Chapter one

Introduction to Economics

Meaning of Economics
“Economics is a social — The term ‘economics’ comes from the Greek term Oikonomos, which is composed of
oikos (house) and nomos (custom or law), meaning Rules of the Household.
science, which tries to
Economics is the social science that studies economic activities to gain an
study how to achieve the understanding of the processes that govern the production, distribution and
maximum benefits using consumption of goods and services in an economy.
limited resources. — Initially, the study of economics concentrated mainly on wealth by concentrating on
factors of production and consumption. This emphasis on wealth excluded from its
Understanding
study, those who were not directly connected with the formal economic system. Thus,
economics is important the needs of poor, senior citizens, children etc. were neglected. It was corrected with
to provide for the the emergence of welfare economics, which focused on welfare needs of the whole
maximum welfare of society instead of just the production of wealth.

society using the Branches of Economics

resources available.” Traditionally, economics has been divided into the two main branches :

Micro Economics
— It examines the economic behaviour of individual actor at the level of the individual
economic entity — the individual firm, the individual consumer and the individual
worker.
— It is concerned with how supply and demand interact in individual market and how
these interactions determine the price level of goods and services.

Macro Economics
— It studies the economy as a whole and its features like national income, employment,
poverty, balance of payments and inflation.
— It is concerned with how the overall economy works. It studies such things as
employment, Gross Domestic Product (GDP) and inflation.

Some Other Branches of Economics

Development Economics
— It is a branch of economics, which deals with the economic aspects of the
development process in low income countries.
— The goal of development economics is to determine how poor countries can be
transformed into prosperous ones.

Behavioral Economics
— This branch studies the effects of social, cognitive and emotional factors on the
economic decisions of individuals and their consequences for market prices, returns
and resource allocation.
2 Magbook ~ Indian Economy

— It is mainly exploring why people sometimes make irrational Command Economy

decisions and why and how their behaviour does not follow — Here, the resources of production are completely under
the predictions of economic models. government control. The functioning of these economies
Environmental Economics is based on control planning. Due to lack of competition,
resource allocation is inefficient and consumers have very
— This branch studies the economic impact of environmental
little choices. Examples of this type are the former Soviet
policies. Its goal is to balance the economic activity and the
Union, Cuba, North Korea etc.
environmental impacts, by taking into account all the costs
and benefits. Mixed Economy
— This type of economy consists of a combination of public
International Economics sector and private sector units. Here, the government is
— It is a branch of economics, which studies economic inter- the decision-maker for the public sector and individuals,
actions among different countries, including foreign trade, and businessmen make decisions for the private sector.
foreign exchange, balance of payments and balance of trade. — It basically incorporates governmental involvement in a
— The guiding principle in the study of international economics is market based economy. Examples of this type are India,
comparative advantage, which indicates that every country, no Russia and UK etc.
matter what their level of development, can find something that
it can produce cheaper than others. Open Economy
— An economy is said to be open, if it has trade with other
Information Economics economies. In this economy, market is mostly free from
— It is a branch, which studies how information and information trade barriers and where exports and imports form a large
technology influence the economy. percentage of the GDP.
Information economics has certain characteristics, like: — The degrees of the openness of an economy determines
(i) It is easy to create, but hard to trust. government’s freedom to pursue economic policies of its
(ii) It is easy to spread, but hard to control. choice and the susceptibility of the country to
international economic cycles.
Demographic Economics
Closed Economy
— Demographic economics or Population economics is the
application of economics to demography; the study of human — An economy is said to be closed, if it has no trade or
population, including size, growth, density, distribution and vital trade area with other economies. In this economy, the
statistics. consumer get everything within the economic borders
and government act as the arbitrator, articulator and
facilitator.
Types of Economies
— Typically, economies are divided into different types based on Capitalist Economy
the extent of government involvement in economic — Capitalism is the economic system based on private or
decision-making. corporate ownership, production and distribution of
Based on the above criteria, the following are the major types of goods. Capitalists favour a system of free enterprise which
economies: means the government does not interfere in the economy
that the laws of supply and demand will make sure that
Traditional Economy the economy runs most efficiently in meeting people’s
— In this type of economy, there is very little government needs. Capitalism is characterised by competition in
involvement. Allocation of resources here is based on rituals, which there is rivalry in supplying or getting an economic
habits or customs. service or goods.
— Economic roles are defined by the family and people work Socialist Economy
together for the common good. There is also very little individual — Socialism is an economic system in which the means of
choice in this system. Examples of this type exist in tribes in production are socially owned and used to meet human
Amazon, Aborigines in Australia etc. needs instead of to create profits.
Free Market Economy — Socialism tends to favour cooperation whereas capitalism
— This type of economy also has very little governmental is characterised by competitions. A form of socialism
interference or control. Economic decisions here are made called communism sprang up based on the writings of
based on market principles. There is a lot of competition Karl Marx and Friedrich Engels.
between firms, which provides many choices to consumers. — Communism advocates class struggle and revolution to
— Resources for production are under private ownership and they establish a society of cooperation with strong government
make their decisions with the desire to maximise profits. control. Communism predominated in the former Soviet
Although, there are no pure free market economies. United Union and much of Eastern Europe at one time. Today, it
States and Australia come close to this type. predominates in China and Cuba, but its influence has
lessened.
Magbook ~ Introduction to Economics 3

Sectors of an Economy Other Sectors of Economy

— A nation’s economy can be broadly divided into various Quaternary Sector
sectors to define the proportion of people engaged in a — This sector consists of the intellectual and knowledge based
particular sector. This categorisation is generally seen as a
activities. Examples of activities associated with this sector
continuum of the distance from the natural environment.
are research and development, culture, information
— Traditionally, economies are divided into the following three
technology, consulting, financial planning, education etc.
sectors :
Quinary Sector
(i) Primary Sector
— This sector consists of the highest levels of decision-making
— This sector is involved in the extraction or harvesting of
in a country. This includes the top officials of government,
products from the Earth. It includes the production of raw
media, universities etc.
materials and basic foods. Some of the activities included in
this sector are agriculture, mining, forestry, fishing, quarrying
etc. Classification of Countries
— The packaging and processing of raw materials is also by the World Bank
considered as a part of this sector. As an economy develops The World Bank prepares the World Development Report (WDR).
the share of primary sector in total production and
The WDR as on 1st July, 2021, classified the different countries on
employment goes down.
the basis of their per capita income.
(ii) Secondary Sector Categories Based on Per Capita Income
— The secondary sector of the economy is involved in the ◆
High income countries — $ 12,695 and above
production of finished goods. All manufacturing, processing
and construction activities lie in this sector (in India,
◆
Upper middle income countries — Above $ 4,096 to $ 12,695
construction sometimes considered as part of the services or ◆
Lower middle income countries — Above $ 1,046 to $ 4,096
tertiary sector). ◆
Low income countries — $ 1,046 and less.
— Some of the activities in this sector are metal working, Source World Bank Report, 2021
automobile manufacturing, textile, production, shipbuilding
etc. Most economies in their process of development go
through the middle phase, where the secondary sector Classification of Countries Based
becomes the largest sector of the economy in terms of
production and employment with the reduction in importance on Economical Activities
of the primary sector. Developed Country
— India is an exception, where we have directly moved to — It refers to a country with a relatively high level of economic
services sector development, without first improving the
growth and security. A country’s degree of development is
manufacturing capabilities.
evaluated on the basis of per capita income or GDP, level of
(iii) Tertiary Sector industrialisation, general standard of living and the amount
— The tertiary sector of the economy is also called as the of widespread infrastructure.
services sector. This sector provides services to the general Developing Country
population and to business. Some of the activities which are — It is also called a less developed country with lower living
part of this sector are retail, transportation, entertainment, standard, underdeveloped industrial base and low Human
tourism and banking etc. In the advanced developed Development Index (HDI).
economies, the tertiary sector is the largest in terms of
production and employment. Least Developed Country
— Sometimes, two more sectors, i.e. quaternary and quinary are
— According to the United Nations, countries having lowest
defined separately, even though these can also be considered indicator of socio-economic development with the lowest
as part of the services sector itself. HDI ratings are called as least developed countries.
Magbook ~ National Income 5

Chapter two
National Income

National Income Market Price

National Income is defined as the total
— Market price is the price that customers
National Income is an —
actually pay. It includes the component
net earnings from the production of
uncertain term which is goods and services in a country over a of indirect taxes and of subsidies.
used interchangeably with period of time, usually one year and Accordingly, when indirect taxes are
consisting essentially of wages, salaries, deducted and subside added to the
national dividend, national market price, we get values of National
rent, profits and interest.
output and national Income at factor cost
National Income = C + I + G + (X − M)
expenditure. On this basis, MP = FC + Indirect taxes – Subsidies
national income National income is considered as NNP at Or MP = FC + Net indirect taxes
factor cost.
accounting records the
Where,
GDP (Gross Domestic Product)
level of activity in accounts
C = Total Consumption Expenditure — It is the monetary value of all final goods
such as total revenues
I = Total Investment Expenditure and services produced with a country’s
earned by domestic G = Total Government Expenditure border in a specific time.
corporation, wages paid to X = Export —GDP = C + I + G + NX
foreign works and amount M = Import Where C = Consumption
spend on sales and — It can be measured by Gross National I = Investment
Product (GNP), Gross Domestic G = Government expenditure
income taxes by Product (GDP), Gross National Income NX = Net Export
corporations and (GNI), Net National Product (NNP), Net
GDP at FC and MP
individuals outsiding in the National Income (NNI) and Per-Capita
Income (PCI). GDPMP = GNPMP − (X −M)
country.
GDPFC = GNPFC − (X − M)
National Income and Where, X is the export and M is import of a
country.
its Related Aggregates
— Various National Income aggregates are
Nominal GDP
estimated either at factor cost or at — It is the market value (money-value) of all
market price. final goods and services produced within
the country.
Factor Cost
— Factor cost refers to cost of factors of
Real GDP
production viz., rent of land, interest of — The adjustment transforms the nominal
land, interest of capital wages for GDP into an index for quantity of total
compensation of employees for labour output. It is a measurement of the value
and profit for entrepreneurship of output economy, adjusted for price
FC = MP − Indirect taxes + Subsidies changes.
6 Magbook ~ Indian Economy

India Changes Base Year for GDP Calculation Disposable Income (DI)
— Choosing a base year is the first step while counting the real GDP. — It is the income of individuals at their disposal after
— For the revised GDP calculations the Indian statisticians have paying direct tax liabilities.
changed the base year from 2004-05 to 2011-12. Disposable income = Personal income
— The change in base year is not an unusual phenomena as base – Direct taxes (e.g. Income tax)
year is regularly updated after every five year.
— The government has proposed the new base year for GDP and
Green Economy
IIP (Index of Industrial Production) as 2017-18 while for CPI it — In this economy, which deals with the
will be 2018. environmental risks and ecological scarcity and
also an economy that aims for sustainable
GNP (Gross National Product) development without degrading the environment.

— It is the market value of all products and services produced in Green GDP
one year of a country (i.e. by labour and property). — It is the calculation of net natural consumption (i.e.
GNP = GDP + X − M . resource depletion, environmental degradation,
protective and restorative environmental initiatives).

Difference Between GDP and GNP Green GNP

— GNP means that there has to be an adjustment for
In GDP, goods and services produced in a country is
the depletion of the country’s physical assets.
added, whether it is produced by residents of the
country or foreigners. In GNP, the production of Calculating National Income
foreigners in the country is not included, while the
production of nationals outside the country is included. According to Simon Kuznets, National Income can be
calculated by three method are as follows:
Net National Product (NNP) (i) Product Method In this method, net value of final
goods and services produced in a country, during
— It is the value of GNP after deducting depreciation of plant and
a year is obtained, which is called Total Final
machinery.
Product.
NNP = GNP – Depreciation
(ii) Income Method In this method, a total of net
National Income (NI) = NNP − Indirect taxes + Subsidies income earned by working people in different
sector and commercial enterprises is obtained. By
Real National Income (RNI) this method, NI is obtained by adding receipts as
total rent, total wages, total interest and total profit.
— It is the value of National Income adjusted for inflation and
(iii) Consumption Method It is also called Expenditure
calculated from some reference point (base year).
Method. Income is either spent on consumption
Real National Income = NNP at current prices × 100/Price index
or saved. Hence, NI is the additional of total
Per-Capita Income (PCI) consumption and total saving.
It is the measure of the amount of money that is being earned
—
per person in a certain area.
Problems in Calculating of
— Per-Capita Income of a Country National Income
National Income Black Money Illegal activities like smuggling and
= —
Population of the Country unreported income due to tax evasion and
corruption are keeping outside the GDP estimates.
Personal Income (PI) Thus, parallel economy poses a serious hurdle to
— It is the income of the residents (individuals) of a country. To accurate GDP estimates. It also causes loss of
calculate personal income, transfer payments to individuals are revenues to the state exchequer due to tax evasion.
added to National Income, while social security contributions, — Non-Monetisation In most of rural economy
corporate tax and undistributed profits are subtracted. considerable portion of transaction occurs
Personal Income = National Income informally and, they are called as Non-Monetised
+ Transfer payments Economy. This keeps the GDP estimates at lower
level than the actual.
– Social security contributions
— Growing Service Sector Many services like BPO,
– Corporate tax
value addition in legal consultancy, health services,
– Undistributed profits financial and business services and service sector
Magbook ~ National Income 7

as a whole is not based on accurate reporting and — Challenges like difficulties in getting information, especially
hence, national income is underestimated. those related to underground economy.
— Double Counting It is also a hurdle to accurate GDP
estimates. Though, there are some corrective measures, Gross Fixed Capital Formation
but it is difficult to eliminate it. (GFCF)
Estimation of National — It refers to net additions of capital stock such as
equipment, buildings and other intermediate goods.
Income in India — The term fixed signifies that only fixed capital is counted
— The first attempt to calculate National Income of India and financial assets, stocks of inventories etc are excluded.
was made by Dadabhai Naoroji in 1867-68, who GFCF also excludes land sales and purchases.
estimated Per-Capita Income to be ` 20.
Incremental Capital Output Ratio (ICOR)
— The first scientific method was made by Professor VKRV
Rao in 1931-32, but was not very satisfactory. — ICOR is used to assess a country’s level of production
efficiency. ICOR equals Annual Investment or Annual
— The first official attempt was made by National Income
Increase in GDP. Higher levels of ICOR means that capital
Committee headed by Professor PC Mahalanobis in
is not being used efficiently to increase production.
1949.
Generally, for most countries ICOR is at around 3.
— According to the National Income Committee Report
(1954), National Income of India was ` 8710 crore and Indian Organisations Related to
Per-Capita Income was ` 225 in 1948-49.
— In India, the National Statistical Office (NSO) under
National Income Accounts
Ministry of Statistics and Programme Implementation is Ministry of Statistics and Programme
responsible for estimation and publication of National Implementation
Income.
The Ministry of Statistics and Programme Implementation
Limitations in the Measurement (MOSPI) is a ministry of Government of India concerned with
of National Incomes coverage and quality aspects of statistics released. The surveys
conducted by the Ministry are based on scientific sampling
— Whilst measuring National Income, we need to be aware methods. The Ministry of Statistics and Programme
of some of the following limitations, challenges, problems
Implementation (MOSPI) came into existence as an Independent
which are discussed below
Ministry on 15th October, 1999 after the merger of the
— National Income measures domestic economic
performance, not social welfare, but there should be a Department of Statistics and the Department of Programme
strong positive correlation. Implementation.
— National Income understates social welfare, non-market
transactions like home-makers service and do-it-yourself
National Statistical Office
projects are not counted. The government has merged the Central Statistical Office (CSO)
— National Income does not measure an increase in leisure or and National Sample Survey Office (NSSO) under the Ministry of
work satisfaction changes in product quality.
Statistics and Programme Implementation (MOSPI) into a single
— National Income does not accurately reflect changes in
entity on 23rd May, 2019. The new merged entity has been
environment like oil spills clean-up is measured as positive
output, but increased in pollution is not measured as named the National Statistical Office (NSO) and will continue to
negative. be headed by the secretary of MOSPI.
— Per-Capital Income is a more meaningful measure of living
standards than total National Income. The National Statistical Office (NSO) headed by a Director
— Problem of double counting, however, problem of double General is responsible for conduct of large scale sample surveys
counting could be avoided by utilising the value added in diverse fields on All India basis.
approach.
The NSO has four divisions :
— Problems of depreciation estimation.
— Survey Design and Research Division (SDRD) : This division,
— Different methods of calculating or estimating depreciation.
— Arbitrary definition.
located at Kolkata is responsible for technical planning of
surveys, formulation of concepts and definitions, sampling
— Inclusion or exclusion of certain items in National Income
accounting can cause confusion. design, designing in inquiry schedules, drawing up of
tabulation plan, analysis and presentation of survey results.
Chapter three
Economic Growth and
Development
Economic Growth
Economic growth is — Economic growth is an increased economic capacity to produce goods and services,
an indicator of wealth, compared from one period of time to another which is conventionally measured by
increased in a country’s GDP (Gross Domestic Product) or GNP (Gross National Product)
reflecting the quantity or per capita Net Domestic Product (NDP). Per capita NDP is the most appropriate
of resources available measure of economic growth.
to a society. But it — Economic growth comes in two forms:

provides no (i) An economy can either grow extensively by using more resources (i.e. physical, human or
natural capital).
information about the
(ii) Intensively by using the same amount of resources more efficiently (productively).
allocation of these
resources. Economic
development is a
Economic Development
— According to Michael Todaro ‘‘Economic development is an increase in living standards
normative concept. It improvement in self-esteem needs and freedom from oppression as well as a greater choice.’’
applies in the context — It is referred to as the quantitative and qualitative changes in economy such as

of people’s sense of development of human capital, critical infrastructure, regional competitiveness,

environmental sustainability, social inclusion, health, safety, literacy etc.
morality.
— Human Development Index (HDI) is the most appropriate measure of economic
development.
Economic development in all societies must have atleast the following objectives:
— To increase the availability and widen the distribution of basic life sustaining goods.
— To raise levels of living by ensuring higher incomes, more jobs and greater attention to culture.
— To expand the range of economic and social choices available to both individuals and nations.

Difference Between Economic Growth and Economic Development

Economic Growth Economic Development
Economic growth refers to an increase Economic development implies an upward movement
over time in a country’s real output of of the entire social system in terms of income,
goods and services (GNP). savings and investment alongwith progressive
changes in socio-economic structure of country.
Growth relates to a gradual increase in Development relates to growth of human capital
one of the components of GDP : index, a decrease in inequality figures and structural
consumption, government spending changes that improve the general population’s quality
investment, net exports. of life.
It is qualitative in nature and measured It is qualitative and measured through HDI, GDI, HPI
through increase in real GDP. etc.
It is concerned with increase in the It is concerned with structural changes in the
economy’s output. economy.
Magbook ~ Economic Growth and Development 11

Measurement of Economic Human Development Index

(HDI)
Development — The United Nations Development Programme
— To measure economic development is a complex process. (UNDP) introduced the HDI in its first Human
Economists have used various yardsticks for measuring economic Development Report (HDR) prepared under the
development. stewardship of Mahbub-ul-Haq in 1990.
Life Expectancy Index (LEI) Educational
National Income and Per Capita —
Attainment Index (EAI) and Standard of Living
Income Index (SLI) are the indicators of HDI.
— This is the traditional approach to measure economic — Life expectancy refers to life expectancy at birth,
development. World Bank uses the concept of per capita Gross not at age 1.
National Income (GNI) as a measure for comparing and classifying — Educational Attainment Index (EAI) is a
countries based on their stage of economic development. combination of adult literacy rate and combined
— World Development Report (WDR), 2015 (sub-titled Gender enrolment ratio.
Equality and Development) classifies countries category wise — Standard of Living Index (SLI) is represented
based on per capita GNI. here by the concept of Purchasing Power Parity
— Since official exchange rate is used in the international comparison (PPP). Per capita income is converted into PPP
of GNI, therefore, they do not give a correct picture for two reasons in terms of US dollar.
They are :
(i) Purchasing power capacity of a country ignored. Human Development Report
(ii) Official exchange rate does not reflect the value of non-traded (HDR), 2020
goods. — The United Nation’s Human Development Report,
— In order to overcome this problem, following the work of IB Kravis was released in December 2020 with the theme
and others ‘‘International comparisons of real product and ‘Human Development and the Anthropocene’.
purchasing power’’ (1978), the UN International Comparison — In the 2020 report, India with a score of 0.645
Programme gave the Purchasing Power Parity (PPP) method. has been ranked 131 out of 189 countries in
terms of HDI. In 2019 report, India was ranked
Purchasing Power Parity (PPP) 129 out of 189 countries.
PPP approach was given by economist Gustav Casell in 1918. The — HDR report is a composite indices covering five
concept is based on the law of one price, wherein the absence of trade sub-indexes including Human Development,
and non-trade barriers, identical goods will have same price in different Inequality Adjusted Human Development, Gender
countries, when the prices are expressed in the same currency. PPP Development, Gender Inequality and
exchange rates are calculated by comparing the prices of the same basket Multidimensional Poverty Index.
of goods are services indifferent countries. Human Development Group
PPP was first used by International Monetary fund (IMF) in 1988 for
measuring standard of living in different countries. Indian Economy is the Group Index Value
third largest economy in term of PPP. Very high human development 0.800 and above
High human development 0.700 and 0.799
The PPP is defined as the number of units of a country’s currency required
Medium human development 0.550 and 0.699
to buy the same amount of goods and services in the domestic market as
Low human development 0.352 and 0.549
$ 1 would buy in the United States. e.g. if we have to spend ` 30 for
purchasing the same amount of goods and services as are purchased in
spending $ 1 in USA, then the exchange rate in PPP approach is $1= ` 30. Inequality-Adjusted Human
Development Index (IHDI)
Physical Quality of Life Index (PQLI) — IHDI adjusts the Human Development Index
(HDI) for inequality in distribution of each
— PQLI was the first attempt towards providing comprehensive dimension across the population. The IHDI
measure of economic development. It was developed by Morris accounts for inequalities in HDI dimensions by
David Morris in the mid-1970s. ‘discounting’ each dimension’s average value
— PQLI is the average of three values, viz, life expectancy, basic literacy according to its level of inequality.
rate and infant mortality rate. Each value was scaled on 1 to 100,
where 1 represents the worst and 100 represents the best.
12 Magbook ~ Indian Economy

— The IHDI equals the HDI, when there is no inequality across — Each dimension and each indicator within a
people, but is less than the HDI as inequality rises. In this sense, dimension is equally weighted.
the IHDI is the actual level of human development (accounting for — The lower and the index value of lesser the
this inequality), while the HDI can be viewed as an index of multidimensional poverty.
potential human development (or the maximum level of HDI) that
could be achieved, if there was no inequality. Gross National Happiness
— The loss in potential human development due to inequality is given (GNH)
by the difference between the HDI and the IHDI and can be
expressed as a percentage. India’s HDI value after discounting the — The term ‘Gross National Happiness’ was coined
IHDI is 0.477. in 1972, by Bhutan’s then King Jigme Singye
Wangchuck.
Gender Inequality Index (GII) — GNH was designed in on attempt to define an
— GII reflects women’s disadvantage in three dimensions: indicator that measures quality of life or social
reproductive health, empowerment and the labour market for as progress in more holistic and psychological
many countries as data of reasonable quality allow. terms than the economic indicator of GDP. It is
— The index shows the loss in human development due to inequality not measured directly, but only by the factors,
between female and male achievements in these dimensions. It which are believed to lead to it.
ranges from 0, which indicates that women and men fare equal to — A second-generation GNH concept, treating

1, which indicates that women fare as poorly as possible in all happiness as a socio- economic development
measured dimensions. metric was proposed in 2006, by Med Jones.
GNH value is proposed to be an index function of
Gender Development Index (GDI) the total average per capita of the following
— The new GDI measures gender gap in human development measures:
achievements in three basic dimensions of human development — Economic wellness — Environmental
health, measured by male and female life expectancy at birth, Wellness
education and command over economic resources. — Physical wellness — Mental wellness
— Workplace wellness — Social wellness
Multidimensional Poverty Index (MPI) — Political wellness

— MPI was developed in 2010, by Oxford Poverty and Human Genuine Progress Indicator
Development Initiative and UNDP and different factors to determine
poverty beyond income based list were used.
(GPI)
— The MPI is an index of acute multidimensional poverty. It shows the — The GPI is a concept in green economics and
number of the people, who are multidimensionally poor (suffering welfare economics. A GPI attempts to measure
deprivation in 33% of weighted indicators) and the number of whether or not a country’s increased production
deprivation with which poor households typically contend. It reflects of goods and expanding services have actually
deprivation in very rudimentary services and core human resulted in the improvement of welfare of the
functioning for people across 104 countries. The index uses same people of the country. Genuine Progress
three dimensions as the Human Development Index such as Indicator refers to the concept of a quantitative
health, education and standard of living. measurement of well-being and happiness.
— These are measured using 10 indicators: — The two measures of GPI and GNH are both
motivated by the notion that subjective measures
Dimensions and their 10 Indicators like well-being, are more relevant and important
Dimensions Indicators than more objective measures like consumption.
Health 1. Child mortality
2. Nutrition
Global Hunger Index (GHI)
Education 3. Years of schooling — GHI is designed to measure and track hunger
4. Children enrolled globally and by country and region. It is
Living Standards 5. Cooking fuel calculated each year by the International Food
6. Toilet Policy Research Institute (IFPRI).
7. Water
8. Electricity — The Global Hunger Index (GHI) was first
9. Floor released by IFPRI in 2006.
10. Assets
Magbook ~ Economic Growth and Development 13

(ii) Improvement in the quality of life.

GHI Index, 2021 (iii) Use of cultural heritage based on a value system in each
GHI 2020 was published in October 2021. It comprehensively area of life.
measures and track hunger at the global, regional and country Former President APJ Abdul Kalam said that the country’s
level. It was prepared jointly by global NGOs namely, Concern economic growth should always be guided by ‘National
Worldwide (Ireland) and Welt Hunger Hilfe (Germany). Prosperity Index’ that includes components like improvement
In order to reflect the multi-dimensional nature of the hunger, the of quality of life and adoption of a value system derived from
GHI 2021 combines the following four components/indicators our ancient civilisation besides GDP. SAARC prosperity Index
into one index. idea is given by Abdul Kalam on the basis of NPI.
1. Undernourishment (Insufficient calorie intake)
2. Child wasting (Low weight for their height) Human Capital Index Report 2020
3. Child stunting (Low height for their age) World Bank released the report titled “The Human Capital
Index 2020 Update: Human Capital in the Time of COVID-19” in
4. Child mortality (Under the age of five)
September, 2020. The Human Capital Index (HCI) 2020 is a
India with a score of 27.5 in this index ranked 101 out of 107 collaboration between the Human Development Practice Group
countries. Hunger level in India has been characterised as and the Development Economics Group of the World Bank.
serious’. India has been ranked at the 116th position among 174
countries in the Human Capital Index 2020. Last year India was
Green Gross Domestic Product (Green GDP) ranked 115 out of 157 countries. The country of Singapore
— Green GDP is an index of economic growth with the topped the score with 0.88 followed by Hong Kong and Japan
environmental consequences of that growth factored in. in this index of 2020.
— Green GDP monetises the loss of biodiversity and accounts
for costs caused by climate change. Some environmental Millennium Development
experts prefer physical indicators (such as waste per capita
or carbon dioxide emissions per year), which may be
Goals (MDGs)
aggregated to indices such as the Sustainable MDGs were eventuated at the UNs Millennium Summit,
Development Index. 2000, where the world leaders of 189 UN Member States
(193 currently) agreed on a set of quantifiable and
Sustainable Development monitorable goals for development and poverty eradication to
be achieved by 2015.
Index (SDI)
— The sustainable development is defined as the MDGs Report, 2015
development to achieve the needs of present generation UN released the Global Report on MDGs. NITI Aayog
without compromising future generations need. released the Asia-Pacific MDGs Report, 2015. India has
— Sustainable development ensures the well-being of individual managed to reduce its extreme poverty incidence to a half
by integrating social development, economic development from 49.4% in 1994 to 24.7% in 2011. The report set the
and environmental conservation and protection. limit for extreme poverty as those living on $ 1.25 or less a
— The challenges of sustainable development are population, day.
poverty, inequality, the shortage of drinking water, human New Global Goals
health, consumption of energy, deforestation and petrol
The United Nations General Assembly (UNGA) formally
consumption.
adopted the 2030 Agenda for sustainable development on
26th September, 2015, along with a set of bold new Global
Human Sustainable Development Goals. The 193 members GA adopted the new framework,
Index (HSDI) ‘‘Transforming Our World: the 2030 Agenda for Sustainable
— HSDI was developed in 2010, by independent economists. Development,’’ composed of 17Goals and 169 targets to wipe
HSDI attempts to measure the overall quality of life by out poverty, fight inequality and tackle climate change over
factoring in a fourth parameter-per capita carbon emission the next 15 years. Ambitious 17 goals are–no poverty, zero
to the existing HDI. According to HSDI, the top five hunger, good health and well-being, quality education,
countries are Norway, followed by New Zealand, Sweden, gender equality, clean water and sanitation, affordable and
Switzerland and France. clean energy, decent work and economic growth, industry,
innovation and infrastructure, reduced inequality.
National Prosperity Index (NPI) Sustainable cities and communities, responsible
consumption and production, climate action, life below
NPI is a standard measure of social and economic water, life on land, peace, justice and strong institution and
development. Its three components are as follows partnership for the goals.
(i) GDP growth rate
Chapter four
Economic Planning
in India
Meaning of Strategies of
Economic Planning Planning
Planning involves — Economic planning refers to the path Harrod Domar Strategy
of actions in terms of policy measures The first Five Year Plan (1951-56) was
acceptance of a clearly to be followed in future, in pursuance
—
based on this strategy. This strategy
defined set of objectives in of pre-determined objectives. emphasised the role of capital
terms of which to frame — Planning Commission (now NITI accumulation’s dual character, which on
overall policies, formulation Aayog) defines economic planning as the one hand, increases the national
the utilisation of country’s resources income (demand side role) and on the
of a strategy for promoting
for developmental activities in other hand, increases the production
the realisation of the ends accordance with national priorities. It is capacity (supply side role).
defined and working out a a consciously and judiciously carried — According to this growth model, the rate
rational solution to out process for optimum utilisation of of economic growth in an economy is
problems—an attempt to existing resources in order to fulfil dependent on the level of savings and
some well defined objectives. capital output ratio.
coordinate means
and ends.
Objectives of Nehru-Mahalanobis
Planning Strategy
The broad objectives of Five Year Plans in — This strategy was a two sector model,
that is, consumer good sector and capital
India are as follows:
good sector. The strategy emphasised
— A high rate of growth with a view to investment in heavy industry to achieve
improvement in standard of living. industrialisation for rapid economic
— Modernisation of economy in terms of development. It was based on the
adoption of new technologies and Russian experience.
social outlook. — The objective was to become self-reliant
— Economic self-reliance meaning and overcome capital constraint. This
avoiding import which can be strategy was adopted in the Second Five
produced in India. Year Plan (1956-61) and with minor
— Equity implying equitable distribution modifications, up to the Fifth Plan. It was
of wealth with social justice. a long-term strategy.
— Economic stability, which means — It is also referred as planning by
controlling inflation and inducement as against imperative
unemployment. planning.
18 Magbook ~ Indian Economy

In 1945, People’s Plan was given by MN Roy.

