quick revision notes (cpt economics december 2014) ready

ECONOMICS QUICK REVISION NOTES FOR CPT The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups--Henry Hazlitt

Shandar Ahmed 20-Nov-14

In Association with

PREFACE

Dear students,

It has been a wonderful experience teaching you all. I know that you all are working very hard,

preparing for the final battle and I believe that each one of you would prove yourselves

beyond everyones expectations.

Just remember that every examination is designed to test your presence of mind along with

your knowledge about the respective subjects. Strategy should be your biggest weapon. I hope

that you all are working on the strategies that I had presented you with, in the class i.e. to

solve as many MCQs as possible. Solving MCQs will help you tremendously when it comes to

time management and accuracy, that reading alone can never impart.

I have prepared this Last Minute Quick Revision Notes to help you consolidate all the ideas

that we have already discussed in the class. It will help you revise both Micro and Macro

economics in under two hours. I suggest you, to please keep this revision note handy while

solving MCQs and readily refer to it over and over again. This process will help you retain facts,

data and concepts.

Remember, it all starts with Believing. Believe in yourself and the world will be at your feet. I

am available to you till the day of your examination, so please feel free to contact me in case

of queries related to the subject. My blessings will always follow you.

ALL THE BEST

Shandar Ahmed

[email protected] +91 9990740183

Compiled by Shandar Ahmed Yeshas Academy in association with ETEN CA Page 1

MICRO ECONOMICS

Chapter 1 Introduction to Micro Economics

The word Economics is derived from Greek word OIKONOMIA which means HOUSEHOLD.

Economics answer to the problem faced by mankind due to:

1) Unlimited Wants;

2) Scarce resources;

3) Alternate use of Resources.

Central Economic problems is to answer:

1) What to produce and how much to produce?

2) How to produce?

3) For whom to produce?

4) What provisions should be made for future generations (Sustainable Development)?

Adam Smith: Economics is an inquiry into the nature and causes of wealth of the nation. He is considered as the

father of Modern Economics.

J.B.Say: Science which deals with wealth.

Alfred Marshall: Economics is the study of Mankind in the ordinary business of life.

Lord Robbins: Economics is a science which studies human behaviour as a relationship between unlimited ends,

and scarce means which have alternative uses.

A.C.Pigou: The range of our inquiry becomes restricted to that part of social welfare that can be brought directly

or indirectly into relation with the measuring rod of money.

Paul A. Samuelson: He defines economic growth in terms of Dynamic Growth and development.

Jacob Viner: He said Economics is what Economist does.

Henry Smith: Economics is the study of how civilized society obtains the share of what other people have

produced and of how the total product of society changes and is determined.

Economics is Pragmatic or Positive Analysis but it is not Practical Science

A pragmatic analysis is only concerned about the fact of the matter and defines What is.

A Normative analysis passes Value Judgment or gives Opinions or Prescribes; It states What ought to

be.

Deductive Method: Logic proceeds from General to Particular (DGP)

Inductive Method: Logic proceeds from Particular to General (IPG)

Both Deductive and Inductive Models are complementary to each other

Under Micro Economics we study:

1) Theory of Price or Product Pricing;

2) Theory of Consumer Behaviour;

3) Theory of factor Pricing;

4) Theory of Study of a single firm.


Under Macro Economics we study:

1) Theory of National Income and Output;

2) Theory of Unemployement;

3) Theory of Money Supply;

4) Theory of General Price Level (Inflation);

5) Theory of Economic growth and development;

6) Theory of International Trade.

Both Macro Economics and Micro Economics are complementary to each other.

The Word Macro is derived from Greek MAKROS means Large

PRODUCTION POSSIBILITY CURVE

Production Possibility Curve is also known as Production Possibility Frontier or Production Transformation

Curve.

It is Downward Sloping or Negatively Sloped

It is based on the fundamental premise of scarcity of resources

It is CONCAVE to the origin because of increasing OPPORTUNITY COST

It will be a STRAIGHT LINE if opportunity cost is CONSTANT

It will be CONVEX if Opportunity cost is Decreasing

If an economy produces on the PPC curve then it can be said that that there is no unemployement/full

employement/no underemployement. It is a productively efficient point.

A point outside PPC is not possible with the current resources

A point inside PPC curve means underemployement/less than full employement/unemployement

There will be an Inward/Leftward shift in the PPC due to natural calamity like earthquakes, floods, etc.

There will be a Rightward/Outward shift in PPC due to improvement in technology, increase in population,

greater capital formation, discovery of new resources.

Movement along the PPC is known as Trade Off.

Types of Market/Economy

In an Open Economy there is no restriction on Export and Import

A Command Economy is system where the government, rather than the free market, determines what goods

should be produced, how much should be produced and the price at which it must be sold

A Socialist Economy is an economic system based on State ownership of capital. It is an economic system which

is heavily regulated and controlled by the government.

A Planned Economy is an economic system in which decisions regarding production and investment are

embodied in a plan formulated by a Central Authority i.e. Government

A Market Economy (Capitalist Economy) also widely known as a "free market economy", is one in which goods

are bought and sold and prices are determined by the interplay of Demand and Supply. In Market Economy

there is Consumer Sovereignty.

Note: Command economy, Planned economy, Socialist economy have very similar characteristics.


CHAPTER 2 Theory of Demand and Supply

Law of demand states that the quantity demanded and the price of a commodity are inversely related, other

things remaining constant (Ceteris paribus).

Demand is quantities of goods and services that consumers are willing and able to purchase at a particular price

during a period of time.

Demand is a Qualitative concept and not Quantitative

Price of a good and Quantity demanded are Inversely proportional/Negatively related/Indirect relationship

Complementary Goods: Inverse Relationship/ Indirect/ Negative relationship between Quantity and Price.

Substitute Goods : Direct/Positive Relationship between Quantity and Price

Income Increases---- Demand for Normal Goods (e =1) and Luxury Goods (e > 1) increases and vice-versa

Income Increases----Demand for Inferior goods decreases and vice-versa

Income Increases---- Demand for necessities remain inelastic in the beginning and then it becomes Perfectly

Inelastic

Positive change in tastes and preferences-----Increases Demand

Negative change in tastes and preferences----Decreases Demand

Increase in future expected rise in price---- Increases demand during current times

Fall in future expected price----- Decreases demand during current times

When Price of any good decreases----- Real Income of Consumers Increases and vice versa

Exceptions to the Law of Demand:

1) Conspicuous/Veblen/Prestigious goods----Price increases and Quantity demanded also increases

2) Giffen Goods (Some inferior goods)---- Price increases Quantity demanded also increases

3) Speculative Goods: Even if price rises, quantity demanded rises

Market Demand is a Horizontal Summation of Individual demand curves

PRICE EFFECT = SUBSTITUTION EFFECT + INCOME EFECT (The reason why demand curve slopes downward)

Expansion and Contraction in demand happens due to change in Price alone (called as change in Quantity

demanded).

In Expansion and Contraction the slope of demand curve does not change.

Increase and decrease in demand happens due to factors other than price, like Income, change in price of

substitute or complementary goods, change in taste and preferences etc. (termed as change in demand)

In increase or decrease in demand the slope of demand curve changes (dd curve shifts leftward or rightward)

Elasticity is the responsiveness in quantity demanded due to change in factors affecting demand

Price Elasticity measures change in quantity demanded as a result of change in price

Income Elasticity measures change in demand due to change in income of individuals

Cross Elasticity measures change in demand due to change in price of Substitute and Complementary goods.

In case of e= (Perfectly Elastic demand) the demand curve is a Horizontal Straight line, parallel to X-axis and

touching the Y-axis.

In case of e = 0 (Perfectly Inelastic demand) the demand curve is a Vertical line, parallel to Y-axis and touching

the X- axis

Methods to Measure Elasticity:

1) Proportional Method: % change in quantity demanded = Q0 Q1 X __P0__

% change in price Q0 P0 - P1


2) Total Outlay or Expenditure Method: E= 1 ----Change in price does not affect total expenditure

E>1 ---- Rise in Price leads to fall in total Expenditure and vice-versa

E< 1 ----Rise in price leads to rise in total Expenditure and vice-versa

3) Point Elasticity or Geometric Method: Elasticity = Lower segment of the demand curve

Upper segment of the demand curve

4) Arc Method: Elasticity = Q0-Q1 X P0+P1

Q0+Q1 P0-P1

When the change in quantity demanded is very less, we can measure this change on a single point on the

demand curve----- in such a case we use Point Elasticity Method

When the change in quantity demanded is large due to a big change in price, we have to measure this change

over an Arc on the demand curve, between two points---- in such a case we use Arc Elasticity Method.

