(SS) All Economics by Shyam Sunder Sir CD

NOTES MADE BY AKASH 7589157201 E-5 BATCH STUDENT 2022
 (SS) ECONOMICS SHYAM SUNDER SIR real national Income (not nominal) as real NI
adjusts nominal NI for inflation
 SOURCES  NI Deflator= {Nominal NI ÷ real NI} = measure of
 Class notes  Budget Inflation
 Yellow books  Current events
 CIRCULAR FLOW (C-FLOW)
 Economy survey  NCERT
 SOME TERMS AND CONCEPTS

1. MICROECONOMICS
 Study of economic behaviour from individual
perspective (consumers, producers)
 No Q/A are asked in prelims
2. DEMAND
 Quantity of a goods & Services that a consumer
is willing to buy at different prices  Circular flow of the income and the expenditure
3. SUPPLY reflects interrelationships b/w different
 Quantity of goods & service that a producer is economic sectors
willing to sell at different prices  PFCE:-expenditure on the final goods & services
4. MARKET FORCES made by households to firms. While purchasing
 the term demand & supply are often called as we are contributing to PFCE
Market Forces  HOUSEHOLD SAVINGS=
 rise in demand for goods (same supply) is rise in = {factor income (earning) – PFCE (Spending) }
market prices and vice-versa  Three types of household savings are
 higher supply for goods given same demand = 1) Household savings:- major
decline in market prices & vice-versa 2) Corporate savings:- By firms
5. MACROECONOMICS 3) Govt savings:- by Govt (very less)
 Study of economic aggregates (total) & their behavior
 E.g:-  FACTORS OF PRODUCTION /FACTOR
a) National income(in total)= Economic Aggregate
b) Growth of national income (in total, inflation)=
PAYMENTS:
behavior economic aggregate
1) Land:- natural resource inputs to produce= rent
 INFLATION:- generally rise in prices (aggregate price 2) Labor:- human resource inputs= wages
level . examples:- WPI, CPI etc) 3) Capital:- long term man made resource input=
6. CLOSED AND OPEN ECONOMY interest
 Closed economy:- only domestic sectors interact 4) Entrepreneurship:- risk taking ability= profit
with each other  FOUR TYPES OF ECONOMIC SERVICES
 Open economy:- when a domestic economic 1) Households (HHs)
sectors interact with each other & with external  Group of consumers with similar
sectors consumption habits
 TOPIC:-NATIONAL INCOME 2) Firms
 Companies; producers of goods and services
 Total money value of all final goods and 3) Government
services produced by residents of a country over 4) Financial sector
a period (e.g a year). Money Value= (quantity ×  Banking
Price)  Financial market
1) NATIONAL INCOME AT CURRENT PRICE
(NOMINAL NI)  GOVERNMENT ROLES IN ECONOMY
 Governments acts as consumers of goods and
 Nominal NI= (quantity of productivity of G&S in
services
current year × price of G&S in this current year)
 It acts as provider of services and of infrastructure.
2) NI AT CONSTANT PRICE (REAL NI) Services include public administration, infrastructure
 Real NI= (quantity of productivity of G&S in like schools, hospitals.
current year × price of G&S in this base year)  Govt provides subsidies
 Base year:- Some year before current year (4-5  Govt levies taxes as it is major source of revenue
years before)  Got always borrows from financial sector (money
 While comparing national income over years or banks)
over any time period we should compare the
NOTES MADE BY AKASH 7589157201 E-5 BATCH STUDENT 2022 1
 FINAL & INTERMEDIATE GOODS  GDCF:- GROSS DOMESTIC CAPITAL
 INTERMEDIATE GOODS AND SERVICES FORMATION
 Goods that are used up in production of other  GDCF:- { GFCF + Change in stocks/ inventions }
goods & lose their identity in the production  Change in stocks :- difference b/w the value of
process called intermediate goods or raw materials , semi finished & finished goods at
intermediate goods and services the end of a year (which we also call closing
 FINAL GOODS ARE GOODS THAT ARE EITHER stock or inventories) & at the beginning of a year
a) Consumed finally by households or (opening stock by a firm)
sometimes by government  GDCF also called investment expenditure or
b) Used for further production of goods capital expenditure (capex) or capital formation
without lose of its identity  It determines the economies potential to
 Also called “final consumer goods” achieve long term growth in national income
 Also called “capital goods” (because capital by nature is long-term)
 EXAMPLE:-  RESIDENTS (NORMAL RESIDENTS):-
a) Steel bars are intermediate goods for  Are individuals who ordinarily reside in a country
manufacturing cars and their center of economic interest lies in that
b) Cars by consumers/ govt.= final consumers country
c) Cars by OLA/ UBER = capital goods because  US system of national accounts says that
they reproduce goods & services a) “if an Indian national stays outside India for
 Note:- it always depends on who is buying and a period of less than one year for purposes
using that is it IG or FG like employment, education, tourism etc,
 DEPRECIATION OF FIXED CAPITAL OR then he or she is still Indian resident.
CONSUMPTION OF FIXED CAPITAL b) “if an Indian national stays outside India for
 Gradual loss in the value of capital goods over a a period of more than one year for purposes
long time period (very slow) due to normal wear like employment then he or she is
& tear considered as a resident of foreign country.
 Provision for D.O.F. capital means to keep a  Nationals of a country can be residents & non-
percentage of capital value aside so that it can residents of that country or vice-versa (most
finance new capital after the entire loss in the nationals are also residents)
value  Foreign professionals who are working in India
 Any type of more than 1 year have become residents of India
 Net national income = {Gross NI- Depreciation but not nationals
of Final capital }  EXCEPTIONS:- all govt officials of a country
employed in other countries are always
 THREE TYPES OF EXPENDITURE ON Residents of home country. Example:- diplomats
FINAL GOODS ,members of armed forces , irrespective of
1. PFCE:- period of stay in other country
 Private final consumption expenditure  INSTITUTIONS:-e.g:- companies, NGOs, are
 expenditure on final consumer goods by the residents of country where these are registered
households & these institutions are mainly owned by the
2. GFCE:- residents of home country
 Govt final consumption expenditure  INTERNATIONAL INSTITUTIONS (UN,IMF etc)
 Expenditure on final consumer goods by the  These are not residents of any country which
govt. makes them truly international. Employees
3. GFCF:- working in these institutions may be sometimes
 Gross domestic fixed capital formation residents. E.g:- Indian Person in WHO Delhi is
 The purchase of new capital or new fixed capital Indian Resident
goods by firms, govt, or households  GROSS NATIONAL PRODUCT (GNP) or
 Example:-
 New machinery, setting new company=
GROSS NATIONAL INCOME (GNI)
 Total money value of all final Goods and services
firms
produced by residents of country over a period
 New infrastructure (roads, schools)= govt.
of time, without adjusting for depreciation of
 Purchase of new houses= by households
fixed capital.
 Even if imported it is a part of GFCF if used
for production in India
 NNP: NET NATIONAL PRODUCT  Contribution to Indian economy
a) Primary sector:- 18-20%
 NNP= {GNP-Depreciation of Final capital}
b) Secondary Sector:- 24%
 NNP at factor cost is considered to be ,
c) Tertiary Sector:- 53-58%
conceptually, the best NI measure
 GDP:- GROSS DOMESTIC PRODUCT  METHODS OF GDP CALCULATION
 Official NI measure in India 1. VALUE ADDED METHOD/ NET OUTPUT
 It refers to total money value of all final goods & METHOD/ PRODUCT METHOD
services produced in the domestic territory of a
 Gross value added (GVA) is calculated in this
country, irrespective of ownership, over a period.
 Domestic territory of a country includes territory
method
lying within:-  GVA= { value of gross output of final G&S – the
a) The political control including the territorial value of gross output of intermediate goods}
waters  Only used for GDP calculation Im primary sector
b) Ships, aircrafts etc operated by residents b/w & registered manufacturing in India
two or more countries 2. INCOME METHOD
c) Oil, natural gas rigs etc are operated by residents  Measures of GDP from side of payments made
in international waters to factors of production (wages, rent, interest,
d) The govt officers like embassies located outside
profit)
 GDP CALCULATED IN INDIA
 It estimates the GDP by dividing factor payment
 Done earlier by CSO:- central statistical
into three parts
organization
a) COE: Composition of employees
 Now CSO+ NSSO= merged and called NSO
 Includes wages, salary, either paid by firm or
 NSO: National Statistical organization calculates
govt and payments on social security
the GDP in India, it comes under MOSPT, GOI
benefits related to the employees
 CSO or NSO divides Indian economy into
 Like pensions, PF, insurance etc
three sectors b) OS: operating surplus
1. Primary sector (PS):-  The sum of incomes from property savings
 Uses national resources to produce (interest) and entrepreneurships
commodities. c) MI: Mixed Income of Self employed
 Example:;- wheat, paddy  Sum of wages , rents, interest, profits for
 Includes sub-sectors those self employed who don’t maintain
a) Agriculture & allied sector accounts
b) Forestry  Income method is used for GDP calculation of
c) Fishing un-registered manufacturing, construction,
d) Mining & quarrying (digging) anything that value added method is not doing.
2. Secondary sector
 Like industries , it includes manufacturing,  NFIFA: NET FACTOR INCOME FROM
construction, public utilities (like electricity, Gas, ABROAD
water supply)  Factor income brought by Indian residents for
 It uses the commodities to produce other providing factor services abroad:- FI paid to non-
commodities residents in Indian domestic territory
 Manufacturing can be  GNP= GDP + NFIFA (for India it is negative)
 For India :- GNP<GDP
a) Registered (organised)
 Under Factory Act 1948  BEFORE 2015 NATIONAL INCOME NI
 10 or more hired workers CALCULATION IN INDIA:-
b) Un-registered  NIT: NET INDIRECT TAXES
 Not under Act
 NII= { Indirect taxes - Subsidies}
 Have less than 10 hired workers
 Govt imposes indirect taxes on producers but
 Now these are used for all not producers shift to consumers
manufacturing but for all enterprises  Indirect tax has a very specific impact on cost of
3. Tertiary sector or services production
 Includes the enterprises that do not produce  STEPS
commodities but provide services like a) Value added method
transportation , trading, banking, IT, telecom etc  Used for primary sector and registered
 50% + Indian economy depends upon tertiary manufacturing to arrive at GVA (Gross value
sector added) at market prices (MPs)
 GVAMP= {value of gross output of Final goods 2. Income method is used even now for sectors
at market price – value of gross output of (services, un recognised ) to calculate GVAFC
 GVAFC= {COE + MI+ OS + Provision made for
intermediate goods at market price }
depreciation of final capital }
b) GVAFactor cost = GVAFC = { GVAMP – NIT} 3. For these sectors we get
c) Income method  GVABP = GVAFC + Net production taxes
 was used for other sectors (services, 4. GVABP is aggregated (summed) for all sectors to
unregistered) to get GVAFC for these sectors get GDPBP
 GVAFC= {COE + MI+ OS + Provision made for 5. GDPMP= {GDABP + net product taxes }
depreciation of final capital }  GDPMP is official national income measure
 COE= Compensation of employees after 2015
d) GVAFC= was added for all sectors to arrive at  Now we have a mid-way= base price b/w FC &
GDPFC official NI measure in India Before 2015 MP
 Why this change:- Govt said it is only following
 AFTER 2015 NATIONAL INCOME (int…) UN system of national accounts
(NI) CALCULATION IN INDIA:- recommendations of 2008
 Base year for NI calculation has been changed  Main criticism of this method:- GDPFC is
from 2004-2205 to 2011-12 conceptually better than GDP at MP. GDPMP as it
 GDPMP is now used as official NI measure excludes the role of transfer payments in NI
replacing GDPFC accounting (one-sided payments)
 Method of calculation has been changed
 THIRD METHOD OF NI CALCULATION
 GDPMP has changed it is not same as before 2015
{EXPENDITURE METHOD/ DEMAND
 SOME CONCEPTS
SIDE OF GDP (method) }
1. Production taxes or subsidies
 It measures GDP from the side of expenditures
 Are paid or received in relation to
made of final goods and services by different
production but independent of volume of
sectors (households, firms, govt etc)
actual production
 LOGIC BEHIND THIS METHOD:-
 Example:-
 GDP:- {C+I+G+NX}
 Production of taxes= land revenue, stamp
 C=consumption expenditure (PFCE) by household
duties
 I=investment expenditure GDCF by firms to
 Input subsidies= fertilizers subsidy
others
2. Product taxes or subsidies  G=govt final consumption expenditure
 Are paid or received per unit of the product  NX=Net exports imports
 Example:-  This method is used in policy making in relation to
 Product taxes:- GST, exercise duty GDP growth , inflation etc
 Product subsidies:- food grain subsidies, LPG  Note:- whenever questions on policy making impact
subsidies use it for answer writing
3. Value of goods and services at basic prices  DIFFERENCE BETWEEN ACTUAL GDP
(BP)
 Refers to the amount receivable by the
& POTENTIAL GDP
producers of goods and services from the 1. ACTUAL GDP OR ACTUAL DEMAND
purchaser per unit of the output inclusive of  The value of final goods & services actually
net production taxes but does not include produced within domestic territory
net product taxes 2. POTENTIAL GDP
 Net production taxes= { production taxes –
 What an economy can potentially produce if
production subsidies} all resources (land, labor, capital) are fully
 Net product taxes= { product taxes –
employed at their normal levels of utilization
product subsidies}
 GDP Gap (Output Gap):-{ GDPPOTENTIAL-
 STEP TO CALCULATE GDP AFTER 2015 GDPACTUAL}
1. GVABP is calculated for primary sector registered  Output Gap= {P.GDP-A.GDP}
manufacturing by Value added method  CONDITIONS:-
 GVABP 1) P.GDP >A.GDP
 ={value of gross output of final G&S at BP -value a. Resources are not fully employed at
of gross output of intermediate G&S at BP} their normal utilization level

b. Example:- unemployment or factories  COMPARISON OF MER & PPP
c. Indicates economic slow down MER PPP
d. Solution:- create employment, ensure
factories machines working at full Rs75/$ Rs22-25/$
potential More imports = more Lower for countries
2) P.GDP < A.GDP demand for dollars= with lower cost of living
a) Indicated more MER
 Economic growth or boom  GDPMER (Rs GDP to $GDP) > GDPPPP (Rs to $GDP)
 Employment everywhere  If both are converted into Dollars
 GDPMER < GDPPPP
 GDP growth is occurring th th
 India’s rank on basis of MER= 5 , 6
b) Problem
 India’s rank on basis of PPP= 3rd largest
 Resources are employed (exploited) economy
beyond their normal utilization level
 Example:- extra (exploit) hours of work …….Three classes now been done………
 Demand of GDP > Supply GDP  THE MONEY AND BANKING
 Demand of GDP higher inflation
demand pull inflation  MONEY:-
a) Assets that are liquid in nature
 INTERNATIONAL COMPARISON b) Anything that can be used to buy goods and
OF GDP (Needs):- services
c) Medium of exchange
 EXCHANGE RATE d) Which assets:- currency + demand deposits
 Number of units of a domestic currency (Rs) (deposits with banks that can be easily with
needed to exchange it for one unit of foreign drawn)
currency (hard currency =acceptable globally  MONEY SUPPLY:-
currency e.g dollar of USA)
 Amount of money with public
 To bring all GDP in common currency we need
 Public:- any entity except banks & government
an exchange
 Money:- currency + DD
1) MARKET EXCHANGE RATE (MER)  Example:- Home land (Bank) to  Household,
 Determined through interaction b/w results in increase of money supply
demand and supply of a foreign currency in  Therefore, any loan given by banks will increase
the domestic economy money supply
a) DEMAND BY  Note:- 1 lakh given as loan to a man, man
 Importers buy dollars as they need to pay deposited the cheque and immediately
dollars for their imports withdrawn = results= no change will happen in
b) SUPPLY DOLLARS BY money supply because currency =DD= same
 By exporters who sell it for rupees in  In general:-
domestic economy at least major part  Ask yourself when question comes that what is
c) MER is not a good representative of Indian change in currency & DD, are they increasing or
GDP as share of exports is rare decreasing or same
d) MER is very useful in international  Even also focus on direction where it is coming
transactions & going e.g:- I pay tax to govt then (govt
2) PURCHASING POWER PERITY (PPP) BASED account)  so currency supply decreases
EXCHANGE RATE  MONEY DEMAND
 PPP= The amount of rupees needed in India to  The purpose for which money is held
buy the same consumption basket that can be  Three types
bought for 1 dollar in USA 1) Transaction demand
 𝐏𝐏𝐏 𝐞𝐱. 𝐫𝐚𝐭𝐞 =  Money as used a medium of exchange –buying
𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐨𝐧 𝐜𝐨𝐦𝐦𝐦𝐨𝐧 𝐜𝐨𝐧𝐬𝐮𝐦𝐩𝐭𝐢𝐨𝐧 𝐢𝐧 𝐈𝐧𝐝𝐢𝐚
{ } goods and services
𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐨𝐧 𝐜𝐨𝐦𝐦𝐦𝐨𝐧 𝐜𝐨𝐧𝐬𝐮𝐦𝐩𝐭𝐢𝐨𝐧 𝐢𝐧 𝐔𝐒𝐀
 for expected needs like rent, fees, anything we
 It is useful, used when exchange rate is needed
know
for purposes other than international
 Depends mainly on income
transactions
 Income↑↑↑= G&S↑↑↑= Tran. Demand↑↑
 For Indian GDP at least, the common
consumption basket has biggest share in GDP 2) Precautionary demand
than exports  Demanding money to meet certain un-expected
emergency needs
 Example:- suddenly sick, using money for all
 It also depends upon your income
3) Speculative demand
 Where money is used as a store of value (means
that gives returns)
 Example:- interest rate
 Currency itself is not a store value, so it is
basically demand deposits where we get some  Foreign institutional investors (FII):- foreign
returns as a form of like interest investors like firms coming & buying bonds,
 Depends on the interest rate on bond, money shares etc in India
 SUBSTITUTES OF MONEY AS A STORE
OF VALUE
FEATURES OF BONDS
1) FACE VALUE OF BOND:-
 In each we get return in some form or other  principal amount of loan raised by bond issuer
form
1) Bonds 2) INTEREST RATE OF BOND:-
a. Interest here is higher than demand  Return to bond holders. Generally market
deposits’ interest determined that means determined through
b. Bonds are not a part of money they are interaction b/w demand and supply of money
substitute because they are not liquid  Interest on bonds = opportunity cost of money =
c. I cannot use it to buy goods & services like price on money (as interest on money)
2) Shares  Opportunity cost is simply return on next best
3) Gold alternative (where more interest is given like on
4) Property (buying) bonds or shares )
 Note:-  It is also defined as what we lose or sacrifice
 Higher interest on bonds then the speculative while holding an assets or while making a choice
demand and will be lower  Interest rate on bond is fixed once bond is
𝟏
 Speculative demand of money ∝ 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐨𝐧 𝐛𝐨𝐧𝐝𝐬 purchased. It makes bonds less risky than any
 Example:- other financial instruments like share for
 I have 1 lakh in saving account investment
 Need:- 3) MATURITY VALUE OF A BOND
 For transaction demand(expected) = 50,000
 Value at the end of the maturity period of a
 for unexpected things (like) disease etc +
precautionary demand = 20,000Rs
bond = Face value of bond + Interest amount
 left after meeting expected and un-expected  Example:-
demands= 30000Rs  A bond has face value= 100rs
 Now= Rs10000 plan to use as  Maturity period = 1year
a) bank deposit=5% interest rate  Interest = 10%
b) Bond 7% interest rate  After one year Maturity value= 100+ 10% of
 You put 10,000 in bonds at 7% interest rate 100= 110 Rs
 Now :- bonds rate of interest goes up to 8% so  Maturity value:-{ FV + (FV × r%×Time)}
 You put 5000/ to bonds more
 15000/ is now bonds shifted from your banks so here 4) BOND PRICE
bonds interest rate increase = speculative demand of  As loans are not tradable but bonds are tradable
money decreases  Bonds can be bought and sold
 Because from 20,000 left money in Bank at bank’s  Bond price and bond interest are two different
interest rate is now 15000 (Decreases) & Bonds :- things
10000 to 15000 (increases)  Bond price is also determined by market , means
it is market determined through interaction b/w
 TOPIC:- THE BONDS demand and supply of bond
 Refers to financial instruments used by the  Demand and supply depend upon
issuers to raise funds in the form of loans a) Funds needed by bond issuer
 Fundamentally, We mainly talk about bonds, b) How many bonds buyers willing to pay
shares as financial instruments In the form of  Bond price often ranges b/w face value &
loans ,only used in Bonds not in shares mature value of the bond
 Bonds are always in form of loan shares are not  Example:-
 In any Bond there are two entities  Let face vale of bond= 100Rs
 Mature value = 110Rs