Gandhian Strategy —

— In 1950, Sarvodaya plan was given by Jai Prakash

— It was enunciated by Acharya Shriman Narayan Agarwal in
Narayan. A few recommendations of this plan were
his ‘Gandhian Plan’ in 1944. The basic objective of the
accepted by the government.
Gandhian Model is to raise the material as well as cultural
level of the masses so as to provide a basic standard of life.
National Institution for
— It laid emphasis on scientific development of agriculture Transforming India (NITI)
and rapid growth of cottage and village industries.
Moreover, Gandhian strategy emphasised on employment
Aayog
oriented planning rather than production oriented planning — National Institution for Transforming India (NITI) Aayog is a
of Nehru. policy ‘think-tank’ of government that replaces Planning
commission and aims to involve states in economic
LPG Strategy policy-making. It will be providing strategic and technical
advice to the Central and the State Governments. Prime
— Liberalisation, Privatisation and Globalisation (LPG) strategy
Minister heads the Aayog as its Chairman.
of planning was introduced by the Finance Minister,
Dr Manmohan Singh under Narasimha Rao government in — It was formed via a resolution of the Union Cabinet on
1991. 1st January 2015 for providing directional and policy
inputs, designing strategic and long term policies,
— The strategy ended the ‘license-permit-raj’ and opened
programmes, advising Centre, States and Union
the hitherto areas reserved for the public sector to
Territories on technical aspect. It acts as the
private sector. It allowed for foreign direct investment and
quintessential platform of the Government of India to
followed an export promotion policy to boost economic
bring the states to act together in national interests and
growth. In all, it changed the nature of planning from
thereby fosters cooperative federalism.
centralised to ‘indicative’, wherein planning was to play a
facilitating role.
— It is also referred to as planning by inducement as against
NITI Aayog-Composition
imperative planning. — NITI Aayog is headed by the Prime Minister and it
consists of a governing council, comprising Chief
Ministers of states and Heads of all Union Territories.
History of Planning in India The Governing council replaces the earlier National
— First attempt to initiate economic planning in India was Development council.
made by M Visvesvaraya, a noted engineer and politician, in — In addition, there will also be a regional council
1934, through his book, Planned Economy for India. comprising of Chief Ministers and Lieutenant Governors
— In 1938, National Planning commission was set-up under of Union Territories, which will be mandated to develop
the Chairmanship of Jawaharlal Nehru by the Indian plans that are region specific.
National Congress. — The Aayog have 7-8 full time members and two
— Its recommendations could not be implemented because of well-known and accomplished part-time members,
the beginning of the World War II and changes in the Indian drawn from leading research organisations and major
political situation. universities. Four Union Ministers, nominated by the
— It stated that the objective of planning was to ensure an Prime Minister, are also be included in ex-officio
adequate standard of living for the masses. It emphasised capacity.
heavy industry and land reforms. — On the PM’s invitation, specialists across domains, will
— In 1944, Bombay plan was presented by 8 leading be invited to share knowledge and add value to the
industrialists of Bombay including JRD Tata, GD Birla and planning process, making extensive use of technology in
others. developing sustainable plans and programme
implementation. The Prime Minister shall appoint a full
— It saw future progress based on textile and consumer
time Chief Executive Officer with a fixed tenure and may
industries and saw an important role for the state in post
sanction a dedicated secretariat, if deemed necessary.
independent India.
Magbook ~ Economic Planning in India 19

vision. The long vision document (Perspective plan) will

Planning Commission comprise three year mass economic framework.
— After independence in 1950, the Planning commission was — 2017-18 to 2032-33 Vision Document
set-up under the Chairmanship of Pt Jawaharlal Nehru. It — 2017-18 to 2024-25 National Development Agenda
was to formulate plans for the economic development of the
— 2017-18 to 2019-20 Three Year Action Agenda (to be
country on the basis of the available physical, capital and
repeated after every three year)
human resources.
— The Planning commission was essentially a non-political
and non-constitutional advisory body, which makes National Development
recommendations to the government. It was set-up through Council (NDC)
an executive order of the Union Government on
— The National Development Council (NDC) is neither a
15th March, 1950.
constitutional body nor a statutory body. Union Cabinet
Differences between NITI set-up NDC in 1952, through an executive order.
Aayog and Planning Commission — National Development Council (NDC) is mainly
Parameter NITI Aayog Planning Commission concerned with approval of Five Year Plans. The NDC is
headed by the Prime Minister and consists of the Central
Financial To be an advisory body or a Enjoyed the powers to
Clout think-tank. The powers to allocate funds to
Ministers, Chief Ministers of the State and Lt Governors,
allocate funds might be ministries and State Administrators of Union Territories and Members of the
vested in the Finance Governments. Planning commission.
ministry. — The Secretary of the Planning commission acts as the
Full-time The number of full-time The last commission had Secretary of the Council. From a strictly legal point of
Members members could be fewer eight full-time members. view, NDC is essentially an advisory body.
than Planning commission.
States Role State Government are
expected to play a more
States role was limited to
the National Development
Five Year Plans in India
significant role than they did council and annual — After independence, India launched a programme of
in the Planning commission. interaction during plan Five Year Plans to make the optimum use of country’s
meetings. available resources and to achieve rapid economic
Member To be known at the CEO and Secretaries or Member development.
Secretary to be appointed by the Secretaries were — In India, development plans were formulated and
Prime Minister. appointed through the carried out within the framework of the mixed economy.
usual process.
— In India, Economic planning was adopted in the form of
Part-time To have a number of Full Planning commission
Members part-time members, had no provision for Five Year Plans and was seen as a development tool on
depending on the need from part-time members. account of various reasons.
time- to- time. These are:
—Limitations of market mechanism in view of the existing

15 Years Vision Document in economic backwardness of India at the time of

independence.
Place of Five Year Plan —The need for social justice as experience of the past five
and-a-half decades suggests that in a free enterprise
— The newly elected NDA government in 2014 decided to economy, economic gains do not necessarily trickle down.
discontinue the Five Year Plan and replace it with 15 Year —Judicious mobilisation and allocation of resources in the
Vision Document. The first 15 Year Vision Document will context of overall development programme in the light of the
come into effect from 2017-18 after the end of the 12th resource constraint in India.
Five Year Plan. It will be formulated with central objective of — So far, Twelfth Five Year plans have been formulated since,
eradication of poverty. It will come alongwith a 7 year the year 1951. Twelfth Five Year Plan (2012-2017), came
National Development Agenda which will lay down the into force once it was approved by the NDC on 27th
programmes, schemes and strategies to achieve a long term December, 2012.
20 Magbook ~ Indian Economy

Formulation of Five Year Plan

— The preparation of a Five Year Plan starts with the formulation of an Approach Paper, outlining the macroeconomic
dimensions, strategies and objectives of the plan.
— The Approach Paper is prepared by the Planning Commission (NITI Aayog) after intensive consultations with individuals.
— The Approach paper then presented to the National Development Council (NDC).
— Thus, based on the parameters postulated in the NDC approved Approach Paper, the Central Ministries and the states
prepare their respective plans, with the help of a large number of Steering committees or Working groups.
— Based on the reports of these Steering committees and Working groups, the States and the Central Ministries were come
with their proposals of detailed plans and programmes.

Implementation of Five Year Plan

— The Five Year Plan is implemented through Annual plans, which is a detailed description of the allocation of resources
between centre and states and for different sectoral activities in the government.
— In particular, it involves allocation of budgetary resources and detailed consideration of public sector projects, programmes
or schemes.
— The sanction of government expenditure is affected through Annual Budget, which is passed by the Parliament every year.

Brief Description of Five Year Plan

Plans Objectives Facts Assessments
First Plan ˜ Highest priority accorded to agriculture in view of ˜ Agriculture production increased dramatically.
(1951-56) large-import of foodgrain and inflation. ˜ National income went up by 18% and Per- Capita income
(Harrod ˜ Increasing the rate of investment from 5% to 7%. by 11%.
Domar Model) ˜ 31% of total plan outlay on agriculture followed by ˜ Targeted growth rate was 2.1% and First Plan achieved
transport and communication, social services, power 3.6%.
and industry. ˜ Price level was stable.
˜ Economist KN Raj was the architect.
Second Plan ˜ Rapid industrialisation with particular emphasis on ˜ Moderately successful, targeted growth rate was 4.5% but
(1956-61) the development of basic and heavy industry, also achieved 4.1%.
called Nehru Mahalanobis plan. ˜ Durgapur (UK), Bhillai (USSR) and Rourkela.
˜ To promote a socialistic pattern of society as (W Germany) Steel plants set-up with foreign help.
envisaged at Avadi Summit of Indian National ˜ Atomic Energy commission came into being and TIFR was
Congress in 1955. set–up.
˜ To increase National income by 25%, expansion of ˜ Inflation and low agricultural production and Suez crisis.
employment and reduction of inequality.
˜ To increase the rate of investment from 7% to 11%
of GDP.
˜ There was a thrust towards substitution of basic and
capital good industries in this plan.
Third Plan ˜ Indian economy entered take off stage (WW Rostow). ˜ A failure because of worst famine (1965-66), in 100
(1961-66) ˜ Self-reliant and self-generating economy was the goal. years.
(Gadgil ˜ Priority to agriculture and development of basic ˜ Indo-China (1962) and Indo-Pakistan (1965), conflict
Yojana) industries. Tried to balance industry and agriculture. diverted the resources from development to defence.
˜ To increase the National Income by 30% and Per ˜ Postponement of fourth Plan by 3 years.
Capita Income by 17%. ˜ Targeted growth 5.6% achieved growth 2.8%.
˜ The situation created by Indo-Pakistan Conflict (1965),
two successive years of severe drought, devaluation of
currency by 57% general rise in prices and erosion of
resources for plan delayed.
˜ Fourth Plan delayed because between 1966 to 1969 three
Annual Plans were formulated.
Magbook ~ Economic Planning in India 21

Plans Objectives Facts Assessments

Annual Plan ˜ Due to the unfortunate failure of the Third Plan, the production in various sectors of the economy became stagnant.
(1966-69) In 1966, the Government of India declared the devaluation of rupee, with a view to increase the exports of the
country. So, the Fourth Plan was postponed and 3 Annual Plans were implemented. Some of the economists called
this period, i.e. from 1966 to 1969, Plan Holiday.
Fourth Plan ˜ Objective was growth with stability and progressive ˜ First 2 years of the plan were successful with record
(1969-74) achievement of self-reliance. foodgrain production on account of Green Revolution.
˜ Laid special emphasis on improving the condition of ˜ Adoption of import-substitution policy and
under privileged and weaker sections. export-promotion policy widened the industrial base.
˜ Food security in gold was also one of its main goal. ˜ Targeted growth 5.7% however, achieved growth 3.3%.
˜ The objective is of correcting the earlier trend of ˜ The plan was failure on account of runaway inflation (due
increased concentration of wealth and economic to 1972 oil crisis or supply shock); huge influx of refugees
power. from Bangladesh post 1972 Indo-Pak War.

Fifth Plan ˜ Original approach to plan prepared by ˜ Targeted growth 4.4% and achieved growth 4.8%.
(1974-79) C Subramaniam, who proposed economic growth ˜ Fifth Plan cost calculations based on 1971-72, prices
alongwith direct attack on poverty. proved to be wrong.
˜ However, final draft prepared by DP Dhar with ˜ Fifth Plan terminated 1 year before the plan period in
objectives of removal of poverty (Garibi Hatao) and March, 1978.
attainment of self-reliance. ˜ Brought to the fore problem associated with coalition
˜ To step-up domestic rate of saving. government making a mockery of formulation of Five Year
˜ Introduction of minimum needs programme. Plan.

Rolling Plan Rolling plan (Gunnar Myrdal) was brought out by Janata Party Government under Morarji Desai in 1978. The focus of
(1978-80) the plan was enlargement of the employment potential in agriculture and allied activities to raise the income of the
lowest income classes through minimum needs programme. Annual Plan period was 1979-80.

Sixth Plan ˜ Removal of poverty through strengthening of ˜ Indian economy made an all round progress and most of
(1980-85) infrastructure for both agriculture and industry. the targets fixed by the plan was achieved.
˜ The emphasis was laid on greater management, ˜ Targeted growth 5.2%.
efficiency and monitoring of various schemes. ˜ Achieved growth 5.4%.
˜ Involvement of people in formulating schemes of
development at local level.
Seventh Plan ˜ To accelerate foodgrains production. ˜ Foodgrain production grew by 3.23% as compared to a
(1985-90) ˜ To increase employment opportunities. long-term growth rate of 2.68% between 1967-68 and
˜ To raise productivity. 1988-89.
˜ Outward looking strategy with gradual liberalisation
˜ The Indian economy finally crossed the barrier of the
over of economy. Hindu rate of growth of 3% given by Professor Raj
Krishna.
˜ Average annual growth rate was 6.0% as against the
targeted 5.0% and average of 3.5 % in the previous plans.
˜ It saw the beginning of liberalisation of Indian economy.
Annual Plan The Eighth Plan could not take off due to fast changing political situations at the centre. Therefore, from 1990-92,
(1990-92) Annual plans were formulated.
Eighth Plan ˜ Process of fiscal reforms and economic reforms ˜ Higher economic growth rate of 6.8% achieved as against
(1992-97) initiated by Narasimha Rao Government to prevent the targeted 5.6%.
another major economic crisis. ˜ Improvement in trade and current account deficit.
˜ To increase the average industrial growth rate to ˜ Significant reduction in fiscal deficit.
7.5%. ˜ Agriculture growth and industrial growth increased.
˜ To provide a new dynamism of the economy and ˜ Unshackled private sector and foreign investment control
improve the quality of life of the common man. was the prime reason for high growth.
˜ Also called as Rao-Manmohan Singh model. ˜ Overall socio-economic development indicators low.
˜ First indicative plan. ˜ The growth became jobless and fruitless.
22 Magbook ~ Indian Economy

Plans Objectives Facts Assessments

Ninth Plan ˜ Growth with social justice and equality. ˜ Global economic slowdown and other factors led to
Emphasis on Seven Basic Minimum Services (BMSs), revision of targeted growth rate from 7% to 6.5%,
(1997-02) ˜

which included safe drinking water universalisation of which too was not achieved.
primary education, streamlining PDS among others. ˜ The economy grew at 5.4% only.
˜ Pursued the policy of fiscal consolidation. ˜ Agriculture grew by 2.1% as against the target of
˜ Decentralisation of planning with greater reliance on 4.2% per annum.
states.
˜ Ensuring food and nutritional security to all.
˜ Empowerment of women, SC/STs/OBCs.

Tenth Plan ˜ The Tenth Plan aimed at achieving 8.1% GDP growth ˜ Increase in GDP growth to 7.6% compared to 5.5%
assuming that ICOR (Incremental Capital Output compared to 5.5% in the Ninth Plan. The lower than
(2002-07)
Ratio) will decline from 4.53% to 3.58%. targeted growth rate of 8% was due to low growth of
˜ It aimed at increasing domestic saving rate from 3% in the first year of Tenth Plan.
23.52% to 29.4% of GDP and gross capital ˜ Increase in gross domestic saving and investment.
formation to 32.2% from 24.4% of GDP. ˜ Reduction in ICOR to 4.2% though higher than
˜ To improve the overall framework of governance. targeted, but less than Ninth Plan’s ICOR of 4.53%.
˜ Agriculture was the core element. ˜ Increase in foreign exchange reserves to US $ 287
billion.
˜ However, Tenth Plan fared worst on socio-economic
indicators and the agricultural growth rate was meagre
2.1%.
Eleventh Plan ˜ Average GDP growth of 8.1% per year. ˜ The growth rate during the Eleventh Plan period was
(2007-12) ˜ Agricultural GDP growth of 4% per year. Generation about 7.9%, which is higher than the 7.8% growth
of 58 million employment opportunities. rate achieved in the Tenth Plan.
˜ Sex ratio for age group 0-6 years to be raised to 935 ˜ As against the target of 4% growth in the agriculture
by 2011-12 and to 950 by 2016-17. sector, the plan could register a growth of only 3%
during 2007-12 period.
˜ The services sector continued to register a growth rate
of more than 10%. However, the industrial growth rate
showed at 7.9%.

Reducing Infant Mortality Rate (IMR) to 25, Maternal

Twelfth Five Year Plan (2012-17) —

Mortality Rate (MMR) to 100 and Total Fertility Rate (TFR)

— 12th Five year plan of the Government of India was India's to 2.1.
last five year plan. It is prepared and launched by D. P. Dhar. — Increasing infrastructure investment to 9% of GDP.
— The Finance Ministry has extended the time period for — Improving child sex ratio (0-6) to 950.
12th plan schemes ending on 31st March by six months
— Provide access to banking services to 90% Indian
(i.e., September, 2017)
households by the end of twelfth five year plan.
— The Approach Paper of the Twelfth Five Year Plan is
concerned with the faster, sustainable and more inclusive Achievement of 12th Five Year
growth. In it, the challenge of urbanisation has been
identified as one of the key focus area.
Plan
— The total plan size of Twelfth Plan is ` 47.7 lakh crore, — GDP growth rate achieved of financial year (FY) of
13.5% more than the Eleventh Plan. 2012-13, 2013-14, 2014-15, 2015-16 and 2016-17 are
5.6, 6.6, 7.5, 8.0 and 6.6 percent respectively.
Twelfth Five Year Plan’s Goals — Base line of IMR was 44. Achievement was 37 (in 2015)
12th five year plan main goals are as follows as per appraisal document of 12th plan of NITI Aayog.
— Base line of TFR was 2.4 and achievement was 2.3 (in
— It aims at average GDP growth rate of 8%.
2015) as per appraisal document of 12th five year plan of
— It seeks to achieve 4% growth in agricultural sector. NITI Aayog.
— It aims at reducing head-count poverty by 10%.
Magbook ~ Economic Planning in India 23
— Base line of child sex ratio in the 0-6 year age group was 914 and — Annual GVA growth in tertiary sector of FY
achievement was 919 (2015-16) as per NITI Aayog. 2012-13 to 2016-17 were 8.3% (2012-13), 7.7%
(2013-14), 9.8% (2014-15), 9.4% (2015-16) and
Annual Growth Rate of GVA by Economic 8.5% (2016-17).
Activity at constant (2011-12) Basic Prices of FY 2012-13 to
— Share of primary sector in GVA at current prices
2016-17
from FY 2012-13 to FY 2016-17 were 21.3%,
Sl. Item 2012-13 2013-14 2014-15 2015-16 2016-17 21.4%, 20.9% 20.1% and 20.4% respectively.
No. — Share of secondary sector in GVA at current
1. Agriculture, 1.5 4.2 -0.2 0.8 6.3 prices from FY 2013-13 to FY 2016-17 were
forestry and 28.7%, 27.9%, 27.3%, 27.6% and 27%
fishing respectively.
2. Mining and -0.5 3.0 10.8 12.3 13.0
— Share of Tertiary sector in GVA at current prices
quarrying
from FY 2012-13 to FY 2016-17 were 50%,
3. Manufacturing 6.0 5.6 5.5 10.6 7.9
50.6%, 51.8%, 52.3% and 52.6% respectively.
4. Electricity, gas 2.8 4.7 8.0 5.1 9.2
& water supply,
& other utility Three Year Action
services
5. Construction 0.6 4.6 4.4 2.8 1.3 Agenda (2017-18 to 2019-20)
6. Trade, hotels, 9.7 7.8 9.8 10.7 7.2 — The first Three Year Action Agenda, a NITI Aayog
transports, document, is based on extensive discussions with
communication and inputs from the Central ministries and State
and services governments on 23rd April 2017.
related to
broadcasting — The Agenda is a part of a longer-term 15-year
7. Financial 9.5 10.1 10.6 10.8 6.0 Vision and 7-year Strategy outlined in a separate
services, real document. The Action Agenda proposes a path to
estate, achieve all-round development of India and its
ownership of people. The objective of eliminating poverty in all
dwellings and its dimensions such that every citizen has access
professional to a minimum standard of food, education,
services
health, clothing, shelter, transportation and
8. Public 4.1 4.5 10.7 6.9 10.7
energy has been at the heart of India’s
administration
and defence and development efforts since Independence.
other services — Farmers make up nearly half of India’ workforce.
Total GVA at 5.4 6.1 7.2 8.1 7.1 Therefore, for India to flourish, its farmers and
Basic Prices the farm economy must prosper. It is against this
Industry (2-5) 3.6 5.0 5.9 7.4 7.5 background that the Prime Minister has called for
Services (6-8) 8.1 7.8 10.3 8.9 8.4 doubling farmer’s income by 2022.
— Water demand for irrigation, drinking and
industrial use has been increasing with growth in
Sector Wise Growth and Share in 12th incomes and population under this agenda.
Five Year Plan — Digital connectively has become an important
— Annual GVA growth data in all sectors of 12th five year plan i.e. driver of economic growth. The Action Agenda
2012-13 to 2016-17 were based upon 2011-12 prices at constant discusses the Digital India campaign and the
prices. actions related to enhancing digital connectivity.
— Annual GVA growth during Financial Year (FY) 2012-13 to 2016-17 — Important aim of the Action Agenda is education,
in Primary Sector were 1.4% (2012-13), 4.8% (2013-14), 1.2% skill development, health and reducing issues
(2014-15), 2.6% (2015-16) and 7.4% (2016-17) respectively. facing specific groups such as Scheduled Castes,
— In secondary sector; Annual GVA growth during FY 2012-13 to Scheduled Tribes, women, children, differently
2016-17 were 3.6% (2011-12), 4.2% (2013-14), 6.7% (2014-15), abled and senior citizens.
9.4% (2015-16) and 7.5% (2016-17) respectively.
Chapter five
Money and Banking
M1 = Currency with the public +
Money —
Demand deposits with the Banking
Financial market — Fiat money, derives its value by being declared System + Other deposits with the
provides channels for by a government to be legal tender; i.e. it must RBI.
be accepted as a form of payment within the — M2 = M1 + Saving deposits of Post
allocation of saving to boundaries of the country, for all debts, public Office Savings Banks.
investment. The financial and private. — M3 = M1 + Time deposits with the
market thus, contribute — The money supply of a country consists Banking System.
to economic currency (bank notes and coins) and bank — M4 = M3 + Office Savings of Banks.
development to the money (the balance hold in checking accounts — The decreasing order of liquidity of
and savings accounts). these monetary aggregates is
extent that latter
— Bank money, which consists only of records M0 > M1 > M2 > M3 . The decline in
depends on the rates of (mostly computerised in modern banking), liquidity indicates the shifting of
saving investment. forms by far the largest part of the money ‘medium of exchange ‘to’ store of
supply in developed nations. value’.
— Demand deposits are those deposits
Measures of Money Supply payable by the bank on demand by
in India a customer like current and savings
account.
— Money supply is the stock of liquid assets held
by the public which can be freely exchanged
for goods and services. Indian Currency
— RBI calculates four concepts of money supply. Symbol ( `)
These are known as measures of monetary ◆
The symbol of Indian rupee ` came
aggregates or money stock measures. into use on 15th July, 2010. India is
— The working group under the Chairmanship of the fifth economy (after America,
Dr YB Reddy, then Deputy Governor of RBI Britain, Japan and European Union to
(now Former Governor of RBI) has suggested accept a unique currency symbol.
four new monetary measures. ◆
The new symbol designed by
(M0 , M1, M2 , M3 ) and three liquidity measures D Udaya Kumar, a post graduate
(L, L 2 , L 3 ). Besides, the group also of IIT Mumbai was finally selected by
recommended the publishing of Financial the Union Cabinet on 15th July,
Sector Survey ‘A Monetary Aggregates’, every 3 2010.
months. ◆
The new symbol, is an amalgamation
— M0 = Currency in circulation + Banker’s deposit of Devanagari ‘Ra’ and the
with RBI + Other deposit with RBI. Roman ‘R’ without the stem.
Magbook ~ Money and Banking 27

Liquidity Aggregates — It is a market for short-term funds with maturity ranging

from overnight to 1 year and includes financial
— L 1 = M 3 + All Deposits with the Post Office Savings
instruments that are deemed to be close substitutes of
Banks (excluding National Savings Certificates).
money.
— L 2 = L 1 + Term Deposits with Term Lending Institutions
and Refinancing Institutions (FIs) + Term Borrowing Functions of Money Market
by FIs + Certificates of Deposit issued by FIs; and The money market performs three broad functions are as
— L 3 = L 2 + Public Deposits of Non-Banking follows
Financial Companies. (i) It provides an equilibrating mechanism for demand and
supply of short-term funds.
Financial Sector (ii) It enables borrowers and lenders of short-term funds to
fulfil their borrowing and investment requirements at an
— Financial Sector of a country is one of the important
efficient market clearing price.
determining factors of the level of economic development.
(iii) It provides an avenue for Central Bank intervention in
Sound financial system induces the level of savings and
influencing both quantum and cost of liquidity in the
investment, thus, working as a stimulant for the
financial system, thereby transmitting monetary policy
development variables.
impulses to the real economy.
— Weak financial structure certainly hinders the tempo of
development process by discouraging the developmental — Efficient functioning of the money market is important for
variables. Thus, rapid economic development requires a the effectiveness of monetary policy.
sound financial system with adequate availability of finance
Regulation of Indian Money Market
and a strong system of associated financial and investment
institutions. — Indian money market is broadly divided into two
parts-organised and unorganised.
Financial sector in India comprises of Financial Intermediaries or
Financial Institutions are as follows: — The RBI is the Apex Organisation in the Indian Money
—Financial Institutions are the institutions, which are primarily Market. It carries out regulation and development of the
engaged in the collection and mobilisation of savings and Indian money market through instruments such as call ,
convert into investment. Financial institutions include all banks notice or term money market, repo market, certificate of
and non-banking financial institutions. deposit, commercial paper and Collateralised Borrowing
—Financial Markets are the markets, which are engaged in the and Lending Obligation (CBLO).
collection of savings from the surplus units of the economy and
lending to the deficit units of the economy for the investment Organised Money Market
and other purposes. Financial market consists of money market
and capital market. Call Money Market
—Financial Assets include unit shares, debentures, certificate of — The call or notice money market forms an important
deposits, life insurance policies etc. These are the instruments segment of the Indian money market.
traded in the financial markets through financial intermediaries. — Call or notice money is an amount borrowed or lent on
demand for a very short period. If the period is greater
Financial Markets than 1 day and up to 14 days, it is called the notice
— Financial market is an important part of financial sector. money; otherwise the amount is known as call money.
Financial market is that market, where financial transactions No collateral security is needed to cover these
take place. On the basis of short-term and long-term transactions.
transactions, such markets are classified as into money —The call market enables the banks and institutions to even
market and capital market. out their day-to-day deficits and surpluses of money.
Cooperative Banks, Commercial Banks and primary
Money Market dealers are allowed to borrow and lend in this market for
— The cluster of financial institutions that deal in short-term adjusting their cash reserve requirements.
securities and loans, gold and foreign exchange are termed as —This is a completely inter-bank market. Interest rates are
money market. Money has a time value and therefore, the use market determined. In view of the short tenure of these
transactions, both borrowers and lenders are required to
of it, is bought and sold against payment of interest.
have current accounts with Reserve Bank of India.
Short-term money is bought and sold on the money market
and long-term money on the capital market. Banker’s Acceptance Market
— Neither the money market nor the capital market exists in — A Banker’s Acceptance (BA) is a short-term credit

one physical location. The money market is a key investment created by a non-financial firm and
component of the financial system, as it is the function of guaranteed by a bank to make a payment. Acceptances
monetary operations conducted by the Central Bank in its are traded at discounts from face value in the secondary
pursuit of monetary policy objectives. market.
28 Magbook ~ Indian Economy

— One advantage of a banker’s acceptance is that it — These bills are called trade bills. These trade bills are called
does not need to be held until maturity and can be commercial bills, when they are accepted by Commercial
sold off in the secondary markets, where investors Banks. If the bill is payable at a future date and the seller needs
and institutions constantly trade BAs. money during the currency of the bill, the seller may approach
the bank for discounting the bill.
Collateral Loan Market
— The banks discount this bill by keeping a certain margin and
— In this market, loan is often secured against collateral
credits the proceeds. Banks, when in need of money, can also
security. Security may be in any form viz pledge,
get such bills rediscounted by financial institutions such as LIC,
mortgages etc. Thus, the market for loans secured by
UTI, GIC, ICICI and IRBI.
collateral security is called the collateral loan market.
The maturity period of the bills varies from 30 days, 60 days or
Treasury Bill Market 90 days, depending on the credit extended in the industry.
— Treasury bills are money market instruments to
finance the short-term requirements of the
Government of India. These are discounted securities
and thus, are issued at a discount to face value. The
return of the investor is the difference between the
maturity value and issue price.
— The market that deals with treasury bills is called
treasury bill market. These are the lowest risk
category instruments for the short-term. RBI issues
treasury bills [T-bills] at a prefixed day and for a fixed
amount. Organisation of Indian Money Market

— There are four types of Treasury Bills: Certificates of Deposits Market

(i) 14 Days T-Bill It was introduced in 1997, by the — After treasury bills, the next lowest risk category investment
RBI. Maturity is in 14 days, it is auctioned on every option is Certificate of Deposit (CD) issued by banks and
Friday of every week and the notified amount for Financial Institution (FI).
auction is ` 100 crore. — Allowed in 1989, CDs were one of RBI’s measures to
(ii) 91Days T-Bill Maturity is in 91 days, it is auctioned
deregulate the cost of funds for banks and FIs.
on every Friday of every week and the notified amount A (CD) is a negotiable promissory note, secure and short-term,
for auction is ` 100 crore. of upto a year, in nature.

(iii) 182 Days T-Bill Maturity is in 182 days, it is Repo Market

auctioned on every alternate Wednesday, which is not — Repo is a money market instrument which helps in
a reporting week and the notified amount for auction collateralised short-term borrowing and lending through sale or
is ` 100 crore. It was introduced on the purchase operations in debt instruments.
recommendations by Vaghul Working Group. — Initially repos were allowed in Central Government treasury bills
and dated securities created by converting some of the
(iv) 364 Days T-Bill Maturity is 364 days, it is auctioned
treasury bills, RBI gradually allowed repo transactions in all
on every alternate Wednesday, which is a reporting government securities and T-bills of all maturities and now
week and the notified amount for the auction is ` 500 State Government Securities, PSU’s bonds, private corporate
crore. It was also recommended by Vaghul Working securities have also been made eligible for repos to broaden
Group. the repo market.
— These are bought by the Reserve Bank, Commercial Money Market Mutual Funds (MMMFs)
Banks, non-banking financial intermediaries, LIC, UTI — The scheme was introduced by RBI in April, 1992 with the
and GIC. Treasury bills are most liquid, because
objective of providing an additional short-term avenue to the
Reserve Bank is always ready to buy and discount
individual investors. They have now been brought under the
them.
purview of SEBI since March, 2000.
Commercial Bill Market
Commercial Paper Market
— It is the market that deals in commercial bills. — Commercial Papers (CPs) are negotiable short-term unsecured
Commercial bills of exchange are negotiable promissory notes with fixed maturities, issued by well-rated
instruments drawn by the seller or drawer of the organisations. These are generally sold on discount basis.
goods on the buyer or drawer of the good for the value
— Organisations can issue CPs either directly or through banks or
of the goods delivered.
merchant banks (called as dealers).
Magbook ~ Money and Banking 29

Unorganised Money Market Besides helping diversify funding sources, the cost of
borrowing could also turn out to be lower than domestic
— The sector consists of unregulated non-bank financial
markets. In 2013, the first masala bonds were issued
intermediaries such as money lenders Chit funds, Nidhis etc.
by the International Finance Corporation (IFC), an arm
— Chit funds are savings institutions. They are of various types
of the World Bank. IFC then named them Masala bonds
and don’t have any standardised form. Chit funds have
to give a local flavour by calling to mind Indian culture
regular members, who make periodic contributions.
and cuisine.
— At periodic intervals funds are given to a member based on — Masala bond will help the Indian corporates to reduce
a pre determined criterion, usually on the basis of bids or
its interest cost burden on the debt amount on its
draw of lots. All members are assured of their turn before
balance sheet. The more of foreign funds can be used
the round ends.
for infrastructural development in the country. Overall,
— Chit funds are prevalent in almost all states, but Kerala and the development of a Masala bond market would be
Tamil Nadu account for the major part. They exist in both positive for Indian firms, opening up potentially
organised and unorganised form. significant new sources of funding over External
— Organised Chit funds are regulated by registrar of Chit funds Commercial Borrowings (ECBs).
and the relevant legislation in this regard is the Chit Funds
Act, 1982. There is however, regulatory confusion since Capital Market
Collective Investment Schemes (CIS) are to be registered — It is one of the most important segments of the Indian
and regulated by SEBI. Many Chit funds take advantage of financial system. It is the market available to the
the regulatory loopholes. companies for meeting their requirements of the
— Nidhis are a kind of mutual benefit funds. Their dealings are long-term funds. These are markets for buying and
restricted to members only and they operate in the selling equity and debt instruments.
unregulated credit market. — The market consists of a number of individuals and
— Deposits mobilised by them are not much. Their principal institutions (including the government) that channelise
source of funds is from the members and they provide loans the supply and demand for long -term capital and
to members at relatively reasonable rates and are secured. claims on it.
— Money lenders and loan companies are present all across — The demand for long-term capital comes predominantly
the country. They generally give loans to wholesale traders, from private sector manufacturing industries,
artisans and other self-employed persons. They charge high agriculture sector, trade and the government agencies,
rates of interest from 26% to 48% and 50 people who while the supply of funds for the capital market comes
approach them are generally unable to get loans from largely from individual and corporate savings, banks,
Commercial Banks. insurance companies, specialised financing agencies
Promissory Note and the surplus of governments. The Indian capital
market is broadly divided into the Industrial Securities
— It is a legal document between a lender and a borrower,
Market and Gilt-edged Market.
whereby the latter agrees to certain conditions for the
repayment of the sum of money borrowed.
(i) Industrial Securities Market
— Promissory note is signed when one borrows from a
— The industrial securities market refers to the market,
Commercial Bank.
which deals in equities and debentures of the
— Particular forms of promissory notes, known as commercial corporates. It is further divided into primary market and
paper, can be bought and sold. secondary market.
Dated Government Securities Primary Market
— These are securities issued by the Government of India and — Primary market (new issue market) deals with new
State Governments. The date of maturity is specified in the securities, i.e. securities, which were not previously
securities, therefore, they are known as dated securities. available and are offered to the investing public for the
Masala Bond first time. It is the market for raising fresh capital in the
form of shares and debentures.
— Masala bonds are rupee denominated overseas bonds.
Masala bonds will help to internationalise the Indian rupee — It provides the issuing company with additional funds
and also deepen the Indian financial system( Public and for starting a new enterprise or for either expansion or
Private Sector). By issuing bonds in rupees, an Indian diversification of an existing one and thus, its
company is shielded against the risk of currency fluctuation, contribution to company financing is direct. The new
typically associated with borrowing in foreign currency. offerings by the companies are made either as an Initial
Public Offering (IPO) or rights issue.
30 Magbook ~ Indian Economy

Secondary Market/Stock Market — In particular, it is responsible for

— Secondary Market or Stock Market (old issues market or —institutional reforms in the securities markets.
stock exchange) is the market for buying and selling —building regulatory and market institutions.
securities of the existing companies. Under this, securities —strengthening investor protection mechanism and
are traded after being initially offered to the public in the —providing efficient legislative framework for securities markets,
such as Securities and Exchange Board of India Act, 1992
primary market and listed on the stock exchange.
(SEBI Act, 1992); Securities Contracts (Regulation) Act, 1956
— The stock exchanges are the exclusive centres for trading and the Depositories Act, 1996.
of securities. It is a sensitive barometer and reflects the
trends in the economy through fluctuations in the prices Securities and Exchange Board of
of various securities. India (SEBI)
(ii) Gilt-Edged Market — It is the regulatory authority established under the
SEBI Act, 1992, in order to protect the interests of the
— The gilt-edged market refers to the market for
investors in securities as well as promote the development
government and semi-government securities, backed by
of the capital market.
the Reserve Bank of India (RBI). Government securities
— It involves regulating the business in stock exchanges
are tradeable debt instruments issued by the government
supervising the working of stock brokers, share transfer
for meeting its financial requirements.
agents, merchant bankers, underwriters etc as well
— The term gilt-edged means ‘of the best quality’. This is as prohibiting unfair trade practices in the securities market.
because the government securities do not suffer from risk
— The main functions of SEBI are as follows:
of default and are highly liquid (as they can be easily sold
—To regulate the business of the stock market and other
in the market at their current price). The open market
securities market.
operations of the RBI are also conducted in such —To promote and regulate the self-regulatory organisations.
securities. —To prohibit fraudulent and unfair trade practices in securities
market.
Other Instruments of Capital Market —To promote awareness among investors and training of
intermediaries about safety of market.
◆
Derivatives the term derivative indicate that it has no
—To prohibit insider trading in securities market.
independent value i.e. its value is entirely derived from an
—To regulate huge acquisition of shares and takeover of
underlying asset. The underlying asset can be securities,
companies.
commodities, currency etc. Derivative is a forward future
option or any other hybrid contract of fixed duration, linked
for the purpose of contact fulfillment to the value of an asset. Reforms in Capital Market
◆
Futures Contract means a legally binding agreement to buy or of India
sell the underlying security on a future date. — The capital market has witnessed major reforms in the
◆
Options Contract is a type of derivatives contract which gives 1990s and thereafter. It is on the average of growth. Thus,
the buyer or holder of the contract the right (but not the the Government of India and SEBI have taken a number of
obligation) to buy or sell the underlying asset at a measures in order to improve the working of the Indian
pre-determined price within or at the end of a specified Stock Exchanges and to make it more progressive and
period ‘call’ and ‘put’ are the two types of options contract. vibrant.
◆
Forwards Contract is also an agreement to buy or sell an asset The major reforms undertaken include are as follows:
on a future date. However, unlike a futures contract it is —Credit Rating Agencies Three credit rating agencies viz the
between two private parties and there is no guarantee of Credit Rating Information Services of India Limited
fulfillment of the contract. (CRISIL-1988), the Investment Information and Credit Rating
Agency of India Limited (ICRA - 1991) and Credit Analysis and
Research Limited (CARL) were set-up in order to assess the
Regulatory Framework financial health of different financial institutions and agencies
related to the stock market activities.
— In India, the capital market is regulated by the Capital
Markets Division of the Department of Economic Affairs, —Merchant Banking Activities Many Indian and foreign
Commercial Banks have set-up their merchant banking
Ministry of Finance.
divisions in the last few years. It has proved as a helping hand
— The division is responsible for formulating the policies for the factors related to the capital market.
related to the orderly growth and development of the —Growth of Electronic Transactions Due to technological
securities markets (i.e. share, debts and derivatives) as development in the last few years, the physical transaction
well as protecting the interests of the investors. with more paper work is reduced. It saves money, time and
energy of investors.
32 Magbook ~ Indian Economy