Please Note: The numerical problem, when asked to solve using Point Method, Proportionate Method Formula

should be applied

Other Factors affecting Elasticity Demand:

1) Availability of Substitutes: If close substitutes are available------ Demand is Elastic and vice-versa

2) Greater proportion of income spent on any good----- Greater would be Elasticity and vice-versa

3) Normal goods have elastic demand and necessities have inelastic demand

4) More number of uses of a commodity---- more will be its elasticity and vice-versa

5) In the long time period demand will be more elastic and vice-versa

6) In case the consumer is addicted to any good---- demand will be inelastic

7) Tied goods will have inelastic demand

8) Goods in the high price range and low price range will have inelastic demand and normal goods will

have elastic demand

Supply

Law of Supply states that, holding all other factors constant, an increase in price results in an increase in quantity

supplied and vice versa i.e. there is a direct or positive relationship between price and quantity supplied, holding all

other factors constant (Ceteris paribus).

Supply is------Amount of goods and services that producers are willing to offer to market at various Prices during a

period of time. It is also a Qualitative Concept

Both Demand and Supply are Flow concept.

Price and Quantity supplied have Direct/Positive relationship.

Determinants of Supply:

1) Price of the Product: Direct/Positive relationship

2) Price of Related goods: Indirect relationship/Negative relationship (It implies, that, if the price of Y

rises, the supply of X will fall because suppliers will shift towards more of supply of Y.

3) Factors of Production: Indirect/Inverse relation between cost of production and Supply (Cost

increases supply decreases and vice versa)


4) Taxes: Indirect/ Inverse relation between taxes and Supply (tax increases supply decreases and vice

versa)

5) Subsidy: Direct/positive relationship (Subsidy increases Supply increases and vice versa)

6) Technology: Improved technology increases supply as cost of production decreases.

7) Since Supply of perishable goods cannot be increased in the short run, thus their supply is

perfectly inelastic.

Expansion and Contraction in Supply happens due to change in Price alone (this change is known as Change in

Quantity supplied)

In case of Expansion or Contraction----the slope of supply curve does not change

Increases and Decrease in Supply happens due to change in factors other than price (this change is known as

change in supply).

In case of Increase or Decrease----- there is a change in the slope of supply curve i.e. the supply curve shifts

either Rightwards (in case of Increase in supply) and Leftwards (in case of Decrease in supply)

Methods to Measure Elasticity:

1) Proportional method: Elasticity= : % change in quantity supplied = Q0 Q1 X P0___

% change in price Q0 P0 - P1

2) Arc Method: Elasticity = Q0-Q1 X P0+P1

Q0+Q1 P0-P1

3) Point Method: Elasticity = dq X p

dp q [Differentiation of quantity(q) w.r.t Price (p)]

In case of Horizontal Supply curve (Parallel to X-Axis)----- Supply is Perfectly Elastic (E= Infinity)

In case of Vertical Supply curve (Parallel to Y-Axis)------- Supply is Perfectly Inelastic (E=0)

When demand curve shifts Rightward-----Supply remaining the same----Both Price and supply increases and vice

versa

When supply curve shifts Rightward------- Demand remaining the same -----Price decreases but supply increases

and vice versa

When both demand and supply curve shift by the same amount, quantity may increase or decrease as the case

may be, but the price remains same.

Theory of Consumer Behaviour Marginal Utility Analysis was given by Alfred Marshall

Utility is the want satisfying power of a commodity

Two theories comes under Marginal Utility Analysis: 1) Law of Diminishing Marginal Utility

2) Law of Equi-Marginal Utility

Law of Diminishing Marginal Utility states that, as one consumes more of any commodity the satisfaction that

he/she derives from the consumption of one additional unit (Marginal Utility) goes on diminishing.

Marginal Utility Analysis is based on Cardinal Principle (something that can be measured and quantified in

numerical terms or monetary terms)

When TU increases------ MU diminishes, but remains positive.

When TU is Maximum------ MU is Zero

When TU starts to fall (diminishes)------------ MU becomes Negative

Consumer Surplus(given by Alfred Marshall) = MU Price OR TU (MU X No. of Units consumed)

Consumer is at Equilibrium when : MU = Price

MU curve is also many a times referred to as Demand Curve


Indifference Curve Analysis (given by Hicks and Allen) Indifference Curve is based on Ordinal concept, meaning utility cannot be measured in numerical terms but can

be ranked and compared.

It is based on consumer preferences and thus considered to be a superior utility analysis.

Indifference curve is also known as ISO-Utility Curve

Every point on the Indifference curve gives the same level of satisfaction

Indifference curve is CONVEX to the origin because Marginal Rate of Substitution (MRS) is decreasing

MRS is the rate at which a consumer is ready to give up one good in exchange for another good while

maintaining the same level of utility (satisfaction).

Indifference Curve is a Downward Sloping curve (Negatively Sloped)

If MRS is constant-------- Indifference curve will be a STRAIGHT LINE (it happens when two goods are PERFECT

SUBSTITUTES)

When two goods are PERFECT COMPLEMENTARY goods ---------- MRS will consist of two straight lines which will

be RIGHT ANGLED or L shaped.

Important Properties of Indifference Curve:

1) It slopes Downward to the right i.e. negatively sloped

2) Two Indifference Curve will never intersect each other (due to different levels of satisfaction)

3) Indifference Curve is always Convex to the Origin due to falling MRS

4) A higher Indifference Curve will represent higher level of satisfaction and vice versa

5) Indifference Curve will never touch either X-axis or Y-axis.

An Indifference Map depicts complete picture of consumers tastes and preferences.

A BUDGET LINE---- depicts combinations of TWO goods that a consumer can buy with his given money income.

A point outside Budget line ----------- Shows Overspending

A point inside Budget line ------------- Shows Under spending

Any point anywhere on the Budget Line -------- Shows same amount of money spent.

Budget Line is a result of:

1) Price of Commodity X

2) Price of Commodity Y

3) Income of the consumer

A consumer is at Equilibrium when he/she is deriving the maximum possible satisfaction. It happens when

Price Line or budget Line is Tangent to the Highest Possible Indifference Curve i.e. Slope of Indifference Curve

= Slope of Price Line or Budget Line

Consumer Equilibrium: MUx = Px

MUy Py


CHAPTER- 3 Theory of Production and Cost

Production is defined as creation or addition of utility.

Man cannot create matter but can add or create utility

Characteristics of Land:

1) Its a free gift of nature;

2) Its immobile

3) Its usefulness depends on human effort

4) Its limited in supply, i.e. it perfectly inelastic (supply curve will be a vertical straight line)

5) Its indestructible, meaning it cannot be destroyed

Characteristics of Labour:

1) Its directly connected with human effort;

2) Its highly perishable, meaning one cannot store his/her labour;

3) Its mobile, meaning it can migrate from one place to another;

An entrepreneur is one who initiates any business;

Innovation is the most important function of an entrepreneur as propounded by Joseph Alois Schumpeter.

Production function----Its the relationship between Physical INPUTS and Physical OUTPUT (where Output is a

dependent variable and Inputs are Independent variable), Technology as an input is assumed constant

Short Period Production Function---- At least one factor remains fixed while others are variable

Long Period Production Function----- All factors vary in the same proportion.

Time concept in Production Function was conceived by Alfred Marshal

CobbDouglas Production function:

1) Q= K X La X C 1-a (Where; K and a are Positive Constants, L stands for units of Labour and C stands

for amount of Capital)

2) It gives Constant Returns to Scale

3) It concludes that----- Labour consists of 3/4th and Capital consists of 1/4th in a Production function

4) The production function given by them is LINEAR and HOMOGENEOUS implying Constant Returns to

Scale

Average Product= Total Product / Units of Variable inputs (Q)

Marginal product = Change in Total Product/ Change in Input (MP= TPn - TPn-1)

Total Product is the Total Output

Law of Variable Proportion:

1) Point of INFLECTION is a point on TP curve when MP is Maximum

2) Point of SATURATION is a point where TP is Maximum after which it starts falling

3) MP curve cuts AP curve from above, where AP is maximum (at this point AP=MP)

4) When AP is rising------ MP is rising initially and then it is falling (MP> AP)

5) When AP is falling----- MP is Falling (AP> MP)

6) When TP is rising-----MP and AP is rising initially and then they start to fall

7) When TP is Maximum, MP is Zero

8) When TP starts to fall, MP becomes negative

9) A firm must produce within Stage II (as it is optimally utilizing its fixed factors)


The Long Run Production Function goes through 3 stages:

1) Increasing Returns to Scale (Output increases more than proportionate to the increase in Inputs)

2) Constant Returns to Scale (Output increases proportionate to the increase in Inputs)

3) Diminishing or Decreasing to Returns to Scale (Output increases less than proportionate to the increase in

Inputs

In case of Negative Returns to Scale, Output decreases when Input is increased (Marginal Product becomes

Negative)

Internal Economies of Scale affects a single firm

External Economies of Scale affects a group of firms

ISO-Quant Curve

It represent Equal Production Level, thus it is also known as Equal production curve

It has all the characteristics of an Indifference Curve.