 Bond Price lies b/w= 100 to 110 Rs c) 364month TBs=
 Note:-  These are used only by center not state
 Sometimes bond price may go down the face  Issued as “zero coupon bond” :- coupon in
value (like here 99,98,…..) only when bond bonds means interest rate is zero but the bonds
holder is in immediate need for the liquidity  it are provided at discounted price not issued on
would be loss for bond issuers face value so
 However, Bond price will not exceed the mature  Return (profit)= face value- discounted price
value because holder cannot get more than the 2) DATED GOVT SECURITIES
fixed interest rate at the end (like here 10% rate,  For long term i.e. maturity period is more than
110 he gets so)(no more tan 110:- can anyone one year
buy ? :- Not is the answer)  Issued by both centre and states as these loans
5) BOND YIELD in form of bonds are taken by govt (both) for
 Bond yield = ×100 developmental purposes
 State development loans:- when dated govt
 Bond yield ∝ interest amount of bond ∝
securities bonds are issued by state govt called
 Yield:- real returns or net returns from something SDLs
 Example:- let say:- federal reserve (Bank USA)
increases the interest rate (Repo rate in India like)
….4th ended…5th class started….
leads to less demands for bonds by FII in India as they
now can earn more interest in USA (their country)  TOPIC:- MONEY MARKET
leads to lower bond price leads to higher bond yield  Short term , maturity period is less than 1 year
 Regulated by RBI and are of three types
 TOPIC:GOVERNMENT BONDS OR 1) OVERNIGHT MONEY MARKET
GOVERNMENT SECURITIES  Loan for 1 day maturity period
1) Issued by govt  Used by mainly banks for short term liquidity
2) Acknowledgment of govt borrowings from management
Banks, Public, FII etc  liquidity management:- if the banks facing lack
3) Most of the govt securities are purchased by of liquidity they borrow , and in surplus they
banks then by pubic + FII lend
4) RBI:- regulates it as it arranges the primary
2) NOTICE MONEY MARKET
(new) auctions of government securities
 Loan for 2 to 14 days maturity period
5) RBI: RETAIL DIRECT SCHEME 2021
 Public (households + firms+ FII) can now also buy 3) TERM MONEY MARKET
primary govt securities before that only banks  Loan for 15 to 364 days maturity period
were allowed
 MONEY MARKET INSTRUMENTS
6) GILTEDGED
 Tell us using some certificate / bonds who is
 Govt securities are gilt edged means best in
borrowing/lending etc
quality because they are the least risky among
 Tell us about who is
all other types of bonds (who are also less risky
a) borrower/lender
not least) + govt securities also provide fixed
b) interest rate determination :- often market
returns as fixed (even other also do)
determined but some exceptions are still
7) MARKET DETERMINED INTEREST RATE
present
 Govt securities interest rate is often market
determined. 1) TREASURY BILLS
 Exception:- However one exception is there i.e.  Short term, maturity period is less than ‘one
inflation index bonds (IIBs) that govt securities year’
whose returns depend upon both interest +  Further three types
inflation d) 3 month TBs= 91days
e) 6 month TBs= 182days
 TYPES OF GOVT SECURITIES f) 364month TBs=
1) TREASURY BILLS (TBS)  These are used only by center not state
 Short term, maturity period is less than ‘one  Issued as “zero coupon bond” :- coupon in
year’ bonds means interest rate is zero but the bonds
 Further three types are provided at discounted price not issued on
a) 3 month TBs= 91days face value so
b) 6 month TBs= 182days  Return (profit)= face value- discounted price

2) CALL MONEY MARKET
 Call loans or call borrowings
 Mostly inter-bank loans (borrowers & lenders
both are banks)
 Sometimes, but, lender can be financial
institutions which are not necessarily a bank, but
borrower will be bank
 Interest rate = market determinant not by GOI
and RBI. Here interest rate is called “call money
rate or interbank offer rate (IOBR) or call rate”
 These are non-tradable
 Roles of call money rate
a) Acts as indicator of liquidity situation in
banking sector. Therefore
 Liquidity problem ∝ Increase in IBOR
 Regular Increase in IBOR considered as
increase in economic crisis and banking crisis
b) It acts as bench mark lending rate
(benchmark loan interest rate) (benchmark
means lower- difficult to borrow below this  Commercial bank here is giving guarantee so
rate) that the buyer can issue commercial bill without
3) CERTIFICATE OF DEPOSITS (CDS) it buyer cannot issue (why guarantee- to make
 Issued by banks to raise short term funds from CBs less risky)
public  Bank rate = RBI determined= it is interest rate at
 Borrower= bank which RBI is ready to rediscount the commercial
 Lender= public bills brought by banks. It means bank rate is a
 Somewhat similar to fixed deposits (FDs) type of interest rate at which banks can borrow
 Interest rate = market determined from RBI using commercial bills not using govt
 CDs are always short times but FDs are both securities
short + long times 6) REPO MARKET
 CDs are tradable but FDs are not  Repo means “repurchase obligation”
4) COMMERCIAL PAPERS (CPS) a) OBJECTIVE
 Issued by companies to raise short term funds a) Banks can take short term loans from RBI
from public using govt securities (imp) not using
 Borrower= companies commercial bills
 Lender= public b) When bank is in need of loan, it can sell the
 Interest rate= market determined govt securities (mostly treasury bills) to RBI
 CPs are tradable and can be issued by both with a promise to repurchase these govt
banks and companies securities later at higher price (later means
5) COMMERCIAL BILLS OR BILLS OF maturity period)
b) REPURCHASE PRICE:-
EXCHANGE (CBS)
 Issued by a company (buyer) to raise short term =Loan value + {𝐥𝐨𝐚𝐧 𝐯𝐚𝐥𝐮𝐞 ×𝐦𝐚𝐭𝐮𝐫𝐢𝐭𝐲
𝟑𝟔𝟓
𝐩𝐞𝐫𝐢𝐨𝐝×𝐫𝐞𝐩𝐨 𝐫𝐚𝐭𝐞
}
funds from some other company (lender)  Example
 Borrower= company  Let bank borrowed= 100rs for 30 days
 Lender= other company 𝟏𝟎𝟎 ×𝟑𝟎 ×𝐑𝐑%
 Re…rate=100+{ 𝟑𝟔𝟓
}
 Interest rate =market determined
 CBs are tradable c) REPO RATE:-
 Also called “Inter-corporate loans”  Rate at which RBI gives loans to banks who used
govt securities to get loan
 Discounting CBs:-  Repo rate ∝ Repurchase rate∝ costlier the loan
 A seller company can take CBs to bank of buyer
 Therefore repo rate is an interest rate at which
fails to return loan payments because bank gives
banks can take short term loans from RBI using
guarantee and bank gives loan to seller charging
govt securities
discount rate
 In repo market bank can take short term loans
by selling govt securities to RBI and
repurchasing them later at a higher price, 5) TOTAL RESERVES
determined through repo rate  Parts of deposits with bank that is not given as
 Interest rate = RBI determined loans
d) REVERSE REPO RATE  Part may be 0.2= 20%, but variable in nature
 Bank with surplus funds can buy govt securities  Means 80% = loan can be given from total
from RBI and re-sell these govt securities later at  20% reserved
higher price determined through the reverse  Two types of reserves are
repo rate a) Required reserve
 Acts as deposit rate that banks can earn from  Reserves that banks are statutory (by law)
RBI required to keep with RBI (as CRR)
 Repo rate >>> reverse repo rate :- always  CRR:- cash reserve ratio= concept arose here
because lending rate is always higher than 𝐫𝐚𝐭𝐢𝐨 𝐨𝐟 𝐫𝐞𝐪𝐮𝐢𝐫𝐞𝐝 𝐫𝐞𝐬𝐞𝐫𝐯𝐞
deposit rate  CRR:- 𝐍𝐃𝐓𝐋
× 100
 BANK RATE+ REPO RATE + REVERSE REPO RATE  CRR now is = 4%
 RBI determined , not by market  No return is given by RBI and cannot use it
 RBI uses them as monetary policy instrument to give loans
 However, they impact market but they are not b) Excess reserve
market determined  Banks can maintain in excess of required
reserve with themselves (voluntarily)
 CREATION OF MONEY SUPPLY  For short term liquidity management
 Certain basic things before knowing creation of
money supply  SIMPLIFIED BALANCED SHEET OF RBI
1) ROLE OF COMMERCIAL BANKS  Assets , Liabilities should match
 Accept deposit from public and pay interest rate LIABILITIES ASSETS
called “deposit rate” for us and borrowing rate 1) Currency in circulation 1) Loans to
for banks (because it does not give a) Banks= repo market
 Banks provide loans to public & charge interest return after printing b) GOI= ways & means
rate called lending rate notes):- major part with advances
 Lending rate >>>> borrowing rate public and minor part c) Others= financial
 Deposits are liabilities of banks as they do not
with bank institutions
2) Banks deposit with RBI 2) Investments (very
get return from deposits
3) Govt deposit with RBI diverse)
 Loan are assets of banks = gives returns
4) Other’s deposit with RBI a) Domestic
 Deposits are of two types (national + International)  Govt securities
DEMAND DEPOSITS (DDs) TIME DEPOSITS (TDs) 5) Others liabilities  Other securities
Can be demanded and Cannot be withdrawn 6) Example:- dividend paid b) Foreign
withdrawn unless return is sacrificed by RBI to GOI  Foreign govt
Example Example securities
Current account Fixed deposits  Foreign
Demand liabilities of Tie liability of saving currencies
saving account deposit account deposit 3) Gold
 Example:- saving A/C=100000Rs 4) Other assets
 Minimum balance limit= 20000  High Powered money:- Total liabilities of RBI , has
 Can withdraw now= 80000Rs potential to create higher amount of money supply
th th
 Demand liabilities of saving A/C deposit = time ………5 class ended , 6 class started…………
liability of saving A/C deposit= 80000 Rs  THE PROCESS OF MONEY SUPPLY
2) DTL: DEMAND & TIME LIABILITY OF BANK CREATION / THE PROCESS OF MONEY
 DTL= {DDs + TDs with a bank}= liability of bank MULTIPLIER
 Net DTL= {DTL (liability) – Deposits of bank with  Steps involved please understand through an
other banks or with RBI(assets) } example
 Why:- for short term liquidity management 1. First central bank buys as In India- RBI purchases or
buys some assets worth some amount like Gold
3) CASH DEPOSIT RATIO (cdr)  RBI buys of money Rs=H
 cdr=
𝐀𝐦𝐨𝐮𝐧𝐭 𝐨𝐟 𝐦𝐨𝐧𝐞𝐲 𝐡𝐞𝐥𝐝 𝐢𝐧 𝐟𝐨𝐫𝐦 𝐨𝐟 𝐜𝐮𝐫𝐫𝐞𝐧𝐜𝐲  Seller get payment in Cheque form of same amount H
𝐦𝐨𝐧𝐞𝐲 𝐡𝐞𝐥𝐝 𝐢𝐧 𝐟𝐨𝐫𝐦 𝐨𝐟𝐝𝐞𝐦𝐚𝐧𝐝 𝐝𝐞𝐩𝐨𝐬𝐢𝐭 from RBI
4) RESERVE DEPOSIT RATIO (rdr) 2. Seller deposits cheque in Bank’A’ , have two parts
𝐭𝐨𝐭𝐚𝐥 𝐫𝐞𝐬𝐞𝐫𝐯𝐞 𝐰𝐢𝐭𝐡 𝐛𝐚𝐧𝐤 a) withdrawn as currency (H/2) or
 rdr= 𝐍𝐃𝐓𝐋 𝐨𝐟 𝐚 𝐛𝐚𝐧𝐤 (𝐭𝐨𝐭𝐚𝐥 𝐝𝐞𝐩𝐨𝐬𝐢𝐭) b) left as demand draft (H/2)
 money supply created till now is ‘H’ 2. Factors effecting rdr
 cdr will be determined  RBI increases CRR=↑rdr=deposit↓= credit
3. Bank “A” has now “H/2” divides it into two parts creation↓=MM↓
a) Reserves { 0.2 × (H/2) }  Any factor leads either lower cdr or rdr will
b) Loans to public { 0.8 × (H/2) }
always lead to MM↑ and vice-versa
 It will determine Overall reserve deposit ratio (rdr), If
 In money supply we also talk about Monetary
rdr= 0.2
4. Suppose { 0.8 × (H/2) } is loan given to firms – and aggregates
5.
they use it for wages for workers
{ 0.8 × (H/2) } now wages get deposited in some
 MONETARY AGGREGATES :-
 different measures of money
other banks where workers have bank accounts
suppose bank”B”  Four types given by RBI
 Workers divide their wages 1. M◦ or reserve money = {currency in
a) withdrawn as currency { 0.8 × (H/4)} circulation + bank’s deposit with RBI + other
b) left as demand draft { 0.8 × (H/4)} deposits with RBI}
6. Bank’B’ has now { 0.8 × (H/4)} DD and it divides it into  Reserve money is part of High powered
two parts and if rdr=0.2 money
a) Reserves { 0.16 × (H/4) } 2. M1 or narrow money = {currency with public
b) Loans to public { 0.64× (H/4) } + DD deposit with banks+ other deposits
 NOTE:- this process continuous and if everyone has
with RBI}
bank account this process will be infinite
 Total Money supply created in this example (M )
s 3. M2 = { M1 + Short-term time deposit of
 M = H + { 0.8 × (H/2) }+ {0.8/2) H + - - - -
s 2 resident with banks }
 H cannot be negative 4. M3 or broad money = { M2 + long-term time
 So this { 0.8 × (H/2) }+ {0.8/2) H + - - - - } entire
2 deposit of resident with banks + all loans
part must be positive taken by banks from financial institutions
 Therefore M > H
s
 As we move from M1 to M3
 So called as Money Multiplier process as money a) there is an increase in coverage of Money
supply created in multiple amounts of “H” supply
s
 Money Multiplier = { M ÷ H } b) there is decrease of liquidity of money
 It refers to the amount of money supply created supply
out of each rupee increase in High powered  Money multiplier = {M3 /H } generally in India it
money (H) by the RBI
is used
 CONDITION FOR MONEY MULTIPLIER
PROCESS IS  BROADER LIQUIDITY AGGREGATES :-
 Every depositor does not withdraw deposits  looks into contribution of money supply not by
from banks simultaneously or at the same time banks but also by post-offices , NBFCs
 three in number
 If this condition fails or not true then there will
be no credit creation by banks and there will be a) L1
failure of money multiplier process called bank b) L2
Run (means banks fails to create credit ) c) L3
 For investment loans needed and so money  Read from yellow book
multiplier is very crucial for investment and  NBFCS (NON-BANKING FINANCIAL
ultimately GDP growth COMPANIES )
 FACTORS AFFECTING MONEY  FEATURES :-
A. Companies with core business related to
MULTIPLIER:- providing financial services like giving loans
 Affected by Factors effecting Cdr and rdr  Similar to banks and most features are
1. Factors effecting Cdr comparable with banks
a) Number of bank accounts in economy:- B. Some types of loans giving NBFCs
 If it increase cdr decrease and money 1. Asset finance companies :- give loans to buy
multiplier (MM) increases assets (moveable assets ) like automobiles ,
 Bank accounts↑= cdr↓= DD↑= credit tractors
creation↑=MM↑  E.g Mahindra finance Ltd, Bajaj finance ltd
b) Change in banking habits of public 2. Housing finance companies
 Digital transactions↑= withdrawal↓ = cdr↓ 3. Gold loans companies :- gold as security
= MM↑ they provide loans e.g Muthoot finance Ltd
 So when cdr is effected mark the answer 4. Micro-Finance Institutions (MFIs)
 Provide microfinance based credit
 Smaller amounts of credits are given to SHGs
 TYPES OF MONETARY POLICY
(self-help groups ) 1. EXPANSIONARY MONETARY POLICY
 Often at lower interest rates on amount of  Also called easy or cheap money policy
like 2 lakh , 3 lakh  Here MPC tries

 Give to groups of low income (social issues )  to keep credit cheaper (means lower
C. Types of non-loan giving NBFCs interest rate on credit )

 to make more demand of credit from public ,
1. Insurance companies
 which leads to
 Life , health , motor , travel insurance and
many more companies  higher consumption expenditure and
 Take risk
investment expenditure (Higher money
 Regulated by IRDAI ( regulate all insurance
supply )
 Higher consumption expenditure and
companies)
2. Core investment companies investment expenditure leads to higher GDP
 Buy shares and bonds of other companies 2. CONTRACTIONARY MONETARY POLICY
 Example mutual fund companies  Also called Dear or tight money policy
 Regulated by SEBI  This policy Impacts Demand pull inflation
D. NBFCs are mainly regulated by RBI  Here MPC tries
E. Types of NBFCs  to keep credit costlier (means high interest
a) Deposit accepting NBFCs (NBFC-B) rate on credit )
b) Can accept time deposits only  to make less demand of credit from public
c) NON-Deposit accepting NBFCs (NBFC-ND)  which leads to
 NOTE:- NBFC cannot accept DD ( main difference  lower consumption expenditure and
between banks and NBFC) investment expenditure (lower money
F. NBFCs :- raise funds from banks (loans ) and use supply )
it to give loans to public, and sometimes also  lower consumption expenditure and
issue Commercial papers (CPs) and raise funds investment expenditure leads to lower GDP
G. NBFCs:- often charge higher interest rates on & lower inflation
loans than that of the banks  Inflation-Growth conflict :- lower GDP &
lower inflation , here Monetary policy tries
MONETARY POLICY to control inflation will also reduce the GDP
 M-Policy related to cost and availability of credit growth and vice-versa
 Cost depends on Interest rate on credits  RBI facing this currently in INDIA
(Loans)  INSTRUMENTS OF MONETARY
 M-Policy related to money supply (money
supply can be impacted by Monetary policy and POLICY
other policies like fiscal policy )’ 1. QUANTITATIVE INSTRUMENTS
 Overall Objectives of Monetary policy
a) To control inflation (inflation targeting)
A. CASH RESERVE RATIO (CRR)
 Minimum proportion of NDTL that the banks are
b) To impact GDP growth
statutorily required to keep with RBI
 M-policy regulated by :- Monetary Policy
 CRR currently = 4%
Committee (MPC)-with major role of RBI
 Working of CRR
 MONETARY POLICY COMMITTEE (MPC)  Higher CRR by RBI leads to  higher reserve
 founded =2016 deposit ratio (rdr)  less funds will be available
 total = 6 members to banks to give loans to public  costlier loans
 3 of RBI including Governor of RBI who (high interest rate ) less demand for loans 
is chairman and has right to cast vote lower money supply (lower consumption
 3 Nominated by Government expenditure and investment expenditure)
 So higher CRR would be contractionary policy
 Before 2016 RBI alone managed Monetary
Policy but after 2016 RBI has still upper hand B. STATUTORY LIQUIDITY RATIO (SLR):-
but has to work with Nominated members  Minimum proportion of NDTL that banks are
also statutorily required to keep in some specific
 Main objective of MPC = to keep CPI forms with themselves
inflation in range of {2%-6%} per annum  Kept in Specific forms like (some write forms as
asset)