— CDS shall be permitted on securities with original maturity up ◆

Metropolitan Stock Exchange of India Ltd, Mumbai*
to one year like CPs, certificates of deposit and ◆
India INX, Gandhi Nagar*
non-convertible debentures with original maturity less than ◆
Saurashtra Kutch Stock Exchange, Gujarat
1 year as reference or deliverable obligations. ◆
Mangalore Stock Exchange, Mangalore
◆
Guwahati Stock Exchange, Guwahati
Stock Exchanges in India ◆
Hyderabad Stock Exchange, Hyderabad
— Bombay Stock Exchange (BSE), the oldest stock exchange in ◆
Jaipur Stock Exchange, Jaipur
Asia, was established in 1875. It is synonymous with Dalal ◆
Ludhiana Stock Exchange, Ludhiana
Street.
◆
Madras Stock Exchange, Chennai
— BSE was corporatised and renamed BSE Limited in 2005. In
◆
MP Stock Exchange, Indore
1894, the Ahmedabad Stock Exchange was started to
facilitate dealing in the shares of textile mills.
◆
Pune Stock Exchange, Pune
— In 1908, Calcutta Stock Exchange was started to facilitate
◆
Interconnected State Exchange of India Limited, Mumbai
market for shares of plantations and jute mills. At present, * Active Exchange
there are 22 stock exchanges in the country. Two types of
Commodity Exchanges
transaction take place in stock exchanges. These are as
follows :
◆
Multi Commodity Exchange of India Limited (MCX)
—Investment Transaction Sale or purchase of securities
◆
National Commodity and Derivatives Exchange Limited
undertaken with the long-term prospect relating to their yield and (NCDEX)
price. ◆
Indian National Multi-Commodity Exchange (NMCE)
—Speculative Transaction Sale or purchase of securities ◆
Indian Commodity Exchange Limited (ICEX)
undertaken with short-term gain from differences in yield and
price. In this, delivery of securities or the payment of full price is
rare. National Stock Exchange (NSE)
— Speculative transaction of different types are as follows: — NSE was promoted by leading financial institutions at
—Spot Transaction involves delivery of and payment for securities the behest of the Government of India and was
on the same day. incorporated in November, 1992, as a tax-paying
—Cash Transaction are ready delivery transaction, wherein delivery company unlike other stock exchanges in the country.
of and payment for securities is completed within a period of one — On the basis of the recommendations of high powered
to 7 days. Pherwani Committee, the National Stock Exchange was
—Forward Transaction involves delivery of and payment for incorporated in November, 1992. In April 1993, it was
securities will be made on certain fixed settlement days, coming recognised as a stock exchange and commenced
once in 15 or 30 days. operations in 1994. In October 1995, NSE became
—On the recommendation of the Narasimham Committee, SEBI largest stock exchange in the country.
was given the power to control and regulate the new issues
— Trading at NSE can be classified under two broad
market as well as stock exchange through Amendment of the
Capital Issues Control Act, 1947. categories:
(i) Wholesale debt categories
Approved Stock Exchanges in India (ii) Capital market
◆
UP Stock Exchange, Kanpur — Wholesale debt market operations are similar to money
◆
Vadodara Stock Exchange, Vadodara market operations, where institutions and corporate
◆
Coimbatore Stock Exchange, Coimbatore bodies enter into high value transactions in financial
◆
Bombay Stock Exchange, Mumbai* instruments such as government securities, treasury
◆
Over the Counter Exchange of India, Mumbai bills, public sector unit bonds, commercial paper,
certificate of deposit etc.
◆
National Stock Exchange, Mumbai*
— NSE has several advantages over the traditional trading
◆
Ahmedabad Stock Exchange, Ahmedabad
exchanges.
◆
Bangalore Stock Exchange, Bengaluru
They are as follows:
◆
Bhubaneswar Stock Exchange, Bhubaneswar
—NSE brings an integrated stock market trading network
◆
Calcutta Stock Exchange, Kolkata* across the nation.
◆
Cochin Stock Exchange, Cochin —Investors can trade at the same price from anywhere in the
◆
Delhi Stock Exchange, Delhi country since inter-market operations are streamlined
coupled with the countrywide access to the securities.
◆
NSE IFSC Ltd, Gandhi Nagar*
Magbook ~ Money and Banking 35
i.e. playing a leading role in developing a sound financial
Banking in India system so that it can discharge its regulatory function
efficiently.
— History of Indian banking goes back to 19th century it
—Ensuring that credit allocation by the financial system
failed. First successful bank in India was Bank of Bengal
broadly reflect the national economic priorities and societal
set-up in 1806. First Commercial Bank in country was concerns.
Awadh Commercial Bank established in 1881.
—Regulating the overall volume of money and credit in the
— In 1921, Imperial Bank, of limited liability of India was economy with a view to ensuring a reasonable degree of
set-up. There were two important steps in the banking sector price stability.
after independence in 1949. Nationalisation of Reserve Bank
of India and the Banking Regulation Act, which empowered
Role of the RBI
RBI to regulate banking sector in country. RBI plays the following roles in the Indian banking and
— The Punjab National Bank, established in Lahore in 1895, financial system are as follows:
has survived to the present and is now one of the largest Note Issuing Authority
banks in India. — RBI has had the sole authoring to issue currency notes
— The largest bank-Imperial Bank of India was nationalised in other than ` 1 notes or coins and coins of smaller
1955 and renamed as State Bank of India followed by denominations since, its inception. ` 1 notes or coins and
formation of its 7 associates in 1959. coins of smaller denomination are issued by the Central
— The step toward social banking was taken with the Government, but are put into circulation through the
nationalisation of 14 Commercial Banks on 19th July, RBI.
1969. Six more Commercial Banks were nationalised on — RBI can issue notes against the securing of coins or
15th August, 1980. bullion, foreign securities, rupee coins, Government of
— Banking crisis during 1913-1917 and failure of 588 banks in India securities as such bills of exchange (promissory
various parts of the country during the decade ended 1949 notes as are eligible for purchase by it. The Reserve
underlined the need for regulating and controlling Bank has adopted Minimum Reserve System for the note
Commercial Banks. The Banking Companies Act was passed issue. Since 1957, it maintains gold and foreign
in February, 1949, which was subsequently amended to read exchange reserves of ` 200 crore of which atleast ` 115
as Banking Regulation Act, 1949. This Act provided the legal crore should by in gold.
framework for regulation of the banking system in India.
Printing of Securities and Minting in India
— Now, the Indian Banks have overseas presence in the form
of physical branches, representative offices, joint ventures Security Press Station Related by
and subsidiaries. Currency Notes Press (1928) Nasik Bank notes from
` 1 to 100
Security Paper (Established Hoshangabad Banks and
Reserve Bank of India (RBI) 1967-68) currency notes
— The RBI was set-up on the basis of Hilton Young paper
Commission recommendation in April, 1935, with the Bank Notes Press (1974) Dewas Bank notes of
enactment of RBI Act, 1934. ` 20, 50, 200,
100, 500 and
— The RBI continued to serve as the Central Bank to Burma
2000
(Myanmar), until Japanese occupation of Myanmar in
Security Notes Printing Hyderabad Union excise duty
April, 1947.
Press (Established 1982) stamps
— The RBI also continued to serve as Central Bank to
India Security Press(1992) Nasik Postal material
Pakistan, until June, 1948.
postal stamps etc
— The RBI was nationalised in 1949 and its First Indian Modernised Currency Notes Mysore (Karnataka)
Governor was CD Deshmukh. Press (1995) Sarbani (West Bengal)
— Main functions of RBI are as follows: Coins are minted at four places viz, Mumbai, Kolkata,
—Maintaining monetary stability so that business and economic life Hyderabad and Noida.
can deliver welfare gains of a properly functioning mixed
economy. ` 1 note released after 20 years
—Maintaining financial stability and ensuring sound financial — In November 1994, printing of ` 1 note was stopped
institutions so that monetary policy can be safely pursued and mainly due to highest cost and for freeing capacity to
economic units can conduct their business with confidence.
print currency notes of higher denomination.
—Maintaining a stable payments system so that financial
— Printing of ` 2 and 5 notes were discontinued in 1995.
transaction can be safely and efficiently executed.
—Promoting the development of financial infrastructure in terms
— Notes of ` 1 to be issued would be legal tender as
of markets and systems and to enable it to operate efficiently, provided in the Coinage Act, 2011.
36 Magbook ~ Indian Economy

Banker to the Government — To boost the economy by facilitating the flow of adequate
— RBI has the obligation to transact the banking business volume of bank credit to different sectors.
of the Union and State Governments. In this capacity, it — Stability in exchange rate and money market of the country.
accepts , money on account of these governments
makes payments on their behalf and carries out their Monetary Policy Committee
exchange and remittance operations. Banker to Banks
Government recently approves a six member Monetary Policy
— RBI has a special relationship with the banks. It controls
Committee, that will set policy interest rates. Out of the six
the amount of their reserves (SLR and CRR) and holds all
members, three members are from RBI including the governors,
or part of their reserves. Banks borrow from the RBI in who would have a casting vote.
times of need and RBI is in effect the lender of last resort.
The other three external members in the committee would be
RBI is the ultimate source of money and credit in India.
appointed by the government. Besides, the six members, a finance
Regulator and Supervisor ministry nominee would also take part in the deliberations of the
— In this role, RBI provides the broad parameters within committee to convey the government’s view on policy, but he won’t
which the banking and financial system of India
have a voting right.
functions. Its regulatory powers are provided by the RBI
Act and the Banking Regulation Act. RBI also regulates
many types of Non-Banking Financial Companies Methods of Credit Control
(NBFCs). Some of the regulatory powers of RBI are as
There are two types of methods of credit control are as follows:
follow finance:
—Issuing licenses for new banks. Quantitative/Credit Control
—Prescribing minimum requirements related to paid-up
capital, reserves etc. — Quantitative or credit control is used to control the volume of
—Inspecting the working of banks with regard to credit and indirectly to control the inflationary and deflationary
organisational set-up, branch expansion etc. pressures caused by expansion and contraction of credit.
—Conducting investigations into complaints of fraud, — The quantitative or credit control consists of:
irregularities etc in respect of banks. —Bank Rate It is also called the rediscount rate. It is the rate, at
—Approving or forcing amalgamations, reconstruction or which the RBI allows finance to Commercial Banks. It is currently
liquidation of banks. at 9%.
—Controlling appointments or termination of Chairman and —Cash Reserve Requirement (CRR) Since, 1962, the RBI has
Chief Executive Officers of private sector banks. been empowered to vary the CRR requirement between 3% and
15% of the total demand and time deposits. The RBI (Amendment)
Custodian of Foreign Reserves Bill, 2006, empowers RBI to prescribe CRR cash that banks
— As the custodian of foreign reserves, RBI is responsible deposit with the RBI without any floor rate or ceiling rate.
for managing the investment and utilisation of the —Statutory Liquidity Ratio (SLR) It is the ratio of liquid asset,
country’s foreign reserves in the best possible manner. which all commercial banks have to keep in the form of cash, gold
With the introduction of floating exchange rate system and unencumbered approved securities equal to not more than
40% of their total demand and time deposits liabilities.
and convertibility of the rupee, RBI also has act to
—Open Market Operations (OMOs) It role as a credit control
stabilise the foreign exchange market.
instrument emerged after economic reforms of 1991, when
— RBI’s function in this role is to develop and regulate the Indian economy was flushed with excessive inflow of foreign
foreign exchange market and to facilitate external trade funds. Under OMOs, when the RBI sells G-secs in the market,
and payment. it withdraws money or liquidity from the market and thus,
reduces volume of credit leading to control of inflation.
Credit Control —Repo Rate It was introduced in December, 1992, by RBI. It is
— It is an important tool used by RBI, a major weapon of the rate, at which RBI lends short-term money to the banks
the monetary policy used to control the demand and against securities. When the repo rate increases (Dearer Money
Policy) borrowing from the RBI becomes more expensive and
supply of money (liquidity) in the economy. Central
when the repo rate decreases, (Cheaper Money Policy)
Bank administers control over the credit that the borrowing becomes cheaper. Repo rate injects liquidity in the
Commercial Banks grant. Such a method is used by market.
RBI to bring economic development with stability. —Reverse Repo Rate It was introduced in November, 1996. It is
the rate, at which banks park short-term excess liquidity with the
Need for Credit Control
RBI. An increase in the reverse repo rate means that the RBI is
— To encourage the overall growth of the priority sector. ready to borrow money from the banks at higher rate of interest .
— To keep a check over the channelisation of credit. As a result, banks would prefer to keep more and more surplus
— To achieve the objective of controlling inflation as well as funds with the RBI. Reverse repo rate withdraws liquidity from
the market.
deflation.
Magbook ~ Money and Banking 37
—Other banking operation activities are Marginal Standing
Facility Rate (MSFR), Net Demand and Time Liabilities etc.
Market Stabilisation Scheme
— It is used by the RBI in times of volatility in exchange rate.
Marginal Standing Facility (MSF) — Here, RBI right release or buy foreign exchange in the
market to stabilise the exchange rate.
◆
MSF scheme came into effect in 2011. It is a very short-term
borrowing scheme for Scheduled Commercial Banks. MSF
— Under MSS, RBI issues bonds on behalf of the government.
rate is the rate at which these banks can borrow funds
overnight from RBI against government securities. Qualitative Credit Control
◆
Banks can use MSF during severe cash shortage or acute — Qualitative credit control is used by RBI for the selective
shortage of liquidity. MSF reduces volatility in the overnight purposes, some of which are as follows:
lending rates in the inter-bank market and enables smooth —Margin Requirements This refers to difference between the
transmission of monetary policy. Under MSF, Banks can securities offered and amount borrowed by the banks.
borrow upto 2% of the Net Demand and Time Liabilities —Consumer Credit Regulations This refers to issuing rules
(NDTL). regarding down payments and maximum maturities of
instalment credit for purchase of goods.
—RBI Guidelines RBI issues oral or written statements, appeals,
MCLR guidelines, warnings etc to the banks.
—Rationing of Credit The RBI controls the credit granted or
— The Reserve Bank of India has brought a new
allocated by Commercial Banks.
methodology of setting lending rate by commercial banks
— Moral suasion an application of pressure, but not force to
under the name Marginal Cost of Funds based Lending
get members to adhere to a policy RBI gives advices and
Rate (MCLR). It has modified the existing base rate system
suggestions to the bankers to follow the instructions given
from April 2016 onwards.
by it.
— As per the new guidelines by the RBI, banks have to
prepare Marginal Cost of Funds based Lending Rate RBI Controls, Inflation and Growth
(MCLR) which will be the internal benchmark lending — RBI can influence inflation and growth in the economy to a
rates. large extent through its instruments of control. If RBI
— Based upon this MCLR, interest rate for different types of squeeses out liquidity from the economy by selling
customers should be fixed in accordance with their securities, increasing repo rates, increasing CRR etc, then
riskiness. The base rate will be now determined on the the demand in the economy is reduced and inflation is
basis of the MCLR calculation. The MCLR should be brought under control.
revised monthly by considering some new factors — However, in case inflation is due to supply side shortages,
including the repo rate and other borrowing rates. RBI controls have less influence. Similarly, increasing
— Specifically the repo rate and other borrowing rates that liquidity in economy means that households have more
were not explicitly considered under the base rate money to consume, industries have more money to invest
system. in plant and machinery etc, all of which lead to increase in
economic activity. Thus, it can be seen that measures
Quantitative Easing taken by RBI, which control inflation can hurt growth and
— It refers to an extreme form of monetary easing through measures which boost growth, can cause inflation.
which the Central Bank floods the financial system with RBI Guideline for Small Banking
liquidity.
— The RBI issued draft guidelines for those sealing a license to
— It is done to induce bank lending to productive sectors of set-up a payments banks or small banks, as a part of its efforts
the economy and thus, promote growth during times to expand banking services to more businesses and poor
when banks are overcautious to lend the money due to household.
prevailing situation of recession or depression.
— The minimum paid capital required for both categories of
bank licenses would have to contributes atleast 40% initially.
Liquidity Adjustment Facility (LAF)
— Repo rate and reverse Repo rate are the parts of Liquidity
Adjustment Facility (LAF) of RBI.
Scheduled Commercial Banks
— LAF allows the RBI to manage market liquiding on a daily
— All banks which are mentioned in the Second Schedule of
RBI Act, 1934 are known as Scheduled Banks.
basis and to send interest rate signals to the market.
— These banks comprise Scheduled Commercial Banks and
— LAF operates through repo and reverse repo auctions.
Scheduled Cooperative Banks. Advances, deposits, money
It has now becomes the principal operating instrument of
at call, short notice etc. are included in the assets of
monetary policy. commercial Bank of India. Scheduled Commercial Banks
38 Magbook ~ Indian Economy
in India are categorised into five different groups Merging of SBI and Mahila Bank
according to their ownership or nature of operation.
— SBI, merged its associate bank and BMB with itself on 1
— These bank groups are as follows:
April, 2017. With this merger, SBI becomes one of top 50
—State Bank of India and its associates —Nationalised Banks
global banks.
—Private Sector Banks —Foreign Banks and
—Regional Rural Banks — The Union Cabinet, on 15th June, 2016, approved the
merger of 5 associate banks as well as BMB with State
Public Sector Banks Bank of India.
— After 1969 Commercial Banks are broadly classified into
Nationalised or Public Sector Banks and Private Sector Merging of Nationalised Bank
Banks. The State Bank of India and its five Associate Banks (2019 and 2020)
alongwith Nationalised Banks are the Public Sector Banks.
— Vijaya Bank and Dena Bank merged with Bank of Baroda
(BoB) on 1st April, 2019. This merge has created BoB as
Nationalised Banks of India the 3rd largest public sector in India.
— From 1st February, 1969, the government imposed social — Government has merged Indian Bank with Allahabad Bank,
control on banks by introducing certain provisions in the Oriental Bank of Commerce (OBC) and United Bank of
Banking Regulation Act, 1949. It imposed severe restrictions India with Punjab National Bank, Syndicate Bank with
on the composition of the Board of Directors and internal
Canara Bank and Andhra Bank with Union Bank of India
management and administration of banking companies.
on 1st April, 2020. After merger, there will be 12 Public
— It also introduced restrictions on advances by banking
Sector Banks of India.
companies. These were intended to ensure that the bank
advances were not confined to large-scale industries and
big business houses, but were also directed, in due Private Banks
proportion to other important sectors like agriculture, — All those banks where creator parts of stake or equity are
small-scale industries and exports. held by the private shareholders are called as private
— On 15th April, 1980, six more banks having demand and sector banks. In India, private sector banks are known
time liabilities of not less than ` 200 crores were with two names; old private sector banks and new private
nationalised. The undertakings of these banks are taken sector banks.
over and vest in six corresponding new banks under the
banking companies (Acquisition and Transfer of
Old Private Sector Bank
Undertakings) Act, 1980. — The banks which were not nationalised at the time
— Later on, in the year 1993, the government merged New of nationalisation of banks that took place during 1969
Bank of India with Punjab National Bank. It was the only and 1980 are known as the old private sector banks. These
were not nationalised, because of their small size and
merger between Nationalised Banks and resulted in the
regional focus.
reduction of the number of Nationalised Banks from 20 to 19.
— In the group wise classification, since 31st December, 2007 New Private Sector Bank
IDBI Bank Limited has been included in Nationalised — The banks, which came in operation after 1991, with the
Banks. RBI again clarified dated 14th March, 2019 that introduction of economic reforms and financial sector
IDBI Bank stands re-categorised as a Private Sector Bank. reforms are known as new private sector banks. Banking
Regulation Act was then amended in 1993, which
State Bank of India permitted the entry of new private sector banks in the
Indian banking sector.
— State Bank of India (SBI) was previously called Imperial
Bank of India in 1921, which was created by amalgamation Licence to New Private Banks
of 3 Presidency Banks viz, Bank of Bengal, Bank of
IDFC First Bank
Bombay and Bank of Madras. It was nationalised in 1955.
— Prime Minister Narendra Modi on October 19, 2015
Bharatiya Mahila Bank inaugurated the IDFC Bank in New Delhi. IDFC Bank
Limited, which started its operations on October 1, 2015,
— Former Prime Minister Dr Manmohan Singh and UPA
is an Indian Banking company with headquarters in
Chairperson, Sonia Gandhi jointly inaugurated India’s first
Mumbai that forms a part of IDFC, an integrated
all women bank, Bharatiya Mahila Bank in Mumbai on
infrastructure finance company.
19th November, 2013, on the birth anniversary of former
Prime Minister Indira Gandhi.
Magbook ~ Money and Banking 39
— IDFC Bank was granted a universal banking license in — A Regional Rural Bank seeking permission of the Reserve
July, 2015 by the Reserve Bank of India (RBI). It was Bank for opening branches has to obtain the
selected along with micro-lender Bandhan in the last recommendation of NABARD.
round of award of licenses. — RRB (Amendment) Bill, 2014 this amendment to raise
Bandhan Bank the authorised capital of the RRBs from ` 5 crore to
` 2000 crore. The bill also provides that the authorised
— Bandhan Bank Limited appointed its Chairman and Board
capital of any RRB shall not be reduced below ` 1 crore.
of Directors on July 9, 2015. The bank started its
operations in India from August 23, 2015. It is the first Lead Bank Scheme
bank established in Eastern India post Independence. — Lead Bank Scheme based on area approach was
— Former Chief Economic Adviser to the Indian government launched in 1969, on the recommendation of Dr Gadgil
Ashok Kumar Lahiri has been appointed as the Chairman. Committee and Narasimham Committee. Under the LBS,
Chandra Shekhar Ghosh, founder of Bandhan Financial all the 12 Nationalised Banks and a few Private Sector
Services Limited, was appointed as the Managing Director Banks were allotted specific districts and were asked to
and Chief Executive Officer (MD & CEO) of the bank. They play the lead role in coordinating credit deployment. The
both will be in the board of directors as well. services area approach was implemented under the
purview of lead Bank scheme.
Foreign Banks
— Foreign Banks are allowed to operate in India through Scheduled Co-operative Banks
branches and representative offices. A new Foreign Bank — Co-operative Banks have also played a limited, but important
desirous of opening a branch in India is required to apply role in the banking system of the country. Scheduled
Reserve Bank of India giving relevant information about its Co-operative Banks consist of Scheduled State Co-operative
shareholders, financial position and the dealings with Banks and Scheduled Urban Co-operative Banks.
Indian parties.
— The request is examined keeping in view the financial State Co-operative Banks (SCBs)
soundness of the bank, international and home country — State Co-operative Bank means the Principal co-operative
ranking, international presence, economic and trade society in a state, the primary object of which is the
relations between the two countries and supervisory financing of other co-operative societies in the state.
standards in the home country etc. — The Banking Ombudsman Scheme, 1995 notified by RBI
on 14th June, 1995 was in terms of powers conferred on
Regional Rural Banks the bank by Section 35A of the Banking Regulation Act,
1949 (10 of 1949) to provide for a system of redressal of
— In 1976, the Parliament enacted the Regional Rural
grievances against banks.
Banks Act, 1976 to provide for the incorporation,
regulation and winding up of Regional Rural Banks. The Urban Co-operative Banks (UCBs)
Act has been made effective from the 26th September,
1975. — The UCBs are registered under the Co-operative Societies
Acts of the respective State Governments. UCBs having a
— The equity of the RRBs is contributed by the Central
Government, concerned State Government and the multi-state presence are registered under the Multi-state
sponsor bank in the proportion of 50:15:35. There are 43 Co-operative Societies Act and regulated by the Central
RRBs in India (March, 2020). Government.
— The objective of the RRBs is to develop the rural economy — Besides, the Reserve Bank also has regulatory and
by providing; for the purpose of development of supervisory authority for bank related operations under
agriculture, trade, commerce, industry and other certain provisions of the Banking Regulation Act, 1949 (as
productive activities in the rural areas, credit and other applicable to Co-operative Societies).
facilities, particularly to the small and marginal farmers,
agricultural labourers, artisans and small entrepreneurs
Banking Regulation (Amendment)
and for matters connected there with and incidental there Bill, 2020
to. The bill proposes amendments to the Banking Regulation Act,
— Besides, the Reserve Bank which is the regulatory 1949 and will replace the Banking Regulation (Amendment)
authority for the RRBs in accordance with the provisions Ordinance, 2020. The bill aims to bring co-operative banks
of the Banking Regulations Act, 1949, the Banking under the supervision of the Reserve Bank of India (RBI). The
Regulations Act empowers NABARD (National Bank for bill will also permit the RBI to initiate a scheme for
Agriculture and Rural Development) to undertake the reconstruction or amalgamation of a stressed lender without
inspection of RRBs. imposing a moratorium.
40 Magbook ~ Indian Economy
The Bimal Jalan Committee recommended the name of
Payment Banks the two entities, from among the list of several entities,
— The Reserve Bank of India (RBI) granted ‘in-principle’ approval like Indian post, Anil Ambani Group, Aditya Birla Group,
to 11 entities, including Reliance Industries, Aditya Birla Nuvo, Bajaj Finance, Muthoot Finance, Religare Enterprise
Vodafone and Airtel, to set-up payments banks and proposed etc.
such licenses ‘on tap’ in future on August 18, 2015. — However, the committee has put forth certain conditions
— The other entities which have been given ‘in-principle’ before the entities, in order to get the banking license.
approval are—Department of Posts, Cholamandalam Within a period of 18 months these two entities are
Distribution Services, Tech Mahindra, National Securities required to
Depository Limited (NSDL), Fino PayTech, Sun Pharma’s —get a net worth of ` 1000 crore or more;
Dilip Shantilal Sanghvi and PayTM’s Vijay Shekhar Sharma. —open at least 25% branches in unbanked rural areas.
— The ‘in-principle’ approval granted will be valid for a period
of 18 months, during which time the applicants have to
comply with the requirements under the guidelines and fulfil
Types of Banking System
the other conditions as may be stipulated by the RBI. There are three types of banking are as follows:

Small Finance Banks Core Banking

— The Reserve Bank of India (RBI) has granted ‘in-principle’ — Core banking is often associated with retail banking and
approval to set-up small finance banks under the many banks treat the retail customers as their core
“Guidelines for Licensing of Small Finance Banks in the banking customers. Business is usually managed via
Private Sector” (Guidelines) on September 16, 2015. the Corporate banking division of the institution. Core
banking covers basic depositing and lending of money.
— The ‘in-principle’ approval granted will be valid for
18 months to enable the applicants to comply with the — Normal core banking functions will include transaction
requirements under the Guidelines and fulfil other conditions accounts, loans, mortgages and payments. Banks make
as may be stipulated by the RBI. these services available across multiple channels like
— On being satisfied that the applicants have complied with the ATMs.
requisite conditions laid down by it as part of ‘in-principle’ — It is also known as Core Banking solution.
approval, the RBI would consider granting them a licence for
commencement of banking business under Section-22(1) of Retail Banking
the Banking Regulation Act, 1949. Until a regular licence is
— When a bank executes transactions directly with
issued, the applicants cannot undertake any banking
consumers, rather than corporations or other banks,
business.
then it is called Retail Banking.
— Names of selected applicants
—Au Financiers (India) Limited (Jaipur) Narrow Banking
—Capital Local Area Bank Limited (Jalandhar)
— It restricts banks to hold liquid and safe government
—Disha Microfin Private Limited (Ahmedabad)
bonds.
—Equitas Holdings Private Limited (Chennai)
—ESAF Microfinance and Investments Private Limited (Chennai)
— It is also called as safe bank.
—Janalakshmi Financial Services Private Limited (Bengaluru)
—RGVN (North-East) Microfinance Limited (Guwahati) Inter-Bank Transfer
—Suryoday Micro Finance Private Limited (Navi Mumbai) — It is a special service that allows you to transfer funds
—Ujjivan Financial Services Private Limited (Bengaluru) electronically to accounts in other banks in India
—Utkarsh Micro Finance Private Limited (Varanasi) through.
NEFT The acronym ‘NEFT’ stands for National
Bimal Jalan Committee/ —

Electronic Funds Transfer. Funds are transferred to the

New Bank Licenses, 2014 credit account with the other participating bank using
— A committee, under the Chairmanship of former RBI Governor RBI’s NEFT service. RBI Acts as the service provider
Bimal Jalan, was constituted to scrutinise the application for and transfers the credit to the other bank’s account.
new banks in India. The committee submitted its report in — RTGS The acronym ‘RTGS’ stands for Real Time Gross
February 2014. Recommending for the ‘in-principal approval’ Settlement. The RTGS system facilitates transfer of
of banking licenses to Bandhan Microfinance and IDFC funds from accounts in one bank to another on a ‘real
(Infrastructure Development and Finance Corporation). time’ and on ‘gross settlement’ basis. The RTGS system
— The RBI had issued guidelines for new banks in February, is the fastest possible inter bank money transfer facility
2013 and invited applications from the various stakeholders. available through secure banking channels in India.
Magbook ~ Money and Banking 41
— Minimum or Maximum account for RTGS or NEFT. Transactions (RBI) after the Finance Ministry wanted the Central
under Retail and Corporate Internet Banking. Bank to follow global best practices and transfer more
surplus to the government. In the past, the issue of
Types Retails Corporate
the ideal size of the Reserve Bank of India reserves
Minimum Maximum Minimum Maximum was examined by the three committees- V
RTGS ` 2 Lakhs ` 10 Lakhs Saral ` 10 Lakhs Saral ` 10 Lakhs Subrahmanyam in 1997, Usha Thorat in 2004 and
Vyapaar ` 50 Lakhs Vyaapar – No limit Y H Malegam in 2013.
Vistaar ` 2000 Crore Vistaar – No limit
VG Kannan Committee
NEFT No Minimum ` 10 Lakhs Saral ` 10 Lakhs Saral ` 10 Lakhs
The RBI has set up a six-member committee in 2019,
Vyaapar ` 50 Lakhs Vyaapar – No limit
headed by VG Kannan, Chief Executive, Indian
Vistaar ` 2000 Crore Vistaar – No limit
Banks’ Association, to review the ATM interchange
fee structure. It aims for giving a fillip to ATM
Banking Sector Reforms deployment in unbanked areas.