It may be defined as a curve showing various combinations of two factors (Capital and Labour) that can produce

a given level of output.

It is based on the principle of Cardinality because the Output can be measured.

Concept of Total Revenue(TR), Average Revenue(AR) and Marginal Revenue(MR) TR= Price X Quantity

AR= TR/Quantity

MR= Change in TR/Change in Output (Q) i.e. TPn - TPn-1 TR is an inverted U shaped curve

Both AR and MR have Negative slope

When MR= 0 ---------------- TR is Maximum

When MR is Negative TR is falling

MR = AR X e-1

e

AR curve is also commonly referred to as Demand Curve

Theory of Costs

Explicit Cost: It is also known as Accounting Cost. It involves Cash Payments made to the outsiders or third

party for goods and services

Implicit Cost: It is also known as Non-Accounting Cost or Opportunity cost or Alternative cost. It involves the

cost involved when resources owned by the entrepreneur himself is used in the production process. It does not

involve any cash payment.

Economic Cost = Explicit Cost(Accounting Cost) + Implicit Cost (Non-Accounting Cost)

Economic Profit = Total Revenue Economic Cost

When e>1-------MR is Positive and TR is rising When e=1 ------MR is Zero and TR is Maximum When e


Accounting Profit = Total Revenue Explicit Cost (Accounting Cost)

Accounting Profit will always be more than Economic Profit (if there is any Implicit Cost)

Zero Economic Profit also means Normal Accounting Profit or Accounting Profit

Direct cost or Traceable cost is a cost that can be identified to a particular good or activity (it is directly related

to production)

Indirect Cost or Non-Traceable cost is a cost that cannot be identified to any particular good or activity

Total Variable Cost changes with change in output; it starts from origin.

Total Fixed Cost is also known as Overhead Cost; it does not change with the change in output. TFC curve is

Horizontal or Parallel to X-axis

Average Variable Cost is the Variable Cost per Unit of Output (TVC /Q). AVC curve is U shaped due to Law of

Variable Proportions)

Average Cost Curve goes on falling with the increase in output (but it will never be Zero, therefore it will never

touch the X-axis)

Average Total Cost= Total Cost/Q or AFC + AVC

Average Total Cost (ATC) Curve is also U shaped due to Law of Variable Proportions.

Marginal Cost is the change in total cost due to change in Output by one unit (TCn TCn-1 ) or Change in Total

Cost Change in Output

Relation between ATC,AVC and MC curve:

1) AVC curve never touches ATC curve due to Fixed cost

2) MC curve cuts ATC & AVC curves from below from their Minimum point

Relation between AC Curve and MC Curve:

1) When AC curve falls --- AC > MC

2) When AC curve rises --- MC > AC

3) AC curve= MC curve when AC is minimum

4) MC curve cuts AC curve from below from its Minimum Point

Cost Function is the mathematical relation between Cost and its various determinants.

Cost is a Dependent Variable

Independent Variables that affects costs are: Size of plant, size of output, time period, managerial efficiency,

technology, labour etc.

Long Run Average Cost Curve (LAC):

1) It is also known as Envelop Curve or Planning curve

2) It is made up of several Short Run Average Cost (SAC) curves

3) In the long run a firm will produce at a point where LAC and SAC (Short run Average Cost Curve) are

minimum.

4) When LAC declines----- SAC is Tangent to the falling portion of the LAC curve;

5) When LAC is rising------ SAC is Tangent to the rising portion of the of the LAC curve

6) LAC decreases due to Increasing Returns to Scale

7) LAC rises due to Decreasing Returns to Scale

8) LAC is minimum -------- it is due to Constant Returns to Scale

9) If modern technology is used----- LAC will gradually become Flat and it will become L shaped.


Chapter- 4 Price Determination in Different Markets

PERFECT COMPETITION:

1) Many sellers and buyers

2) Product Homogeneity or no product differentiation

3) No price discrimination

4) Free entry and exit

5) Firm and industry are different

6) Demand curve is Perfectly elastic, i.e. horizontal and parallel to X-axis

7) AR=MR=P

8) MC curve cuts MR curve from below

9) If MR>MC; Increase output and if MC > MR, decrease output

10) One must always try to achieve MR = MC (also known as point of profit Maximization)

11) Firms in this market are Price Takers

12) Firms in this type of market will only earn Normal Profit

Conditions for Profit and Loss:

1) AR > AC or ATC --------- Abnormal of Supernormal Profit

2) AR = AC or ATC --------- Normal Profit

3) AR < AC or ATC --------- Abnormal Loss

NOTE: The above conditions for Profit is valid for any type of Competition

Production or Shutdown decision to be taken by a firm in the short run:

1) P = AVC (Shutdown point). But the firm must continue production as it is able to fully recover at least its variable

factors used in the production process.

2) P > AVC ------- The firm must continue producing as it is able to recover some of its fixed factors apart from its

Variable factors

3) P < AVC -------- The firm must discontinue production or shutdown as it is not able to recover even its variable

factors.

MONOPOLY:

1) It means Alone to sell i.e. only one seller

2) Product Homogeneity or no product differentiation (Goods sold are identical)

3) Price Discrimination (it will depend on elasticity of demand)

4) No free entry for any player or competitor

5) No difference between firm and industry

6) Downward sloping and less elastic demand curve

7) Cross Elasticity of demand in Monopoly is always Zero (as there are no substitutes available)

8) A Monopolist will charge High price where demand is Inelastic and lower price where demand is Elastic

9) A Monopolist can determine either Price or Output and not both

10) A Monopolist is a Price maker (he will sell his products at a price determined by him and not by the market)

11) Pigou classified three degrees of price discrimination i.e.:

First- a monopolist will take away all of consumers surplus;

Second- a monopolist will take away only a part of consumers surplus and


Third- price will vary in different markets due to various attributes like location or consumer segments.

MONOPOLISTIC COMPETITION:

1) Large number of small sellers and buyers

2) Free entry and exit for other competing firms

3) Selling similar but not identical products, meaning there is some sort of Product Differentiation

4) Very Close substitutes are available

5) Its a Non-Price Competition. Advertisement plays a very important role

6) There is no Price Discrimination (Firms charge equal price for same goods)

7) Firm and Industry are Different

8) Both AR and MR curves are downward sloping, but AR is more elastic than MR

9) Demand for products sold in this type of market will be highly elastic (as large number of Substitutes are

available)

10) Any firm under Monopolistic Competition has always Excess Capacity

11) Firms in this market are Price makers

OLIGOPOLY:

1) There are very few players in the market (not more than 10 players)

2) When there are only TWO players, it is termed as Duopoly

3) In a Pure Oligopoly there is product homogeneity, meaning no product differentiation

4) Firms are dependent on each others reactions

5) It is also a Non-price competition and so advertisements play great importance

6) The Demand curve is KINKED or there is Indeterminateness of demand curve (Price Rigidity)

7) Above the Kink Elasticity will be greater than one (e>1) and below the Kink it will be less than one (e


MACRO ECONOMICS Chapter- 5

Indian Economy A Profile Percentage of people employed in different sectors:

1) Primary Sector: 53.2 percent (Increased)

2) Secondary Sector: 21.5 percent (Increased)

3) Tertiary sector: 25.3 percent (Increased)

Contribution to GDP by various sectors:

1) Primary Sector: 14.1 percent (Decreased)

2) Secondary Sector: 30.2 percent (Increased)

3) Tertiary Sector: 55.7 percent (Increased)

Per-capita income in India is $1410 in 2011, it has grown by around five times in 60 years (avg. annual growth is

3%)

The Real National Income in India has grown by more than 18 times in the last 60 years (avg. annual increase is

4.5 %)

Human Development Index(HDI) consists of following basic indicators:

1) Life Expectancy at birth

2) Literacy

3) Standard of living in terms of per-capita income

In 2013 report India ranks 136 among 187 nations.

