Economy Static 1

INDIAN ECONOMY
PART 1
Introduction of Indian Economics 2
CHAPTER-1
Basic Concepts of Micro Economics 6
CHAPTER-2
National Income Accounting 8
CHAPTER-3
Poverty, Inequality and Unemployment 13
CHAPTER-4
PART 2
Fiscal Policy 26
CHAPTER-5
Taxation in India 36
CHAPTER-6
Monetary Policy 46
CHAPTER-7
PART 3
Inflation 50
CHAPTER-8
Banking System of India 55
CHAPTER-9
Balance of Payments 70
CHAPTER-10
PART 4
Financial Markets 80
CHAPTER-11
Regulatory Bodies 89
CHAPTER-12
International institutions 100
CHAPTER-13
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Chapter: Introduction of Indian Economics
1. Introduction: It is system of production, distribution, and consumption of goods and
services that a society uses to address problem of scarcity + It aims to transform resources
into useful goods and services (the act of production), then distribute to useful ends (the act
of consumption).
2. Factors of Production
• Land: It is the naturally occurring materials used for production of goods and services,
including the land itself; minerals and nutrients; water, wildlife, and vegetation on the
surface; and the air above.
• Labour: It is the mental and physical efforts of humans (excluding entrepreneurship)
used for production of goods and services.
• Capital: Manufactured, synthetic goods used in the production of other goods, including
machinery, equipment, tools, buildings, and vehicles.
• Entrepreneurship: Human effort which takes on the risk of bringing labor, capital, and
land together to produce goods.
3. Factor Payments: Wages paid for the services of labour; Interest is the payment for the
services of capital; Rent is payment for the services of land; Profit is factor payment to
entrepreneurship.
4. Physical Capital Vs Human Capital
5. Economic Agents
Households: All people living under one roof are considered a household + They
demand goods and services from markets + Supply labor, capital, land, and
entrepreneurial ability to resource markets + They undertake consumption expenditure
which is total money spent on final goods and services by individuals for personal use.
Firms: They combine services of four factors of production acquired from household
sector, to pursue their productive activities + They primarily produce goods which satisfy
wants and needs of household sector.
Government: It intervene in economy by collecting and spending tax revenue and by
establishing and enforcing laws, rules, and other regulations + It promotes competition,
regulate natural monopolies, produce public goods, redistribution of Income,
Employment, price stability, economic growth.
Foreign sector: Primary role is foreign trade + The domestic household, business, and
government sectors purchase imports produced in the foreign sector. The foreign sector
buys exports produced by the domestic business sector.
6. Opportunity Cost: It represent the potential benefits that an individual, investor, or
business misses out on when choosing one alternative over another + Opportunity Cost =
Return on investment for an option not chosen – Return on investment for a chosen option
7. Types of Economy
Ø Market/Capitalist Economy: It is a system in which the laws of
supply and demand direct the production of goods and services. Supply includes natural
resources, capital, and labor. Demand includes purchases by consumers, businesses, and
the government.
o Features
§ Private ownership of most resources, goods, and other stuff (private property);
§ Freedom to use the privately-owned resources, goods to get the most wages,
rent, interest, and profit possible
§ Relatively competitive markets + Only those consumer goods will be produced
that are in demand, i.e., goods that can be sold profitably either in the domestic
or in the foreign markets.
§ Limited role of government-> mainly to protect the rights of private
citizens and maintain an orderly environment.
§ Advantages are Supply and demand are driven by consumers and businesses,
competition encourages efficiency, Innovation is rewarded with profits.
§ Disadvantages are not everyone can realize their full potential, Self-interest tends
to rule over concern for the whole.
Ø Socialist Economy: It is based on government ownership of resources, worker control
of the government, income allocated on need rather than on resource ownership or
contribution to production, government decides what goods are to be produced in
accordance with the needs of society.
§ Advantages are reduction of relative poverty, benefits of public ownership, equal
society which is more cohesive.
§ Disadvantages are lack of incentives, welfare state can cause disincentives.
Ø Mixed Economy: It is a system that combines aspects of both capitalism and socialism
+ It protects private property and allows a level of economic freedom in the use of capital,
but also allows for governments to interfere in economic activities in order to achieve
social aims.
8. Capitalist Vs Socialist
9. Types of Economy: Per Capita Income

Categorization Per Capita GNI (2019)
Low Income Economy < $1025
Lower Middle Income Economy $1026-$3995
Upper Middle Income Economy $3996-$ 12, 375
High Income Economy > $ 12,376
10. Structural Composition of Economy
• Primary activities: Extracts products from the earth such as raw materials and basic
foods + Activities include agriculture (both subsistence and commercial), mining,
forestry, grazing, hunting and gathering, fishing, and quarrying.
• Secondary activities: Produce finished goods from the raw materials extracted by the
primary economy. All manufacturing, processing, and construction jobs lie within this
sector + Activities include metalworking and smelting, automobile production, textile
production, the chemical and engineering industries, aerospace manufacturing, energy
utilities, breweries and bottlers, construction, and shipbuilding.
• Tertiary activities: Activities include retail and wholesale sales, transportation and
distribution, restaurants, clerical services, media, tourism, insurance, banking, health
care, and law.
• Quaternary activities: It consists of intellectual activities often associated with
technological innovation + It include government, culture, libraries, scientific research,
education, and information technology.
• Quinary activities: It includes top executives or officials in such fields as
government, science, universities, nonprofits, health care, culture, and the media +
Domestic activities also sometimes mentioned in the quinary sector.
11. Types of Goods: Consumer Vs Capital goods
12. Public Vs Private Goods
Chapter: Basic Concepts of Micro Economics
1. Microeconomics: When the economics study relates to an individual unit or part of the
economy + Focus on production, consumption, supply-demand and price determination +
Basically concerned with determination of output and price for anindividual firm or
industry + Its focus is on maximization of individual’s gain.
2. Law of Demand: It states that if all other factors are equal, the demand for a good is
inversely proportional to the price of the good.
3. Law of Supply: It states that, all other factors being equal, as the price of a good or service
increases, the quantity of goods or services that suppliers offer will increase, and vice
versa.
4. Elasticity of Demand: It refers to the sensitivity of the demand for a good to the
differences in other economic variables such as prices and customer benefits + Higher
demand elasticity indicates that the customers are more conscious of changes in this
variable.
5. Price Elasticity of Demand: It is the ratio of the percentage change in quantity demanded
of a product to the percentage change in price.
6. Substitute and Complementary goods
7. Giffen Goods: It is a low income, non-luxury product that defies standard economic and
consumer demand theory + Demand for Giffen goods rises when the price rises and falls
when the price falls.
8. Veblen Goods: It is a good for which demand increases as the price increases + These are
typically high-quality goods that are made well, are exclusive, and are a status symbol +
Examples include designer jewelry, yachts, and luxury cars.
9. Market Structure
Chapter: National Income Accounting
• Gross Domestic Product: The gross domestic product is the sum of all the final goods and
services produced by the residents of a country in one year.
Types of GDP:
Nominal GDP Real GDP
Definition Current year production of Current year production of
Final goods and services Final goods and services
Types of valued at current year prices. Types of valued at base year prices.
Representation More of estimation of economy Representation of real economy
of economy
Inflation Inflation not taken into account Inflation taken into account
Considered Based on everyday prices Relative to some other points (base
using year)
Implications Increase in nominal GDP does not Increase in real GDP implies
implies production of goods and increase in the production of good
services as it may be due to general and services
price rise.
Real GDP: Nominal GDP/ Deflator (to adjust the inflation)

Market Price and Factor Cost:
• Market Price: Market price refers to the actual transacted price and it includes indirect taxes;
custom duty, GST etc.
• Factor Cost: Factor cost refers to the actual cost of the Various factors of production includes
government grants and subsidies but it excludes indirect taxes.
Transfer Payments: Transfer payment refers to payments made by government to
individuals for which there no economic activity is produced in return by these individuals.
Example: Scholarship, pension.
Measurement of GDP:
Measurement of GDP
Value added Method (Net Income Method (Sum of all Expenditure Method (Sum
value added by all factor income is measures) of all items of final
producing units) expenditure is measured)
Expenditure Method:
Mean: final expenditure on GDP is measured.
Covered agencies: Expenditures of Households, Firms, Government and net exports
(consume by rest of the world) is measured.
Covered Goods: All the goods that are used for the production of final goods and services
i.e intermediate goods are not included in the expenditure GDP measure.
Limitation of GDP:
Doesnt consider Limited focus on Simplistic approach to

Mask Inequalities sustainability of growth than measure standard of
growth development living
Expenditure Method:
1. Contains four components:
Consumption expenditure: Expenditure by the households on the perishable and non-
perishable goods and services.
Investment expenditures: It refers to fixed investment by the Businesses, inventory
investment by the businesses and Residential investment by the households.
Government expenditures
Net income = Net exports (Exports – Imports)
2. GDP = C + I + G + NX (X-M) where C=consumption, I = Investment G = Government
Expenditure NX = Net Exports (Export - Import)
Items measures using expenditure Method:

Agriculture and Mining Manufacturing Construction Electricity, gas
allied services and water supply
Banking and Public administration Real Estate Transport Communication
insurance and Defense and trade
Income Method:
Definition: measures the income by everybody in economy for the factor services provided.
• Classification: 4 types of factor incomes are accordingly classified i.e. Rent, Wages, Interest
and Profit.
• GDP at MP = Compensation of employees + Proprietor’s Income + Rental Income +
Corporate Profits + Net Interest + Net Indirect Taxes (excluding subsidies) + Depreciation
• NNP at FC= Compensation of employees + Proprietor’s Income Fs + Rental Income +
Corporate Profits + Net Interest + Net Factor Income from Abroad
Included All factor incomes

generated via production of
goods/services
The INCOME Method
Wages + Rent + Profit (Private
The sum of all (factor) incomes
Sector businesses) = GDP (by
Rewards: Land (Rent), Labour (Wages),
factor income)
Excluded
Capital (Interest) and Enterprise (Profit)
National Income (at factor cost) = net • Transfer Payments i.e. social
domestic (from home) product at factor cost + welfare (dole) payments, state
net factor income from non-domestic (from pension etc
abroad) • Private Money Transfers
• The Black ‘Shadow’ Economy
Value Added method unrecorded income from unofficial
• Definition: Value added is the difference between sources (criminal)
the cost of inputs to production and the price of
output at any particular stage in the overall
production process.
• Calculation: GDP at FC = Value Added = Value of output - Intermediate Consumption
• About Market Price: Market price refers to the actual transacted price and it includes
indirect taxes, custom duty, excise duty, sales tax, service tax etc. (which raise the prices)
and excludes subsidies which are provided by government.
• Calculation of Net National Product: NNP at FC = GDP at FC - Depreciation + NFIA
Factor Cost
• About Factor Cost: Factor Cost = Market Price - Indirect Taxes + Subsidies
• Example: Selling of Maggie by Nestle through mixing of wheat floor and spices is value
addition.
Recent Changes for GDP calculation

• Revision of Cost Price: CSO revised the National Accounts statistics in January 2015 and
it was decided that sector-wise wise estimates of Gross Value Added (GVA) will now be
given at basic prices instead of factor cost.
• Change in base year: Also changed base year from GDP from 2004-05 to 2011-12.
• Improved coverage of financial corporations: By including stock brokers, stock
exchanges, asset management companies, mutual funds and pension funds, as well as the
regulatory bodies, SEBI, PFRDA and IRDA.
• Changes in calculation of agricultural income: Earlier data only included value added in
farm produce but the new data includes value addition in Livestock as well. For ex. Value
added to the by-product of Meat like head, skin legs etc.
• Shift from Establishment approach to Enterprise approach: The establishment approach
used in Annual Survey of Industries did not capture the activities of a unit other than
manufacturing. Now in new approach, the activities of a manufacturing company other than
manufacturing are accounted in manufacturing sector. These changes possibly have
increased the coverage of registered sector of manufacturing. The Enterprise approach is
facilitated by MCA 21 with Ministry of Corporate Affairs.
• Incorporation of findings of NSSO Surveys: The updates are an improvement in the
representation of activities in the unorganized manufacturing sector.
• The change in Labour input Method: The new series has switched over to “Effective
Labour Input Method” for Unincorporated Manufacturing & Services Enterprises. Earlier
method was assigning equal weights to all types of worker, while the new method assigns
different weight for workers as per their productivity.
Gross National Product:

1. Definition: The gross national product is the sum total of all final goods and services
produced by the people of one country in one year.
2. Calculation: Equal to the gross domestic product plus the net income from foreign
investment.
3. Objective: Measure the physical activity of a nation by adding all the different types of
productions
4. GNP = GDP + Net Factor Income from Abroad
• Example: For India, GNP is lower than its GDP as income from abroad has always been
negative in India. Due to heavy outflows on account of trade deficits and interest
payments on foreign loans
Net factor income from abroad:

1. It is the difference between:
• Income received from abroad by the normal residents of India for rendering services in
other countries and
• The income paid to the foreign residents for the services rendered by them in India.
Net National Product or NNP:

• Definition: It is the monetary value of finished goods and services produced by a country's
citizens, overseas and domestically, in a given period.
• NNP = GNP - Depreciation
• About Depreciation: It is decline in the asset value over time due to wear and tear.
Per Capita Income

• Definition: Per capita income, also known as income per person, is the mean income of the
people in an economic unit such as a country or city.
• Calculation: When we divide NNP by the total population of nation we get the ‘Per Capita
Income’ (PCI) of that nation i.e. ‘income per head per year’.
Net Domestic Product(NDP)

1. Definition: NDP is GDP calculated after adjusting value of depreciation’.
2. Calculation: NDP = GDP – Depreciation
• Example: NDP of an economy is always lower than its GDP, as depreciation can never
be reduced to zero.
GDP Deflator:
Definition: The GDP deflator (implicit price deflator) is used to determine the levels of
prices of the new domestically produced final goods and services in a country in a year.
Calculation: GDP deflator = (Nominal GDP/Real GDP) * 100
Importance: Covers the whole economy and not based on fixed baskets.
Base Year: Base year is the year used as the beginning or the reference year for constructing
an index, and which is usually assigned an arbitrary value of 100.
Green GDP:
Green GDP is an attempt by economists to measure growth of an economy compared to the
harm caused to the environment.
Monetisation
of the loss of
biodiversity
Focus on Accounting
sustainable Green for cost due
development GDP to climate
change
Substracting
resource
depletion and
environmental
degradation
Personal Income
Definition: PI is the Part of National Income (NI) which is received by households.
Formula: Personal Income (PI) = National Income – Undistributed profits (Savings of
firms) – Net interest payments made by households – Corporate tax + Transfer payments to
the households from the government and firms
Personal Disposable Income
Definition: Personal Disposable Income is the part of the aggregate income which belongs
to the households. They may decide to consume a part of it, and save the rest.
Formula: Personal Disposable Income (PDI) ≡ PI – Personal tax payments – Non-tax
payments.
Gross National Happiness:

Four pillars of Happiness:
1. Sustainable and equitable socio -economic development
2. Environmental conservation
3. Preservation and promotion of culture
4. Good governance
Example: Adopted by Bhutan in 2008.
Chapter: Poverty in India
1. Introduction: Poverty is a state or condition in which a person or community lacks the
financial resources and essentials for a minimum standard of living + It means that the
income level from employment is so low that basic human needs can't be met.
2. Amartya Sen Definition: Poverty refers to deprivation of basic capabilities of life rather
than mere lowness of income.
3. Poverty Gap rate = Poverty Gap/ Poverty line + It tells about the depth of the poverty.
4. Types of Poverty
• Absolute Poverty: Defined as lacking the basic means to survive i.e. food, safe drinking
water, Sanitation facilities, health, shelter, education and information.
• Relative Poverty: When people in a country do not enjoy a certain minimum level of
living standards as compared to the rest of the population + It is closely related with
issues of inequality + Gini- coefficient is used to measure relative poverty.
• Situational Poverty: Poverty caused because of adversities such as earthquakes, floods,
illness etc.
• Generational Poverty: Poverty handed over to individuals from their generations.
• Multi-dimensional Poverty: It is made up of multiple factors such as poor health, lack
of education, inadequate living standard etc.
5. Vicious cycle of Poverty
6. Poverty Estimation in India

• Pre-Independence Poverty Estimation
o Dadabhai Naoroji ‘Poverty and Un-British Rule in India’-> Formulated poverty
line ranging from Rs16 to Rs35 per capita per year based on 1867-68 prices + Used
cost of subsistence diet consisting of rice, vegetables, mutton and oil.
o National Planning Committee (1938): Estimated poverty line between Rs15 to
Rs20 per capita per month + Also formulated poverty line based on minimum
standard of living.
o Bombay Plan (1944): Poverty line of Rs75 per capita per year.
• Post-Independence Poverty Estimation
o Working Group Poverty Line (1962): National minimum for each household of
five persons should be not be less than Rs100 per month for rural and Rs125 for
urban at 1960-61 prices (Excluded expenditure on health and education).
o Dandekar and Rath Committee (1971): First scientific assessment of poverty
estimation based on NSS Data (1960-61) + It recommended daily intake of 2,250
calories per person to define the poverty line for both rural and Urban India.
o Alagh Committee (1979): Poverty line defined as people consuming less than 2100
calories in the urban areas or less than 2400 calories in the rural areas + Defined the
first poverty line in India.
o Lakdawala Committee (1993): Recommended that consumption expenditure be
calculated based on calorie consumption + Suggested for different poverty line for
each state, prescribed basket of commodity and measured poverty in states.
o Tendulkar Committee (2009): Shift away from calorie consumption based poverty
estimation + Uniform poverty line basket across rural and urban India + Incorporation
of private expenditure on health and education + Using Mixed Reference Period
(MRP) based estimates instead of Uniform reference period + Poverty line of Rs32
per capita per day in Urban India and Rs27 in rural India.
o Saxena Committee (2009): Separated calorific intake apart from nominal income in
its economic analysis of poverty in India + 50% of Indians lived below the poverty
line.
o Rangarajan Committee (2012): Methodology based on an independent large survey
of households by Center for Monitoring Indian Economy (CMIE) + Use of Modified
mixed reference period.
Ø Nutritional requirements
§ Calories: 2090 Kcal in urban areas and 2155 Kcal in rural areas.
§ Protein: 48 gm for rural areas and 50gm for Urban areas.
§ Fat: 28gm for urban areas and 25gm for rural areas.
Ø Poverty threshold of Rs47 a day in urban areas and Rs32 in rural areas +
Estimated number of BPL people 19% higher in rural areas and 41% higher in
urban areas.
7. Differences between Rangarajan and Tendulkar committee
Parameters Tendulkar Committee Rangarajan Committee

(2009) (2012)
Poverty Estimation Per Capita Expenditure Monthly expenditure of
Method Monthly family of five members
Urban Poverty Line Rs 32/day/person Rs 47/day/person
Rural Poverty Line Rs 27/day/person Rs 32/day/person

BPL in crores 27 crores 37 crores
Calorie Expenditure Measures only calorific Calories, Protein and Fats
value in expenditure
Calories in rural areas 2400 Kcal 2155 Kcal
Calories in Urban 2100 Kcal 2090 Kcal
areas
Focus areas Expenditure on food, health, Food, healthcare, clothing,
clothing and education rent, transport and non-food
items such as education.
8. International Estimations
• World Bank-> $1.90 per day
• Asian Development Bank (ADB): $1.51 per day.
9. National Poverty Lines (Rs per capita per month)
Year Rural Urban
2004-05 446.7 578.8
2009-10 672.8 859.6
2011-12 816 1000
10. Official Poverty rates
Based on Planning Commission’s (Now NITI Aayog) data derived from Tendulkar
Committee methodology.
Defines poverty not in terms of annual income, but in terms of consumption or spending
per individual over a certain period for a basket of essential goods.
Census 2011: India’s extreme poverty rate was reported to be 21.9%, or 265 million
people.
Indian government has not given any number for poverty since 2011 — it was 21% as
per the Tendulkar poverty line.
11. Socio-Economic Caste Census
It is the first-ever census to collect detailed data from rural and urban households +
Conducted by Ministry of Rural Development.
Criteria Used
o 14 parameters of Automatic Exclusion
Ø Motorized 2/3/4 wheeler/fishing boat.
Ø Mechanized 3-4 wheeler agricultural equipment.
Ø Kisan credit card with a credit limit of over Rs. 50,000/-.
Ø Household member government employee.
Ø Households with non-agricultural enterprises are registered with the government.
Ø Any member of the household earning more than Rs. 10,000 per month.
Ø Paying income tax.
Ø Paying professional tax.
Ø Three or more rooms with pucca walls and roof.
Ø Owns a refrigerator.
Ø Owns landline phone.
Ø Owns more than 2.5 acres of irrigated land with 1 irrigation equipment.
Ø 5 acres or more of irrigated land for two or more crop seasons.
Ø Owning at least 7.5 acres of land or more with at least one irrigation equipment.
o 5 parameters of Automatic Inclusion: Households without shelter + Destitute,
living on alms + Manual scavenger families + Primitive tribal groups + Legally
released bonded labour.
o Households based on Seven Deprivation: Households with Kutchha house + No
adult member in working age + A household headed by female and no working age
male member + Households with handicapped members and no able bodied adult +
Household with no literate over 25 years + Landless households engaged in manual
labour + SC/ST households.
Important Findings of SECC
o In India, there are 24.49 crores (243.9 million) households, with 17.97 crores (179.7
million) living in villages. 10.74 crore of these families are considered impoverished.
o 5.37 crore (29.97 percent) rural households are "landless" and rely on manual labour
for the majority of their income.
o In villages, 2.37 crore (13.25 percent) of families live in one-room dwellings with
'kachcha' (permanent) walls and roofs.
o SC/ST families account for 21.53 percent of village families or 3.86 crores.
o In India, 56 percent of rural households do not have access to agricultural land.
o 74.5 percent of rural households (13.34 crore) make ends meet with a monthly salary
of Rs 5,000 for their highest earner.
12. Multidimensional Poverty Index

• It was launched by United Nations Development program (UNDP) and Oxford Poverty
& Human Development Initiative (OPHI).
• The index uses three dimensions and ten indicators which are:
• A person is multi-dimensionally poor if he is deprived in one third or more of the

weighted indicators.
• Deprivation in one half or more of the weighted indicators-> considered living in extreme
multidimensional poverty.
• Global Multidimensional Poverty Index, 2021
o Global Data: Around 1.3 billion people are multi-dimensionally poor + Nearly 85%
live in Sub-Saharan Africa (556 million) or South Asia (532million) + About 2/3rd of
multi-dimensionally poor people live in households where no woman completed
minimum of 6 years of schooling (227 million in India) + Women and girls living in
multidimensional poverty are at higher risk of intimate partner violence.
o India Specific findings: In India, five out of six multi-dimensionally poor people are
from lower tribes or castes + 9.4% of the Scheduled Tribe group lives in
multidimensional poverty + 33.3% of the Scheduled Caste group lives in
multidimensional poverty + 27.2% of the Other Backward Class group lives in
multidimensional poverty.
13. Human Development Index: It is a statistical tool used to measure a country's overall
accomplishment in its social and economic dimensions published by the United Nations
Development Programme (UNDP)
• It was created as a complement to the Gross domestic product (GDP) as it emphasises on
importance of human development in the growth process.
• India ranked 131 among 189 countries on HDI for 2019.
• India's HDI score has risen at an annual average rate of 1.42 percent over the last three
decades.
• India's Gross national income per capita has more than doubled since 2005 and the
number of “multi-dimensionally poor” individuals has decreased by more than 271
million since 2005-06.
Fig: Dimensions in Human Development Index

14. Human Poverty Index: The HPI was an indication of the standard of living in a country,
developed by the United Nations (UN) to complement the Human Development Index
(HDI).
15. Poverty Reduction and Growth Facility (PRGF): PRGF is an arm of the International
Monetary Fund which lends to the world's poorest countries.
16. Gini-Coefficient: It measures the degree of income equality in a population + It can vary
from 0 (perfect equality) to 1 (perfect inequality) + Gini Coefficient of zero means that
everyone has the same income, while a Coefficient of 1 represents a single individual
receiving all the income.
17. Terms related to Poverty

• Uniform Reference Period (URP): Until 1993-94, consumption information collected
by the NSSO across a 30day recall period.
Mixed Reference Period (MRP): measures consumption of five low-frequency items
(clothing, footwear, durables, education and institutional health expenditure) over the
previous year, and all other items over the previous 30 days.
Modified Mixed Reference Period (MMRP): new consumption data (in addition of
other attributes of MRP) for edible oil, egg, fish and meat, vegetables, fruits, spices,
beverages, refreshments, processed food, pan, tobacco and intoxicants are collected using
7 day recall period.
18. Important Poverty Alleviation programmes in India
Mahatma Gandhi National Rural Employment Guarantee Act, 2005: It is a statutory
job guarantee scheme for rural India by Ministry of Rural Development (MoRD).
o Aim: Enhancing the livelihood security of people in rural areas by legally guaranteeing
100 days of wage employment to adult members of any household willing to do unskilled
manual labour at statutory minimum wage.
o Workers provided work when they demand it (Demand driven program).
o Employment is to be provided within 5kms of residence.
o Work not provided within 15 days of applying -> Applicants should be paid unemployment
allowance.
o 1/3rd of workforce should be women + Social audit by Gram Sabha.
o Wages must be paid according to statutory minimum wages specified for agricultural
labourers in the state under the Minimum Wages Act, 1948.
Integrated Rural Development programme: Provide benefits to the poorest at first
priority + Set out a goal to generate income of Rs. 2000 per family + Subsidy to small
farmers and landless farmers.
Food for Work Programme: Its objective is to generate supplementary wage
employment + Launched in 150 most backward districts of India + Presently subsumed
under MGNREGA + Provided food for unskilled manual labor.
Pradhan Mantri Jan Dhan Yojana: It aimed at direct benefit transfer of subsidy,
pension, insurance etc. and attained the target of opening 1.5 crore bank accounts. It
particularly targets the unbanked poor.
Annapurna Scheme: Started by Government in 1999-2000 to provide food to senior
citizens who cannot take care of themselves and are not under National Old age pension
scheme (NOAPS) + It provide 10kg of free food grains a month for eligible senior
citizens.
Economic Growth Vs Economic Development
INCLUSIVE GROWTH
Inclusive growth
• Economic growth: Economic growth that is distributed fairly across society and creates
opportunities for all.
• Participation and benefit: The process and the outcome where all groups of people have
participated in growth and have benefited equitably from it
• Addition above GDP and GNP: Talks not only about growth in GDP or GNP, but also talks
about how the output is distributed
• Focus on the equity of health, human capital, environmental quality, social protection, and
food security.
• Equality of opportunity in terms of access to markets, resources and unbiased regulatory
environment for businesses.
Associated Terms
• Casualization of Work Force: Casualization of work force is a process in which
employment shifts from a full-time and permanent positions to casual or contract positions.
• Underemployment: A situation in which persons are working less than they are willing to
work or they do not get wages according to their skills.
• Disguised Unemployment: It refers to the situation of employing surplus labourers whose
Marginal Productivity = 0.
• Human Development Index (HDI): Created in 1990, to measure country's development by
United Nations Development Program (UNDP), Has 3 Components: Health, Education and
Per Capita Income, geometric mean of normalised indices for each of the three dimensions.
Long term
approach
Combined
Economic
efforts of
Growth a
Private and
Pre-requisite
Public
Features of
Inclusive
Growth
Quality and
Pro Poor
Quantity of
Growth
Growth
Not defined
in Specific
Targets
Elements of inclusive growth:

Skill Development + Financial Inclusion + Technological Advancement + Economic Growth +
Social Development + Environment protection + Poverty reduction + Employment generation
Inclusive growth in India:

• It was adopted in India after 11th plan onwards.
Challenges for inclusive growth:
Challenge Impact
High population • Leads to greater competition and increasing pressure on natural
resources.
Low agricultural • Marred by disguised unemployment
growth • Involves 50% of the population.
Poverty and inequality • One of the poorest and inequal nation across the world
Unemployment • Demand for employment is not being met.
Health • India is burdened by health-related issues like malnutrition, infant
mortality, poor sanitation, lack of potable drinking water,
communicable and non-communicable diseases
Education • Poor quality of education with little learning outcomes
Means for inclusive growth

Means Ways
Resource allocation • Includes natural resources (eg. Coal, iron-ore, water, sunlight),
man-made resources (eg. Machines, bridges, roads, money) and
human resources (eg. Physical and cognitive skills)
• Efficiency in resource utilisation and equitable resource allocation
• Participation of government, private sector and public sector
Employment • Indicator of qualitative employment is the transition of increasing
generation employment from unorganised to organised sector.
• Leads to income generation from individual as well national
perspective
Skill development • The Skill India Mission of the Indian government which aims to
train over 40 crore people in India in different skills by 2022.
Agricultural • Poverty and disguised unemployment is concentrated in the
development agricultural domain.
Chapter: Unemployment in India
1. Definition of Unemployment: It is defined as “a situation in which the person is capable of
working both physically and mentally at the existing wage rate, but does not get a job to
work”.
2. Unemployment rate: The unemployment rate is defined as the percentage of unemployed
persons in the labour force.
3. Status of Employment in India
Census 2011
4. Long term trends in Employment using PLFS Data (Economic Survey 2021-22)
[Students: Focus on the trends]
During Periodic Labour Force Survey (PLFS) 2019-20 (survey period from July 2019 to
June 2020), employment at usual status continued to expand.
Between 2018-19 and 2019-20, about 4.75 crore additional persons joined the workforce.
It is about threetimes more than the employment created between 2017-18 and 2018-19.
The rural sector contributed much more to this expansion relative to the urban sector
(3.45 crore in rural sector and 1.30 crore in urban sector).
Amongst the additional workers, 2.99 crore were females (63 percent). About 65% of
additional workers joined in 2019-20 were self-employed.
About 75% of the female workers who joined as self-employed were ‘unpaid family
labour.’ About 18% of the additional workers were casual labourer and 17% were
‘Regular wage’.
Further, the number of unemployed persons in 2019-20 decreased by 23 lakhs,
constituted largely by males from the rural sector.
Of workers added in 2019-20 shows that more than 71% were in the agriculture sector.
Among the new workers in the agriculture sector, females account for about 65%.
5. Causes of Unemployment: Large population, lack of vocational skills, low productivity in
agriculture sector, low investments in manufacturing sector, inadequate growth of
infrastructure, Regressive social norms which deter women from taking employment.
6. Types of Unemployment
Structural Unemployment: It occurs due to structural change in the economy such as
change in technology or change in pattern of demand etc.
Open Unemployment: It is a situation where a large section of the labour force does not
get a job that may yield them regular income.
• Frictional Unemployment: It occurs when a worker is shifting from one job to the other;
unemployment for some time during mobility period.
• Cyclical Unemployment: It occurs because of cyclical fluctuations in the economy;
Phases of boom, recession, depression and recovery + Boom phase-> High level of
economic activity-> High level of employment.
• Under- Employment: Situation under which employed people are contributing to
production less than they are capable of + Part time workers come under this category.
• Disguised Unemployment: It is a phenomenon wherein more people are employed than
actually needed + Primarily seen in agricultural and the unorganized sectors of India.
• Seasonal Unemployment: Unemployment which occurs during certain seasons of the
year.
• Vulnerable Employment: People working informally without proper job contracts +
Deemed ‘unemployed’ since records of their work are never maintained.
• Casual Unemployment: Industries such as building construction, agriculture, where
workers are employed on a day- to-day basis -> chances of casual unemployment
occurring due to short-term contracts, terminable any time.
• Chronic Unemployment: When unemployment tends to be a long-term feature of a
country + It is a feature of Underdeveloped countries due to vicious cycle of poverty.
7. Institutions measuring Unemployment: Labour Bureau (Ministry of Labour and
Employment) + National Sample Survey Organization (NSSO) (Ministry of Statistics and
Programme Implementation).
8. Measurement of Unemployment in India: National Sample Survey Office (NSSO)
measures unemployment through:
• Usual Status Approach: It estimates only those persons as unemployed who had no
gainful work for a major time during the 365 days preceding the date of survey + It gives
the lowest estimates of unemployment.
• Weekly Status Approach: It records only those persons as unemployed who did not
have gainful work even for an hour on any day of the week preceding the date of survey.
• Current Daily Status Approach: The status of Unemployment is measured for each
day in a reference week. A person having no gainful work even for 1 hour in a day is
described as unemployed for that day + It is considered to be a comprehensive measure
of unemployment + Usually if a person works for four hours or more during a day, he or
she is considered as employed for the whole day.
9. Household Surveys
• Employment-Unemployment Survey (Released by NSSO)
o First survey conducted 1955 and since 1972-73, it is conducted every five years
+ The latest such survey was conducted in 2011-12 + Note: Presently, the survey has
been discontinued.
• Periodic Labour Force Survey (Released by NSO)
o It is India’s first computer-based survey launched by NSO in 2017 + It is constituted
on the recommendation of Amitabh Kundu committee + It collects data on several
variables such as level of unemployment, types of employment and their respective
shares, wages earned from different jobs, number of hours worked etc + First Annual
report conducted for the period July 2017- June 2018 covering both rural and urban
areas released in May 2019.
o Objective of PLFS
§ To estimate the major employment and unemployment indicators (viz. Worker
Population Ratio, Labour Force Participation Rate, Unemployment Rate) in the
short time interval of three months for the urban areas only in the ‘Current Weekly
Status’ (CWS).
§ To estimate employment and unemployment indicators in both usual Status and
CWS in both rural and urban areas annually.
o Quarterly Bulletin of PLFS (July- Sep 2021)
§ Unemployment rate (UR) for persons of age 15 years and above in urban areas
dipped to 9.8 per cent in July-September 2021 from 13.2 per cent in the same
quarter of the previous year.
§ Worker Population Ratio (WPR) (in per cent) in CWS in urban areas for
persons of age 15 years and above stood at 42.3 per cent in July-September 2021,
up from 40.9 per cent in the same period a year ago.
§ Labour force participation rate (LFPR) in CWS (current weekly status) in
urban areas for persons of 15 years of age and above was 46.9 per cent in the
July-September quarter of 2021, down from 47.2 per cent in the same period a
year ago.
• Annual Labour Force Survey (Ministry of Labour and Employment)
o It was published since 2009-10. A total of six rounds of surveys has been held till
2016 + It has been discontinued.
10. Enterprise Surveys
• Economic Census (By Ministry of Statistics and Programme Implementation): It
covers all non-agricultural economic activities (Both industries and services sectors
included) + 7th Economic census conducted in 2020-21.
• Annual Survey of Industries (By MoSPI): It covers the industrial units registered under
Factories Act, 1948 and only those industrial units which employ 10 or more workers (in
case of using power) or 20 or more workers (in case of not using power).
• Unorganized Sector Surveys of Industries and Services (By NSSO): It covers
unorganized nonagricultural enterprises, across manufacturing, services and trade.
• Quarterly Employment Survey (QES) (By Labour Bureau): The survey measures
employment in 8 selected labour intensive and export oriented sectors.
• Ministry of MSME: Only four surveys have been conducted + Last survey was
conducted in 2006-07.
11. Administrative sources: Data from EPFO, ESIC, NPS + It includes only the formal sector.
12. Centre for Monitoring Indian Economy (CMIE) (Privately held survey): It is a privately
owned business information company headquartered at Mumbai + It conducts the largest
survey to estimate household incomes, the pattern of spending and savings.
13. Important Terms
• Labour Force: It refers to those who are either engaged in any economic activities or
are willing to pursue an economic activity in a reference period + It includes both those
who are in workforce and unemployed (refers to all those who are seeking and available
for work).
• Labour Force Participation rate: Defined as proportion of population in Labour force
to the total population.
o Recent Trends
§ CEIC data: Labor Force Participation Rate dropped to 46.3 % in December 2020
as compared with 49.3 % in the previous year + It reached an all-time high of
58.4 % in December 1990 and a record low of 46.3 % in December 2020.
Worker population ratio (WPR): Defined as proportion of employed persons to the

total population.
14. Differences between Organized and Unorganized sector
Organized Sector Unorganized Sector
Meaning Employment terms are fixed and It comprises mainly of small

employees have assured work. scale enterprises which are not
registered with government.
Governed By Various acts like factories act, They are not governed by any act.
Bonus act, PF act, Minimum
wages act etc.
Working Fixed Not fixed
Hours
Benefits Various add on benefits like Not provided.
medical facilities, pension, leave
travel compensation, etc.
15. Important Government schemes related to Employment
Pradhan Mantri Rojgar Protsahan Yojana: It was launched in 2016-17 by Ministry
of Labor and Employment with objective of promoting employment generation + GOI
pays Employee pension scheme (EPS) contribution (employer’s full contribution of 12%
from 2018) for all new employees enrolling in EPFO for last 3 years of their employment
+ It is applicable for workers earning wages upto Rs15000.
Pradhan Mantri Employment Generation Program (PMEGP): It is a credit linked
subsidy program for generation of employment opportunities through establishment of
micro-enterprises in rural and urban areas + Subsidy of up to 35% provided by
Government for loans up to Rs 25 lakhs in manufacturing and Rs 10 lakhs in service
sector + It is implemented by Khadi and village industries commission (KVIC) +
Eligibility-> Individuals above 18 years, Class 8th qualification (for projects > 10 lakh in
manufacturing and > 5 lakh in service sector), SHGs and charitable trusts, maximum cost
of project should be 25 lakhs in manufacturing and 10 lakh in service sector.
Integrated Rural Development Programme (IRDP): It was launched in 1980 to create
full employment opportunities in rural areas.
• Training of Rural Youth for Self-Employment (TRYSEM): It was started in 1979 to
help unemployed rural youth between the age of 18 and 35 years to acquire skills for self-
employment.
• Pradhan Mantri Kaushal Vikas Yojana (PMKVY), launched in 2015 has an objective
of enabling a large number of Indian youth to take up industry-relevant skill training that
will help them in securing a better livelihood.
• MGNREGA (Covered in poverty chapter).
• Aatmanirbhar BharatRojgar Yojana (ABRY): It was announced as part of
Aatmanirbhar Bharat 3.0 package to increase the employment generation in post COVID
recovery phase + GOI is crediting for a period of two years both the employees’ share
(12% of wages) and employers’ share (12% of wages) of contribution payable or only
the employees’ share, depending on employment strength of the EPFO registered
establishments.
• Garib Kalyan Rojgar Abhiyaan: To boost employment and livelihood opportunities
for returnee migrant workers, launched in June 2020 + Focuses on 25 target-driven
works to provide employment and create infrastructure in the rural areas of 116 districts
of 6 States with a resource envelope of Rs 50,000 crore.
• Deendayal Antyodaya Yojana: National Rural Livelihoods Mission (DAY-NRLM):
It was launched in 2011, seeks to alleviate rural poverty through building sustainable
community institutions for the poor + It targets to mobilise about 9-10 crore households
into Self Help Groups (SHGs).
• DAAY (NULM): It was launched by Ministry of Hosuing in 2013 by replacing Swarna
Jayanti Shahari Rozgari yojana + Under Employment through skill training component,
an expenditure of Rs. 15,000 per person is allowed on training of Urban poor which is
Rs18000 in North East and J&K + Urban poor assisted with interest subsidy of 5%-7%
for setting up individual micro-enterprises with a loan of up to Rs2 lakh and for group
enterprises with a loan of up to 10 lakhs.
• DDU-GKY: It is a scheme launched by Ministry of rural development + It aims to skill
rural youth who are poor and provide them with jobs having regular monthly wages or
above the minimum wages + It focus on socially disadvantaged groups -> 50% of funds
earmarked for SCs and STs, 15% to minorities and 3% for PwDs + 1/3rd of the person
covered should be women.
• e-SHRAM Portal: It was launched to create a National Database of Unorganized
Workers (UWs) + The database is seeded with Aadhaar and for age group between 16-
59 years.
• Aatmanirbhar Skilled Employees Employer mapping (ASEEM) portal: It is a digital
platform, created to match supply of skilled workforce with the market demand, acts as
a directory of skilled workforce + A demand and campaign management system for
employers to forecast the current and future demand.
Chapter: Fiscal Policy in India
1. Introduction: Fiscal policy refers to the action of government which influences the
revenue and expenditure of the government. The major purpose of the fiscal policy is to
stabilize the economy.
2. Objectives: Boost aggregate demand for goods and services, economic growth, price
stability, employment generation, enhance inclusive growth and bring exchange rate
stability.
3. Importance of Fiscal Policy in India
• Increasing the rate of capital formation both in public and private sectors;
Government provide capital subsidy to firms, helping them undertake investment
expenditure.
• Mobilization of resources for welfare programmes.
• Providing stimulus to elevate the savings rate: Government has launched various
saving schemes such as - Equity-Linked Savings Scheme, Public Provident Funds,
National Savings Certificate, Senior Citizens Savings Scheme, Kisan Vikas Patra and
Sukanya Samruddhi Yojana to promote savings within the household sector.
• Minimize imbalance in the dispersal of income and wealth.
4. Differences between Monetary policy and Fiscal policy
5. Types of Fiscal Policy

• Expansionary Fiscal policy: It means that government spending is more than tax
revenue + It is designed to boost the economy; mostly in times of high unemployment
and recession + It leads to increasing money supply, increasing government spending
and decreasing taxation.
• Contractionary Fiscal policy: It occurs when government spending is lower than tax
revenue + It is designed to slow economic growth in case of high inflation + It leads to
raising of taxes by the government and cuts in the spending.
Neutral Fiscal policy: It means that total government spending is fully funded by the
tax revenue + It is adopted by the government when the economy is in a state of
equilibrium.
6. Tools of Fiscal Policy

Taxation: Funds in the form of direct and indirect taxes help the government
function + Taxes affect the consumer's income and changes in consumption lead to
changes in real gross domestic product (GDP) + Through fiscal policy, government
aims to keep the taxes as much progressive as possible.
Government spending: It includes welfare programs, government salaries, subsidies,
etc.; it can raise or lower the real GDP + Budget is the most important instrument
embodying expenditure policy of the government.
Investment and Disinvestment Policy: Optimum levels of domestic and foreign
investment are needed to maintain the economic growth.
Debt / Surplus Management: To fund the deficit, the government borrows from
domestic or foreign sources. It can also print money for deficit financing.
7. Constitutional Provisions of Budget
The Constitution refers to the budget as the ‘annual financial statement’ in Article
112.
The President shall in respect of every financial year cause to be laid before both the
Houses of Parliament a statement of estimated receipts and expenditure of the
Government of India for that year.
No demand for a grant shall be made except on the recommendation of the President.
No money shall be withdrawn from the Consolidated Fund of India except under
appropriation made by law.
No tax shall be levied or collected except by authority of law.
Parliament can reduce or abolish a tax but cannot increase it.
• The estimates of expenditure embodied in the budget shall show separately
the expenditure charged on the Consolidated Fund of India and the expenditure made
(votable) from the Consolidated Fund of India.
8. Funds related to Budget:
• Consolidated fund of India: Article 266, Contains incoming tax revenue, raised loans
and recovered loans. Withdrawal from it need parliament permission.
• Public Account of India: Article 266, Contains Incoming provident fund, small
savings, postal deposit etc. Government acts as Banker. No need for parliament
permission.
• Contingency Fund of India: Article 267, For unforeseen events upto Rs. 500 crores by
Finance secretary on behalf of President. Need subsequent Parliament approval.
9. Components of Budget: The Union Budget is divided into two parts:
• Revenue Budget: Comprise revenue receipts and expenditure met from these
revenues.
o Revenue Receipts: These are one-way transactions which are not required to be
paid back + They do not reduce asset, recurring in nature and non-redeemable.
§ Tax revenue like income tax, custom duty, excise duties etc.
§ Non-Tax revenue: It includes interest receipts (from loans given to states),
Dividend and profit and other non-tax receipts which include receipts from
fiscal services (Eg: Currency and coinage), Economic services (E.g: receipts
from various departments like agriculture, transport etc.), social services
(education, health etc.), General services (profits from central police etc.),
Grants in aid (from foreign governments, multilateral bodies) and non-tax
receipts from UTs.
o Revenue Expenditure: They are referred as ongoing operating expenses + It is
expenditure incurred for purposes other than creation of physical or financial assets
of the central government. It includes:
§ Interest payments by the government on the internal and external loans.
§ Salaries, Pension and Provident Fund paid by the government-to-government
employees.
§ Subsidies forwarded to all sectors by the government.
§ Defence expenditures by the government.
§ Postal deficits of the government.
§ Law and order expenditures (i.e. police & paramilitary).
§ Expenditures on social services (includes all social sector expenditures as
education, health care, social security, poverty alleviation, etc.) and general
services (tax collection, etc.).
§ Grants given by the government to Indian states and foreign countries.
• Capital Budget: It consists of capital receipts (like borrowing, disinvestment) and long
period capital expenditure (creation of assets, investment).
o Capital Receipts: It results in either reduction in government assets (sale of shares,
disinvestment) or an increase in the liability (government borrowings), not recurring
in nature and can be redeemable (Government should repay the loans taken).
§ Debt capital receipts: They include fresh borrowings by government, along
with other liabilities + Fresh borrowing from market loans through bonds,
treasury bills issued to RBI, Ways and Means Advances (WMA) by RBI and
external bilateral and multilateral loans + Other liabilities include money
deposited by people in Provident Fund, Small savings account etc.
§ Non-Debt capital receipts: They do not create any liabilities + They include
recovery of loans and disinvestment of government shares.
o Capital Expenditure: These are one-time large purchases of fixed assets that will
be used for revenue generation over a longer period + It includes expenditure on
acquisition of land, building, machinery, loans and advances by central government
to state and UTs, PSUs and other parties.
§ Loan Disbursals by the Government: Internal (i.e., to the states and UTs) or
external (i.e., to foreign countries, loans to IMF and WB, etc.)
§ Loan Repayments by the Government
§ Plan Expenditure of the Government
§ Capital Expenditures on Defence by the Government
§ General Services: These also need huge capital expenditure by the government
- the railways, postal department, water supply, education, rural extension, etc.
§ Other Liabilities of the Government: Includes all the repayment liabilities of
the government on the items of the 'other receipts'.
10. Some key terms
Balanced Budget: If the estimated government expenditure is equal- to expected
government receipts in a particular financial year + It ensures economic stability and
refrain government from imprudent expenditures.
Surplus Budget: If the expected government revenues exceed the estimated government
expenditure in a particular financial year + It allows a government to repay existing
national debt and to cut taxes to stimulate the supply-side of the economy.
Deficit Budget: If the estimated government expenditure exceeds the expected
government revenue in a particular financial year.
11. Types of Deficit
Types of Formula Remarks Budgeted

Deficit Deficit (% of
GDP)
Revenue Revenue Expenditure – It includes only such 3.8%
Deficit Revenue receipts transactions that affect
the current income and
expenditure of the
government.
Most dangerous deficit
because government is
not able to meet its day
to day expenditure.
Effective Revenue Deficit – The term introduced in
Revenue Grants for creation of Budget 2011-12.
Deficit capital assets It signifies that amount
of capital receipts that
are being used for actual
consumption
expenditure of the
Government.
Budget Budget Expenditure – Discontinued by
Deficit Budget Receipt government from 1997
Fiscal deficit Budget Deficit + It is reflective of total 6.4%
Borrowing borrowing requirements
of the government.
Includes borrowing
from small savings
scheme, G-Secs,
Borrowing from RBI
and External
Borrowing.
Adopted by IMF as
principal policy target in
their programmes.
Primary Fiscal Deficit – Interest Provide picture on how 2.8%
Deficit to be paid on previous government borrowing
loans is for new programs.
• Reduction in primary
deficit is reflective of
government efforts at
bridging fiscal gap
during a financial year.
Monetized Purchase of government • It is also known as ‘net
Deficit bonds by the central reserve bank credit to
bank to finance the the government.
spending needs of the • Financed solely by
government. borrowing from RBI.
• It is inflationary if rate
of growth of money
supply is greater than
rate of increase of
demand of cash
balances.
12. Deficit Financing: It is the practice where the government spends more money than it
receives as revenue, the difference being made up by borrowing or minting new funds + The
deficit is financed by borrowing loans from the central bank, commercial banks, and even
state governments through Ad-hoc Treasury Bills.
• Means of Deficit Financing: External aids and borrowings, internal borrowings,
withdrawing cash balances held with RBI, printing currency (last resort as it increases
inflation proportionally).
• Impact: Increases aggregate expenditure which in turn increases aggregate demand and
hence the risk of inflation + It can also lead to the process of economic surplus which
causes economic growth.
• Advantages: Increases financial strength of the government + It leads to inflation which
can prove to be beneficial under certain circumstances + Multiplier effect on economic
development as it encourages the government to utilize unemployed and underemployed
resources.
• Disadvantages: It causes inflation and a rise in prices + Individuals with fixed sources
of income are not benefited + It disturbs the entire investment system as most of the
investment is attracted towards the quick profit-yielding industries which are not
beneficial for long-term growth + Decrease in purchasing power of money leading to an
outflow of capital from the country.
13. Fiscal Consolidation: It is a set of policies undertaken by government so as to reduce
government deficits and debt accumulation + It can be achieved by increasing revenue and
decreasing expenditure + Tools of Fiscal consolidation are Government spending, transfer
payments and taxes.
14. Fiscal Responsibility and Budget Management act, 2003: It is an act to provide for
responsibility of Central Government to ensure intergenerational equity in fiscal
management and long-term macro-economic stability by removing fiscal impediments.
• Objectives
o To introduce transparency in India’s fiscal management systems.
o Achieve inter-generational equity by ensuring equitable distribution of debt over
the years.
o Ensure long term macro-economic stability through fiscal stability.
• Key Provisions
o Provisions: Originally reduce Fiscal deficit to 3% for Union government, 3% to State
government by 2008, Eliminate Revenue deficit by 2008, total liabilities of central
government should not rise by more than 9% a year.
o Amendment in 2012: No need of 0% revenue deficit rather 0% Effective Revenue
Deficit by 2015.
o Escape Clause: During National Security/Act of War, National calamity, fall in
agriculture output and farm income, fall in real output or GDP growth government
can escape the target. Note: The term “escape clause” has not been used in the act. It
was used by FRBM review committee headed by NK Singh.
o Budget 2021: Amended the FRBM act to provide fiscal deficit to 6.8% (2011-22)
and 4.5% (2025-26).
o Required documents to be presented with Budget (Section 3): FRBM act requires
following documents to be presented with budget.
§ Macroeconomic Framework Statement: Shows economic data, GDP growth rate,
imports-exports and government receipts and expenditure.
§ Medium Term Fiscal Policy Statement
§ Fiscal Policy Strategy Statement: Explains how government controls the deficits,
provide for the deviation.
§ Medium term Expenditure Framework
15. NK Singh committee to review FRBM act (2016)
• Scrap the FRBM act, 2003 and a new Debt and Fiscal Responsibility and Debt
management act be adopted.
• Creation of a Fiscal council -> Proposed 3-member body for preparing multi-year fiscal
forecast, providing independent assessment of central government’s fiscal performance.
• Gradual reduction in fiscal deficit to 2.5% of GDP
• Reduction of revenue deficit to 0.8% by 2002-23 in a phased manner
• Bringing Debt to GDP ratio to 60% by 2023-> 38.7% for central government and 20%
for the state government.
• Escape clause-> allowing up to 0.5% slippage
• Buoyance clause-> Fiscal deficit must fall at least 0.5% below the target if real output
grows 3% faster than average of previous four quarters.
• Borrowing from RBI: Prohibits the government from borrowing from the RBI except
in the following circumstances:
o Centre must meet a temporary shortfall in receipts.
o RBI subscribes to government securities to finance any deviations from specified
targets, or
o RBI purchases government securities on the secondary market.
16. Public Debt in India
Internal Debt
o Dated Securities: Primarily fixed coupon securities of short, medium- and long-
term maturity which have a specified redemption date.
o Treasury-Bills: Zero coupon securities that are issued at a discount and redeemed
in face value at maturity.
o Securities issued to International Financial Institutions: Securities issued to
institutions viz. IMF, IBRD, IDA, ADB, IFAD etc. for India’s contributions to these
institutions etc.
o Securities issued against ‘Small Savings’: All deposits under small savings
schemes are credited to National Small Savings Fund (NSSF).
o Market Stabilization Scheme (MSS) Bonds
External Debt: External loans are not market loans; they are raised from institutional
creditors at concessional rates + Most of these external loans are fixed-rate loans, free
from interest rate or currency volatility + Majority of Debt owed by private businesses
which borrowed at attractive rates from foreign lenders + Most of India’s external debt
is linked to the dollar.
Government Debt Scenario
o Internal debt constitutes more than 94% of the overall public debt.
o Total liabilities of government increased 45% to Rs. 82 lakh crore in last four years.
o Out of the total government liabilities, public liability is 41% and other liabilities are
5.5% of GDP.
o Public Debt-> Internal (38.2% of GDP) and external debt (2.9% of GDP)
Type 31st march 2022 31st march 2023

Internal Debt and 131 Lakh Crore 147 Lakh Crore
other liabilities
External Debt 4.29 Lakh Crore 4.69 Lakh Crore
Debt Composition: Type