Narasimham Committee
Swabhiman
Recommendation ◆
A major financial inclusion initiative was formally
— Deregulation of interest rate. launched as ‘Swabhiman’ on 10th February, 2011,
— Reduction in reserve requirement. which aims at providing branchless banking through
— Prudential norms. the use of technology. Banks will provide basic
— Supervision of Commercial Banks. services like deposits, withdrawal and remittances
— Measures to improve the competitive efficiency in banking sector. using the services of Business Correspondents.
◆
The initiative enables government subsidies and
Narasimham-I social security benefits to be directly credited to the
accounts of the beneficiaries, enabling them to draw
— The purpose of the Narasimham-I Committee was to study all
the money from the business correspondents in their
aspects relating to the structure, organisation, functions and
village itself.
procedures of the financial systems and to recommend
improvements in their efficiency and productivity.
— The committee submitted its report to the Finance Minister in Khandelwal Committee Report
November, 1991. — Government constituted a Committee on Human
Resources issues of Public Sector Banks (PSBs)
Narasimham-II under the Chairmanship of Dr AK Khandelwal,
— The Narasimham-II Committee was tasked with the progress who has submitted its report.
review of the implementation of the banking reforms since, 1992 — The committee made 105 recommendations on
with the aim of further strengthening the financial institutions of matters related to Manpower and Recruitment
India. Planning, Training, Career Planning, Performance
Management, Reward Management, Succession
— It focussed on issues like size of banks and capital adequacy ratio
Planning and Leadership Development,
among other things. M Narasimham, Chairman, submitted the
Motivation, Professionalisation of HR, Wages,
report of the committee in April, 1998.
Service Conditions and Welfare etc.
As 49 recommendations required further
Damodaran Committee —
deliberations, the remaining 56 recommendations
— The committee, headed by former SEBI Chairman M Damodaran, were forwarded to PSBs with the request that an
was set-up by the Central Bank to look into the issues of customer HR Plan for each bank be prepared and got
services and evaluate the existing system of grievance redressal approved by the respective Board of Directors.
mechanism prevalent in banks, its structure and efficacy and
recommend measures for expeditious resolution of complaints. Nachiket Mor Committee
Recommendations — The RBI appointed committee on comprehensive
— Bank should offer no-frill savings accounts with certain basic financial services for small business and low income
facilities such as cheque book and ATM card without prescribing under the Chairmanship of Sri Nachiket Mor.
any minimum balance. Recommendation of committee are as follows:
—Every adult (above 18 years) of over country should
Bimal Jalan Committee have a bank account by 1st January, 2016. This
The Bimal Jalan Committee constituted in 2019 to review the account will be known as Universal Electronic Bank
Economic Capital Framework (ECF) for the Reserve Bank of India Account (UEBA).
42 Magbook ~ Indian Economy
—Every resident should be issued an account at a time of Banks) and will consist of professionals with two
receiving Aadhaar number (UIDAI) by a bank itself. government representative viz Secretary of Financial
—It recommends abolition of interest subsidies and loan waivers. Services and Public Enterprises.
—It recommends raising priority sector lending cap for bank to — Vinod Rai appointed as the First Chairman of the Banks
50% from the current 40%.
Board Bureau. He was the former Comptroller and Auditor
—It also proposed for creation of a payment bank to provide
General (CAG) of India.
payment services including credit, insurance and risk
management products. — The government has maintained the BBB as a holding
company for state run banks, an idea first mooted at the
Payment Bank maiden banking conclave Gyan Sangam in January, 2015.
On 23rd September, 2013, Committee on Comprehensive
Financial Services for Small Business and Low Income Indradhanush to Revamp PSU Banks
Households headed by Nachiket Mor, was formed by the ◆
To revive the fortunes of public sector banks, the government
RBI. On 7th January, 2014, the Nachiket Mor Committee unveiled a seven-point plan ‘Indradhanush’ encompassing
submitted its final report. Among its various ` 20000 crore immediate fund infusion, creation of a single
recommendations, it recommended the formation of a new holding company and minimising political interference on
category of bank called Payment Bank. On 17th July, 2014, August 14, 2015. The seven Key reforms of Indradhanush mission
the RBI released the draft guidelines for Payment Banks, include appointments, de-stressing capitalisation, empowerment,
seeking comments for interested entities and the general frame work of accountability and governance reforms.
public. On 27th November, RBI released the final guidelines
for Payment Banks.
The key aspirants to payment banking business include Basel Norms
telecom firms, prepaid payment instruments / payment — It was in 1988 that the central banking bodies of the
solution providers retail chains, large business developed economies agreed upon the provision of Capital
correspondents and business conglomerates. Out of them, Adequacy Ratio (CAR), also known as the Basel Accord. The
telecom firms have an advantage over others mainly because accord was agreed upon at Basel, Switzerland, at a meeting
they already have a distribution network in rural areas. Most of the Bank of International Settlements (BIS). This accord
of the prepaid payment instruments / payment solution provides recommendations on banking, regulations with
providers are tech sauuy and already working in the field of regard to capital risk, market risk and operational risk. It’s
mobile payments. objective was to ensure that financial institutions have enough
Scope of activities of Payment Banks capital to meet obligations and absorb unexpected losses.
Payment Banks can accept demand deposits. This
—

implies that customers can open savings accounts as well

Basel I
— The Basel Committee on Bank Supervision (BCBS)
as current accounts; but NO time deposits (such as FDs).
published a set of minimal capital requirements for banks,
— An account balance cannot exceed ` 1 lakh for an
to maintain a certain amount of free capital (ratio) to their
individual customer. Payment Banks can issue ATM/
assets, as a cushion against probable losses in investment
debit cards but not credit cards.
and loans. Basel I primarily, focus on credit risk. In 1988,
— Payment Banks can not give loans. Payments and
this ratio capital was decided to be 8%. The CAR is the
remittance services through various channels.
percentage of the total capital to the total weighted assets.
— A Payment Bank can become Banking Correspondent
— CAR = (Total of Tier-I and Tier-II capital)/ Risk weighted
(BC) of another bank and offer all products / services
assets.
which a BC can offer.
— Thus, CAR is also known as Capital to Risk-Weighted
— Payment Banks can distribute non-risk sharing financial
Assets Ratio (CRAR). It is used to protect the depositors
products like mutual fund units and insurance products,
and promote the stability and efficiency of the financial
etc.
system.
— The revenue of these banks would come mainly from the
transaction fees. Basel II
Banks Board Bureau — It attempts to integrate Basel I capital standards with
national regulations, by setting the minimum capital
— Prime Minister Narendra Modi has approved the requirement of financial institutions with the goal of ensuring
guidelines of Banks Board Bureau (BBB) on 28th institution liquidity. It aims securing at international
February, 2016. BBB starts its work from 1st April, 2016. convergence on regulations governing the CAR.
— BBB will work as Search Committe or appointments —Minimum capital requirements
board, appointment of Chairman of PSBs (Public Sector —Supervisory review —Market discipline
Magbook ~ Money and Banking 43
These institutions have been playing a crucial role in
Basel III —
channelising credit to the needy sectors and
— It seek to strengthen the existing capital requirements and addressing the challenges or issues faced by them.
introduce a global liquidity standard to enable the banks to — The four financial institutions - EXIM Bank, National
weather financial storms. It mandates the banks to increase the
Bank for Agriculture and Rural Development
loss absorbing capital from 2% to 4.5% by January, 2015. Also,
(NABARD), National Housing Bank (NHB) and Small
banks will be required to hold a capital conservation buffer of 2.5%
Industries Development Bank of India (SIDBI) are under
of withstand future period of stress.
full-fledged regulation and supervision of the Reserve
Bank.
Basel III Guidelines, 2015 — As in the case of Commercial Banks, prudential norms
— The Reserve Bank of India (RBI) released on 28th May, relating to income recognition, asset classification and
2015, the draft guidelines on the Net Stable Funding Ratio provisioning and capital adequacy ratio are applicable
(NSFR) under Basel III framework on liquidity standards of to these financial institutions as well. These institutions
banks. also are subject to on-site inspection as well as off-site
— The NFSR is defined as the amount of available stable surveillance.
funding relative to the amount of required stable funding. — Since, all the banks are directly or indirectly
— In draft guidelines released, the Central Bank said that banks contributing to the development works in the country,
will have to maintain Net Stable Funding Ratio (NSFR) from thus, all are development financial institutions.
March 2019, but in the view of the corona virus, the — National Investment and Infrastructure Fund (NIIF),
implementation of Basel-III norms for banking services has established in 2015 is the first Sovereign Wealth Fund
been deferred by 1 January, 2023. of India. It manages three separate funds, namely
— Basel III norms define the capital of the banks in different Master Fund, Fund of Funds and strategic Fund. They
ways. It consider common equity and retained earnings as primarily aimed for investing in infra-related projects of
the predominant component of capital, but restrict the the country through formation of capital from both
inclusion of items such as-deferred tax assets, mortgage domestic and international investors.
service rights and investments in financial institutions to no — The Union Government through the Budget 2021
more than 15% of the common equity component. announced creation of Development Financial
Institution with an initial capital infusion of ` 20,000
Banking Ombudsman crores. The government expects to rope in marquee
pension funds, sovereign funds to come in through
— Banking Ombudsman Scheme was introduced by the RBI in DFI to fund infrastructure projects in the country.
1995 under the Banking Regulation Act, 1949. It is a senior
official appointed by the RBI to redress customer complaints Financial Stability and
against deficiency in certain banking services. Development Council (FSDC)
— Decision of Banking Ombudsman can be appealed against to — Financial Stability and Development Council is an
the appellate authority (vested in a Deputy Governor of RBI).
apex-level body constituted by the Government of
— Banking Ombudsman can award compensation to the India. The idea to create such a super regulatory body
complainant. In this, it takes into account the loss of the was first mooted by the Raghuram Rajan Committee in
complainant’s time, expenses incurred and the harassment 2008. Finally in 2010, the then Finance Minister of
and mental anguish suffered. India, Pranab Mukherjee, decided to set-up such an
— It has jurisdiction over all Commercial Banks, RRBs, autonomous body dealing with macroprudential and
Scheduled primary co-operative banks, NBFCs etc. It deals financial regularities in the entire financial sector of
with matters less than or equal to ` 10 lakh. India. The council is headed by the Finance Minister
and has the Reserve Bank of India (RBI) Governor and
Development Financial chairpersons of the Securities and Exchange Board of
India, Insurance Regulatory and Development
Institutions (DFI) Authority and Pension Fund Regulatory and
Development Authority as other members alongwith
— Financial institutions are an important part of the Indian
finance ministry officials.
financial system as they provide medium to long-term finance
to different sectors of the economy. FSDC will perform following roles
— The institutions have been set-up to meet the growing — To engage in macroprudential supervision of the
demands of particular segments, such as export, rural housing economy, including the functioning of large financial
and small industries. conglomerates and address inter-regulatory
coordination issues.
44 Magbook ~ Indian Economy
— To focus on financial literacy and financial inclusion. Industrial Finance Corporation of
To periodically look into issue relating to financial
—
India Limited (IFCI)
development.
— It was the first development finance institution set-up in
National Housing Bank (NHB) 1948 under the IFCI Act in order to provide long-term
institutional credit to medium and large industries. It aims
— National Housing Bank was set-up on 9th, July, 1988
to provide financial assistance to industry by way of rupee
under the National Housing Bank Act, 1987 as a
and foreign currency loans, underwrites or subscribes the
wholly-owned subsidiary of the Reserve Bank to act as
issue of stocks, shares, bonds and debentures of industrial
an apex level institution for housing.
concerns etc.
— The Finance Act, 2019 has amended National Housing
— It has also diversified its activities in the field of merchant
Bank Act, 1987. The amendment confers the powers of
banking, syndication of loans, formulation of rehabilitation
regulation of housing finance companies to RBI.
programmes, assignments relating to amalgamations and
— The Union Government in April 2019 purchased mergers etc.
complete stake of NHB for ` 1,450 crore from RBI. The
decision has been taken to end the cross-holding in the Industrial Development Bank of
regulatory institutions. It also follows Narasimham-II
recommendations of prohibiting Central bank holding in
India (IDBI)
the entities that are regulated by it. — It was established in July, 1964, as an apex financial
— NHB has been established to achieve, among other institution for industrial development in the country. It
things, the following objectives: caters to the diversified needs of medium and large-scale
—To provide a sound, healthy, viable and cost effective housing
industries in the form of financial assistance, both direct
finance system to all segments of the population and to and indirect. Direct assistance is provided by way of project
integrate the housing finance system with the overall financial loans, underwriting of and direct subscription to industrial
system. securities, soft loans, technical refund loans, etc. While,
—To promote a network of dedicated housing finance indirect assistance is in the form of refinance facilities to
institutions to adequately serve various regions and different industrial concerns.
income groups.
—To augment resources for the sector and channelise them for Small Industries Development
housing. Bank of India (SIDBI)
—To make housing credit more affordable.
— It was set-up by the Government of India in April, 1990, as
—To regulate the activities of housing finance companies
a wholly owned subsidiary of IDBI. It is the principal
based on regulatory and supervisory authority derived under
the act. financial institution for promotion, financing and
—To encourage augmentation of supply of buildable land and development of small-scale industries in the economy. It
also building materials for housing and to upgrade the housing aims to empower the Micro, Small and Medium Enterprises
stock in the country. (MSME) sector with a view to contributing to the process of
—To encourage public agencies to emerge as facilitators and economic growth, employment generation and balanced
suppliers of serviced land for housing. regional development.

National Bank for Agriculture MUDRA Bank

and Rural Development (NABARD) — Micro Units Development and Refinance Agency Bank (or
— National Bank of Agriculture and Rural Development MUDRA Bank) was launched by Prime Minister Narendra
(NABARD) is one of the subsidiaries where the majority Modi on 8th April, 2015 with a corpus of ` 20,000 crore
stake is held by the Reserve Bank. NABARD is an Apex and a credit guarantee corpus of ` 3,000 crore.
Development Bank with a mandate for facilitating credit — It is a public sector financial institution in India. It provides
flow for promotion and development of agriculture, loans at low rates to small entrepreneurs. MUDRA Bank
small-scale industries, cottage and village industries, will be set-up through a statutory enactment.
handicrafts and other rural crafts. — It will be responsible for developing and refinancing all
— It also has the mandate to support all other allied economic Micro-Finance Institutions (MFIs) which are in the business
activities in rural areas, promote integrated and sustainable of lending to micro and small business entities engaged in
rural development and secure prosperity of rural areas. After manufacturing, trading and service activities. The formation
disinvestment of entire stake of NABARD by RBI to of the agency was initially announced in the 2015 Union
Government of India in April 2015, it has become fully own Budget of India in February 2015.
subsidiary to government.
Magbook ~ Money and Banking 45
Formation of MUDRA Bank — So, MUDRA can be seen as an initiative to reach the last
mile for underfinanced small scale units that could not
— The MUDRA banks will be set-up under the Pradhan
benefit from insitutional sources of finance.
Mantri MUDRA Yojana Scheme. The bank will intially
function as a non-banking financial company and a
subsidiary of the Small Industries Development Bank of
Industrial Investment Bank of
India. Later, it will be made into a separate company. India Limited (IIBI)
— It will also serve as a regulator for other Micro-Finance — It was set-up in 1985 under the Industrial Reconstruction
Institutions (MFIs) and provide them refinancing Bank of India Act, 1984, as the principal credit and
servies. It will provide guidelines for MFIs and give reconstruction agency for sick industrial units. It was
them ratings. converted into IIBI on 17th March, 1997, as a full-fledged
— The bank would partner with state level/regional level development financial institution. It assists industry mainly in
co-ordinators to provide finance to Last Mile Financer medium and large sector through wide ranging products and
of small/micro business enterprises. services. Besides project finance, IIBI also provides short
duration non-project asset-backed financing in the form of
Objectives of MUDRA Bank underwriting or direct subscription, deferred payment
The objectives of the MUDRA Bank are as follows: guarantees and working capital or other short-term loans to
— Regulate the lender and the borrower of microfinance companies to meet their fund requirements.
and brings stability to the microfinance system through
regulation and inclusive participation.
Export-Import (EXIM) Bank
— Extend finance and credit support to Microfinance ◆
Recognising the important role of exports in maintaining the
Institutions (MFI) and agencies that lend money to
viability of external sector and in generating employment, the
small businesses, retailers, self-help groups and
Reserve Bank had sought to ensure adequate availability of
individuals.
Concessional Bank credit to exporters. It took the lead role in
— Register all MFIs and introduce a system of setting up the Export Import Bank of India (EXIM Bank) in
performance rating and accreditation for the first time. January, 1982.
— This will help last mile borrowers of finance to evaluate ◆
In recent years, with the liberalisation of real and financial
and approach the MFI that meets their requirement sectors of the economy, interest rates on export credit have been
best and whose past record is most satisfactory. This rationalised within the overall monetary and credit policy
will also introduce an element of competitiveness framework.
among the MFIs. The ultimate beneficiary will be the ◆
In order to provide adequate credit to exporters on a priority
borrower. basis, the Reserve Bank has also prescribed a minimum
Differences Between SIDBI and proportion of banks’ adjusted net bank credit to be lent to
exporters by Foreign Banks.
MUDRA Bank
It is very important to understand certain
things/context/facts and differences between SIDBI and New Gold Investment Schemes
MUDRA.
The Government had launched Sovereign Gold Bonds and Gold
Difference between SIDBI and MUDRA bank are as Monetisation Schemes on 5th November, 2015. The main
follows: objective of the schemes is to reduce the demand for physical
— SIDBI is an apex small units development bank where gold and shift a part of the gold imported every year for
MUDRA will initially be started as a department of investment purposes into financial savings.
SIDBI.
Sovereign Gold Bonds
— The role of SIDBI remains to promote and finance the
small scale sector, implement government plans and — These are issued by the RBI on behalf of the Government of
co-ordinate with other organisations while the role of India in rupees and denominated in grams of gold and
MUDRA has been conceived more in the context of restricted for sale to the resident Indian entities only both in
present state of microfinance sector. demat and paper form.
— Over a period of time, MUDRA, replacing RBI, may — The minimum investment in this scheme is one gram with a
emerge as a regulatory body for Microfinance sector maximum limit of subscription of 4 kg for individual, 4 kg for
housed by emerging NBFC-MFIs. (This is vehemently HUFS and 20 kg for trusts and similar entities notified by the
protested by MFIs who wish to function under government from time to time per fiscal year from April to
regulatory powers of RBI.) March. The rate of interest for the year 2020-21 is 2.50%
per annum, payable on a half yearly basis.
— MUDRA may refinance other MFIs to finance SHGs
(Self Helf Groups) to promote micro entrepreneurship.
46 Magbook ~ Indian Economy
— The tenure of the Bond is for a period of 8 years with exit — The reason for the establishment was to safeguard the
option from fifth year onwards. KYC norms are the same as interest of the policy holders and for the upgradation of
that for gold. Exemption from capital gains tax is also available. the entire insurance sector.
— Redemption is made in the rupee value equivalent to the — The Insurance Regulatory and Development Authority of
price of gold at the time of maturity. In the first two India has been authorised to register the new insurance
tranches of SGB, total subscription of 3788 kg of gold companies in India.
amounting to ` 993 crore were received from about 3.90
lakh applications.
Insurance Companies
Gold Monetisation Scheme — Insurance industry includes two sectors; Life Insurance
— Bureau of Indian Standards (BIS) certified Collection, Purity and General Insurance. Life Insurance in India was
Testing Centres (CPTC) to collect the gold from the introduced by Britishers. A British firm in 1818
customer on behalf of the banks. established the Oriental Life Insurance Company at
— The minimum quantity of gold (bullion or jewellery) which Calcutta (now Kolkata).
can be deposited is 30 grams and there is no limit for — Since, the opening up, the number of participants in the
maximum deposit. insurance industry has gone up from 7 insurers
— Gold Saving Account can be opened with any of the (including LIC, four public sector general insurers, one
designated bank and denomination in grams of gold for specialised insurer and the GIC as the national
short-term period of 1-3 years, a medium-term period of re-insurer) in 2000 to 49 insurers as on 30th
5-7 years and a long-term period of 12-15 years . September, 2011.
— The CPTCs transfer the gold to the refiners. The banks will — Insurance Companies in India The insurance companies
have a tripartite / bipartite Legal Agreement with refiners offer protection against losses. They deal in life
and CPTCs. insurance, marine insurance, vehicle insurance and
so on.
— For the year 2020-21, interest rates has been fixed as
2.25% and 2.5% for the medium and long term — The insurance companies collect the little savings of the
respectively. Redemption is made in cash/gold for investors and then reinvest those savings in the market.
short-term and in cash for medium and long-term deposits. The indigenous insurance companies are collaborating
As of January, 2021 Government has been successful in with different foreign insurance companies after the
mobilising gold worth ` 31,290 crore since 2015-16. liberalisation process. This step has been incorporated to
expand the Indian insurance market and make it
Non-Banking Financial Companies competitive.
(NBFCs) Types of Non-Banking Financial Institutions
— NBFCs are essentially banks, since, they perform the basic Institution Principle Business
twin functions of attracting deposit from the public and
NBFCs Receiving deposits under any
making loans. However, unlike Commercial Banks, they are scheme and lending.
not incorporated as a bank and are not governed by the Equipment Leasing Equipment leasing and financing.
provision of the Banking Regulation Act, 1949. Company
—With the Enactment of RBI (Amendment) Act, 1997, the RBI Hire Purchase Finance Hire purchase transaction.
now control the functioning of NBFCs. Company
—NBFCs as a whole account for 11.2% of assets of the total Invest Company Buying or selling of securities.
financial system. Loan Company Making loan or advances for an
—Two broad categories of NBFCs are as follows : activity other than its own.
(i) Deposit taking NBFCs (NBFCs-D). Residuary Non-Banking Business same as NBFCs, but does
(ii) Non-deposit taking NBFCs (NBFCs -ND). Companies (RNBCs) not belong to any of the categories
—Capital to Risk-weighted Assets Ratio (CRAR) norms were made under NBFCs.
applicable to NBFCs-D in 1998. The CRAR norm for NBFC-D is Mutual Benefit Financial Any company notified by the
12% (15% in case of unrated NBFCs-D). Company (MBFC) Central Government as a Nidhi
Company under Companies Act,
Insurance Regulatory and 1956.
Miscellaneous Called Asset Finance Companies,
Development Authority of India Non-Banking Companies which manages, conducts and
(IRDAI) (MNBCs) supervises Chit Funds.
— The Insurance Regulatory and Development Authority of
India was established in the year 1999 by the Government
of India.
Chapter six
Inflation
general price level in the country over a period
Inflation of time. Inflation could be monetary or price Causes of Inflation
— Inflation refers to the inflation. During periods of inflation, there is an — Inflation is caused due to a mismatch
persistent rise in increase of the money supply. between demand and supply, i.e. when
— When you have inflation more money is being demand exceeds supply. Thus, inflation
India has restored can occur due to changes in the
circulated, which causes the currency to lose its
macroeconomic and purchasing power, which leads to an increase in demand side or the supply side or
financial stability, but the price of goods and services. Over the course both.
structural of many years, economic cycles go through
impediments to periods of inflation, deflation and stagflation. Demand Side Inflation
— Each one of these, has a specific effect on the — It is also known as demand pull
growth and inflation. Increase in demand can
overall economy as a whole and sometimes can
persistently high lead to long periods of recessions or occur due to many reasons, such as:
inflation remain key depressions in the economy. —Increase in public expenditure,
especially by the government operating
concerns policies large fiscal deficits.
meant to reduce Types of Inflation —Loose Monetary Policy of the Central
inflation often lead to Bank, which leads to low interest rates
Low Inflation/Creeping and thus, higher consumption.
lower growth and
Inflation —Rapid GDP growth, which leads to
thus, reduction in more employment, higher wages.
— It is an inflation that is slow and on predictable
employment while lines.
—Increase in population.
policies meant to —Depreciation of exchange rate, which
— This inflation takes place in a longer run and reduces imports, increases exports and
increase growth and the range is generally in a single digit. thus, pulls up demand.
employment are —Reduction in direct taxes, which puts
accompanied by high Galloping Inflation more money in the hands of
households.
inflation. — It is a very high inflation running in the range of
—Speculation in commodities market etc.
double digits or triple digits.
— It is also known as hoping inflation, jumping Supply Side Inflation
inflation or running inflation.
— It is also known as cost push inflation.
Hyper Inflation Factors influencing inflation from the
supply side can also be many, such
— It is an inflation, which is large and accelerating,
as:
which might have annual rates in millions.
—Backward agricultural sector, which is
— Germany after World War I experienced such not able to produce enough food.
inflation; while Bolivia experienced it in —Inefficient storage, transportation and
mid-1985. marketing infrastructure, which leads
to wastage and reduction in supplies.
Bottleneck Inflation —Hoarding by traders of essential items,
artificially reduces supply and causes
— It takes place when the supply falls drastically inflation.
and the demand remains at the same level.
Magbook ~ Inflation 49
—Rise in the prices of crude oil, fertilizers etc.
—Rise in labour costs.
—Higher costs of imported materials.
Other Inflation Related Concepts
—Higher costs of capital due to squeezing of credit by the Deflation A general decline in prices, often caused by a
Central Bank. reduction in the supply of money or credit. Deflation can be
—Cartelisation by a few big suppliers to fix prices arbitrarily to also caused by a decrease in government, personal or
make undue profits. investment spending. The opposite of inflation, deflation has
—Monopoly of a single supplier in the market, enabling him to the side effect of increased unemployment since, there is a
set arbitrary prices. lower level of demand in the economy, which can lead to an
—Pushing up of profits by the management of a company by economic depression.
increasing the prices also leads to inflation. Stagflation When you have a slow economy with high inflation
—It has to be understood that it is not always easy to rates and unemployment, stagflation is usually the result.
differentiate between demand and supply side inflation and an When the economy does not grow and prices continue to rise
example from the demand side can also be explained from the
you have a stagflation cycle in the economy.
supply side and vice-versa.
Disinflation This is a reduction in the rate of inflation over time,
even though inflation itself may be positive.
Effects of Inflation Reflation It is an attempt to bring back inflation in an economy,
— The effect of inflation is different on different communities. which is in deflation so as to induce growth.
When price rises or the value of money falls, some groups
of the society gain, some lose and some stand in between.
Let us discuss the effects of inflation on distribution of
income and wealth, production on the society as a whole Measures of Inflation
Inflation refers to the changes in general price level in the
On Business Community —
country over a period of time. There are three standard
— Inflation is welcomed by entrepreneurs and businessmen measures of inflation, viz
because they stand to profit by rising prices. (i) Wholesale Price Index (WPI)
— They find that the value of their inventories and stock of (ii) Consumer Price Index (CPI)
goods is rising in money terms. They also find that prices (iii) GDP deflator.
are rising faster than the costs of production, so that their — In India, to measure the price level, the Wholesale Price
profit is greatly enhanced. Index (WPI) and the Consumer Price Index (CPI) are used.

On Fixed Income Groups Wholesale Price Index (WPI)

— Inflation hits wage-earners and salaried people very hard. — It measures the change in wholesale prices on weekly
Although wage-earners, by the grace of trade unions, can basis. On the basis of weekly indices, average annual WPI
chase galloping prices, they seldom win the race. is worked out. Average annual wholesale prices of the
— Since, wages do not rise at the same rate and at the same current year are related to average annual wholesale
time as the general price level, the cost of living index prices of the base year (assumed as 100).
rises and the real income of the wage earner decreases. New Series WPI
On Farmers The new series of the WPI has 697 items as compared to 676
items in old series. New vegetables and fruits such as radish,
— Farmers usually gain during inflation, because they can carrot, cucumber, bitter gourd, mosambi (sweet lime),
get better prices for their harvest during inflation. pomegranate, jackfruit and pear have been added to the list
of primary articles. In the mineral group, items like copper
On Investors concentrate, lead concentrate and garnet have been added
— Those, who invest in debentures and fixed-interest bearing and other items like copper concentrate, lead, dolomite and
magnesite have been removed.
securities, bonds etc lose during inflation. However,
investors in equities benefit because more dividend is Natural gas has been added as a new item. In the
manufacturing items list, around 173 new items including
yielded on account of high profit made by joint-stock
conveyer belt, rubber tread, steel cables, tissues paper and
companies during inflation.
wooden splint have been added, while 135 items like
— Inflation will lead to deterioration of gross domestic savings khandsari (unrefind raw white sugar), poppadom and video
and less capital formation in the economy and less CD players have been removed. 2011-12 is chosen as the
long-term economic growth rate of the economy. base year for WPI.
50 Magbook ~ Indian Economy
and CPI (Rural). The new CPIs once compiled will go a
Producer Price Index long way in filling a major data gap in price statistics.
The PPI covers price changes faced by the producers on primary, — The Central Statisticals Office (CSO), Ministry of Statistics
intermediate and finished goods and services ready for the and Programme Implementation, has revised the base
market. year of the CPI from 2010 to 2012.
The primary difference between the WPI and the PPI is, in
Introduction of CPI (Urban) and CPI (Rural)
addition to the coverage, that the WPI reflects changes in the
average cost of production including mark-ups and taxes, while — The Central Statistical Organisation (CSO) has taken up a
the PPI measures price changes of transacted goods at the gate new initiative of compilation of CPI (Urban) and CPI
excluding taxes. (Rural) and CPI (rural+urban) for all States or UTs and all
The purpose of the PPI is to provide a measure of prices received India by considering all sections of the urban and rural
by producers of commodities. The PPI usually covers the industrial population.
(manufacturing) sector as well as public utilities (electricity, gas — In urban areas, all cities or towns having population
and communications). Some countries also include agriculture, (2001 Population Census) more than 9 lakh and all State
mining, transportation and business services. or Union Territory capitals not covered therein were
Reflation It is an attempt to bring back inflation in an economy, selected purposively. In all 310 towns have been selected
which is in deflation so as to induce growth. either on purposive or random basis, from which 1114
quotations (price scheduled) are canvassed every month.
— In rural areas, with a view to having a manageable
Consumer Price Index (CPI) workload and considering that the CPI (Rural) would
— It measures the change in retail prices on monthly basis. provide the price changes for the entire rural population
On the basis of monthly indices, average annual CPI is of the country, a total of 1183 villages have been selected
worked out. Average annual retail prices for the current at all India level.
year are related to the average annual retail prices of the — The CSO has also decided to bring out a national CPI by
base year (assumed as 100). Like Wholesale Price Index, merging CPI (Urban) and CPI (Rural) with appropriate
different goods are accorded weights depending on their weights, as derived from NSSO 61st round of Consumer
relative significance. Expenditure Survey (2004-05) data.
— It needs to be emphasised that while WPI includes goods — Besides these two (CPI-Rural-Urban Combined and
only, CPI includes both goods as well as services. Another CPI-IW), two separate indexes i.e. CPI for Agricultural
important feature of CPI is that it focuses on a labourer and CPI for Rural labourer is also calculated.
homogeneous group of consumers. With the base year of 2012, these two are compiled by
— CPI reflects cost of living of the concerned category of National Stastical Office (NSO) in the Ministry of Statistics
consumers. CPI for the industrial workers is a widely used and Programme Implementation.
index in India. It is also used to determine the dearness
allowances of government employees.
CPI Industrial Worker CPI (IW)
— Besides, CPI of agricultural labourers, CPI for urban
non-manual employees are also calculated by the This index is used for determining Dearness Allowance (DA) to
government employees and workers in Industrial sector besides
economists for some specific purposes.
measuring inflation in retail prices and in revision of minimum
New Consumer Price Indices wages in Scheduled employment. The government in
— At the retail level, CPI is meant to reflect the cost of living October, 2020 has decided to revise its base year to 2016. It is
conditions and is computed on the basis of the changes in compiled and maintained by the Labour Bureau, an attached
the level of retail prices of selected goods and services, on office of the Ministry of Labour and Employment.
which consumers spend the major part of their income.
— Therefore, a broad-based CPI for the country as a whole, GDP Deflator
including both services and manufacturing products, has
greater relevance for Monetary Policy formulation. — It refers to the ratio between GDP at current prices and
GDP at constant prices. If GDP at Current Prices = GDP at
— In India, however, data on CPI relates to different
Constant Prices, GDP deflator = 1, implying no change in
segments of the population rather than the entire
price level. If GDP deflator is found to be 2, it implies rise
population. With a view to addressing this issue, the
in price level by a factor of 2 and if GDP deflator is found
Reserve Bank has taken the initiative and prepared an
to be 4 , it implies a rise in price level by a factor of 4.
approach paper on CPI (Urban) and CPI (Rural).
— GDP deflator is acclaimed as a better measure of price
— Subsequently, the Central Statistical Organisation (CSO)
behaviour because it covers all goods and services
has taken up the work for generating data on CPI (Urban)
produced in the country.
Magbook ~ Inflation 51

Core Inflation Measures to Check Inflation

— Another way to analyse inflation data is by looking at core — The handling of India’s inflation challenge consists of a
inflation, which is generally a chosen measure of inflation careful combination of effort on the part of the RBI and
that excludes the more volatile categories like food and government, including the Ministry of Finance and several
energy prices. The main argument, here is that the other ministries, alongwith advisory support by the
Central Bank should effectively be responding to the Inter-Ministerial Group (IMG) on inflation.
movements in permanent component of the price level
— The IMG on inflation recommended several steps for
rather than temporary deviations. It is, therefore, a
improving supply chains from the farmer to the consumer.
preferred tool for framing long-term policy.
It recommended amending the Agricultural Produce
Difference between WPI and CPI Marketing Committee (APMC) Acts in order to cut down
on the large middleman price margin. It also
Parameters for WPI CPI
recommended that one way to improve the supply chain
comparison
and benefit farmers is to allow FDI in multi-brand retail.
Targeted group Whole sellers and Retail users and
Businesses general public — The IMG argued that if this was permitted within a
Publishing agency Office of Economic National Statistics carefully crafted regulatory framework, there could be
Advisor (Ministry of Office (Ministry of large gains for farmers and also for ordinary consumers.
Commerce and Statistics and — The fiscal measure, the administrative measure and the
Industry) Programme
Implementation and monetary measure are the three different ways to contain
Labour Bureau) inflation.
Weightage of food 18.8% 50% — Keeping these issues in mind, government in 2020
Number of indices One Four separate brought three Legislations empowering farmers to sell
categories agricultural produce directly in the market and establish
Measures prices of Goods only Goods and services
contract farming agreements with the private players. The
both
Base year 2011-12 2012 and 2016
essential Commodities Act, 1955 was amended to increase
(CPI-IW) the private sector participation in food processing sector.
Utility For producers CPI (Combined) is
used as measure for Fiscal Measures
inflation by RBI since
— Fiscal policy can be effectively employed to check
2014
inflation. Manipulation of public expenditure, taxation and
public debt can be used for this purpose.
Change in Reporting of — Government can spend more money in the developmental
Inflation sphere to increase supply by improving productivity. Tax
incentives can also be used to improve the supply
— At present, the WPI for all commodities including
situation.
manufactured products is released only on a monthly
basis. However, until recently WPI for primary articles and
the fuel group was also being released on a weekly basis.
Administrative Measures
But, it was observed over a period of time that, there was — The authority to take decisions on this front is with the
a tendency for upward revisions in the indices reported executive branch of the government. Under this measure,
once the final numbers were later released. they:
— The higher frequency weekly reporting was thus, prone to —remove levy obligations in respect of imported materials.
more statistical noise and sometimes provided a —ban export of constrained materials.
misleading picture, so the trade-off was between the more —maintain the central issue price, particularly for rice and
wheat.
frequent and less reliable data and less frequent, but
—suspend future trading.
more reliable data. International practice for reporting CPI
—allot rice and wheat under Open Market Sale Scheme (OMSS)
inflation is also on a monthly basis.
and many more.
— In view of this, the Cabinet Committee on Economic
Affairs (CCEA) in its meeting held on 24th January, 2011, Monetary Measures
agreed to discontinue the weekly release of WPI for the
commodities. Items under the groups primary articles and
— Monetary measures come under the purview of Reserve
fuel and power with immediate effect. WPI shall, Bank of India (RBI). Through, the Monetary Policy review,
henceforth, be released on a monthly basis only. RBI tries to control price rise and maintain economic
growth and financial stability.
Chapter seven
Public Finance
without any contractual obligations to
Public Finance the payee. It includes taxes, fines and
Public finance is the — The study of government’s revenue and forfeitures, special assessment levies,
expenditure is called as public finance. escheats, gifts and grants etc.
study of the financial
The boundary of public finance in modern Sources of public revenue can also be
health of State time is not limited to ways and means of classified into Tax and Non-Tax
Government and local government income and expenditure only, revenue.
bodies in India. Public but it also studies public debt, financial
Tax Revenue
administration and Fiscal policy of the
finance assesses the Tax is a compulsory payment by the
economy. So, we can say that public —
government revenue finance studies revenue and expenditure citizens to the government to meet the
and government of government of an economy and all the public expenditure. It is legally imposed
activities related to it. Public finance can by the government on the taxpayer and
expenditure of the in no case taxpayer can deny to pay
be divided into five sections which are as
public authorities and follows : taxes to the government.
one or the other to (i) Public revenue Types of Tax
achieve desirable effects (ii) Public expenditure — Tax can be direct or indirect : income
and avoid undesirable (iii) Public debt tax, wealth tax, gift tax etc are the
ones. (iv) Fiscal policy and examples of direct taxes and sales taxes,
(v) Financial administration excise duty, customs duty etc are the
examples of indirect taxes.
Public Revenue Direct Tax
— Public revenue, an indispensable organ of — A direct tax is that, which is borne by
public finance operation, includes all the person on whom it is levied. A direct
income and receipts of the government tax cannot be shifted to other person.
through various sources. Different means — Direct as well as indirect money burden
of revenue to the government are called of the direct tax is on the person on
sources of public revenue. Sources of whom the tax is imposed. Impact of the
public revenue can be broadly divided into tax as well as incidence of the tax is on
two categories such as : the same person.
(i) Earned Revenue is the kind of revenue, — As a proportion of gross tax revenue,
which is received from certain assured direct taxes have been accounting for
sources kept under the complete over a half of total tax revenue since
disposal of governmental ownership. It 2007-08.
includes public domain like rent, Some of the direct taxes are as follows :
royalties, sales of forest products etc — Personal Income Tax It is the tax levied
and commercial revenues like profits of directly on the income of individuals by
public sector enterprises, public utility the Central Government. Income sources
services etc. is added for taxation.
(ii) Unearned Revenue is that revenue, — Corporate Tax It is levied on the profit of
which is mobilised by the government the companies or corporations. Now, the
54 Magbook ~ Indian Economy