Gini Index measures prevalence of inequality. An index of ZERO represents Perfect Equality and an index of

ONE represents Perfect Inequality. India has a Gini co-efficient of .368 (Income inequality has increased in

India)

At present nearly 50 percent of the people are dependent on Agriculture

India is the second fastest growing country in the world after China

For almost three decade 1950- 1980, GDP growth rate was as low as 3.5 percent per annum (Hindu growth rate)

In 2011-12 agricultural exports formed about 12 per cent of the national exports

Green revolution or High Yielding Variety Programme (HYVP) started in 1966 (also known as Wheat revolution)

HYVP was restricted to five crops - wheat, rice, bajra, jawar and maize

National Bank for Agriculture and Rural Development (NABARD) was established in 1982, considered as an

apex bank for agriculture credit.

Regional Rural Bank (RRB): They specifically meet the requirements of the farmers and villages. It was

established in 1975

Measure under Land Reforms:

1) Abolition of Intermediaries or Zamindari system

2) Tenancy reforms

3) Reorganisation of agriculture

Three measures were taken under Tenancy Reforms:

1) Regulation of rent

2) Security of tenure

3) Conferment of ownership rights on tenants


AGRICULTURE

National Policy on farmers 2007--- It include provisions for assets reforms, water use efficiency, use of

technology, inputs and services, good quality seeds, disease free planting material, credit insurance etc

The Rashtriya Krishi Vikas Yojana (RKVY), now merged with MGNREGS

National Food Security Mission (NFSM) was launched in 2007-08its aim is to have self sufficiency in

different food crops like rice, wheat and pulses.

Kisan Credit Card scheme was started in 1998 to provide adequate and timely support for the banking system to

the farmers for their cultivation needs

The National Food Security Mission (NFSM) was launched in 2007-08, to provide self-sufficiency in different

food crops like rice, wheat and pulses

Only 40 percent of the gross cropped area has irrigation facilities

About 60 per cent net sown area are rain fed

In order to address the problems faced by farmers of rain fed areas especially small and marginal farmers,

Rainfed Area Development Programme was launched

Our target was to raise agriculture growth to 4 percent

The growth target for agriculture was set at 4 percent in the 12th five year plan (in the 11th FY plan it has grown

a little over 3 percent).

The Indian Council of Agricultural Research (ICAR) is the apex body for co-ordinating, guiding and managing

research and education in agriculture including horticulture, fisheries and animal sciences in the entire country.

The ICAR has played a pioneering role in ushering Green Revolution and subsequent developments in agriculture

in India through its research and technology development.

The share of agriculture in India's national income has decreased over the years

The area under irrigation has increased over the years in India

Agriculture sector faces the problem of slow and uneven growth, inadequate and incomplete land reforms,

inadequate finance

Regional Rural Banks has been specifically established to meet the requirements of credit of the farmers and

villagers

INDUSTRY

Industry contributes more than two-third to Export Earnings

In March 2009, there were 1.07 lakh sick units out of which more than 96 percent were small units (The causes

of sickness are identified as financial mismanagement, demand recession, labour unrest, working capital

shortage, cost escalations, shortage of raw materials, uneconomic size, outdated machinery and equipment and

so on.

Main focus on industries started from 2nd Five Year Plan(1956-61) also famously known as Nehru-Mahalanobis

Plan

Mahalanobis model stressed upon the establishment of capital and basic goods industries

Basic goods industries examples are minerals, fertilizers, cement, iron and steel, non-ferrous basic metals,

electricity etc.

Capital goods industries examples are machinery, machine tools, rail-road equipments etc.

Three Steel Plants were set up in the public sector at Bhilai, Rourkela and Durgapur under the 2nd Plan

The industrial sector faced the process of retrogression and deceleration during 1965-1980

In March 2011, the number of Central Public Sector Enterprises (CPSEs) increased to 248 with a cumulative

investment of about Rs. 6,66,800 crore


Micro, Small and Medium Enterprises Development (MSMED) Act was passed in 2006

India had an Incremental Capital Output Ratio(ICOR) of around 4 during Eighth, Ninth, Tenth and Eleventh Plans

(ICOR has increased over the years)

The industry grew at an annual average rate of about 7.4 per cent as against the target of 10 per cent during

the Eleventh Plan

Nearly 22 percent of working population is engaged in the industrial sector

SERVICE SECTOR

Services account for over one third of total exports of India (2010-11)

Services exports from India comprise services such as travel, transportation, insurance, communication,

construction, financial services, software, agency services, royalties, copyright and licence fees and management

services

Indian services exports recorded a growth of more than 23 per cent per annum during 2001-11. However, due to

uncertainty in the global economy and weak growth in advanced economies, services export showed a lower

growth of less than 15 percent in 2011-12

It the list of export of commercial services India is comes at 12th position

India has the third largest scientific and technical manpower in the world

The Eleventh plan aimed at an annual average growth rate of 9.4% and actual growth rate is a little less than

10%

The service sector in India now accounts for 55.7 percent of GDP

Nearly 25 percent of working population is engaged in the service sector

NATIONAL INCOME

National Income is measured at NNP at Factor Cost (NNPFC)

GDPMP = GDPFC + Net Indirect Taxes( Indirect Tax Subsidies)

NDP = GDP - Depreciation (Capital Consumption)

NNP = NDP + NFIA (Net Factor Income from Abroad)

GNP = GDP + NFIA

GDPMP = GNPMP if NFIA is zero

GDP = NDP if Depreciation is zero

GDPMP = GDPFC if Net Indirect Taxes is zero

National Income can be measured through three ways:

1) Value Added Method of Production Method or Net Output Method or Industry of Origin Method (They all

mean one and the same thing).

2) Income Method

3) Expenditure Method

In Income method we do not include(exclude) the followings:

1) Transfer income like pension, unemployment allowance, Scholarships etc.

2) Illegal incomes, windfall gains, income from gambling

3) Sale proceeds from Second hand machinery (to avoid Double Counting)

4) Self-Consumption Services e.g. Work done by a housewife or any other person without any monetary

consideration)

5) Hobbies


In Expenditure method we do not include (exclude) the followings:

1) Govt. expenditure on transfer payments like pension, unemployement allowance, scholarships etc.

2) Expenditure on raw materials and intermediate goods and services (to avoid double counting)

3) Expenditure on goods produced in the preceding year

By all three methods the National Income obtained would be same if no mistakes are made

Developed countries use Income method to measure national income

The biggest problem while measuring national income in India is Double Counting

National Income is calculated by Central Statistical Organisation (CSO)

TAXATION

There are two types i.e. Direct tax and Indirect tax

A direct tax is generally a tax paid directly to the government by the person on whom it is imposed

In case of Indirect Tax, the burden is passed on or shifted to some other individual

Examples of Direct Taxes are Income tax, gift tax, corporation tax, estate duty, wealth tax, property tax etc.

Examples of Indirect tax are: Sales tax, Service tax, VAT (Value Added Tax), Excise duty, Customs duty,

GST(Goods and Services Tax), Entertainment Tax etc.

Direct Taxes are imposed according to the ability of the person to pay. Therefore these taxes are considered

Progressive.

Indirect taxes are Regressive in nature

Personal Disposal Income = Personal Income Income Tax

FBT (Fringe Benefit tax) was introduced in the year 2005-2006 budget (It has been abolished)

Corporation Tax on Domestic Companies is 30 percent and on Foreign Companies is 40 percent

Estate duty was introduced in 1953 abolished in 1985 (It was levied on the total property passing to the heirs on

the death of a person).

Wealth Tax was introduced in year 1957

Contribution of various taxes to tax revenue in 2011-12:

1) Corporation Tax 37 percent

2) Excise duty 18.9 percent

3) Personal Income Tax 18.6 percent

4) Customs 17 percent

Gift tax was introduced in year 1958, abolished in 1998 and reintroduce in April 2005

Gift exceeding Rs.50,000 is taxable

Peak rate of customs duty in India is 10 percent

Excise duty is charged of Production and Manufacturing

VAT was introduced in 1999 and implemented in April 2005. All states have implemented it.

Benefits of VAT:

1. It reduces Cascading Effect, thereby lowering the overall tax burden 2. A set off will be given for input tax as well as tax paid on previous purchases. 3. Price will in general fall. 4. There will be higher revenue growth. 5. There is a provision of self-assessment. 6. Tax evasion will become difficult and thus there will be more transparency


Service Tax contributes 11 percent towards tax revenues and 1.2 percent towards GDP

Ratio of direct to indirect tax (41%: 59%)

Less than 3 percent of population pay income tax (2.5%)

In India the agriculture income is mostly exempt from the income-tax

Direct Tax is 7 percent of GDP as per 2011-12 data

The proposed Direct Taxes Code and Goods and Services Tax (GST) , aim at simplification of tax laws

The Booth Lingam Committee and Chelliah Committee recommended simplification and rationalization of tax

system in India.