Type of loans Trend
Total Public debt State Govt (70%) > Union
(30%)
Source Internal (94%) > External (6%)
Type of Interest Mainly Fixed rate
17. Extra Budgetary Resources: Off budget loans taken by Public Sector Organisations and
Government Organisation.
Example: Loans by FCI, Loans by Ministry of Housing and Urban Affairs to finance
PM Awas Yojana.
18. Types of Budgeting
Gender Budgeting: Started in 2005, Not separate budget but shows expenditure on
women, monitors expenditure and public service delivery from a gender perspective.
Zero Based budgeting: Initiating budget from zero base every year + The process
involves review of the expenditures incurred by every department each year. It considers
current expectations. On the basis of this, expenditures are allocated and revenues are
estimated for the next period + In India, it is believed to be in practice since 1997-99.
• Outcome Budgeting: It is a process of budgeting done at micro levels that sets
measurable physical targets to be allocated on every planned project under various
ministries + It measures quantitative and qualitative aspects of the budget and makes
Budget accountable and transparent.
• Performance Budget: It is presented by the Ministry of Finance on behalf of the
government + Check cost –benefit and efficiency of each scheme + First time introduced
in USA + It is the compulsion of the government to tell that 'what is done', 'how much is
done' by it for the betterment of the people.
19. Miscellaneous Concepts
• Challenges of Fiscal Deficit: Crowded out the private sector, impact the sovereign credit
ratings, can result into inflation, leaves lesser money with Public.
• Counter Cyclical Policy: During economic slowdown increase in fiscal expenditure
boosts employment & GDP – It leads to Crowding in of Private investment –
• Pro-Cyclical Fiscal Policy: Increase in Fiscal expenditure during economic Boom.
• Interest Rate Growth Rate Differential (IRGD): Difference between interest rate paid
by government and GDP growth rate in economy. If negative IRGD – Need not worry
much.
• Automatic stabilisers: During slowdown, Income tax, Corporation tax, Unemployment
allowance, Food subsidy acts as automatic stabilisers as people reduced income leads to
reduction in taxes.
• Measures of Fiscal Consolidation: Reducing leakage by targeted delivery of schemes
and subsidies, shutting down loss making PSUs (Sale of Air India), Privatisation of loss
making PSU, Undertaking austerity measures like ending parliament subsidy.
• Poor Budget Making: Misses the Budget targets of tax collection, leads to litigation in
tax department, Higher extra budgetary borrowing reliance, Cutting of Schemes
expenditures.
• No Lapsable fund: Money doesn’t lapse on 31st March. Example: Nirbhaya Fund.
• Plan vs non Plan Expenditure: Stopped after 2017
o Plan expenditure: Contained Revenue expenditure and Capital expenditure.
o Non Plan Expenditure: Expenditure on general, economic and social services of
government, interest payment, defence services, subsidies.
• Fiscal Drag: Fiscal drag is a concept where inflation and earnings growth may push more
taxpayers into higher tax brackets. Therefore, fiscal drag has the effect of raising
government tax revenue without explicitly raising tax rates.
• Fiscal Neutrality: Where government spending is covered almost exactly by tax revenue
– in other words, where tax revenue is equal to government spending. A situation where
spending exceeds the revenue generated from taxes is called a fiscal deficit and requires
the government to borrow money to cover the shortfall.
• Pump Priming: It is the action taken to stimulate an economy, usually during a
recessionary period, through government spending and interest rate and tax reductions.
20. Types of Schemes:
• Central Sector Schemes: 100% funded by Union, Example: Urea Subsidy, MDR
Subsidy, Jan Aushadhi Scheme, Bharat NET,
• Centrally Sponsored Schemes: Bearing of the expenditure by the states too.
o Core of the Core: Only 6 Schemes, MGNREGA, National Social Assistance
Programme, Umbrella schemes for ST, SC, ST, Minorities & other vulnerable
groups.
o Note: National Social Assistance Programme is 100% funded by Central govt.
o Core Scheme: Funding Pattern in 60:40, 70:30,90:10
21. Department of Finance Ministry:
• Department. of Economic Affairs: Prepares budget, fiscal policy, liasons with Finance
commission, Financial Stability and Development Council (FSDC) falls under it,
Security Printing and Minting Corporation of India(SPMCIL) to print coins and notes
fall under it.
• Department of Expenditure: deals with Pay Commission reports, Pension Accounting
office, Preparation of expenditure by Controller General of Account, Manages Public
Financial Management System (PFMS) for disbursing money to ministries at Union and
state level, Bharatkosh- Non Tax Receipts Portal (NTRP) to sell India yearbook Yojana,
Kurukshetra.
• Department of Revenue: Looks after taxation matters, Implements Central Boards of
Revenue Act 1963, Controls Central Board of Direct Taxes (CBDT), Central Board of
Indirect Taxes and Customs (CBIC), Implements GST.
• Department of Financial Services: Implements Schemes for Financial Inclusion,
Undertakes PSB supervision and recapitalization, Controls Bank Board Bureau, Parent
department for National Credit Guarantee Trustee Company (NCGTC) to provide credit
guarantee for loans in Mudra, MSME loans, Stand up India.
• Department of Investment and Public Asset Management (DIPAM): Looks after
Disinvestment /privatization of Govt Companies / Central Public Sector Enterprises,
Gives 'Ratna' status to CPSEs,
22. Chief Economic advisor
• About: Falls under Finance Ministry’s Department of Economic Affairs, not
constitutional or statutory body.
• Tenure & Reappointment: 3 years usually, eligible for reappointment, Control over
Indian Economic services.
23. Other Bodies
• Financial Stability and Development Council (FSDC): Finance Minister as
Chairperson, Members include chiefs of all financial regulatory bodies such as RBI,
SEBI, IRDAI
• Goods and Service Tax Network (GSTN): Non- Profit Company, 100% owned by
Union & State government.
• Public Debt Management Agency (PDMA): NITI Aayog called for separate PDMA to
manage market borrowing outside the purview of RBI (as RBI plays a dual and
conflicting roles as the banker and manager of Central government borrowing).
• Public Debt Management cell: It aims to streamline government borrowings and better
cash management for deepening bond markets + It is an interim arrangement and will be
upgraded to a statutory Public Debt Management Agency (PDMA) in about 2 years + It
will allow separation of debt management functions from RBI to PDMA in gradual
manner + The Joint Secretary (Budget), Department of Economic Affairs of the Finance
Ministry will be overall in-charge of the PDMC + It will have only advisory functions in
order to avoid any conflict with the statutory functions of RBI.
24. Fiscal Performance Index: It is published by Confederation of Indian
Industry(CII) which measures the quality of budget of Central as well as various state
governments + It has been constructed using the United Nations Development Programme
(UNDP) Human Development Index methodology + It comprises six components for
holistic assessment of quality of government budgets : Quality of revenue expenditure,
Quality of capital expenditure, Quality of revenue, Degree of fiscal prudence, Degree of
fiscal prudence II: revenue deficit to GDP, Debt index: Change in debt and guarantees to
GDP.
Chapter: Taxation
1. Introduction: Tax is a compulsory levy payable by individuals/corporations to the government

without any corresponding entitlement to receive a direct quid pro quo from the government.
2. Principles of Taxation: It must be equal/ proportionate to income, must be certain in nature,
must provide convenience of paying and should be based on economy principle.
3. Important Terms associated with taxation
Tax Base: It is legal description of object with reference to which tax is payable; it has
dimensions like year, month etc.
Tax Incidence Vs Tax Impact
Parameter Direct Tax Indirect Tax
Tax Incidence: Point from where On the On the seller
government collects tax (Event of tax Assesse
imposition)
Tax Impact: Point where the burden falls On the Customer/Buyer
(after-effect of tax imposition) Assesse
Tax Buoyancy: It measures actual observed change in Tax revenue relative to GDP + It
largely depends on size of the tax base, friendliness of the tax administration,
reasonableness and simplicity of the tax rates.
Tax Elasticity: It measures proportionate change in tax revenue without any discretionary
change, relative to GDP.
Tax planning: It refers to financial planning for tax efficiency-> aims to reduce one’s tax
liabilities and optimally utilize tax exemptions, tax rebates as much as possible.
Tax Avoidance: It is legally reducing one’s taxable income + Minimising tax liabilities
using exemptions and tax laws-> It usually happens at tax planning stage.
Tax Evasion: It is the willful and illegal evasion of taxes by individuals, trusts and
corporations by misrepresenting their financial state of affairs + Includes practices like
dishonest tax reporting, declaration of less income than amount actually earned etc.
Tax Havens: It is a jurisdiction which has very low tax rates (varies from 2% to as low as
0.02%) + It is done by countries primarily to increase foreign investment and cash flow in
their economy.
Base Erosion and Profit shifting (BEPS): It is a tax evasion mechanism used by various
MNCs to artificially shift profits from countries with high taxation rates (such as USA and
European countries) to countries that have low or no taxes (such as Bahamas and Cayman
Island).
Pigouvian taxes: It is a tax on a market transaction which creates a negative externality,
borne by individuals not directly involved in transaction. Examples include tobacco taxes,
sugar taxes, and carbon taxes + It is named after Arthur C. Pigou, who developed the idea in
his book “The Economics of Welfare”.
Inverted Duty structure: It arises when the taxes on output or final product is lower than
the taxes on inputs + Example: GST rate on purchases is higher than the GST rate on sales.
Sin tax: A sin tax is taxing something like cigarettes or gambling which society sees as
immoral or at least bad for society.
4. Laffer Curve: It establishes correlation between direct tax rates and tax revenues and explains
that when tax rates are low, raising them would increase tax revenue + However, there is an
optimal rate of tax at which tax revenues are maximize and beyond this rate it causes
disincentives to produce so that tax revenue start falling.
5. Different methods of taxation on goods
• Ad Valorem: If tax is levied as % of the value of the goods regardless of number of units
produced or sold + Example: 10% custom duty on gold value.
• Specific Duty: If tax is levied at a flat rate per unit of goods.
6. Classification of Taxation
• Proportional Taxation: Tax levied as a percentage of tax base irrespective of size of tax
base at a uniform rate + Since the tax is charged at a flat rate for everyone it is also called a
flat tax.
• Progressive Taxation: Higher tax rate on high income + It results in redistribution of income
from rich to poor + Example: Income tax in India.
• Regressive Taxation: If the tax rate decreases with increase in tax base + Higher tax rate on
poor person (Indirect taxes come into it) + Such tax does not take into account the ability to
pay + Example: Indirect taxes such as VAT, GST.
• Retrospective Taxation: It allows a country to pass a rule on taxing certain products or
services and charge companies from a time behind the date on which the law is passed.
7. Cess and Surcharge

• Cess: Imposed by the central government, it is a tax on tax, levied by the government for a
specificpurpose + Tax amount collected should not be used for purposes other than purposes
for which it is meant for + Computed on (Tax + Surcharge) + Examples include Education
cess and Krishi Kalyan cess.
• Surcharge: It is a tax additionally levied as a percentage of existing tax amount, but without
any specific purpose + It is levied if size of tax base exceeds a certain threshold.
• The centre need not share both Cess and Surcharges with the states.
• Differences: Surcharge can be kept with Consolidated Fund of India (CFI) and spent like
any other taxes. But, Cess should be kept as a separate fund after allocating to CFI and
should be spent only for specific purpose.
8. Duties
• Countervailing Duty: It is a specific form of duty that government imposes in order to
protect domestic producers by countering the negative impact of import subsidies + It is an
import tax by the importing country on imported products.
• Anti-Dumping Duty: It is a protectionist duty imposed by a domestic government on
foreign goods that the government believes are priced below fair market value +
Department of Commerce recommends the anti-dumping duty; Ministry of Finance levies
the duty.
o Dumping: It means exporting goods to other country in large quantity at a cheaper rate
+ Price dumping-> selling goods in foreign country at price lower than price of home
country + Cost dumping-> selling goods in foreign country at a price lower than cost of
production; also called as predatory dumping.
9. Types of Taxes
• Direct Taxes: It is a type of tax where the impact and the incidence fall under the same
category + It is paid directly by individual to the entity that has imposed the payment +
Central Board of Direct taxes (CBDT) looks after administration of laws related to direct
taxes.
o Merits: Progressive in nature, Certainty of taxation, rises with rise in economy, can be
used to enhance savings and investment.
o Demerits: Very narrow base, high litigation, high rate of taxation curtails economic
activities.
o Taxes abolished in Past year: Dividend distribution tax, Wealth tax, Banking Cash
Transaction tax.
Type Applied by Union government Applied by state
government
On Corporation tax (levied on companies) , Min Agriculture income tax,
Income Alternate tax (levied on zero profit companies), Professional tax( Ceiling
Income tax on income except agricultural of max 2500 per year)
income, Capital Gains tax(CGT)
On Securities transaction tax, Commodities Land revenue,
Assets transaction tax Stamp/Registration duty,
Property tax in urban
area
o Different types of Direct taxes in India

Ø Corporation tax in India: It is imposed on company's net income or profit from its
operations + It is payable by both public and private companies registered in India
under Companies Act 1956 + Minimum Alternate Tax (MAT) does not apply to such
companies.
§ Taxation laws amendment ordinance, 2019: Corporate tax rate to be 22 per
cent without exemptions; MAT not applicable on such companies + Effective
corporate tax rate after surcharge and cess to be 25.17 percent + Local companies
incorporated after October 2019 and till March 2023, will pay tax at 15 percent.
Ø Income tax: Levied on individual income; calculated as per the provisions of

Income Tax Act, 1961 and is directly paid to the central government on an annual
basis + The government announced a new regime of income tax (optional) in Union
Budget 2020-2021.
§ Who should pay Income Tax in India? - Self-employed individuals, Salaried
individuals, Hindu Undivided Family, Body of individuals, Association of
Persons, Corporate firms or companies and local authorities.
Ø Capital Gains Tax: Tax on the income arising from the sale of capital assets + It can
be either long term or short term.
§ Short term capital asset: It is an asset held for a period of 36 months or less is a
short-term capital asset + The criteria of 36 months have been reduced to 24
months for immovable properties such as land, building and house property from
FY 2017-18.
§ Long-term capital asset: It is an asset that is held for more than 36 months.
Ø Equalisation Levy/Google tax: Imposed in 2016, On the income of foreign digital
advertisement companies, in 2020, 2% equalisation levy imposed on E-commerce
also.
Ø Minimum Alternate Tax: It is levied on zero profit companies, introduced in 1996
+ It is applicable on all entities operating in India irrespective of Indian or foreign
ownership + Exceptions: Life insurance companies and shipping companies liable for
tax on tonnage.
Ø Dividend Distribution tax: Dividend constitutes income in the hands of the
shareholders which should be subjected to income tax + Any domestic company
distributing dividend is required to pay tax at the rate of 15% on the gross amount of
dividend + Budget 2020-21 removed DDT and adopted the system in which dividend
shall be taxed only in the hands of recipients at their applicable rate.
Ø Buyback Tax: Tax levied on companies undertaking buyback of their shares.
Ø Presumptive taxation: Self-employed people pay x% of their gross receipts as
income tax
Ø Advance tax payment: Paying tax in advance instalments on quarterly basis if tax
liability is more than 10000 crores.
Ø Tax deducted at source: To reduce tax evasion, government requires TDS where
payment is made after deducting the TDS. Ex: Payment of Salary by companies.
Ø Tobin tax: Tax on conversion of the currency to discourage the short term
speculative investment.
Ø Securities Transaction tax: Tax levied on selling and buying of securities; taxable
securities include equity, derivatives, equity oriented mutual fund etc + It is free of
any surcharge.
Ø Fringe Benefits Tax: It is a form of tax that companies paid in lieu of benefits they
offered their employees in addition to the compensation paid to them; it was
abolished in 2009.
Ø Commodities Transaction Tax: It is levied on transactions done on the domestic
commodity derivatives exchanges + First introduced in Union Budget 2008-09 + It
is charged on the buyer and seller of exchange-traded non-agricultural commodity
derivatives in India + Non-farm items like metals and energy products are among the
commodities covered by it.
• Indirect Taxes: These are taxes imposed by the government on a taxpayer for goods
and services rendered + The incidence and impact of indirect taxes does not fall on the
same entity (seller pays indirect taxes to the government, and the liabilityis transferred
to the consumer) + Central Board of Indirect Taxes and Customs (CBIC) is the nodal
national agency responsible for administering Customs, GST, Central Excise, Service
Tax and Narcotics in India.
o Merits: Easy to collect, has very wide base, highly elastic in nature, equitable
contributions-> basic necessities attract lower rates of tax while luxury items are
charged at higher tax rates, thereby ensuring that contributions are equitable,
growth-oriented (encourage consumers to save and invest), difficult to evade.
o Demerits: Regressive in nature, leads to inflation, not visible to individual, not
industry friendly-> Taxes are levied on raw materials which in turn increases the
cost of production, not allowing industries to expand as their competitive capacity
is restricted.
o Different Types of Indirect taxes in India: Service tax, Excise duty, value
added tax, sales tax, stamp duty, customs duty, local body tax such as octroi and
Entertainment tax.
• Goods and Services Tax (GST): 101st Constitutional amendment act; it is one
indirect tax for whole country on the supply of goods and services, right from the
manufacturer to the consumer.
o Features of Goods and Services Tax (GST)

Ø It is applicable on supply of goods and services (Earlier on manufacture or
sale of goods and services).
Ø Destination-based tax-> Goods/services will be taxed at the place where
they are consumed and not at the origin.
Ø Integrated GST (IGST) -> It is levied on inter-state supply of goods or
services; levied and collected by centre; centre will then distribute IGST
proceeds among the states.
Ø Import of goods/services deemed as supply of goods or services or both, in
course of inter-state trade thus attracting IGST + Import of goods attract BCD
and IGST; Import of services attract IGST.
Ø Exports are zero rated-> GST will not be levied on export of any kind of
goods or services.
Ø Reduce cascading effect: Credits of input taxes paid at each stage will be
available in subsequent stage of value addition, making GST essentially a
tax only on value addition at each stage.
Ø Cross utilization of credit: Credit of CGST may be used only for paying
CGST on output and credit of SGST paid on inputs may be used only for
paying SGST.
Ø Compensation to states: The amendment provides for compensation to
states for loss of revenue for five years.
o Advantages: Easy compliance (online tax filing, single tax), improved cascading
effect, improved competitiveness, gain to manufacturers and exporters, better
control on leakages, higher revenue efficiency, spur economic growth (attracting
foreign investments, creation of more jobs), promote co-operative federalism,
increasing resource of poor consuming states.
Taxes subsumed under GST

Existing taxes to be merged in GST - 17 different taxes and 23 different cesses have been
fitted into GST. GST would replace the following taxes currently levied and collected by the
Centre:
Taxes levied and collected by the Centre State taxes that would be subsumed within
the GST are:
a) Central Excise Duty; a) State VAT;
b) Duties of Excise (Medicinal and Toilet b) Central Sales Tax;
Preparations); c) Purchase Tax;
c) Additional Duties of Excise (Goods of d) Luxury Tax;
Special Importance); e) Entry Tax (All forms);
d) Additional Duties of Excise (Textiles and f) Entertainment Tax (except those levied
Textile Products); by the local bodies);
e) Additional Duties of Customs (commonly g) Taxes on advertisements;
known as CVD); h) Taxes on lotteries, betting and gambling;
f) Special Additional Duty of Customs i) State cesses and surcharges insofar as
(SAD); they relate to supply of goods or services.
g) Service Tax;
h) Cesses and surcharges insofar as they
relate to supply of goods or services.
Exceptions and Exclusions

Exclusion Taxes on entertainments and amusements to the extent levied and
collected by a Panchayat or a Municipality or a Regional Council or a
District Council shall not be subsumed under GST. The local bodies of
States could continue to levy such taxes.
Applicability of The GST shall be levied on all goods and services except alcoholic
GST liquor for human consumption
Status of They are subjected to GST. However, it has been decided that five
Petroleum & products, viz. petroleum crude, motor spirit (petrol), high speed diesel,
petroleum natural gas and aviation turbine fuel would be kept out of the purview of
products GST in the initial years of implementation. GST Council shall decide
the date from which they shall be included in GST.
Status of Tobacco Tobacco and tobacco products would be subject to GST. In addition, the
and Tobacco Centre would have the power to levy Central Excise duty on these
products products.
Real Estate sector GST is not applicable on real estate sector and electricity sector.
Electricity sector
o GST Council:
Ø Chairman: Finance Minister
Ø Union Representation: 1/3rd Voting power, Representation of Union
minister of State for Finance or revenue
Ø State representation: Nomination of member by each state govt having
legislature (UT-J &K, Delhi & Puducherry), Selection of one of them as Vice
Chairman, 2/3rd Voting power.
Ø Functions: Decide GST rate, provide compensation to states for their revenue
loss, protect interests of Special Category states, decide norms related to GST
registration of Businessmen.
Ø If not a unanimous decision than minimum 3/4th votes required to pass the
proposal.
Ø Quorum: Needed quorum of 50% of total membership for council meetings.
o 45th GST Council meeting (Sep 2021)
o 46th GST Council meeting (Dec 2021): Existing GST rate on textiles (of 5%)
is to be continued into 2022 (at least for the Q1 period).
GST Composition Scheme

Meaning Small taxpayers can get rid of tedious GST formalities and pay GST at a
fixed rate of turnover. This scheme can be opted by any taxpayer whose
turnover is less than Rs. 1.5 crore
Condition The following conditions must be satisfied in order to opt for composition
scheme:
• No Input Tax Credit can be claimed+ cannot supply goods not taxable
under GST such as alcohol+ taxpayer has to pay tax at normal rates
for transactions (under the Reverse Charge Mechanism)+ taxpayer
has to mention the words ‘composition taxable person’ on every
notice + taxpayer has to mention the words ‘composition taxable
person’ on every bill+ CGST (Amendment) Act, 2018, a
manufacturer or trader can now also supply services to an extent of
ten percent of turnover
GST Compensation Cess

Parameters Action
Compensation • Allows the central government to levy a GST compensation cess on
fund supply of certain goods and services.
Division of • 50% of amount is shared b/w states in proportion to their total revenue
Cess • Remaining 50% is a part of the centre’s divisible pool of taxes.
Release • Released at the end of every two months.
Provided for • Guaranteed compensation for any revenue shortfall below 14% growth
(base year 2015-16) for the first five years ending 2022.
Legislation • GST (Compensation to States) Act, 2017.
Others • Compensation cess is levied on 5 products considered to be sin or luxury
goods-> SUV Vehicles are charged 50% of tax, of which GST rate is
28% and compensation cess is 22%.
• GST Network (GSTN): It is a not for profit company created under Section 8 of
Companies act, 2013 + It provide IT infrastructure and services to central and state
governments and tax payers + There would be no manual filing of returns + It is owned
hundred percent by government-> Centre and states will have 50-50 ownership of GSTN.
National Anti-Profiteering Authority (NAA/NAPA)
§ Objective: To Check the profiteering arising out the reduction in GST taxes.
§ Provided action: Reduce prices, Refund money with interest to consumers, Deposit
money to Consumer Welfare Funds at union & state level, Impose penalty upto 10%
of profiteered amount, Cancel registration
§ Appeal: Lies to high court
o Glossaries associated with GST
§ Reverse charge mechanism: In Case seller is not registered with GST Portal, buyer
will have to submit the GST.
§ E-way bill system: If goods beyond a specific limit is travelling across the states,
then the transporter needs E-Way bills generated by GST portal.
o GST Appellate Tribunal
§ It is the second appeal forum under GST for any dissatisfactory order passed by the
first appellate authorities.
§ It ensures uniformity in the redressal of disputes arising under GST.
§ It holds the same powers as the court and is deemed Civil Court for trying a case.
§ Structure
Ø National Bench: The National Appellate Tribunal is situated in New Delhi,
constitutes a NationalPresident (Head) along with 2 Technical Members (1 from
Centre and State each)
Ø Regional Benches: On recommendations of the GST Council, the government
can constitute(by notification) Regional Benches, as required. At present, there are
3 Regional Benches (situatedin Mumbai, Kolkata and Hyderabad) in India.
o Loan to States in lieu of GST Compensation shortfall
§ Government of India had set up a special borrowing window in 2020-21.
§ An amount of 1,10,208 crores was borrowed through by Government of India
during on behalf of the States and UTs and was passed on to the States/UTs as loan
on back-to-back basis to help the States/UTs to meet the resource gap due to non-
release of compensation (owing to inadequate balance in GST compensation fund).
Chapter: Monetary Policy
1. Introduction: Monetary policy is considered as the most dynamic function of central bank
(RBI) primarily aimed at regulating size and cost of money in the economic system.
2. Monetary Policy: It is brought out by central bank (RBI) + It manage money and interest
rates, controls inflation, savings, investment and capital formation + RBI's Monetary policy
responsibility is explicitly mandated under the Reserve Bank of India Act, 1934 + It is
announced bi-monthly (announced 6 times in a financial year).
3. Goals of Monetary policy: Economic Growth, price stability, interest rate stability,
stability of exchange rate and safety of the financial system etc.
4. RBI Monetary policy stances
• Neutral stance: It means policy repo rate may be unchanged/increased/decreased + It
is adopted when the policy priority is equal on both inflation and growth.
• Calibrated Tightening: It means interest rates can only move upward + Central bank
may not go for a rate increase in every policy meeting, but the overall policy stance is
tilted towards a rate hike.
• Accommodative/Expansionary/Dovish stance: It means injection of more funds into
the financial system + It is aimed at expansion in lending, investment and growth +
Lowering key interest rates and enhancing market liquidity are used to implement it +
It is adopted when growth needs policy support and inflation is not immediate concern.
• Contractionary Monetary policy: It means syphoning out of fund from the financial
system + It is aims to decrease the money supply in an economy; at times also aimed to
tame inflation in long-term + Increase in key interest rates used to achieve this policy.
• Hawkish stance: It means contractionary stance aimed at checking inflation rise + It is
linked to statutory goals of inflation targeting the headline inflation.
5. Monetary Policy tools: Quantitative and Qualitative.
6. Quantitative tools of Monetary Policy

