest free loan.

World Trade Organisation (WTO) In 1947, 23 countries signed GATT. India was one of the founder members of GATT. In 1994, 118 countries were members of GATT. GATT was converted into WTO with eff ect from January 1, 1995. WTO is global in its membership. Each member has a single voting right. WTO is the main organ for implementing Multilateral Trade Agreements. At present WTO has 159 members.


C H A P T E R


MoneyMoney is something which is freely used and generally accepted as a medium of exchange and/or as a unit of account.

Functions of MoneyFour functions of money are: (i) It is a medium of exchange (ii) It is a unit of value account (iii) It is a standard of deferred payments. (iv) It is a store of value.

Defi nition of Money Supply 1. Money supply refers to the stock of money held by the public , Commercial Bank and Govt. at a point

of time in an economy. 2. In 1979 the RBI classifi ed money stock in India in four categores M1, M2, M3 and M4. 3. In 1998 RBI redefi ned parameters for measuring money supply and introduced new monetary

aggregate NM1, NM2 and NM3.

Commercial BanksDefi nitionBank means an institution which receives funds from the public and gives loans and advances to those who need them.

Functions of a Bank (a) Accepting deposits (b) Advancing loans (c) Agency services (d) General services.

Nationalisation of Banks Took place 1st in 1969 of 14 major commercial banks and then in 1980, 6 more banks were nationalized.Reasons for Nationalization - (a) Private ownership of commercial banks and concentration of economic power (b) Urban bias

8 Money and Banking


29MONEY AND BANKING


(c) Neglect of agriculture sectors (d) Violation of norms (e) Speculative activities (f ) Neglect of priority sector.

Commercial Banks after NationalisationAfter Nationalisation of banks signifi cant growth of branch network of commercial banks is clear from statistics on: (a) Branch expansion (Increased from 8262 in 1969 to 98,591 in 2012) (b) Deposit mobilisation (Increased from ` 4665 cr. in 1969 to ` 60,00,000 cr. in 2012) (c) Bank lending (Increased from ` 3399 cr. in 1969 to ` 50,00,000 cr. in 2012). (d) Advances to Priority Sectors (Increased from 15% in 1969 to 41% in 2012). (e) Promotion of new entrepreneurship (f ) Branch operating in unbanked and rural areas (Increased from 22% in 1969 to 37% in 2012)

Shortcomings of Commercial Banking in India (a) Excessive over dues (b) Falling profi tability ratio (c) Ineffi ciency in services (d) Regional disparities (e) Insuffi cient resource mobilization (f) Insuffi cient banks operating in rural areas.

Th e Reserve Bank of IndiaCentral Bank 1. Every country has an apex banking institution whose functions are to supervise, regulate and control

the activities of the commercial banks as well as fi nancial institutions. Its functions are: (a) Bank of issue (b) Banker and fi nancial adviser to the state and central govt. (c) Banker to the banks (d) Custodian of foreign exchange reserves (e) Lender of last resort (f ) Clearing house function (g) Controller of credit. 2. Reserve Bank of India is the central bank of our country. 3. RBI Act was passed in 1934 and RBI started is functioning from 1st April, 1935. 4. RBI was nationalized in 1949.

Monetary Policy 1. It refers to those policy measures which are taken by the RBI to control and regulate money supply. 2. Objectives of Monetary Policy in India are: (a) To regulate monetary growth so as to maintain price stability. (b) To ensure adequate expansion of credit to assist economic growth.




(c) To encourage in priority sector. (d) To strengthen the banking system. 3. Credit control Instruments of RBI (A) Quantitative Instruments

Instruments Rate

July 2013 2014

Bank Rate 10.25% 9%

Open market operations -

Variable Reserve Ratio

a. Cash Reserved Ratio (CRR) 4% 4%

b. Statutory Liquidity Ratio (SLR) 23% 23% (22.5% in June 14)

Repo Rate 7.25% 8%

Reverse Repo Rate 6.25% 7%

(B) Qualitative Instruments 1. Marginal Requirement 2. Consumer Credit Regulation. 3. Issue of Directives. 4. Rationing of credit 5. Moral Suasion. 6. Direct Action


SOME IMPORTANT DATA FOR EXAMINATION POINT OF VIEW

Role of Diff erent Sectors in IndiaOccupational Structure

S.No. Sector %

2009-101 Agriculture 53.2

2 Industrial 21.5

3 Service 25.3

Agriculture • Providing Employment : 53.2% (2009-10) • Share in NY : 14% of GDP in 2011-12 • Share in Export : 12% (2010-11) • Productivity Increases – (i) 1950 – 51 - 51(m.t) (ii) 2011 – 12 - 259.3 (m.t)

× 5

• Green Revolution started in 1966

Industry • Share in GDP – 30% • Share in Export – 2/3rd of export earnings.