As of June, 2021 corporate tax for the companies with — Value added = Total sales − Cost of intermediate
turnover upto ` 250 crore is 25%. While it is 30% for the consumption.
companies with the turnover above 250 crore. To prevent
companies from avoiding taxes a Minimum Alternate Tax
Central Value Added Tax (CENVAT)
(MAT) at 15% of book profit is levied. It is one of the largest — The basic purpose of CENVAT is to eliminate the
source of revenue of the Central Government, covering about cascading effects of the taxes by Tax Credit system.
18% of the total revenue. — Under the CENVAT scheme, a manufactures of final
— Wealth Tax This tax was levied on the net wealth of the product or provider of taxable service shall be allowed
individuals, Hindu undivided family and joint stock to take credit of duty of excise as well as service tax
companies. To assess net wealth, net obligations are paid on input received.
deducted from its market value. It is a minor source of
Custom Duties
revenue of the government, primarily imposed to reduce
concentration of wealth in the society. — These duties are imposed on commodities, which are
to be imported or exported from India. In other words,
— Gift Tax This tax is imposed by the Central Government on
when a goods cross the political boundary of a country
all donations and gifts over and above the prescribed limits
or come from other countries, custom duties are
to the family members. However, donation given by the imposed. Like excise duties, customs duties also
charitable institutions and companies is not covered under contribute largely to the government revenue.
gift tax. This tax is basically imposed to check the evasion of
estate duty and wealth tax. Service Tax
— Interest Tax This tax is imposed on the interest income of — Comparatively a new concept in India, service tax is a
the commercial banks on their gross loans and advances. tax imposed on the person, who avails any specified
Now, it is not in force in India. service. Its importance as a source of revenue has
— Recent Initiatives for Direct Taxes Alternate Minimum Tax been increasing in recent years.
(AMT) has been extended to non-company assets. This — The government is receiving more and more revenue
move has been taken to widen the tax base. In order to bring from service tax. Because of this after year, more and
about greater certainty and to reduce litigation in matters more services are being covered under the service
related to transfer, pricing and international taxation, the tax net.
Advance Pricing Agreement (APA) scheme has been — This tax was introduced in India in 1994-95. With
notified. economic growth and expansion of service sector in the
Indirect Tax economy, revenue from service tax has been increasing
over the years. From Budget 2014-15, the negative list
— Indirect taxes are those taxes, which have their primary
concept in service tax has been reformed and a
burden or impact on one person, but that person succeeds
number of services have been brought under the ambit
in shifting his burden on to others.
of the service tax. However, some of the components
— Consequently, the final or the real burden of the taxes or the
under the negative list have been kept intact.
incidence has to be borne by a third person. In India, sales
— Surplus budget is the revenue of the financial year are
tax, excise duty, custom duty etc are the examples of indirect
greater than anticipated expenditures.
taxes.
Some of the indirect taxes are as follows :
Central Excise Duties Ways and Means Advances (WMA)
◆
Ways and means advances are provided by the RBI to the
— Central excise duties are imposed by the Central Government
states, banking with it, to help them to tide over temporary
on the goods produced within the country except certain
mismatches in the cash flow of their receipts and
goods on which State Governments are empowered to
impose tax. These goods include liquor, drugs etc.
payments.
◆
Such advances are under the RBI Act, 1934, repayable in
Value Added Tax (VAT) each case not later than 3 months from the date of making
— VAT is a multi point sales tax with set-off for tax paid on that advance.
purchases of inputs. There is no cascading (tax on tax) effect ◆
These are two types of WMA is normal and special.
as there is credit mechanism for tax paid on inputs. The tax
is levied on the value of the product and consumption only. Goods and Services Tax (GST)
Total burden of the tax is borne by the consumer only.
— VAT is simply a new name for the sales tax of states, in which
— Government of India implemented GST from 1st July,
a number of other indirect taxes have been merged. Haryana 2017. It converts the country into unified market,
was the first state to introduce VAT from 1st April, 2003. Now, replacing most indirect taxes with one tax. It is levied
most states have introduced VAT. both on goods (manufacturing) and services.
Magbook ~ Public Finance 55

— It is an integrated scheme of taxation that does not GST, (IGST) levied on international commodities and
discriminate between goods and services and is a part of services. It is imposed and recovered by the Central
the proposed tax reforms that centre on evolving an Government.
efficient and harmonised consumption tax system in the The amount of taxes received under this tax is distributed
country. Key features of the GST are as follows : to the state for the loss of revenue generated to the States.
(i) Two components one levied by the centre (referred to as — Union Territory GST (UTGST) Arrangement or provision
Central GST) and the other levied by the states (referred under the UTGST and Tax system is for the Union
to as State GST), rates for which would be prescribed Territory where they do not have their own Legislative
appropriately. Assemblies, such as Andaman and Nicobar Islands,
(ii) The Central GST and the State GST would be applicable Dadra and Nagar Haveli and Daman and Diu (DNHDD)
to all transactions of goods and services except the and Ladakh etc. These Union Territories have the
exempted goods and services. provision to and collect taxes by the Central Government.
(iii) The Empowered committee has decided to adopt a Taxes Out of GST
two-rate structure a lower rate for necessary items and
goods of basic importance and a standard rate for goods
◆
Taxes that are not included in any of the provision of the GST,
in general. There will also be a special rate for precious they contain alcohol, real estate, crude oil, petrol, natural gas
metals and a list of exempted items. and the fuel for turbine. All these items will be out of GST
provision and the current taxation system will be applicable on
(iv) The GST will be levied on import of goods and services
them.
into the country.
(v) The administration of the Central GST to the Centre and Direct Tax Code (DTC)
for State GST to the states would be given.
— DTC was proposed by the United Progressive Alliance
(vi) Central Taxes replaced by GST Central Excise Duty,
(UPA) Government to consolidate the law relating to the
Additional Duties of Excise and Customs, Special
direct taxes. The bill seek to replace the Income Tax Act,
Additional Duty of Customs (SAD), Service Tax and
1961 and Wealth Tax Act, 1957. The bill, in its original
Cesses and Surcharges on supply of goods and
form, widened the tax slabs and lowers corporate tax
services.
rates. It also removed a number of exemptions and grant
(vii) State Taxes Subsumed in the GST VAT, Central Sales for some other. DTC provision introduced in the Budget
Tax, Purchase Tax, Luxury Tax, Entry Tax, 2012-13 are as follows :
Entertainment Tax, Taxes on advertisements, lotteries, —General Anti- Avoidance Rule (GAAR).
betting, gambling and State Cesses and Surcharges. —Advance Pricing Agreement (APA).
Types of GST —Income tax exemption limit rose to ` 2 lakh.
Under the GST form, four types of GST are —Upper limit of 20% tax slab rose to ` 10 lakh.
— Central GST (CGST) Under the CGST, there is a provision —20% cut in Securities Transaction Tax (STT).
to impose tax on the supply of goods and services by the
Central government. Earlier, Central Excise, Excise (Drugs GAAR
and Toilet construction), Excise duties on the taxes — The General Anti-Avoidance Rule (GAAR) was proposed in
imposed by the Central Government, (Goods of special mid-March as a hart of budget for fiscal year 2013.
importance), additional duty of custom duty (known under — GAAR was scheduled to come into effect from 1st April,
CVD), Special Duty of Custom Duty (SAD), Service tax and 2013. In the Budget 2013-14, it was announced that a
gratuity surcharge related to the supply of goods or modified version of GAAR provisions will come into effect
services were separate taxes. All these included in CGST. from April, 2016.
— State GST (SGST) Taxes imposed and collected by the
— GAAR aims to target tax evaders partly by stopping Indian
State government on goods and services are levied under companies and investors from routing investment to
State GST system. Earlier, State governments pay VAT Mauritius or other tax heavens for sole purpose of
under State taxes, purchase tax, entry tax, entertainment avoiding tax.
tax, advertisement tax including State excise and
— GAAR was scheduled to come into effect from 1st April,
surcharge related to State sub-tax and imposition, lottery
2013. In the Budget 2013-14, it was announced that a
taxes, tax on speculation and gambling. All these taxes
modified version of General Anti-Avoidance Rule (GAAR)
now included in SGST.
provisions will come into effect from April, 2016. A
— Integrated GST (IGST, State Indemnification) The
number of representation were received against GAAR
proposed Goods and Services tax provides an integrated provisions introduced in the last budget.
56 Magbook ~ Indian Economy

Non-Tax Revenue — Lotteries organised by the Government of India or the

Government’s State.
— Non-tax revenue are those receipts, which are received — Post office savings bank.
from sources other than taxes like fees, fines etc. Some of
— Post and telegraphs, telephones, wireless, broadcasting
the non-tax revenue are as follows :
and other like forms of communication.
—Fee, License and Permit One of the main sources of non-tax
revenue of the government are fee, license and permit.
— Property of the union.
—Fee A fee is a payment to the government for the services that — Public debt of the union.
it renders to the people. Examples of fees are: land registration — Railways.
fee, birth and death registration fee, passport fee, court fee etc. — Rates of stamps duty in respect of bills to exchanges,
—License and Permit The amount that the government charges cheques, promissory notes etc.
for allowing the people to perform a given job, is called license or — Reserve Bank of India.
permit fee. “License fees are charged to give permission for — Taxes on income other than agricultural income.
something by the government.” e.g. driving license, import
license. There is a difference between fees and license fees.
— Taxes on the capital value of the assets, exclusive of
License fees are paid, when a person is permitted to do some agricultural land of individuals and companies.
specific job by the government. No service is provided to the — Taxes other than stamp duties on transactions in stock
license holder. exchanges and future markets.
—Escheat Escheat refers to that income of the state, which arises — Taxes on the sale or purchase of newspapers and on
out of the property that comes to it for want to a legal heir. Such advertisements published therein.
a property has no claimant. State alone has the legal right over — Terminal taxes on goods or passengers, carried by
it. railways, sea or air.
—Special Assessment It is yet another source of non-tax revenue
of the government. Special assessment is that payment, which State Sources
is made by the owners of those properties, whose value has
appreciated due to developmental activities of the government. — Capitation tax.
— Fines and Penalties Fines and penalties are those — Duties in respect of succession to agricultural land.
payments, which are made by the law breakers to the — Duties of excise on certain goods produced or
government by way of economic punishment. The aim is manufactured in the state, such as alcoholic liquids
not to earn revenue. Its actual aim is to force the people to opium etc.
be law abiding (follow the rules and regulations). — Estate duty in respect of agricultural land.
— It is determined by the government in an arbitrary manner — Fees in respect of any matters in the State list, but not
and not on the basis of administrative cost. including fees taken in any court.
— Land revenue.
— Income from Public Enterprises Several public enterprises
are owned by the government. For instance, Indian
— Rates of stamps duty in respect of documents other than
Railways, Nangal Fertilizer Factory, Indian Oil, Bhilai Steel those specified in the Union List.
Plant etc. — Taxes on agricultural income.
— Profit from sale proceeds of the products of these — Taxes on land and buildings.
enterprises constitutes the income of the government. — Taxes on mineral rights, subject to limitations imposed by
Parliament relating to mineral development.
Sources of Revenue —

—
Taxes on the consumption or sale of electricity.
Taxes on the entry of goods into a local area for
— The following list will show the respective sources of consumption, use or sale therein.
revenue for the Union and the States. — Taxes on the sale and purchase of goods other than
newspapers.
Union Sources — Taxes on advertisements other than those published in
— Corporation tax. newspapers.
— Currency, coinage and legal tender, foreign exchange. — Taxes on goods and passengers carried by road or on
— Duties of excise on tobacco and certain goods inland waterways.
manufactured or produced in India. — Taxes on vehicles.
— Estate duty in respect of property other than agricultural — Taxes on animals and boats.
land. — Taxes on professions, trades callings and employments.
— Fees in respect of any matters in the Union list, but not — Taxes on luxuries, including taxes on entertainments,
including any fees taken in any court. amusements, betting and gambling.
— Foreign loans. — Tolls.
Magbook ~ Public Finance 57

Duties Levied by the Union, but Collected and — Transfer Pricing It is the price at which divisions of a company
Appropriated by the States (Article 268) transact with each other. Transactions may include trade of
— Stamp duties and duties of excise on medicinal and supplies or labour. It is used when individual entities of a larger
toilet preparations (those mentioned in the Union firm are treated as separately run entities.
list) shall be levied by the Government of India but — Specific Duty Tax is levied based on weight or quantity.
shall be collected. — Ad Valorem Tax is levied based on value and not an weight or
—In the case, where such duties are leviable within any quantity.
Union Territory, by the Government of India. — Withholding Tax It means withholding tax of certain payments
—In other cases, by the States within which such duties such as salary to employees, payments to contractors, interest
are respectively leviable.
etc. It is the same as Tax Deducted at Source (TDS).
Taxes Levied and Collected by the Union, but Assigned — Capital Gains Tax It is the tax on gains made from buying and
to the States (Article 269) selling assets such as land, shares etc. Gain made on assets
— Duties in respect of succession to property other held for over three years (one year for shares) is called
than agricultural land. long-term capital gain.
— Estate duty in respect of property other than — Base Erosion and Profit Shifting (BEPS) It is of major
agricultural land. significance for developing countries due to their heavy reliance
— Taxes on railway fares and freights. on corporate income tax, particularly from multinational
— Taxes other than stamps duties on transactions in enterprises. BEPS refers to tax planning strategies that exploit
stock exchanges and future markets. gaps and mismatches in tax rules to artificially shift profits to low
or no-tax locations where there is little or no economic activity.
— Taxes on the sale or purchase of newspapers and
on advertisements published therein.
Tax Related Primary Concepts
— Terminal taxes on goods or passengers carried by
railways, sea or air. — Tax Evasion It is the illegal evasion of taxes by individuals,
— Taxes on the sale or purchase of goods other than
corporations and trusts. Tax evasion often entails taxpayers
deliberately misrepresenting the true state of their affairs to the
newspapers where such sale or purchase takes
tax authorities to reduce their tax liability and includes dishonest
place in the course of inter-state trade or commerce.
tax reporting, such as declaring less income, profits or gains
Taxes which are Levied and Collected by the Union, than the amounts actually earned or overstating deductions.
but which may be distributed between the Union and — Tax Shifting Transferring some or all of a tax burden of an entity
the States (Articles 270 and 272) (such as a subsidiary) to another (such as the parent firm) is tax
—Taxes on income other than agricultural income. shifting. Tax shift or tax swap is a change in taxation that
—Union duties of excise other than duties and taxes eliminates or reduces one or several taxes and establishes or
referred to in Articles 268, 268A and 269. increases others while keeping the overall revenue unchange.
— Taxes on income does not include corporation tax. — Tax Avoidance It is the legal usage of tax regime to one’s own
The distribution of income tax proceeds between the advantage to reduce the amount of tax that is payable by means
union and the states is made on the basis of the that are within the law. Tax shattering is very similar term and
recommendations of the Finance commission. tax havens are jurisdictions which facilitate reduced taxes. The
term tax mitigation is sometimes used, its original use was by
Important Terms Related to tax advisers as an alternative to the pejorative term tax
Taxation avoidance.
— Tax Haven It is a country or territory where certain — Fiscal Space It is a relatively new term that refers to the
taxes are levied at a low rate or not at all. Tax haven flexibility of a government in its spending choices and more
lead to loss of revenue for governments, money generally, to the financial well-being of a government. Peter
laundering etc. Cayman islands, Gibraltar, Haller (2005) defined it ‘‘as room in a government’s budget that
Liechtenstein etc are some of the tax havens. allows it to provide resources for a desired purpose without
jeopardising the sustainability of its financial position or the
— Pigouvian Tax It is a tax, which is imposed on
stability of the economy.’’
bodies having negative externalities. An example of
pigouvian tax is the carbon tax levied in some
* Higher fiscal deficits usually lead to rising public debt.
countries for causing pollution. India’s Central Government liabilities GDP ratio has
infact come down since 2002-03.
— Tobin Tax It is a tax levied on foreign exchange
* The government appointed a committee headed by
transactions both when foreign capital enters a
Dr Vijay Kelkar to check out a roadmap for fiscal
country and when it leaves. It is meant to check
consolidation.
speculative flows.
58 Magbook ~ Indian Economy

Public Expenditure Internal Debt

— Before independence, the activities of the Government in — Includes market borrowings, money raised by issuing
India were influenced by classical thinking. Classical bonds treasury bills, special securities issued to the RBI
economists opposed the idea of entrusting too many etc.
functions to the government and thus, public expenditure
remained limited. External Debt
— After independence, the government decided to interference — Includes borrowings from foreign countries and
directly in the economy of the country. It was realised that international financial institutions.
economic growth and welfare of the people cannot be — Non-government external debt includes NRI deposits,
increased without government playing a major role.
trade credit, external commercial borrowings etc.
— Centralised planning and the public sector were to play a — India’s external debt is held in multiple currencies, the
major role in this. Thus, the scope of public expenditure largest of which is the United States dollar (48.2%).
increased rapidly after independence.
Necessity of Public Debt
Sources of Government
— Public debt is considered necessary for the following
Expenditure reasons :
There are some sources of Government expenditure given belows : —Smoothening out tax rates. Borrowing means that tax rates
— Subsidies.
need not be increased or decreased sharply.
—In times of recession economy can be pump-primed by
— Purchase and provision of goods and services.
spending money through borrowing.
— Investments and money transfer.
—Financing war or other emergency expenditure.
— Creation and maintenance of the military police emergency
—To finance expenditure on social sector for human capital
and five fighting organisation. formation.
—Towards capital formation to boost economic activities in
Debt Management Strategy the country.
— Despite these benefits public debt is also criticised when
— In a more aimed at a focused targeting of subsidies for the
it reaches a high level. Reasons for its criticism are as
country’s debt management. The Nilekani Task force was
follows :
set-up to come up with a mechanism improve intro strategy
—It creates a burden of interest which has to be paid out of
for kerosene. The main recommendations are as follows :
the current revenue.
—Set-up a strong, robust IT infrastructure backbone to reform the
functioning of PDS, which would be an incentive based system —It often does not lead to direct or indirect returns which
for all stakeholders. makes its repayment difficult.
—End to end computerisation of PDS across the country. —It reduces availability of funds to the private sector.
—PDS Network (PDSN), as the National Information Utility (NIU) to —It can increase inflationary tendencies in the economy by
be the common software platform for all states, to implement and increasing the money supply.
operate the IT infrastructure for PDS.
—Aadhar (UIN) to be used in PDS to simplify ration card registration, Debt to GDP Ratio
cleaning up the beneficiary database. — It is the ratio of a country’s national debt to its Gross
—Set-up a Core Subsidy Management System (CSMS) for direct Domestic Product (GDP). By comparing what a country
transfer of subsidies on kerosene, LPG and fertilizer through owes to what it produces the debt-to-GDP ratio
Aadhar Enabled Bank Account (AEBA) to facilitate robust
indicates the country’s ability to pay back it’s debt.
identification of the beneficiary.
—Fertilizers movement and sale at market price with * In Fiscal year 2020-21, India’s debt to GDP
reimbursement of subsidy directly to the beneficiary. ratio was 60.5%. The external debt to GDP ratio
increased to 21.1 per cent in March 2021 from
Public Debt 20.6% in March 2020.
* The higher the debt to GDP ratio, the less likely
— Public debt in the Indian context refers to the borrowings of
country will be to pay its debt back and higher
the Central and State Governments. Public debt of Central
the risk of its default.
Government consists of internal and external debt and other
liabilities.
Magbook ~ Public Finance 59

The other members of the commission, which is

Finance Commission —
required to submit its report by October 2019, are
— According to Article 280 of Constitution, the President former economic affairs secretary Shaktikanta Das and
appoints a Finance commission after every 5 years. This former chief economic adviser Ashok Lahiri, NITI
Aayog member Ramesh Chand and Georgetown
provision is also a Fundamental feature of Indian Constitution,
University professor Anoop Singh.
which is not found in any other Constitution. The Finance
— The commission will review the current status of the
commission was appointed 2 years after the implementation
finance, deficit, debt levels, cash balances and fiscal
of the Constitution and every 5 years thereafter. discipline efforts of the union and the states.
— The President has the power to appoint a new Finance — Union Government extended the term of proposal of
commission even before the expiry of 5 years, if he deems it 15th Finance Commission by 11 months to 30th
necessary. In other words, the appointment of the Finance October, 2020.
commission is a continuous process according to our — The duration of the 15th finance commission was
Constitution. supposed to be from 1st April, 2020 to 31st March,
— Finance commission, generally, presents its recommendations 2025 but it is 2021-26 for the full set of
regarding the allocation of revenue between the centre and recommendation.
the state, so that, there is no discord between the centre and
the states. Recommendations of 15th Finance
— Main objective of the Finance commission is to assess the Commission
financial requirements of the states to determine amount of — The commission has reduced the vertical devolution-
grants- in-aid to be given to various states and to strengthen the share of tax revenues that the central shares with
the federal financial system. the states from 42% to 41%.
Objectives of Finance Commission — The 1% decrease is to provide for the newly formed
union territories of Jammu and Kashmir and Ladakh
— To determine the basis for the allocation of funds collected from the resources of the central government.
from the taxes, which are divisible between the centre and the — The previous FC used both the 1971 and the 2011
states.
populations to calculate the state’s shares, giving
— To formulate the principles regarding the grants to the states greater weight to the 1971 population (17.5%) as
from the centre. compared to the 2011 population (10%).
— To continue the agreements made between the Government of
India and the states or to recommend changes in them.
— Tax effort has been used to reward states with higher
tax collection efficiency. It has been computed as the
— To consider any other financial matter in the interest of the
ratio of the average per capita own tax revenue and
country, on being notified by the President to do so.
the average per capital state GDP during the
— On the basis of this arrangement, 15th Finance Commissions three-year period between 2014-15 and 2016-17.
have been set-up so far : — The commission highlighted some challenges with the
Finance Finance implementation of the Goods and Services Tax (GST).
Chairman Chairman
Commission Commission
14th Finance Commission
1st (1951) Mr KC Neogy 9th (1987) Mr NKP Salve
— The 14th Finance commission, headed by former RBI
2nd (1956) Mr K Santhanam 10th (1992) Shri KC Pant
Governor YV Reddy, has endorsed the compensation
3rd (1960) Mr AK Chanda 11th (1998) Prof AM Khusro road map for the goods and services tax finalised by
4th (1964) Mr R V Rajamannar 12th (2002) Dr C Rangarajan the Centre, but has called for an autonomous and
5th (1968) Mr Mahaveer Tyagi 13th (2007) Dr Vijay L Kelkar independent GST compensation fund.
6th (1972) Mr Brahmananda Reddy 14th (2013) YV Reddy — Members of the 14th Finance Commission YV Reddy,
Abhijit Sen, M Govinda Rao, Sushama Nath and
7th (1977) Mr JM Shelat 15th (2017) N K Singh
Sudipto Mundle. The Government of India on 24th
8th (1983) Mr YB Chavan February, 2015 accepted recommendations of the
14th Finance commission for increasing share of
15th Finance Commission states in central taxes to 42%.
— Former Planning Commission member N K Singh was — The commission recommended increase in the share
appointed as the chairman of the 15th Finance Commission, of states in the centre’s tax revenue from the current
which has been asked to look into the impact of the Goods 32% to 42%, the single largest increase ever
and Services Tax (GST) on finances of both the centre and the recommended.
states.
60 Magbook ~ Indian Economy

Recommendations of 14th Finance —Influencing Efficiency of Resource Allocation This is done by an

Commissions efficient and rational allocation of resources to maximise the rate of
growth.
— The 14th Finance commission is of the view that tax
— Fiscal policy also tries to achieve social justice through various
devolution should be the primary route for transfer of
measures :
resources to the states. In understanding the states
—Relying more on direct taxes than indirect taxes.
needs, it has ignored the plan and non-plan
distinctions. —Increasing taxes on the rich and expenditure on luxury goods while
lowering them on the poor and goods of common use.
— In recommending an horizontal distribution, it has
—Spending on welfare and development projects.
used broad parameters population (1971), changes
in population since then, income distance, forest
cover and area, among others.
Fiscal Imbalance and Deficit
— It has recommended distribution of grants to states Financing
for local bodies using 2011 population data with — Fiscal imbalance is a situation, in which there is a gap between
weight of 90% and area with weight of 10%. revenue and expenditure. Deficit financing is a method of filling
— Grants to states are divided into two. One, grant to this gap which in India means borrowing from the RBI against
duly constituted Gram Panchayats. Two grant to duly the issue of Treasury Bills and running down of accumulated
constituted municipal bodies. cash balances. This amounts to creation of money.
— It has divided grants into two parts. A basic grant — The need for deficit financing arises when the government fails
and a performance one for Gram panchayats and to mobilise enough resources to fund its plans. Since, cutting
Municipal, bodies. down plan expenditure would hurt growth, the government
instead resorts to deficit financing.
— The ratio of basic to performance grant is 90 : 10 for
panchayats and 80 : 20 for municipalities. Consequences of Deficit Financing
— During a recession deficit financing can have positive effects. It
7th Pay Commission leads to an increase in Aggregate demand, which puts the
— The 900-page report of the 7th Pay Commission hitherto idle machinery and capital equipment into operation
headed by Justice AK Mathur was presented to thus, leading to an increase in production and the general
former Finance Minister Arun Jaitley on economic activity.
November 19, 2015 with a recommendation that the — There is a time lag between the increase in demand due to
new scales be implemented from January 1, 2016. deficit financing and the increase in supply of goods and
— The panel recommended a 14.27% increase in basic services. This leads to high inflation during this period.
pay, the lowest in 70 years. The previous 6th Pay — The level of inflation depends on how much of the resources
Commission had recommended a 20% hike which are spent on producing consumer goods and how much on
the government doubled while implementing it capital equipment. Production of consumer goods leads to
in 2008. increased supply and thus, lower inflation.

Fiscal Policy Kelkar Committee Report on

— Fiscal policy is that part of government policy, which Fiscal Consolidation
is concerned with raising revenue through taxation
and with deciding on the amount and purpose of The Vijay Kelkar committee, which was given the task of preparing a
government spending. The idea of using fiscal policy fiscal consolidation plan has suggested number of steps, which are
to combat recessions was introduced by John given below:
Maynard Keynes in the 1930s. ◆
Immediate increase in the price of diesel by ` 4 litre that of
kerosene by
Objectives of Fiscal Policy ` 2 litre and cooking gas by ` 50 per cylinder.
— Fiscal policy in India has two major objectives : ◆
Instead of subsidies provision for diesel, kerosene, gas move to
(i) Improving the growth performance of the economy. system of market based price by March, 2014.
(ii) Ensuring social justice to the people.
◆
Implement of goods and service tax.
◆
Reduce excise and ST rates to 8%.
— Fiscal policy influences the growth performance in
the following manner :
◆
A 360° profile of all tax paying individual and institution should be
created to help decrease tax evasion and tax fraud.
—Influencing Resource Mobilisation India has done well in
this area as reflected in the tax GDP ratio which
◆
The proposed Food Security Bill should be appropriately phased
increased from 6.3% in 1950-51 to 16.2% in 2011-12. taking into account the present difficult fiscal challenge.
Magbook ~ Public Finance 61

Fiscal Responsibility and Budget Union Budget

Management Act, (FRBM) 2003 — The budget is an extensive account of the
government’s finances, in which revenues
— FRBM Act, 2003 was passed by the Union Government to provide a
from all sources and expenses of all activities
legislative control over the fiscal situation of the country, which had
undertaken are aggregated.
deteriorated earlier. It was meant to bring fiscal discipline, increase
plan expenditure, leave the RBI with autonomy as far as money — Union budget is an expression of the Fiscal
creation was concerned, meet the consumption expenditure of the Policy of the Government.
government from its own resources etc. — The Finance Minister presents the Union
— The Fiscal Responsibility and Budget Management Act, 2003 (FRBM budget every year in the Parliament that
Act) has been amended as part of the Finance Bill, 2012. It has contains the Government of India’s revenue
introduced two concepts to reform the expenditure aspect of the fiscal and expenditure for 1 fiscal year, which runs
policy. from 1st April to 31st March.
These are :
—Effective Revenue Deficit It excludes from the conventional revenue deficit,
Historical Preview
grants for the creation of capital assets. This is an important development — The term budget is actually derived from a
for the reason that while the revenue deficit of the consolidated general French word Bougette, which means a sack
government fully reflects total capital expenditure incurred, in the accounts or pouch. It was first used in France in 1803.
of the centre, these transfers are shown as reserve expenditure. In the Constitution of India, the term budget is
Therefore, the mandate of eliminating the conventional revenue deficit of nowhere used.
the centre becomes problematic. With this amendment, the endeavour of
— It is rather mentioned as Annual Financial
the government under the FRBM Act, 2003 would be to eliminate the
effective revenue deficit.
statement under Article 112 comprising the
Revenue budget, Capital budget and also the
—Medium-term Expenditure Framework Statement It will set forth a
estimates for the next fiscal year called
three-year rolling target for expenditure indicators. It would help in
undertaking a de-novo exercise for allocating resources for prioritised
budgeted estimates.
schemes and weeding out others that have outlived their utility. — As per the British legacy, the Union Budget of
India used to be presented on the evening of
NK Singh Committee last working day of the month of February to
follow the British budget.
— The FRBM Review Committee headed by former Revenue Secretary,
— During the NDA regime, then Finance Minister
NK Singh was appointed by the government to review the
Yashwant Sinha was the first to present the
implementation of FRBM. In its report submitted in January 2017,
budget on 28th February, 2001 at 11 am.
titled, ‘The Committee suggested that a rule based fiscal policy by
(The budget has to be passed by the Lok
limiting government debt, fiscal deficit and revenue deficits to certain
Sabha before it can come into effect on
targets is good for fiscal consolidation in India.
1st April.)
— Its members included RBI Governor Urjit Patel, Chief Economic
Advisor Arvind Subramanian, former Finance Secretary Sumit Bose, Preparation of Budget
and National Institute of Public Finance and Policy Director
Rathin Roy. — The budget is prepared by the budget division
— Review Committee Report has recommended a debt to GDP ratio of of Department of Economic affairs in the
60% for the general (combined) government by 2023, comprising Ministry of Finance (MoF), after consulting
40% for the Central Government and 20% for the State Governments. with other ministries and the Planning
As per the Constitution of India, it is mandatory for a State to take the Commission.
Central Government’s consent for raising any loan if the former owes — The process majorly includes following steps
any outstanding liabilities to the latter. which may be sequential or overlapping too.
Overall Budget
Financial Administration — Overall budget are available for more than 1
— All financial activities involving issues of financial administration fiscal year but are not distributed to individual
including public budget, its passing, auditing and similar other fiscal year. It is a hierarchical and structure
matters. Without a extensive study of relevant dimensions of financial containing budget structure elements (budget
administration the subject of public finance remains incomplete. hierarchy).
62 Magbook ~ Indian Economy

Passing of Finance Bill cash through the firm‘s capitalisation structure (debt, equity
(Under Rule 219 of the Lok Sabha) or retained earnings).
— Capital budget includes capital receipts and payments of
Classification of the Budget
the government. Loans from public, foreign governments
— Budget of the Union Government is classified into revenue and RBl form a major part of the government’s capital
account and capital account. receipts. Capital expenditure is the expenditure on
Revenue Account development of machinery, equipment, building, health
facilities, education, etc.
— Consists of all those receipts or expenditure or that do not
entail sale or creation of assets or increase or decrease of Outcome Budget
liabilities.
— An Outcome budget measures the development outcomes
— Capital account consists of receipts or expenditure from of all government programmes. For instance, it will tell a
liquidation or creation of assets or increase or decrease of
citizen if money has been allocated for building a primary
liabilities. Expenditure is also divided into two expenditure:
health centre has it indeed come up. In other words, it is
(i) Plan Expenditure Consists of money going to annual a mean to develop a linkage between the money spent by
plans of the Union and State Governments. a government and the results which follow.
(ii) Non-Plan Expenditure It is the expenditure not falling — Outcome budgeting in India was introduced by the
under the annual plans. It has a small capital Finance Minister P Chidambaram from Budget 2005-06. It
component whose largest chunk is on defense. Both is based on the idea that financial outlays in the budget do
plan and non-plan expenditure are divided into revenue not necessarily lead to outcomes, while the people of the
and capital account as usual. country are concerned with the outcomes.
Stages in Budget Enactment * The first such mini-budget was presented by TT
Krishnamachari on 30th November, 1956, in form of
The budget goes through the following six stages in the fresh taxation proposals through Finance Bills,
Parliament : demanded by the prevailing domestic and
(i) Presentation of the budget on the floor of the House International Economic Situation.
before the Lok Sabha. * John Mathai proposed the first Budget of Republic
(ii) General discussion on the budget. of India in 1950 and also the creation of Planning
(iii) Vote of account. commission.
(iv) Scrutiny by departmentally related Standing
* Finance Minister Morarji Desai has given Budget
committees. for the maximum number of times (10), followed by
P Chidambaram, who has given 9 Budgets.
(v) Voting on demands for grants.
(vi) Passing of Appropriation Bill (Article 114 of the
* CD Deshmukh was the first Indian Governor of
RBI to have presented the Interim budget for the
Constitution of India).
year 1951-52.
* Ms Indira Gandhi is the first woman to hold the
Types of Budgeting post of the Finance Minister and to have presented
Zero-Based Budgeting the budget in her capacity as the Prime Minister of
India in 1978.
— It is a method of budgeting, in which all budgetary
* Plan expenditure was for the first time presented
allocations are set to nil at the beginning of a financial year.
separately in the budget for 1959-60.
Gender Budgeting
— It came into being in 2004-05. To contribute towards the Deficit
women empowerment and removal of inequality based on
A deficit is the amount by which a sum falls short of some
gender, role of budgeting has been accepted through this
reference amount. The meaning of deficit differs from that of
step. debt which is an accumulation of yearly deficits.
Capital Budgeting
— Capital budgeting or investment appraisal is the planning Types of Deficits
process used to determine whether an organisation‘s — Revenue Deficit It is the difference between the revenue
long-term investments such as new machinery, receipt on tax and non-tax side and the revenue
replacement of machinery, new plants, new products, and expenditure. Revenue expenditure is synonymous with
research development projects are worth the funding of consumption and non-development.
Magbook ~ Public Finance 63