• Cash Reserve Ratio (CRR): Banks cash deposit with RBI [% of their NDTL], no
minimum and maximum limit, mandatory for all banks, stored in bank’s vault or is sent
to the RBI + It is to be calculated with a lag of one fortnight, i.e., on the reporting
Friday + Purpose: It ensures the security of the amount; helps in keeping inflation under
control + RBI does not pay interest on deposits even if the deposits are in excess of
minimum required by RBI-> Increase cost of deposits to the banking sector + Penalty
for non-maintenance-> penal interest will be levied for that day at the rate of 3% per
annum above the Bank Rate.
• Statutory Liquidity ratio (SLR): Banks deposits in G-Sec, Cash, gold, T-bills, state
development loans and other securities notified by RBI, mandated under Banking
regulation act 1949 + Maximum limit: 40%+ Banks should report every alternate Friday
+ Mandatory for all scheduled commercial banks, local area banks, Primary (Urban) co-
operative banks (UCBs), state co-operative banks and central co-operative banks +
Banks earn returns on money parked as SLR + The main objectives are to control the
expansion of bank credit; ensures the solvency of commercial banks.
• CRR and SLR: Decided on fortnightly basis, involves penalty on interest rates by
Banks, provide protection, assist in money multiplier effect, play role in inflation
control.
o Recent changes in CRR: March 2020: Cut by 1%, March 2021: Increase by 0.5%,
May 2021: Increase by 0.5%, current: 4%.
• Bank rate/Discount rate: Introduced by RBI Act, 1934. Since 2012: Bank rate % =
Marginal Standing Facility (MSF)%, rate at which RBI provides refinancing facilities to
commercial banks. In other words, when banks give loans, the RBI may refinance some
of these loans given by banks on the request of the concerned banks + Only Banks can
borrow from RBI + Duration is longer than Repo, mainly used to decide penalty.
• MSF (Marginal Standing Facility): A facility under which SCBs can borrow additional
amount of overnight (short-term) money from the RBI by dipping into their SLR
portfolio up to a limit (currently 2% of their deposits) at a penal rate of interest + MSF is
always fixed above the repo rate + Provides safety valve against unanticipated liquidity
shocks to the banking system.
• Repo rate: Introduced in 2000, decided by Monetary Policy + It is used for borrowing
by banks, state government, Union government, non-bank + Collateral is G-Sec, T bill
but not from SLR + Duration is short term (one day, 7 days, and a maximum of up to 21
days) + High repo rate -> access to money is expensive for banks and lesser credit will
flow into the system.
• Liquid Adjustment Facility: Consists repo rate and reverse Repo rate. Implies that by
repo it injects liquidity in banks and under reverse repo it absorbs liquidity from banks
depends upon whether banks have excess liquidity (R. Repo) or whether they are short
of liquidity (Repo) + RBI introduced it on recommendation of Narasimhan Committee
on Banking Sector Reforms (1998) + Banks are permitted to borrow only a certain
percentage of its NDTL + If Bank requires more funds, it can access through Marginal
Standing Facility (MSF).
• LAF Repo rate: Rate at which RBI lends by keeping G-sec as collateral. Policy rate to
control inflation.
• LAF reverse Repo rate: Rate at which clients deposit their surplus funds with RBI +
Collateral used is Government secs + Reverse Repo= Repo - X. Example: RBI increases
Repo rate to control inflation and reduces it to inject liquidity in economy.
Long-term repo operations: Funds are provided at repo rate, but for longer duration (1
year and 3 years) of appropriate sizes for up to a total amount of Rs 1 lakh crore at the
prevailing repo rate + It helps RBI to ensure that banks reduce their marginal cost of
funds-based lending rate, without reducing policy rates.
Targeted Long Term Repo operations (TLTRO): Tenure is 3 years, interest rate is
linked to Repo rate, demands Banks to invest in bonds of corporates, mutual funds and
NBFC.
On tap liquidity window: Launched in 2021 to counter Corona, 3-year Duration loan
for specific sectors at Repo rate, needs to achieve specific amount of loan.
Open Market Operations: RBI buys and sells Union and state government securities to
control money Supply and inflation.
Purchase of security: increases money Supply, enhances inflation, cheap money policy.
Sell of security: Reduces money Supply, controlling the inflation, dead money policy.
Open Market Operations (OMOs): It is the simultaneous sale and purchase of
government securities and treasury bills by RBI + Objective is to regulate the money
supply in the economy + RBI carries out the OMO through commercial banks and does
not directly deal with the public.
Operation twist: RBI sells shorter duration G-sec (less than 1 year) and purchases longer
duration G-sec to reduce bond yield on long term, make borrowing cheaper, make
corporates to invest in economy.
Market Stabilization scheme: It is intervention by the RBI in 2004 to withdraw excess
liquidity by selling government securities in the economy + These securities are owned
by the government though they are issued by the RBI + The securities issued under
MSS are purchased by financial institutions.
Standing deposit facility scheme: It is first recommended by Urjit Patel committee
report in 2014 + It is a remunerated facility that will not require the provision of
collateral for liquidity absorption.
7. Qualitative tools of Monetary policy: They are direct and specific in nature + It include
persuasion by RBI in order to make commercial banks discourage or encourage lending
done through moral suasion.
Moral suasion: Appealing to Banks to give credit to specific sectors. Example: RBI
persuades Banks to open branches in rural area, passing interest rate to customers + It is
not a statutory obligation + RBI may request commercial banks not to give loans for
unproductive purpose which doesn’t add to economic growth but increases inflation.
Direct action: taking action against the erring Banks, in 2019, RBI asked Banks CEO
to return previously paid salary if engaged in scam.
Loan to Value(LTV): Mandate LTV for home loan, auto loan, gold loan etc. Like not
allowing lending more than x% of collateral.
Selective Credit Control: Priority Sector lending, relaxing down EMI during Corona.
Rationing of credit: It is done by regulating the purposes for which loans are given
among the various member banks + Priority sector should be given preference in lending
loans + Under it, RBI directed banks since 1969 that they must give at least 40% of their
total credit at any given point of time to priority sectors.
8. Priority Sector Lending (PSL): Introduced in 1968, minimum 40% loans to priority
sector., applicable for scheduled commercial banks and foreign banks with more than 20
branches, Regional rural banks (75%), Small finance banks (75%), Urban cooperative banks
(75%).
Covered sectors:
o Weaker section (12%): SC, ST, Women, PH, Minorities, Manual Scavengers,
Artisans), Beneficiaries of national livelihood mission and PM Jan Dhan overdraft
upto 10000.
o Agriculture (8%): Farmers (big and small); activities covered are Farm credit,
Agriculture infrastructure and Ancillary activities.
o Micro enterprise, Village level enterprise: 7.5%
o Education: Loans to individuals for educational purposes including vocational
courses upto Rs. 20 lakhs irrespective of sanctioned amount are eligible for
classification under priority sector.
o Other categories (2.5%): Small and medium enterprise, Affordable housing loan
beneficiaries, food processing companies, Vermi Compost, Biofertilizers, seed
production, social infrastructure, Renewable energy projects.
• PSL 2020 reforms: Included all startups, Increased limit for Renewable energy from 15
Cr to 30 Cr and Healthcare from 5 crores to 10 crores, gave priority to poor districts.
• Other points of PSL: PSL certificates- overachiever banks can sell to underachieving
banks, underachieving banks deposit shortfall with NABARD's Rural infrastructure
development fund, SIDBI, National Housing Bank (NHB), Mudra Ltd., will earn interest
on such deposits.
9. Monetary policy transmission: It is the process by which the central bank's policy action
is transmitted in order to achieve the ultimate goals of inflation and growth + Channels of
transmission-> Interest rate, Credit, exchange rate and asset price.
10. Functions of Money: Medium of Exchange (Individual goods and services are priced in
terms of money and are exchanged using money) + Measure of value (used to measure and
record the value of goods or services) + Standard for Deferred Payments (Money is used as
an agreed measure of future receipts and payments in contracts).
CHAPTER: INFLATION
1. Introduction: It is the general rise in the prices of goods and services in an economy over a
period of time + Rate of inflation = (Prices in current year/ Prices in base year) * 100 +
Inflation is measured ‘point-to-point’ (Example: January 1 to January 1 of two consecutive
years).
2. Causes of Inflation
• Demand pull inflation: It is caused by overall increase in demand for goods and services
+ Too much money chasing too few goods + Major reasons are increase in money supply,
economy close to full capacity, increase in exports which undervalues rupee, Aggregate
demand for a good or service overtakes aggregate supply + It is often promoted by
Keynesian school of economics.
• Cost Push inflation: It occurs when firms respond to increase in factor input costs by
increasing prices in order to protect their profits + Major reasons are rise in labor cost,
rise in raw material price, fall in exchange rate and increase in taxes + For example,
Brent crude prices crossed $65 per barrel in May 2021, which is more than double
of 2020.
• Monetary inflation: It is caused by oversupply of money in an economy + This theory
is promoted by Monetarist school of economics.
• Inflation expectations: Once inflation comes in economy, it becomes basis of
expectations of workers and entrepreneurs to calculate pricing.
3. Measures to check inflation

• Measures by Government: Cutting down the taxes, Technological improvement to
enhance the efficiency, Upscaling the production or import of the items.
• Monetary policy: Increasing Repo rate and CRR, undertaking Open market operations
(OMOs) to reduce the money Supply.
• Usage of CPI by RBI: Used to determine the Monetary policy, CPI head inflation or
CPI combined is taken by RBI.
4. Measurement of Inflation
Calculating Base Utility Additional

Indices Authority year Information
CPI- Combined CSO 2012 Determination of RBI uses CPI-C
(CPI-C) Dearness as sole inflation
Allowance, measure for
understanding the monetary policy.
real values of 908 items (448
salaries, Pension and for rural and 460
wages. for Urban)
CPI-IW Labour Bureau, 2016 Used for wage
(Industrial Ministry of indexation in
workers) Labour organized sector and
government jobs,
also used for price
variation clause in
business contract.
CPIL- Labour Bureau, 1986-87 Determining Data collected in 600
AL(Agricultural Ministry of minimum wages and villages with a
labourers) Labour those for jobs under monthly frequency
MGNREGA and three weeks’
time lag.
CPI- RL (Rural Labour Bureau, 1986-87 Determining
labourers) Ministry of minimum wages and
Labour those for jobs under
MGNREGA
Whole Sale Price Office of 2011-12 Measurement of
Index (WPI) Economic headline inflation
advisor, DIPP,
Ministry of
Commerce and
Industry
5. Consumer Price Index (CPI): It measures the average change of prices paid by final
consumers for a basket of goods and services + CPI = (Weighted price for current year/
Weighted price for base year) * 100.
Recent changes
o CPI (Rural, Urban and Combined) are published at all India as well as state wise
levels.
o Base year changed from 2010 to 2012.
o Basket of items and their weight diagrams prepared using Modified Mixed Reference
Period (MMRP) data of Consumer Expenditure Survey (CES), 2011-12 of 68th round
of National sample survey (NSS).
o Number of Items: 448 (Rural) and 460 (Urban).
o Weight of Core group increased from 42.9% to 47.3%.
o Increase in number of groups-> Pan, tobacco and intoxicants which was a subgroup
under ‘Food, beverages and Tobacco’ made as a separate group.
Sub-group Weight Rural Weight Urban Weight Combined
Food and Beverage 54.18 36.29 45.86
Pan, Tobacco and 3.26 1.36 2.38
intoxicants
Clothing and 7.36 5.57 6.53
Footwear
Housing 21.67 10.07
Fuel and Light 7.94 5.58 6.84
Miscellaneous 27.26 29.53 28.32
(Household goods
and services, health,
transport and
communication etc.)
6. Wholesale Price Index (WPI): It measures change in price of commodities supplied to

wholesale market; based on value of production adjusted for net imports.
• Features: It captures inflation closest to producers + It does not capture price inflation
in services + Headline inflation measured through WPI + It is measured year-on-year
basis + Indirect taxes are excluded.
• Categories: It consists of 3 categories (in decreasing order of weight): Manufacturing->
Primary articles-> Fuel and power.
• Recent changes to WPI (2017)
o Base year for All-India WPI revised from 2004-05 to 2011-12.
o Do not include indirect taxes in order to remove impact of fiscal policy.
o New “WPI Food Index” to capture inflation in food items.
o Item level aggregates compiled using Geometric Mean.
o Number of items increased to 697 from earlier 676.
o Decrease in weight of manufacturing items from 64.9% to 64.2%.
o Decrease in weight of fuel and power from 14.9% to 13.1%.
o Increase in weight of primary articles from 20.1% to 22.6%.
Table showing new commodity groups and their weights

Group Weights Number of items
All commodities 100 697
Primary articles 22.62 117
Fuel and Power 13.15 16
Manufactured Products 64.23 564
7. Other measures of Inflation

• Consumer Food Price Index: Measure of change in retail prices of food products, CSO
releases CFPI for 3 categories-> rural, urban and combined + Calculated on a monthly
basis and base year is 2012.
• Producer Price Index: It measures average change in price of goods at the place of
production or when they enter production process + Only basic prices used and taxes,
trade margins, transportation costs excluded + Government working on proposal to shift
from WPI to PPI.
• Housing Price Index: It measures price changes of residential housing + National
Housing Bank (NHB) computes an index called NHB RESIDEX.
8. Types of Inflation
• Creeping inflation: Mild/ Moderate inflation around 3%, acts as driver of economic
growth.
• Walking inflation: Rate is higher than creeping inflation, typically in the range of 3% to
10%.
• Trotting Inflation: When inflation rises to 10% or more.
• Galloping inflation: When prices rises at a double, triple digit rate per annum. (i.e, 20%,
100% in a year) + Also known as hopping inflation, jumping inflation and runaway
inflation.
• Hyperinflation: Hyperinflation is large and accelerating with annual rates in million or
even trillion, increase in prices may shoot up overnight. Example: Venezuela hyper-
inflation (2021).
• Stagflation: High inflation and stagnant economic growth leads to stagflation. Rise in
prices while unemployment is high.
• Bottleneck/Structural inflation: Supply falls drastically and the level of demand
remains at same level + It occurs mainly due to supply-side hurdles.
• Skewflation: When there is a price rise of one or a small group of commodities over a
sustained period of time, without a traditional designation.
• Deflation: Sustained decline in the prices of goods.
• Reflation: Reflation is a monetary or fiscal policy by the central bank and government
to boost demand and thus increase the level of economic activity and combat deflation.
• Headline inflation: Inflation of the basket of goods, has food and fuel as component.
• Core inflation/Underlying inflation: Inflation after removing the price rise in the
volatile items - food and fuel, Measure of long-term price movement, often calculated
using consumer price index (CPI).
• Asset inflation: Rise in prices of specific assets like housing, gold etc.
• Benign inflation: It means inflation is moderate not harmful i.e. under control. It gives
room to RBI to cut key policy rates for economic growth.
• Disinflation: Rate of inflation is low but there is rise in prices of goods.
9. Terms related to inflation
• Base effect: Relates to inflation in the corresponding period of previous years, if inflation
rate was too low in previous year, it will lead to higher inflation in this year.
• Philips curve: Describes relationship between inflation and Unemployment, they have
an inverse relationship, Rate of inflation is indirectly proportional to unemployment.
• Inflationary gap: Difference between the current level of real GDP and potential GDP
when GDP is at full employment. Exists because higher employment increases the
demand leading to inflation.
• Deflationary Gap: The shortfall in total spending of the government (i.e. fiscal surplus)
over the national income creates deflationary gaps in the economy. This is a situation of
producing more than the demand and the economy usually head for a general slowdown
in the level of demand.
• Inflation tax: Inflation erodes the value of money and the people who hold currency
suffer in this process.
• Inflation Spiral: When wages press price up and prices pull wages up.
Inflation Accounting: Due to inflation the profit of firms/companies get overstated.
When a firm calculates its profits after adjusting the effect of current level of inflation,
this process is known as inflation accounting.
Inflation Premium: The bonus brought by the inflation to the borrowers is known as the
inflation premium.
10. Effect of inflation
Effect on demand/ Supply of money: Price rise -- lowers the value of currency--
weakening of currency w.r.t foreign currencies-- Rise in price of imported goods.
Effect on Production: Favorable conditions for production, creates an incentive to
enhance the production.
Effect on taxation: Price rise -- leads to higher tax -- which reduces the disposable
income-- cools the inflation. Reduction of taxes have the opposite effect.
On creditors and debtors: Lenders suffer and borrower benefit due to inflation.
On the Industry: High inflation increases the cost of raw material and also borrowing
rates which discourage investment.
Exchange rate: Currency of any country with a relatively higher interest rate will
depreciate (fall in the value currency) because high nominal interest rates reflect expected
inflation which will consequently negate any gains by investors who invested in the
securities of that countries due to a higher interest rate
Gainers: Businessmen, Farmers, Shareholders, Debtors and Government.
Losers: Wage earners, Pensioners, Students, Bondholders and Creditors.
11. Inflation Targeting in India: It is a central banking policy that revolves around
adjusting monetary policy to achieve a specified annual rate of inflation.
Reserve Bank of India act, 1934 amendment: It provides for inflation target to be set
up by government in consultation with RBI once in every five years.
Target: Government has notified 4% CPI inflation as the target for the period from
August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6% and the lower
tolerance limit of 2%.
Composition of Monetary Policy Committee (MPC)
o Governor of RBI (ex officio chairperson), Deputy Governor of RBI, in charge of
Monetary policy (Member), one officer of RBI (member) and 3 members appointed
by Central government as members.
o One vote for each member and a casting vote for governor in cases of tie.
o Members appointed on recommendation of Search-cum-selection committee headed
by cabinet secretary with RBI governor; Secretary and three experts as members.
Chapter: Banking System in India- Part 1
1. Introduction: A bank is a financial institution that accepts deposits from public and creates
credit + Lending activities is performed either directly or indirectly through capital
markets.
2. Functions of a Bank
3. History of Banking
• Pre-Independence Evolution
o Earliest evidence of Banking in India is found in Vedic Civilization-> loan deeds
called rnapatra (or) rnalekhya.
o First bank was set up in Madras by officers of British East India company in 1683.
o First joint stock bank was Bank of Bombay (Established in 1720).
o First Presidency bank was Bank of Bengal (Established in 1806) with a capital of
Rs. 50 lakhs.
o First Indian owned bank was Allahabad Bank, set up in 1865.
o In 1921, three presidency banks amalgamated to form Imperial Bank of India + It
was nationalized in 1955 and renamed as State Bank of India (SBI).
o Impact of Great Depression: Failure of small banks-> RBI act, 1934 was enacted
and RBI was set up in 1935 to check bank failures + Commercial banks governed
by Company Law and permission of RBI not required for setting up of a new bank.
• Post-Independence Evolution
o Banking Companies act, 1949 (later renamed as Banking regulation act) enacted
to increase the reach and growth of Banking sector.
o Bank consolidations: State Bank of India (SBI) became state owned in 1955 + On
19th July, 1969, Indira Gandhi government nationalized 14 largest private banks of
the country having deposits of at least Rs. 50 crores + Six banks nationalized in
1980s included Punjab and Sind Bank, Vijaya bank, Oriental Bank of India,
Corporate bank, Andhra Bank and New bank of India.
o Objective of nationalization: Extension of banking facilities on a large scale,
particularly in rural and semi-urban areas and for diverse other public purposes.
4. Banking system in India
• Banking regulation act: Empowers RBI to give license to open Banks, give permission
to open new branches, prescribe auditing and liquidity norms like CRR, determine
merger and elimination of Banks.
• Scheduled Commercial Banks: These are banks included in second schedule of the
Reserve Bank of India Act, 1934 + Fulfils conditions- having paid up capital and reserves
more than 5 Lakh, it becomes eligible for debts/loans at the bank rate from the RBI; and,
it automatically acquires the membership of clearing house.
o Provisions: Deposits CRR money to RBI's office/ Vault, eligible to borrow/ deposit
funds in RBI's window operations.
o Types
§ Public sector banks: State Bank of India and its associates and nationalized
banks.
§ Private sector banks: The Narasimham Committee-> RBI should permit the
establishment of new banks in the private sector provided they conform to the
minimum start-up capital and other requirements + Examples of Private banks
are ICICI, HDFC bank etc.
§ Foreign banks in India: Many foreign banks from different countries set up their
branches in India during the 1990s—the liberalization period. A total of 27 new
foreign banks opened branches in India following the reforms of 1991.
§ Regional rural banks: These are local level banking organizations created to
serve primarily the rural areas with basic banking and financial services +
However, RRBs may have branches set up for urban operations and their area of
operation may include urban areas too + Functions of RRBs include:
Ø Providing banking facilities to rural and semi-urban areas.
Ø Carrying out government operations like disbursement of wages of
MGNREGA workers, distribution of pensions etc.
Ø Providing Para-Banking facilities like locker facilities, debit and credit cards.
• Provisions of non-Scheduled banks: Can maintain CRR money in their Vault, RBI's
discretion in allowing for window operations, lots of cooperative banks.
Scheduled Cooperative banks:
o Urban Cooperatives: Majority of these banks fall in the non-scheduled and single-
state category + Banking activities of Urban Cooperative Banks are monitored by
RBI + Registration and Management activities are managed by Registrar of
Cooperative Societies (RCS).
o Rural Cooperatives:
§ Short term: State Cooperative Banks- They operate at the apex level in states;
District Central Cooperative Banks-They operate at the district levels; Primary
Agricultural Credit Societies-They operate at the village or grass-root level.
§ Long term: State Cooperative Agriculture and Rural Development Banks
(SCARDS)- These operate at state- level + Primary Cooperative Agriculture
and Rural Development Banks (PCARDBS)-They operate at district/block
level.
5. Types of Account
Fixed deposit: higher interest rate than saving (around 6%), penalty on withdrawal, can
provide for collateral to secure loan.
Current Account/Financial account: 0% interest, no penalty, mainly used by
business entity, provides overdraft facility, no restrictions on number of transactions in
a day, higher minimum balance compared to saving account.
Savings Account: Lower interest rate (around 3%), no penalty on withdrawal, can't
pledge as collateral for loan.
6. Types of Deposits
Demand Deposits: These are types of accounts that offer money accessibility on
demand + They offer lower interest rate as they are more used for day to day business
+ No penalty or advanced notice required to withdraw money.
Fixed Deposits: Banks accept deposits varying from 7 days to maximum of 10 years;
interest varies from bank to bank.
Recurring Deposits: Banks accept a fixed amount from a customer in fixed
instalment at regular interval of time; period varies from 6 months to 10 years.
Savings account Deposit: Most common and basic type of bank account + Interest
earned is generally low + It allows to deposit and withdraw funds at your
convenience.
o Basic Savings Bank Deposit Accounts: No requirement of minimum balance +
Available for Economically weaker sections + Only one BSBDA account in one
bank is permitted + Jan Dhan accounts come under this.
o Basic Savings bank deposit accounts small scheme: Relaxed KYC and self-
attested required documents + Upper limit on credit is Rs. 1 lakh in a year +
Account can be opened for only 12 months-> further extension requires
submission of documents.
o Normal saving Bank account: Minimum balance provisions vary from bank to
bank + Mostly help the salaried individuals, students etc.
7. Narasimhan Committee on Banking Reform
Narasimhan Committee 1991: Establishment of 4 tier banking structure+ supervisory
functions over banks and financial institutions can be assigned to a quasi-autonomous
body sponsored by RBI+ phased reduction in SLR+ Phased achievement of 8% CAR+
Abolition of branch licensing policy+ Proper classification of assets and full disclosure
of accounts of banks+ Deregulation of Interest rates+ Competition among financial
institutions+ Setting up Asset Reconstruction fund to take over a portion of the loan
portfolio of banks.
• Narasimhan Committee Report II – 1998: Strengthening Banks in India
(recommended the merger of strong banks) + Narrow Banking (where weak banks will
be allowed to place their funds only in the short term and risk-free assets) + Government
should raise the prescribed capital adequacy norms+ freedom for banks in its working
and bank autonomy+ Review of banking laws
8. Privatisation of Banks
• 2007: UTI Bank privatized into Axis Bank.
• 2018: IDBI Bank bought by LIC.
• Banking Investment Company: 2014 P J Nayak committee recommended to establish,
act as holding company for PSB, not yet implemented.
9. Private Banks in India
• 3 round for giving license for private Banks completed.
• On tap License: 2016, RBI has made on tap license to open the private banks. No need
to wait for notification, can apply anytime for banking license.
• Conditions: Resident Indian individual, min 10 years of experience in NBFC, Initial
shareholding in hands of Indians, willing to open 25% branches in rural India, investment
of minimum 500 crore capital, Not allowed for large industrial groups and NBFC.
• Performance of ON - Tap license: No applicant has been given license.
10. Foreign Banks
• Foreign banks in India: Can open branches/ subsidiary in India, can invest upto
maximum 20% in public sector Bank, can invest upto 49% through automatic route and
74% by approval in Private Sector Bank.
11. Regional Rural Banks
• Establishment: Set up in 1976 by provisions for RRB act 1976.Voting power is ( Union
govt+ State+ Sponsor bank) = 51% [Ownership structure: Central Govt (50%), State
government 15% and Sponsor Bank 35%]
• Subjected to CRR, SLR norms but RBI could prescribe separate norms.
• PSL: 75%
• Loan interest rate can't be more than prevailing lending rates of cooperative banks.
• Operation restricted to few areas.
• Regulator: RBI but immediate is NABARD.
12. Payment Banks
• It is a differentiated bank that will undertake only certain restricted banking functions
which include acceptance of deposits, payments and remittance services but cannot lend
money.
• They can accept deposits restricted to Rs. 2 lakhs per customer, and can pay customers
interest on the money that is deposited.
• They cannot lend money to the people.
• They can offer financial products like loans, insurance, mutual funds, pension funds etc.
by partnering with other financial institutions and banks.
• They can issue ATM cards but cannot issue credit cards.
• 75% of the deposits generated by payment banks must be invested in government
securities and the remaining maximum of 25% as deposits (including fixed deposits) with
scheduled commercial banks.
• They are required to maintain a minimum capital adequacy ratio of 15% of its risk
weighted assets (RWA) on a continuous basis, subject to any higher percentage as may
be prescribed by RBI from time to time.
• The minimum paid-up capital is Rs 100 crores.
• Minimum initial contribution to the paid-up equity capital shall at least be 40% for the
first five years from the commencement of its business.
13. Small Finance Banks: They will offer basic banking services, accepting deposits and
lending to unserved sections, including small business units, small and marginal farmers,
micro and small industries, and entities in the unorganized sector.
• They can issue both credit and Debit cards and can have their own ATM’s.
• The maximum loan size and investment limit exposure to single and group obligators
cannot be more than 10 per cent and 15 per cent of its capital funds, respectively.
• 75% of the credit to the priority sector.
• 50% of their loan portfolio constitutes advances of up to Rs.25 lakhs.
• They can undertake financial services like distribution of mutual fund units, insurance
products, pension products, and so on, but not without prior approval from the RBI
• The initial paid-up voting equity share capital/net worth required to set up a small
finance bank, currently, it is Rs 200 crore.
14. Small Finance Bank and Payment Bank
Small Finance Bank (SFB) Payment Bank
Examples Capital Small Finance Bank 6 at present: Airtel, India Post,
(Punjab), Ujjivan (Kar), Utkarsh FINO, Paytm, Jio, NSDL.
(UP): Total 10
CRR, SLR, Same as Indian private banks Same as Indian Private Banks,
Repo, FDI but T& C for SLR
Conditions 25% Branches 25% access points
for Rural
area
Devised for Unserved Underserved Farmers, Remittance of migrant labors,
Micro, Small industries low-income households,
unorganized sector, small
business
Conditions No Condition Can’t accept NRI deposits, Fixed
for Deposits deposit, Recurring Deposit. Can
accept only Demand deposits
under 2 Lakh/ customer.
Loan 75% in PSL, 50% loan lower than Can’t give loan, Can only issue
50 Lakh/Customer G-sec, T- bill, and other
government securities
Issuance of Allowed Debit and Credit Card Can issue only Debit card
Cards
15. On-Tap License for SFB: RBI allowed in 2019, promotes financial inclusion, allowed urban
cooperative banks to become SFB. Example: Centrum Small Finance Bank (SFB) is getting
the On-tap license and will take over the PMC assets.
Chapter: Banking System –Part 2
1. Basel Norms: It is a global, voluntary, regulatory framework on bank capital adequacy stress
testing and market liquidity risks + Formulated by Basel committee on Banking supervision;
secretariat located at Bank of International settlement (BIS) in Basel, Switzerland.
Parameters: They comprise parameters like Liquidity, Asset quality, Risk weight,
Capital adequacy, Management, Earning, Supervision and system control (CAMELS).
Important Terms related to Basel Norms
o Risk weighted assets: Assets of a bank weighted by their degree of credit risk + Used
to determine minimum amount of capital should be held by banks to reduce risk of
insolvency.
o Capital to risk weighted asset ratio (CRAR)/Capital adequacy ratio (CAR): It is
an important measure of “safety and soundness” for banks because it serves as a
buffer or cushion for absorbing losses.
o Tier 1 capital: It is bank’s core capital used when it needs to absorb losses without
ceasing its operations + It consists of Equity share capital, Reserves (excluding
revaluation reserve), Capital reserve arising due to sale of assets.
o Additional Tier 1 capital: Perpetual bonds which carry a fixed coupon payable
annually from past or present profits of the bank.
o Tier 2 capital: It is supplementary capital of bank used to absorb losses if a bank is
winding up its assets; less reliable than first tier + It includes revaluation reserves,
subordinate term debt, general provisions and hybrid capital instruments.
o Leverage Ratio: It is a relative amount of capital to total assets + Aimed to put cap
on swelling of leverage in banking sector.
o Capital Conservation Buffer: It ensure that banks maintain cushion of capital which
can be used to absorb losses during financial and economic stress.
o Counter Cyclical Capital Buffer (CCCB): It is aimed to increase capital
requirements in good times and decrease them in bad times.
o Liquidity Coverage Ratio: It refers to proportion of highly liquid assets held by
financial institutions to ensure their ongoing ability to meet short-term obligations +
It is calculated by dividing bank high quality assets by its total net cash flows over a
30-day stress period + Urjit Patel committee recommended that India should move
away from SLR mechanism and adopt LCR.
o Net Stable Funding Requirement: It is defined as the amount of available stable
funding in relation to amount of required stable funding.
• Basel 1/Basel Capital Accord (1988): It focused entirely on credit risk; established the
capital and risk-weighting structure for banks; minimum capital was set at 8% of risk-
weighted assets (RWA) + India adopted the Basel 1 guidelines in 1991.
• BASEL 2 (2004): Banks should keep a minimum capital adequacy requirement of 8%
of risk assets + Supervisory review and market discipline-> stricter disclosure
requirements; Banks must report their CAR, risk exposure, and other information to the
central bank on a regular basis + They were implemented in India from 2009.
• Basel 3 (2010): These guidelines were put in place in response to the 2008 financial crisis
+ Minimum requirement of capital equity raised from 2% to 4.5% of total risk weighted
assets + Overall Tier 1 capital requirement increase from current minimum 4% to 6% +
The capital adequacy ratio should be kept at 12.9 percent + Minimum Tier 1 and Tier 2
capital ratios must be maintained at 10.5% and 2 percent of risk-weighted assets,
respectively + Capital conservation buffer of 2.5 percent + Counter-cyclical
buffer should also be kept at 0-2.5 percent + The leverage ratio must be at least 3%.
o Liquidity Coverage Ratio (LCR): Basel 3 requires banks to hold an amount of high-
quality liquid assets that are enough to fund cash outflow for 30 days.
o Net Stable Funding Requirement (NSFR): Basel 3 requires banks to hold enough
stable funding to cover duration of their long term assets + Banks must maintain a
ratio of 100% to satisfy the requirement + LCR assesses short-term (30-day)
resilience while NSFR assesses medium-term (1-year) resilience.
• Recent decisions: Implementation of BASEL 3 standards finalized in 2017, deferred by