2011-12

• Providing employment – 21.5% of labor force (2009-10)

Industrial Growth Rate

Year 1950-65 1965-80 1980-91 1991-00 2001-02 2002-07 2007-12

Growth Rate (%) 8 4.1 7.8 5.7 2.1 8.7 7.4

• Eleventh plan targets industrial growth of 10% and manufacturing growth of 12% and actual growth was 7.4%.

• Period of Industrial retrogression & recession – 1965-80 • Mahalanobis Model: For promotion of capital goods industries in 2nd plan. • High Capital Output Ratio 2.95 → 3.9 → 4 1st Plan 7th Plan 8th , 9th , 10th & 11th Plan • In March, 2009, there were 1.07 lakh sick units out of which 96% are SSI.

Service Sector • Share in GDP – more than 56% (2011-12) • Employment – 25.3% of labour force (2009-10) • Export – 1/3rd of total export (2010-11)

* India ranks 10th in the list of services exporters.



National Income in IndiaNational Income (NNP)

1950 – 51 2010 – 11

2,55,000 crore 45,72,000 crore

Growth rate of NY First 30 years (1950-51 to 1980-81) 3.2% p.a. Next 30 years (1980-81 to 2009-10) 6.6% p.a. Between 1991-92 to 2009-10 7.3% p.a.

Gross Domestic saving as a proportion of GDP 34% in 2010-11

Gross Capital formation 36.8% in 2010-11 35% in 2011-12

Tax System Tax revenues – 16% of NY Total tax collection – 14,60,000 crore Ratio of direct to indirect taxes – 41:59 Direct Taxes – 7% of GDP 2011-12

Service Tax – 1.2% of GDP Service Tax – 11% of Tax Revenue


SELECTED ASPECTS OF INDIAN ECONOMY

Population • As per census 2011 population of India was 121.02 Cr. • 2nd largest population in world. • Every 6th person of world is Indian • India has 2.4% of world area to support 17.5% of world’s population. • 1921 – year of great divide • Population Growth Rate between 2001-2011 was 1.64%.

Year BR DR

1950-512011

39.921.8

27.47.1

• Density of Population – 382/sq. km. • Sex Ratio – 940/1000 males • Life expectation at birth 63.5 years • Literacy ratio – 74%

2011

Problem due to Population

Particulars 1951 2011-12

Food Supply (mt) 51 260

Population (ml) 361 1210

Per capital availability of food (gm.) 395 gm 463 gm

• Unproductive Population – (below 15 yrs. and above 64 yrs.) 37% • Working age group (15 to 64 yrs.) 63% • New population policy (NPP) announced in 2000.

Tenth Plan Target

2007 2012

IMR (Infant mortality rate) 45 28MMR (Maternal Mortality Rate) 2 1

• IRM - 44 (2011) • MMR - 2.12 (2009)

per 1000 live births

Poverty: Data given be Tendulkar Committee is accepted by Planning Commission

Year % of poor population (MRP method)

1993-94 45.3%

2004-05 37.2%

2009-10 29.8%

per 1000 live births



• Th e Human Development Report (HDR) 2010 measures poverty in terms of new parameter namely Multidimensional Poverty Index (MPI). MPI shows the share of population which is multidimensionally poor in terms of living standard, health and education. According to MPI, India has a poverty index of 0.283.

• Human Development Index (HDI) – India’s rank is 136 out of 187 countries in UNDP report 2013 and its HDI index is 0.554 in 2012.

• Gini Index used for measuring Inequalities of Income. For India Gini Index is 0.368 (2000 – 2010).