— Fiscal Deficit It is the difference between what the — Government budget deficit that is deficit spending.
government earns and its total expenditure. — Primary deficit, the pure deficit derived after deducting
◆
Fiscal Deficit = Difference between country’s expenditures and the interest payments and structural and cyclical deficit
earnings. part of the public sector deficit.
◆
Fiscal Deficit = Revenue Receipts (Net tax revenue + Non-tax — Income deficit (the difference between family income and
revenue) + Capital Receipts (only recoveries of loans and other the poverty threshold).
receipts) – Total expenditure (Plan and Non-plan) — Trade deficit ( when the value of imports exceed the value
of exports).
— Budget Deficit It considers only the difference between
the total budgeted receipt and the expenditure. It was — Introduction of new schemes would entail more spending
abolished in 1997. and it goes just opposite to what we are trying to do, i.e.
reduce deficit. Import duty is a tax collected on imports
— Monetised Deficit It is the borrowing made from the RBI,
and some exports by the customs authorities of a country.
through printing fresh currency. It is resorted to, when
It is usually based on the value of the goods that are
government cannot borrow from market.
imported. There are two distinct goals to import duties :
— Gross Fiscal Deficit The Gross Fiscal Deficit (GFD) of to raise income for Local Government, and to give a
government is the excess of its total expenditure, current market advantage to locally grown or produced goods that
and capital, including loans net of recovery, over revenue are not subject to import duties.
receipts (including external grants) and non-debt capital
receipts.
—Gross Fiscal Deficit = Total Expenditure – (Revenue Receipts Financial Stability and
+ Non-debt Creating Capital Receipts). Development Council
— Net Fiscal Deficit The Net Fiscal Deficit (NFD) is the gross
It is an apex-level body constituted by Government of
fiscal deficit reduced by net lending by government.
India, which was first mooted by Raghuram Rajan
— Primary Deficit Amount by which a Government’s total
committee in 2008. It envisages to strengthen and
expenditure exceeds, its total revenue, excluding interest
institutionalise the mechanism of maintaining financial
payments on its debt.
stability, financial sector development, inter-regulatory
—Primary deficit = Fiscal deficit – Interest payments.
coordination alongwith monitoring macro-prudential
— Gross Primary Deficit The Gross Primary (GFD) Deficit
regulation of economy.
(GPD) is the Gross Fiscal Deficit less interest payment
while the primary revenue deficit is the revenue deficit Financial Sector Legislative Reform
less interest payments. Commission
Action of the Government to It is a body set-up of Ministry of Finance by Government
of India to review and rewrite the legal-institutional
Reduce the Deficit architecture of the Indian financial sector, which is
A deficit is the amount by which a sum falls short of some chaired by a former judge of the Supreme Court of India
reference amount. In economics, a deficit is an excess of and have an electric mixer of expert members drawn
expenditures over revenue in a given time period. In more from the fields of finance, economics, public
specific cases, it may refer to administration, law etc.
— Balance of Payments (BOP) deficit, when the Balance of
Payments is negative.
Chapter eight
India’s Balance of
Payments
Components of Capital Account
Balance of There are the principle forms of capital account
India’s balance of
Payments (BoP) transactions :
— When the difference in the value of —Foreign Investment It has two sub-components
payments has been which are as follows:
imports and exports of all the three
under increasing items i.e. visible, invisible and (i) Foreign Direct Investment (FDI) referring to
stress recently. Exports capital transfers, is taken into the purchase of assets in the rest of the
account, it is called Balance of world, which allows control over that assets.
have declined while e.g. purchase of a firm by TATA in the rest of
Payments (BoP).
imports have not the world.
— Thus, an overall record of all
fallen significantly, (ii) Portfolio Investment referring to purchase of
economic transactions of a country
resulting in increasing an asset in the rest of the world, without any
in a given period, with rest of the
control over that asset. Portfolio investment
trade and current world. into India also consists of Foreign Institutional
account deficits. — Balance of Payments (BoP) account Investment (FII).
India’s growing broadly comprises of the following e.g. purchase of the some shares of a
components: company by TATA in the rest of the world.
external exposures
— Current Account of Balance of —Loans It has two sub-components which are as follows:
can also be attributed Payments consist of all transactions (i) Commercial Borrowings referring to
to the increasing relating to goods, services and borrowing by a country (including
integration of India’s income. It is functionally classified government and the private sector) from the
into merchandise or visible and international money market. This involves
economy with the rest
invisibles. Current account deficit is market rate of interest without considerations
of the world. the situation where payments on of any concession.
the current account out of the (ii) Borrowings as External Assistance referring
country are more than the to borrowing by a country with considerations
payments into the country. In of assistance. It involves lower rate of interest
current account surplus, there is a compared to that prevailing in the open market.
net inward payment into the —Banking Capital Transactions referring to transactions
country on the current account. of external financial assets and liabilities of
Commercial Banks and Cooperative Banks operating
— Capital account is that account
as authorised dealers in foreign exchange. These
which records all such transactions include NRI deposits.
transactions between residents of
—Reserve Account The official reserve account records
a country and rest of the world, the change in stock of reserve assets (also known as
which causes a change in the foreign exchange reserves) at the country’s monetary
asset or liability status of the authority.
residents of a country or its —Net Errors and Omissions This is the last component
government. Investments (FDI and of the Balance of Payments and principally exists to
FII) and Borrowings External correct any possible errors made in accounting for the
Commercial Borrowing (ECB) are three other accounts. They are often referred to as
part of the capital account. balancing items.
Chapter fifteen
Poverty and Unemployment
—Calorie Criteria The energy that an individual gets from
Poverty the food that he eats everyday is measured in terms
of calories. In India, Planning Commission was
— Poverty is a social phenomenon,
“Goal of sustained of the opinion that an individual in rural area
wherein a section of society is unable to must get 2400 Kilo calories and in urban area,
poverty reduction cannot fulfill even its basic necessities of life. 2100 calories per day.
be achieved unless — The UN Human Rights Council has —Minimum Consumption Expenditure Criteria
equality of opportunity defined poverty as a human condition An Expert Committee was appointed in
characterised by the sustained or 1962, by the Planning Commission to
and access to basic determine poverty line, by adopting
chronic deprivation of the resources,
services is ensured. Goal Minimum Consumption Expenditure
capabilities, choices, security and power
Criteria. As per this committee, those
of reducing inequality necessary for the enjoyment of an people will be treated as living below the
adequate standard of living and other poverty line, whose per-capita consumption
must be explicitly
civil, cultural, economic, political and expenditure at 2004, prices is below
incorporated in policies social rights. ` 368 per month in rural areas and below
and programmes aimed ` 559 per month in urban areas.
— Global poverty had dropped at the rate
at poverty reduction.” of around 1 per cent point per year Relative Poverty
between 1990 and 2015. The World — Relative poverty refers to poverty on the
Bank had developed $ 1.90 per day as basis of comparison of per-capita income
criteria for deciding International of different countries. The country, whose
Poverty Line. per-capita income is quite less in
— According to UNDP’s Multidimensional comparison to other countries is treated
as relatively poor nation.
Poverty Index 2019, India was able to
lift 271 million people out of poverty — In poor nations, that part of population,
between 2006 to 2016. However, still which is living at the bottom (whose
365.55 million poor people resides in income is less), is unable to fulfill the basic
requirements of life. In addition to the
the country.
$ 1.90 per-day international poverty line,
the World Bank measures poverty lines
Types of Poverty of $ 3.20 and $ 5,50, reflecting national
The poverty has two aspects: poverty lines in lower-middle income and
upper-middle income countries.
Absolute Poverty
— It is a situation, in which the
consumption or income level of people
Poverty in India
— There is substantial decline in poverty
is less than some minimum level ratios in India from about 45% in
necessary to meet basic needs as per 1993-94 to about 21.9% in 2011-12.
the national standards. It is expressed India lifted 271 million people out of
in terms of a poverty line. poverty between 2006 and 2016. If the
— Economists have given many definitions trend continues, people below poverty line
of poverty in this regard, but in a large may come down to less than 20% in the
number of countries poverty has been next few years.
defined in the context of per capita — In a given year in India, official poverty
intake of calories and minimum level of lines finds higher in some states than in
per capita consumption expenditure. others because price levels vary from
state to state.
136 Magbook ~ Indian Economy
It is expressed as:
Categories of Poor in India
S = H [ I + (1 − I) G ]
— Although poverty is a relative concept, but where there is an
absolute poverty, we can categorise the poor people by Where, S = Sen index of poverty
defining the poverty line. H = Head count index
— Some are always poor, some are occasionally poor and some I = Poverty gap index and
are never poor. G = Gini co-efficient.
— We can categorise poor people in three categories;
semicolon chronic poor, trausient poor and non-poor.
Multi-Dimensional Poverty Index (MPI)
— It was developed in 2010, by Oxford Poverty and
Poverty Line Human Development Initiative and the United Nations
Development Programme. It uses different factors to
— It is the line, which indicates the level of purchasing power determine poverty beyond income-based lists. It uses a
required to satisfy the minimum needs of a person. range of deprivations that afflict an individual’s life.
— This line divides the population in two groups, one of those, — The measure assesses the nature and intensity of
who have this purchasing power or more and the other poverty at the individual level in education, health
group of those people, who do not have this much of outcomes and standard of living. The MPI is calculated
purchasing power. as follows:
— The former group is regarded as living ‘Above the Poverty MPI = H × A
Line (APL)’. These people are not regarded as poor. The
latter group is considered as living ‘Below the Poverty Line Where, H = Percentage of people, who are MPI poor
(BPL)’. These people are called poor. (incidence of poverty).
— Asian Development Bank has defined a new poverty line A = Average intensity of MPI poverty across
taking base of expenditure of US $ 1.35 per day. the poor (%).
— According to the Tendulkar Committee Report, which gives
state wise poverty estimates, Odisha with 57.2% of BPL Human Poverty Index (HPI)
people is the poorest state followed by Bihar, Madhya — Earlier UNDP set HPI as parameter to measure poverty in
Pradesh and Chhattisgarh. its Human Development Reports but 2010 onwards it
switched over to a new parameter,
Measures of Poverty namely–Multidimensional Poverty Index (MPI).
— The extent of poverty is depicted by the following measures: — The measure assesses the nature and intensity of
poverty at the individual level in education. Health out
Head Count Ratio or Poverty Ratio
comes and standards of living.
— It is calculated by dividing the number of people below
poverty line by the total population. It measures the Fisher Price Index (FPI)
proportion of poor in the total population. — It updates the poverty line on the basis of actual
consumption data. This index gives just 60% weightage
Poverty Gap Index (PGI)
to food articles.
— It is the difference between the poverty line and the average — The reason why Tendulkar’s method show higher
income of all households living Below Poverty Line (BPL),
poverty level is primarily that he has moved away from
expressed as a percentage of poverty line. It indicates the
the traditional practice of bench marking poverty by
depth and severity of poverty.
certain caloric consumption levels.
Poverty Line − Average Income of BPL
PGI =
Poverty Line
Conditional Cash Transfers (CCTs)
Squared Poverty Gap Index ◆
It is an important mechanism to fight poverty around the
— It is the mean of the squared individual poverty gaps relative world. Here, the government transfers cash to the
to the poverty line. It indicates the severity of poverty as well beneficiaries conditional upon certain action by the
as the inequality among the poor. receiver. These actions could include enrolling children into
Sen Index of Poverty school, regular check-up with doctor, institutional delivery,
receiving vaccination etc.
— It was developed by Professor Amartya Sen. It is based on
◆
It helps to reduce poverty not only by providing cash to the
the head count ratio, poverty gap index and the Gini
needy households, but also inducing positive behaviour in
co-efficient. It takes into account the extent and severity of the people through the conditions.
poverty as well as inequality.
Magbook ~ Poverty and Unemployment 137

Two methods of poverty estimation on the basis of

Expert Groups for consumption:
Estimating Poverty Uniform Recall Period (URP)
Here, consumption data is asked for a 30 days recall period
Lakdawala Committee —
for all items. The updated poverty estimates of the Tendulkar
— It was constituted in 1989 by the Planning Commission to Committee have lowered the poverty line from ` 32 a day to
consider methodological and computational aspects of ` 28.
estimation of proportion and number of poor in India.
— The report of this committee was submitted in July, 1993.
Mixed Recall Period (MRP)
— It suggested that the consumption expenditure should be — Here, consumption expenditure is asked for five
calculated based on caloric consumption as earlier. frequently used items clothing, footwear durable goods,
— It also suggested that state specific poverty lines should be education and institutional medical expenses for a 365
constructed and these should be updated using CPI – days recall period and other items are asked for a 30
Industrial workers in urban areas and CPI–Agricultural days recall period.
labour in rural areas.
NC Saxena Committee
Tendulkar Committee Report (For BPL Families in Rural Areas)
— Tendulkar Committee headed by Prime Minister’s Economic — To review the Methodology for conducting BPL Census in
Advisor, Mr Suresh Tendulkar was set-up in March, 2009 to Rural Areas. An expert group headed by Dr NC Saxena
look into the methodology of estimating poverty in India. was constituted by the Ministry of Rural Development to
Tendulkar Committee submitted its report in recommend a suitable methodology for identification of
December, 2009 to the Planning Commission. BPL families in rural areas.
— In its findings, this committee has moved away from just — The expert group submitted its report in August, 2009
calorie criterion definition to a broader definition of poverty and recommended doing away with score-based ranking
that also includes expenditure on health, education, of rural households followed for the BPL Census, 2002.
clothing in addition to food. — The committee has recommended automatic exclusion
— Using this approach, new poverty line for the year of some privileged sections and automatic inclusion of
2004-05, has been raised from ` 356 percapita per certain deprived and vulnerable sections of society and a
month to ` 447 percapita per month in rural areas and survey for the remaining population to rank them on a
from ` 539 per capita per month to ` 579 percapita per scale of 10.
month in urban areas. In daily terms, poverty line has — Based on the above methodology, the committee
been raised from ` 12 to `15 percapita per day in rural estimated the population below the poverty line at 50%
areas and from ` 18 percapita per day to ` 19 percapita of the total population.
per day in urban areas.
— As per Tendulkar Committee Report, 37.2% of Indian SR Hashim Committee
population is living below poverty line using ‘uniform
(For BPL Families in Urban Areas)
recall period consumption’ in the year 2004-05, against
the official estimate of 27.5%. According to this report, — On the methodology for identification of BPL families in
41.8% population in rural areas and 25.7% population in urban areas, according to the expert group headed by
urban areas is living below poverty line. renowned economist.
— The new, updated data released by the commission based — SR Hashim to suggest methodology for identifying urban
on the price indices computed from the 66th Round NSS poor, households having three of the four items like
(2009-10) data on Household Consumer Expenditure refrigerator, motorised two-wheelers, landline telephone
Survey, say anyone who has ` 28 to spend daily is out of or washing machines should not be treated as poor.
poverty. — The panel has suggested that the government should
— It has estimated the poverty lines at all India level as MPCE use three-stage approach-automatic exclusion, automatic
(Monthly Per-Capita Consumption Expenditure) of ` 673 for inclusion and scoring index to identify urban poor.
rural areas and ` 860 for urban areas in 2009-10. — Planning Commission had constituted the expert group
— Based on these cut-offs, the percentage of people living to recommend the detailed methodology for the
below the poverty line in the country has declined from identification of families living below poverty line in the
37.2% in 2004-05 to 21.92 in 2011-12. urban areas on 13th May, 2010.
138 Magbook ~ Indian Economy

— Under the automatic inclusion step, homeless families facing States 2004-05 2011-12 Decrease
social and occupation deprivations should be included in the
BPL list. As per the report, a family be defined as poor if any Maharashtra 38.1 17.4 20.7
of its member (including children) is a beggar or rag picker, Manipur 38 36.9 1.1
domestic worker and sweeper or sanitation worker or mali. Meghalaya 16.1 11.9 4.2
The family would also be poor if all its earning adult
Mizoram 15.3 20.4 –5.1
members are either daily wagers or workers with irregular
wages. Nagaland 9 18.9 –9.9
— In the third and final stage, the remaining households should Odisha 57.2 32.6 24.6
be assigned scores from 0 to 12 based on various indicators Puducherry 14.1 9.7 4.4
of residential, social and occupational vulnerabilities. Those Punjab 20.9 8.3 12.6
households with scores from 1 to 12 should be considered
Rajasthan 34.4 14.7 19.7
eligible for inclusion in the BPL list in the increasing order of
the intensity of their deprivations meaning thereby that those Sikkim 31.1 8.2 22.9
with higher scores are more deprived, the report suggested. Tamil Nadu 28.9 11.3 17.6
Tripura 40.6 14.1 26.5
Rangarajan Committee on Poverty Uttar Pradesh 40.9 29.4 11.5
— Planning Commission constituted an expert group headed by Uttarakhand 32.7 11.3 21.4
C Rangarajan to review the Tendulkar Committee
West Bengal 34.3 20 14.3
methodology for estimating poverty in May, 2012.
Perspective of people about poverty has changed, therefore, All India 37.2 21.9 15.3
commission needs to take a fresh look into the methodology
Source: Review Expert Group to Review the Methodology
for estimation of poverty in the country. The committee
for Estimation of Poverty NITI Aayog, Government of India.
submitted its report on 6th July, 2014 to the Planning
Commission.
UN Report on Indian Poverty
— The report observed that the population, living below poverty
line, has decreased from 38.2% in 2009-10 to 29.5% in — In the Millennium Development Report, 2010, it has
2011-12. This report, thus, contested the facts given by the been mentioned that the poverty rate in India was 51%
Tendulkar Committee. The Rangarajan report also revised the in 1990. However, it is expected to fall to a level of
poverty line by increasing it to ` 972/month (or ` 32/day), as 24% by 2015. According to the UNDP, the 8 poorest
against the ` 816/ month suggested by the Tendulkar Indian States— Bihar, Chhattisgarh, Jharkhand,
Committee. For the urban areas, the Rangarajan Committee Madhya Pradesh, Odisha, Rajasthan, Uttar Pradesh
revised the poverty line to ` 1407/month (` 47/day), as and West Bengal have more number of poor, than the
against ` 1000/month of the Tendulkar Committee. 26 poorest African nations.

Statewise Poverty Estimates (% below poverty line) Measurement of Poverty by UNDP

States 2004-05 2011-12 Decrease
— As per UNDP, poverty is a multi-dimensional problem.
Apart from income, it also includes factors like-health
Andhra Pradesh 29.9 9.2 20.7 and nutrition. World Bank has established 2 parameters
Arunachal Pradesh 31.1 34.7 –3.6 to measure poverty at the international level
Assam 34.4 32 2.4 —Those earning less than 1.25 US $ of per day, such
Bihar 54.4 33.7 20.7 persons are referred as suffering from extreme poverty.

Chhattisgarh 49.4 39.9 9.5 —Those spending less than 2 US $ per day. These sections
are referred to as poor.
Delhi 13.1 9.9 3.2
Goa 25 5.1 19.9
— Besides these parameters, Lorenz Curve and Gini
Co-efficient are also used to observed poverty in a
Gujarat 31.8 16.6 15.2
state. The Asian Development Bank (ADB) has set the
Haryana 24.1 11.2 12.9 parameter of US $ 1.35; while Indian Government has
Himachal Pradesh 22.9 8.1 14.8 set this parameter at US $ 1.02.
Jammu and Kashmir 13.2 10.4 2.8
State of Poverty (World Bank Report)
Jharkhand 45.3 37 8.3
— World Bank, on 18th April, 2013, in its report entitled,
Karnataka 33.4 20.9 12.5 where are the poor and most poor, observed that
Kerala 19.7 7.1 12.6 —one-third of the global poor in India.
Madhya Pradesh 48.6 31.7 16.9 —the poor in the India live on less than US$ 1.25 a day.
Magbook ~ Poverty and Unemployment 139

—there are around 120 crore extremely poor persons in Lorenz Curve of Income Distribution
the world today.

Cumulative income share (%)

—between 1981-2010, the developing countries have 100
witnessed a decline in poverty rate from 50% to 21%. 90
80
—despite development in Africa, poverty is still
70
widespread.
60
50 A
Inequality 40
30 B
— Inequality often refers to the income gap between 20
the rich and poor of society. The greater the gap the 10
greater the inequality. It essentially refers to 0
10 20 30 40 50 60 70 80 90100
disparities in the distribution of economic assets and
Cumulative population share (%)
income among individuals and groups within a
nation and nations.
— It may result from the operation of the economic Inequality in India
system, access to assets, education and skills,
— Both overall GDP and per capita GDP have increased rapidly in
social factors like caste and gender etc.
the economic reform period. The number of poor as the
percentage of population have also come down. However,
Adverse Impacts of Inequality inequality in the reform period has increased.
— Growing inequalities can dampen growth due to — According to Inequality Virus Report, 2021 released by Oxfam,
potential instability; weaken social cohesion. the wealth of Indian billionaries increased by 35% during the
— Urban-dominated growth in India has caused social lockdown, while millions lost their job and saw reduction in their
friction as a result of the high levels of migration to income level in 2020.
cities and a shortage of foreign investment in more — Gini co-efficient increased from 0.27 to 0.28 in rural areas and
isolated areas. from 0.35 to 0.39 in urban areas between 2004-05 and
— In societies, where wealth is concentrated in the 2009-10. The Gini co-efficient of wealth in India in 2017 is at
hands of a few, there is danger of policy levers 0.83, which puts India among the highest inequality countries.
being captured by the rich for their own benefit and Top 10% wage earners make 12 times more than the bottom
a weakening of the institutional foundations of the 10% compared to 6 times 20 years ago.
growth process. * Trickle Down theory says that let business flourish, since
their profits ultimately trickle down to lower income
Gini Co-efficient individuals and the ease of the economy.
— The Gini co-efficient (also known as the Gini index * Typically, India used the Consumer Price Index for
or Gini ratio) is a measure of statistical dispersion Agricultural Labour (CPIAL) and CPIIW for industrial
developed by the Italian statistician and sociologist labour.
Corrado Gini, it measures the inequality among
values of a frequency distribution (e.g. levels of Employment and Unemployment
income).
— Gini co-efficient is commonly used as a measure of Employment
inequality of income or wealth. A Gini co-efficient of — Employment refers to the capacity in which a worker pursues
zero expresses perfect equality, where all values are
gainful activity during the referece period. According to their
the same (e.g. where everyone has an exactly equal
status of employment, there are three types of employed
income).
workers, self employed workers, casual wage and regular wage
— A Gini co-efficient of one (100 on the percentile employees.
scale) expresses maximal inequality among values
(e.g. where only one person has all the income). Unemployment
— The Gini co-efficient is usually defined
— Unemployment refers to a situation, when a person is able and
mathematically based on the Lorenz curve, which
willing to work at the prevailing wage rate, but does not get the
plots the proportion of the total income of the opportunity to work. The term unemployment is directly related
population (y axis) that is cumulatively earned by with the concept of labour force, because the people, who are
the bottom x% of the population (see diagram). The not included in labour force cannot be regarded as unemployed.
line at 45 degrees Gini, thus, represents perfect
— Labour force includes all people in the working age group
equality of incomes.
(15-59 years), who are able and willing to work. Labour force
140 Magbook ~ Indian Economy

equals the work force plus the number of unemployed Educated Unemployment
people. So, unemployment refers to only involuntary — It refers to unemployment of those who are normally
unemployment. educated. It is both of open unemployment and under
— Unemployment rate is defined as the number of persons employment type, i.e. those who can’t find work and those
unemployed per 1000 persons in the labour force (which who work in a job that is not in keeping with their skills,
included both the employed and the unemployed). education or capacity.

Types of Unemployment Disguised Unemployment

There are following types of unemployment are as follows: — It is a situation, in which more persons are employed to
do a job which can be done with equal efficiency by a less
Voluntary Unemployment number of workers.
— It occurs when a person is not willing to work at the — The following features of disguised unemployment are as
prevailing rate of wage or does not desire to work. It is not follows:
taken into consideration while measuring unemployment —Marginal productivity of labour is zero. However, Professor Sen
in an economy. does not agree with this view.

Involuntary Unemployment —It is not possible to identify the persons who are actually
unemployed.
— It is the situation, in which the worker is willing and able
—Excess of population and lack of capital is the principal cause.
to work, but he does not get work. It is also called open
—Generally associated with agricultural families.
unemployment.

Frictional Unemployment Under Employment

— It is temporary unemployment which is associated with — It is a situation, in which a person is employed in a job,
the changing of jobs in an economy. It can occur due to which is not commensurate with his/her qualification, skill
immobility it of labour, shortage of raw materials, lack of and experience. Under this condition, capabilities of the
knowledge of job opportunities, breakage of machines etc. workers are not utilised to the optimum level.
— Under employment is another problem in developing
Structural Unemployment
countries alongwith unemployment. It measures how well
— It is concerned with the structural pattern of the economy. the labour force is being utilised in terms of skills
It arises in situations such as: experience and availability of work.
—Shortage of factors of production like land, capital etc.
—Workers don’t have skills for new industries. Types of Under Employment
—Compared to supply of labour availability of employment is — There are two types of under employment:
less. (i) Visible Under Employment It is when people get work for
—When certain industries close down. less than the normal hours of work e.g. 2 hours a day.
—When there is a change in production technology and nature
(ii) Invisible Under Employment It is the situation, in which
of produced products.
people work full time, but their income is very low or
— Mainly, it is caused due to a mismatch between the they work in jobs, in which they cannot make full use of
skills of a person and the requirements of the job. their ability e.g. an MA degree holder working as a
Cyclical Unemployment driver.
— It is associated with a general depression in the overall — Under employment is found when persons engaged in
economy. It occurs due to economic cycles of boom and part time work are prepared to do more work than they
depression. During depression, demand falls and are doing or the productivity and income of a person rises
production goes down which leads to fall in level of after shifting another type of occupation.
employment.

Seasonal Unemployment
Nature and Estimates of
— It arises because some occupations require workers only Unemployment in India
during certain parts of the year such as in agriculture, — Like all the underdeveloped countries, India presently
sugar industry etc. suffers mainly from structural unemployment, which exists
Technical Unemployment in open and disguised forms.
— It is associated with technical changes. Modern industries
— Apart from structural unemployment, there is Keynesian
are capital intensive and workers are being replaced by involuntary unemployment, which can be eliminated by
machines. Adoption of labour saving technologies renders increasing effective demand as is done in developed
some workers unemployed. countries.
Magbook ~ Poverty and Unemployment 141

The Unemployment Rate (UR) in usual status

Causes of Unemployment in India —
was about 2 per cent for both males and
— Rapid population growth. females in rural areas, 3 per cent for urban
— Limited land holding. males and 5 per cent for urban females.
— Seasonal agriculture. — The unemployment rate among the youth (age:
— Decline of manufacturing industries. 15-29 years) was much higher as compared to
— Inadequate employment planning and its execution. that in the overall population.
— Impact of global slowdown. — The unemployment rates in usual status among
the educated youth (age: 15-29 years and level
Key Indicators for this Estimation of of education: secondary and above) were 8.1
Under Employment in India per cent, 15.5 per cent, 11.7 per cent and
19.8 per cent for rural males, rural females,
◆
Labour Force Participation Rate (LFPR)
urban males and urban females, respectively.
Number of employed persons + Number of unemployed persons The annual report (July 2017-June 2018) of
= × 1000 —
Total population the Periodic Labour Force Survey (PLFS) of
Number of employed persons NSSO, released on 1st June, 2019, pegs the all
◆
Worker Population Ratio (WPR) = × 1000 India unemployment rate at 6.1 per cent in the
Total population
given year. Unemployment was higher in the
Number of unemployed persons urban areas as compared to the rural. For the
◆
Proportion Unemployed (PU) = × 1000
Total population rural areas, the unemployment rate was 5.3 per
Number of unemployed persons cent, while in the urban areas it was 7.8 per
◆
Unemployment Rate (UR) = × 1000 cent.
Number of employed persons +
— The GDP from manufacturing increased at
Number of unemployed persons
9.5% per annum between 2004-05 and
2009-10, alongwith same increase in
employment in the organised manufacturing
Measures of Unemployment in India sector. However, the overall employment in
— On the recommendation of the Bhagwati Committee, since 1972-73, manufacturing actually declined during this
National Sample Survey Office (NSSO) comes out with quinquennial period. Between 2004-05 and 2009-10, vast
survey on employment and unemployment. The persons surveyed majority of new jobs were created in casual
are classified into various activity categories on the basis of activities employment, mainly in construction.
pursued during certain specified reference periods as Usual
Principle Status, Current Weekly Status and Current Daily Status. Periodic Labour Force
— Usual Principle and Subsidiary Status (UPSS) A person is Survey (PLFS) 2021
considered working or employed, if the person was engaged for a PLFS is an annual survey conducted by the National
relatively larger period (over 182 days) in any one or more work Statistical Office (NSO), started in 2017, to ascertain
related (economic) activities during the reference period of 365 days the State of employment. The PLFS 2021, contains
preceding the date of survey. data for the 12 months between July 2019 and June
— Current Weekly Status (CWS) A person is considered working or 2020. It calculate employment based on Usual
employed, if the person was engaged for at least 1 hour on any 1 Status (US) and Current Weakly Status (CWS). The
day on any work related (economic) activity during the reference report shows that in 2019-20, India’s Labour Force
period. It also measures chronic unemployment. Participation Rate (LFPR) improved marginally from
— Current Daily Status (CDS) It is the time rate and measured in 37.5% in 2018-19 to 40.1% in 2019-20.
man days. A person is considered unemployed, if he does not find
work even on a day or some days during the survey week.
Poverty Eradication and
Salient Features of NSSO (68th Round) on Employment Related
Employment and Unemployment Programme
— Between NSS 66th round (2009-10) and 68th round (2011-12), — Currently, India is passing through an
labour force participation rate (LFPR) in usual status for rural males unprecedented phase of demographic changes.
and urban males remained at the same level, decreased by 1 The ongoing demographic changes are likely to
percentage point for rural females and increased by about 1 contribute to an ever increasing size of labour
percentage point for urban females. force in the country.
142 Magbook ~ Indian Economy

— The government has been attempting to improve basic — The Central Government has created a National Skill
education through a host of measures in recent decades Development Fund with an initial corpus of ` 995.10 crore
and achieving some success. But, vocational education for supporting the activities of the corporation.
and imparting skills remains a critical area of concern. — The corpus of the fund is expected to go up to about
` 15,000 crore as it is intended to garner capital from
Skill Development Programme governments, public and private sectors and bilateral and
— The Union Cabinet has approved a Coordinated Action multilateral sources.
Plan for Skill Development, which envisages a target of Objectives of Skill Development
500 million skilled persons by 2022. The plan will be Programme in India
executed through 3 tier strategy of
— Create opportunities for all to acquire skills throughout life
and especially for youth, women and disadvantaged groups.
Promote commitment by all stakeholders to own skill
development. Develop a high-quality skilled workforce
-
relevant to current and emerging market needs.
— Enable establishment of flexible delivery mechanisms that
respond to the characteristics for a wide range of needs of
stakeholders. Enable effective coordination between
Prime Minister’s National Council on Skill different ministries, the centre and states and public and
Development private providers.
— The council is chaired by the Prime Minister with Pradhan Mantri Kaushal Vikas Yojana
Ministers for Human Resource Development, Finance, It is a demand-driven, reward-based skill training scheme.
Heavy Industries, Rural Development, Housing and PMKVY is formed to provide skill training to class 10 and 12
Urban Poverty Alleviation and Labour and Employment dropout youths across the country.
as members. Under the scheme, besides assessing and certifying 10 lakh
— Deputy Chairman, Planning Commission, Chairperson of youth for the skills they already possess, around 24 lakh youth
the National Manufacturing Competitiveness Council, will be skilled over the next year.
Chairperson of the National Skill Development The important characteristics of PMKVY are as follows
Corporation and six experts in the area of skill — It will cover 24 lakh persons and skill training would be
development are its other members. based on the National Skill Qualification Framework (NSQF)
— The Prime Minister’s National Council on Skill and industry-led standards.
Development has endorsed a vision of creating 500 — It will be implemented by the Union Ministry of Skill
million skilled people by 2022 through skill systems, Development and Entrepreneurship through the National
which must have high degree of inclusiveness in Skill Development Corporation (NSDC) training partners. In
terms of gender, rural or urban, organised or addition, Central and State Government affiliated training
unorganised and traditional or contemporary. providers would also be used for training purposes.
— Focus of the training would be on improved curricula, better
National Skill Development Co-ordination pedagogy and better trained instructors.
Board (NSDCB) — A monetary reward will be given to trainees on assessment
— The NSDCB has been set-up under the chairmanship of and certification by third party assessment bodies. The
Deputy Chairman, Planning Commission, with average monetary reward would be around ` 8000 per
secretaries of ministries of human resource trainee.
development, labour and employment, rural Skill Loan Scheme
development, housing and urban poverty alleviation and
— Under the scheme, loans ranging from ` 5000 to ` 1.5 lakh
finance as members.
will be made available to 34 lakh youth to attend skill
— Secretaries of four states by rotation, for a period of development programmes. It will be operational between
2 years, three distinguished academicians and subject 2015 and 2020.
area specialists are the other members. Secretary,
planning commission is the member secretary of the Mahatma Gandhi National Rural
board. Employment Guarantee Scheme
National Skill Development Corporation (MGNREGS)
— The third tier of the coordinated action on skill — The National Rural Employment Guarantee Act (NREGA)
development is NSDC, which is a non-profit company was enacted in 2005. It was implemented in three phases,
under the Companies Act with an appropriate starting with 200 districts in 2006 to cover the whole
governance structure. country by 2008. On 2nd October, 2009 it was renamed as
Mahatma Gandhi.
Magbook ~ Poverty and Unemployment 143
Features of MGNREGS — It provides revolving fund, interest subsidy and capital
subsidy to the SHGS.
— It seeks to provide at least 100 days (150 days for
tribals) of guaranteed wage employment in one — It will provide infrastructure support for key livelihoods and
financial year to at least one adult member of every support for marketing.
rural household who volunteer to do unskilled manual — Funding would be in the ratio of 75:25 between Centre and
work. States (9:10 for North-East and special category states).
— Atleast 33% of the beneficiaries are to be women. — It will be implemented in phases to reach all districts of the
— Originally, it promised a wage rate of ` 100 per day country by the end of 12th Plan.
from January, 2011 wages have been linked to — All states have to transition to NRLM from SGSY within 1 year
increase with Consumer Price Index for Agricultural of launch.
Labour (CPI-AL) for each state.
— Focuses on works related to water conservation, National Urban Livelihood Mission
drought proofing, land development, flood control, (NULM)
rural connectivity through all weather roads etc.
— The centrally sponsored scheme of Swarna Jayanti Shahari
— Provides time bound employment guarantee and wage Rozgar Yojana has been restructured as the National Urban
payment within 15 days. Livelihood Mission (NULM) to be implemented in the 12th
— A 60:40 wage to material ratio has to be maintained to Plan.
ensure greater employment generation. No contractor — The new scheme expands the beneficiaries among the urban
or machinery is allowed for any work. poor to include homeless and street vendors.
— Panchayats have been given an important role through — A special provision for funding of 24/7 shelters with all
preparation of perspective plan, approval of shelf of essential facilities for the urban homeless has been made.
projects and execution of works atleast to the extent of
50% in terms of cost. PM Street Vendor’s Aatmanirbhar Nidhi (PM
— Rights based framework. SVANidhi) scheme
— Transparency accountability. The PM SVANidhi scheme was launched by the Ministry of
Housing and Urban Affairs, on 1st June, 2020. It aims to provide
Recent Changes in MGNREGS affordable working capital loans to street vendors to resume their
— 30 new activities such as rural sanitation, live stock, livelihoods that have been affected due to the corona virus
fishery etc have been added to the permissible list. lockdown. It targets over 50 lakh street vendors who would be
— Electronic Fund Management System in all states has eligible to avail a working capital loan of up to ` 10,000 whose
been initiated in a phased manner. businesses were operational on or before 24th March, 2020. The
street vendors will be allowed to repay the loan in monthly
— Convergence of MGNREGS with total sanitation
installments in one year.
campaign has been undertaken.
— Provision has been made for seeding in Aadhaar into Pradhan Mantri Garib Kalyan Rojgar Yojana
the MGNREGS workers records to prevent leakage. — The Government of India has decided to launch a rural public
works scheme ‘Garib Kalyan Rojgar Abhiyaan’ through
National Rural Livelihood video-conferencing from village Telihar in Khagaria district of
Mission (NRLM) Bihar on 20th June, 2020. The scheme will empower and
provide livelihood opportunities to the returnee migrant
— The Swarna Jayanti Grameen Swarojgar Yojana (SGSY) workers and rural citizens who have returned to their home
has been restructured and launched as the National states due to the Covid-19 induced lockdown. A total of 116
Rural Livelihood Mission (NRLM). NRLM was recently districts across six states, namely Bihar, Uttar Pradesh,
renamed as Ajeevika. Madhya Pradesh, Rajasthan, Jharkhand and Odisha (where
maximum migrant workers have returned) have been chosen
Key Features of NRLM for the campaign.
— It will ensure that atleast one member (preferably a — 12 different Ministries/Departments, namely, Rural
woman) from each identified poor rural household is Development, Panchayati Raj, Road Transport and Highways,
brought under a Self Help Group (SHG). Mines, Drinking Water and Sanitation, Environment, Railways,
— NRLM focuses on setting up and strengthening of etc. will be coordinating for the implementation of the
institutions of the poor in partnership mode. scheme. It will involve intensified and focused implementation
— Poor will be provided with adequate skills to manage of 25 different types of works to provide employment to the
their institutions. migrant workers on one hand and create infrastructure in the
— NRLM would work towards universal financial rural regions of the country on the other hand.
inclusion.
Chapter sixteen
Government Schemes
and Programmes
be employed. Along with this mission,
Social Welfare Schemes the government also launched a
— Some new social development schemes to Sampark portal, a digital platform on
address the critical issues of the country have which five lakh job seekers can connect
Government aided been introduced. These include the following: with the Ministry of Micro Small and
schemes and Medium Enterprise (MSME).
programmes are run Skill Development and ‘Nai Manzil’ Scheme
by the Central and Employment Scheme — The Union Minister for Minority Affairs
State Governments Rail Kaushal Vikas Yojana Dr. Najma Heptulla launched a new
for the health and — This skill development initiative of Ministry of
Central Sector Scheme ‘Nai Manzil’ in
welfare of citizens. Patna on August 8, 2015.
Railways was launched on 17th September,
The people of the 2021 to provide training to 50,000 candidates — The scheme is intended to cover people
over the next three years. It is a component of in between 17 to 35 age group from all
countries are one of
Pradhan Mantri Kaushal Vikas Yojana minority communities as well as
its most valuable Madarasa students.
(PMKVY) and will provide training to youth in
resources. four trades i.e. Electrician, Welder, Machinist — The scheme ‘Nai Manzil’ scheme will
and Fitter. address educational and livelihood
needs of minority communities in
Van Dhan Internship general and muslims in particular as it
Programme lags behind other minority communities
— The Ministry of Tribal Affairs launched the Van in terms of educational attainments.
Dhan Internship Programme on 17th October, — It is a new direction and a new goal for
2019. Under the ministry, the program will be the all out of school/dropped out
organised by TRIFED (Tribal Cooperative students and those studying in
Marketing Development Federation of India). Madarasas. It is so because they will
The program will train the interns and the not be getting formal Class XII and
interns will help the tribal population in Class X Certificates rendering them
becoming self reliant and entrepreneurs. largely un employed in
organised sector.
Solar Charkha Mission
— President Ram Nath Kovind launched Solar USTAD Scheme
Charkha Mission on June 27, 2018, in which — Union Minister Najma Heptullah
the government will be providing a subsidy of launched a welfare scheme,
` 550 crore to the thousands of artisans and Upgradation of Skills and Training in
generating employment in the rural areas. The Ancestral arts/crafts for Development
Ministry of Micro Small and Medium Enterprise (USTAD), aimed at upgrading and
(MSME) will cover the 50 indentified clusters promoting the skills of artisans from the
across the country including in the Northeast minority community, on May 14, 2015.
and in each cluster 400 to 2000 artisans will It is launched from Varanasi in order to
146 Magbook ~ Indian Economy