one year to Jan 1st 2023 (earlier Jan 2022).
• Basel 3 and India
o Guidelines regarding capital required to be maintained by banks are issued by RBI.
o Indian Banks need to maintain minimum Capital Adequacy ratio (CAR) of 9% +
Capital Conservation Buffer in form of common equity at 2.5% of risk weighted
assets.
o Indian Banks required to maintain 5.5% of Common Equity Tier 1 (CET1) as against
4.5% required under Basel 3.
Parameters Requirement by Basel 3 Requirement by RBI
Capital Adequacy ratio 8% Banks-9%

Small Finance Banks and
Payment Banks- 15%
Capital Conservation 2.5% 2.5%
Buffer
CET 1 4.5% 5.5%
NSFR 100% 100%
Leverage Ratio 3% DSIBs- 4%

Other Banks- 3.5%
§ Note: Capital Adequacy Ratio requirements required by RBI are stricter than Basel
3 norms.
• Domestically Systematically Important Banks: It means the bank is too big to fail->
significant disruption to essential services + Banks whose assets exceed 2% of GDP are
considered part of this group + As per the framework, from 2015, every August, the
central bank has to disclose names of banks designated as D-SIB + It classifies the banks
under five buckets depending on order of importance. ICICI Bank and HDFC Bank are
in bucket one while SBI falls in bucket three + Banks in bucket one need to maintain a
0.15% incremental Tier-I capital from April 2018 + Banks in bucket three have to
maintain an additional 0.45%.
Balance sheet of Bank: Assets: Loans, G.sec + Liabilities: CASA (Current Account,
Saving Account and Demand draft), FDRD (fixed deposits and recurring deposits)
2. Coinage act
Provisions: Government prints Rs 1 note and all coins upto Rs 1000 denomination, RBI
circulates as agent of government, RBI pays government currency notes.
RBI: Public debt Manager of government, issues G- sec on behalf of government,
primary dealers, Banks, EPFO buys the G-sec, Unsold G- sec bought by RBI, if RBI
doesn't have cash then prints the cash and buys it.
3. RBI balance sheet
Liabilities: Bank notes (2-2000) issues under RBI Act, coins and Rs 1 issued under
coinage act.
Assets: American/ foreign government treasury bonds, gold coins, gold billions, Indian
government bonds, Rupee coins and 1 Rs note.
Note: RBI can print notes of difference between its assets and Liabilities.
4. All India Financial Institutions(AIFI)
Parameters EXIM (Jan NABARD (Jul NHB (1988) SIDBI (1990)
1982) 1982)
Shareholder GOI GOI (Earlier RBI- GOI (Earlier SBI & LIC ;
minority but not after RBI, but sold earlier 100%
2018) to govt in with IDBI.
2019).
Objective To promote Regulatory Finance to
Operates Credit
cross border supervision of Banks &
Guarantee fund,
trade Cooperative Banks NBFCs
Small for
& RRB, Refinance to housing,
Enterprises
farmers, artisans, Monitors
Development
Operates Rural Infra. RESIDex,
Fund(SEDF).
Development fund ( Operates
RIDF) udyamimitra.in
for loans to small
firms
Common Don’t accept deposits from public, Regulator is RBI, BASEL norms are
Points for applicable.
AIFI
5. Type of Borrowers
Prime: Has capacity to pay.
Subprime Borrower: Lacks the capacity to pay.
Zombie lending: Weak banks giving new loans to subprime borrower.
6. Non-Performing Asset Related Definitions
Standard Assets: Loan account where borrower is paying regularly.
NPA: If loan principal or interest on an account is not paid for more than 90 days from
its due date + In case of agricultural loans if instalment/interest is due for two crop
seasons for a short duration crop, or one crop season for a long duration crop.
Provisioning: Setting aside funds to cover losses against arising NPA.
Gross NPA: Grand total of all NPA. PSB GNPA: 6 Lakh Crore, Private GNPA: 2 Lakh
Crore, Total: 8 Lakh Crore.
Sectors with High GNPA: Industries > Agriculture > Service Sector> Personal Loans.
Net NPA: GNPA – Provisioning
• Substandard asset: If loan account remains in NPA classification for 12 months.
• Doubtful: When loan account in substandard classification for 12 months.
• Loan write –off: When Bankers remove the loan amount from the asset side of the bank
balance sheet, reduces the NPA% of bank.
• Restructuring of Loans: Changing the principal/interest rate/tenure of loan.
• Stressed Assets: NPA + Loans Written – Off + Restructured Loans
7. RBI means to recover stressed assets
• Rectification: Conduct Asset Quality Review, find new partner to revive the project.
• Restructuring: Changing the tenure or loan interest amount, Schemes like 5/25 for
Infrastructure loans, Corporate debt structuring, Strategic debt restructuring loans, S4A
scheme for stressed assets announced for restructuring.
• Recovery: Checking the defaulter under Sarfaesi act-2002 and Insolvency and
Bankruptcy Code 2016.
8. SARFAESI ACT 2002
• Provisions: Allows attaching of the mortgaging assets for non-payment of loan, case is
tried in debt recovery tribunal, higher appeal to Debt Recovery Appellate Tribunal.
• Lenders having SARFAESI Powers: Banks, HFCs, NBFCs and Cooperative Banks too
9. Insolvency and Bankruptcy Code, 2016: It is based on recommendations of Bankruptcy
Law Reform committee headed by TK Viswanathan.
• Unified Framework: It is applicable to both individuals and companies + It applies to
companies, LLPs, partnerships, individuals and any other body specified by the central
government.
• Operational Creditors: Suppliers, contractors, salaried employees etc.
• Financial Creditors: Banks, NBFC, bond & other debt security holders, + Home buyers
• Provisions: Insolvency proceedings at National Company Law Tribunal (NCLT),
Insolvency professional to draft a resolution plan like reviving or finding another
investor.
• Committee of Creditors: Comprised of Financial Creditors, voting based on loan given
by financial creditor, determine the final verdict on resolution.
• Appeal Structure: If individual borrower – Debt recovery tribunal, Company borrower-
NCLAT
• No applicability: For wilful defaulter, Incapable defaulter (has no capacity to pay)- they
do directly to SARFAESI.
• Insolvency resolution: Max (180 + 90 days) 330 days (including liquidation process
after Aug 2019 amendment).
• Institutional Infrastructure
o Insolvency and Bankruptcy Board of India-> Insolvency regulator, oversees
functioning of insolvency intermediaries.
o Insolvency professionals and Insolvency professional agencies-> These are private
bodies specialized in helping sick companies.
o NCLT: Adjudicate insolvency resolution for corporates (Companies and LLPs);
appeals to NCLAT and Supreme Court.
o Debt Recovery Tribunal (DRT)-> It will adjudicate insolvency resolution for
individuals; appeals to DRAT and Supreme Court.
• Insolvency and Bankruptcy Board of India
o About: Statutory Body, implements I & B code
o Membership: 1 Chairman, 1 nominated member from RBI and 8 members from govt.
o Ministry: Ministry of Corporate affairs
o Tenure: Chairman-5 years/65 age, eligible for reappointment
o Functions: Selects Insolvency Professional Agencies, selects Information Utility to
maintain database of borrowers.
• Cross Border Insolvency
o Provisions: I &B 2016 code has provisions but not yet enforced. Allows for foreign
creditor to recover money lent to Indian corporates and allow Indian lenders to
recover money from foreign assets.
10. Important Schemes of banking sector

• Differential Interest Rate Scheme (DIRS): It is used in 1972, under which it is
mandatory for every PSB to lend to poorest of the poor families atleast 1% of their total
loans given by them at the end of the preceding year at a mere rate of 4%. Families
eligible under the scheme should have annual income not exceeding Rs 18000 in rural
areas and Rs 24000 in other areas.
• Lead Bank Scheme (Introduced in 1969): Under which every PSB as well as some
private sector banks have to adopt certain districts with the objective of bringing about
their extensive development by identifying their problems, credit requirement. This
scheme is popularly known as scheme based on ‘Area Approach’.
11. Non-Banking Financial Companies (NBFC): It is a heterogeneous group of institutions
(other than commercial and co-operative banks) performing financial intermediation in a
variety of ways, like accepting deposits, making loans and advances etc + It is mandatory for
a NBFC to get itself registered with the RBI as a deposit taking company.
• Registration: Under Companies act
• Supervision: Reserve Bank of India
• Types: Deposit taking NBFCs and Non-deposit taking NBFCs
• Condition of Deposits: Can take only Time deposits, Can’t issue the Chequebooks,
debit/credit card and deposits not insured under DICGCI Act, cannot offer gifts,
incentives or any other additional benefit to the depositors, need to maintain CAR
norm as prescribed by the RBI, allowed to accept and/or renew public deposits for a
minimum period of 12 months and maximum period of 60 months.
• Investment of Deposits: Can invest in Share Market.
• Forum for Consumer Complaints: RBI started separate Ombudsman for NBFCs
since 2018.
• Minimum NOF (net owned fund) of ₹100 crores.
• Following are exempted from the regulatory control of the RBI:
o venture capital fund, merchant bank, stock broking firms (SEBI registers and
regulates them);
o insurance company (registered and regulated by the IRDA);
o housing finance company (regulated by the National Housing Bank);
o nidhi company (regulated by the Ministry of Corporate Affairs under the
Companies Act, 1956);
o chit fund company (by respective state governments under Chit Funds Act, 1982).
12. Different types of NBFC often in news: These are regulated by RBI.
Micro Finance Institutions: Give small loans to poor without collateral, Regulation by
RBI and Ministry of Corporate affairs, limitation of income to borrow from MFI.
Factoring Companies: Lend short term money to client against his invoices.
Asset Reconstruction companies: Buy bad loans from Banks & other NBFC.
MUDRA (2015): Doesn’t accept deposits, NBFC owned by SIDBI. Gives indirect loans
to Micro enterprises.
13. Shadow Banking
About: Not fully regulated by RBI, operates outside the traditional commercial banking
sector, composed of single institution, mobilise funds by borrowing from banks, issuing
Commercial Papers(CP) and Bonds.
14. MUDRA Bank
Micro units can avail up to ₹10 lakh loan through refinance route (through the
Public and private sector banks, NBFCs, MFIs, RRBs, District Banks, etc).
The products designed under it are categorized into three buckets of finance named
Shishu (loan up to ₹50,000), Kishor (₹50,000 to ₹5 lakh) and Tarun (₹5 lakhs to ₹10
lakh).
It covers the traders of fruits and vegetables, but it does not refinance the agriculture
sector.
There is no fixed interest rate in this scheme. Interest rates on the loans are supposed to
vary according the risk involved in the enterprises seeking loans.
15. Money multiplier:
Money multiplier: Complete rotation of money (RBI issues currencies- Banks gives
loans - Banks gets the deposits - further makes the loans), Dependent upon Cash reserve
ratio (CRR) of Banks. Every R% CRR cash generates 1/R new money.
Stock of Total Money (M3)/ Stock of high powered Money(M0)
Example: Presently, CRR is 4% which means money multiplier is 100/4 = 25. Printing
of 100 rs note by RBI would generate Rs.2500 in economy.
Not exactly 25x in real life: Black money, lack of financial inclusion, Banks do not loan
to last extent, not Demand of loans in economy.
Example: Money multiplier during Corona 2020 was 5.5. (Economic Survey 2020).
Money multiplier is reducing because economic activities are down and people are not
seeking loans.
Velocity of money circulation: No of times money passes from one hand to another.
Poor people> rich people, developed countries > developing countries (More
consumption oriented)
Currency in circulation (CIC): Usage cash as payment than cheque, digital payment.
Cic down: People keeping cash in bank and using less to spend.
16. Other important
Project Shakti: Project to solve issue of NPA.
Project Sashakt: To help consolidate stressed assets + Marked based solution with a
focus on asset turnaround to ensure job protection and creation.
• RBI Financial Year: April-March, Before 2020 – July to June.
• RBI income source: Interest on G-sec, Interest on foreign G-Sec, Interest on Loans given
to other Banks, Revaluation of foreign currency and gold, Penalties on errand banks.
• RBI expenditure: Staff salary, Reserves for contingency, Reserve for Exchange rate
stability (called as Currency & Gold Revaluation Reserve)
• Credit Information companies: Maintain database of borrowers, CRISIL, CARE, Fitch
India, ICRA are some companies.
• Central Repository of Information on Large Credits (CRILC): RBI database for
Loans above 5 crores.
• National e-governance services Ltd (NeSL): Provides borrower database under I&B
act.
• Legal Entity Identifier (LEI) Number: Global number for companies to keep a trail of
financial transaction of company, 20 Digit alphanumeric code, Initiated in June 2018 for
large borrowers.
• EASE framework: 6 pillars to make PSBs more Responsive and Responsible like
Customer responsiveness, reach out to potential borrowers, helping MSME
enterpreneurs.
• Ease 3.0 Framework: Smart, Tech-enabled Banking like Doorstep Banking, Dial-a-
loan, Credit@click, Palm banking (using phone/tablets)
• AT1 bonds: No maturity date, Banks pays interest for infinite time/perpetuity and no
principal payment.
• Haircut in banking: Haircut is the difference between the actual dues from a borrower
and the amount he settles with the bank. it is often a last resort when there is absolutely
no hope of a recovery and the loan is written off for a one-time settlement.
• For example: Loan due is Rs. 10 lacs, Final Settlement Rs. 4 lacs then haircut Rs. 6 lacs.
• RTGS: Settlement in “real time”. “Gross settlement” means the transaction is settled on
one to one basis without bunching with any other transaction. Transfer limit Minimum
amount to be transferred Rs. 2 lakhs. No upper ceiling
• NEFT: Meaning NEFT operates in hourly batches. There is no limit either minimum or
maximum on the amount of funds that could be transferred using NEFT
• Core Banking Solution (CBS): CBS is networking of branches, which enables
Customers to operate their accounts, and avail banking services from any CBS branch of
the Bank, regardless of where he maintains his account. The customer is no more the
customer of a Branch. He becomes the Bank’s Customer.
• Bancassurance: Bancassurance, i.e., banc + assurance, refers to banks selling the
insurance products.
• Reverse Mortgage: A reverse mortgage enables a senior citizen to receive a
regular/monthly income from a lender (a bank or a financial institution) against the
mortgage of his home. The borrower continues to reside in the property till the end of his
life.
• Merchant banker: It means any person who is engaged in the business of issue
management (e.g. issue of equity shares, preference shares and debentures or bonds)
either by making arrangements regarding selling, buying or subscribing to securities or
acting as manager, consultant, adviser or rendering corporate advisory service in relation
to such issue management. Registration with SEBI is required for working as Merchant
Banker
17. Fugitive Economic Offenders Act,2018:
• Provisions: Attachment of the Indian & Overseas properties of economic offenders, No
civil court can stay the order, appeal only in High court or Supreme Court, Union govt
will oversee administration of attached properties.
• Declaration of Economic offender: Special courts under the PMLA (Prevention of
Money-laundering Act, 2002) will declare economic offender.
18. Banking Reforms by India
• Indradhanush plan for bank recapitalisation, bifurcation of PSB’s CMD post into
chairman & MD&CEO, setting up of Bank Board Bureau (2016) for appointment of top
officials (MD, CEO, Chairman and full-time Directors).
19. Investment Models
• Investment: It is defined as an increase in the capital stock of an economy during a given
year. It is addition to the country’s physical stock of capital during a given period.
• Importance of Investment: Opens up the possibilities of large scale production, Enables
the country to make use of modern techniques of production, Creates employment.
20. Factors affecting investment
• Technological Advance and Innovation: Investment in labour and capital saving
machines and other facilities are an example.
• Government Policy: The monetary and fiscal policies of the government affect
investment through monetary policy, taxation and Government expenditure.
• Discovery of resources: Discovery of new natural resources such as metals, minerals
and oil induce investment.
• Political Environment: Peaceful and stable political environment favour investments.
• Rate of Population Growth: Leads to increased demand, Higher profit and lower wages.
• Other Factors: Availability of finance, stock of capital goods, aggregate demand and
conditions of labour market are other factors.
Classification of investment:
• Gross Investment: total expenditure on buying capital goods over a specific period of time
without considering ‘depreciation’.
• Net Investment: Net investment considers depreciations and is calculated by subtracting
depreciation from gross investment.
• Net Investment = Gross Investment - Depreciation
Types of Investment:
Type Nature Remarks
Public • Made by central, state or local self govt
• Generally made for social welfare, defence
and economic development
Private • Made by the private individuals or private For enhance private investment:
organisations with the sole objective of • Reduction in rate of Interest
earning profit. • Reduction in Taxes
• Can come from domestic sources or abroad: • Policy of wage cut
FDI,FPI • Increase in Govt Expenditure
• Focus on competition
PPP • Working arrangement b/w public and private
• Private sector brings technology & efficiency
• Public sector brings accountability& mandate
Measures of Money Supply (M0-M4)
Need: Needs to measure the presence of money in economy for controlling the inflation.
High Powered Money

M0: The total liability of the RBI is called the monetary base or high-powered money. It
consists of Currency in Circulation + Bankers' Deposits with RBI + Other Deposits with
RBI
Narrow Money
M1: Coin& Currency with Public + Demand deposits in Bank(CASA)
M2: M1+ Demand deposits with Post Office
Broad Money:
M3: M1 + Time deposits with Banks(fdrd), used most commonly for measuring money
Supply, also known as Aggregate Monetary resources/ Supply.
M4: M3+ Demand deposits and Time deposits in Post Office.
Chapter: Balance of Payments
1. Introduction: It is a systematic record of economic transactions made by residents of a
country with other country in a specific time frame.
2. Objective: It’s objective is to assess international economic position of a country to help
government make decisions on monetary and fiscal policies on one hand, and trade
policies on the other.
Balance of
Payments
Current Capital Errors and

Account Account Omission
Components of Balance of Payment:

Current Capital
Visible Invisible Investment Loans Banking
Goods Services Income Transfers FDI External NRI
Profit Remittances FPI borrowing by accounts
Interest Donations sovereign; with
Dividend Gifts External Indian
Commercial Bank
Borrowing
3. Current Account: It is a record of all trade between one nation and other nations +
Includes payments for imports and exports of both goods and services; monetary gifts or
transfer payments to and from other nations.
Current
Account
Trade in Transfer
Trade in Goods
Services payments
Gifts,
Export of Import of Net Factor Net Non-factor
remittances
Goods Goods Income Income
and Grants
o Trade in Goods
Ø Exports of India
§ Most exported Goods: Petroleum Products > Pearl, precious & semi -
precious stones > Drug Formulation > Gold jewellery > Iron and Steel
§ Trade Surplus countries: USA, UAE and Singapore
§ Export Preparedness Index: Developed by NITI Aayog, Ranks states by
their infrastructure, Transport connectivity and ease of doing business.
§ Remittances: India > China > Mexico
Ø Imports of India
§ Most imported Goods in year: Petroleum crude > Gold > Pearl, precious
and semi - precious stones > Petroleum Products > Coal and Coke.
§ Most imported services in year: Business Service > Travel > Transport >
Software service.
§ Trade Deficit: China, Switzerland, Middle East nations.
o Trade in Services: It includes factor income and non-factor income transactions.