a) Government securities (preferred way by  Understand by Example
banks as they give fix and secure returns )  Suppose a bank is having surplus funds uses
b) Excess reserve it to buy Government securities from RBI. If
c) Deposits with other banks this bank needs a Repo loan later, same
d) Gold government securities can be used
 Working of SLR  LIQUIDITY ADJUSTMENT FACILITY (LAF)
a) Higher SLR by RBI leads to  higher excess  It is a facility provided by RBI to banks to
reserve  higher rdr  less funds will be manage short-term liquidity mismatch
available to banks to give loans to public  through repo and reverse repo markets
costlier loans (high interest rate ) less  Mismatch means sometimes banks have
demand for loans  lower money supply more money or sometimes have less money
(lower consumption expenditure and  Same upper example can be used here
investment expenditure)  LAF is important for prelims
b) Crowding-out effect or process :- Higher SLR  LAF instruments are repo rate (RR) and
by RBI  banks buy more government reverse repo rate (RRR) not CRR and SLR
securities  means government is  LAF corridor = ( RR – RRR) = difference
borrowing more from banks less funds will between RR and RRR
be available to banks to give loans to public  MARGINAL STANDING FACILITY (MSF)
 costlier loans (high interest rate ) less  RBI provides overnight loans to banks at
demand for loans  lower money supply different interest rate often higher then
(lower consumption expenditure and repo rate
investment expenditure)  Why higher interest rate :- as RBI helping in
 Crowding-out effect or process:- immediate emergency so it charges premium
effect  Under MSF banks can use SLR government
 Note:-government is borrowing more from securities. It is a simultaneous use of
banks:- used for welfare like creating Jobs or government securities for SLR and for taking
giving subsidies and leads to increase money loans
supply (slower impact )
 STANDING DEPOSIT FACILITY (SDF)
 CRR or SLR  Banks can keep their surplus fund with RBI
 CRR is more effective Monetary policy and can earn an interest rate without need
instrument than SLR , as in CRR – banks have to buy Government securities
to keep money with RBI (no flexibility ) but in
SLR there is some flexibility D. OPEN MARKET OPERATIONS (OMOS)
 There is no repurchase obligation
 SLR impact may be different depending upon
 Here RBI says it wants to buy government
which forms that banks choose to keep SLR
securities from banks, banks cannot deny
………6th class ended and 7th started………..
 Are of two types
C. REPO RATE + BANK RATE a) RBI buys government securities from banks
 Meaning we did before so going to discuss direct
 It will lead to increase with liquidity with
working banks or banks will have more money 
 Working of repo rate banks have more funds for loan lower
 Suppose RBI increases RR or Bank rate it interest rates  more demand for loans 
encourages bank to keep higher excess reserves money supply will increase  higher money
as lending from RBI gets costlier for banks (banks supply
need this lending for Short term liquidity b) RBI buys government securities from banks
management)  higher reserve deposit ratio
(rdr)  less funds will be available to banks to  It will lead to decrease with liquidity with
give loans to public  costlier loans (high banks or banks will have less money 
interest rate ) less demand for loans  lower banks have less funds for loan higher
money supply (lower consumption expenditure interest rates  less demand for loans 
and investment expenditure money supply will decrease  lesser money
 If RR and Bank rate have same working then supply
why RBI changes RR often Why not Bank Rate  Conventional monetary policy
 Because banks prefer to take loan on RR due  Monetary policy that impacts money supply through
to Inter-linkage between repo and reverse changes in the interest rates on the loans
 CRR, SLR , RR, RRR, Bank Rate , OMOs all are related
repo market
to conventional monetary policy
E. QUANTITATIVE EASING (QE) a) TLTRO {targeted Long term repo Operations
 Also a type of monetary policy instrument  RBI provided long term loans to banks at
but not much used in India repo rate, provided that the bank should
 Non-conventional monetary policy means give cheaper loans to the targeted sectors at
money supply increases without change in lower interest rate like MSMEs and NBFCs
interest rate  RBI is favoring here borrowers like MSME
 It refers to large scale purchase of different and NBFCs
types of securities (Govt + other like b) Differential rates of interest
corporate bonds) by the central banks from  RBI instructs the banks to give cheaper loans
Banks and Public to relatively less privileged sectors like
 All in all it will lead to high money supply Agriculture and MSME
 Very strong expansionary monetary policy of c) Moral Suasion
higher degree means very high degree of  RBI gives certain informal instructions
money supply related to monetary policy to the banks
 Often used by developed countries like USA, through a public forum called moral suasion
Germany , Japan etc when there is either a  Informal means these instructions are not
economic slowdown (GDP is coming down) binding to banks
or even there is recession (GDP goes  Sometimes it is very effective policy
negative, worst form of economic  Public forum means like RBI governor visits
slowdown) and the interest rates are very a college and gives lecture and says “banks
low that it cannot fall further should reduce interest on education loans”
 LIQUIDITY TRAP etc is informal but through public forum
 When the interest rates are very low d) Else read in yellow book
that it cannot fall further
 QE can also lead to very high inflation  MONETARY POLICY TARGETING
(reason why it is not used much in India) as  Whether the impacts of monetary policy have
in QE currency printing is involved to pay for reached the public?
buying securities  If yes then it is good MPT or ideal MPT
 Tapering of QE:-simply means stopping of  If No then it is poor MPT or bad MPT
QE because of very high inflation and lead to  Example
less foreign investments {(impact on share  In any monetary policy there are three stake
market , in India like Rupee depreciation)} in holders (RBI + Banks + Public)
developing countries as currency printing  Good MPT
will also be made less to stop QE  RBI lowers the Repo Rate  Banks
F. SOME NEW INSTRUMENTS OF lower the loan interest rate by similar
percentage  Public
MONETARY POLICY USED BY RBI  Here banks get less profit
 Two examples (Especially after Covid-19)
 Bad MPT
1. GSAP (Government securities acquisition  RBI lowers the Repo Rate  Banks do
program):-
not lower the loan interest rate by
 RBI promised to buy Govt. securities worth similar percentage  Public
around Rs. 1.2 lakh crores from banks during
 Here banks get more benefit
2021-22
 The contractionary monetary policies are often well
 Rs. 1.2 lakh crores is large amount transmitted , as it gives more profits to banks
 Makes monetary policy very predictable  When it is an expansionary monetary policy MPT or
 Limitation :- good MPT is more challenging as banks are not
 Similar to QE as large amount of purchase is getting more benefited
included and leads to inflation  WHAT STEPS RBI DOES TO GET
2. LTRO {Long term repo Operations } TRANSMISSION OF EXPANSIONARY
 RBI provided long term loans to banks at repo POLICIES AND TO ENSURE EXPANSIONARY
rate POLICY IS WELL TRANSMITTED
2. QUALITATIVE INSTRUMENTS 1. BPLR {Benchmark prime lending rate}
 Introduced in 2004
 Under qualitative instruments , RBI can
 Should act as the lowest interest rate that banks
differentiate among the borrowers
should charge on loans ,even for their prime

borrowers {prime means less risky and good  Decided by banks
borrowers)  Includes operation cost with cost of funds
 RBI believes if such concept followed well then there  Differences
is a better transmission of expansionary policy.
 MCLR should be dependent on marginal cost of
understand by following example
funds (marginal means additional or immediate
 Example in economy)
 Option 1:- bank decides that prime borrower will  dependent on marginal cost of funds :- Money
get very cheaper loan & charge higher interest spent by banks when they are in immediate need
rate from common borrowers of money and banks take money/loan from RBI
 Option 2:- prime borrowers can get less cheap on repo rate when there is immediate need
loan (relatively) and banks charge relatively less  Therefore MCLR should be dependent on repo
as compare to high rates from common rate changes or it should change with repo rate
borrowers  So banks are obliged to change MCLR with
 For good MPT second option is best change in repo rate within a time period
 BPLR was successful about 4 years generally of 2-3 months
 BPLR is decided by banks, concept was brought by  RBI is still not happy with this time period even
RBI as banks have to follow rule that BPLR should be before/after Covid-19 so it brought new term
determined through cost of funds to the banks. called external benchmark rate
 cost of funds to the banks means the borrowing rate 4. EBR {EXTERNAL BENCHMARK RATE}
/ deposit rate we get on our deposits in banks  Under the EBR framework the banks should link (or
 Main limitation tie) their lending rates to one of the three EBRs (as
 the deposits rates can be of many types and RBI following)
did not specify the type of deposit rate a) Repo rate
2. BASE RATE b) Three months treasury bill yield
 Introduced in 2010 c) Six months treasury bills yield or to any market
 Also the lowest interest rate that banks should determined interest rate published by an agency
charge on loans ,even for their prime borrowers called FBIL
{prime means less risky and good borrowers)  FBIL:- financial benchmark of India limited, more like
 Also decided by Banks but RBI said base rate should a research agency (independent)- collects data
be determined by short-term cost of funds (short  If banks deny to link their lending rates to one of the
term deposits) three EBRs, RBI allows banks to choose any market
 Now RBI made it clear and specified that it should be determining interest rate published by FBIL and link it
short term deposit rate (less than one year of to your lending rates
maturity )  Example
 In base rate banks were/are allowed to include  CDs interest rate (certificates of deposits)
operational costs of giving loans along with short  CPs interest rate (commercial papers )
term cost of funds.  Under EBR
 Operational costs means any type of cost like  banks are more free to link their lending either
related to infrastructure , salary etc other than repo rate or to other interest rates but once
cost of funds chosen it should be tied to it
 Base rate was reasonably good for 4-5 years but in  impact of monetary policy can be transferred
2015 RBI reduced Repo rate multiple time within few weeks
(expansionary policy ) ………….7th class ended, 8th started……….
 Main limitation of base rate
 Banks were not obliged to reduce base rate INDIAN BANKING SECTOR
when RR is reduced
 Despite reduction in RR multiple times the base A. FROM 1969-1991
rate did not fall much , banks said to RBI that RBI  1969:- nationalization of banks started
did not tell them to change base rate on basis of  14 banks were nationalized and process completed in
RR as it is dependent on only short term deposit 1980 with 6 more banks nationalized
rate not RR  Nationalized means GOI took over control of banks
 So RBI learnt lesson and introduced Marginal cost of from big industrialists
funds based lending rate
 IMPACTS OF NATIONALIZATION
3. MCLR {MARGINAL COST OF FUNDS 1. Lead bank scheme
BASED LENDING RATE}  Every nationalized bank was made
 Same definition:- lowest interest rate that banks responsible to provide banking services in
should charge on loans ,even for their prime some selected districts (mostly backwards)
borrowers  Ideal concept but problem was , in order to
 Similarities provide banking services there was need of

branch expansion , higher cost was  Give more freedom to bank to give more credit
associated with it with more branches , on commercial lines (at reasonably higher
higher the costs and lower the profit for interest rates compared to government loan)
 Reduction in SLR and CRR is related to
banks
liberalisation (note it for prelims questions)
2. Priority sector lending (PSL)
 At least 40% of bank credit should be given 2. THE Interest rate deregulation /
to priority sectors like agriculture , MSME, liberalization
rural artisans etc  Banks were allowed to follow the system of
 At least 18% of out of 40% credit was market determined interest rates (like on
reserved only for agriculture only loans , on government securities)
 Problem:- defaults rates were higher ( today 3. Nationalization + Privatization
called NPA) and so less profit to banks was  Private sectors banks were allowed to provide
there, as banks got sudden change to shift banking services along with public sector banks
credit from industrialists to agriculture and (PSBs)
st
banks were not prepare  1994 = ICICI bank 1 private sector bank fully
 PSL is still there in India but some changes fledged
are there after 1991 4. FDI was Allowed in Banking sector
 Not changed :- At least 40% of bank credit  Foreign banks were also allowed to provide
should be given to priority sectors At least banking services in India
18% of out of 40% credit was reserved only
for agriculture only  Clearly it is a Globalization reform
 Change :- apart from agriculture we have  SOME MORE REFORMS BEYOND LPG
now sectors like MSME, education , housing
, exports , renewable energy etc
A. Capital adequacy reforms
 Meaning of it is that every bank should have/keep
 Earlier PSL rule followed by only PSU
(nationalized banks) but after 1991 even some minimum capital and reserves to handle risks
private sectors and foreign banks need to related to assets
 Simplified balance sheet of banks
follow it and within agriculture out of 18% ,
8% should only be given to small and LIABILITIES ASSETS
marginal farmers 1. Capital 1. Investments(bond,
 However , foreign banks not need to give 2. Reserves govt. securities
loan compulsory to agriculture (note it) 3. Deposit of ,shares
public 2. Loans to public
3. Higher SLR and CRR
4. Borrowings by 3. Fixed assets
 SLR was before 1991 = 38.5% of NDTL banks (building etc)
 CRR was before 1991 = 25% of NDTL 5. Other liabilities 4. Other assets
 Both gives 63.5% of NDTL , It was like telling
 Risks related to assets particularly to loans as
banks cannot use freely more than 63.5% of their
deposits some part of loan can be defaulted called credit
risk (most crucial risk that the bank faces as it is
 Finally resulted lower profits to commercial
banks risk of loss to banks due to defaults on credit )
 Capital adequacy is both capital and reserve
 Why high SLR and CRR :- Mainly to finance
higher government borrowings and CRR was  THESE CAPITAL AND RESERVES CAN BE
higher as government was borrowing higher DIVIDED INTO TWO PARTS
from RBI also 1. Tier 1 capital :- very good quality capital and
B. POST 1991 BANKING SECTOR reserves with the banks, quality here mainly
is the liquidity. if it is high in liquidity , it can
REFORMS be easily used during some crisis
 Also called LPG reforms are also known as
liberalisation, privatization and globalisation reforms.  Examples =
 Accepted recommendations of Narsimhan  common equity capital (called share
committee 1991 capital):-the capital that banks raise to sale
of their shares to public. As it is highly liquid
 ACCEPTED RECOMMENDATIONS as process of selling purchase is completed
and no obligation to repay
(REFORMS) OF THIS  excess reserves
1. Reduction in SLR & CRR 2. Tier 2 capital :- good quality capital and
 Took time after LPG but reserves with the bank but not as good as
 By 2001 SLR to 25% and CRR to 5% of NDTL tier-1
 2022= SLR= 18% and CRR = 4.5%
 Examples 2008 and USA government initially refused
 Revaluation reserves :- can be raised by the to help and crisis spread to world
banks if its assets are revalued at current  These events resulted in formulation of
prices Basel 3 norm
 RISK WEIGHTED ASSETS (RWAS)  BASEL-3 Norms , 2010
 Assets of a bank adjusted for different types of  Still minimum CAR of 8% of RWAs
risks (credit risk)  Three risks have been identified credit risk
 RWAs= {Loan amount × credit risk} ,Market risk and operational risk
 Suppose bank has given= 100 crores loans in i. Stricter capital requirements for banks:-
total to Govt. + Firms +households(HHs) banks are required to keep more of Tier-1
loans Credit Risk RWAs capital & within this , more of common
% equity capital, to handle crisis better
Govt 30cr 0% 0 ii. Banks should maintain capital conservation
Firms 50cr 20% 10cr buffer (CCB)- CCB was to be created by
HHs 20cr 30% 6cr cutting down some expenditures by banks
(expenditure on bonus and dividend
Total RWAs =16cr
payment)
 RWAs must be less than value of assets
 Buffer means addition to CAR
 CAPITAL ADEQUACY RATIO (CAR/ CRAR)
 Capital To risk weighted assets ratio
 CCB should be minimum 2.5% of RWAs
 CAR= {(tier 1 +tier 2 capital) ÷RWAs}×100  why- Due to Lehman brothers , at their
 CAR is about questioning the banks whether banks bankruptcy time CAR 11% but most of it was
have adequate good quality capital to handle risks or of Tier-2 capital so they got bankrupt even
not by maintaining CAR
 If CAR is relatively higher  more prepared is the  Effective CAR= (8% + 2.5% )of RWAs=10.5%
bank to handle risks  Note – RBI not made mandatory CCB to
 So higher CAR is good for banks Indian banks so CAR in India is minimum 9%
 Minimum CAR should be 8% of the RWAs
iii. Counter cyclical capital buffer (CCCB)
 In India Minimum CAR should be 9% of the RWAs
 Banks can maintain an additional capital
 BASEL NORMS buffer during higher economic growth and
 Global norms on capital adequacy use it to handle risks during lower economic
recommended by an international organization growth
called bank of international settlements (BIS),  Optional condition not mandatory made by
within BIS through the Basel committee Basel committee
meetings (mainly central banks of nations who
 NOTE:- Basel norms are legally binding
are members of Basel committee . India is also
only when the central banks make it
part of it)
compulsory in their respective countries
 Basel is city in Switzerland hence the name given
 RBI makes Basel-2 legally binding but RBI
 BASEL-1 Norms , 1988
still not making Basel-3 obligatory
 Required the banks to maintain minimum  COVID-19 impact
CAR of 8% to handle only credit risk  Entire BASEL committee has extended
 BASEL-2 Norms , 2004 Basel-3 deadline to 2023
 Required the banks to maintain minimum CAR of
8% to handle credit risk now along with Market  INDIAN BANKS AND CAPITAL
risk and operational risk
 Market risk is the risk of loss to the banks due to ADEQUACY
the change in market prices of its assets or  banks are fully compliant to BASEL-2 norms
liabilities. Example- fall in market interest rate on  but partially compliant to BASEL-3 norms
loans  Indian banks still follow minimum CAR according
 Operational risk is the risk of loss to the banks to BASEL-3 but some banks still do not full fill the
due to failure in systems, processes etc of the CCB requirement
bank. Example :- cyber fraud
 2008 USA crisis
B. REFORMS TO SOLVE :-NPA PROBLEM
 First know some concepts about loans
 subprime banking crisis :-Large scale
 Standard assets of banks
defaults on housing loans given by US banks
to their Sub-prime borrower  Loans that are regularly repaid (both
 Bankruptcy of Lehman brothers:- (large principal + interest)
bank in US)- somewhere in second half of  E.g :- EMI (equal monthly installments)

 NPA:-non performing assets b. Due to Economic slowdown like in covid-19
 The loans on which the repayment or EMI is lockdown many people’s earning became
90 days past due very low and they would not be able to
 Same as bad loans or bad debt repay loan
 Sub-standard assets 2) Lack of willingness to repay the loans despite
 Include loans in NPA category for a period of having ability mainly due to legal loopholes.
up to 12 months {borrowers know legal system cannot catch him
 Doubtful assets if he defaults the loan}
 Mean the loans in sub-standard category for  Note the following arguments with reasons
next 12 months a) India NPAs condition was very serious even in
 Loss assets 1991 and Narsimhan committee claimed that
 Loans that are identified as loss in the the main reason behind NPA was lack of
auditing process willingness to repay the loans
 Write-offs of loans b) But recent research claims that it is the lack of
 Mean that bank has identified loan as a loss ability since 2010 for NPAs in India, why this is
and therefore loan is removed as an asset said understand by following
from the balance sheet a. Most of the NPAs since 2010 came from the
th th
…….8 ended, 9 class started…….. loans given during 2005-2008
b. 2005-2008= very high economic growth =
 IMPACTS OF NPAs ON BANKS best time period for Indian economy
1) Higher NPA= Lower will be interest earnings by resulted over optimism in economy (both
the banks on past loans banks and borrowers)
2) Higher the NPAs of the banks More will be the c. Therefore, Banks gave more loans without
provisioning required by the banks means less proper risk appraisal, most of these banks
fund available for giving loans with the banks, were public sector banks (PSUs) (possibly
which makes the profits lower for the banks {but political pressure to be there to give loans)
note these are lower profits on future loans} d. Borrowers (firms), most of the loans
defaulted more from the firms not the
 PROVISIONING FOR NPAs individuals and came from selected sectors
1) Provisioning means keeping a part of NPA value
like steel firms, power firms, infrastructure
on the liability side(cannot be used for giving
loans) by the banks to even out (spread out) the
firms and later on housing sector also came
possible losses from NPAs in future e. Borrowers were earning high profits and so
2) RBI decides the provisioning amount demanding more loans hoping to repay with
3) Provisioning cannot reduce the loss of bank but higher profits that they were earning
spread it out f. This pattern is telling that this is not mainly
4) Provisioning is done only when there is a NPA as lack of willingness problem
with Bank if NPA is zero bank does not need it g. 2008 by end entire global economy was in
{Note:-the difference of provisioning with economic crisis
capital adequacy, as capital adequacy is a h. India post 2008 there was economic
general requirement & it is needed at all time} slowdown in India , but not in recession
 Understand By Example i. Therefore, Due to economic slowdown
 Bank earned let= 250crore rupees (asset there were lower profits earned by the
from all sources)
borrower firms  could not repay higher
 Total NPA= Rs100 crore
 Provisioning amounts= 10% of NPA
NPAs  lower profit earned by Banks = this
 From assets side banks (earnings)take entire chain shows clearly lack of ability to
10crore repay loans …
 Actual earning= {250-10}= 240 crore j. This entire chain of events also called “twin
 This 10 crore bank cannot give as loan as it is balanced sheet or twin balanced problem”
provisional amount for NPAs k. Twin balanced sheet problem:- Poor
balanced sheet of the borrower firms is
 REASONS BEHIND NPAs when they are in loss or earning less,  it
1) Lack of ability to repay the loan leads to higher NPAs ultimately leads Poor
a. like when a farmer took loan for crop balanced sheet of banks
production but due to fail of monsoon , he  Since 2017 we are finding new pattern in
would not be able to repay increase of NPAs:- loans given to sectors like
agriculture and MSMEs etc , their defaults are