In India there is high tax evasion

Black money or Parallel economy accounts for nearly 50 percent of Indias GDP

Chapter-6

Select Aspects of Indian Economy Population:

Census 2011 is 15th census since 1872

Size of population according to 2011 census is 121.02 crore

India has only about 2.4 per cent of the worlds area and less than 1.2 per cent of the worlds income but

accommodates about 17.5 per cent of the worlds population

India is the 2nd most populous country in the world after China

Every sixth person in the world is an Indian.

Year 1921 is known as Year of Great Divide or Year of Big Divide for Indias population

As per Census 2011, the Growth rate of population during 2001-2011 decade was 1.64 per cent per annum

Birth rate: Kerala has the lowest birth rate of 14.7 (2007) and Uttar Pradesh has the highest birth rate of 29.5

(2007). All India average is 21.8 in 2010 (it is falling).

Death Rate: West Bengal has the lowest death rate of 6.3 and Orissa has the highest death rate of 9.2 in 2007.

All India average 7.1 (it is falling)

The birth rate in India is high because of Predominance of agriculture, Slow urbanization and High incidence

of poverty

Density of population: Bihar is the most densely populated state in the country with 1102 persons living per

sq. km. Among Union territories Delhi has the highest density of population with 11297 persons per sq.km.

National average according to 2011 census is 382 persons per sq.km

Arunachal Pradesh has the lowest density of population of 17 persons per sq. km

Uttar Pradesh is most populous state

India is at the second stage of Demographic transition

National population policy (NPP) was brought in year 2000. Its main objective is to stabilize population by

2046.

Sex ratio: Kerala has the highest Sex ration of 1084 females per 1000 males and Haryana has the lowest Sex

ratio of 877 females per 1000 males. National average is 940 females per 1000 males

Life Expectancy: Kerala has the highest life expectancy at birth at 71.4 years and Madhya Pradesh has the

lowest life expectancy at birth at 58 years(as per 2006 data). All India average is 63.5 years (as per 2011 data)

Literacy Ratio: In 2011, 82 per cent of males and 65 percent of females were literate giving an overall literacy

rate of 74 percent

Kerala has the highest literacy ratio of 92 percent and Bihar lowest of 53 percent.


Infant mortality rate: Highest in Madhya Pradesh (62) and lowest for Kerala (13). National average is 47.

Maternal Mortality Ratio (MMR) is at 2.12 (2009)

Department of Family Planning was established in 1966.

POVERTY

Two types:

1) Relative Poverty- taken in relative terms (related to the income and consumption expenditure distribution)

2) Absolute Poverty- taken in absolute terms (relevant for the less-developed countries)

Gini co-efficient is often used for measuring poverty in relative sense

In India we use the concept of Absolute Poverty for measuring the prevalence of poverty. For this a minimum

level of consumption standard is laid down (known poverty line).

Poverty Line according to Planning Commission: Less than2400 calories consumption in rural areas and less

than 2100 calories consumption in Urban areas.

As per the Tendulkar Committee Report, the national poverty line at 2004-05 prices was a monthly

consumption expenditure of Rs.446.68 in rural and Rs.578.80 in urban areas

National Sample Survey Organisation (NSSO) brings out Poverty data every 5 years.

Poverty can be calculated through two methods:

1) Uniform Recall Period(URP)- It uses 30 days recall/reference period for all items of consumption

2) Mixed Recall Period(MRP)- It uses 365 day recall/reference period for five infrequently purchased non-food

items namely, clothing, footwear, durable goods, education and institutional medical expenses.

According to the Planning Commission, using Mixed Recall period (MRP) 29.8 percent (around 30 percent)

people were below poverty line in 2009-10

Some important Programmes of the Government of India for Poverty alleviation:

1. Pradhan Mantri Gram Sadak Yojna (PMGSY) launched in December 2000

2. Indira Awas Yojna (IAY) launched in May 1985

3. Swaran Jayanti Gram Swarozgar Yojna (SGSY) ,launched in April 1999(formed by combining IRDP

(Integrated Rural Development Programme) which started in 1980 in 5th plan and Million Wells scheme

(MWS)

4. Sampoorna Grameen Rojgar Yojna (SGRY), launched in 2001(formed by combining EAS- Employment

assurance Scheme and JGSY-Jawahar Gram Sammridhi Yojna)

5. Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)- Launched in February 2006

and in 2008 spread all over country to provide 100 days work (not applicable in Jammu and Kashmir)

6. Swarna Jayanti Shahari Rojgar Yojana(SJSRY)- Launched in December 1997

7. National Food Security Mission (NFSM) was launched in 2007-08 to promote self-sufficiency in different

food crops like rice, wheat and pulses.

8. The Rashtriya Krishi Vikas Yojana (RKVY) (now merged with MGNREGS) is being implemented for

integrated development of food crops. The scheme focuses on agricultural mechanization, improvement

of soil health and productivity, development of rain fed farming systems, improvement of agricultural

marketing and pest management.


UNEMPLOYMENT

Types of Unemployment:

1) Seasonal Unemployment- Employement dependent on Season, largely found in agriculture

2) Disguised Unemployment- It is a situation of employment with surplus manpower in which some workers

have zero marginal productivity and their removal will not affect the volume of total output.

3) Voluntary Unemployment- Happens when people who are unwilling to work at the prevailing wage rate

4) Frictional Unemployment- When people are temporarily out of work while switching between jobs or due

to strikes and lockouts.

5) Casual Unemployment- Where workers are employed on a day to day basis (on contract)

6) Structural Unemployment- Happens due to economic progress and innovation in a complex industrial

economy of modern times.

7) Technological Unemployment: Happens due to the introduction of new machinery, improvement in

methods of production, labor-saving devices, etc.

8) Cyclical Unemployment: Happens due to trade cycle i.e. recessionary phases

9) Chronic Unemployment- When unemployment tends to be a long- term feature of a country.

Most of the unemployement in India are Structural

Labour-force Participation Rate (LFPR) is defined as the number of persons in the labour force per 1000

persons

Work Force Participation Rate (WPPR) is defined as the total number of people out of Labour Force who are

actually working or get to work.

Measurement of Unemployment:

1) Usual Status (US): estimates the number of persons who may be said to be chronically unemployed,

generally gives the lowest estimate of unemployment

2) Current Daily Status (CDS): It gives the highest level of Unemployment rate

3) Current Weekly Status (CWS): According to this estimate a person is said to be employed for the week even

if he/she is employed only for a day during any particular week.

According to National Sample Survey Organisation (NSSO) during 2009-10, the unemployment rates according to

the Current Daily Status (CDS) approach is 6.6%.

According to 61st round of NSSO survey, the unemployment rates went up between1993-94 to 2004

In India, 63 per cent population is in the working age group (15-64 years) and it is projected that in 2026 this

will increase to 68.4 per cent.

The projected decline in the dependency ratio (ratio of dependents to working age population) from 0.8 in

1991 to 0.73 in 2001 further declined sharply to 0.59 in 2011.

INFRASTRUCTURAL CHALLENGES:

India is the 5th largest energy producer

India is the 4th largest energy consumer but Indias per capita energy consumption is lowest

Major users of electricity are industry (37 per cent), domestic (25 per cent), agriculture (21 per cent) and

commercial establishment (10 per cent)

Largest energy is produced by thermal sector(72.5%), through hydroelectricity 12.5% , through Nuclear

reactors 3% and through Renewable sources 12%

At present 23% energy is obtained from non-commercial sources or traditional sources

Present Capacity is 236000 MW

Plant load factor (PLF) measure the operational efficiency of thermal plant.


PLF is highest area wise in Southern region and Lowest in North-eastern region

PLF is highest sector wise in private sector and lowest in state electricity board

Rajiv Gandhi Grameen Vidhyutikaran Programme was started in 2005 to provide electricity in villages

Still around 19% villages are not electrified

Nine sites were identified for the development of Ultra-Mega Power Plants (UMPPs) with capacity of 4000 MW

each

Indian railway is Asias largest and worlds 2nd largest rail network and Worlds Largest (in terms of any

department under single management)

In terms of route length, Indian Railways, is the fourth largest railway network in the world

Indian railway has a route length of 64 thousand kms. Out of this 21000 kms is electrified.

Indian road network is 2nd largest networks in the world

The National Highway is just 2% but carry more than 40% of the road traffic.