Ø Net Factor Income abroad: It captures the net flow of income payments
between domestic economy and the foreign sector + It is the difference between
foreign factor payments to domestic citizens and domestic factor payments to
foreign citizens.
Ø Net Non-Factor Income from abroad: All invisible receipts not attributable to
i.e, income (remittances from overseas migrants) and capital (income from
investments and interest payments)
§ Non-factor services: It comprise shipment, passenger and other transport
services and current account transactions not separately reported (e.g., not
classified as merchandise, non-factor services, or transfers).
o Transfer payments: These are one-sided transactions-> which do not have any
quid pro quo + It includes grants, gifts, remittances and repatriation of savings +
Official transfer receipts include grants, donations received by GOI from bilateral
and multilateral institutions; similar transfers by Indian Government to other
countries.
o Balance on Current Account: Current Account is in balance when receipts on
current account are equal to the payments on the current account + It has three
components:
Ø Balance of Trade (BOT): It is the difference between the value of a country’s
imports and exports for a given period + It is the largest component of a
country’s balance of payments (BOP) + Deficit BOT will arise if a country
imports more goods than what it exports.
Ø Balance of Invisibles: The invisible balance is that part of the balance of trade
that refers to services and other products that do not result in the transfer of
physical objects. Examples include consulting services, shipping services,
tourism, and patent license revenues.
Ø Balance of Transfer: It is the difference between gifts or transfers received
from other nations and transfers sent to other nations.
o Components of Current Account
Ø Crude Oil Prices:
§ Price Goes Up: When Oil supply decreases, or when economic growth
increase then leads to higher demand leading to high prices, Uncertainty in
world order.
§ Reduction in Prices: When Supply goes up or world faces economic
slowdown.
§ Indian Major Oil Supplier: Iraq, USA and Saudi Arabia.
Ø Other Items related to Crude Oil
Indian Strategic Oil reserve: Store strategic oil reserve for strategic
purposes. Places: Visakhapatnam, Chandikhol, Padur & Mangalore. Stored in
rock cavern structure.
West Texas Intermediate (WTI): To measure US oil price.
Brent Index: Measures Prices in North West Europe.
Ø Gold component in Current Account:
§ High Import: Importance in culture, act as hedge against inflation, provide
safety and lack of mines in India lead to its import.
§ Sovereign Gold Bond: Can purchase from commercial banks, post offices
and authorized agents, Issues Gold bonds in one gram and in multiples,
Tenure is 8 years, 2.5% interest rate, traded on stock exchange.
§ Gold Monetization Scheme: Allows old jewellery to be deposited in Banks
for 1 year to 15 years, around 2% interest, can be redeemed into gold bar/
coin.
§ Gold Coins: Available in denomination of 5,10 and 20 grams, Not a fiat
money.
4. Capital Account: It records all international purchases and sales of assets such as money,
stocks, bonds, and so on + It keeps track of capital inflows and outflows that have a direct
impact on a country's international assets and liabilities.
Capital
Account
External External
Investments
Borrowings Assistance
Direct Portfolio ECB, Short- Aids and

Investment Investment term Debt Loans
FDI, Equity FII, Off-

Capital Shore Funds
o Foreign Direct Investment: It is a financial investment made by a party from one

country into a business or corporation in another country with the intention of
establishing a long-term partnership + It brings money, skills, technology and
knowledge.
Ø Components: Equity capital, reinvested earnings, short and long-term
borrowing and lending operations direct investors and linked enterprises.
Ø FDI in India: India is the world's top greenfield FDI destination + Computer
software and hardware received the most FDI equity inflows of US$ 7.1 billion
from April to September 2021 + Singapore remains the top investment country
in terms of FDI equity inflow.
Ø Automatic Route: A non-resident or Indian firm does not need the RBI's or the
Indian government's prior approval for FDI.
§ Sectors: Medical devices (up to 100%); Thermal power (up to 100%);
Insurance (up to 49%), Pension (up to 49%); Power exchanges (up to 49%),
Petroleum Refining (By PSUs): up to 49%, Ports and harbor construction
(100%), Railway infrastructure (up to 100%).
Ø Government Route: The corporation must submit an application through the
Foreign Investment Facilitation Portal-> application is sent to the appropriate
ministry, which, in collaboration with Ministry of Commerce's DPIIT will accept or
reject it.
§ Sectors: Core Investment Company: 100%; Multi-Brand Retail Trading: 51%;
Mining & Minerals separations of titanium bearing minerals and ores: 100%;
Print Media up to 100%; Satellite (Establishment and operations): 100%.
Ø Prohibited sectors: Lottery industry (Government, private and internet lotteries),
Gambling and betting, including casinos, Nidhi corporation and chit
funds,Transferable Development Rights (TDRs), Tobacco or tobacco substitutes for
cigars, cheroots, cigarillos, and cigarettes; investment in atomic energy and railway
operations sectors not opened to private sectors.
Ø FDI Policy reforms (2020-21)
§ Insurance Sector: Under the automatic method, the government increased the
permitted FDI ceiling in insurance companies from 49 percent to 74 percent,
allowing foreign ownership and control with protections.
§ Telecom sector: Foreign investment in the telecom services sector is allowed
up to 100% under the automatic route.
Ø Domestic Direct investment in foreign sector: Net flow of payments used by
those in the domestic economy to purchase physical assets in other nations.
(Example: Indian buys a USA car company).
Ø Foreign Direct Investment in Domestic Sector: Net flow of payments used by
those in the foreign sector to purchase physical assets in the domestic economy.
(Example: American companies getting stake in an Indian company)
o Portfolio Investment: It is the acquisition of financial assets (which includes stock,
bonds, deposits, and currencies) from one country in another country.
Ø Foreign Portfolio Investment (FPI)/Hot money: Not involved in actual operations,
production and management; investor goal is to create a quick return on his money;
Undertakes buying and selling of shares; more liquid and less risky than FDI.
§ Hot money effect of FPI: Large money is speculative in nature, short term
approach, Has strong flight nature.
Ø Foreign Institutional Investor (FIIs): It is an investor of group of investors who
bring FPIs + Include hedge funds, insurance companies, pension funds and mutual
funds + They have to register with SEBI.
o External Borrowings: Portion of a country's debt that was borrowed from foreign
lenders, including commercial banks, governments, or international financial institutions.
o External Assistance: It denotes aid extended by India to other foreign Governments
under various agreements + External Assistance to India refers multilateral and bilateral
loans received under the agreements between GOI and other International institutions or
Governments and repayments of such loans by India.
5. India’s External Debt scenario
o India’s external debt is US$ 593.1 billion (Sep 2021)-> Commercial borrowing (US$
218.8 billion) forms the largest component of external debt.
o NRI Deposits (US$ 141.6 billion) is the second largest component.
o Short term trade credit (US$ 97.4 billion) forms the third largest component.
o Together, these three (Commercial Borrowings, NRI deposits and Short term trade
credit) constitute 77.2% of total external debt.
o Currency Composition of External Debt: Dominated by US$ (51%), followed by
Indian Rupee.
o External debt dominated in Indian rupee witnessed an impressive increase over the
years, owing to FPI investment into Indian debt market, apart from continued large
accretion to Non-Resident External Rupee Account.
6. Exchange rate: It is the value of one nation's currency versus the currency of another nation
or economic zone.
o Flexible/Floating Exchange rate: Non-intervening policy which allows foreign
exchange market to adjust to equilibrium through the balance of demand and supply with
no explicit government actions. (Eg: USA).
o Fixed Exchange rate: It is an exchange rate established at a specific level and
maintained through government actions (usually through monetary policy actions of a
central bank).
Ø Devaluation: Reducing the price (exchange rate) of one nation's currency in terms
of other currencies + Usually done to lower the price of the country's exports and
raise the price of foreign imports -> greater domestic production.
Ø Revaluation: Increasing the price (exchange rate) of one nation's currency in terms
of other currencies + It is done to raise the price of the country's exports and lower
the price of foreign imports.
o Managed Flexible Exchange rate: It is a combination of fixed and flexible exchange
rate + When demand and supply force in market are independent and Government also
give direction (e.g. India).
7. Nominal Exchange rate: The number of units of the domestic currency that are needed to
purchase a unit of a given foreign currency.
8. Real Exchange rate: It can be defined as the rate that takes into account inflation differential
between the countries + It tells how much the goods and services in the domestic country
can be exchanged for the goods and services in a foreign country.
9. Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER)
• NEER: NEER is calculated as geometric weighted averages of bilateral exchange rates
of domestic currency in terms of foreign currency.
• REER: REER is a weighted average of bilateral nominal exchange rates that have been
adjusted for inflation i.e. relative price differential between the domestic and foreign
countries.
• Increase/ Decrease in REER: The competitiveness of exports is determined by the
REER as the latter reflects the movements in relative price levels. The higher India’s
REER, lower India’s Export growth
• REER-6: It is calculated with reference to the basket of six major trading currencies
representing the – USD, Hong Kong dollar, Euro, Pound sterling, Japanese Yen, Chinese
Renminbi.
10. Types of Currencies
• Hard Currency: It is the international currency in which the highest faith is shown and
is needed by every economy; has the highest level of liquidity + Some of the best hard
currencies of the world today are US Dollar, the Euro and Japanese Yen.
• Soft Currency/Weak currency: The currency which is hyper sensitive and fluctuates
frequently to the political or the economic situation of a country + Mostly exist in
developing countries with relatively unstable governments + They cause high volatility
in exchange rates making them undesirable by foreign exchange dealers.
• Hot Money/Stolen Money: It is a currency that quickly and regularly moves between
financial markets, that ensures investors lock in the highest available short-term interest
rates + It continuously shifts from countries with low-interest rates to those with higher
rates + FPI is often referred to as ‘hot money”.
• Heated Currency/Under hammering: It is a domestic currency which is under enough
pressure (heat) of depreciation due to a hard currency’s high tendency of exiting the
economy (since it has become hot).
• Cheap Currency: If a government starts re-purchasing its bonds before their maturities
(at full-maturity prices) the money which flows into the economy is known as the cheap
currency.
• Dear Currency: When a government issues bonds, the money which flows from the
public to the government or the money in the economy in general is called dear currency.
11. Exchange rate Management in India
• Liberalized Exchange Rate Mechanism System (LERMS): It was started by Union
Budget 1992–93; operationalized in 1993 + The market-driven exchange rate shows the
actual tendencies of the foreign currency demand and supply in the economy vis-á-vis
the domestic currency.
12. Convertibility of Rupee: It means when currency of a country can be freely converted into
foreign exchange at market determined rate of exchange.
Current account convertibility: When foreign exchange received for export of
merchandise and services can be freely converted into Indian rupees and vice-versa in
case of imports + Fully convertible since 1994.
Capital account convertibility: A currency is freely convertible into foreign exchange
and vice-versa at market determined exchange rate + After recommendations of the S.S.
Tarapore Committee (1997) it is partially allowed in India; Limit on external borrowing,
controlled under Foreign Exchange Management Act, 1999.
Advantages of a fully convertible currency: Sign of stable and mature markets,
increased liquidity in financial markets, improved business opportunities, On-shore rupee
market development, easy access to foreign capital and improved financial system.
Disadvantages of a fully convertible currency: High volatility and foreign debt burden.
13. FOREX Reserves: These are assets held in reserve by a central bank in foreign currencies,
such as bonds, treasury bills, and other government securities + India's foreign exchange
reserves include Foreign currency assets, Gold reserves, Special Drawing Rights (SDR) and
Reserve position with International Monetary Fund (IMF).
Objectives: Maintaining confidence in monetary and exchange rate management
policies + Provides for intervention in favor of the national or union currency + Limits
external vulnerability by maintaining the foreign currency liquidity to absorb shocks
during times of crisis.
Current foreign reserve: $600 Billion.
Reasons for high reserve: Cheap Policy by Developed countries during Corona - led to
Purchase of Dollars by RBI and selling of Rupee to maintain the export competitiveness.
14. Trade related issues
Safeguard measures: Defined as “emergency" actions with respect to increased imports
of particular products, where such imports have caused or threaten to cause serious injury
to the importing Member's domestic industry.
Arbitrage: Simultaneous buying and selling of securities, currency, or commodities in
different markets in order to take advantage of prices difference for the same asset.
15. SEZ to promote Exports (Current Account)
About: Demarcated area which is treated as foreign territory for taxation and trade laws,
Has low rate of taxes.
Legislation: Regulated under Special Economic Zone Act, 2005.
Accrued Benefits: Single Window Clearances, Government bears the cost of
development of roads, sewer network and other related infrastructure.
Procedure of development: State government proposes - Union government approves (
Ministry of Commerce)
More than 220 SEZ in India.
Asia's First SEZ: Kanda, Gujarat in 1965.
16. Foreign Trade Policy (2015-20) to promote Exports
Nodal agency: Director General of Foreign Trade under Ministry of Commerce
Objective: Double the export from 2013-14 to 2020.
Interest Equalisation Scheme: Interest subsidy on loans by Commerce Ministry.
Advance Authorisation Scheme: Allows duty free import of inputs.
Niryat Bandhu Scheme: Mentors the new and potential exporters.
17. International Financial Service Centre (IFSC)
• About: 50:50 jt. Venture of IL&FS and Gujarat Urban Development Company Limited
(GUDCL), provide tax benefits for operating companies, aims to make India a global
financial hub.
• Set up: As a SEZ under IFSC Authority Act-2019.
• International Financial Service Centres Authority: One chairperson, One Member
nominated from RBI, SEBI, IRDAI, PFRDA.
• Tenure: 3 years, Reappointment allowed.
18. Miscellaneous
• Debt overhang: When debt becomes so much, that all the monthly income goes into
payment of debt, is called debt overhang.
• Current situation in Balance of Payment (BoP): Current Account in deficit, but Capital
Account in surplus.
• 1991 crisis: Deficit in Current Account and low surplus in Capital Account- Poor forex
reserve to bring down the BoP to zero - had to pledge gold with IMF to borrow dollars.
Chapter: Financial Markets
1. Introduction: Financial markets is any marketplace where buyers and sellers participate in
the trade of assets such as equities, bonds, currencies and derivatives.
2. Functions of financial market: Mobilisation of saving and channelized them into more
productive uses + Facilitate price discovery + Providing liquidity to finance assets +
Reducing the cost of transaction and save time and efforts.
Financial
Market
Money Capital Forex

Market Market Market
Equity Debt
3. Money Markets: It refers to the institutional arrangements facilitating borrowing and

lending of short-term funds (less than 365 days) + Chakravarthy committee (1985) for the
first time underlined the need for organized money market in India.
• Functions of Money market: To maintain Monetary equilibrium, provide help to trade
and industry, help in implementing monetary policy and non-inflationary sources of
finance to the government.
• Treasury Bills (T-Bills)

o Also known as Zero coupon bonds (issued at price less than face value and
Government buys them at face value).
o The Central Government for its daily operations borrows through T-bills primarily
to fund fiscal deficit.
o Presently, only the 91-day TBs, 182-day TBs and the 364-day TBs are issued
by government.
o They also function as short-term investment avenues for the banks and fulfill
requirements of CRR and SLR.
o They will be issued for a minimum amount of Rs. 10,000 and in multiples of
10,000.
o They are highly liquid, give assured yield and absence of default risk.
o Note: State governments do not issue treasury bills.
Certificate of Deposit (CD)
o It is an agreement between depositor and bank where a predetermined amount of
money is fixed for a specific time period-> Principal and interest is available for
withdrawal after maturity.
o It can be issued by Scheduled Commercial Banks, RRBs, Small Finance Banks
and financial institutions such as IDBI, IRBI and IFCI permitted by RBI.
o Slightly higher yield than T-Bills (as there is risk of default of banks).
o Tradeable and Transferable unlike FDs.
o They are used by banks when deposit growth is less and credit demand is high.
o It should have a minimum amount of Rs 5 lakh and multiples thereof
o Maturity: For Banks -> should not be less than 7 days; for Financial institutions>
maturity period should not be less than one year and not exceeding three years
o Loans cannot be granted against certificate of deposits
o Buyback can be made only 7 days after the date of issue.
Commercial Paper (CP)
o Promissory notes which are unsecured and are generally issued by companies and
financial institutions. At a discounted rate from their face value.
o Maturity: 1 to 270 days
o Denominations of Rs.5 lakhs or multiples of 5 lakhs
o Enable the corporates with a good credit rating to diversify their resources for short
term fund requirements.
o They are issued at a discount to face value.
o Companies and All India Financial Institutions are eligible to issue CPs subject
to condition that any fund-based facility availed of from banks is not a stressed asset.
o Minimum rating needed is A-3
o They are actively traded in the OTC market on Fixed Income Money Market and
Derivatives Association of India (FIMMDA) platform.
o Buyback offer may not be made before 30 days from the date of issue.
Commercial Bill
o It is a bill of exchange defined by section 5 of the Negotiable Instruments Act of
1881.
o Seller (drawer) issues commercial bills to the buyer (drawee) for the value of items
delivered by him.
o Maturity of 30 days, 60 days, or 90 days.
o It is a bill that is payable on demand.
o Provision of re-discounting-> Bank that accepts the bill is in need of fund and trades
the bill with institutions such as LIC, UTI etc then the bill gets discounted again.
Call Money Market
o It is required by banks to borrow money without collateral from other banks to
maintain CRR (Cash Reserve Ratio).
o Funds are transacted on overnight basis and undernotice money market, funds are
borrowed/lent for a period between 2-14 days.
o All scheduled commercial Banks and RRBs, Cooperative Banks other
than Land Development banks, Small Finance Banks, Payment Banks and
Primary dealers are the participants in the market
o Rate of interest ‘glides’ with ‘repo rate’ of the time.
• Money Market Mutual Funds
o Introduced in 1992 to provide short-term investment opportunity to individuals.
o Since March 2000, MFs have been brought under preview of SEBI, besides the RBI.
o They can be set up by commercial banks, public and private financial institutions and
private sector companies.
• Repurchase Agreement (Repo) and Reverse Repo
o Repo: It allows the banks and financial institutions to borrow money from RBI for
short-term (by selling government securities to RBI).
§ Tenor: 1 day to 1 year
§ Eligible Securities for Repo
Ø Government securities issued by Central Government or State
Government.
Ø Listed corporate bonds and debentures
Ø Commercial Papers (CPs) and Certificate of Deposits (CDs).
Ø Units of Debt ETF
Ø Any other entity approved by the Reserve Bank from time to time.
o Reverse repo: It is used for absorption of liquidity + It is an instrument for lending
funds by purchasing securities with agreement to resell the securities on a mutually
agreed future date at an agreed price which includes interest for the funds lent.
• Cash Management Bill
o Introduced since August 2009 to meet temporary cash flow mismatches of the
government.
o These are non-standard and discounted instruments.
o Maturities less than 91 days.
o Issued at discount to the face value and tradable and qualify for ready forward
facility
o They are considered as an eligible investment in government securities by banks for
SLR purposes.
• Banker's acceptance: Short term investment plan that comes from a firm backed by
guarantee from bank + Guarantee states that buyer will pay the seller at a future date.
• Short term tax exempts: Issued by State and Municipal governments + Somewhat more
risk than T-bills + Interest is not subject to income tax.
• Interest Rate Swaps: Financial transaction in which two parties sign a deal in which one
pays a fixed rate of interest, while the other pays a floating rate of interest + They are
mainly issued by commercial banks.
• Collateralized Borrowing and Lending Obligation(CBLO): It is a discounted
instrument for non-bank entities to borrow money against government
securities(collateral) + maturity ranging from 1 day to 1 year
• Overnight Repo: The maturity contract with 1-day maturity.
• Term Repo: The maturity Contract with certain specified contract date more than 1 day.
• Open Repo: The maturity Contract with no specified contract date.
• Inter corporate deposits: It is an unsecured borrowing by corporates from other
corporate entities + Tenure range from 1 day to 1 year + The borrowing is restricted to
150% of the Net Owned Funds and the minimum tenor of borrowing is for 7 days.
• London Interbank Offered Rate (LIBOR): It is a benchmark interest rate used by
major international banks in the international interbank market to lend to one another for
short-term loans + Rate is calculated and published every day by the Intercontinental
Exchange (ICE).
• Mumbai Interbank Offered Rate (MIBOR): It is utilized related to the Mumbai
interbank bid and forward rates (MIBID and MIBOR) by the national bank of India to
set transient financial arrangements + It is the short-term loaning offered rate for Indian
business banks.
• Components of Money Market:
Component Working Specific Remarks

Call Money • Market for extremely short-period loans • It is governed by Reserve
Market • Issuers of call money or borrowers are Bank of India (RBI).
commercial banks, cooperative banks,
financial institutions
• If money is lent for a day it is called call
money or overnight money,
• If it is for a period more than one day and
less than 14 days, it is called notice
money.
Collateral • When loans are offered against collateral • Products that need
loan market securities like stocks and bonds collaterals:
• Repurchase Agreements
(Repo)
• Exchange Traded Securities
• Equities
• Bank Loans
• Commodities
Acceptance • Market for banker's acceptances involved

Market in trade transactions.
• Banker's acceptances can be easily sold
or discounted in the money market
Bill Market • Market in which short-term papers or • Bills of exchange and the
bills are bought and sold. treasury bills.
Capital Markets
1. Introduction: These are places where savings and investments are channelled between
suppliers of capital and those in need of capital + It facilitates the movement of stream
of capital + Provide incentives to savers in the form of interest or dividend.
2. Features of Equity Markets: Equity markets refers to market where money is raised
from public by issuance of equity + It provides variable returns (investors paid periodic
dividend which is not pre-determined) + Shareholders are ranked last for claiming a share
of company’s assets in case of liquidation.
3. Features of Debt Markets: It comprise basically three segments, viz., Government
Securities Market; PSU Bonds market and Corporate securities market + Debt to fund
for capital intensive projects, tenure is from 3 years to 25 years, low return but relatively
risk free investment.
4. Equity Financing and Debt Financing
Equity Financing over Debt Financing Investing in Equity over Debt
Advantages Advantages
No obligation to return back to It may result in higher returns over
investor. Debt investments (Due to higher
No obligation to pay interest risk).
regularly.
Disadvantages Disadvantages
Results in diluting ownership of No guaranteed returns due to higher
business. risks.
Less control over management of Risking capital
company’s operations.
5. Difference Between Capital and Money Market:

Parameter Capital Market Money Market
Tenure Long & Medium term Short
Main Shares, debentures & Bonds T-bills, Commercial Papers,
Instruments Certificate of deposits
Use For long term requirement To finance ongoing operations
Volume Corporately Small amount Large amount
Location Mostly on the exchange No Formal location
Managed by SEBI RBI
6. Primary market/ New issues market: When company directly issues shares to certain
private individuals + It taps larger markets for capital + Price of stock determined by
market forces-> fosters competition + Diversify ownership + Facilitate transfer of
investible funds from savers to entrepreneurs seeking to establish new businesses or
expand existing ones by issuing securities for the first time + Banks, financial institutions,
mutual funds, and individuals are among those who are investors.
• Offerings in Primary Market
o Initial Public Offer (IPO): IPO is public launch of equity of any unlisted firms,
leads to listing of company on the exchange, underwritten by one or more
investment banks.
o Process of IPO
Selecting a Draft offer

Underwriter Pricing the Selling the
merchant document to
selection securities securities
banker SEBI
o Further Public Offer: It refers to already listed company which generates funds
from public for its expansion by issuing more number of shares + Fresh issue ->
stake of promoters decreases + Offer for sale-> sale of shares by promoters (large
shareholders) to public where the money collected from sale is pocketed by
promoters.
o Rights Issue: An issue of shares offered at a special price by a company to its
existing shareholders in proportion to their holding of old shares.
o Preferential Issue: Stocks issued to parties with some preference over common
shareholders + They are usually guaranteed a fixed dividend forever if the
company has sufficient profits + Event of liquidation-> preferred shareholders
are paid off before common shareholder + They do not offer voting rights or a
right over the assets of the company except in certain cases.
Parameters Preference Shares Shares

Dividend Fixed rate Variable
Voting Rights No Yes
Case during Right of return of capital Last right
liquidation before equity shares
o Private Placement: It refers to offer made by a company to a select group of

investors such as financial institutions, banks and mutual funds.
o Qualified Institutional Placement (QIP): Special type of private placement ->
It can be only made by already listed companies.
7. Secondary market/Stock Market: It refers to market where one person buy/sell shares
from another person + It makes existing securities more liquid and marketable + SEBI
governs the trading, clearing, and settlement of securities.
• Functions: Liquidity and marketability to existing securities + Enable price
discovery of traded securities.
• Stock Exchange: It facilitates buying and selling of stocks between company and
shareholders or between different stakeholders + Ensure participants live up to their
commitments-> follows institutionalised rules and procedures + Publishes Index and
fulfils purpose of projecting moods of stock exchange + First stock exchange
established in Antwerp, Belgium in 1631 + Top five largest stock exchanges on basis
of market capitalisation are New York Stock exchange, NASAQ, Tokyo stock
exchange, London stock exchange and Bombay stock exchange.
Ø Different Stock Exchanges in India
o Bombay Stock Exchange (BSE): SENSEX (Sensitivity Index) is the
benchmark index of BSE which comprises of 30 stocks from different sectors
such as IT, Pharma etc.+ It is the first stock exchange which got recognition
from SEBI + Headquarters at Mumbai.
o National Stock Exchange (NSE): NIFTY is its benchmark index which
comprises of fifty stocks from different sectors such as IT, Automobile,
Cement, Pharma etc. + It is located at Bandra in Mumbai.
o Calcutta Stock Exchange Ltd. (CSE): One of the oldest stock exchanges of
India. It was set up as an Association in 1908. It has permanent recognition as
stock exchange.
o India International Exchange (India INX): It is a subsidiary of BSE and
has been set up in the International Financial Services Centre (IFSC),
Gandhinagar.
o OTCEI (Over the Counter Exchange of India): Set up in 1992, to provide
small and medium companies an access to the capital market for raising
finance
o MCX Stock Exchange (MCX-SX): Its flagship index is SX40 comprising 40
blue chip companies.
o Indo Next: It is a new stock exchange to promote liquidity to stocks of small
enterprises + Launched in 2005 jointly and for medium the BSE and FISE
(Federation of Indian stock exchanges, representing 18 regional stock
exchanges).
Investors (Domestic and
SEBI (Regulator) Foreign investors)
Stock Market
Participants
Stock Exchanges (BSE and Brokers (Example: Groww,