increasing (till 2017 the defaulters were mainly securities, managing the defaulting companies
large firms but now also MSMEs started to get etc
default)  ARCs involved when NPAs are big enough
a) Demonetarization :- more than 85% of  Let NPAs = 100 crore Rs and banks offer 30%
currency were taken back impacted farmers  So banks sell it to ARC and pay 70 crore
& MSMEs as more of their trade was in cash, immediately and ARCs now take control under
so their earnings got effected and started SARFAESI Act
defaulting loans  ARCs get profit by getting shares of the
b) GST Implementation:- although it was good defaulted companies or by selling its securities
 This is how ARC works
decision but without having proper structure
 Note:- when banks sell NPAs to ARCs, the NPAs
reading, at starting many MSMEs got
reduce immediately  so less provisioning
effected
needed so more loans can be given by banks
 However, Recent RBI says NPAs have been (Banks Balance sheet gets improved)
declining significantly  But after 2010 ARCs effectiveness getting
 SOLUTIONS FOR NPAs PROBLEM reduced
 LIMITATIONS OF ARCs
1) LEGAL REFORMS (MAJORITY POST 1991) a) Conflict b/w banks and ARCs over the discount
 There are main two legal reforms b) ARCs being an NBFCs may not be able to manage
a) Setting up of debt recovery tribunals (DRTs) all types of defaulting companies
to speed up the resolution of NPA cases
3) BAD BANKS
 NPA cases means:-
 NPA cases are often referred to legal conflict
 Function in similar manner as ARCs but with
b/w bank and borrower greater role of government
 Often on the issue of collateral or security  Under RBI jurisdiction
 collateral or security:-  In India 2021 First bad bank was established in
 moveable or immovable , as a guarantee name of “NARCL= National ARC Ltd.”
against the loan and if borrower gets default  FEATURES OF NARCL (DIFFER FROM ARC)
and Banks can take control of collateral a) Promoted by public sector (not private as in case
 but borrower then files the case against bank of ARC) enterprises including some public sector
if his property anything taken into control by banks
banks b) NARCL Buys NPAs only from Public sector Banks
 so it takes years to settle cases without discount (NARCL pays money in
 it became also a problem as number of cases installments to banks) (80-90% NPAs as in India are
increase with PSU banks)
 That is why Narsimhan committee set up  LIMITATIONS CAN BE OF NARCL
DRTs to speed up the cases progress to a) As like ARCs, NARCL may also not be able to
reduce NPAs manage all types of defaulting companies
 However, DRTs are now not effective but b) NARCL solution may lead to higher Fiscal deficit in
now in today’s time as now reasons are long run {as public sector enterprises or banks give
different dividend to GOI , so due to less dividends paid by
b) SARFAESI Act 2002:- PSEs, fiscal deficit would be higher)
 The Securitisation and Reconstruction of c) NARCL may encourage the public sector banks
Financial Assets and Enforcement of Security (PSBs) to give riskier loans as banks have no loss
Interest Act, 2002 (SARFAESI Act India) even if the loan gets defaulted as there is no
discount is to be given to NARCL {example of Moral
empowers Banks and Financial Institutions
hazard problem in economic theory}
to take control of the securities (collateral)  {Moral hazard means giving incentives to do
to recover their non-performing asset (NPA) something wrong or undesirable }
loan dues without the intervention of the
Court
4) RESTRUCTURING OF NPAs
 Banks giving concessions to the borrowers to
 But generally a 60 days’ notice period given
facilitate the loan repayment
to defaulter  Note:- Restructured NPAs are not reflected as NPAs
 Also had role in setting up of ARCs in the balance sheets of banks for sometime (1-2
2) ARC:- ASSET RECONSTRUCTION COMPANIES years):- this leads to less provisioning required
 Privately owned NBFCs that buy NPAs from the
more money to give loans  their balance sheet
improves
banks at a discount and tried to recover it by a
 Here banks are benefiting for temporary basis not
number of steps like taking control over permanent (As in ARC case it is permanent)

 Concessions may include :- lower interest rate, defaulting company (sale of assets not entire
longer repayment period etc company as in resolution plan entire company
 If there is lack of ability problem then this is very gets sold and no problem to working
effective method as banks here show trust on the employees).
borrowers lack of ability
 Liquidation creates problems for almost as
 TYPES OF RESTRUCTURING a. It is challenging for owner company because
A. CDR:- CORPORATE DEBT RESTRUCTURING he gets less money
 If restructuring of loan is done for the corporate = b. Employees also may lose jobs
borrowers firms c. Challenging for banks also
B. S4A: SCHEME FOR SUSTAINABLE STRUCTURING OF
 EXAMPLES OF IBC
STRESSED ASSETS
 1st Resolution plan of India :- Tata steel
 Here banks divide NPAs into two part
a) Debt :- bought Bhushan Steel and repaid about
 CDR will be applied Rs.35000crores of loans to the banks, with
b) Equity:- 37% Haircut.
 A part of NPAs Value is converted into the shares  CRITICAL APPRAISAL OF IBC
of defaulting company & the shares are held by A. Positives of IBC
banks that lend money (lenders)  Most successful solution to recent NPAs
 Therefore the banks get some management  RBI study claimed that about 45% of NPAs
rights in the company due to shares acquisition referred to NCLT are recovered , Whereas
 Example:-Let NPA= 100cr others solution (except IBC) have only 25%
 Debt= 40cr = CDR applied
recovery rate
 Equity= 60cr= converted into 60 cr worth shares B. Limitations or Negatives of IBC
and can manage the defaulting company
 Recovery of NPAs under IBC has been
 STRESSED ASSETS
successful in some selected sectors
 Stressed assets = NPAs + Restructured NPAs + write-
offs
particularly steel sector
 Suppose that banks say their NPAs are declining, it is  Number of successful resolution plans is also
possible that some of these NPAs are shifted to very few. So far they are nearly 2000, out of
Restructuring , like a problem is being shifted not them top 10 are very crucial but others
solved as NPAs still not recovered performance is similar to other solutions
rd
 It can be a mechanism to hide the NPAs  Delays in resolution plans, roughly 1/3 of
 So in stressed assets are helpful to look into real the resolution completed after 300 days
situation  Numbers of liquidations have increased
 LIMITATIONS OF RESTRUCTURING  Haircuts are higher in recent resolution plans
a) Banks may misuse restructuring to hide NPAs in certain it is upto 80-90%
b) Willful defaulters may also misuse (they just buying A. FIRST GENERATION REFORMS
time but ultimately they know they get defaulted)  LPG reforms 1991
c) there can be a possibility of a nexus b/w both of them  Liberal entry for the firms in different sectors
(banks and willful) {RBI should be always vigilant, like in Industries {abolishing industrial
therefore licensing}
ND
5) INSOLVENCY & BANKRUPTCY CODE (IBC) B. 2 GENERATION REFORMS
 2015 =IBC, Insolvency and Bankruptcy Code (IBC)  Reforms which support or complete the LPG
2016 was implemented through an act of Parliament. reforms
It got Presidential assent in May 2016. Centre  Example;- IBC, labor reforms
introduced the IBC in 2016 to resolve claims involving  RESOLUTION PLAN
insolvent companies  NCLT invites bids for the sale of defaulting
 IBC is to ensure smooth exit (successful resolution company to a buyer company from the same
plan) of inefficient firms from the particular economic sector (to make management well)
sector  Buyer companies also agrees to repay a
nd
 IBC can be one of the examples of 2 generation significant part of loans to the banks that taken
reforms by defaulting company
 IBC AS SOLUTION TO NPAs  Here entire company is sold (note it)
a) Under IBC, defaulting companies with higher  Haircut (Under IBC)
 Part or share of loans that is not repaid to the
NPAs are referred by Banks to NCLT (National
banks
Companies Law Tribunal), NCLT tries to bring
resolution plan (RP) for the defaulting company  NOTE: IBC CURRENT AFFAIRS
b) If resolution plan is not successful in 330 days  PRE-PACK RESOLUTION PLANS FOR MSME
then NCLT proceeds with liquidation of the  Different features of resolution plans like value

of defaulting company at the time of selling it  Will definitely increase fiscal deficit because
or haircuts etc are pre-decided means there is it an expenditure, so GOI come with second
no bidding process method mentioned below}
 So far this is not highly successful as buyers b) By issuing recapitalization bonds :-
show some reluctance
 Re-Cap bonds are the bonds issued by GOI
……..9th class ended,10th started…. to the PSBs (any PSBs) to raise funds in order
 Two more sections left in banking to capitalize low CAR PSBs.
1. Reforms in public sector banks (PSBs)  To some extent in this case , taking money
2. Financial inclusion from banks is done and used it for a
particular CAR low bank , because it will not
 INDRADHANUSH REFORMS 2015 increase immediate fiscal deficit a,
 GOI brought reforms for PSBs under  However, the interest levied on these bonds
recommendation of Nayak committee will definitely increase the fiscal deficit.
 Indradhanush tells 7 parts of reforms (but only 6
were recommended by nayak committee)
4. Distressing reform
 Distressing means restructuring the PSBs’ NPAs
 Why Reforms in public sector banks (PSBs)
Restructuring done before in notes read from there
a) CAR is lower
b) Relatively higher NPA 5. Empowerment reform
c) PSBs face lack of professionalism  Means less Govt intervention in the regular
 INDRADHANUSH 7 REFORMS ARE:- functioning of PSBs

1. Separation of top positions in PSBs 6. Accountability reform
 Separation of Chairperson and managing  Means PSBs are ranked on the basis of key
director (MD) performance indicators
 Means separating political position from  key performance indicators is the combination
professionalism position for bringing more of some economic and some socio-economic
professionalism (by giving more freedom to MD) indicators
a) economic indicator:- CAR, NPA etc
in functioning of PSBs
b) socio-economic indicators :- PSL, Micro
2. Setting up Bank board bureau (BBB) finance etc
 BBB must now be mainly responsible for  GOI said the PSBs performs better will get
recruiting top positions in PSBs (which GOI used incentives
to directly appoint before)  Main role of accountability reform is to increase
 BBB should be independent of GOI and should competitiveness among PSBs
include only banking officials
 When BBB was set up it was supposed to have a
7. Governance reforms
 These are Family of reforms that improve systems,
a) chairperson (a retired bureaucrat) + 6members
processes, skill sets etc In PSBs
b) 6 members = 3 should be officials means
 Most common example here can be “digital banking
bureaucrats and 3 must be expert within reform (started somewhere in 2007 & since 2015
which 2 should be bankers) more reforms are taken like UPI, e-RUPI system etc)”
 BBB has recently been replaced by FSIB {financial {read also from newspaper}
services institution bureau}, FSIB is owned by  Like digital banking reform , Due to this more
GOI. transparency has been brought
3. Capitalization of PSBs EXTRA REFORM APART FROM
 Means GOI providing funds to ensure minimum
CAR requirements of the PSBs INDRADHANUSH REFORMS:-
 GOI funds When generalling they are falling in  PRIVATIZATION OF PSBs
their CAR  Still a purposed reform (GOI would have thought off,
 Only reform Nayak committee did not but debate is going on it still)
recommend because it will lead to  Privatization means Govt sells majority state or
a) Higher fiscal deficit ownership in some PSBs to a private sector
b) Burden ultimately be on Public (tax payers  This is purposed by GOI in 2021 budget, the finance
will have to bear) minister formally announced to privatize two or three
 Nayak committee recommended to privatize the PSBs
 Still in debate {update from newspaper}
bank in this condition
 Capitalization is done in two ways A. ARGUMENTS FAVOR PRIVATIZATION
a) By providing fund through budget Privatization of PSBs improves management of
a)
the banks and this better management will lead
to lower NPAs.  {This idea is highly cost effective as this bank
 {this is main argument because enough evidence mitra opens accounts, deposits money, even
is there, As majority of NPAs are of PSBs and also gives service of withdraw of money in
blame is given to bad management as compare remote areas etc}
to private sector banks}  Limitations of this scheme
b) Privatization of PSBs improves competition (for a) Lack of professionalism among many
maximizing profits) among banks and in banking business correspondents
sector, which leads to better efficiency. b) Low remuneration provided to the business
c) Privatization of PSBs leads to decline in govt correspondents
burden needed for capitalization of PSBs  {like lack of training, infrastructure in basic
B. ARGUMENT AGAINST PRIVATIZATION nature and equipments and it can be a
a) NPAs in PSBs are higher not only due to poor reason for lack of professionalism}
management but also due to higher exposure (either 2. PM Jan Dhan Yojana,2014
forced to) to loans given to riskier sectors. For  Objective:- to open a large number of bank
example a riskier sector like infrastructure in general. accounts {why, because that is the simplest way
b) Competition can also be encouraged among the PSBs to measure financial inclusion}
through accountability and other similar reforms
 They gave a number of incentives to people to
{just need of environment for competition, as no
open bank accounts , incentives like
economic theory tells competition only comes when
privatization is done} a) Zero balance account means no minimum
c) Privatization of PSBs can result in Job losses and balance needed
creation of fewer or less jobs in future. {even at b) Account holder be provided free of cost
present, getting job in PSBs is not as easy also due to services like debit cards, mobile banking etc
entrance exams but it is a serious argument as there c) Free of cost insurance service {one is life
is existing high un-employment rate} insurance i.e Rs.30,000 and second is
d) PSBs have played crucial role in financial inclusion accident insurance i.e upto Rs 2lakh now
and Privatization of PSBs may negatively impact it. before it was upto Rs.1 lakh}
 Financial inclusion is about providing the basic d) Easier KYC norms, Govt clarified only one
banking services like opening bank accounts etc document for KYC is needed and even for
to the less privileged sections of society , remote
that there is long list of choices like
areas etc.
MGNREGA card can be allowed
 Without PSBs financial inclusion seems to be
impossible in India mainly in remote areas as e) Over draft facility upto Rs.10,000 is provided
most of banks in hilly terrain or other remote {earlier it was Rs5000}
areas are PSBs not private areas  {overdraft facility is like a short term loan ,but
 So far contribution of private sector banks in here interest has to be paid}
financial inclusion is limited  {even interest is there it is an excellent facility
particularly for farmers}
 FINANCIAL INCLUSION INITIATIVES:  Statistics that it is a success
 Note with financial inclusion , savings is encouraged, a) The proportion of adult population having a
people’s saving habit improves, savings help in
bank account has increased just about 55%
financing investments, and investments lead to
growth (GDP, economy also)
in 2014 to about 85% by 2021, Even this
 Financial inclusion initiatives Can be brought by GOI data is verified by world bank
or RBI, anyone can bring  Limitations of this scheme
 Conditions must for financial inclusion a) Not highly cost effective for the banks
a) Should be cost effective for banks (as they have because of higher expenditure and lower
to provide basic services free of cost like revenue associated with these accounts
opening bank accounts )  As number of bank accounts increase= more
b) Should be easier and simpler KYC norms infrastructure , individuals are needed ,
 FOUR UNIQUE INITIATIVES ARE: which increases the expenditure of banks
 People have to pay zero for services
1. Business correspondents scheme  Lower revenue due to zero balanced
 2005 brought by RBI accounts and less deposits as accounts are
 Also known as “Bank Mitra” mostly owned by poor people
 Bank Mitra is an individual temporarily b) There are many duplicate bank accounts
appointed by the bank to provide basic banking under the scheme
services by visiting remote areas.

 Duplicate bank accounts simply means Jan a. Easier KYC = there is need for electronic KYC
Dhan bank account opened by a person only (like electronic Aadhar card etc), no
already having a bank account paper copy of KYC document needed.
 Duplicate accounts even if allowed , cannot
Location of bank account holder does not
matter, as e-KYC is there.
be a part of financial inclusion (as they are
b. Migrants workers can send money back to
already exist) their families through tie-ups between the
c) There are many dormant accounts also payments banks and local stores (any store
 Dormant Accounts which are in-operative like grocery store etc, local stores get some
for 2years and these accounts cannot be a commission)
part of financial inclusion g) PBs licenses were given by RBI to entities who
 That is why we look into percentage not are already providing some services in remote
numbers of bank accounts as numbers can areas, like
not show a proper financial inclusion  Airtel PBs = first PB of India, as it has already has
 Solution:- Dormant accounts can be reduced
a huge base
 Jio payment bank
by DBT (direct benefit transfer), like during
 Paytm payment bank
Covid-19 almost all women were provided  Indian post payment bank = only govt entity who
with a DBT got payment bank license = as it is already
3. Small finance banks initiative:- existing in every remote areas
 Initiative by RBI  Limitations of payments banks
 These are the banks that accept deposit from a) Many payment banks have not been able to earn
the public and provide loans mainly to less good profits (So, they demand license of small
finance bank due to less NPA but we must give
privileged sectors like Agriculture, MSME etc
them more time}
 Came up from recommendation of committee b) High commissions charged on remitting money
called “Nachiket mor committee under RBI”. by many local stores. {but financial inclusion
 The Nachiket Mor committee was headed by must be at low cost, and problem is that local
Nachiket Mor. This committee was formed by stores can’t be regulated}
former Reserve Bank of India Governor c) Lack of infrastructure (mainly needed for digital
Raghuram Rajan in 2013. This committee is banking like lack of electricity, regular internet
also known as the Committee on facility, access to mobile phones )
Comprehensive Financial Services for Small
Businesses and Low Income Households  CHALLENGES RELATED TO FINANCIAL
 This recommended a number of unique INCLUSION GOAL:-
banks to be opened in India but only two a) Lack of infrastructure (mainly needed for digital
accepted banking like lack of electricity, regular internet
a) Small finance banks facility, access to mobile phones )
b) Payment banks b) Lack of financial literacy. Financial literacy
Read from yellow book and newspaper incorporates two things
a. Awareness about financial services (people who
4. Payment banks (PBs) ,2015 by RBI are using must be aware of the pros and cons of
 Some features are as following its)
a) These are the banks (PBs) can accept deposits b. Capabilities to use financial services {means
from public upto Rs.2lakh {earlier it was Rs.1lakh} whether people are capable of suing digital
b) They can’t give loans to public (only bank in banking services etc, as with financial inclusion
India who are not allowed) the cyber scams are also increasing}
c) These banks are not allowed to issue credit cards
 POVERTY & INEQUALITY
d) Payments banks must keep 75% of NDTL in Govt
 Watch Poverty youtube channel of vajiram
securities (SLR) = this is the source of income for
PBs as they earn interest on this money (but of sham sunder sir
return is less)
e) They have lesser number of branches and ATMs;  TOPIC : INEQUALITY:-
they mainly operate through digital banking  Inequality means that there is increasing gap
service. b/w average income levels of different sections
 Note:-Lesser number of branches = lower cost of society
(expenditure) associated with banks = also a
 MEASURES OF INEQUALITY
profit for PBs
 So this is unique model of banking  Lorenz curve
f) PBs are highly beneficial for the migrant  This curve plots cumulative percentage (%age) of
workers, as they get benefited by two ways population (starting with the poorest person) against
the cumulative percentage of income
⑨
 But the problem is that if there are more number of