The road network connects around 65% all weather road

India has 14500 kms of navigable waterways (India has 5 waterways)

India has longest coastline of 7517 km

There are 12 major ports out of which Kandla (Gujarat) is the top traffic handler and 200 minor ports

Indias overseas shipping tonnage has 20th rank

About 95% of India global merchandise is carried through sea route

Domestic and international Air traffic growth is the 2nd highest in world

India has become the ninth largest civil aviation market in the world

Airport authority of India(AAI) manages 125 airports including 16 international airports.

India has become the ninth largest civil aviation market in the world during the period 2006-11

Indian Airlines and Air India were amalgamated with National Aviation Company Ltd. (NACIL) With effect from

November 2010, the name of National Aviation Company Ltd., has been changed to Air India Ltd.

Indian postal department was created in 1837

It is the largest network in the world. There are 1.55 lakh post offices, out of which around 90 per cent are in

the rural areas

On an average, one post office serves 7814 persons and 21.23 sq. km area.

E-post service was started in 2001.

Department of Posts launched a pilot project Project Arrow with the aim of providing fast and reliable postal

services to the consumers.

TRAI(Telecom Regulatory Authority of India) is the regulator of telecom sector

By October 2012 India had more than 935 million connections (wireline and wireless)

Indias telephone network is the second largest in the world after China

Indias telephone network is the second largest in the world (after China) with a tele-density (number of phones

per 100 persons) of 76.75 per cent

While tele density in rural areas is 40.6 per cent, the urban tele density shot up to 159 per cent in October,

2012

The two PSUs in the telecom sector - Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam

Limited (MTNL)

GAGAN Project GPS aided Geo Augmented Navigation Project

NIXI- National Internet Exchange of India

VSAT- Very Small Aperture Terminal

VPT- Village Public Telephone

AMPC- Automatic Mail Processing Centre


EMO- Electronic Money Order

MNP- Mobile Number Portability

SEBI- Securities and Exchange Board of India

DGCA- Directorate General of Civil Aviation

IRDA- Insurance Regulatory and Development Authority

PFRDA- Pension Fund Regulatory and Development Authority

HEALTH

There are 9,22,177 doctors, 1,76,820 health centres, 38,832 hospitals and dispensaries

For good health, two things are essential: (1) balanced and nutritional diet and (2) medical care.

Since Sixth Five Year Plan there has been a change in the whole approach towards health services

National Rural Health Mission was started in 2005 to provide accessible, affordable, and quality health services

to rural areas.

Accredited Social Health Activists (ASHAs) have been selected and trained in health care for various villages.

Pradhan Mantri Swasthiya Yojana has been launched with the objectives of correcting regional imbalances in

the availability of reliable health care services in the country

Janani Shishu Karyakaram (JSSK) is a new initiative launched in 2011 for mother and child care. Under the

programme, free entitlements are given to pregnant women and sick new-born for cashless delivery, drugs and

consumables, diet etc. the main objective of this programme is to bring down Maternal Mortality Rate in India

National Vector borne Disease control Programme is being implemented for prevention and control of vector

borne diseases such as malaria, filarsis, kala-azar, dengue, etc.

EDUCATION

India, now, has the one of the largest education systems in the world.

Eighty four percent of rural habitation in India now have a primary school located with in a distance of 1

kilometer.

The National Policy on Education (NPE) was made in 1986 and further modified in 1992. It emphasized on:

1) Universal Access and Enrolment

2) Universal Retention of children up to 14 years of age and

3) Substantial improvement in the quality of education.

National Policy on Education (NPE) had set a goal of expenditure on education at 6 per cent of the GDP

Right of Children to Free and Compulsory Education Act (RTE Act) 2009, has made free education for all

children between the age of 6 and 14 years, a fundamental right.

Gross Enrolment Ratio (GER), which shows the proportion of children in the 6-14 years age group actually

enrolled in elementary schools, has increased progressively from 32.1 in 1950-51 to 96.7 in 2011.

Sarva Shiksha Abhiyan (SSA) was launched in 2001-02. It aimed at having all children in school by 2005 and

Universal Retention by 2010.

Kasturba Gandhi Balika Vidyalaya (KGBV), Parambhik Shiksha Kosh (PSK) are other schemes for encouraging

people for elementary education.

There has been an impressive growth in the area of higher education with an increase in the number of

secondary and higher education school from 7416 in 1950-51 to about 1,72,000 in 2007-08.

Rashtriya Madhyamik Shiksha Abhiyan was launched in 2009. It envisages raising the enrolment at secondary

stage from 52.26 per cent in 2005 to 75 per cent within five years.


The Tenth Five Year Plan aimed at 80 per cent literacy rate, reduction in gender gap in literacy to 10 per cent

and reduction of regional, social and gender disparities (74 per cent literary rate has been achieved but the

gender gap and regional disparities are still there).

INFLATION

Inflation refers to a persistent upward movement in the general price level. It results in a decline of the

purchasing power of money.

Demand-pull inflation : When more money chases relatively less quantity of goods and services. The excess of

demand relative to supply pushes up the prices of goods and services.

Cost-push inflation : It refers to a situation where prices persistently rise because of persistent rise in the cost of

factors of production.

Cost push inflation is much more difficult to control than demand pull inflation.

Stagflation : It is the combined phenomenon of both demand-pull and cost-push inflation

Deflation: It is a decrease in the general price level of goods and services. Deflation increases the real value of

money and allows one to buy more goods with the same amount of money over time. Thus it is opposite of

Inflation.

Demand Pull Inflation is also called sometimes as Pure Inflation of True Inflation.

Galloping or Hyper-inflation: A very high rate of inflation. In this case the price level rises very fast.

Recession: It is a business cycle contraction. It is a general slowdown in economic activity which leads to

decreased spending and rise in unemployment rate.

CRR(Cash Reserve Ratio) is the most effective quantitative method among other methods, used by RBI to

control inflation.

Inflation can be measured through Wholesale Price Index (WPI) or Consumer Price Index (CPI)

Currently, in India WPI series with base 2004-05 is being used to measure Inflation

Causes of Inflation:

1) Increase in population

2) Increase in government expenditure

3) Deficit financing leading to borrowings from bank. printing notes

4) Slow agriculture growth

5) Hoarding and black marketing

6) Inadequate rise in industrial production

7) Upward revision of administered prices

8) Increase in money supply

9) Rise in global prices of goods and services

Measures to Control Inflation:

1) Monetary measures: Quantitative measures used by RBI

2) Fiscal Measures: These are the measures taken by the government with regard to taxation, expenditure and

public borrowings.

3) Administrative policies: Check hoarding and Black marketing

4) Control over investment: Resources should be employed for investment which does not have the effect of

increasing inflation and which creates productive assets.


Budget and Fiscal Deficits

Fiscal Policy: It means policy relating to public revenue and public expenditure and Government Borrowings i.e.

Government Finances.

Booth Lingam Committee and Chelliah Committee recommended simplification and rationalization of tax

system in India.

Budget: It shows the expected receipts and expenditures of the government in the coming financial year.

Receipts of the government comes from taxes (both direct and indirect)

Budget Deficit is the difference between total receipts and total expenditure (revenue plus capital)

If borrowings and other liabilities are added to the budget deficit, we get Fiscal Deficit.

Revenue Deficit= Total revenue Expenditure Total Revenue Receipts

Fiscal Deficit = Total Expenditure Total Non-debt creating Receipts

Since 1997, the practice of RBI lending to government through ad hoc Treasury Bills was given up.

If receipt are equal to the expenditure the budget is balanced.

In the year 2007-08 the fiscal deficit was 2.5 per cent which increased to 6.5 percent in 2009-10

Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 with the aim to reduce fiscal

deficit by 0.5 percent of the GDP in each financial year.

Primary Deficit = Fiscal Deficit Interest Payment

When the government tries to meet the gap of public expenditure and public revenue through borrowing from

the banking system, it is called Deficit Financing.

Balance of Payment

Balance of Payment is the systematic record of all economic transactions between the residents of one country

and the residents of the rest of the world in a year

Balance of Current Account: It includes balance of services and balance of unilateral transfers (i.e., unrequited

transfers) besides including balance of trade.

Balance of Trade: It is the difference between the value of goods exported and the value of goods imported.

Also referred to as Balance of Visible.

Balance of Invisibles: It is the difference between the value of services exported and the value of services

imported.

Balance of Payment on Capital Account: It includes balances of Foreign Investment (FDI and FIIs), External

commercial borrowings, NRI deposits, Official Development Assistance (ODA), Government Loans, etc.