Unemployment

Unemployment rate UPS CWS CDS

2009-10 2 % 3.6% 6.6%

(NSSO – 66th Round)

Infrastructural ChallengesEnergy • 3% rise in Industrial production is accompanied by 2% rise in energy consumption. • India is world’s 5th largest energy producer (4% of world’s total energy production) • India is world’s 4th largest consumer of energy (6% of world’s total energy consumption) • Sources of energy – Commercial Source – 77% (Oil and gas, coal, hydro-electricity & nuclear power) – Non-Commercial Source – 23% (Firewood, dung cakes and agricultural waste) Consumption of Energy Industry – 37% Domestic – 25% Agriculture – 21% Commercial Establishment – 10% Others – 7% Growing Import Bill 1973 → 1990-91 → 2011-12 1100 → 10816 → 6,00,000 (cr. Rupees)

×10 ×55

• Petroleum, oil and lubricants (POL) constitute around 35% of India’s import bill.

Transmission and Distribution loss: National Average – 20% • PLF (Plant Load Factor) – Lowest in East region – 62% – Highest in Southern region – 81%

2012-13

• PLF SEB Central Sector Private Sector 65% 79% 79% (2012-13)

19% of villages not electrifi ed.


35SELEC TED ASPEC TS OF INDIAN ECONOMY

Installed Capacity (Electricity) 1950-51 2011-12 2300 MW 2,36,000 MW

Power Generation Water (Hydel) - 12.5% Coal, Oil & Gas (Th ermal) - 72.5% Radio active (Atomic) - 3% Wind, bio-gas, waste etc. (others) - 12%

Railway • World’s 4th largest

Two Segment

Freight Passenger 70% revenue 30% revenue

Total Route length – 64 thousand K.M. (21 thousand K.M. electrifi ed) 2011-12

In 2011-12 Railways – 8200 million passengers carried 970 million Tones of freight traffi c

Road Transport - World’s 3rd largest Route Length - 4.69 million Kms. NH Route Length - 76,800 Kms. & Carry more than 40% of the total road traffi c.

Water Transport

Inland Water Transport Shipping

Coastal shipping Overseas shipping

• Navigable waterways - 14,500 kms • Coastline – 7,517 kms. • 12 major ports and 200 minor ports • 50 million tones of cargo moved by inland water transport (per annum). • 1.02 million GT (Gross Tonnage) in 2011. • 95% of India’s global merchandise trade is carried through sea route • Th e country has one of the largest merchant and shipping fl eet among developing countries. • India has the fl eet at the end of March 2011 was 1071 vessels (1% of world fl eet) • Total traffi c carried by major ports in 2011-12 was 560 million tonnes. • 12 major ports carry about 64% of total traffi c. • Kandla port is top traffi c handler for each of the last 5 years.



Communication

A. Postal Services • Started in 1837 India’s postal network is the largest in the world. • 1.55 lakh post offi ces out of which 1.4 lakh (90%) are in the rural areas. • On an average, a post offi ce serves 7814 persons and 21.23 sq. km area.

B. Telecommunication • 2nd largest in the world after China. • Tele-density (Telephone Penetration Rate)-

Whole India - 76.75% Rural Area - 40.6% Urban Area - 159%

October, 2012

Health

2012

Health Centers 1,76,820

Dispensaries + Hospitals 38,832

Beds 11,75,374 (year 2008)

Nursing Personnel 18,94,968 (year 2010)

Doctors 9,22,177

Bed Population Ratio 1.03 per 1,000 population

Education Colleges - 35,500 Universities - 690 IIT - 13 IIM - 13

2011

Literacy ratio - 74% (Males - 82% & Females - 65.5%) in 2011. Education programme –

Programme Launched in the year

NPE 1986

SSA 2001-02

NPEGEL 2001-02

KGBV 2004-05

PSK 2004-05

Budget and Fiscal Defi cits Public Expenditure was 28% of GDP in 2012-13 Fiscal defi cit = Budget Defi cit + borrowings & other liabilities (5.7% of GDP in 2011-12) Budget Defi cit = Total Exp. – Total Receipt


ECONOMIC REFORMS OF INDIA

FDI• Drugs and pharmaceuticals, hotels and tourism, courier services, oil refi ning, mass rapid transport system,

airports, business to business E-commerce, special economic zones industries and certain telecom industries, internet services providers, net providing gateways, infrastructure providing dark fi ber (Infrastructure provider category I), electronic mail and voice mail, advertising fi lm sector, tea and for development of township (however with prior approval).