improve degrading conditions of world famous Banaras National Broadband Mission

Saree weavers who belong to minority communities.
— The government has launched the National Broadband
— The programme is linked to the ‘Make in India’ campaign Mission on 17 th December, 2019. National Broadband
and termed as close to the Prime Minister’s heart. It seeks to Mission aimed at providing broadband access in all
help weavers and artisans connect with buyers all over villages in the country by 2022. It will help in achieving
the world. fast track growth of digital communications
infrastructure, bridge the digital divide, facilitate digital
Van Bandhu Kalyan Yojana
empowerment and inclusion and provide affordable and
— For the welfare of the tribal people ‘Van Bandhu Kalyan universal access of broadband for all. Objective of this
Yojana’ is being launched with an initial allocation of `100 mission is to empower those people who are living in
crore. YKY aims at creating enabling environment for need India's rural and remote regions with digital connectivity
based and outcome oriented holistic development of the on the back of ongoing BharatNet initiative that aims to
tribal people. connect 250,000 gram panchayats or village blocks
— The scheme is launched on a pilot basis and will be with an optic fibre network.
implemented in only 1 block in each of the 10 states being
selected for the scheme. The states which have been picked Swachh Bharat Abhiyan
are Andhra Pradesh, Madhya Pradesh, Himachal Pradesh, — Total sanitation by 2019, is the slogan of this
Telangana, Odisha, Jharkhand, Gujarat, Chhattisgarh, programme. The year 2019 also marks the 150th Birth
Rajasthan and Maharashtra. Anniversary of Mahatma Gandhi. Nirmal Bharat Abhiyan
was relaunched in name of Swachh Bharat Abhiyan.
Skill Upgradation Programme for
Minorities GOBAR-Dhan Yojana
— A programme for the upgradation of skills and training in — The Galvanising Organic Bio-Agro Resources Dhan
ancestral arts for development for the minorities called (GOBAR-DHAN) scheme was launched by Haryana’s
upgradation of traditional skills in arts, resources and goods Chief Minister Manohar Lal Khattar and Uma Bharti
is to be launched to preserve the traditional arts and crafts, (Union Minister for Sanitation and Drinking Water) on
which are rich heritage. April 30, 2018. The GOBAR-Dhan scheme is an effort
by the government to improve the living conditions in
— An additional amount of ` 100 crore for Modernisation of
the Indian villages and make them open-defecation
Madarsas has been in the budget provided to the Department
free. A segment of the Swachh Bharat initiative, this
of School Education.
scheme will focus on useful conversion of solid waste
and cattle dung into manure and biogas.
Rural Infrastructure and
Development Pradhan Mantri Awaas Yojana (PMAY)
— The rural housing scheme Indira Awaas Yojana (IAY),
Swamitva Scheme started by former Prime Minister Rajiv Gandhi, has
— Prime Minister Narendra Modi on 24th April,2020 launched been restructured and renamed as Pradhan Mantri
‘Swamitva Yojana’ or Ownership Scheme to map residential Awaas Yojana (PMAY) on 21st September, 2016. The
land ownership in the rural sector using modern technology IAY would be included by the PMAY. Under the new
like the use of drones. The scheme aimed to revolutionise scheme, the government was aiming to construct one
property record maintenance in India was launched on the crore houses by 2019.
Panchayati Raj Diwas by the Prime Minister, who also — Under the new modified PMAY scheme, the sharing
interacted with members of Gram Panchayats across the pattern between the Centre and states is same, but the
country through video conferencing. grant would be transferred directly into the bank
— Swamitva Yojana is aimed to fill the above gap to provide account of beneficiaries, who had been selected on the
basis of socio-economic caste census of 2011.
ownership rights to people in the villages. It is expected to go
a long way in settling property rights in rural hinterlands and Pradhan Mantri Awas Yojana – Gramin
likely to become a tool for empowerment and entitlement, — PM Narendra Modi launched the scheme on 20
reducing social strife on account of discord over properties. November, 2016 at Agra. Aim of scheme to construct
The property records for a village will also be maintained at ` 1 crore Pucca Houses in rural areas in next 3 years
the Panchayat level, allowing for the collection of associated by financial assistance (for plain areas – ` 1,20,000
taxes from the owners. The money generated from these local and for hilly areas – ` 1,30,000).
taxes will be used to build rural infrastructure and facilities.
Magbook ~ Government Schemes and Programmes 147

Shyama Prasad Mukherjee Rurban Water and Sanitation Scheme

Mission (SPMRM) — The Central Government has been assisting State Governments
— It launched in 2016 to deliver integrated project based by way of various centrally sponsored schemes through national
infrastructure in the rural areas. The scheme will also financial institutions providing better urban infrastructure, and
include development of economic activities and skill improving the state of drinking water infrastructure and sanitation
development. The preferred mode of delivery would in the country. Some of the initiatives in this area are as follows
be through PPPs while using various scheme funds.
— The scheme of Providing Urban Amenities in Rural
Jal Jeevan Mission
Areas (PURA) is merged with Shyama Prasad — The mission was launched on 15th August, 2019 to provide
Mukherjee Rurban Mission. safe and adequate drinking water through individual
household tap connections by 2024 to all households in rural
Benefits of Rurban Mission
India. It is based on community approach to water
The benefits of Rurban mission are as follows management and will implement source sustainability
— Under this scheme, the facilities of cities will be given
measures as mandatory elements, such as recharge and
to villages. reuse through grey water management, water conservation and
— Electricity, water, roads and health facilities will be
rain water harvesting.
provided to villages.
— The villages will be developed on the line of the Atal Bhujal Yojana
cluster. — Atal Bhujal Yojana is Central Government’s ` 6,000 crore
— Population in a cluster will be 21,000 to 50,000.
ambitious water conservation scheme launched in June, 2018
— 30% of total expenditure on Center Gap Funding will
to deal with the ever-deepening crisis of depleting
be from our Budget. groundwater level. The main objectives of this scheme are to
Sansad Adarsh Gram Yojana revitalise groundwater level and create sufficient water storage
for agricultural purposes; rejuvenation of the surface water
— It is a rural development and cleanliness programme
bodies so that groundwater level can be increased, especially
broadly focusing upon the development in the villages,
in the rural areas; recharging sources of groundwater and
which includes social development, cultural
ensure effective use of water by involving people at local level.
development and spread motivation among the people
on social mobilisation of the village community. The “Sankalp Se Siddhi” Programme
programme was launched by the Prime Minister on
the birth anniversary of Jayaprakash Narayan on 11th — “Sankalp Se Siddhi” (Attainment through Resolve) programme
October, 2014. Prime Minister Narendra Modi is a new initiative launched by PM Narendra Modi on 23
adopted Jayapur village under this scheme. August ,2017 for a New India movement from 2017 to 2022.
This program aims to bring in many changes in the country
Bharat Nirman for the betterment of country’s economy, citizens, society,
— This programme, launched in 2005-06 for building governance, security and other verticals.
infrastructure and basic amenities in a rural areas, has
6 components, namely rural housing, irrigation Neeranchal
potential, drinking water, rural roads, electrification and — To give an added impetus to watershed development in the
rural telephone. country, a new programme called Neeranchal with an initial
outlay of 2142 crore in the current financial year. Pashmina
Pradhan Mantri Gram Sadak Yojana
Promotion Programme (P-3) and a programme for the
(PMGSY) development of other crafts of Jammu and Kashmir is also to
— The PMGSY was launched in December, 2000, as a be started. For this a sum of ` 50 crore is set aside.
fully funded centrally sponsored scheme with the
objective of providing connectivity to the eligible Rural Sanitation Total Sanitation
unconnected habitations in the core network with a Campaign (TSC) and Nirmal Bharat
population of 500 persons and above (as per Census, Abhiyan
2001) in plains areas and 250 persons and above in
hill states, tribal areas, desert areas. The government — Government started the Central Rural Sanitation
has revised its target year for completion of phase-I of Programme(CRSP) in 1986 primarily with the objective of
PMGSY a rural road scheme, to 2019 from 2022. improving the quality of life of the rural people and also to
provide privacy and dignity to women.
148 Magbook ~ Indian Economy
— The concept of sanitation was expanded to include and mentored to become successful entrepreneurs. And
personal hygiene, home sanitation, safe water, garbage Innovation promotion: to provide a platform where
disposal, excreta disposal and waste water disposal. With innovative ideas are generated.
this broader concept of sanitation, CRSP adopted a
demand driven approach with the name Total Sanitation DIKSHA Scheme
Campaign (TSC) with effect from 1999. Nirmal Gram — The Union Ministry of Human Resource and Development
Puraskar (NGP) is given to Panchayati Raj Institutions that (HRD) has launched Diksha (National Digital
achieve 100% coverage of sanitation facilities. Infrastructure for Teachers) Portal (diksha.gov.in) in
— Encouraged by the success of NGP, the TSC is being September, 2017 for providing digital platform to teacher
renamed as ‘Nirmal Bharat Abhiyan’ (NBA). The objective to make their lifestyle more digital. It will serve as National
is to acelerate the sanitation coverage in the rural areas so Digital Infrastructure for Teachers. Through this portal, all
as to comprehensively cover the rural community through teachers across nation will be equipped with advanced
renewed strategies and saturation approach. digital technology. The portal will help teachers boost their
— Nirmal Bharat Abhiyan (NBA) envisages covering the teaching skills and create their own separate profile with
entire community for saturated outcomes with a view to their skills and knowledge.
create.
SWAYAM Scheme
Integrated Low Cost Sanitation Scheme
— MHRD has launched a Massive Open Online Courses
(ILCS) (MOOCs) platform popularly known as SWAYAM (Study
— The ILCS aims at conversion of individual dry latrines into pour Webs of Active learning for Young Aspiring Minds) on 9th
flush latrines thereby liberating manual scavengers from the July, 2017. The portal is offering various online courses for
age-old, degrading practice of manually carrying night soil. school education and higher education. NCERT is
The allocation for the scheme for 2012-13, is ` 25 crore. developing course modules for Massive Open and Online
Course (MOOCs) for school education system in 12
Education subject areas (accountancy, business studies, biology,
chemistry, economics, history, geography, mathematics,
— India, which had a bottom heavy population is now
physics, political science, psychology and sociology) for
graduating to an economy with middle-heavy population. To
classes 9-12.
reap the benefits of the demographic dividend to the full,
India has to provide education to its population and that too Samagra Shiksha Scheme
quality education.
— The Samagra Shiksha Scheme was launched by the Union
— The draft Twelfth Plan focuses on teacher training and Ministry of Human Resource Development (HRD) on May
evaluation and measures to enforce accountability. It also 24, 2018, in view of improving the quality of education at
stresses the need to build capacity in secondary schools to school level in India. It is an overarching program which
absorb the pass outs from expanded primary enrolments. will incorporate digital technology and introduce skill
Schemes for Transformational and development in the school education system. An annual
grant of five thousand to twenty thousand rupees will be
Advanced Research in Science (STARS) provided for strengthening libraries in schools under the
Project program.
— This initiative was launched in October 2019 to improve
monitoring and measurement activities in the Indian Sarva Shiksha Abhiyan (SSA)/Right to
School Education System. This project is aligned with Education (RTE)
objectives of National Education Policy 2020 and is aided — The Right of Children to Free and Compulsory Education
by the World Bank. This scheme covers 6 States i.e. (RTE) Act, 2009, legislating Article 21A of the Constitution
Himachal Pradesh, Rajasthan, Maharashtra, Madhya of India, became operational in the country on 1st April,
Pradesh, Kerala and Odisha. 2010. It implies that every child has a right to elementary
education of satisfactory and equitable quality in a formal
Atal Innovation Mission school, which satisfies certain essential norms and standards,
— Atal Innovation Mission (AIM) is Government of India’s significant reduction in the number of out-of-school children
flagship initiative to promote a culture of innovation and on account of SSA interventions has been noted.
entrepreneurship in the country on 26th April, 2018 . It is — Top 5 government education schemes are Shiksha Sahayog
launched by the NITI Aayog.
Yojana, Sarva Shiksha Abhiyan, Saakshar Bharat, Kanya
— The Atal lnnovation Mission has two core functions: Saaksharta Prothsan Yojana and Kasturba Gandhi Balika
Entrepreneurship promotion through Self-Employment and Vidyalaya Yojana.
Talent Utilisation, wherein innovators would be supported
Magbook ~ Government Schemes and Programmes 149

— Rashtriya Madhyamik Siksha Abhiyan (RMSA) has quality — It would particularly focus to empower the weaker
intervention schemes to ensure that all second any conform to sections of the society, including women, small and
prescribed worms, removing gender, socio-economic and marginal farmers and labourers. Two bank accounts in
disability barriers. each household are proposed to be opened which will
be eligible for credit.
PM Poshan Scheme
— Pm Poshan is a revamped version of the existing Md-Day Meal Pradhan Mantri Jan-Dhan Yojana
scheme. Central Government of India on 20th September, The Pradhan Mantri Jan-Dhan Yojana (PMJDY), launched
2021 renamed the existing Mid-Day Meal Scheme as Pradhan by Prime Minister Narendra Modi on August 28, 2014 was
mantri Poshan Shakti Nirman Yojana (PM Poshan). Meals will recognised for opening the most bank accounts (about
now be extended to students studying in pre-primary levels or 12 crore) in one week as part of the financial inclusion
Bal Vatikas of government and government-aided primary campaign. The benefits of account holders under PMJDY
schools, in addition to those already covered under the are as follows:
scheme. It is expected to benefit 11.80 crore children studying Accidental Insurance Coverage
in 11.20 lakh schools across the country. — Accidental insurance of ` 2 lakh is available to all RuPay
— PM Poshan has been launched for a period of five years, card holders in the age group of 18 to 70 where RuPay
from 2021-22 to 2025-26, with a budget of ` 1,30,794.90 card need to be used once in 45 days of receipt.
crore. This included ` 54,061.73 crore as the Central — Claim intimation should be given his or her bank where
government’s share and ` 31,733.17 crore as State
account is maintained within 30 days from the date of
government’s share. The Centre will also bear an additional
accident.
cost of ` 45,000 crore for food grains. The nationwide
— The persons should normally be head of the family or an
Mid-Day Meals Scheme was launched in 1995 by the
earning member of the family and should be in the age
Narasimha Rao government.
group of 18 to 59.
Rashtriya Madhyamik Shiksha Abhiyan — Account holder need to have valid RuPay card. The
(RMSA) account can be any bank account including a small
— RMSA was launched in March, 2009, with the objective to account.
enhance access to secondary education and to improve its — Only one person in the family will be covered and in
quality. case of the person having multiple cards or accounts,
— Objectives include : improving quality of education imported at the benefit will be allowed only under one card i.e. one
the secondary level through making all secondary schools person per family will get a single cover of ` 30000.
conform to prescribed norms; removing gender, — The claim of ` 30000 is payable to the nominee(s) of
socio-economic and disability barriers; providing universal account holder who need to submit necessary documents
access to secondary level education by 2017 and achieving to the Nodal Branch of the concerned bank.
universal retention by 2020. — Government employees (serving/retired) and their
— Important physical facilities provided under the scheme are- families, persons filling Income Tax Return or TDS
additional class rooms, laboratories, libraries, toilet blocks, art deductees and persons covered under the Aam Adami
and craft rooms and residential hostels for teachers. Bima Yojana, are ineligible for life insurance under
PMJDY.
Saakshar Bharat (SB) or Adult Education — Overdraft facility upto ` 10,000 is available.
— Saakshar Bharat has been formulated with the objective of
achieving 80% literacy level by 2012 at national level by Direct Benefit Transfer
focusing on adult women literacy seeking to reduce the gap — The government has decided to initiate direct transfer of
between male and female literacy to not more than 10% subsidy under various social schemes into beneficiaries’
points. The principal target of the mission is to impart bank accounts. The transfer will be enabled through a
functional literacy to 70 million non-literate adults in the age payments bridge known as Aadhar Payment Bridge
group of 15 years and beyond. (APB), wherein funds can be transferred into any
Aadhar-enabled bank account on the basis of the Aadhar
Financial Inclusion Mission number.
— To provide all households in the country with banking services, a — This eliminates chances of fraud or error in the cash
time bound programme is to be launched as Financial Inclusion transfer process. The Aadhar number will be linked to
mission on 15th August, in 2014. the beneficiary database, so that ghosts or duplicates
are weeded out from the beneficiary list.
150 Magbook ~ Indian Economy
— To make withdrawal of money by the beneficiaries easier and Prime Minister Atmanirbhar Swasth
more accessible and friendly, micro ATMs will be set- up by
Bharat Yojana (PMASBY)
banks or post offices throughout the country in an open
manner particularly with the help of SHGs, Community Service This scheme was launched on 1st February 2021 with an
Centres (CSCs), post offices, grocery stores, petrol pumps, outlay of about ` 64,180 crore for six years. Under this
etc in rural areas and accessible pockets. This is being done scheme, the Union Government will support for
initially in 51 pilot districts across the country from 1st establishment of 17,788 rural health and wellness centre
January, 2013 pilots on direct benefit. in 10 high focus states. Integrated public health labs and
critical care hospitals will also be established in every
Brief Descriptions of Major Programmes district and government will also strengthen the National
— Transfer (DBT) have also been successfully conducted in the Centre for Disease Control (NCDC) and its regional
States of Jharkhand, Tripura, and Maharashtra to transfer branches.
monetary benefits related to rural employment, pension, the
IAY and other social welfare schemes. An important pilot is National Digital health Mission
the fair price shops in East Godavari and Hyderabad districts This mission was launched on 15th August, 2020 to create
of Andhra Pradesh, which are being enabled to carry out an integrated healthcare system by linking practitioners
online Aadhar authentication. with the patients digitally and by giving them access to real
time health records. This scheme will be implemented by
PAHAL the National Health Authority (NHA) under the Ministry of
— The Direct Benefit Transfer of LPG (DBTL) or PAHAL Health and Family Welfare.
(Pratyaksh Hastantrit Labh) scheme was earlier launched on
1st June, 2013 and finally covered 291 districts. Suposhit Maa Abhiyan
— The modified scheme is being relaunched in 54 districts on Lok Sabha Speaker Om Birla launched ‘Suposhit Maa
15th November, 2015 in the 1st Phase and in the rest of the Abhiyan’ in March, 2020 to provide nutritional support to
country on 1st January, 2015. Under the modified scheme, pregnant women and adolescent girls. In the first phase of
the LPG consumer can now receive subsidy in his bank the campaign, 1,000 kits of 17 kg balanced diet each were
account by two methods. Such a consumer will be called provided to 1,000 pregnant women. Only one pregnant
CTC (Cash Transfer Compliant) in the bank account. The two woman would be adopted in this scheme from a family.
options are as follows
—Option I (Primary) For joining the scheme, the consumers have to SUMAN Scheme
fill up a form available with distributors and also on — The government launched the Surakshit Matritva
www.mylpg.in. The consumers need to provide their Aadhaar Aashwasan (SUMAN) scheme on 10th October, 2019.
number to LPG distributor and to bank. The scheme was launched by Union Health Minister
—Option II (Secondary) If LPG consumer does not have an Aadhaar Harsh Vardhan. The scheme aimed for zero
number, he can directly receive subsidy in his bank account preventable maternal and newborn deaths in India.
without the use of Aadhaar number. The scheme will ensure to help in bringing down
maternal and infant mortality rates in the country. The
Health beneficiaries who visit public health facilities will avail
— Improvement in the standard of living and health status of the several free services. The scheme provides zero
population has remained one of the important objectives for expense access to identify and manage complications
policymakers in India. during and after pregnancy. It also provides free
transport from home to health institutions.
— In line with the National Health Policy, 2002, the NRHM was
launched on 12th April, 2005 with the objective of providing Bharatiya Poshan Krishi Kosh
accessible, affordable and quality healthcare to the rural
— The Union Government has launched Bharatiya
population.
Poshan Krishi Kosh with the aim of reducing
— It seeks to bring about architectural correction in the health
malnutrition in India. The Kosh was launched by WCD
systems by adopting the approaches like increasing
Minister Smriti Irani along with Bill Gates on 18th
— involvement of community in planning and management of November, 2019 in New Delhi. The Bharatiya Poshan
healthcare facilities, improved programme management, Krishi Kosh is a repository of diverse crops across 128
flexible financing and provision of untied grants, decentralised agro-climatic zones to help enable better nutritional
planning and augmentation of human resources. outcomes. The Kosh aims to reduce malnutrition
— The government has launched a large number of programmes among women and children across the country,
and schemes to address the major concerns and bridge the through a multi-sectoral results-based frame work,
gaps in existing health infrastructure and provide accessible, including agriculture.
affordable, equitable healthcare.
Magbook ~ Government Schemes and Programmes 151

Pradhan Mantri Matru Vandana Yojana —Improved management capacity.

—Flexible financing.
— Pradhan Mantri Matru Vandana Yojana (PMMVY) is a
—Innovations in human resources development for the health
maternity benefit program run by the government of India. It
sector.
was introduced in 2017 and is implemented by the Ministry
—Setting of standards and norms with monitoring.
of Women and Child Development. It is a conditional cash
transfer scheme for pregnant and lactating women of 19 Accredited Social Health Activist
years of age or above for the first live birth.
(ASHA)
— It provides a partial wage compensation to women for
— One of the key components of the National Rural Health
wage-loss during childbirth and childcare and to provide
mission is to provide every village in the country with a
conditions for safe delivery and good nutrition and feeding
trained female community health activist ASHA or
practices. In 2013, the scheme was brought under the
Accredited Social Health Activist elected from the village
National Food Security Act, 2013 to implement the provision
itself and accountable to it, the ASHA will be work as an
of cash maternity benefit of
interface between the community and the public health
` 6,000 (US$84) stated in the Act. Presently, the scheme is
system.
implemented on a pilot basis in 53 selected districts.
— Following are the key components of ASHA:
Ayushman Bharat Scheme —ASHA must primarily be a woman resident of the village,
married, widowed or divorced, preferably in the age group of
— It is centrally sponsored health insurance scheme of Ministry
25 to 45 years.
of Health and Family Welfare. It will cover of ` 5 lakh per
—She should be a literate woman with formal education up to
family per year, taking care of almost all secondary care and
class VIII. This may be relaxed only if no suitable person
tertiary care procedures. There will be no limitation on family
with this qualification is available.
size and age in the scheme. It was announced in Union
—Capacity building of ASHA is being seen as a continuous
Budget 2018.
process. ASHA will have to undergo series of training
episodes to acquire the necessary knowledge, skills and
Mission Indradhanush
confidence for performing her spelled out roles.
— The Union Ministry of Health and Family Welfare launched —ASHA will mobilise the community and facilitate them in
Mission Indradhanush on 25 December, 2014 to achieve full accessing health and health related services available at the
immunisation coverage for all children by 2020. The mission Anganwadi or sub-centre or primary health centres, such as
aims to cover all those children who are either unvaccinated immunisation, Ante Natal Check-up (ANC), Post Natal
or are partially vaccinated against seven vaccine preventable Check-up supplementary nutrition, sanitation and other
diseses including diphtheria, whooping cough, tetanus, polio, services being provided by the government.
tuberculosis, mearles and hepatitis-B. —She will act as a depot older for essential provisions being
made available to all habitations like Oral Rehydration
National Rural Health Mission Therapy (ORT), Iron Folic Acid Tablet (IFA), Chloroquine,
(NRHM) Disposable Delivery Kits (DDK), Oral Pills and Condoms, etc.
— At the village level, it is recognised that ASHA cannot
— The NRHM, which provides an overarching umbrella to the
function without adequate institutional support. Women’s
existing health and family welfare programmes, was launched
committees (like self-help groups or women’s health
in 2005, to improve accessibility to quality healthcare for the
committees), village Health and Sanitation Committee of
rural population, bridge gaps in healthcare, facilitate
the Gram Panchayat, peripheral health workers
decentralised planning in the health sector and bring about
especially ANMs and Anganwadi workers and the
inter-sectoral convergence.
trainers of ASHA and in-service periodic training would
— Better infrastructure, availability of manpower, drugs and be a major source of support to ASHA.
equipment and augmentation of health human resources in
health facilities at different levels have led to improvement in Auxiliary Nurse Midwife (ANM)
healthcare delivery services and increase in Out Patient — The roles of Auxiliary Nurse Midwife (ANM) and ASHA
Department (OPD) and In Patient Department (IPD) services. have been integrated in various ways. The ANM will hold
— The NRHM is thus also about the health sector reform. The weekly or fortnightly meeting with ASHA and provide on
architectural correction envisaged under NHRM is organised job training by discussing the activities undertaken
around 5 pillars, each of which is made up of a number of during the week or fortnight and provide guidance in
overlapping core strategies. case ASHA encounters any problem.
—Increasing participation and ownership by the community.
152 Magbook ~ Indian Economy

Anganwadi Workers (AWW) institutional delivery, ` 700 for delivery in health centers in
rural areas and ` 1500 for cesarean delivery. This benefit is
— The responsibilities of Anganwadi Workers (AWW) will be to
available if delivered in recognised private health institutions
their role will be guide ASHA in performing on health and
other than government hospitals also. The eligibility
integrated with the role of ASHA. AWW will guide ASHA in
conditions for the beneficiaries are as follows:
performing activities such as organising Health Day once or
—The woman delivering at home or admitted to sub-centreor
twice a month at Anganwadi centre and orientating women
government hospital or registered private hospital (general
on health related issues such as importance of nutritious ward), must belong to BPL family.
food, personal hygiene, care during pregnancy, importance
—Current delivery must be the first or second live delivery.
of immunisation etc.
—She should be above 19 years of age and must have got ANC
— Anganwadi worker will be depot holder for drug kits and will check up at-least 3 times.
be issuing it to ASHA. ASHA will support the AWW in —Must have taken Iron and Folic acid tablets and TT injection.
mobilising pregnant and lactating women and infants for —SC or ST women not belonging to BPL families are also entitled
nutrition supplement. She would also take initiative for for this benefit if they are admitted to general ward of
bringing the beneficiaries from the village on specific days government or registered private hospital.
of immunisation, health check-ups or health days etc to — The JSY launched in 2005, aims to bring down the MMR by
Anganwadi centres. promoting institutional deliveries conducted by skilled birth
National Urban Health Mission (NUHM) attendants.