Balance of unrequited transfers (unilateral transfers): it includes gifts, donations, grants, etc.

During 2001-04 there was surplus in current A/c

Indias exports of goods as a percentage of GDP (2011-12) is around 16.5 per cent

The average growth rate of export was about 24 percent per annum during the Tenth Plan, due to the

impressive growth of petroleum products and manufactured goods of agricultural and allied products

Exports now finance more than 80 percent of imports of goods and services

Indias exports growth decelerated in 2011-12 to 21 percent

In 2011-12 the current account deficit reached () 4.2 of GDP

Asia and ASEAN (Association of South East Asian Nations) have become Indias major trade partners. They now

account for nearly 60 per cent of Indias exports and imports

Import recorded an annual growth of around 30 percent during the 10th plan, mainly due to increase in oil

prices. During the year 2011-12 the growth in Import was 32 percent.


External Debt

External assistance to India has been in two forms Grants and Loans.

While grants do not involve any repayment obligation, loans carry an obligation to pay interest and repay the

principal.

About 90 percent of the external assistance received by India has been in the form of loans from institutions like

World Bank, International Monetary Fund (IMF), International Development Association, U.S.A., U.K., Japan, etc.

The share of Concessional debt in total debt now is about 13 percent, during 1980-81 it was as high as 75

percent. Thus it has decreased.

Indias External Debt as a percentage of GDP has reduced to less than 20 percent at end March 2012

In terms of indebtedness classification, the World Bank has categorized India as a less indebted country since

1999.

Among the top 15 debtor countries of the world, India ranks 4th after China, Russia and Brazil.

Debt service ratio (ratio of principal and interest to total exports) for India remains high at 6 percent.

For export promotion following step can be taken:

1) Currency can be devaluated,

2) Export promotion steps can be taken,

3) Import substitution

As per IMF export and import (Balance of payment) should be presented in FOB (Free on Board) basis.

Devaluation and depreciation make exports beneficial and import expensive and vice versa.

CHAPTER 7 Economic Reforms in India

State of Indian Economy before Economic Liberalization:

1) Domination of Public Sector leading to absence of competition

2) Low inflow of Foreign investments due to inward looking policy

3) Low FOREX reserve due to adverse balance of payment (only $1.1 billion), just sufficient to finance import of

3 weeks

4) High Inflation of 12 percent and High Fiscal Deficit of 7 percent

5) High Tariff structure of 125 percent

6) Banking sector functioned in a highly regulated environment.

Economic Reforms was introduced that reformed Industrial Sector, Financial Sector, External Sector and Fiscal

Sector

Liberalisation: It means removing restrictions and control by the government by ending License/Permit and

Quota Raj. It involves de-regulation of the economy and introduction of a policy of Laissez Faire.

1) New Industrial Policy of 1991 liberalized the Indian Economy (also known as Rao-Manmohan model of

Economic reforms)

2) Industrial licensing was abolished for all projects except for 18 industries related to strategic and security

concerns

3) At present there are only 6 industries where licensing is needed i.e. Alcohol, Cigars and Cigarettes,

Electronic Aerospace and Defence equipment, Industrial explosives, Hazardous chemicals and Drugs and

Pharmaceuticals


Under New Industrial Policy of 1991:

1) Prior approval of central government for establishing new undertakings and expanding existing undertaking

is not required

2) The system of phased manufacturing programmes approved on case to case basis would not be applicable

to new projects

3) The mandatory convertibility clause would no longer be applicable for term loans, from the financial

institutions for new projects

4) Monopolies and Restrictive Trade Practices (MRTP) Act 1969 has been abolished and a new act known as

Competition Act (2002) has been passed.

5) Under economic reform of 1991 the numbers of sectors reserved for public sector was reduced to 8 & at

present only 3 industries are reserved for the public sector. These are atomic energy, minerals specified in

the schedule to the atomic energy 1953 and Rail transport.

Privatization and Disinvestment:

Privatization refers to the transfer of assets or services functions from public to private ownership.

Complete privatization is a form of majority disinvestment wherein 100% control of the company is passed on to

a buyer.

For privatization to be successful it requires liberalization and de-regulation of the economy, well developed

capital market

Privatization helps in promoting competition, reducing government burden, revive sick units etc.

Franchising, leasing, contracting are some ways of privatization

Disinvestment: Refers to disposal of public sectors units in equity in the market.

Disinvestment Programme was started in 1991-92.

In 2005, a National Investment Fund (NIF) was constituted into which the realization from sale of minority

shareholding of the Government in profitable CPSEs would be channelized. This fund will be used for:

1) Investment in social sector projects which promote education, health care and employment

2) Capital investment in selected profitable and revivable Public Sector Enterprises to improve the overall

capital base of Public Sector in India

Sale of a PSU comes under Department of Disinvestment

Some methods of disinvestment are:

1) Issue of GDRs (Global depository receipts), ADRs (American depository receipts)

2) Cross holding (selling share from one PSU to another),

3) Warehousing (government own financial institutions buying government stake in select PSUs and holding them

until any third buyer emerge)

4) Retaining golden share (government stake up to 26%)

5) Token privatization (sale of share to extent of 8 to 10 %)

6) Strategic sale method where government sells a major portion of its stake to a strategic buyer and also gives

over the management control. Under this disinvestment price will be market based

Globalisation:

Globalisation means integrating the domestic economy with the world economy.

Globalisation helps in:


1) Proper allocation of economic resources;

2) Re-distribution of economic resources

3) Improvement in technology

Steps taken towards globalization involves:

1) Liberalization of import licensing

2) Rationalization of tariff structure.

3) Opening the economy to foreign capital (FDI and FII)

4) Convertibility of Rupee

5) Replacing Foreign Exchange Regulation Act(FERA), 1973 with Foreign Exchange Management Act(FEMA)

1999.

Devaluation: It means lowering the external value of the countrys currency in relation to a global currency. It

boosts export.

Rupee Convertibility: It means the freedom to exchange a domestic currency with any globally accepted

currency and vice versa. It is of 2 types:

1) Capital Account convertibility and

2) Current Account convertibility

Tarapore committee 2 (2007-2011) suggested for Full Capital Account Convertibility . Still India has not

achieved Full Capital Account Convertibility.

FDI comes through two routes:

1) Automatic Route for which approval is given by the RBI

2) FIPB (Foreign Investment Promotion Board)

FDI Ceilings:

1) Up to 26 percent allowed in: Defence, Insurance, Print Media

2) Up to 74 percent in: Banking sector and Telecom sector, Direct To Home (DTH) in broadcasting, credit

Information companies

3) Up to 49 percent in: Power exchanges, FDI by foreign airlines in the domestic carriers

4) UP to 51 percent in: Multi-brand retail (recently notified)

5) 100 percent in: Drugs and pharmaceuticals, hotels and tourism, courier services, oil refining, Greenfield

airports, mass rapid transport system, business to business e- commerce, special economic zones industries,

electronic mail and voice mail, advertising film sector, tea and certain telecom industries and internet

services providers, asset reconstruction companies, single brand retail trading, and basic and cellular

services, etc.

FDI is prohibited in:

1) Atomic Energy

2) Railway Transport

3) Lottery Business

4) Gambling and betting

5) Business of chit fundS

6) Nidhi companies

Export Promotion:

EXIM Policy was framed in 1992 under which Quantitative restriction was removed on most of items .Currently

we have an EXIM policy of 2009-2014


EXIM bank was established in 1982

In foreign trade policy 2004-2009:

1) Certain thrust areas like agriculture, handlooms, handicrafts etc. have been identified

2) Vishesh Krishi Upaj Yojana has been started for promotion of agriculture export

3) Served from India scheme to promote export of service .it was brought in place of Duty free export credit

(DFEC) scheme.

The Foreign Trade policy of 2009-14 aims at reviving exports and to double Indias share in global trade by 2020.

Export Promotion Capital Goods (EPCG) scheme originally introduced in 1990 was liberalised in April 1992 to

encourage imports of capital goods.

Cash Compensatory Scheme was abolished in July 1991

Special Economic Zones (SEZs) policy was announced in 2000. SEZ act came into effect in 2006.

FIEO (federation of Indian export Organisation) has been established to promote export

Indias share in world export is 1.6% in 2012 (it has increased)

FOREX reserve in India was US $ 294 billion at the end March 2012

The average growth of export has been more than 24% per annum during the Tenth Plan

Indias export growth rate of 33.8 per cent in 2011 is one of the highest in the world

Export now finance nearly 80% of imports of goods and services

The World Bank:

Known as International Bank for Reconstruction and Development (IBRD)

Formed as a part of the deliberations at Bretton Woods in 1945

Head Quarter at Washington DC

188 member nations

Facilitates lending and borrowing for reconstruction and development

Provides Long Term loans

It includes: International Development Association (IDA), the International Finance Corporation (IFC), the

Multi-lateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment

Disputes (ICSID).