NSE) Motilal Oswal)
Regulatory Legislations
o SEBI Act, 1992: It was enacted to empower SEBI with statutory powers
for protecting the interests of investors in securities + promoting the
development of the securities market + regulating the securities market
o Depositories Act, 1996: It provides for the establishment of depositories in
securities with the objective of ensuring free transferability of securities
with speed, accuracy and security.
8. Derivatives: Derive its value on underlying equity, index. Volatility, price depend upon
underlying assets.
9. Convertible bond: A type of derivative, can be converted into equity from bond,
Beneficial to investors.
10. Depository Receipts: These are financial instruments that represent shares of a local
company issued in foreign currency, listed and traded on a stock exchange outside
country; It gives investors the right to dividends and capital appreciation from the
underlying shares, but not the voting rights.
Indian Depository Receipt: Created by Indian depository for the foreign company
to trade in India. Ex: Trading depositories of Facebook in India.
American Depository Receipt: Negotiable certificate issued by US bank to trade
foreign securities. Ex: Investment in TCS ADR by American investors.
Global Depository Receipt: Issuance of Bank certificate in more than one country.
Sponsored issue: When existing shareholders of a company agree to offer their shares
for conversion into DRs in which case shares gets acquired and delivered to the local
custodian of the depository bank
11. Participatory Notes: Instruments issued by registered foreign institutions investors to
overseas invest without registering themselves with the market regulator, Keep the
investor name anonymous, make it simplified to invest in multiple foreign securities.
12. Debentures: Securities issued by limited companies to raise loans from public, Medium
to long term debt instrument to raise money at fixed rate, not secured by Physical assets.
13. Other terms associated with Capital Markets
o Depository: Holds securities of investors like Shares, bonds, debentures, mutual
fund, Licensed by SEBI.
o National Securities Depository Ltd.(NSDL): Promoted by UTI, IDBI and NSE,
first depository of India.
o Dematerialisation: Conversion of physical securities into electronic form, Demat
account is used for purchase and sell of shares, Mandatory in India since 2018.
o Angel Investors: Affluent individual who provides capital for a business start-up in
exchange of equity, also provides management advise.
o Venture Capital(VC): Funding for the start-ups by firms or individuals, invests in
early state companies, general. ly after Seed funding round.
14. Funding Stages
Angel Funding VC Funding PE Funding IPO
15. Foreign Security Market: It is the market where different currencies can be bought and
sold + There are two levels to this global market - interbank market and over-the-counter
market + It is the world's largest financial market.
• Benefits: Low cost transactions, increased leverage, relatively transparent, high
liquidity and operates 24 hours.
• Forex reserves: These are assets held by the central bank (Reserve Bank of India)
in foreign currencies, gold reserves, SDRs with the IMF + They act as a buffer and
as hedging against difficult and challenging times + The foreign currencies held as
forex reserves include the US dollar, the Euro, the British pound sterling, the Japanese
yen, and the Chinese yuan + India currently has the fourth largest foreign exchange
reserves in the world + As of November 2021, the forex reserves of India stood
at USD 640.4 billion.
• Spot Market: Transactions involving currency pairs take place on the spot market +
Necessitate immediate payment at the current exchange rate, also known as the spot
rate + Traders are not exposed to market uncertainty, which can result in an increase
or decrease in the price between the agreement and trade.
• Forward Contracts: Agreement to buy/sell an asset on specified date for specified
price.
• Future Contracts: Essentially forward contracts, more liquid in nature, traded on
exchanges, Standardised in nature.
• Option Contracts: Contract which gives one part to buy or sell the underlying on a
future date at predetermined price, traded on exchanges + Call Option: Right to buy
+ Put Option: Right to sell.
• Swaps: Derivatives in which counterparties agree to exchange one stream of cash
flows against another stream, used to hedge interest rate risks, not used in equity
market in India + Transaction is carried out in order to pay off their obligations
without having to deal with foreign exchange risk.
Chapter: Regulatory Bodies
1. Reserve Bank of India: It is India’s central bank which was set up on April 1, 1935 under
the RBI act,1934 based on the recommendation of Hilton Young Commission Report (1926)
with a share capital of 5 crores+ Originally, RBI was privately owned but in 1949 it was
nationalized and is now fully owned by the Government of India.
• Administration of RBI: The Board of directors (21 members) is the key decision
making body of RBI + The board is appointed by GOI in keeping with RBI Act + The
directors are appointed/nominated for a period of four years + It consists of:
o RBI Governor
o Four Deputy Governors
o Two Finance Ministry representatives- Economic affairs secretary and Financial
services secretary.
o 10 government nominated directors
o 4 directors to represent local boards headquartered at Bombay, Calcutta, Madras and
New Delhi.
• RBI Governor and Deputy Governors are appointed by the Central Government. Their
appointments are made by Cabinet Committee on Appointments.
• Legal Framework: The major duties and responsibilities of RBI flow from RBI act,
1934. However, its functions are governed by other statutes as well such as FEMA,1999,
Payment and settlement act, 2007 etc.
• Functions of RBI
o Public Debt Functions: Section 20 of RBI act-> Central government to entrust RBI
with its debt and cash management functions + Market borrowing through issuance
of various bonds.
o Foreign Exchange Management: Section 10 of FEMA empowers RBI to authorize
person to deal in foreign exchange as an authorized dealer as it deems fit + Custodian
of Foreign Exchange reserves in India + It facilitates external trade and payment and
promotes orderly development and maintenance of foreign exchange market in India
+ Maintains external value of rupee.
o Monetary Functions
§ Issue of Currency: All currency in India (except Rs.1 notes and coins of all
denominations) are issued and circulated by RBI. [Note: Rs.1 notes and all coins
issued by Ministry of Finance but circulated by the RBI].
§ Minimum reserves system: RBI has to keep a minimum reserve of 200 crores
comprising of Gold and foreign exchange.
§ Implements Monetary policy: It implements and monitors the monetary policy
and ensures price stability + RBI amendment act provided statutory basis for
implementation of the flexible inflation targeting framework and provided for
empowered six-member Monetary Policy Committee (MPC) to be constituted by
the Central Government.
o Banker and Debt Manager to government: It maintains bank account for
government, receive and make payments out of it + It helps GOI to raise money from
public through issue of bonds + In 2020, RBI increase the Ways and Means Advance
limits of states by 60% over and above levels of 31st March till Sep 2020.
o Bankers Bank: Commercial banks are account holders in RBI and it maintains
banking account of all scheduled banks + Provides financial assistance against
mortgaged securities and rediscounts bills of exchange + It also acts as lender of last
resorts by providing fund to banks.
o Developmental role: Various functions to support national objectives such as
making institutional arrangements for rural or agricultural finance + SCBs lend loans
to small-scale industrial units as per its directives (Priority Sector Lending).
o Financial Inclusion: No Frills accounts (account either with nil or very low
minimum balance) + Use of technology (Devices such as ATMs, hand held devices
to identify user accounts through a card and biometric identifier etc).
o Controller of credit: By making frequent changes in monetary policy (like CRR,
SLR, Repo Rate and Reverse Repo Rate), it ensures that the monetary system in the
economy functions according to the nation’s needs and goals.
o Inflation control: The RBI has targeted to keep the mid-term inflation at 4 four
percent (+/- 2 percent).
o Payment and settlement functions: Payment and settlement systems act, 2007
designate RBI for regulation and supervision of payment systems in India.
o Regulatory role: Maintains public confidence in the system, protect depositors'
interest and provide cost-effective banking services such as commercial banking, co-
operative banking, to the public + It covers commercial banks, co-operative banks
and certain categories of NBFCs registered with it + All India financial institutions
such as EXIM, NABARD, NHB and SIDBI are covered under regulation of RBI.
Subsidiaries of RBI
o Deposit Insurance and Credit Guarantee Corporation (DICGC): It insures
various deposits with eligible banks + Every bank depositor insured upto Rs. 5 Lakh
for both principal and interest.
o Bharatiya Reserve Bank note mudran private limited (BRBNMPL)
o Reserve Bank Information Technology Private Limited (ReBIT)
o Indian Financial Technology and Allied Services (IFTAS)
Independence of RBI: Central government may from time to time give such directions
to the RBI as it may, after consultation with RBI governor + There is no legal act
mandating autonomy of the RBI.
Assets of RBI: Foreign currency assets, Gold coin Bullion, Rupee securities (including
treasury bills), Loans and advances to Central and State Governments, commercial and
cooperative banks and others in terms of section 17 and 18 of RBI act, 1934.
Liabilities of RBI: Notes issued, Notes in circulation, Notes held in banking
departments, cash balances maintained with Reserve Bank by Central and State
governments, banks, All India Financial institutions such as EXIM Bank, NABARD,
foreign central banks and balance in different accounts relating to Employee’s Provident
Fund, Gratuity and Superannuation Funds.
Recent Initiatives of RBI
o RBI liberalizes norms for Micro Finance institutions (Mar 2022): Any collateral-
free loan given to a household with an annual income of up to Rs. 3 lakhs as an MFI
loan + Lenders cannot provide loans where loan payment is at 50% of monthly
household income + If any existing loans with an outgo of > 50%, the loans will be
permitted to mature; RBI eliminates restrictions on processing fees and interest.
o One Nation One Ombudsman scheme: It provides unified ombudsman scheme by
integrating Banking ombudsman scheme of 2006, Ombudsman scheme for NBFCs
2018 and Ombudsman scheme of digital transactions of 2019 + It defines ‘deficiency
in service’ as the ground for filing a complaint + Centralized receipt and processing
centre has been set-up in Chandigarh for initial handling of complaints + RBI’s
Executive Director-in charge of Consumer Education and Protection Department
would be the Appellate Authority under the integrated scheme.
o Revised Priority sector lending (PSL) norms: Scope of PSL broadened to include
startups, increase in limits for renewable energy including solar power and
compressed bio-gas plants.
o Central bank digital currencies (CBDC): RBI proposed amendments to the RBI
Act, 1934, which would enable it to launch CBDC + It is a digital form of Fiat
currency which can be transacted using wallets backed by block chain and is
regulated by the central bank + It would lower the cost of currency maintenance while
allowing real-time payments to be made without the need for interbank settlement.
o Legal Entity Identifier (LEI) for large value transactions in RTGS/NEFT: It is
a 20-digit number used to uniquely identify parties to financial transactions
worldwide aimed at improving accuracy of financial data systems for better risk
management + RBI decided to introduce the LEI system for all payment transactions
of value Rs.50 crores and above undertaken by entities (non-individuals) using RBI-
run centralised payment systems viz. RTGS and NEFT + It can be obtained from
Legal Entity Identifier India Ltd. (LEIL) recognized by Reserve Bank under the
Payment and Settlement Systems Act, 2007.
o Operation Twist: It is RBI’s simultaneous selling of short-term securities and
buying of long term securities through OMOs + It will bring down interest on long
term loans-> increase in economic spending, borrowers will benefit as the retail loans
will get cheaper.
o Access to Government Gilt bonds to retail investors: RBI allowed retail investors
to directly buy government debts (gilt bonds), making India the first Asian country
to do so + It will broaden investor base and provide retail investors with enhanced
access to participate in government securities market + G-Secs are tradeable
investment instruments issued by government which are mostly risk-free as they are
backed by sovereign.
o PCA framework: It has been introduced by RBI to enable supervisory intervention
at appropriate time and require supervised entity to initiate remedial measures so as
to restore the financial health of banks and for effective market discipline + It applies
to all banks in India (including the foreign banks) but excludes payment banks and
small financial banks from initiation of the action + Recently it has introduced the
PCA framework for NBFCs which came into effect from October,1 2022 on the basis
of their financial position on or after March 31st.
o Ways and Means Advances (WMA): It was introduced in 1997 to meet
mismatches in the receipts and payments of the government + Under it, the
government can avail immediate cash from RBI provided it returns the amount within
90 days + Interest is charged at the existing repo rate + The limits for WMA (for
Centre) are decided by the government and RBI mutually and revised periodically +
RBI decided to continue with the existing interim WMA scheme limit of Rs. 51,560
crores for all States/UTs upto September 2021.
o Lead Bank scheme: It was introduced by RBI in 1969 which was aimed at
eradication of unemployment and underemployment + The basic idea was to have an
“area approach” for targeted and focused banking + Each district assigned to different
banks (public and private) to act as a consortium leader to coordinate efforts of bank
in district with regard to branch expansion and credit planning + In 2009, Government
constituted High-Power Committee under Mrs Usha Thorat to suggest reforms in the
Lead Bank Scheme.
o 24th Financial stability report: Capital to risk-weighted assets ratio (CRAR) of
scheduled commercial banks (SCBs) rose to a new peak of 16.6 percent and their
provisioning coverage ratio (PCR) stood at 68.1 per cent in September 2021 + Gross
non-performing asset (GNPA) ratio of SCBs may increase from 6.9 per cent in
September 2021 to 8.1 per cent by September 2022 under the baseline scenario +
Main sources of risks for India are commodity prices, domestic inflation, equity price
volatility, asset quality deterioration, credit growth and cyber disruptions.
o Monetary policy report: Unchanged Policy Rates-> Repo Rate - 4%, Reverse Repo
Rate - 3.35%, Marginal Standing Facility (MSF) - 4.25%, Real GDP growth for 2021-
22 has been retained at 9.5% + It increased the amount of money it will absorb
variable reverse repo rate to Rs 7.5 lakh crore by the end of December 2021.
o Regulatory Sandbox: It refers to live testing of new products or services in a
controlled and test regulatory environment for which regulators may (or may not)
permit certain regulatory relaxations for the limited purpose of the testing to boost
innovation in Fintech firms + Objective is to foster responsible innovation in financial
services, promote efficiency and bring benefit to consumers + Advantages include it
fosters learning by doing on all sides, tests product viability without large and
expensive rollout, improves the pace of innovation and technology absorption.
o On-tap licensing for Universal Small Finance Banks (SFBs): On-tap licensing
means that the window for getting a bank license from RBI is open throughout the
year.
o Digital Payments Index: It comprises five broad parameters that enable us to know
the penetration of digital payments in the country over different time periods +
Parameters include payment enablers (with 25% weight), payment infrastructure-
demand-side factors (10%), payment infrastructure-supply-side factors (15%),
payment performance (45%) and consumer centricity (5%) + It will be published on
on semi-annual basis from March 2021 onwards with a lag of 4 months.
o Other Reports published by RBI: Industrial Outlook Survey of Manufacturing
sector, Consumer Confidence Survey.
2. Securities and Exchange Board of India (SEBI): It came into existence as a non-
statutory body in 1988 under a resolution of GOI + Later became autonomous and given
statutory powers by SEBI Act 1992 + Headquarters at Mumbai and regional offices at
Ahmedabad, Kolkata, Chennai and Delhi.
Ø Structure of SEBI
Composition: SEBI Board consists of nine members-
Securities Appellate Tribunal

o It is a statutory body established under provisions of SEBI act 1992.
o Composition-> Presiding officer (appointed by central government in
consultation with CJI) and two other members.
o To hear and dispose of appeals against orders passed by SEBI or by an
adjudicating officer under SEBI act, 1992, PFRDA, IRDAI.
o It has the same powers as vested in a civil court.
o Further, if any person feels aggrieved by SAT’s decision or order can appeal to
the Supreme Court.
Ø Powers and Functions of SEBI: The basic function is to protect the interests of
investors in securities and to promote and regulate the securities market.
It is a quasi-legislative and quasi-judicial body which can draft regulations,
conduct inquiries, pass rulings and impose penalties.
Review market operations, organizational structure and administrative control of
stock exchanges.
Regulation of market intermediaries such as merchant bankers, portfolio
managers etc.
Overlook registration and regulation of mutual funds and venture capital funds.
• Prohibit unfair trade practices in securities market.
• Prohibition of insider trading.
• Securities laws (Amendment) Act, 2014 -> Enables regulating any money pooling
scheme > Rs. 100 crore and attach assets in cases of non-compliance.
Ø Recent Initiatives of SEBI

• SaaRthi App: It is an initiative of SEBI to create investor awareness of the
fundamental concepts of the securities market + It also include information on the
KYC procedure, trading and settlement, mutual funds and investor grievance
redressal mechanisms + It is available in Hindi and English.
• SEBI amends norms for Independent directors: Appointment, re-appointment and
removal of independent directors will be done only through special resolution passed
by shareholders (applicable to all listed entities) + One-year cooling period will be
given for an independent director transitioning to a whole-time director in same
company or subsidiary or any company belonging to promoter group.
• Usha Thorat committee: The SEBI revamped its committee that advises it on
matters of development of mutual fund + It advise the regulator on measures required
for a change in legal framework to introduce transparency and simplification in
mutual fund regulations.
• SCORES: It is a mobile application which assist investors to enter grievances in
SEBI complaints redress system (SCORES) portal + It is available on both iOS and
Android platforms, will encourage investors to lodge their complaints on SCORES
instead of sending physical letters.
• T+1 Settlement system: SEBI allowed stock exchanges to start the T+1 system as
an option in place of T+2 for completion of share transactions on an optional basis in
a move to enhance liquidity + It is expected to reduce settlement time, reduction in
systemic risks and reduction in unsettled trade.
3. NABARD: Established on recommendations of B Sivaraman committee under National
Bank for Agriculture and Rural Development Act, 1981 + It is the apex banking
institution to provide finance for Agriculture and rural development + It is headquartered at
Mumbai + Its paid-up capital was Rs 100 crore; wholly owned by Government of India.
Ø Organizational structure
• Board of Directors: Management of NABARD vests in board of directors + It has
representatives from RBI, GOI, State governments and directors nominated by GOI
+ The Chairperson and other directors (except elected ones by share-holders and
officials of the Central Government) shall be appointed by the Central Government
in consultation with RBI.
• Executive committee: Executive committee may be constituted by Board of
Directors. They shall discharge such functions as may be prescribed or may
be delegated to it by the Board.
Ø Subsidiaries of NABARD: NABARD Consultancy services (NABCONS), Delhi,
NABARD Financial services (NABFINS), Bengaluru, Agri business finance ltd,
Hyderabad and NABKISAN Financial Ltd. Chennai.
Ø Functions of NABARD
• Financial Functions
o Refinance support: It provides short-term and long-term refinance available to
SCBs and RRBs for activities such as agriculture and allied activities, marketing
of crops, fisheries sector etc + Refinance given to both farm sector and non-farm
sector (artisans, handicrafts, handlooms, MSME etc).
o Direct Finance
§ Rural Infrastructure Development Fund (RIDF): It was set up with
NABARD in 1995-96 by the RBI out of the shortfall in lending to PSL by
SCBs to support rural infrastructure projects.
- Eligible activities: 37 activities classified under three broad categories
such as Agriculture and related sector, social sector and rural connectivity.
- Mode of Finance: It releases the sanctioned amount on reimbursement
basis except for the initial mobilisation advance @30% to North Eastern
& hilly States and 20% for other states.
- Quantum of loan: The project for rural connectivity, social and agri-
related sector, are eligible for loans from 80 to 95% of project cost.
- Rate of interest: Interest rates payable to banks on deposits placed with
NABARD and loans disbursed by NABARD from RIDF have been linked
to bank rate prevailing at that point of time.
- Repayment period: Loan to be repaid in equal annual instalments within
seven years from the date of withdrawal, including a grace period of two
years.
§ NABARD Infrastructure Development Finance (NIDA): NIDA designed
to complement RIDF.
§ Rural Infrastructure Promotion Fund (RIPF): It has been setup with a
corpus of Rs. 25 crores + Contributed out of margin received by NABARD
from special window under RIDF for funding rural roads component of
Bharat Nirman.
§ Warehouse Infrastructure Fund (WIF): It was created in 2013- 14 with
NABARD with a corpus of Rs 5,000 crore for providing loans to meet the
requirements for scientific warehousing infrastructure for agricultural
commodities in the country.
§ Long term Irrigation Fund (LTIF): It was launched in 2016 to complete
projects along with their command area development (CAD) + It has
instituted in NABARD as a part of Pradhan Mantri Krishi Sinchayee Yojana
(PMKSY) + It aimed to bridge the resources gap and facilitate completion of
99 prioritized irrigation projects as part of Pradhan Mantri Krishi Sinchayee
Yojana (PMKSY) during 2016-2020 + Funds raised through budgetary
resources from GOI and market borrowings by NABARD.
Developmental Functions
o Farm technology transfer fund (FTTF): Set up in 2008 out of NABARDs
operating profit to facilitate better access for farmers to various inputs,
technology, credit, marketing support etc.
o Tribal development fund (TDF): It was created with a corpus of Rs. 50 crores
in 2003-04 out of its profits.
o Promotion of FPOs: It provides financial and development support to FPOs
through Producers organization development fund (PODF), PRODUCE fund and
central sector scheme for promotion of FPOs.
o Kisan credit card: The Kisan credit card (KCC) scheme was designed by
NABARD in association with the RBI in August 1998 for providing crop loans.
o RuPayKisan Cards (RKCs): It helped rural financial institutions in providing
RuPay Kisan Cards to all their farmer clients.
o EShakti: It was launched in 2015 to improve the digitization of SHGs.
o Training: It provides training to handicraft artisans and helps them in developing
a marketing platform for selling these articles.
o Micro Finance Sector: NABARD launched SHG Bank Linkage programme in
1992 with target of linking 500 SHGs in a year.
o District credit plans: It prepares district level credit plans to guiding and
motivating the banking industry in achieving these targets.
o Green Climate Fund: It is designated as operating entity of financial mechanism
of UNFCCC + NABARD accredited as National Implementing Entity and it is
eligible to submit large size projects having outlay of more than USD 250 million.
o National Adaptation Fund for climate change: It was established in 2015 to
meet the cost of adaptation to climate change for the State and UTs particularly
vulnerable to the adverse effects of climate change + NABARD has been
designated as National Implementing Entity (NIE) for implementation of
adaptation projects under NAFCC + NABARD perform roles in
facilitating identification of project ideas from State Action Plan for
Climate Change (SAPCC), project formulation and capacity building of
stakeholders.
Supervisory Functions: It supervises Cooperative Banks and Regional Rural Banks
(RRBs) and helping them develop sound banking practices and integrate them to the
CBS (Core Banking Solution) platform.
Ø Recent initiatives of NABARD
• RBI extends fresh support of ₹50,000 crores to NABARD: RBI provided NABARD
with a special liquidity facility (SLF) of ₹25,000 crores for one year to support
agriculture and allied activities, the rural non-farm sector and non-banking
financial companies-micro finance institutions.
• First Agricultural Export Facilitation Centre: The Maharashtra government and
NABARD recently launched first agricultural export facilitation centre at Pune + It will
aid in boosting the agricultural and food exports of Maharashtra and act as a one-stop
shop to export agricultural food productions.
• Grameena Habba: It is a platform for rural artisans to sell handicraft, agricultural, and
handloom products held by NABARD’s Karnataka regional office in Bengaluru.
• JIVA Programme: It is an agroecology-based programme that aims to promote natural
farming under NABARD’s existing watershed and wadi programmes in 11 states
covering five agroecological zones + An amount of Rs 50,000 per hectare will be
invested under the programme + NABARD collaborates with national and multilateral
agencies with focus on resilience to climate change, food sustainability and nutrition
security.
4. Pension Fund regulatory and development authority (PFRDA): It is the statutory
authority under Department of Financial services (Ministry of Finance) + It is established by
an act of Parliament, to regulate, promote and ensure orderly growth of the National pension
system (NPS) + Major functions include -> Performing function of appointing various
intermediate agencies like Pension Fund Managers and Central record keeping agency
(CRA) + It functions as a quasi-government organization with executive, legislative, and
judicial powers similar to RBI, SEBI and IRDA.
5. Insurance Regulatory and Development Authority of India (IRDAI): It is a statutory
agency established by IRDA Act of 1999 following the recommendations of Malhotra
committee + Its main function is overall supervision and development of Insurance sector in
India + Its headquarters is situated at Hyderabad, Telangana.
• Composition: Chairman + Five whole-time members + Four part-time members
appointed by GOI.
• Objectives: Protect the interest and fair treatment of policyholders + Regulation of
insurance industry + Framing regulations to ensure that industry operates without any
ambiguity.
• Entities regulated by IRDAI
o Life Insurance companies - Both public and private sector Companies
o General Insurance companies - Both public and private sector companies.
o Reinsurance companies
o Agency channel
o Intermediaries which include corporate agents, brokers, third-party administrators,
surveyors and loss assessors.
• Powers and Functions: These are laid down in the IRDAI Act, 1999, and Insurance Act,
1938 + Important functions include:
o Grant, renew, suspend, cancel certificates of insurance company.
o Protecting the interests of the policyholder; specify code of conduct, qualifications
and training for insurance agents.
o Specify code of conduct for loss assessors and surveyors.
o Levying fees and charges for carrying out the provisions of the act.
• Recent Initiatives of IRDAI
o Saral Jeevan Bima: It is regulator-mandated standard term life insurance plan
offering basic protection to people who are self-employed or belong to a lower
income category launched by IRDAI.
§ Key Features
- Eligibility: It is a pure term life insurance product which can be
purchased by people in the age group of 18- 65 years with policy term
of 5 to 40 years.
- Sum assured: It ranges from Rs 5 lakh to Rs 25 lakh (in multiples of
Rs 50,000).
- Lump sum payment: It provides for payment of sum assured in lump
sum to the nominee in case of the life assured’s unfortunate death during
the policy term.
- Maturity: It allows for a maximum maturity age of 70 years + There
will be no maturity benefit. Neither will there be any surrender value
nor can any loan be taken against the product.
- No Exclusions: There are no exclusions, other than suicides.
o Domestic Systemically Important Insurers (D-SIIs): IRDAI identified LIC,
General Insurance Corporation of India (GIC) and New India Assurance Co as D-
SIIs for 2020-21 + D-SIIs are perceived as insurers that are ‘too big or too important
to fail’ (TBTF) + IRDAI would identify D-SIIs on an annual basis and disclose the
names of such insurers for public information.
o Deposit Insurance and Credit Guarantee Corporation (DICGC): It was
established in 1978 after merger of Deposit Insurance Corporation (DIC) and Credit
Guarantee Corporation of India Ltd (CGCI) in 1961 + It serves as a deposit insurance
and credit guarantee for banks in India + It is a fully owned subsidiary of the RBI +
It covers banks, including regional rural banks, local area banks, foreign banks with
branches in India, and cooperative banks + It maintains funds such as Deposit
Insurance Fund, Credit Guarantee Fund and General Fund.
§ Coverage: It insures all bank deposits, such as saving, fixed, current, recurring,
etc up to a limit of Rs 5 lakh per account holder of a bank, except the
following types of deposits:
- Deposits of foreign Governments.
- Deposits of Central/State Governments, Inter-bank deposits.
- Deposits of the State Land Development Banks with the State co-operative
banks.
- Any amount due on account of any deposit received outside India.
- Any amount which has been specifically exempted by the corporation with
the previous approval of the RBI.
§ DICGC Bill, 2021
- Expedited Liquidation: It is now proposed to be done in 90 days.
- Deposit Insurance Premium: It allows raising the deposit insurance
premium by 20% immediately, and maximum by 50%.
- Insurance coverage: Funds up to Rs 5 lakh to an account holder within 90
days in the event of a bank coming under the moratorium imposed by RBI +
It covers 98.3% of depositors and 50.9% of deposit value in the banking
system, way above the global level of 80% and 30%, respectively + Cover all
types of banks including RRBs and Co-operative banks.
- New and Old Banks Inclusion: It will cover banks already under
moratorium and those that could come under moratorium.
- Insurance Premium: It allows raising insurance premium by 20%
immediately, and maximum by 50%.
- Expansion of definition of Small LLP: Such entities with contributions
(from partners) up to Rs 5 crore and annual turnover up to Rs 50 crore will be
categorised as small LLPs; earlier, these limits were set at Rs 25 lakh and Rs
40 lakh, respectively.
Chapter: International Institutions
1. United Nations Monetary and Financial Conference (1944): Also known as Bretton woods
conference + It resulted in establishment of International Bank for reconstruction and
development (IBRD, later known as World Bank) and International Monetary Fund (IMF).
2. World Bank Group: It is the largest developmental bank in the world; came into existence on
27th December 1945 + All the five organizations make up World Bank Group and are
headquartered at Washington D.C, USA.
• Goal/Mission: ‘Working for a World Free of Poverty’
• Purpose: Bridge the economic divide between poor and rich countries.
• Five organizations which form part of WBG:

o IBRD: It provides assistance to middle income and poor but credit worthy countries
(Developmental loans with interest) + It was the original arm of World Bank responsible
for reconstruction of post-war Europe + Its membership is compulsory for a country to
be a member of WB Group affiliates such as IFC, MIGA and ICSID + It finances only
the sovereign governments directly or projects backed by sovereign governments.
§ Board of Governors: It consist of one Governor and one alternate governor
appointed by each member country + It delegates most of its authority over daily
matters such as lending and operations to the Board of Directors.
§ Board of Directors: It consists of 25 executive directors and chaired by the President
of WB Group + They are appointed or elected by the Governors + Their main role is
to select WB President.
§ Funding: It raises most of its funds in the world's financial markets + It earns income
from the return on its equity and from the interest on lending.
o IDA: It provides concessional financing (mostly interest free loans or grants), usually
with sovereign guarantees + They offer 10-year grace period and maturity of 35-40 years
+ It also provides debt relief through the Heavily Indebted Poor Countries (HIPC)
initiative and the Multilateral Debt Relief Initiative (MDRI).
o IFC: It provides various forms of financing without sovereign guarantees, primarily to
private sector of developing countries + It acts as an investor in capital markets and help
governments privatize inefficient public enterprises + No policy of uniform interest rates
for its investments; interest rate negotiated in each case by analyzing the risks
involved + Global Trade Finance Program-> provides guarantees to cover payment risks
for emerging market banks with respect to promissory notes, bills of exchange, supplier
credit for capital goods imports, and advance payments.
o MIGA: It offers (foreign) investors insurance against non-commercial risk (helps poor
nation to attract the investment) + These guarantees include political risk insurance + The
convention can be amended by the Council of Governors of MIGA + Its membership is
open to all IBRD members.
o ICSID: It helps towards settlement in the event of a dispute between a foreign investor
and a country + India is not a member of ICSID + Membership is available to IBRD
members, and parties to the Statute of the International Court of Justice (ICJ), on the
invitation of the ICSID Administrative Council by a vote of two-thirds of its members.
• Membership: There are 189 member countries in IBRD which is the primary arm of WBG
+ To become a member of the bank, a country must first join the International Monetary
Fund (IMF) + Membership in IDA, IFC, and MIGA are conditional on membership in
IBRD + Size of shareholders depends on size of country’s economy + Obligatory
subscription fee equivalent to 88.29% of quota should be paid to the IMF + President of
WB comes from largest shareholder i.e, USA + Five largest shareholders – US, UK,
France, Germany and Japan + It gets its funding from rich countries and issuance of bonds
on the world’s capital markets.
• Decision making process: Bank runs like a cooperative -> members are shareholders and is
operated for benefit of those using its service + Number of shares of each country is based
on size of its economy + Board of Governors represent shareholders; they are ultimate policy
makers and meet once in a year + 24 Executive directors deal with daily functions of bank
which includes approving loans and guarantees (Five executive directors are from five largest
donors).
• Reports published by World Bank: Global Economic prospects, World Development
report, Ease of Doing Business, International Debt statistics, Logistics performance index
and Human capital index.
3. International Monetary Fund (IMF): It is formed in 1944 Bretton woods conference primarily
by the ideas of Harry Dexter white and John Maynard Keynes + It is an organization of 190
member countries (Principality of Andorra is the latest entry in 2020) + Headquarters in
Washington, D.C + Objective is to help in global currency exchange stability and against balance
of payment crisis.
• Objectives of IMF
o Foster international monetary cooperation.
o Secure financial stability.
o Facilitate international trade.
o Encourage high employment and sustainable economic growth.
o Reduce poverty all around the planet.
• Internal Working Arrangement of IMF
o Board of Governors: Highest decision making body; consists of one governor and one
alternate governor for each member country + Governor appointed by member country
(Usually Minister of Finance or Governor of Central Bank) + All powers of IMF vested
in BoG which may delegate to Executive board all except certain reserved powers +
They normally meets once a year + Board of Governors advised by two ministerial
committees, the International Monetary and Financial Committee (IMFC) and the
Development Committee.
§ Primary responsibilities of Board of Governors: Electing or appointing executive
directors to the Executive Board + Approving quota increases and Special Drawing
Rights (SDR) allocations + Admittance of new members, compulsory withdrawal of
member + Amendments to the Articles of Agreement and By-Laws.
o Executive Board: It is 24-member Executive Board elected by the Board of Governors
+ It is responsible for conducting day-to-day business of the IMF + It meets several times
each week and discusses all aspects from the IMF staff's annual health checks of member
countries' economies to policy issues relevant to the global economy + Votes of each
member equal the sum of its basic votes and quota-based votes. A member’s quota
determines its voting power.
o Ministerial committees: The Board of Governors is advised by International Monetary
and Financial Committee (IMFC) and Development committee (joint committee from
Board of Governors of IMF & World Bank).
o Management: The fund Managing Director is both chairman of the IMF’s Executive
Board and head of IMF staff; appointed by the Executive Board by voting or consensus.
Membership: It is open to any country that conducts foreign policy ad accepts
organization’s statutes + Membership in the IMF is a prerequisite to membership in the
IBRD.
Where the IMF gets its Money: Most resources of IMF provided by countries through their
payment of Quotas + Borrowings provides a temporary supplement to quota resources +
Contribution based trust funds for concessional lending to low income countries.
Functions of IMF
o Financial Assistance: It provides loans to member countries experiencing financial
difficulties + Unlike Development banks, IMF does not lend for specific projects.
§ Process of Lending: Request from a member country -> IMF resources made
available under a lending ‘arrangement’ depending on stipulating economic policies,
lending instrument used and measures country agreed to resolve its BoP crisis.
§ Facilities of IMF to lending: Stand-By arrangements (address short-term BoP
problems), Standby Credit Facility for low income countries.
o Surveillance: Oversee international monetary system and monitor economic and
financial policies of its member countries.
o Technical Assistance: Helps countries strengthen their capacity to design and
implement sound economic policies.
o Capacity Development: Assisting central banks, finance ministries, tax authorities, and
other economic institutions with technical help and training + aids governments in
achieving the Sustainable Development Goals (SDGs).
• IMF Quotas: Quota subscriptions are cardinal component of the IMF resources + Each
member assigned quota based on its position in the world economy + A country’s quota
determines its Maximum financial commitment to IMF, its voting power (Each member
votes include basic votes and one additional vote for each SDR 1,00,000 of quota) and access
to Finance (amount of finance obtained by member country from IMF based on its quota).
Fig: Multiple Roles of Quotas
o Current Quota Formula: It is a weighted average of GDP (weight of 50%), Openness

(30%), Economic variability (15 %) and International reserves (5 %).
§ Note: GDP is measured as a blend of GDP—based on market exchange rates
(weight of 60%) and on PPP exchange rates (40 %).
o Review of Quotas: Board of Governors conducts general quota reviews (usually at
intervals of 5 years) + Changes in quota should be approved by 85% majority of
total voting power + Member quota can’t be changed without its consent.
§ 2010 Quota review: Key outcomes are Double quota from SDR 238.5 billion
to SDR 477 billion + Shift more than 6% of quota shares from over-
represented to under-represented member countries + Preserve the quota and
voting shares of poorest countries + India’s voting rights increased by 0.3%
from current 2.3% to 2.6% + China’s voting rights increased from 3.8% to 6%
+ USA quota share dropped from 16.7% to 16.5% but it will retain its veto
power + China will have 3rd largest IMF quota and voting share after US and
Japan.
o Denomination of quotas: The quotas are denominated in Special Drawing Rights
(SDRs), IMFs unit of account.
• Special Drawing Rights (SDRs): It is an international reserve asset created by IMF in 1969
to supplement its member countries official reserves.
o It is neither a currency nor a claim on the IMF but it is a potential claim on freely usuable
currencies of IMF members.
o Value of SDRs-> Calculated by adding the values of an SDR basket of currencies which
consists of the US dollar, Euro, Japanese yen, pound sterling, and Chinese renminbi.
o SDR currency value is updated every five years (except during IMF vacations), and the
valuation basket is reviewed and altered every five years.
o A country's quota is measured in SDRs and voting power is proportional to their quotas.
o Working of SDR-> When SDRs allocated to member country, the members are given
two positions which are SDR allocations and SDR holdings. The countries receive
interest on their SDR holdings and pay interest based on their SDR allocations.
o SDR allocations to IMF member countries
§ It allocates SDRs to member countries in proportion to their IMF quotas.
§ It is a Self-financing mechanism; it levies charges on allocations to member countries
which are then used to pay interest on SDR holdings.
o Aside from gold reserves, foreign currency assets, and the IMF Reserve Tranche, India's
foreign exchange reserves include SDR.
o Recent Developments: G20 nods to IMF for fresh SDR Issue-> IMF permitted to
provide SDR worth 650 million USD to help the least developed and developing
countries facing high foreign exchange crisis due to COVID-19.
• Reports published by IMF: Global Financial Stability Report, World Economic Outlook,
Fiscal Monitor.
• Differences Between IMF and World Bank
4. New Development Bank (NDB)

• Establishment: It is a multilateral development bank established at 6th BRICS Summit
in Fortaleza (2014) headquartered at Shanghai, China.
• Objectives: Fostering development of member countries + Supporting economic growth
+ Promoting competitiveness and facilitating job creation + Building a knowledge
sharing platform among developing countries.
• Members: Brazil, Russia, China, India, South Africa, Bangladesh, UAE, Egypt and
Uruguay (Total 9 members)
• Voting powers and contributions: Each participant country will be assigned one vote
and no country has a veto power + Each member is given equal 20% voting power +
Each member’s contribution will be equal with equal voting rights +
• Governance: It is governed by Board of Governors-> comprises the finance ministers of
the BRICS nations + President of the NDB is elected from among the member countries.
There are four vice presidents who are from the remaining members.
• Development Capital
o Its primary focus of lending is on infrastructure projects with authorized lending of
up to $34 billion annually.
o Capital share of each member cannot be increased without all other four members
agreeing.
o BRICS capital share cannot fall below 55% even after entry of new members.
o It supports public or private projects through loans, guarantees, equity participation
and other financial instruments.
Contingency Reserve arrangement (CRA)-> It is a framework for provision of support
through liquidity and precautionary instruments in response to actual potential short term
BoP crisis.
Current Developments: In 2018, NDB received observer status in UNGA +
Bangladesh, UAE, and Uruguay joined in September 2021 + Egypt became a new
member of the NDB in December 2021.
5. Asian Development Bank (ADB)

Establishment: It is a regional development bank established on 19 th December
1966; headquartered in Ortigas center in Mandaluyong, Manila, Philippines.
Members: ADB has 68 members + The bank admits the members of the United Nations
Economic and Social Commission for Asia and the Pacific (UNESCAP) and non-
regional developed countries.
Voting rights: Weighted voting system where votes are distributed in proportion with
member’s capital subscriptions (similar to World Bank) + ADB’s five largest
shareholders are Japan and the United States (each with 15.6% of total shares), the
People’s Republic of China (6.4%), India (6.3%), and Australia (5.8%).
Aims of ADB
o Social development by reducing poverty in the Asia Pacific with inclusive growth,
sustainable growth, and regional integration.
o It invests in infrastructure, health, public administration system, helping nations to
reduce the impact of climate change and to manage natural resources.
Masala Bonds and ADB: It has listed its 10-year masala bonds worth Rs.850 crores on
the global debt listing platform of India INX (BSE-owned exchange).
Reports: Asian Development Outlook
Fig: Asian Development Bank member states
• Current Developments
o ADB lends record USD 4.6 bn loans to India in 2021.
o ADB and India agreed to lend each other $206 million to improve urban services in
five Tamil Nadu cities.
o It has launched its Rs 850 crore 10-year masala bonds on India's global debt listing
platform.
o A Conceptual Development Plan (CDP) for Vishakapatnam -Chennai Industrial
Corridor created by INX Asian Development Bank (ADB)
o It granted member countries USD 4 million to combat coronavirus epidemics.
6. Asian Infrastructure Investment Bank

• Establishment: It is an international development bank founded in January 2016
with headquarters at Beijing.
• Goals: Fostering sustainable economic development, create wealth and improve
infrastructure connectivity in Asia + Encourage public and private capital investment for
development reasons, particularly in infrastructure and other productive areas.
• Membership: It presently has 105 members; France, Germany, Italy, and UK are
among the 14 G-20 countries that are members of the AIIB + New members are
considered for membership only once a year.
o Criteria: Membership open to all members of the Asian Development Bank or the
World Bank + It also allows non-sovereign entities to apply for membership
provided their home countries are members.
• Voting power: Based on share capital provided; Asian countries control about 75%
voting; China largest ~27%, India second largest shareholding~7% + Regional
members hold 75% of the total voting power.
• Governance
o Board of Governors (Highest decision making body)-> It consists of one Governor
and one alternate Governor appointed by each member-country + All the powers of
the AIIB are vested in the Board of Governors + It may delegate to Board of
directors any of its powers, except powers of:
§ Admitting new members and determine the conditions of their admission
§ Increase or decrease the authorized capital stock of the Bank.
§ Elect the Directors of the Bank and determine the expenses to be paid for
Directors and Alternate Directors and remuneration
§ Elect the President, suspend or remove him from office, and determine his
remuneration and other conditions of service.
§ Amending the AIIB Articles of Agreement.
o Board of Directors: It is made up of 12 governors and in charge of the daily
operations and tasks.
o Senior Management: It is headed by the President who is elected by AIIB
shareholders for a five-year term and eligible for reelection once.
o International Advisory Panel: To support the President and Senior Management on
the Bank’s strategies and policies as well as on general operational issues.
• APVAX project (Asia Pacific Vaccine Access Facility)-> India requested financing
from AIIB and ADB to purchase 667 million doses of Covid-19 vaccines.
• Finances: Initial total capital is 100 billion $-> 20% is paid-in share capital and
remaining 80% is called-up share capital.
• AIIB Lending: Recipients include member countries and international or regional
agencies concerned with the economic development of the Asia-Pacific region + It can
lend outside Asia provided that it supports connectivity with Asia or it is for a global
public good that benefits Asia.
7. Bank for International Settlement (BIS): It is an international financial organisation
owned by 60 member central banks + It fosters international monetary and financial
cooperation and serves as a bank for central banks + It is headquartered in Basel, Switzerland.
8. African Development Bank: It is a multilateral development finance bank established to
contribute to the economic development and social progress of African countries + Founded
in 1964 and comprises of The African Development Bank, the African Development
Fund and the Nigeria trust fund + It is governed by a Board of Executive Directors,
made up of representatives of its member countries + Voting power on the Board is
given according to the size of each member’s share + The largest African
Development Bank shareholder is Nigeria with 9% of the votes + India became a
member of the Bank in 1983; It is a non-regional member of the Bank.
9. European Bank for Reconstruction & Development (EBRD): It is an international

financial institution setup at London in 1991 + India will not be eligible for loans from EBRD
but can initiate joint loan proposals, became shareholder in 2018 + It uses investment as a
tool to build market economies + Biggest shareholder being the United States + It is owned
by 65 countries and two EU institutions + It invests mainly in private enterprises, together
with commercial partners.
Chapter: World Trade Organization
1. Introduction: WTO was set up under Marrakesh Treaty (1994) as a result of Uruguay round
(1986-94) of negotiation + It is the successor of GATT established in wake of 2nd World War
+ India is the founding member + It is the only international organization which deals with
global rules of trade between nations + Headquartered at Geneva, Switzerland.
• Members: It has 164 members (including European Union, Hong Kong, Macau,
Thailand) + Afghanistan became 164th member in 2015+ 23 observer governments like
Iran, Iraq, Bhutan etc.
• Objectives
o Improve standard of living in member countries.
o Ensure Full employment and broad increase in effective demand.
o Enlarge production and trade of goods.
o Ensure that trade flows as smoothly, freely and predictably as possible.
o Ensure optimum utilization of world resources.
o To protect the environment.
o To accept the concept of sustainable development.
o Reviewing national trade policies: Technical assistance to developing countries on
trade policy issues.
• Structure of WTO
o Ministerial Conference: Highest decision-making body + meets once every two

years + Based on One country one vote + It appoints Director General.
o General Council: Day to day decision making body and implements the decisions +
It also meets as Trade Policy Review Body and Dispute settlement body.
o Council for Trade in Goods (Goods Council), Council for Trade in Services
(Services Council), Council for Trade-Related Aspects of Intellectual Property
Rights (TRIPS Council) are at next level which report to Genera council.
o Specialized committees, working groups and working parties deal with individual
agreements.
o Secretariat: It is based in Geneva; headed by a Director-General + Its main duties
include provide technical assistance to developing countries, analyze world trade etc.
• Decision making: Decisions made by entire membership (By consensus) + Majority vote
is also possible but never used + WTOs agreements have been ratified in all member’s
parliaments.
• Principles Used in WTO
o Most Favoured Nation (MFN)
§ Treating Other People Equally: Countries cannot normally discriminate
between their trading partners + Grant someone a special favour (lower customs
duty rate for one of their products)-> it must do the same for all other WTO
members.
§ Exceptions: FTAs, developing countries, national security, unfairly traded
goods, in services countries allowed in some circumstances to discriminate.
o National Treatment
§ Treating Foreigners and locals equally: Imported and local produced goods
should be treated equally- at least after foreign goods enter the market + The same
applies to foreign and domestic services.
§ It only applies once a product or service has entered the market (Charging
customs duty on import is not a violation of this principle)
o Freer Trade: Gradually through negotiations
§ Lowering trade barriers (include custom duties, import bans or quotas) + It allows
countries to bring changes gradually through “progressive liberalization”.
o Predictability: Binding and transparent policy-> predictability-> Businesses get
clear view of future opportunities-> investments are increased.
o Promoting Fair competition: Many WTO agreements such as in agriculture,
intellectual property promote fair competition.
o Encouraging Development and Economic reform: WTO agreements allow special
assistance and trade concessions for developing countries.
• Doha Development Agenda (2001)
o It was launched in Doha, Qatar in 2001 + Aims at further liberalizing trade whilst
making it easier for developing countries to integrate into WTO system.
o Major subjects: Multilateral environmental agreements, Trade barriers on
environmental goods & services and Fisheries subsidies.
o Issue of the Geographical Indications is the only intellectual property right issue
included in the Doha Round.
o Negotiations stalled after July 2008 due to disagreements over agriculture, services,
non-tariff barriers and trade remedies.
• India Stand in Doha Round: It supports Special Safeguard Mechanism (SSM) to
protect its farmers from the import surge + Rich countries should drastically reduce its
‘trade-distorting’ farm subsidies + It wants a permanent solution to the issue of public
food stockholding in developing countries for the purpose of food security + IPR
protection under GI should not be limited only to wine and spirits but should be extended
to include other products (such as Basmati rice).
Important Agreements of WTO
o Agreement on Agriculture (AoA), (1994)
§ Objective: It is aimed at establishing a fair and market oriented agriculture
oriented trading system.
§ Three pillars-> Market access, Domestic support and Export subsidies.
1. Market Access: It requires that tariffs fixed by individual countries be cut
progressively (tariff reduction), remove non-tariff barriers and convert them
into Tariff duties (tariffication) + It urges for provision of access to imported
agriculture goods in the member countries.
2. Domestic Support: It refers to subsidies such as guaranteed Minimum Price
which are direct and product specific + They are categorized into:
Ø Green Box: Subsidies that do not distort trade, or at most cause minimal
distortion. They are government-funded + They does not involve price
support + They include environmental protection & regional development
programmes + Allowed without limits provided that they comply with
policy specific criteria + Examples include Agriculture research, Training
and Pest control etc.
Ø Amber Box: All domestic support measures considered to distort
production and trade (with some exceptions) fall into the amber box +
These include measures to support prices, or subsidies directly related to
production quantities + Example: Minimum Support Price in India.
- De minimis provision: Developed countries allowed to maintain
trade distorting subsidies to level of 5% of total value of agri-output +
10% of agricultural production for developing countries.
- Aggregate Measure of Support” (AMS): It is the amount of money
spent by governments on agriculture production, except for those
contained in Blue box, Green box and De minimis.
Ø Blue Box: This is the “amber box with conditions”. Only Production
limiting subsidies are allowed under this; They cover payments based on
acreage, yield or number of livestock in a base year + Example is giving
MSP on rice for only 1000 kgs-> It comes under Blue box.
Ø Special and Differentiated Treatment Box (S &D Box) Subsidies: It is
not available to developed countries + These subsidies include assistance
which are essential for rural development and up-liftment of poor farmers.
3. Export Subsidies: Subsidies that subsidizes exports are called export
subsidies + These are direct subsidies given by government to producers of
agricultural products against exports.
Ø Special Safeguard Mechanism: It allow developing countries to impose
additional (temporary) safeguard duties in event of abnormal surge in
imports.
o Trade-Related Aspects of Intellectual Property Rights (TRIPS): International
legal agreement between all member nations of WTO + It sets minimum standards
for regulation by national governments of Intellectual property + It was negotiated at
Uruguay round of GATT (1989-1990) + It became effective on 1st January 1995 +
Geographical Indications covered under TRIPS; India enacted Geographical
Indications of Goods (Registration and Protection) act, 1999.
o Agreement on Subsidies and Countervailing Measures: It applies to non-
agricultural products + It classifies subsidies into:
§ Red: Subsidies with high trade-distorting effects such as export subsidies.
§ Green: Subsidies that are not specific to an enterprise or industry or industries
are non-actionable.
§ Amber: They are actionable by trading partners if their interests are adversely
hit.
o Agreement on Sanitary and Phyto-Sanitary Measures: SPS measures must be
based on international standards + It is open to country to adopt a level of SPS
protection higher than international standards if there is scientific justification.
o Agreement on Anti-Dumping: It provides right to contracting parties to apply anti-
dumping measures on a unilateral basis after investigations + All countervailing
duties should be terminated within five years of their imposition.
o Agreement on Technical Barriers to Trade: To counter Non-Tariff barrier for non-
food Trade.
o General Agreement on Tariffs and Trade (GATT) for goods and General
Agreement on Trade in Services (GATS): To counter the tariff barrier.
o Trade-Related Investment Measures on Foreigners (TRIMS): Regulates the
foreign investment.
o Trade Facilitation agreement (2013): Concluded at the Bali Ministerial conference
+ India became 76th member to ratify this agreement + It include lowering import
tariffs and agricultural subsidies, abolishing hard import quotas and reduction in red
tape at international borders.
• Trade Barriers
o Countervailing Duty (CVD): It is a duty that the government imposes to protect
domestic producers by countering the negative impact of import subsidies.
o Anti-dumping duty: Dumping is when countries sell the produce at lower cost than
production. Foreign countries levy anti-dumping duty to protect industry.
§ Mechanism to raise complaints: Commerce Ministry raises complaints -
Directorate General of Trade Remedies investigates - Finance Ministry imposes.
§ ARTIS Portal: Developed by DG Foreign Trade to raise complaints related to
dumping.
• Non-Tariff Barriers: Subsidies to domestic industries, Public procurement, Technical
barrier to trade, and Quota system.
• Developing Country status: It allows a member to seek temporary exception from
commitments under various agreements of WTO + These exceptions are known as Special
and Differential treatment (SDT) + Individual countries themselves are allowed to
unilaterally classify themselves as developing countries + Two-third of 164 members of
WTO classified themselves as developing countries.
• Least Developing Countries: Identified by UN Economic & Social Council (ECOSOC),
WTO agreements permit other countries to give duty free quota free access to exports from
LDC.
• Rule of Origin: To prevent dumping of goods by 3rd country, it allows a minimum value
addition to be qualified for trade agreements.
• Certificate of Origin: Issued by the Director general of foreign trade under the commerce
ministry for allowing companies to take benefit of free trade agreements.
• Submits and related agreements:
Doha development • Exhorted 1st world countries to give more access to 3rd world countries
round (Qatar 2001) • Allowed 3rd world countries to retain some barrier to protect their
industries
Food subsidies and • Under WTO’s Agreement on Agriculture (AOA), 1st world and 3rd
peace clause world countries provide subsidies to farmers at differential amount.
• Peace Clause: Allows subsidies to the farmers for any amount.
Bali package & trade • Exhorted to cut red tape to enhance trade
facilitation agreement • Trade facilitation agreement: set up online portals to seek clearances
/ TFA (2013) and pay fees
• Mechanism in India: national committee on trade facilitation (NCTF)
under cabinet secretary (IAS)
Nairobi package & • Extended peace clause
SSM (2015) • Brought special safeguard mechanism (SSM): allowed protection of
industries of 3rd world countries from export of 1st world countries by
letting them raise the barrier
• Types of Trade Agreements:

Type of Agreement Activities
Partial Scope Agreement Trade for small list of items between two countries
Preferential Trade Agreement /Free Trade for large list of goods and services at reduced
Trade agreements tariff rates between two countries
Customs Union Union in which countries apply same external tariff
Common Market Customs union where factors of production
(capital, labour) can move freely amongst members
Economic Union Same external tariff, free movement of goods, labor
and deciding fiscal policy in tandem.
Dispute Settlement System at WTO: Uruguay round of negotiations resulted in adoption
of Dispute settlement system (DSS) and Dispute Settlement Understanding (DSU) with
objective of resolving trade disputes between member states.
o Dispute settlement process: Consultations between parties-> Adjudication by panels or

Appellate body (if appealed)-> Implementation of the ruling including possibility of
counter-measures if party does not implement the ruling.
o General Council-> It also convenes as Dispute Settlement Body; it has authority to
establish dispute settlement panels, refer matter for arbitration, appellate body, maintain
surveillance over implementation of recommendations.
o Appellate Body-> It is a standing body of persons which hear appeals from reports issued
by panels in disputes brought by WTO members + It can uphold or reverse the legal
findings and conclusion of a panel.
§ Structure of Appellate Body: It is composed of seven members who are appointed
by the DSB to serve for four-year terms + Each person may be reappointed for
another four-year term + Chairman is elected among the Members to serve a one-
year term, responsible for the overall direction of Appellate Body business + Division
of three Members is selected to hear each appeal and each division elects a Presiding
Member.
§ US Withholding of Appellate Body Appointment: At present only 1 member is left
in appellate body, thus it has become incapacitated to handle cases + US is
withholding approval of Appellate body appointments in protest of several issues it
has with procedural aspects of Appellate Body.
• Multi-Party Interim Appeal Arrangement: The new system will allow EU, together with
other participating WTO members, to overcome the current paralysis of the WTO’s
Appellate Body and solve trade disputes amongst themselves + It is a temporary arrangement
based on Article 25 of the WTO Dispute Settlement Understanding (DSU).
• India’s Sugar Subsidy dispute at WTO: India has appealed against a ruling of WTO trade
dispute settlement panel which ruled that the country’s domestic support measures for sugar
and sugarcane are inconsistent with global trade norms.

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INDIAN ECONOMY

4. Physical Capital Vs Human Capital

9. Types of Economy: Per Capita Income

12. Public Vs Private Goods

Real GDP: Nominal GDP/ Deflator (to adjust the inflation)

Doesnt consider Limited focus on Simplistic approach to

Items measures using expenditure Method:

Included All factor incomes

Recent Changes for GDP calculation

Gross National Product:

Net factor income from abroad:

Net National Product or NNP:

Per Capita Income

Net Domestic Product(NDP)

Gross National Happiness:

6. Poverty Estimation in India

Parameters Tendulkar Committee Rangarajan Committee

Rural Poverty Line Rs 27/day/person Rs 32/day/person

12. Multidimensional Poverty Index

• A person is multi-dimensionally poor if he is deprived in one third or more of the

Fig: Dimensions in Human Development Index

17. Terms related to Poverty

Economic Growth Vs Economic Development

Elements of inclusive growth:

Inclusive growth in India:

Means for inclusive growth

Worker population ratio (WPR): Defined as proportion of employed persons to the

Meaning Employment terms are fixed and It comprises mainly of small

5. Types of Fiscal Policy

6. Tools of Fiscal Policy

Types of Formula Remarks Budgeted

Type 31st march 2022 31st march 2023

Debt Composition: Type

1. Introduction: Tax is a compulsory levy payable by individuals/corporations to the government

7. Cess and Surcharge

o Different types of Direct taxes in India

Ø Income tax: Levied on individual income; calculated as per the provisions of

o Features of Goods and Services Tax (GST)

Taxes subsumed under GST

Exceptions and Exclusions

o 45th GST Council meeting (Sep 2021)

GST Composition Scheme

GST Compensation Cess

6. Quantitative tools of Monetary Policy

3. Measures to check inflation

Calculating Base Utility Additional

6. Wholesale Price Index (WPI): It measures change in price of commodities supplied to

Table showing new commodity groups and their weights

All commodities 100 697

Primary articles 22.62 117

Fuel and Power 13.15 16

Manufactured Products 64.23 564

7. Other measures of Inflation

• Recent decisions: Implementation of BASEL 3 standards finalized in 2017, deferred by

Parameters Requirement by Basel 3 Requirement by RBI

Capital Adequacy ratio 8% Banks-9%

NSFR 100% 100%

Leverage Ratio 3% DSIBs- 4%

10. Important Schemes of banking sector