Lorenz curve, there are chances of overlapping which
creates problem to interpret the exact inequality gap
……..10th class ended,11th started….
 GINI COEFFICIENT
 Another measure of income-inequality
 This is a ration calculated from two areas.
 The Gini coefficient is based on the comparison of
cumulative proportions of the population against
cumulative proportions of income they receive, and it
ranges (0-1) between 0 in the case of perfect
equality and 1 in the case of perfect inequality.
𝐚𝐫𝐞𝐚 𝐛𝐞𝐭𝐰𝐞𝐞𝐧 𝐋 𝐜𝐮𝐫𝐯𝐞 &
 G.C =
𝐚𝐫𝐞𝐚 𝐨𝐟 𝐡𝐚𝐥𝐟 𝐬𝐪𝐚𝐮𝐫𝐞 𝐢𝐧 𝐰𝐡𝐢𝐜𝐡 𝐚𝐥𝐥 𝐋 𝐜𝐮𝐫𝐯𝐞𝐬 𝐥𝐢𝐞
 Perfect equality line represents , if there is

perfect equality then same number of
population is earning same %age of income
 But Lorenz curve tells reality, like in graph it is
representing the equality gap means 20% people
is earning only 5% of the total income (showing
inequality gap)
 Farther the lorez curve from the line of perfect
equality, higher is the income inequality

expenditure not income. Logically , consumption
expenditure inequality is less than income
inequality
d) Now today G-coefficient also done Based on
income also now in India even if direct income
data is not available which roughly gives G-
coefficient value = 0.55 by IHDS (Indian Human
Development Survey). This implies consumption
expenditure inequality is less than income
inequality , income inequality is higher than
consumption expenditure inequality
e) Note:- NSSO conducts surveys on “Asset
ownership” of the households , and on basis of
this survey when we calculate G-coefficient on
basis of asset ownership it comes out be around
= 0.7. this state asset based inequality is higher in
India
f) Recent data from “World inequality report,
2022” ,
a. In India “top 1% of the population earns
 The triangular area shown in diagram is fixed , about 22% of the National Income & bottom
why Because there are two extremes of 505 earns about 18% of the national income
inequality b. “World inequality report, 2022” , published
a) Perfect equality = L-cure will be same as annually under supervision of economists of

Paris school of economics (department
diagonal
called world inequality lab)
b) Perfect in-equality = it will be like reverse L
c. This is also an another method to calculate
 Therefore farther the L-curve from the income-inequality
Perfect equality line, results
a) higher will be the G-coefficient value  LINK B/W INCOME INEQUALITY AND
b) Higher income in-equality ECONOMIC GROWTH
 it ranges (0-1) between 0 in the case of  Kuznets (economist) given a hypothesis i.e
perfect equality and 1 in the case of perfect “Kuznets inverse-U hypothesis” = according to it
inequality. income inequality initially increases with
a) G-coefficient < 0.5 = lower income inequality. economic growth and decreases beyond some
 Examples = East asian countries, some level of the economic growth.
Europeans countries like Scandinavian
countries
b) G-coefficient > 0.5 = higher income inequality
 Examples = Latin American countries like
Brazil, Argentina, Mexico, USA
 Western Asian countries
 As USA despite having so much development
, income-inequality is there, so it states that
just by per-capita income or standard of
living, it cannot guarantee the lower income-
inequality  It is not true for India so far
 India: -  India:- Thomas Piketty along with Chancel,
a) started analysis for India and looked into income
G-coefficient in third official records = 0.37. so it
is below 0.4. but this value in India is based upon inequality during period of 1921-2014 (longer
“consumption expenditure not on income basis” time period ever).
because income data is not easily available in  They looked into top level data and found
India as most reliable data comes from income that
tax department and number of people of India
 Before independence Income inequality was
paying income tax is very low.
b) This data on consumption expenditure has been
increasing
traditionally collected by NSSO (NSSO now made  1950-1980 :- all in Income inequality in India,
part of NSO now) as lower economic growth was there (low
c) Therefore G-coefficient value in India is GDP relatively)
reflecting inequality in consumption  Post 1980:- regular rise in Income inequality
 Post 1991, & post 20005=India was going c. It infers poverty before this was calculated at all
through “Jobless growth” means despite India level. (note it)
higher GDP growth the growth of jobs and B. STATE-II: COLLECTION OF DATA ON
employment is lower CONSUMPTION EXPENDITURE:-
 Note failure to implement land reforms  Collected by NSSO Household consumption
increases income-inequality expenditure surveys (since 1970 till 2012 every 5
years), now this survey is slightly discontinued.
TOPIC:- POVERTY INDIA:-  In this surveys NSSO used to use or these surveys are
done on the basis of consumption basket
1. ABSOLUTE POVERTY
 Consumption basket refers to the list of food and
 Lack of some basic minimum requirements non-food items used in the survey
2. RELATIVE POVERTY  There are 3 methods of consn expre
 Lack of income as compare to some proportion of
average income surveys used by NSSO in India
 here Average income means per capita income 1. UNIFORM RECALL PERIOD (URP)
 here proportions can be 50%, 60% for example,  Recall period = period of reference
means let say takes proportion of 50% , so  Defined as a method where both food items
anyone earning income less than 50% of the and non-food items , there is same recall
average income ,will be facing relative poverty. period of 30 days
 India :- we don’t talk about relative poverty,  For example:- NSSO asks about like in last 30
we always talk about absolute poverty days how many food items a person consumed
 The measurements of absolute poverty done by as well as how many clothes etc consumed by
same individual in same 30 days.
poverty line:-
 URP as till 1991-92 we had only URP, making it
 Poverty line:- level of consumption expenditure oldest method
(not income) needed by an average Household to
2. MIXED RECALL PERIOD (MRP)
fulfill some basic minimum requirements for all
members over a period.
 Better concept than URP
 Food items here has = 30 days recall period
ESTIMATE POVERTY LINE  For non-food items = 365 days recall period
3. MODIFIED MIXED RECALL PERIOD
1. STEPS (MMRP)
A. STEP-I HOW TO DEFINE POVERTY LINE  In this modification,
 Defining poverty line means specifying basic  for some food items (mostly perishable or
minimum requirements, done by “Planning some are costlier like edible oil, spices):- 7
commission”. planning commission made several
days recall period (shorter recall period)
committees to define it , some important are
 for other Food items = 30 days recall period
 1971: Dandekar & Rath committee
a. They attempted to give first conceptual  For non-food items = 365 days recall period
definition of poverty line because these are the  The quality of data improves here by this
minds behind “calorie-based poverty line”. survey as MMRP >MRP >URP
b. In the “calorie-based poverty line basic C. STEP-III:COMPARISION B/W P-LINE
minimum requirements are given as minimum
nutrition & it is given through minimum calories
DEFINITION & CONSN EXPRE OF HH
intake of a person (2250 Kcal per person per day)  Comparison will give who is poor and who is not
c. Any person spends enough to consume these  UNDERSTAND BY EXAMPLE
calories considered non-poor .  Poverty line definition say = Rs 5,ooo/HH/Month
 1979: Alagh Committee  Consumption expenditure of
a. More or less agreed with Dandekar 1) HH1= 3500/HH/M
b. But separated the rural calorie intake and urban 2) HH2= Rs 6700/HH/M
calorie intake 3) HH3= Rs 7000/HH/M
 Rural calorie intake= 2400Kcal/P/D (greater  Therefore
degree of physical work in rural jobs) 1) So here HH1 will be called Poor of BPL
 Urban calorie intake = 2100Kcal/P/D Household (HH) as there expenditure is less
c. Committee didn’t go against Dandekar. (note) than the minimum
 1993:Lakdawala committee 2) HH2 & HH3 are called Non-poor or APL HHs
a. Recommended that poverty should be measured  Once we realize the BPL and APL HHs in a particular
first at state level using “state poverty lines” and state, we use to calculate first poverty in state and
then aggregated at all India level. BPL card holders aggregated to give all India poverty
b. Why he said this because at state level estimate
“inflation” is different.
 Head count ratio or poverty ratio :- defined 3) Committee said that poverty should be
. measured on MRP basis only {Not on URP
as the = × 100
. basis}
 Suppose at some point Poverty ratio = 22%  If there is only one measure of poverty it
means 22% of the houses are BPL HHs leads to easier comparison of poverty over
2. HOW HAS THE POVERTY LINE time. {as poverty is highly political sensitive
ESTIMATION CHANGED SINCE 2005- issue}
2005  RANGARAJAN COMMITTEE, 2011-12
 It was also a committee on poverty 7
 Why 2004-2005 ?
RECOMMENDATIONS are
 Around 2004-2005, India was witnessing a
1) Recommended separate consumption
debate named “Poverty Debate” in India about
basket to measure rural & urban poverty. It
“weather the official poverty ratio
was not against tendulkar as consumption
underestimates actual poverty in India”
basket was already updated for both urban
 GOI was under a lot of pressure that it is not
and rural before this committee (so no need
calculating the Poverty line correctly
now for a uniform consumption basket)
 Official poverty ratio by NSSO 2) More comprehensive definition of poverty
a) counted by Planning commission & NSSO
line was given than tendulkar committee.
that time
More comprehensive in terms of food
b) it was In 2004-2005:- 26%
expenditure and Non-food expenditure, he
c) Problem:- this 26% figure was not near any
recommended
alternate poverty estimate being done in
 Food expenditure:- expenditure not on just
India or Outside India as according to World
minimum calorie but also on protein intake
bank report it was about 42% (slightly
and fats (minimum= calories + Protein + fats)
higher) of Indian Households were Poor
 Non-food expenditure:- he also included a
 World bank poverty line (Acc to it) minimum expenditure on house rent &
a) Present $2.14/person/Day at PPP conveyance)
b) Around 2004-2005:- $1/person/Day at PPP 3) It also recommended “poverty should be
by this About 42% (slightly higher) of Indian measured on MMRP basis only. {MMRP
Households were Poor model was not available during tendulkar
 TENDULKAR COMMITTEE, 2004-2005 committee time, as this concept cam latter}
 Recommendations of the committee  Note:- tendulkar committee recommendations
1) Uniform consumption basket (means same) were accepted formally but Rangarajan
to be used to measure rural & Urban poverty recommendations were not accepted as
 {however, it is not realistic as we can’t Rangarajan submitted its recommendations
expect urban & rural to consume same 2014 and by 2015 planning commission was
items, as generally it is considered that abolished and NITI Ayog was established.
better quality items consumed in urban than
 All India poverty ratio according to both
rural}
 Then why committee recommended uniform committees = 26% before tendulkar committee
consumption basket because our T-Committee R-Committee
consumption basket was outdate that time 2004-05 37%

and was not changed since 1973-74
By uniform here means keeping urban C-
As rural HHs increased
as rural basked was
×
shifted in calculation
basket same or constant, committee just 2011-12 22% (approx) 29.5%
said that rural C-basket was to be updated (note) As official data Not accepted but
to urban level. {a temporary solution till now on poverty line recommended
As poverty line definition
admitted also by Tendulkar} now became much more
 Once this recommendation implemented, complicated and
consumptions basked also
the “poverty ratio will increase” {important}
2) India should move beyond “calorie-based
 Quote this data in exam
Poverty Line”. Tendulkar committee poverty  Note:- by tendulkar committee method the
line was based on “expenditure on minimum poverty is declining significantly (37% to 22%,
calorie + minimum expenditure on education & fastest decline officially recorded) and some of
health {First time in India} the reasons of this fast decline are

a) Higher agricultural growth= often leads to b) Some minimum school attendance for
higher rural income and it further leads to Children (basic education among school
lower rural poverty children)
b) Higher rural income brings also higher urban 3) Standard of living has 6 indicators
income due to “restricted rural-urban a) Fuel
migration” .{not distressed migration, b) Water
migration is necessary for economy but in a c) Sanitation
limited or restricted way not in distressed d) Electricity
way} e) Housing
c) MGNREGA was also at peak in rural areas f) assets
 ALTERNATE DEFINITION OF POVERTY  here HHs are asked about the access to
these things and based on this poverty is
 Traditional form of definition of poverty, we
calculated
say poverty is about lack of money (income,
 Multidimensionally poor household :-a
expenditure etc)
household deprived in three or more indicators
 Modern view:- poverty is not just lack of
is called “Multidimensionally poor household”
money, but lack of capabilities, therefore we call
 At Risk of Multidimensionally poor
it capabilities approach to the poverty { given by
Amartya sen} household :-a household deprived in two
indicators
 Amartya sen said that capabilities refer to the
freedom that a person enjoys in a society in  India’s status:-
terms of performing certain basic functions. And a) 2006-07:- more than 50% of households in
according to him a person lacking in capability if India were Under Multidimensional poverty
a) A Person is illiterate {is poor} b) 2016-17:-the 50% now declined to about
b) A person who is suffering from a serious 27%
disease is poor  World bank also showing India’s poverty
declining (even said by Tendulkar
 ALTERNATE MEASURES OF POVERTY committee)
A. GLOBAL MULTIDIMENSIONAL  NITI AYOG 2021 came up with Poverty
estimation about India influenced by World’s
POVERTY INDEX (GMPI) bank estimation of GMPI
 GMPI Calculated by UNDP (United nation
development programme), every year with HDR B. THE NATIONAL MULTIDIMENSIONAL
(Human development report) POVERTY INDEX (NITI AYOG)
 In HDI they give 6-7 Indexes , one of the is GMPI  Now in India NMPI calculated since 2021
 UNDP also takes help of OPHI (Oxford Poverty & influenced on GMPI even definition of poverty is
Human development initiative) same just with addition of 2 more indicators ,
 GMPI, in this 10 indicators are taken and one in Health and one in standard living
divided into three categories  NMPI, in this 12 indicators are taken and
1) Health:- divided into three categories
2) Education:- 1. Health:-
3) Standard of living:- 2. Education:-
 Households are surveyed on these Indicators 3. Standard of living:-
and on basis of these the poor are calculated  Households are surveyed on these Indicators
1) Out of these 10 Indicators 2 are from health and on basis of these the poor are calculated
a) One talks about “minimum nutrition”, BMI based 4) Out of these 10 Indicators 3 are from health
{more or less copy of poverty line estimation, a) One talks about “minimum nutrition”, BMI
method may be different however} based {more or less copy of poverty line
b) Child mortality {during last few years){means a
estimation, method may be different
HH if cannot prevent even their children from
however}
dying is poor)
b) Child mortality {during last few years){means
2) Out of these 10 Indicators 2 are from
a HH if cannot prevent even their children
education from dying is poor)
a) Some minimum years of schooling (used for
c) Antenatal care :- NITI Ayog tells that a HHs is
measuring the minimum education among called deprived if any women didn’t receive
adults of HHS) expert health during the Child birth process.

5) Out of these 10 Indicators 2 are from  There is Contribution of labor input from the rural
education households (HHs) (mainly poor) and for this
contributions they Get wages as returns , and these
c) Some minimum years of schooling (used for
wages help them in coming out of poverty
measuring the minimum education among This program is a very ideal solution to seasonal
adults of HHS) unemployment
d) Some minimum school attendance for
Children (basic education among school
 MAHATMA GANDHI NATIONAL
children) RURAL EMPLOYMENT GUARANTEE
6) Standard of living has 7 indicators SCHEME (MGNREGS 2006):-
a) Fuel  It is most important rural-wage employment
b) Water programme
c) Sanitation A. FEATURES OF MGNREGS
d) Electricity
 Launched in 2006 under NREG Act (statute),
e) Housing
right to work for 100 days to an adult member of
f) Assets
every rural HHs (poor or non-poor) if they are
g) Bank account
willing to do unskilled, manual work.
 here HHs are asked about the access to
 If job is not provided within 15 days of
these things and based on this poverty is
demanding it, unemployment allowance should
calculated
be given by the state govt. {it is needed to make
……..11th class ended,12th started…. it more accountable)
SOLUTIONS TO POVERTY:-  Nature of community work should be linked to
national resource management , it is very
 Solution of poverty is Anything that provides better
important for higher agricultural growth.
access to employment, nutrition, basic amenities,
human capital
 Mainly implemented by gram panchayats. (it is a
 For employment there are Employment generation kind of empowerment of rural local
programmes started since 1980 or poverty alleviation governments)
programmes  Demand based fund availability (more
 There are two types of programmes under this accountable gram panchayats):- funds will be
a) Self-employment provided to gram panchayats, once they plan
b) Wage employment community work and demand funds
 In Rural self-employment program:-Members of rural  Equal minimum wages for both men and women
households (mainly poor) are encouraged to form legally guaranteed {inflation adjusted (indexed)
SHGs. Then SHGs are registered either with bank or
(linked to CPI-AL based inflation)
MFI (microfinance institution) .this registration can
provide them Micro-Finance based loans. Using this,
 Social audit (for better transparency)
Micro enterprises are set up and then revenue  Scrutiny and verification of MGNREGS A/Cs or
generated from these enterprises helps in coming out muster-rolls.
from poverty  Initially by gram sabhas  submit to rural
 Like cottage industry (micro scale) :-using this, micro development ministry
enterprises are set-up  revenue generated + helps  Later :- researchers institutions
in coming out of poverty
A. FOR SELF-EMPLOYMENT PROGRAMMES
B. APPRAISAL OF MGNREGS
FROM CENTERS:- 1) Poor targeting
 Targeting is very poor as About 65% of
 Deen Dayal Antyodaya Yojana or DAY beneficiaries belong to non-poor HHs not the
 दीन दयाल अं ोदय योजना तथा रा ीय शहरी आजीिवका genuine beneficiaries.
िमशन  The reason for this is the corruption (fudging of
 Self-employed program any rural or urban can be a
muster rolls) electronic since 2011 so less
very ideal solution for poverty and It is a solution to
Jobless growth (particularly among women) corruption.
 Therefore most of the SHGs are women SHGs 2) Inter-state differences in implementation
B. FOR WAGE-EMPLOYMENT PROGRAMMES  Some states have good implementation and
FROM CENTERS:- some have bad implementation.
 States have good implementation of schemes
 Rural wage employment program  TN and Kerala are top in having good
(solution to seasonal unemployment) implementation of schemes because they have a
 Under this, Community assets/ work is constructed in
record of good governance of welfare schemes.
rural areas (roads, rural reservoir)