IDA is also known as the Soft Lending Arm or Soft Loan Window of the World Bank

World Trade Organisation(WTO):

Came into existence on 1st January, 1995.

Head Quarter at Geneva, Switzerland

Formerly known as GATT (General Agreement on Trade and Tariff)

159 member nations

Promotes free flow of goods and services, handles trade disputes, monitors national trade policies, provides

technical assistance and training to developing countries.

Implements Multilateral Trade Agreements

The WTO agreement includes: TRIPs Trade Related Intellectual Property Rights, TRIMs- Trade Related

Investment Measures

Under this Patents (Amendments) Act, 1999, was passed to provide for Exclusive Marketing Rights (EMRs)


International Monetary Fund:

IMF was organized in 1946 and commenced its operation in March, 1947.

Head Quarter at Washington DC

188 member nations

Maintains international liquidity

Stabilizes exchange rates

Provides short term loans to resolve Balance of Payment problems faced by any member nation

Issues SDRs or Special Drawings Rights, which is the local currency used by the IMF

SDRs was created by the IMF in 1969

CHAPTER - 8 Money and Banking

MONEY:

There are various categories of assets which possess the attributes of money like, Currencies, bank deposits,

shares, bonds, government securities, equity shares, etc.

In Traditional sense or Static sense money serves as:

1) Medium of exchange

2) Store of value

3) Standard of Deferred payment

4) Unit of Account

In Modern sense or Dynamic sense money does the following functions:

1) It directs economic trends

2) It encourages division of labour

3) It smoothens transformation of savings into investments

Thus in Modern sense Money has:

1) Stability.

2) High degree of substitutability and

3) Feasibility of measuring statistical variation

In year 1979 RBI classified money into different categories. These are:

1) M1 = Currency with the public i.e., coins and currency notes + Demand deposits of the public ( known as

Narrow Money).

2) M2 = M1 + Post office saving deposits.

3) M3 = M1 + Time deposits of the pubic with banks (also called Broad Money).

4) M4 = M3 + Total post office deposits.

The Third RBI working group (1998) redefined its parameters for measuring money supply and introduced

New Monetary aggregates (NM). These are:

1) NM1 = Currency + Demand deposits + Other deposits with RBI.

2) NM2 = NM1 + Time liabilities portion of saving deposits with banks + Certificates of deposits issued by banks

+ Term deposits maturing within a year excluding FCNR (B) (Foreign Currency now Residential Bank) Deposits.

3) NM3 = NM2 + Term deposits with banks with maturity over one year + Call / term borrowings of the banking

system.


4) NM4 has been excluded from the scheme of new monetary aggregates

Three liquidity aggregates L1, L2 and L3 have also been introduced.

M1, and M3 are still used as measures of money supply in India.

Commercial Banks:

Commercial banks encourage savings habits among the people, help improving the capital formation in the

economy and mobilizing the savings in a productive manner.

Commercial banks deal with general public performing functions like:

1) Accepting deposits;

2) Providing Loans;

3) Agency Services like collection and payment of bills, dividends,, interest;

4) General Utility Services like issue of letter of credit, travelers cheques, locker facilities etc.

Reasons for Nationalisation of commercial banks in 1969 and 1980:

1) Private ownership of commercial banks and concentration of economic power;

2) Urban-bias;

3) Neglect of agricultural sector;

4) Violation of norms;

5) Speculative activities;

6) Neglect of priority sectors

In 1969, 14 banks were Nationalised. All were having minimum deposits of Rs.50 crore.

In 1980, 6 more banks were Nationalised all having minimum deposits of Rs.200 crore.

Currently there are 19 Nationalised bank.

In 1991 Narshimhan Committee was formed for financial sector reform. Again in 1998 a committees was

formed for banking sector headed by the same person

Scheduled bank is one which is listed in 2nd schedule of RBI Act of 1934

At the time of independence there where 645 banks having more than 4800 branch offices

Till 1969, out of about 5.6 lakh villages in India, only 5000 were being served by commercial banks

Population served per bank is 12500 currently

Rural areas have nearly 37 per cent of bank branches but more than 70 per cent of the population residing here.

In terms of deposit mobilisation, Maharashtra leads other states

In terms of lending, Priority sectors constitute about 41 percent of total bank lending

Commercial banks suffer from Regional imbalances, Increasing over dues, Lower inefficiency.

The profitability ratio of bank has declined over the years due to, Lower interest on government borrowings

from banks, subsidisation of credit to priority sector, High expenditure resulting from overstaffing and

mushrooming of branches.

The Basel II framework, which lays down norms to be followed by banks to ensure financial stability has been

operationalised by banks since March, 2008

Basel III is supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank

leverage. It has been introduced in 2013 and banks are required to implement it by 2019

Prime lending rates of banks for commercial credit are now entirely within the purview of the banks and not set

by the RBI.


Reserve Bank of India:

RBI is apex of Indian banking system also considered as the Central Bank of India

It was formed on 1st April 1935 by RBI Act in 1934 and was Nationalised on 1st January 1949

It was established on recommendation of Hilton Young Committee

RBI is also known as the Bank of Issue

First Indian governor of RBI C.D. Deshmukh

Current governor of RBI is Raghuram Rajan

It is head quartered at Mumbai

Functions of RBI includes:

1) Issue of currency other than one rupee coins and notes

2) Banker to the government

3) Bankers Bank

4) Custodian of Foreign Exchange Reserves

5) Controller of Credit

6) Promotional and developmental Functions

7) Issues Monetary policies

Monetary Policy: It is policy pertaining to the control of the availability, cost and use of money and credit in the

economy in order to achieve specific goals. Its main objectives are:

1) to regulate monetary growth so as to maintain a reasonable degree of price stability

2) to ensure adequate expansion in credit to assist economic growth

3) to introduce measures for strengthening the banking system

Generally two types of instruments are used to control credit under monetary policy i.e. Quantitative or

General Measures and Qualitative or Selective Measures

Quantitative or General Measures: They are used for changing the total volume of credit in the economy.

Quantitative measures consist of:

1) Bank Rate: It is the rate at which the Central Bank re-discounts the bills of commercial banks.

2) Variable reserve requirements: it includes (i) Cash Reserve Ratio (ii) Statutory Liquidity Ratio (SLR). CRR is the

ratio of total deposits that the commercial banks have to necessarily keep with the RBI. SLR is the ratio of total

deposits that the commercial banks have to keep with itself.

3) Repo Rate: Repo rate is the rate at which commercial banks borrow rupees from RBI.

4) Reverse Repo Rate: It is the rate at which RBI borrows money from the commercial banks.

5) Open Market Operations : It involves sales and purchases of securities and bills in the market by the RBI on its

own initiative to control the volume of credit.

Rates: CRR (4 percent)----- SLR(23 percent)-----Bank Rate (10.25 percent)------ Repo Rate(7.25 percent)----

Reverse-repo rate (6.25 percent)

Currently RBI holds $294 billion in its FOREX Reserves

Quantitative controls affect indiscriminately all sectors of the economy.


REMEMBER:

1) If all or any one of the above rates is/are raised (increased) the money flow in the economy falls and thus

Inflation comes down, but it will also bring down growth along with it (as growth and inflation are directly

proportional).

2) Oppositely, if all or any one of the rates is/are reduced (decreased), the flow of money in the economy

increases. It is done to promote growth, but this will again push up the inflation rates.

3) In the same way Purchase of securities by the RBI will increase the flow of money into the economy and Selling

of securities will reduce the flow of money into the economy.

Qualitative or Selective Measures consists of:

1) Rationing of credit (controlling purpose for which credit is granted)

2) Change in margin requirements (maximum amount which holder of security may borrow against mortgaged

securities)

3) Regulation of consumer credit (laying down rules regarding down payments etc.)

4) Issue of directives (appeal or warnings to curb certain type of credit)

5) Moral suasion (request made by RBI. It is psychological means of controlling credit)

6) Direct action (refuse to rediscount bills or charge higher rate of interest etc.)

Front CoverPrefaceQuick Revision Notes (CPT Economics December 2014) Ready

quick revision notes (cpt economics december 2014) ready

Documents

word economics

economics answer

art of economics

macro economics

micro economics chapter

father of modern economics

economics quick revision

best shandar ahmed