100%

• Private Sector Bank, telecom sector 74%

• Defense production, Insurance, Print –Media 26%

• Multibrand retail business 51%

Globalization • Convertability of rupee in Aug. 1994 (Current account) • Foreign Currency Reserve 1 bn $ in 1991 to 294 bn $ at the end of March 2012 • IMF established in March, 1947 • IMF have 188 member countries • World Bank established in 1945 and have 188 countries as member. • WTO established 1-1-1995 and have 159 countries as member.

Money and BankingTh e 1979, RBI classifi ed money supply in four categories:

M1 M3

1. Narrow Money2. It exclude time deposit with the bank

1. Broad Money2. It includes time deposit with the bank

Refi ned Version (1998) NM1 = CC + DD + other deposit with RBI NM2 = NM1 + Time liabilities portion of saving deposit with bank + certifi cates of deposit issued by banks

+ term deposits maturing within a year excluding FCNR (B) Deposits. NM3 = NM2 + term deposit with banks with maturity over one year + Call/Term borrowings of the banking

system.

At the time of Independence • India had 645 banks having more than 4800 branch offi ces. • Th ese banks generally catered to the needs of industries and that too big ones other priority sectors

like agriculture, small-scale industries, exports were almost neglected. • To overcome the defi ciencies, the government announced the nationalization of 14 major banks from

July, 1969. • Six more bank were nationalized in 1980 • Two banks were merged in 1993, so at present there are 19 nationalized banks.



1. Expansion of BranchTotal no. of branches has increased from 8,262 on June 30, 1969 to 97,111 in 2012. Th e population per bank offi ce has declined from 55,000 in 1969 to 12,500 in 2012.

2. Branch in Rural & Unbanked Area% of bank offi ce in rural areas increased from 22% in 1969 to 37% in June, 2012.

3. Bank Lending Increased • 1969 - ` 3399 cr. • Dec., 2012 – 50,00,000 cr.

3. Deposit MobilizationAggregate Deposit of commercial banks increased from ` 4665 cr. in 1969 to ` 60,00,000 cr. in 2012. Maharashtra leads all other states in deposit mobilization and Account for More 23% of Agg. Deposit.

4. Lending to priority sector increased from 15% in 1969 to 41% in March 2012

5. Monetary Rates of RBI:

Monetary variables (Rate) July 13 Jan. 14

Cash Reserve Ratio (CRR) 4% 4%

Statutory Liquidity Ratio (SLR) 23% 23% (22.5% in June-14)

Bank Rate 10.25% 9%

Repo Rate 7.25% 8%

Reverse Repo Rate 6.25% 7%


ABBREVIATION

NSSO National Samaple Surrey Organization

HDI Human Development Index (longevity, knowledge, standard of living)

NABARD National Bank for Agriculture and Rural Development (1982)

RRBs Regional Rural Banks (1975)

BHEL Bharat Heavy Electrical Limited

BIFR Board for Industrial Financial Reconstruction

MODVAT Modifi ed Value Added Tax (1986-87)

CENVAT Central Value Added Tax

MMR Maternal Mortility Rate

MGNREGS Th e Mahatma Gandhi National Rural Employment Gaurantee Scheme (2006)

SJSRY Swarn Jayanti Shahri Rozgar Yojna (Dec. 1997).

FRBM Fiscal Responsibility and Budget Management (Introduced in 2000 and passed in 2003)

TRAI Telecom Regulatory Authority of India

MRTP Monopolies and Restrictive Trade Practices

SFRA Act Securitisation and Reconstruction of Financial Asset Act.

ESI Act Enforcement of Security Interest Act.

NIXI National Internet Exchange India

IDA International Development Association (1960)

MIGA Multi-Lateral Investment Guarantee Agency (1988)

ICSID International Centre for Settlement of Investment Disputes (1966)

IMF International Monetary Fund (Started Operation in March, 1947)

IBRD International Bank for Reconstruction and Development (1945)

WTO World Trade Organisation (Ist Jan, 1995)

GATT General Agreement on Trade and Tariff

PLF Plant Load Factor

RGGV Rajiv Gandhi Gramein Vidhyutikaran (2005)

AMPC Automatic Mail Processing Centres

EPCG Export Promotion Capital Good Scheme (For import of capital goods)

FERA Foreign Exchange Regulation Act (1973)

FEMA Foreign Exchange Management Act (1999)

BALCO Bharat Aluminum Company Limited

IPC Indian Petrochemical Corporation.

VSNL Videsh Sanchar Nigam Limited

Note: If there is any typing error in data refer ICAI Book.


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