They have created a better culture of  This is an economic benefit
implementing the schemes 2. Social benefits
 Rajasthan has also having good implementation a) Woman empowerment
of schemes  At least 1/3rd of jobs must be given to women
 Majority of North-eastern states also have good (job reservation for women). {however, around
implementation of schemes 40% must be reserved for women}
 Both Rajasthan and North-eastern states are  In certain surveys around 50% of women
known for strong gram Panchayat system beneficiaries claim that MGNREGS provides
relatively . them first wage employment.{it infers these
 These states have lesser poor population. women were self-employed or were
 States have bad implementation of schemes unemployed or were disguisedly unemployed
 Jharkhand, Bihar, Odisha , here the governance before. It is very likely to be true for men also}.
of welfare schemes has not been done even for b) Benefits to children
any scheme  When women earn wages, it is more likely that this is
 They have greater proportion of poor spent on children education, nutrition, heath etc. it
population.. has been seen in surveys
 So interstate differences can be explained by  It has been seen that there has been reduction in
mainly two reasons child labor. As when parents get jobs under
a) Differences in governance MGNREGS, children are getting reduced in child labor
b) Differences in awareness among the as there is no compulsion for these.
3. Empowerment of gram panchayats
beneficiaries. Like in many states people are
4. MGNREGS has provided significant number of jobs to
now aware about the legal obligation of job
the reverse migrants (urban to rural) during the
creation of MGNREGA scheme Covid lockdown.
3) Poor quality of assets or community assets  Note:- Aadhaar card is made compulsory for
 The critics say that this is due to MGNREGS for stopping fake beneficiaries. Geo-
a) Higher wage to material ratio:- tagging is also used for the use of MGNREGS. but it is
 It means how much of funds should be spent also seen as a problem as many poor people cannot
on wage payments and how much on afford smartphones etc
material
 In MGNREGA :- it is 60:40 means 60% of
TOPIC: THE SUBSIDIES:-
funds is used for wages and 40% for  Subsidy is referred to the transfer payments
materials made by Govts to consumers and producers.
 So critics paying more for wages is sacrificing These are unidirectional/one-sided payments
on material hence sacrificing the quality made by the govts.
 However, states having good a) consumption subsidy :- If consumers are
implementation of schemes also work on getting benefited= consumption subsidy.
this ratio Example PDS, LPG cylinder subsidy.
 When scheme was started initially this ratio b) Production subsidy:- If producers are getting
(60:40) was at gram panchayat level. But benefited= consumption subsidy. Example:-
now, this ratio is to be maintained at district agricultural subsidy (fertilizers, MSP,
level. Govt claims it is done to create large electricity subsidies , PLI (production linked
scale infrastructure at district level also. But incentive schemes subsidy) etc.
somewhere or the other the autonomy of  SUBSIDIES NEGATIVE IMPACTS
the gram panchayat has been sacrificed by
a) Wastage of resources
doing this.
 Subsidies lead to wastage of resources, as subsidies
b) Poor governance are more or less like a discount and when we often
get discount , over-purchasing becomes a common
C. BENEFITS OF MGNREGS:- problem. And over-purchasing always leads to
1. Economic benefit wastage of resources.
 Reduction in poverty  Like excessive use of urea .
 Main reason is the higher wages (60% of the b) Increase in fiscal deficit
total) in MGNREGS, helps people to spend more  Subsidies increase govt burden which increases the
on nutrition and other things. It also leads to fiscal deficit. And further leads to inflation also.
higher wages in other sectors due to less rural c) Less public investment
urban migration (distress migration problem is  More the subsidies given in a sector less will be
handled). However, it leads to higher cost of
public investment.
production and also leads stagflation.
 With limited budget when govt spends more on Chances of corruption here is very less as compare to
Subsidies, investment is done smaller. indirect subsidies.
 Example:- in Agriculture sector , around 75% of 2. Higher govt burden under indirect subsidy
govt expenditure goes in form of subsidies and than under the direct subsidy:-
only 25% is spent as an investment in agriculture  The main reason are some additional costs
sector. which are to be incurred like administrative cost
 GENERAL BENEFICIARIES OF THE (something like cost of maintaining offices,
employees’ wages) in indirect subsidy.
SUBSIDIES:-  Indirect subsidy also has extra supervision cost.
 Subsidy should be provided to 3. Less freedom of choice for beneficiaries:-
a) Poor consumers:-subsidies help them to buy the  Indirect subsidies give less freedom of choice to
basic minimum requirements. Like nutrition is a the beneficiaries than the direct subsidies.
basic requirement and PDS is a special subsidy  However in direct subsidies, the freedom is also
helping in this. PDS is a much more basic restricted as like in LPG, people get subsidy after
requirement than LPG subsidy. (always compare purchasing cylinder first.
subsidies in exam)
b) Poor producers:- mainly agricultural producers,
 THE LIMITATIONS FACED IN DIRECT
subsidy must be provided to buy some basic SUBSIDIES IMPLEMENTATION:-
inputs and to maintain minimum standard of 1. Lack of financial inclusion
living. Like MSP, Fertilizers supply. If not  It is simply the number of bank accounts. The
provided, many farmers could leave agriculture share of population not having bank accounts
and which ultimately leads to unemployment are the most genuine beneficiaries (for direct
and a food security issue. subsidies).
 Without almost complete and perfect financial
TYPES OF SUBSIDIES:- inclusion, the direct subsidy cannot be
1. INDIRECT SUBSIDIES implemented
 These are in-kind subsidies means the 2. Lack of unique identification of beneficiary:
subsidized products are provided at lower prices  If there is unique identification, we can reduce
than the market to the beneficiaries the number of duplicate beneficiaries of
 Example:- PDS subsidies, hence better targeting can be done.
 However, it is in case of both direct and indirect
2. DIRECT SUBSIDIES {DBT}
subsidies. In case of PDS, there are lakhs of fake
 These are in-cash subsidies which means the
ration cards, leads to PDS leakages also.
subsidized products are available at higher prices
 For unique identification we need Aadhar card.
means it may be market prices and the subsidy
Claim of every state is that every person has
amount is credited in the bank accounts of the
Aadhar card then why there is lack of unique
beneficiaries
identification of beneficiaries. There are two
 Also called as DBT:- direct benefit transfer
major problems :-
 Example:- LPG cylinder subsidy.
a) Possibility of fake Aadhar cards
 Note:- Economic theory says direct subsidies are
b) Lack of infrastructure needed for biometric
better. Even govt view also favors this.
authentication in Aadhar based subsidies.
 PROBLEMS OF INDIRECT SUBSIDIES: Infrastructure like regular electricity
{IT CAN BE BENEFITS OF DIRECT SUBSIDIES}:- availability, internet connectivity, smart
1. Poor targeting:- phones , point of sale (PoS) machines for
 More room for corruption in the indirect subsidies fingerprints.
due to the fact that the subsidized good crosses 3. Direct subsidies are not adjusted for
multiple administrative levels
inflation:-
 Example:- like PDS, grains have to cross many
administrative levels from FCI to people. Black-
 Even if direct subsidies are conceptually better,
marketing of food grains in PDS:- means selling the the transition from indirect to direct subsidies
subsidized grains at higher prices in open market and (DBT) should be slow and gradual process.
this will lead to poor targeting as very less will reach Basically it should not be done in hurry.
to beneficiaries. In PDS we call it PDS leakages. PDS  Some crucial subsidies can be left as indirect
leakages tell us the share of PDS grains that didn’t subsidies as indirect subsidies are automatically
reach the beneficiaries. adjustable for inflation.
 Hence, direct subsidies are better targeted as it is  Understand by example :- there were some
directly transferred to bank accounts of beneficiaries. pilot projects of GOI in relation to DBT in PDS
 Chandigarh, Pondicherry and some selected Telangana. Under this Rythu Bandhu
districts of Jharkhand were chosen. Scheme Govt. Farmers of Telangana State will
 Chandigarh, Pondicherry were selected for be given Rs. 5000/- per acre will be given to
availability of infrastructures for DBT instrument . every farmer for the crop.
it was a success in these areas but in some
 PM KISAN: - in which is 6000Rs are transferred
selected districts of Jharkhand this DBT system
was not very successful as beneficiaries faced in bank accounts of farmers unconditionally. The
many problems. Government has launched a new Central Sector
 After DBT was launched in these areas, surveys Scheme Pradhan Mantri KIsan SAmman Nidhi
were conducted and asked people about DBT, (PM-KISAN) to provide income support to all
interestingly, in Chandigarh and Pondicherry 70% Small and Marginal landholding farmer families
of the beneficiaries wanted to go back to indirect Under the scheme, Landholder Farmer families
PDS rather than DBT despite success of DBT as with total cultivable holding upto 2 hectares
pilot. Major reason was given by beneficiaries that shall be provided a benefit of Rs.6000 per
after some time when they went to market the
annum per family payable in three equal
grain prices were higher means same amount of
installments, every four months. The scheme
grains could not be bought with DBT subsidy.
(reflecting inflation) takes effect from 01.12.2018. The first
 So real benefits of subsidies were lower in these installment to eligible beneficiaries during this
pilot projects. financial year 2018-19 shall be for the period
 Note:- Transport and storage cost etc are from 01.12.2018 to 31.03.2019
burden on economy both under indirect and  Note:- in both of these farmers must be owning
direct subsidy. land
 KALIA:- by Odisha govt:- also for the landless farmers
 UNIVERSAL BASIC INCOME (UBI) along with land owning farmers. KALIA stands for
 UBI is a proposal to provide certain basic “Krushak Assistance for Livelihood and Income
minimum income unconditionally in the bank Augmentation”. This scheme has been launched by
accounts in a near universal manner. Odisha Government to accelerate Agricultural
 It is similar like DBT but DBT are conditional like Prosperity and reduce poverty in the State.
condition is to buy first LPG then get DBT  Note:-During Covid pandemic 500Rs were transferred
benefit. to every women account was also a type of UBI for
women.
 BENEFITS OF UBI:-  Note:- Some of the economists say we must talk
1) Better targeting (interbank transfers so about UBA :- universal basic amenities rather than
corruption chances are very less) UBI.
2) UBI gives unrestricted Freedom of choice to the ……..12th class ended,13th started….
beneficiaries due to unconditional in nature.
3) UBI acts as insurance for relatively poor  FOOD SECURITY & AGRICULTURE
population/low income population. PRICE POLICY
 LIMITATIONS OF UBI:-  Food security has 2 aspects
1) Possibility of unproductive consumption and lack a) Availability of food grain
of willingness to work. b) Affordability of food grains
2) Very high govt burden higher than even indirect  Any policy ensuring these two aspects for entire
subsidies because of its unconditional and near population at any point of time
universal nature. According to 2015-16  There are also two aspects of Agriculture
economic survey, this burden is 4-5% of GDp, price policy
which is very high. a) Remunerative price of farmers :- MSP , (MSP >
3) UBI may provide basic requirements including Market Price)
human capital but not all basic amenities. {for b) Affordable price to consumers {CIP (PDS), CIP <
Market Price}
this we need investments mainly by the govt in
it}  CIP:- CENTRAL ISSUE PRICE (CIP)
 VARIANTS OF UBI:-  CIP is a price at which central government sells grains
to the states for PDS or for maintaining PDS
 Rythu Bandhu scheme:- scheme related to  If the issue prices is less than CIP means that there is
agriculture , farmers were provided with additional subsidy is given by states to consumers
unconditional support worth 8000Rs. Rythu  Central Issue Price (CIP) is the price at which
Bandhu Agriculture Investment Assistance government makes these foodgrains available to
Scheme is launched by the Directorate of states. The states fix retail price to be charged at fair
Treasury and Accounts, Government of
price shops. The state government's responsibility in  Lower CIP = Higher Food subsidy
PDS is operational.
 It has been decided with the approval of Prime
 PUBLIC DISTRIBUTION SYSTEM (PDS)
Minister's Office to continue to existing Central Issue  Some problems we discussed about PDS are
 One problem was higher leakage of PDS (due to black
Prices of foodgrains i.e. Rs. Rs. 3/2/1 per kg for rice,
wheat and coarse grains respectively under NFSA markets of grains even fake ration cards etc)
 Poor quality of food grains (when better quality of
until further orders
grains taken and sold in black marketing)
 ASPECTS OF FOOD SECURITY  Higher govt burden
 FOOD SECURITY FRAMEWORK  BRIEF HISTORICAL VIEW OF PDS
 Producers of food grains  Sells at MSP to  FCI  MID 1965:-
(Food corporation of India) FCI transports the grain  PDS started in India
to Godowns of FCI where grains are stored  again  PRE 1997:-
transportation and sale of these grains is done to  PDS was Universal PDS means there were higher
states at CIP  this grains within states goes to PDS coverage of PDS (more and more beneficiers were
outlets  then sold to consumers either at CIP or at included in PDS)
lower price  POST 1997:-
 This is called centralised procurement  PDS has become targeted PDS, means lower coverage
 This whole food security framework is associated , means less people have benefit of PDS
with the center (means only reflecting the role of  Targeted is divided into two parts
center)  BPL households:- these were given subsidised grains,
 Suppose states sell at less than CIP to consumers, practically CIP for them was lower even lower than
(as PDS cannot charge more than CIP note it), earlier before
means the issue prices is less than CIP means  APL households:- they were not provided with
that there is additional subsidy is given by states subsidised rains means higher CIP
to consumers  TPDS (Targeted PDS ) got failed as GOI was not able
 So states can only interfere in providing subsidy to achieve its goal of high CIP and less food subsidy
to consumers and can have a decentralised burden because
approach to procure food grains in this whole  Many APL households left PDS (as they neither
food security framework, else everything is done getting subsidy nor better quality grains)
by the center  From 2000-01 govt brought another scheme in food
 In this food security framework ,From producers to security named Antyodaya Anna Yojana (Antyodaya
consumers center is giving different subsidies also households means poorest of the poor) and these
called as Food subsidy households were provided even cheaper food grains
 FOOD SUBSIDY:- means cheaper than the other BPL households
 Basically from 2000-01
 refers to the total govt burden on center while
 APL:- CIP
maintaining the food security framework
 BPL:- lower CIP
 Food subsidy can be divided into three main
 Antyodaya households:- Lower than BPL
components
 So average CIP decreased leading higher food subsidy
1) subsidy to the producers/farmers
 Storage cost became higher (it also lead to higher
 Subsidy to farmers in form of MSP but entire MSP is
not subsidy as farmers can sell without MSP also food subsidy)
 Therefore= (MSP-Market price) = this is called as  YEAR 2013:-
subsidy to the producers/farmers  National Food Security Act (NFSA) came under force
2) Acquisition cost of food grains from 2013
 Acquisition cost:- (transportation + Storage +  NFSA provided:-
miscellaneous costs)  Right to food to a number of beneficiers most
3) Subsidy to consumers
important one are TPDS, Children under midday meal
 (Market price –CIP) = Subsidy to consumers
scheme Children under ICDS, pregnant and lactating
 So food security formulas are as following:- women. Now all get legal right even they were
a) Food subsidy = {(MSP-Market price) receiving this before 2013 also but not as legal right
+(transportation + Storage + miscellaneous
costs)+ (Market price –CIP)}  FEATURES OF TPDS UNDER NFSA
b) Food subsidy = {(MSP + Acquisition cost of food 1) Identification of beneficiaries
grains) –CIP}  Beneficiaries divided further under two
 {(MSP + Acquisition cost of food grains)= is called a) Priority households:- are not clearly defined by
as Economic cost of food grains NFSA
c) Food subsidy = { Economic cost of food grains – b) Antyodaya households
CIP}  Both HHs are called “Eligible HHs” under NFSA and
 Higher MSP = higher Acquisition cost = Higher these eligible HHs are selected by states , but with
Food subsidy certain instructions like states must select
 On basis of socio-economic caste census (this census
started in 2011) more transparent and efficient system
 Eligible HHs must include 75% of rural population,  Most of the PDS reforms were done by states rather
50% of Urban population. than center, Chattisgarh is leading in that because of
 Note:- At all India basis this becomes 67% of total its implementation
population of India if every states follows this NFSA’s a) Door step delivery: - reduction in PDS leakages when
instruction. This represents Higher coverage that is grains are transferred from FCI to PDS outlets
why it is always questioned in India about PDS through better governance , use of technology etc by
2) Entitlements /benefits the states. E.g
 It has also two parts like for  For better governance:- setting up of food
departments to monitor the movements of grains
a) Priority households:- 5 kg grains/person/month
(done in Chattisgarh)
with maximum of 25kg of grains/HHs/Month
 For technology:- End-to End computerisation of food
b) Antyodaya households:- 35kg/HHs/month grains movements record
3) Very low CIP for all eligible HHs b) Better management of PDS outlets by community
 Rs 3/2/1 per Kg means based institutions
a) Rs3/kg= rice  In Both TN and Chattisgarh , PDS are run by
b) Rs 2/kg = wheat Cooperative society , here cooperative society is
c) Rs1/kg = Coarse grains an example of community based institution.
 It is also a matter of debate whether low CIP is {note in economics we talk about private system
worth it or not is more efficient but in business, PDS is a welfare
4) Head of HHs as mentioned in ration card based system so better not to be run by private
must be eldest woman of the HHs (provided entities as it is for welfare not for profit making}
woman must be of 18,18+) c) Reducing fake ration cards by introducing Bar-coded
ration cards.
 DEBATABLE ISSUES UNDER NFSA  E.g Chattisgarh made all the ration cards available with
1) Higher coverage :- bar codes which helped to remove lakhs of fake ration
cards
 Is higher coverage (67%) justified or not:- yes it is
 Center brought Aadhar linked ration card scheme, but
justified. As we know we have Main criticism of
this reform to reduce fake ration cards was not much
higher coverage is that it will lead to higher food successful (as it requires infrastructure needed for
subsidy because there are more people who are biometric authentication for Aadhar is not available in
given food subsidy. This argument (criticism) is all Indian villages) as the bar code does.
correct, but note it that d) One Nation One Ration Card (ONORC) means ration
a) Higher coverage may also reduce storage cost , card issued in a district can be used in any PDS outlet
so food subsidy may not increase much within the district and even anywhere in the state
b) Higher coverage reduces the wastage of food and the nation. It is going to be beneficial more for
grains due to poor quality storage infrastructure migrant workers. Conditions for this are
(rain + rodents + other reasons)  Aadhar linked ration cards
c) Most successful states in PDS have higher  Need for better coordination among the states
coverage and that too even before NFSA. As PDS e) DBT (Direct benefit transfer) in PDS
leakages should be low for a successful PDS,  For Better targeting
states like Tamil Nadu and CHATTISGARH both  Lower burden on govt
states are unique in PDS  More freedom to the beneficiary
 Tamil Nadu:- only state that always follows
universal PDS or that always had UPDS. And it
INTERNET ADDITION ABOUT PDS
 The Public distribution system (PDS) is an Indian food
has always very low PDS leakages
Security System established under the Ministry of
 Chattisgarh:- has UPDS since 2012. It made it by
Consumer Affairs, Food, and Public Distribution.
an Act one year before of center NFSA 2013.
 PDS evolved as a system of management of scarcity
 These states giving evidence that higher
through distribution of food grains at affordable
coverage or UPDS can be better
prices.
2) Very Low CIP  PDS is operated under the joint responsibility of the
 Majority or arguments say Low CIP is not justified Central and the State Governments.
because  The Central Government, through Food Corporation
a) It will lead to higher Food subsidy because CIP is of India (FCI), has assumed the responsibility for
for all eligible HHs. Since lower CIP for all so procurement, storage, transportation and bulk
overall CIP must decline leading higher food allocation of food grains to the State Governments.
subsidy  The operational responsibilities including allocation
b) Under very low CIP, Black marketing of grains within the State, identification of eligible families,
may increase , because there may be black- issue of Ration Cards and supervision of the
marketing of food grains also done by HHs functioning of Fair Price Shops (FPSs) etc., rest with
 THE PDS REFORMS:- the State Governments.
 Under the PDS, presently the commodities
 Reforms that reduce PDS leakages and make PDS
namely wheat, rice, sugar and kerosene are being
allocated to the States/UTs for distribution. Some
States/UTs also distribute additional items of mass
consumption through the PDS outlets such as pulses,
edible oils, iodized salt, spices, etc.
EVOLUTION OF PDS IN INDIA
 PDS was introduced around World War II as a war-
time rationing measure. Before the 1960s,
distribution through PDS was generally dependant on
imports of food grains.
 It was expanded in the 1960s as a response to the IMPORTANCE OF PDS
food shortages of the time; subsequently, the  It helps in ensuring Food and Nutritional Security of
government set up the Agriculture Prices the nation.
Commission and the FCI to improve domestic  It has helped in stabilising food prices and making
procurement and storage of food grains for PDS. food available to the poor at affordable prices.
 By the 1970s, PDS had evolved into a universal  It maintains the buffer stock of food grains in the
scheme for the distribution of subsidised food warehouse so that the flow of food remain active
 Till 1992, PDS was a general entitlement scheme for even during the period of less agricultural food
all consumers without any specific target. production.
 The Revamped Public Distribution System (RPDS) was  It has helped in redistribution of grains by supplying
launched in June, 1992 with a view to strengthen and food from surplus regions of the country to deficient
streamline the PDS as well as to improve its reach in regions.
the far-flung, hilly, remote and inaccessible areas  The system of minimum support price and
where a substantial section of the underprivileged procurement has contributed to the increase in food
classes lives. grain production.
 In June, 1997, the Government of India launched  Issues Associated with PDS System in India
the Targeted Public Distribution System (TPDS) with a Identification of beneficiaries:
focus on the poor.  Studies have shown that targeting mechanisms such
 Under TPDS, beneficiaries were divided into two as TPDS are prone to large inclusion and exclusion
categories: Households below the poverty line or errors. This implies that entitled beneficiaries are not
BPL; and Households above the poverty line or APL. getting food grains while those that are ineligible are
 Antyodaya Anna Yojana (AAY): AAY was a step in the getting undue benefits
direction of making TPDS aim at reducing hunger  According to the estimation of an expert group set up
among the poorest segments of the BPL population. in 2009, PDS suffers from nearly 61% error of
A National Sample Survey exercise pointed towards exclusion and 25% inclusion of beneficiaries, i.e. the
the fact that about 5% of the total population in the misclassification of the poor as non-poor and vice
country sleeps without two square meals a day. In versa.
order to make TPDS more focused and targeted Leakage of food grains:
towards this category of population, the "Antyodaya  (Transportation leakages + Black Marketing by FPS
Anna Yojana” (AAY) was launched in December, owners) TPDS suffers from large leakages of food
2000 for one crore poorest of the poor families. grains during transportation to and from ration shops
 In September 2013, Parliament enacted the National into the open market. In an evaluation of TPDS, the
Food Security Act, 2013. The Act relies largely on the erstwhile Planning Commission found 36% leakage of
existing TPDS to deliver food grains as legal PDS rice and wheat at the all-India level.
entitlements to poor households. This marks a shift Issue with procurement:
by making the right to food a justiciable right.  Open-ended Procurement i.e., all incoming grains
HOW PDS SYSTEM FUNCTIONS? accepted even if buffer stock is filled, creates a
 The Central and State Governments share shortage in the open market.
responsibilities in order to provide food grains to Issues with storage:
 A performance audit by the CAG has revealed a
the identified beneficiaries.
serious shortfall in the government’s storage
 The centre procures food grains from farmers at
capacity.
a minimum support price (MSP) and sells it to  Given the increasing procurement and incidents
states at central issue prices. It is responsible for of rotting food grains, the lack of adequate covered
transporting the grains to godowns in each state. storage is bound to be a cause for concern.
 States bear the responsibility of transporting  The provision of minimum support price (MSP) has
food grains from these godowns to each fair encouraged farmers to divert land from production of
price shop (ration shop), where the beneficiary coarse grains that are consumed by the poor, to rice
buys the food grains at the lower central issue and wheat and thus, discourages crop diversification.
price. Many states further subsidise the price of Environmental issues:
 The over-emphasis on attaining self-sufficiency and a
food grains before selling it to beneficiaries.
surplus in food grains, which are water-intensive, has