— The National Urban Health Mission (NUHM) is a Pradhan Mantri Swasthya Suraksha
sub-mission of National Health Mission (NHM). NUHM
Yojana (PMSSY)
envisages to meet health care needs of the urban
population with the focus on urban poor, by making — The PMSSY was launched in March, 2006, with aims at
available to them essential primary health care services and correcting regional imbalances in the availability of
reducing their out of pocket expenses for treatment. affordable or reliable tertiary healthcare services and
augmenting facilities for quality medical education in the
— This will be achieved by strengthening the existing health
country.
care service delivery system, targeting the people living in
slums and converging with various schemes relating to Ayurveda, Yoga and Naturopathy,
wider determinants of health drinking water, sanitation, Unani, Siddha and Homoeopathy
school education, etc. implemented by the ministries of
Urban Development, Housing and Urban Poverty
(AYUSH)
Alleviation, Human Resource Development and Women — The Indian system of medicines is also being developed
and Child Development. NUHM would endeavour to and promoted by involvement/integration of the AYUSH
achieve its goal through: system in national healthcare delivery through an allocation
—Need based city specific urban health care system to meet the of ` 990 crore plan outlay in 2012-13. To integrate AYUSH
diverse health care needs of the urban poor and other healthcare with mainstream allopathic healthcare services,
vulnerable sections. the states are provided financial support for co-location of
—Institutional mechanism and management systems to meet the AYUSH facilities at PHCs, CHCs and district hospitals and
health-related challenges of a rapidly growing urban population. supply of essential drugs to standalone AYUSH hospitals or
—Partnership with community and local bodies for a more dispensaries.
proactive involvement in planning, implementation and
monitoring of health activities. Women Empowerment
—Availability of resources for providing essential primary health
care to urban poor service providers and other stakeholders. Programmes
—Partnerships with NGOs for profit and not for profit health. Some of the important schemes and policy initiatives for
economic and social empowerment of women and child
Janani Suraksha Yojana (JSY) development are as follows:
— JSY is continuation of the previous delivery allowance
scheme of the Central Government. It is being implemented
PMMSK Scheme
with the objective of reducing maternal and neonatal — Pradhan Mantri Mahila Shakti Kendra Scheme (PMMSK)
mortality by promoting institutional delivery among poor was approved by cabinet committe on Economic Affairs in
pregnant women. November 2017 for a period 2017-18 to 2019-20.
— Under this scheme, pregnant women belonging to below PMMSK Scheme is envisioned as one stop convergence
poverty line families and SC, ST families will get an support service for empowering rural women with
assistance of ` 500 if delivered at home, ` 600 for urban opportunities for skill development, digital literacy, health
Magbook ~ Government Schemes and Programmes 153

and nutrition and employment. This scheme will perform — The objective of the scheme is to provide cooking gas
under the patronage of Ministry of Women and Child connections to 5 million beneficiaries below the
Development. poverty line in the next 3 years (till the year 2019).
Main objectives of this policy are
Beti Bachao, Beti Padhao Yojana
—Free LPG gas connection in the name of the female
— Government has introduced a new scheme called Beti Bachao, member. It will be a cylinder and regulator.
Beti Padhao, which will help in generating awareness and —The scheme will include the rural and urban BPL family.
improving the efficiency of delivery of welfare services meant ` 1600 will be sent to Pradhan Mantri Jan Dhan Yojana
for women with an initial corpus of ` 100 crore. The bank as subsidies.
government would focus on campaigns to sensitise people of
this country towards the concerns of the girl child and women. Rajiv Gandhi Scheme Empowerment
— The process of sensitisation must being early and therefore the of Adolescent Girls (RGSEAG) Sabla
school curriculum must have a separate chapter on gender — Sabla now operational in 205 selected districts, aims at
main streaming. all-round development of adolescent girls in the age
group 11 to 18 years and making them self-reliant with
National Nutrition Mission a special focus on out-of-school girls.
(POSHAN Abhiyan)
— The scheme has 2 major components, nutrition and
— National Nutrition Mission was launched as an expansion of non-nutrition. Nutrition is being given in the form of
Beti Bachao Beti Padhao programme by Prime Minister ‘take home rations’ or ‘hot cooked meals’ to out-of
Narendra Modi at Jhunjhunu in Rajasthan on the occasion of -school 11 to 14 years old girls and all adolescent girls
the International Women’s Day on March 8, 2018. The main in the 14 to 18 age group.
objectives of this scheme are to attain proper nutritional
— The non-nutrition component addresses the
status among children from 0-6 years, adolescent girls,
developmental needs of 11 to 18 years old adolescent
pregnant women and lactating mothers in a timely manner;
girls, who are provided iron-folic acid supplementation,
reduce stunting, under-nutrition, and anaemia among young
health check-up and referral services, nutrition and
children, women, and adolescent girls; and lowering low birth
health education, counselling or guidance on family
weight by at least 2% per annum.
welfare, skill education, guidance on accessing public
Sukanya Samridhi Yojana services and vocational training. The target of the
— Sukanya Samridhi Yojana was launched by Prime Minister scheme is to provide nutrition to 1 crore adolescent girls
Narendra Modi under BBBP campaign in January, 2015. A in a year.
small deposit scheme for girl child ‘Sukanya Samridhi Yojana’
Integrated Child Development
was launched under the Beti Bachao, Beti Padhao (BBBP)
campaign. With an aim to provide social security for girls, the
Services (ICDS) Scheme
scheme will enable parents to open bank accounts of girls who — Launched on 2nd October, 1975, ICDS scheme
are under 10 years of age. represents one of the world’s largest and most unique
— Thus, Sukanya Samridhi account can be opened in any post programmes for early childhood development. ICDS is
office or authorised branches of commercial banks. the foremost symbol of India’s commitment to her
children– India’s response to the challenge of providing
— The account will fetch an interest rate of 9.1% and no income
pre-school education on one hand and breaking the
tax will be levied. The account can be opened at any time from
vicious cycle of malnutrition, morbidity, reduced learning
the birth of a girl child till she attains the age of 10 years, with
capacity and mortality, on the other.
a minimum deposit of `1000. A maximum of `1.5 lakh can be
deposited during the financial year. National Mission for Empowerment of
— The account will remain operative for 21, years from the date Women (NMEW)
of opening of the account. When the girl is 21 years old, she — This initiative for holistic empowerment of women
will get the entire amount. To meet the requirement of higher
through better convergence and engendering of
education expenses, partial withdrawal of 50% of the balance
policies, programmes and schemes of different
amount will be allowed after the girl child has attended
ministries was operationalised in 2010-11.
18 years of age.
— Under the mission, institutional structures at state
Pradhan Mantri Ujjwala Yojana level including State Mission authorities headed by
Chief Ministers and State Resource Centres for
— Prime Minister Narendra Modi has launched Pradhan Mantri
Women (SRCWs) for spearheading initiatives for
Ujjwala Yojana on 1st May, 2016 (Labour Day) at Ballia (UP)
women’s empowerment have been established across
by providing cooking gas connections to 10 women.
the country.
154 Magbook ~ Indian Economy

Rashtriya Mahila Kosh (RMK) Social Defence

— The RMK provides micro-credit in a quasi-informal Major social defence programmes are given below:
manner, lending to Intermediate Micro-credit
Organisations (IMOs) across states. It focuses on poor Pradhan Mantri Laghu Vyapari
women and their empowerment through the provision of Maan-dhan Scheme
credit for livelihood-related activities.
— National Pension Scheme for Traders, Shopkeepers and
Other Women Empowerment Self-Employed Persons (originally proposed name was,
Programmes Pradhan Mantri Laghu Vyapari Maan-dhan Scheme) has
been launched on 12th September, 2019. It is a voluntary
— Support to Training and Employment Programme for and contributory pension scheme. Enrolment to the
Women (STEPW) (set-up in 2003-04) To increase the scheme is done through the Common Service Centres,
self-reliance and autonomy of women by enhancing their with its network of 3.50 lakh Centres across the country.
productivity and enabling them to take up income
generation activities. — The traders in the age group of 18-40 years with an
annual turnover, not exceeding `1.5 crore and who are
— Swayamsiddha (set-up in 2001) Aims at organising
not a member of EPFO/ESIC/NPS/PM-SYM or an income
women into self help groups to form a strong institutional
tax payer, can join the scheme. Under the scheme, 50%
base.
monthly contribution is payable by the beneficiary and
— Swadhar (set-up in 1995) Aims to support women to equal matching contribution is paid by the Central
become independent in spirit, in thought, in action and Government. Subscribers, after attaining the age of 60
have full control over their lives rather than be the victim of years, are eligible for a monthly minimum assured pension
others actions. of ` 3,000/.
— Development of Women and Children in Rural Areas
(DWCRA) (set-up in 1982) To improve the socio-economic Pradhan Mantri Jeevan Jyoti
status of the poor women in the rural areas through Bima Yojana (PMJJBY)
creation of groups of women for income-generating activities
— PMJJBY is one of the several ambitious social security
on a self-sustaining basis.
programmes initiated by Narendra Modi.
— Dhana Laxmi (set-up in March, 2008) Conditional cash
transfer scheme for the girl child to encourage families to — It is basically a term life insurance policy that can be
educate girl children and to prevent child marriage. renewed either on a yearly basis or for a longer period of
time. It will provide life insurance coverage on the death of
— Ujjawala (set-up in 4th December, 2007) A
the policy holder.
comprehensive scheme for prevention of trafficking with
five specific components-prevention, rescue, rehabilitation — The Pradhan Mantri Jeevan Jyoti Bima Yojana willl be
reintegration and repatriation of victims. made available to anyone between the age group of 18 to
— Gender Budgeting Scheme (GBS) (set-up in 2004) with a 50 years.
view to empower women. — The policy holders will need to pay INR 330 per year. The
— Swawlamban (NORAD) (Norwegian Agency for risk coverage being provided in the Pradhan Mantri Jeevan
International Development) Scheme is being implemented Jyoti Bima Yojana is INR 2 lakh.
by the Department of Women and Child Development, — Life Insurance Corporation of India (LIC) will be offering the
Government of India with partial assistance from Norway plan. However, other life insurers, who are eager to take
since, 1982. part in the programme, can join it through tie-ups with
— Its basic objective is to provide training and skill to women specific banks.
to facilitate them obtain employment or self-employment on
a sustained basis. Atal Pension Yojana (APY)
— The target group under the scheme are the poor and needy — The idea of APY is to provide a definite pension to all
women, women from weaker sections of the society, such Indians, However, in order to get pension during your old
as scheduled castes, scheduled tribes etc. age, you need to contribute accordingly.
— Financial assistance is provided to undertake training — An Indian national within the age group of 18 to 40 years is
programmes for women in both traditional as well as eligible to contribute under APY.
non-traditional trades.
Magbook ~ Government Schemes and Programmes 155

— There is also a policy under the scheme, wherein if the —The amount of old age pension in ` 300 per month for
pension account holder dies, the contributions would go to applicants aged 60 to 79. For applicants aged above 80 years,
the family or the nominee of the account. the amount has been revised in ` 500 a month according to the
2012 budget.
Pradhan Mantri Suraksha Bima Yojana National Family Benefit Scheme (NFBS)
(PMSBY) — In case of the death of the ‘primary breadwinner’ of a
— PMSBY aims to reach poor people with it’s benefied household living below poverty line conditions, a lump sum
insurance scheme after the successful performance of Jan grant of ` 20000 (from fiscal 2012-13) is provided to the
Dhan Yojana. household. The primary breadwinner as specified in the
— Benefits scheme, whether male or female, had to be a member of the
—The death benefits are up to 2 lakh. household whose earning contributed substantially to the
—In case of irrecoverable and total loss of both hands, both total household income.
eyes or sight or one leg or foot, the insurance cover would be — The death of such a primary breadwinner occurring whilst he
up to 2 lakh. or she in the age group of 18 to 64 years i.e. more than 18
—In case of lost of one leg, hand, foot eye or sight, the sum years of age and less than 65 years of age, makes the family
assured would be ` 1 lakh. eligible to receive grants under this scheme.
— The premium is just ` 12 per annum for each member.
Indira Gandhi National Widow
— The aspirants should have completed 18 years of age or Pension Scheme (IGNWPS)
should not be more than to years of ager in order to get
— A pension of ` 300 per month (From fiscal 2012-13) to be
benefit of PMSBY.
granted to widows aged 40 to 59 living below poverty-line
National Social Assistance Programme conditions. Pradhan of Gram Panchayat shall review the
(NSAP) list of widows and report in case of any re-marriage.

— The National Social Assistance Scheme (NSAS) or National Indira Gandhi National Disability Pension
Social Assistance Programme (NSAP) is a flagship welfare Scheme (IGNDPS)
programme of the Government of India initiated on 15th — It is a component of National Social Assistance Programme
August, 1995. (NSAP). Under IGNDPS, central assistance of ` 300 pm per
— Article 41 of the Indian Constitution directs the State to beneficiary is provided to persons with severe or multiple
provide public assistance to its citizens in case of disabilities in the age group of 18 to 79 years and belonging
unemployment, old age, sickness and disablement and in to a household living Below Poverty Line (BPL) as per
other cases of undeserved want within the limit of its criteria prescribed by Government of India.
economic capacity and development. The scheme is a
‘giant step’ towards achieving the directive principle in the Other Social Protection
Constitution.
— NSAP at present comprises of Indira Gandhi National Old
Programmes
Age Pension Scheme (IGNOAPS), Indira Gandhi National — Keeping in view the importance of the informal sector’s
Widow Pension Scheme (IGNWPS), Indira Gandhi National share in total workforce, the government has been focusing
Disability Pension Scheme (IGNDPS), National Family on expanding the coverage of social security schemes so as
Benefit Scheme (NFBS) and Annapurna Scheme. to provide a minimum level of social protection to workers
in the unorganised sector and ensure inclusive
National Old Age Pension Scheme development.These include the following:
— The National Old Age Pension scheme provides a pension for
the elderly who live below the poverty line. One Nation One Ration Card Scheme
—The age of the applicant (male or female) should be 60 or above — Union Minister Ram Vilas Paswan launched the NDA
(revised from 65 in 2009). government’s ambitious project ‘one nation one ration
—The applicant may reside in either rural or urban areas, but card’ scheme on 1st June, 2020. This card will enable
must be living under the poverty line. migrant workers to get cheap food grains with one ration
card across the country.
156 Magbook ~ Indian Economy

— The scheme has facilitated all the eligible families under the National Food Security Act to get ration from any fair price
shop in their vicinity on the basis of biometrics. Under the scheme, automation of all the 24 thousand 980 Fair Price
Shops of the state has been completed by installing POS machines. The price of wheat is ` 3 per Kg and rice at ` 2 per
Kg. This scheme was implemented in 12 states across India. These include; Madhya Pradesh, Maharashtra, Goa,Gujarat,
Jharkhand, Karnataka, Telangana, Rajasthan, Kerala, Tripura, Haryana and Andhra Pradesh.

Rashtriya Vayoshri Yojana

— Rashtriya Vayoshri Yojana is a scheme for providing physical aids and assisted-living devices for senior citizens belonging
to BPL category. It is launched in Nellore, Andhra Pradesh on 1st April, 2017. It is the first-of-its-kind Central Sector
Scheme (CCS) in India, to be fully funded by the Central Government.

Aam Admi Bima Yojana (AABY)

— The Janashree Bima Yojana (JBY) has now been merged with the AABY to provide better administration of life insurance
cover to the economically backward sections of society.
— The scheme extends life and disability cover to persons between the ages of 18 and 59 years living below and marginally
above the poverty line under 47 identified vocational and occupational groups, including ‘rural landless households’.
— It provides insurance cover of a sum of ` 30000 on natural death, ` 75000 on death due to accident ` 37500 for partial
permanent disability due to accident and ` 75000 on death or total permanent disability due to accident.
— The scheme also provides an add-on benefit of scholarship of ` 100 per month per child paid on half-yearly basis to a
maximum of two children per member studying in classes 9 to 12 (including ITI courses).

Rashtriya Swasthya Bima Yojana (RSBY)

— The RSBY was launched on 1st October, 2007, to provide smart card-based cashless health insurance cover of ` 30000 per
family per annum on a family floater basis to BPL families (a unit of five) in the unorganised sector.
— The scheme became operational from 1st April, 2008. The premium is shared on 75:25 basis by the Centre and State
Governments. In the case of the North-Eastern states and Jammu and Kashmir, the premium is shared in a 90:10 ratio. As
on 31st December, 2012, the scheme is being implemented in 27 States or UTs with more than 3.34 crore smart card
issued.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

— Government has launched the ‘Pradhan Mantri Vaya Vandana Yojana (PMVVY)’ to provide social security during old age
and to protect elderly persons aged 60 and above against a future fall in their interest income due to uncertain market
conditions. The scheme enables old age income security for senior citizens through provision of assured pension/return
linked to the subscription amount based on government guarantee to Life Insurance Corporation of India (LIC).

National Social Security Fund

— A National Social Security Fund for unorganised sector workers with initial allocation of ` 1000 crores has been set-up. This
fund will support schemes for weaver, toddy tappers, rickshaw pullers, beedi workers etc.

Annapurna Scheme
— On 1st April, 2000 a new scheme known as Annapurna scheme was launched. This scheme aimed at providing food security
to meet the requirement of those senior citizens who, though eligible, have remained uncovered under the other government
scheme. Under the Annapurna scheme, 10 kg of food grains per month are provided free of cost to the beneficiary. The
number of persons to be benefited from the scheme are in the first instance, 20% of the persons eligible to receive pension
in States or UTs.
Chapter seventeen
International Financial and
Economic Organisation
(ii) The creation of International
International Bank for Reconstruction and
Organisations Development (IBRD)
also known as World Bank.
At the Bretton Woods — An international organisation has been
Conference in 1944 it was defined as a forum of co-operation of International
decided to establish new sovereign states based on multilateral
international agreement and comprising of Monetary Fund (IMF)
monetary order that would a relatively stable range of participants. — The International Monetary Fund
expand international trade, — The fundamental feature of this is the (IMF) is the inter-governmental
promote international existence of permanent organs with definite organisation that overseas the
competences and powers acting for the global financial systems by
capital flow and contribute
carrying out of common aims. following the macro-economic
to monetary stability. policies of its member countries, in
Role of International particular, those with an impact on
exchange rate and the Balance of
Organisation Payments (BoP). Its headquarter is
There are various functions of the International in Washington DC, United States.
Organisations (IOs), which are as follows : — The IMF was formally organised on
— One of the main functions of International 27th, December 1945, when the
Organisations (IOs), is that it keeps infact first 29 countries signed its Articles
the sovereignty of states and despite their of Agreement.
different social systems, establish and — Presently, the IMF has 190
expand peaceful co-operation among them. member countries. The Principality
— The second main function is to ensure that of Andorra became the 190th
the competition among the individual states member of IMF on 16th October,
remains peaceful. 2020. It is a specialised agency of
the United Nations, but has its
Bretton Woods own charter, governing structure
and finances. Its members are
Conference represented through a quota
system broadly based on their,
— The Bretton Woods Conference, officially
relative size in the global economy.
known as the United Nations Monetary
and Financial Conference, was a gathering — A Global Financial Stability Report
of delegates to agree upon a series of new (GFSR) is developed and published
rules for the Post World War II International by the International Monetary
Monetary System. Fund. The report is issued twice a
year and provides updates on
— The two major accomplishments of the
current economic conditions and
conference were as follows :
financial markets worldwide. IMF’s
(i) The creation of the International
other publication is the World
Monetary Fund (IMF). Economic Outlook.
164 Magbook ~ Indian Economy
IMF Lending — China is not yet the biggest economy in the world, its currency
— IMF loans are meant to help member countries tackle is alleged to be manipulated by the government and China
limits the amount of its bonds that foreigners can hold.
Balance of Payments (BoP) problems, stabilise their
— There are however, many reasons to find an alternative to
economies and restore sustainable economic growth.
the US dollar as the global reserve currency. Firstly, it
— Today, IMF lending serves three main purposes : creates a global recessionary bias, both during and after
(i) First, it can smoothen adjustment to various shocks, financial crisis. Secondly, if the US succeeds in reigning in
helping a member country avoid disruptive economic its large budget and current account deficits, the global
adjustment or sovereign default, something that would liquidity will shrink. Thirdly, the large accumulation of
be extremely costly, both for the country itself and dollars by countries around the world like China has led to
possibly for other countries through economic and global imbalances.
financial ripple effects (known as contagion). — The SDR of IMF is not a currency. It is a potential claim on
(ii) Second, IMF programmes can help to unlock other the currencies of the member countries. To increase the
financings, acting as a catalyst for other lenders. importance of SDRs internationally, it should be issued in
(iii) Third, IMF lending can help prevent crisis. The larger quantities annually and it should be made the main
experience is capital account crisis typically inflicts or only means of IMF financing.
substantial costs on countries themselves and on other IMF Reforms
countries through contagion.
— On 15th December, 2010, IMF’s Board of Governors
IMF Quota approved a package of reforms of the fund’s quotas and
governance completing the 14th General Review of Quotas.
— When a country joins the IMF, it is assigned an initial
— The reform package builds on the 2008 reforms, which
quota in the same range as the quotas of existing
became effective on 3rd March, 2011.
members that are broadly comparable in economic size
and characteristics. — The 14th General Review of quotas will :
—double quotas from approximately SDR 238.4 billion to SDR
— The quota determines the country’s financial contribution
476.8 billion (about US $ 720 billion).
to the IMF, its voting power and ability to access IMF —shift more than 6% quota share from over-represented
financing. Quota subscriptions generate most of the IMF’s countries to under-represented countries.
financial resources. —shift more than 6% quota share to dynamic emerging market
and developing countries.
Special Drawing Rights (SDRs)
—realign quota share to make all 4 BRIC countries, among the
— SDRs is an international reserve asset, created by the IMF top 10 largest shareholders in the fund.
in 1969, to supplement its member countries’ official —preserve the quota and voting share of the poorest member
reserves. Its value is based on a basket of five key countries.
international currencies (US dollar, Japanese yen, pound — Subsequent to the 2010 reforms implementation, India’s
sterling, euro and Chinese renminbi) and SDRs can be quota share will go upto 2.79%, giving it a rank of 8th.
exchanged for freely usable currencies. Chinese renminbi IMF quota changes have to be approved by 85% votes
came into effect on 1st October, 2016. alongwith consent of the country, whose share is changed.
SDRs (Special Drawing Rights) as Global Reserve
— However, repayment of all the loans taken from the IMF
Currency has been completed on 31st May, 2000. India is now a
contributor to the IMF.
— In recent times, there has been a call to make the SDRs
— The quotas determine the amount of foreign exchange a
i.e. the global reserve currency. In this light, there are
member may borrow from the IMF and its voting power on
several issues related to reserve currency that we need to
IMF policy matters. Quotas are denominated in SDRs.
understand.
— A reserve currency is one, which is held widely by Central Debt Relief
Banks and other financial institutions internationally and — In addition to concessional loans, some low- income
is used for most international trade and other countries are also eligible for debts to be written off under
transactions. two key initiatives. The Heavily Indebted Poor Countries
— Having a currency as one of the global reserve currencies, (HIPC) Initiative and the Multilateral Debt Relief Initiative
enables the issuer to import at lower rates than other (MDRI).
countries, since they don’t need to pay transaction costs.
It also provides the ability to import according to the World Bank
needs, if needed, by simply printing more money. — The World Bank Group (WBG) is a family of five
— A currency to be a global currency should be widely international organisations that provide leveraged loans,
available in the international market, it should be freely generally to poor countries. The bank came into formal
convertible. Also, reserve currencies are generally held as existence on 27th December, 1945 following international
government bonds and not as hard cash. For these ratification of the Bretton Woods Agreements, which
reasons, the Chinese Yen cannot yet become the global emerged from the United Nations Monetary and Financial
reserve currency. Conference (1st to 22nd July, 1944).
Magbook ~ International Financial and Economic Organisation 165
— It also provided the foundations of the Osiander-Committee in — It serves middle-income countries with capital
1951, responsible for the preparation and evaluation of the investment and advisory services. It is one of the largest
World Development Report. sources of assistance for the world’s 79 poorest
— Commencing operations on 25th June, 1946 it approved countries, 39 of which are in Africa. It is the single
its first loan on 9th May, 1947 ($ 250 million to France for largest source of donor funds for basic social services in
(post war reconstruction), in real terms the largest loan the poorest countries. As of June, 2021 the IDA has 173
issued by the bank (to date). countries as member.
— 13th President of World Bank Group is David Malpass. — It lends money (known as credits) on concessional terms.
Traditionally, the President of this bank has always been an This means that IDA credits have no interest charge and
American Citizen nominated by the United States. repayments are stretched over 35 to 40 years, including
— The World Bank itself comprises of two major organisations a 10-years grace period.
are as follows : International Finance Corporation (IFC)
(i) International Bank for Reconstruction and Development.
— The International Finance Corporation (IFC) promotes
(ii) International Development Association.
sustainable private sector investment in developing
(Associated with the World Bank, but legally and financially
countries. It is a member of the World Bank Group and is
separate are three other organisations).
headquartered in Washington DC.
—International Finance Corporation.
—International Centre for Settlement of Investment Disputes. — It shares the primary objective of all World Bank Group
—Multilateral Investment Guarantee Agency. institutions: to improve the quality of the lives of people in
its developing member countries. It has 184 member
World Bank Groups countries.
International Bank for Reconstruction and Development
— It promotes sustainable private sector development
(IBRD) primarily by
—financing private sector projects and companies located in
— Founded in 1944, to help Europe recover from World the developing world.
War-II, the International Bank for Reconstruction and
—helping private companies in the developing world
Development (IBRD) works with middle-income and credit
mobilise financing in international financial markets.
worthy poorer countries to promote sustainable, equitable
and job-creating growth, reduce poverty and address —providing advice and technical assistance to businesses and
issues of regional and global importance. governments.
— IBRD is owned and operated for the benefit of its Multilateral Investment Guarantee Agency (MIGA)
189 member countries. Delivering flexible, timely and — The Multilateral Investment Guarantee Agency (MIGA) is
tailored financial products, knowledge and technical
a member organisation of the World Bank Group that
services and strategic advice helps its members achieve
results. offers political risk insurance. It was established to
promote foreign direct investment into developing
countries.
Ease of Doing Business Index — It promotes foreign direct investment into developing
The ease of doing business index is an index created by Simeon countries by insuring investors against political risk,
Djanhov at the world Bank group. Higher ranking indicate better advising governments on attracting investment, sharing
usually simpler, regulations for businesses and stronger information through online investment information
protections of property rights. A nation’s ranking on the index is services and mediating disputes between investors and
governments.
based on the average of 10 Subindexs - starting a business,
Dealing with construction permits, Getting electricity, registering — As of June, 2021 MIGA is comprised of 182 member
property, Getting credit, Protecting investors, paying taxes, states among which 157 are developing countries while
25 are industralised countries.
trading across borders, enforcing contracts and Resolving
inslovency. Objectives of MIGA
— Raising FDI inflows to the developing countries.
International Development Association (IDA) — Reducing poverty.
— The International Development Association (IDA) is the part — Achieving higher economic growth.
of the World Bank that helps the world’s poorest countries. — Increasing standard of livings.
Established in 1960, it aims to reduce poverty by providing
International Centre for Settlement
interest-free credits and grants for programmes that boost
economic growth, reduce inequalities and improve of Investment Disputes (ICSID)
people’s living conditions. — The International Centre for Settlement of Investment
Disputes (ICSID), an institution of the World Bank Group
168 Magbook ~ Indian Economy

— The agreement covers five broad issues are as follows : — G-7 includes USA, Canada, Germany, Britain, France, Italy
(i) How basic principles of the trading system and other and Japan. Russia was expelled from this organisation in
international intellectual property agreements should 2014 after its annexation of Crimea.
be applied.
(ii) How to give adequate protection to intellectual Organisation of Petroleum
property rights. Exporting Countries (OPEC)
(iii) How countries should enforce those rights adequately
— The Organisation of the Petroleum Exporting Countries (OPEC)
in their own territories.
is a permanent, inter-governmental organisation, created at
(iv) How to settle disputes on intellectual property the Baghdad Conference during 10th-14th September, 1960
between members of the WTO. by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
(v) Special transitional arrangements during the period — OPEC had its headquarters in Geneva, Switzerland, in the
when the new system is being introduced.
first 5 years of its existence. This was moved to Vienna,
Austria, on 1st September, 1965.
Other Important — The current members are Algeria, Angola, Ecuador, Iran,
International Organisations Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and
Venezuela.
G-20 — OPEC’s objectives are to co-ordinate and unify petroleum
policies among member countries, in order to secure fair and
— The G-20 comprises 19 countries namely Argentina, stable prices for petroleum producers; an efficient, economic
Australia, Brazil, Canada, China, France, Germany, and regular supply of petroleum to consuming nations and a
India, Indonesia, Italy, Japan, Mexico, Russia, Saudi fair return on capital to those investing in the industry.
Arabia, South Africa, the Republic of Korea, Turkey,
the United Kingdom, the United States of America Asia-Pacific Economic
and the European Union, which is represented by the
rotating council presidency and the European Central
Co-operation (APEC)
Bank as the 20th member. — Asia-Pacific Economic Co-operation or APEC, is the premier
forum for facilitating economic growth, co-operation, trade
— It represents 90% of the global gross national product,
and investment in the Asia-Pacific region. APEC is the only
80% of the world’s trade and two-third of the world’s
inter-governmental grouping in the world operating on the
population.
basis of non-binding commitments, open dialogue and equal
India and G-20 respect for the views of all participants.
— India is a member of the G-20, since it was established — APEC has 21 members, referred to as Member Economies,
as Finance Ministers Forum in 1999. which account for approximately 40.5% of the world’s
— Currently, India is co-chair of the working group on population, approximately 54.2% of world GDP and about
G-20 framework for strong, sustainable and balanced 43.7% of world trade.
growth alongwith Canada. — APEC’s 21 member economies are Australia, Brunei
— India is contributing to various thematic issues being Darussalam; Canada, Chile, People’s Republic of China,
deliberated in G-20 such as : Hong Kong, Indonesia, Japan, Republic of Korea, Malaysia,
—Financial sector regulatory reforms Mexico, New Zealand, Papua New Guinea, Peru, the
—Climate change Republic of the Philippines, the Russian Federation,
—IFIs (International Financial Institutions) reform Singapore, Chinese Taipei, Thailand, United States of
—Growth and fiscal consolidation America, Vietnam.
—Enhancing shareholding in forums such as FSB, IASB
—Issues pertaining to Non-Cooperative Jurisdiction (Global Purpose and Goals
Forum, FATF etc)
APEC was established in 1989, to further enhance economic
G-7 (Formerly G-8) growth and prosperity for the region and to strengthen the
Asia-Pacific Community. Since, its inception, APEC has worked to
— It is an informal group of seven advanced developed
reduce tariffs and other trade barriers across the Asia-Pacific
nations which meets annually to discuss issues related
with global finance, security, energy and world trade.
region, creating efficient domestic economies and dramatically
increasing exports.
— It was established in 1970s in the backdrop of global
energy crises and collapse of the Bretton Woods fixed Key to achieving APEC’s vision are, what are referred to as the
exchange rate system. Russia was added as the ‘Bogor Goals’ of free and open trade and investment in the
members of G-7 in 1994. Asia-Pacific by 2010 for industrialised economies and 2020 for
developing economies. These goals were adopted by leaders at
their 1994 meeting in Bogor, Indonesia.
170 Magbook ~ Indian Economy

integration. The bank has provided financing totaling

BRICS (Brazil-Russia-India-China-South Africa) more than $ 4.5 billion to investment projects in its
— BRICS is the acronym for an association of 5 major emerging members states.
national economies : Brazil, Russia, India, China and South
Africa. SAARC (South Asian Association for
— The BRICS first summit was held in yekaterinburg, Russia Regional Co-operation)
on 16th June, 2009 and the term was coined by economist
Jim O’Neill. — It was founded in 1985 and dedicated to economic,
technological, social and cultural development
— In order to promote co-operation and boost economic
emphasising collective self-reliance.
growth, the member countries of BRICS had established
specialised institutions such as New Development Bank, — It promote the welfare of the people of South Asia and to
Reserve Contigency Arrangement, Fibre Optic Cable improve their quality of life.
Network etc. — It strengthen co-operation among themselves in
international forums on matters of common interest.
13th BRICS SUMMIT — It was established to contribute to mutual trust,
understanding and appreciation of one another’s
This summit was hosted by India through Video conferencing problems.
mode on 9th September, 2021. The theme of the summit was
BRICS@ 15: Intra-BRICS Cooperation for Continuity, SAARC Summits
Consolidation and Consensus.
Dates Hosts
At this conference, member countries agreed to work towards
7th-8th December, 1985 Dhaka (Bangladesh)
four priority areas i.e. Promotion of Multilateralism,
Counter-terrorism, Using digital and technological tools for 16th-17th November, 1986 Bangalore (India)
achieving SDGs and Enhancing people to people cooperation. 2nd-4th November, 1987 Kathmandu (Nepal)
The ‘New Delhi Declaration’ was adopted by the BRICS leaders. 29th-31st December, 1988 Islamabad (Pakistan)
21st-23rd November, 1990 Male (Maldives)
21st December, 1991 Colombo (Sri Lanka)
European Union (EU)
10th-11th April, 1993 Dhaka (Bangladesh)
— European Union is an economic and Political Union of
2nd-4th May, 1995 New Delhi (India)
27 member states that are located primarily in Europe.
12th-14th May, 1997 Male (Maldives)
— The EU received the 2012 Nobal Piece Prize for having
29th-31st July, 1998 Colombo (Sri Lanka)
“contributed to the advancement of peace and
reconciliation, democracy and Human Rights in Europe”. 4th-6th January, 2002 Kathmandu (Nepal)
— United Kingdom left the European Union on 31st January. 2nd-6th January, 2004 Islamabad (Pakistan)
12th-13th November, 2005 Dhaka (Bangladesh)
3rd-4th April, 2007 New Delhi (India)
Euro
1st-3rd August, 2008 Colombo (Sri Lanka)
It was established by the provisions in the year 1992, Maastricht
28th-29th April, 2010 Thimphu (Bhutan)
Treaty.
10th-11th November, 2011 Addu (Maldives)
The Euro is the currency used by the institutions of the European
26th-27th November, 2014 Kathmandu (Nepal)
Union and is the official currency of the Eurozone, which
9-10 November, 2016 Pakistan (cancelled)
consists of 19 of the 27 Member States of the European Union.

Eurasian Economic Union (EEU) SAFTA

— The Eurasian Economic Union, which comes into force in — The South Asian Free Trade Area (SAFTA) is an
January, 2015, offers a unique chance for co-operation agreement reacher on 6th January, 2004 at the
between Western Europe and the Asia-Pacific Region. The 12th SAARC summit in Islamabad Pakistan, to reduce
EEU members are currently (June, 2021) Russia, Belarus, the import tax and duties on all goods to zero by the year
Kazakhstan and Armenia. Kyrgyzstan also joined the union. 2016.
Its headquarter is in Moscow (Russia).
SAPTA
Eurasian Development Bank — The South Asian Preferential Agreement (SAPTA) is a
— Its mission is to facilitate the development of market Inter-Governmental Group of SAAR couations. It was
economies, economic growth and the expansion of trade its established on 11th April, 1993 and enter into force on
member states through investments. The bank’s objectives 7th December, 1995.
also include financing projects that support Eurasian
Magbook ~ International Financial and Economic Organisation 171
June, 2021, Marcos Prado Troyuo is the President of
ASEAN (Association of South-East Asian Nations) NDB.
— It was established in 1967 in Bangkok, Thailand by — The New Development Bank work towards mobilising
Indonesia, Malaysia, Philippines, Singapore and Thailand. As resources for infrastructure, sustainable development
on June, 2021 it has 10 members which includes apart from projects in BRICS and other emerging economy and
the founding members, Brunei Darussalam, Vietnam Lao developing countries, to supplement existing efforts of
PDR, Myanmar and Cambodia. multilateral regional financial institutions for global
— It is an forum to promote active collaboration and mutual growth and development.
assistance on matters of common interest in the economic,
social, central, technical, scientific and administrative field. Asian Infrastructure Investment
— It also work towards promoting regional peace and stability Bank (AIIB)
through abiding respect for justice and the rule of law in the
relationship among countries of the region and adherence to — It is a Multilateral Development Bank (MDB) conceived
the principles of the UN Charter. for the 21st century. Chinese President Xi Jinping and
Premier Li Keqiang announced the AIIB initiative
Last Few Summits of ASEAN during their respective visits to South-East Asian
countries in October 2013.
Dates Places
— Representatives from 22 countries signed the October
April, 2010 Hanoi (Vietnam)
2014 memorandum of Understanding (MOU) to
October, 2010 Hanoi (Vietnam)
establish the AIIB and Beijing was selected to host
May, 2011 Jakarta (Indonesia) bank headquarters.
November, 2011 Bali (Indonesia)
— By the deadline of March 31st for submission of
2012 Naypyidaw (Myanmar)
membership applications, the Prospective Founding
2012 Naypyidaw (Myanmar)
Members had increased to 57, and the 4th CNM was
April, 2013 Brunei
organised in Beijing in April 2015, after ratifications
October, 2013 Brunei were received from 10 member states holding a total
May, 2014 Myanmar number of 50% of the initial subscriptions of the
November, 2014 Myanmar Authorised Capital Stock. At present (June, 2021) total
April, 2015 Malaysia member of AIIB is 103.
November, 2015 Manila, Philippines
April, 2016 Laos, Vientiane Asian Development Bank (ADB)
November, 2017 Manila, Philippines
— The Asian Development Bank was established following
April, 2018 Singapore
the recommendations of the United Nations Economic
June-November 2019 Thailand
and Social Commission for Asia and the Pacific.
2020 Vietnam
2021 Brunei Darussalam
— It was formed to foster economic growth and
co-operation in the region of Asia and the Pacific and
to contribute to the acceleration of economic
Regional Financial Institutions development of the developing countries of the region.
The Asian Development Bank (ADB), an international
New Development Bank —
partnership of 68 member countries, was established
— The New Development Bank (NDB) formerly referred to as in 1966, with its headquarter is at Manila, Philippines.
the BRICS Development Bank, is a multilateral development India is a founder member.
bank established by the BRICS states (Brazil, Russia, India, — The bank is engaged in promoting economic and social
China and South Africa). The bank is headquartered in progress of its developing member countries in the
Shanghai, China. The first regional office of the NDB will be Asia and the Pacific region.
opened in Johannesburg South Africa.
— Its principle functions are as follows :
— The idea for setting up the bank was proposed by India at
—To make loans and equity investments for the economic and
the 4th BRICS summit in 2012 held in Delhi. The creation of social advancement of its developing member countries.
a new development bank was the main theme of the —To provide Technical Assistance (TA) for the preparation
meeting. BRICS leaders agreed to set-up a development and execution of development projects and programme
bank at the 5th BRICS summit held in Durban, South Africa and advisory services.
on 27th March, 2013. —To respond to the requests for assistance in co-ordinating
— On 15th July, 2014, the first day of the 6th BRICS summit development policies and plans in developing member
held in Fortaleza, Brazil, the BRICS states signed the countries.
Agreement on the New Development Bank, which makes —To respond to the requests for assistance, co-ordinating
provisions for the legal basis of the bank. On 11th May, 2015, development policies and plans of developing member
countries.
K V Kamath was appointed as the President of the bank. As of