been found to be environmentally unsustainable. trucks carrying food grains
 Procuring states such as Punjab and Haryana are from state depots to FPS
under environmental stress, including rapid SMS based Allows monitoring by Chhattisgarh
groundwater depletion, deteriorating soil and water monitoring citizens so they can TN
register their mobile UP
conditions from overuse of fertilisers.
numbers and send/receive
 It was found that due to cultivation of rice in north- SMS slerts during dispatch
west India, the water table went down by 33 cm per and arrival of TPDS
year during 2002-08. commodities
PDS REFORMS Use of
Web based
Publicises grievance
redressal machinery, such
Chhattisgarh
 Role of Aadhar: Integrating Aadhar with TPDS will Citizens as toll free number for call
help in better identification of beneficiaries portal centres to register
and address the problem of inclusion and exclusion complaints or suggestions
errors. According to a study by the Unique
Identification Authority of India, using Aadhaar with  PDS VS. CASH TRANSFERS
TPDS would help eliminate duplicate and ghost (fake)  National Food Security Act,2013 provides for reforms
beneficiaries, and make identification of beneficiaries in the TPDS including schemes such as Cash transfers
more accurate. for provisioning of food entitlements.
 Technology-based reforms of TPDS implemented by  Direct Benefit Transfer (DBT) aims to:
states: Wadhwa Committee, appointed by the  reduce the need for huge physical movement of
Supreme court, found that certain states had foodgrains
implemented computerisation and other technology-  provide greater autonomy to beneficiaries to
based reforms to TPDS. Technology-based reforms choose their consumption basket
helped plug leakages of food grains during TPDS.  enhance dietary diversity
 Tamil Nadu implements a universal PDS, such that  reduce leakages
every household is entitled to subsidised food grains.  facilitate better targeting
 States such as Chhattisgarh and Madhya Pradesh  promote financial inclusion
have implemented IT measures to streamline TPDS,  WAY FORWARD
through the digitisation of ration cards, the use of  PDS is one of the biggest welfare programmes of the
GPS tracking of delivery, and the use of SMS based government, helping farmers sell their produce at
monitoring by citizens. remunerative prices as well as the poorer sections of
 Technology-based reforms to TPDS undertaken by society to buy food grains at affordable rates.
some states  Its effectiveness can be enhanced with technology
Type of Benefits of reforms States
based solutions as is evident from some of the states’
reform implementing
reforms
successes towards the same. Shifting towards DBT is
Digitisation of Allows for online entry and Andhra TN, another idea, but with caution.
ration cards verification of beneficiary MP,  In its report on State finances, the Reserve Bank
data Chattisgarh of India (RBI) has advised States that are
Online storing of monthly GJ, Karnataka, planning to shift to cash transfer to be cautious
entitlement of while effecting the migration.
beneficiaries, number of  Economic survey 2016-17 also highlighted the
dependants, off take of need for more caution and better infrastructure
food grains by beneficiaries while replacing subsidised PDS supplies with DBT.
from FPS, etc.
 Strengthening of the existing TPDS system by capacity
Computerised Computerises FPS Delhi, TN, MP,
Allocation allocation, declaration of Chattisgarh
building and training of the implementing authorities
To FPS stock balance, web-based along with efforts to plug leakages is the best way
truck challans, etc. forward.
Allows for quick and  It can be further strengthened by the increased public
efficient tracking of participation through social audits and participation
transactions of SHGs, Cooperatives and NGOs in ensuring the
Issues of Secure electronic devices Haryana transparency of PDS system at ground level.
Smart used to store beneficiary Andhra  To enhance the nutritional level of masses, bio-
Cards in data Odisha
fortified foods need to be distributed through the
Place of Stores data such as name,
PDS that will make it more relevant in the backdrop
Ration address, biometrics,
cards BPL/APL category and of prevalent malnutrition in India.
monthly entitlement of
beneficiaries and family
 WORLD TRADE ORGANISATION
members (WTO) AND ITS ROLE:-
Prevents counterfeiting  WTO is an organisation that manages rules based
Use of GPS Use of Global Positioning Chhattisgarh
multi-lateral trading system since 1995
technology System (GPS) technology TN
 The World Trade Organization (WTO) is the only
to track movement of
global international organization dealing with the
rules of trade between nations. At its heart are the b) Amber Box Subsidies:- includes trade distorting
WTO agreements, negotiated and signed by the bulk subsidies as it has direct impact on production.
of the world’s trading nations and ratified in their Examples of these are like almost all subsidies on
parliaments. Agriculture inputs (electricity, fertiliser
 The WTO has 164 members (including European subsidies).
Union) and 23 observer governments (like Iran, Iraq,  Major debate on Amber box is going on MSP
Bhutan, Libya etc). related Subsidy as MSP is a price based subsidy
 World bank poverty line has been changed to leading more production and hence distorting
$2.14/person/day at PPP trade. Amber means go slow means a WTO
THE PRINCIPLES OF WTO member can give A-box subsidy without reducing
till a level it reaches and this level is named as
1. FREE TRADE:- “De-minimis Level”
 Trade without barriers (tariff + non-tariff)  De minimis level is decided as
2. FARE TRADE:- a) 5% of agricultural GDP for developed
 Means removing unfair trade practicing like countries
a) Dumping is an unfair trade practicing b) 10% of agricultural GDP for developing
b) Export subsidies:- the subsidies given by govt to countries
producers with the goal of increasing exports are  Reduction will be needed for a WTO member if
also considered as unfair this level is crossed or increased
 AGREEMENT ON AGRICULTURE (AOA)  THE WTO & INDIA LINKAGE:-
1. IMPROVING MARKET ACCESS  Debate:- Mainly
 Market access in WTO refers to the Lower tariffs a) WTO & Indian Agriculture
(basically same as Free Trade Agreement) b) Food security issue in WTO
2. REDUCTION IN EXPORT SUBSIDIES  2011:- US criticised India for giving higher
 An export subsidy reduces the price paid by foreign subsidies on Public stockholding of Food grains
importers, which means domestic consumers pay  2013:- India responded :- Bali Ministerial of WTO,
more than foreign consumers. The World Trade this response of India is called as “Food security
Organization (WTO) prohibits most subsidies directly issue in WTO”
linked to the volume of exports, except for LDCs  So in 2013 India said that
3. REDUCTION IN DOMESTIC SUBSIDIES a) MSP related subsidies are given for food security
 WTO says that These subsidies should be reduced if it b) The Amber box subsidies are still below De-
directly impacts production and therefore distorts minimis level (despite such policies)
trade c) India also pointed out that there are limitations
 Understand by this example:- in Subsidy calculation Formula in WTO
 Suppose that with Rs 100 of cost of production and  As MSP is referred as “External reference Price”
without any subsidy= 10kg of rice can be produced in by WTO and ERP is based on market price or
India. If the subsidy (like MSP) is given and the cost of prices during 1986-88 and India says how WTO
production is same , the production will increase , can compare its present MSP with so old Market
suppose production goes up to 15kg.
prices (which have been very low)
 suppose with same 100Rs of cost of production and
 In 2013 director general of WTO offered India
without subsidy 12 kg of the same variety of rice can
be produced in Bangladesh “Peace Clause” and under it India can continue
 Now WTO will have a problem with Indian subsidy , as its subsidies till 2017, Indian rejected the peace
now Indian farmer becomes competitor of Bangladesh clause and says we should not be given any
and distorts trade timeline as because India says it provides these
 Under WTO there are basically two types of subsidies for food security. Finally India was
Domestic agricultural subsidies allowed in WTO to continue its MSP policy even
a) Green Box Subsidies:- includes non-trade if we cross de minimis level.
distorting subsidies as it doesn’t have direct  From 2013 till 2022 we have geneva ministerial
impact on production. Examples like subsidies of WTO , In food security issue India has only one
given on agriculture research, infrastructure, demand that India demands a permanent
environmental development programmes, solution to Food security issue. In permanent
Decoupled payments etc. therefore there is no solution India has two demands
need to reduce these subsidies by any WTO a) Make MSP a green box subsidy
Member b) MSP subsidy formula should be changed
 Decoupled payments are:-payments made by (means ERP should be based on recent
govt to the farmers irrespective of their market prices)
production. These are mostly popular in INTERNET ADDITION ON WTO
European Union countries . in India, any type of  The World Trade Organization (WTO) is the only global
direct income support to farmers like PM-KISAN international organization dealing with the rules of trade
are considered as decoupled payments. between nations. At its heart are the WTO agreements,
negotiated and signed by the bulk of the world’s trading
nations and ratified in their parliaments. (ITO), which they envisioned as the third leg of the
 The WTO has 164 members (including European Union) and system.
23 observer governments (like Iran, Iraq, Bhutan, Libya etc).  In Havana in 1948, the UN Conference on Trade and
 WHAT ARE THE GOALS OF WTO? Employment concluded a draft charter for the
ITO, known as the Havana Charter, which would have
 The WTO’s global system lowers trade barriers through
created extensive rules governing trade, investment,
negotiation and operates under the principle of non-
services, and business and employment practices.
discrimination.
 The Havana Charter never entered into force,
 The result is reduced costs of production (because
primarily because the U.S. Senate failed to ratify
imports used in production are cheaper), reduced
it. As a result, the ITO was stillborn.
prices of finished goods and services, more choice and
 Meanwhile, an agreement as the GATT signed by 23
ultimately a lower cost of living.
countries in Geneva in 1947 came into force on Jan 1,
 The WTO’s system deals with these in two ways.
1948 with the following purposes:
 One is by talking: countries negotiate rules that are
 to phase out the use of import quotas
acceptable to all.
 and to reduce tariffs on merchandise trade,
 The other is by settling disputes about whether
 The GATT became the only multilateral instrument (not an
countries are playing by those agreed rules.
institution) governing international trade from 1948 until
 The WTO can stimulate economic growth and employment.
the WTO was established in 1995.
 The WTO can cut the cost of doing business internationally.
 Despite its institutional deficiencies, the GATT managed to
 The WTO can encourage good governance. Transparency —
function as a de facto international
shared information and knowledge — levels the playing
organization, sponsoring eight rounds (A round is a series
field.
of multilateral negotiations) of multilateral trade
 Rules reduce arbitrariness and opportunities for
negotiations.
corruption.
 So, the GATT became the only multilateral instrument
 The WTO can help countries develop: Underlying the
governing international trade from 1948 until the WTO was
WTO’s trading system is the fact that more open trade can
established in 1995.
boost economic growth and help countries develop.
 The Uruguay Round, conducted from 1987 to
 In that sense, commerce and development are good
1994, culminated in the Marrakesh Agreement, which
for each other.
established the World Trade Organization (WTO).
 In addition, the WTO agreements are full of provisions
 The WTO incorporates the principles of the GATT and
that take into account the interests of developing
provides a more enduring institutional framework for
countries.
implementing and extending them.
 The WTO can give the weak a stronger voice: Small
 The GATT was concluded in 1947 and is now referred
countries would be weaker without the WTO. Differences
to as the GATT 1947. The GATT 1947 was terminated
in bargaining power are narrowed by agreed rules,
in 1996 and WTO integrated its provisions into GATT
consensus decision-making and coalition building.
1994.
 Coalitions give developing countries a stronger voice in
 The GATT 1994 is an international treaty binding
negotiations.
upon all WTO Members. It is only concerned with
 The resulting agreements mean that all countries,
trade in goods.
including the most powerful, have to play by the rules.
The rule of law replaces might-makes-right.  WHY WTO REPLACED THE GATT?
 The WTO can support the environment and health: The  The GATT was only a set of rules and multilateral
trade is nothing more than a means to an end. The WTO agreements and lacked institutional structure.
agreements try to make trade support the things we really  The GATT 1947 was terminated and WTO preserved its
want, including a clean and safe environment, and to provisions in form of GATT 1994 and continues to
prevent governments using these objectives as an excuse govern trade in goods.
for introducing protectionist measures.  The trade in services and intellectual property rights
 The WTO can contribute to peace and stability: When the were not covered by regular GATT rules.
world economy is in turmoil, the multilateral trading  The GATT provided for consultations and dispute
system can contribute to stability. resolution, allowing a GATT Party to invoke GATT dispute
 Trade rules stabilize the world economy by discouraging settlement articles if it believes that another Party’s
sharp backward steps in policy and by making policy more measure caused it trade injury.
predictable. They deter protectionism and increase  The GATT did not set out a dispute procedure with
certainty. They are confidence-builders. great specificity resulting in lack of deadlines, laxity in
 HOW DID WTO CAME INTO BEING? the establishment of a dispute panel and the adoption
 From the early days of the Silk Road to the creation of the of a panel report by the GATT Parties.
General Agreement on Tariffs and Trade (GATT) and the  It made the GATT as a weak Dispute Settlement
birth of the WTO, trade has played an important role in mechanism.
supporting economic development and promoting peaceful  WHAT ABOUT THE COOPERATION
relations among nations.
 The General Agreement on Tariffs and Trade (GATT) traces BETWEEN THE WTO AND THE UN?
its origins to the 1944 Bretton Woods Conference, which  Although the WTO is not a UN specialized agency, it has
laid the foundations for the post-World War II financial maintained strong relations with the UN and its agencies
system and established two key institutions, since its establishment.
the International Monetary Fund (IMF) and the World  The WTO-UN relations are governed
Bank. by the “Arrangements for Effective Cooperation with
 The conference delegates also recommended the other Intergovernmental Organizations-Relations between
establishment of a complementary institution to be the WTO and the United Nations” signed on 15 November
known as the International Trade Organization 1995.
 The WTO Director General participates to the Chief Governing the Settlement of Disputes (DSU).
Executive Board which is the organ of coordination within  The DSB shall appoint persons to serve on the Appellate
the UN system. Body for a four-year term.
 WHAT IS THE STRUCTURE OF GOVERNANCE  It is a standing body of seven persons that hears appeals
from reports issued by panels in disputes brought by WTO
OF WTO? Members.
a) Ministerial conference  The Appellate Body can uphold, modify or reverse the
 The topmost decision-making body of the WTO is the legal findings and conclusions of a panel, and Appellate
Ministerial Conference, which usually meets every two Body Reports, once adopted by the Dispute Settlement
years. Body (DSB), must be accepted by the parties to the dispute.
 It brings together all members of the WTO, all of which are  The Appellate Body has its seat in Geneva, Switzerland.

countries or customs unions.
The Ministerial Conference can take decisions on all
 WHAT IS THE COUNCIL FOR TRADE IN
matters under any of the multilateral trade agreements. GOODS (GOODS COUNCIL)?
b) General council  The General Agreement on Tariffs and Trade (GATT) covers
 The General Council is the WTO’s highest-level decision- international trade in goods.
making body located in Geneva, meeting regularly to carry  The workings of the GATT agreement are the
out the functions of the WTO. responsibility of the Council for Trade in Goods (Goods
 It has representatives (usually ambassadors or Council) which is made up of representatives from all
equivalent) from all member governments and has WTO member countries.
the authority to act on behalf of the ministerial  The Goods Council has following committees dealing with
conference which only meets about every two years. specific subjects: (1) Agriculture, (2) Market access, (3)
 The General Council also meets, under different rules, as Sanitary and Phytosanitary (measures for the control of
 The General Council, plant diseases especially in agricultural crops) Measures,
 the Trade Policy Review Body, (4) Technical barriers to trade, (5) Subsidies and
 and the Dispute Settlement Body (DSU) countervailing measures, (6) Rule of origin, (7) Anti-
 Three councils, each handling a different broad areas of dumping measures, (8) Importing licensing, (9)Trade
trade, report to the General Council: related Investment Measures, (10) Safeguards, (11) Trade
 The Council for Trade in Goods (Goods Council) facilitation, (12) Customs valuation.
 The Council for Trade in Services (Services Council)  These committees consist of all member countries.
 The Council for Trade-Related Aspects of Intellectual  WHAT IS THE COUNCIL FOR TRADE IN
Property Rights (TRIPS Council)
 As their names indicate, the three are responsible for SERVICES (SERVICES COUNCIL)?
the workings of the WTO agreements dealing with  It operates under the guidance of the General Council and
their respective areas of trade. is responsible for facilitating the operation of the General
 Again they consist of all WTO members. Agreement on Trade in Services (GATS) and for furthering
c) Trade policy review body (tprb) its objectives.
 It is open to all WTO members, and can create subsidiary
 The WTO General Council meets as the TPRB to
bodies as required.
undertake trade policy reviews of Members under the
 Presently, the Council oversees the work of four such
TPRM and to consider the Director-General's regular
subsidiary bodies:
reports on trade policy development.
 the Committee on Trade in Financial Services:
 In Feb 2021, Nigeria's Ngozi Okonjo-Iweala was appointed
 It carries out discussions on matters relating to
as Director-General of the World Trade Organisation
trade in financial services and formulate
(WTO), the leading international trade body.
proposals or recommendations for consideration
 Ngozi Okonjo-Iweala is the first African official and the
by the Council.
first woman to hold the position.
 the Committee on Specific Commitments,
 The TPRB is thus open to all WTO Members.
 the Working Party on Domestic Regulation,
d) Dispute settlement body (dsu)  and the Working Party on GATS Rules
 The General Council convenes as the Dispute Settlement
Body (DSB) to deal with disputes between WTO members.  WHAT IS THE COUNCIL FOR TRADE-
 Such disputes may arise with respect to any agreement RELATED ASPECTS OF INTELLECTUAL
contained in the Final Act of the Uruguay Round that
is subject to the Understanding on Rules and Procedures PROPERTY RIGHTS (TRIPS COUNCIL)?
Governing the Settlement of Disputes (DSU).  It monitors implementation of the Agreement on Trade-
 The DSB has authority to: Related Aspects of Intellectual Property Rights (the TRIPS
 establish dispute settlement panels, Agreement).
 refer matters to arbitration,  It provides a forum in which WTO Members can consult on
 adopt panel, Appellate Body and arbitration reports, intellectual property matters, and carries out the specific
 maintain surveillance over the implementation of responsibilities assigned to the Council in the TRIPS
recommendations and rulings contained in such Agreement.
reports,  The TRIPS Agreement:
 and authorize suspension of concessions in the event  sets the minimum standards of
of non-compliance with those recommendations and protection for copyrights and related
rulings. rights, trademarks, geographical indications (GIs),
e) Appellate body industrial designs, patents, integrated circuit layout
 The Appellate Body was established in 1995 under Article designs, and undisclosed information.
17 of the Understanding on Rules and Procedures  establishes minimum standards for the
enforcement of intellectual property rights (IPRs)
through civil actions for infringement, actions at the negotiations, initiated in January 2000 under Article
border, XIX of the General Agreement on Trade in
 and at least in regard to copyright Services (GATS), and the large number of proposals
piracy and trademark counterfeiting, in criminal submitted by members on a wide range of sectors and
actions. several horizontal issues, as well as on movement of
 HOW MANY WTO MINISTERIAL natural persons.
 The Market access for non-agricultural
CONFERENCES (MC) HAVE BEEN HELD products:
TILL NOW?  The negotiations shall take fully into account the special
 The first Ministerial Conference (i.e. MC1) was held in needs and interests of developing and least-developed
Singapore in 1996 and the last one (MC11) was organised in country participants, including through less than full
Buenos Aires in 2017. All these MCs have evolved prevailing reciprocity in reduction commitments, in accordance with
current global trading system. the relevant provisions of Article XXVIII bis of GATT 1994.
 Singapore, 9-13 December 1996 (MC1)  Transparency in government procurement:
 Trade, foreign, finance and agriculture Ministers from more  Recognizing the case for a multilateral agreement on
than 120 World Trade Organization Member governments transparency in government procurement and the need
and from those in the process of acceding to the WTO for enhanced technical assistance and capacity building in
participated. this area, it agreed that negotiations would take place on
 The following four issues termed as the Singapore the basis of a decision to be taken, by explicit consensus.
issues were first brought up on which the multilateral body  Cancún, Mexico 10-14 September 2003
could initiate negotiations:
 trade and investment (MC5)
 trade facilitation  The main task was to take stock of progress in negotiations
 transparency in government procurement and other work under the Doha Development Agenda.
 trade and competition  Hong Kong, 13-18 December 2005 (MC6)
 Geneva, Switzerland 18-20 May 1998 (MC2)  The WTO member economies aimed to reach a preliminary
 The Ministerial Declaration included following work agreement on liberalization of farm trade by reducing
programmes: subsidies, and address other issues at meeting, aiming for a
 the issues, including those brought forward by successful conclusion of the Doha Round in 2006.
Members, relating to implementation of existing  After an intense talk, WTO Members have
agreements and decisions, produced an interim package for the Doha Round
 the future work already provided for under other negotiation:
existing agreements and decisions taken at  the deadlines for the elimination of agricultural export
Marrakesh, subsidies (2013) and cotton export subsidies (2006),
 possible future work on the basis of the work  and also mandates that duty and quota-free
programme initiated at Singapore, access for at least 97% of products originating from
 Priority areas for the next round of comprehensive the least developed countries (LDCs) be provided by
negotiations on agriculture include Market access, 2008.
Export subsidies etc.  Regarding non-agricultural market access (NAMA),
Members adopted the "Swiss formula" mandating
 Seattle, USA November 30 – December 3, greater cuts in higher tariffs, and decided that
1999 (MC3) modalities for tariff reduction be established by April
 There were two major issues, 30, 2006.
 first, whether to start a new comprehensive round of  The Swiss Formula (by the Swiss Delegation to
negotiations such as the Uruguay Round or confine the WTO) is a suggested method for reducing
negotiations to the so-called "built in agenda" tariff on non-agricultural goods (NAMA) by both
of agriculture and services mandated at the last developed and developing countries.
Ministerial.  It makes different coefficients for developed and
 Secondly, what should the negotiations encompass, developing countries.
more specifically what should be included in the  Here, tariff-cuts are supposed to be undertaken
agenda of the meeting. such that it cuts higher tariffs more steeply than
 The meeting was unable to resolve both issues, and ended it cuts lower tariffs.
in stalemate.  This meeting could have been the final step of the Doha
 The deliberations were suspended without agreement on a trade talks launched in 2001.
new round of negotiations and without agreement on a  Geneva, Switzerland 30 November - 2
ministerial declaration.
December 2009 (MC7)
 Doha, Qatar 9-13 November 2001 (MC4)  The theme of the Conference is “The WTO, the Multilateral
 Agriculture: The special and differential treatment for Trading System and the Current Global Economic
developing countries shall be an integral part of all Environment”.
elements of the negotiations to enable developing  Unlike previous Conferences, this meeting was not a Doha
countries to effectively take account of their development Round negotiating session, but rather a chance for
needs, including food security and rural development. Ministers to reflect on all elements of WTO's work,
 Services: The negotiations on trade in services shall be exchange ideas and extend guidance on the best way
conducted with a view to promoting the economic growth forward in the years to come.
of all trading partners and the development of developing
and least-developed countries.  Geneva, Switzerland 15-17 December 2011
 It recognizes the work already undertaken in the (MC8)

 The Conference approved the accessions of the Russian 19 pandemic.
Federation, Samoa and Montenegro.  The key areas of discussions were WTO’s response to the
 It adopted a number of decisions on intellectual property, pandemic, Fisheries subsidies negotiations, Agriculture
electronic commerce, small economies, least developed issues including Public Stockholding for Food
countries’ accession, a services waiver for least developed security, WTO Reforms and Moratorium on Custom Duties
countries, and trade policy reviews. on Electronic Transmission.
 It reaffirmed the integrality of special and differential
treatment provisions to the WTO agreements and their
 WHAT IS DOHA ROUND OF WTO?
 The Doha Round is the latest round of trade negotiations
determination to fulfil the Doha mandate to review them
among the WTO membership. Its aim is to achieve major
with a view to strengthening them and making them more
reform of the international trading system through the
precise, effective and operational.
introduction of lower trade barriers and revised trade rules.
 Bali, Indonesia 3-6 December 2013 (MC9)  The Round is also known semi-officially as the Doha
 The Conference adopted the “Bali Package”, a series of Development Agenda as a fundamental objective is to
decisions aimed at: improve the trading prospects of developing countries.
 streamlining trade,  The Round was officially launched at the WTO’s Fourth
 allowing developing countries more options for Ministerial Conference (MC4) in Doha, Qatar, in November
providing food security, 2001.
 boosting least-developed countries’ trade and helping  The Doha Ministerial Declaration provided the mandate
development more generally. for the negotiations, including on following subjects:
 The Bali Package is a selection of issues from the broader  Agriculture: More market access, eliminating export
Doha Round negotiations. subsidies, reducing distorting domestic support,
 The Conference also approved accession of Yemen as a sorting out a range of developing country issues, and
new member of the WTO. dealing with non-trade concerns such as food security
 Nairobi, Kenya 15-19 December 2015 and rural development.
 Non-agricultural market access (NAMA): To reduce or
(MC10)
as appropriate eliminate tariffs, including the
 It culminated in the adoption of the "Nairobi Package", a
reduction or elimination of high tariffs, tariff peaks and
series of decisions on agriculture, cotton and issues related
tariff escalation (higher tariffs protecting processing,
to least-developed countries (LDCs).
lower tariffs on raw materials) as well as non-tariff
a) Agriculture: barriers, in particular on products of export interest to
 Special Safeguard Mechanism for Developing Country developing countries.
Members,  Services: To improve market access and to strengthen
 Public Stockholding for Food Security Purposes, the rules.
 Export Competition,  Each government has the right to decide which
b) Cotton: sectors it wants to open to foreign
 Stressing the vital importance of cotton to a number companies and to what extent, including any
of developing economies and particularly the least- restrictions on foreign ownership.
developed amongst them,  Unlike in agriculture and NAMA, the services
 Developed country Members, and developing country negotiations are not based on a “modalities” text.
Members declaring themselves in a position to do so, They are being conducted essentially on two
shall grant preferential trade arrangements in favour tracks:
of LDCs, as from 1 January 2016, duty-free and quota-  bilateral and/or plurilateral (involving only some
free market access for cotton produced and exported WTO members) negotiations
by LDCs.  multilateral negotiations among all WTO
c) LDC issues: members to establish any necessary rules and
 Preferential Rules of Origin for Least Developed disciplines
Countries,  Trade facilitation: To ease customs procedures and to
 Implementation of Preferential Treatment in Favour of facilitate the movement, release and clearance of
Services and Service Suppliers of Least Developed goods.
Countries,  This is an important addition to the overall
 and Increasing LDC Participation in Services Trade, negotiation since it would cut bureaucracy and
 The decision in Nairobi builds on the 2013 Bali Ministerial corruption in customs procedures and would
Decision on preferential rules of origin for LDCs. speed up trade and make it cheaper.
 The “Nairobi Package” pays fitting tribute to the  Rules: These cover anti-dumping, subsidies and
Conference host, Kenya, by delivering commitments countervailing measures, fisheries subsidies, and
that will benefit in particular the organization’s poorest regional trade agreements.
members.  “Clarifying and improving disciplines” under the
 Buenos Aires, Argentina 10-13 December Anti-Dumping and Subsidies agreements,
 and to “clarify and improve WTO disciplines on
2017 (MC11) fisheries subsidies, taking into account the
 The Conference ended with a number of ministerial importance of this sector to developing countries.
decisions, including on fisheries subsidies and e-commerce  The environment: These are the first significant
duties, and a commitment to continue negotiations in all negotiations on trade and the environment in the
areas. GATT/ WTO. They have two key components:
 Geneva, Switzerland 12-17 June 2022  Freer trade in environmental goods – Products
(MC12) that WTO members have proposed include: wind
turbines, carbon capture and storage
 Kazakhstan was originally scheduled to host MC12 in June
technologies, solar panels.
2020 but the conference was postponed due to the Covid-
 Environmental agreements – Improving  Giving more opportunities for businesses from the
collaboration with the secretariats of multilateral poorest countries to provide services in the WTO's 164
environmental agreements and establishing member countries
more coherence between trade and  However, for many observers, Nairobi signalled the end of
environmental rules. the Doha talks, a sentiment that intensified after the 2016
 Geographical indications (GI): multilateral register for election of Trump.
wines and spirits  President Trump made clear his preference for
 Geographical indications are place names (in bilateral trade when he withdrew from the 12-country
some countries also words associated with a Trans-Pacific Partnership (TPP) shortly after taking
place) used to identify products that come from office.
these places and have specific characteristics (for  In 2017 Ministerial Conference Buenos Aires (MC11), USA
example, “Champagne”, “Tequila” or reflected the skepticism toward multilateralism when
“Roquefort”). Under the TRIPS Agreement, all it blocked agreement on a draft ministerial
geographical indications have to be protected at declaration that would have “reaffirmed the centrality of
least to avoid misleading the public and to the multilateral trading system and the development
prevent unfair competition (Article 22). dimension of the organisation’s work.”
 This is the only intellectual property issue that is  Meanwhile, India, which has repeatedly threatened to
definitely part of the Doha negotiations. block WTO agreements (including the Trade
 The objective is to “facilitate” the protection of Facilitation Agreement) unless WTO members
wines and spirits in participating countries. The conceded to its demands on public stockholding for
talks began in 1997 and were built into the Doha food security. India also toughened its stand on new
Round in 2001. issues including e-commerce and investment
 Other intellectual property issues: Some members facilitation.
want negotiations on two other subjects and to link  In the end, it was a relief to many that the United
these to the register for wines and spirits. Other States did not actively seek to dismantle the WTO—
members disagree. Following these two topics are as some had feared. But giving up its traditional
discussed: leadership role could lead to a similar result, only
 GI “extension”- Extending the higher level of more slowly.
protection for geographical indications beyond  How has WTO Contributed to the World?
wines and spirits.  The WTO is one of the three international organisations
 Biopiracy, benefit sharing and traditional (the other two are the International Monetary Fund (IMF)
knowledge and the World Bank Group) which by and
 Dispute settlement: To improve and clarify the large formulate and co-ordinate world economic policy. It
Dispute Settlement Understanding, the WTO is playing a crucial role in:
agreement dealing with legal disputes.  the international trade,
 These negotiations take place in special sessions  global economics,
of the Dispute Settlement Body (DSB).  and the political and legal issues arising in the
 With Doha Round seemingly adrift (directionless), the international business because of globalization.
global Great Recession that began in the second half of  It has emerged as the world's most powerful
2008 led to fears that the world may face a wave of institution for reducing trade related barriers between the
protectionism that the WTO would be powerless to countries and opening new markets.
prevent. Negotiations continued after the 2008 global  It cooperates with the IMF and World Bank in terms of
financial crisis with low expectations. making cohesiveness in making global economic policies.
 The 2013 Ministerial Conference (MC9) in Bali, Indonesia,  Through resolving trade related disputes, the WTO has got
delivered a significant achievement, the first multilateral the potential to maintain world peace and bilateral
agreement since the creation of the WTO. relations between its member countries thorough
 This was the Trade Facilitation Agreement (TFA), following negotiations, consultations and mediations.
which aims to speed up customs procedures and make  Global trade rules: Decisions in the WTO are typically
trade easier, faster, and cheaper. taken by consensus among all members and they
 The TFA was only a small slice of the larger Doha are ratified by members’ parliaments. This leads to a more
agenda, but the successful deal was a cause for prosperous, peaceful and accountable economic world.
optimism.  Trade negotiations: The GATT and the WTO have helped to
 The talks also reached an interim agreement (a peace create a strong and prosperous trading system contributing
clause) on “public stockholding” continuing to unprecedented growth.
exceptions that allow developing countries to stockpile  The system was developed through a series of trade
agricultural products to protect against food negotiations, or rounds, held under the GATT. The
shortages. 1986-94 round – the Uruguay Round – led to the
 2015 Ministerial Conference Nairobi, Kenya WTO’s creation.
(MC10) focused on a selected number of issues that are  In 1997, an agreement was reached on
part of the Doha Development Agenda (DDA). Agreement telecommunications services, with 69 governments
was reached on following DDA issues: agreeing to wide-ranging liberalization measures that
 Stopping the use of subsidies and other schemes went beyond those agreed in the Uruguay Round.
unfairly supporting agricultural exports  Also in 1997, 40 governments successfully
 Ensuring that food aid for developing countries is given concluded negotiations for tariff-free trade in
in a way which does not distort local markets information technology products, and 70 members
 Seeking to simplify the conditions that exporters from concluded a financial services deal covering more
the poorest countries have to meet, so that their than 95% of trade in banking, insurance, securities and
products benefit from trade agreements (so-called financial information.
rules of origin)
 In 2000, new talks started on agriculture and protection to geographical indications for products
services. These were incorporated into a broader work like Basmati rice, Darjeeling tea, and Alphonso mangoes at
programme, the Doha Development par with that provided to wines and spirits under the
Agenda, launched at the fourth WTO Ministerial Trade-related Aspects of Intellectual Property Rights (TRIPS)
Conference (MC4) in Doha, Qatar, in November 2001. agreement.
th
 At the 9 Ministerial Conference (MC9) in Bali in 2013,  Developed countries have been putting pressure
WTO members struck the Agreement on Trade on inclusion of non-trade issues such as labour standards,
Facilitation, which aims to reduce border delays by environmental protection, human rights, rules on
slashing red tape. investment, competition policy in the WTO agreements.
 The expansion of the Information Technology  India is against any inclusion of non-trade issues that
Agreement – concluded at the 10th Ministerial are directed in the long run at enforcing protectionist
Conference (MC10) in Nairobi in 2015 – eliminated measures (based on non-trade issues, the developed
tariffs on an additional 200 IT products valued at over countries like USA and European Union are trying to
US$ 1.3 trillion per year. ban the imports of some goods like textile, processed
 Most recently, an amendment to the WTO’s food etc.), particularly against developing countries.
th
Intellectual Property Agreement entered into force  At the recently held 12 MC of WTO, India opposed the
in 2017, easing poor economies’ access to affordable continuation of a moratorium on Customs Duties on
medicines. electronic transmission (E-Transmission) as it favors
 The same year saw the Trade Facilitation developed nations only.
Agreement enter into force.  India and South Africa on several occasions have asked
 WTO AGREEMENTS: the organization to revisit the issue and have
highlighted the adverse impact of the moratorium on
 The WTO’s rules – the agreements – are the result of developing countries.
negotiations between the members.  India wants the WTO to intensify the work programme
 The current set is largely the outcome of the 1986- on the e-commerce sector.
94 Uruguay Round  India has also stated that the Council for Trade in
negotiations, which included a major revision of the Goods, Council for Trade in Services, Council for TRIPS
original General Agreement on Tariffs and (Trade Related Aspects of Intellectual Property Rights)
Trade (GATT). and the Committee for Trade and Development should
 Goods: From 1947 to 1994, the GATT was the forum for take up discussions on e-commerce as per their
negotiating lower tariffs and other trade barriers, the text respective mandates originally set.
of the GATT spelt out important rules, particularly non-
discrimination. After 1994, WTO ratified new,  WHAT ARE CONCERNS ASSOCIATED
comprehensive, integrated GATT as GATT 1994. WITH WTO?
 What about the Cooperation between WTO  In 2001, the WTO membership launched the “Doha
and India? Development Agenda” – a massive attempt to update
 India is a founder member of the General Agreement on trading rules. The participating countries spent years trying
Tariffs and Trade (GATT) 1947 and its successor, the WTO. and failing to reach an agreement.
 India's participation in an increasingly rule based  A central problem in negotiation was the difficulty of
system in the governance of international trade is to getting well over 150 countries to reach a consensus.
ensure more stability and predictability, which  In the previous negotiating round (The Uruguay
ultimately would lead to more trade and prosperity. Round, conducted from 1987 to 1994), potential hold-
 Services exports account for 40% of India's total exports of out countries could be threatened with exclusion
goods and services. The contribution of Services to India's from the new WTO.
GDP is more than 55%.  That trick could not be repeated once they were
 The sector (domestic and exports) provides already in.
employment to around 142 million people,  The 2017 WTO Ministerial Conference (MC11) Buenos
comprising 28% of the work-force of the country. Aires ended without any substantial outcome as
 India's exports are mainly in the IT and IT enabled consensus failed the 164-member body.
sectors, Travel and Transport, and Financial sectors.  The USA blocked a permanent solution on
 The main destinations are the US (33%), the EU (15%) government stockholding for food security
and other developed countries. purposes, resulting in India’s toughened stand on new
 India has an obvious interest in the liberalisation of issues including e-commerce and investment
services trade and wants commercially meaningful facilitation.
access to be provided by the developed countries.  Developed countries led by the US and the European
 Since the Uruguay Round, India has autonomously Union sought to find a way out of the deadlock at the WTO
liberalised its Services trade regime across the board. talks by forming large pressure groups on e-commerce,
 Ensuring food and livelihood security is critical, particularly investment facilitation and MSMEs within the WTO with
for a large agrarian economy like India. more than 70 members in each formulation.
 India is persistently demanding for a permanent  Though WTO is driven by consensus and even a
solution on public stockholding subsidies at WTO. plurilateral agreement needs approval of all members,
 At 2013 Ministerial Conference (MC9) in Bali, an the formation of these groups as an attempt to steer
interim agreement (a peace clause) was made on WTO away from its focus on multilateralism.
“public stockholding” continuing exceptions that  It’s fierce defense of ‘Trade Related Intellectual Property’
allow developing countries to stockpile rights (TRIPs)—patents, copyrights and trademarks—
agricultural products to protect against food comes at the expense of health and human lives.
shortages.  WTO has protected for pharmaceutical companies’
 India strongly favours extension of higher levels of ‘right to profit’ against governments seeking to
protect their people’s health by providing lifesaving
medicines in countries in areas like sub-saharan Africa,
where thousands die every day from HIV/AIDS.
 The U.S.A. has consciously (or not) destroyed the Doha
round of trade negotiations process in formulating
excessive demands that no country was prepared to meet.
 The priority of the Obama administration was not to
revive a dying WTO negotiation, but to concentrate
on its newly created alternative, the TPP (Trans-
Pacific Partnership), to contain its competitors:
Europe and China.
 For years now, the multilateral system for the settlement
of trade dispute has been under intense scrutiny and
constant criticism.
 The U.S. has systematically blocked the appointment
of new Appellate Body members (“judges”) and de
facto impeded the work of the WTO appeal
mechanism.
 Chinese mercantilism (try to influence trade and business,
especially by encouraging exports and putting limits on
imports), the USA’s aggressive use of unilateral tariff
measures, and the inability of WTO members to reach
consensus on expanding its disciplines to important new
sectors in the modern economy reinforce the critique of
the WTO.
 Lack of Transparency: There is a problem in WTO
negotiations as there is no agreed definition of what
constitutes a developed or developing country at the
WTO.
 Members can currently self-designate as developing
countries to receive ‘special and differential
treatment’ – a practice that is the subject of much
contention.
 For instance, China got the ‘developing country’
status at the WTO which became a contentious issue
with a number of countries raising concerns against
the decision.
 WHAT COULD BE THE WAY FORWARD?
 Since the WTO is consensus-based, reaching an agreement
on reforms among all 164 members is extremely
difficult. One possibility moving forward could be
a plurilateral agreement with a group of like-minded
countries on a new set of rules that serve as an addendum
(supplement) to the broader WTO.
 CONCLUSION
 Today, the world is going through the protectionism, trade
war (like USA & China), and Brexit making global economy
squeezed. The role of WTO in future is very crucial to
preserve global liberalised economic system evolved since
nd
the end of the 2 World War.
 It is right time when countries like USA giving threat to
withdraw from WTO making it dysfunctional, India and
other emerging economies like Brazil, South Africa etc can
provide a strong base for strong WTO with saving interests
of developing countries.
……..13th class ended, All classes done….

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NOTES MADE BY AKASH 7589157201 E-5 BATCH STUDENT 2022

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