ECONOMICS

DOSSIER
2022

The
Economics
&
Strategy Cell
Notice to the Reader
The objective of this dossier is to assist 2022-2024 batch of SBM NMIMS Mumbai in their
summer placement preparation. This document endeavors to provide direction and reading
references only and thus is not exhaustive by itself. It is a compilation of key economic concepts
and select articles meant for internal academic purpose and thus we do not encourage
circulationof the same to any outsider for any purpose. In case you do not belong to the above
audience group and find yourself referring to this document we suggest you stop at this very
moment asit is not designed to address any other purpose except for the one mentioned above.

Instructions to use the document

This year we have divided the dossier into three parts. First part will cover the Economic Concepts
to develop a basic understanding in the domain. Second Part will include current affairs or major
events that have happened in the last two years, which we, at Ecolibria, feel would be relevant
from summers’ point of view. Third Part includes a brief description about certain generic
economic topics and indexes. However, we recommend you all to not restrict your preparation to
these topics only. At the end of the day, it is your research and understanding that will matter in
an interview and thus we strongly recommend our readers to deep dive into the subjects and
differentiate themselves by gaining further insights.
Structure of the document
The document starts with fundamental concepts of Economics. Thereafter, we have discussed
important events of last two years. Each event begins with an overview article from the web, this
is meant to give you’ll a brief understanding of the topic. The article will be followed by l ist of
article references which you’ll can further explore. Then, the document will cover some basic
points about generic economic topics such as unemployment, poverty etc. The idea is to make you
all read about these topics and not influence your opinion. After having read extensively you’ll
need to form an opinion of your own based on sound logical principles and reliable data.
 Table of Contents

PART – A Page No
Chapter 1 – Introduction of Macro Economics 4
Chapter 2 – National Income accounting 6
Chapter 3 – Money and Banking 10
Chapter 4 – Income determination 13
Chapter 5 – Government: Functions and Scope 16
Chapter 6 – Open Economy Macroeconomics 19
Chapter 7 – Introduction to Microeconomics 22
Chapter 8 – Theory of Consumer Behaviour 26
Chapter 9 – Production and Costs 30
Chapter 10 – The Theory of the Firm under Perfect Competition 37
Chapter 11 – Non-Competitive Markets 43
PART - B
Union Budget 2022-23 48
All you need to know about CBDC 52
Russia-Ukraine War 55
Oil – Price Drivers and Inflation 62
What led to Sri Lanka’s biggest economic catastrophe? 68
Global Supply Chain Disruption: Challenges, Impact and Way Ahead 72
Impact of 5G on the Economy 74
Indian Startup Ecosystem 76
Metaverse and its impact on the Digital Economy 79
PART – C
INDICES 82
Gig Economy 85
Quantitative Easing, Unconventional Monetary Policies and RBI 88
Major Economic Indicators 89
 Macroeconomics
Chapter 1 – Introduction

Macro Economics: It deals with the aggregate economic variables of an economy.

It is a branch of economics that studies the economic relationships or issues of an economy
as a whole like total consumption, saving etc. It investigates the principles, problems and
policies relating to achievement of full employment and expansion of productive capacity.

The four aggregate macroeconomic sectors that form the foundation for macroeconomic
analysis are the Household Sector, the Business Sector, the Government Sector and the
foreign sector. These four key functions are responsible for four expenditures on Gross
Domestic Product (GDP).
The four major sectors of an economy according to the macroeconomic point of view are:
i. Households

ii. Firms / Business

iii. Government

iv. External sector / Foreign

These can be represented in the following flow chart:

Sectors

Households Firms Government External Sector

Households: Household means a single individual or a group of individuals who

independently take decisions regarding their economics activities (i.e., consumption and
production). Household sector buy goods and services for consumption and also supply
factors of production like land, labor, capital, and entrepreneur. Households
provide the market for the output of the firms. In short, this sector includes everyone,
consumers, people and every member of the society. This sector is responsible for the
consumption expenditure’s role in GDP.

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Firms: Firms are economic units that carry out the production. They employ and organize
factors of production and undertake production process for the motive of profit making.
This includes sole proprietorship, partnerships and corporations. This sector is
responsible for investment expenditure role in GDP.
Government: A state/government provides law and order, maintains growth and
stability and provides administrative services. The main motive of a government is to
undertake developmental projects such as dams, roads, heavy industries that usually have
long gestation periods by imposing taxes. The government invests in education, health
sector and provides these services at nominal price. The motive of a government is to
serve and not to make profits. Transportation Dept., Environmental Protection agencies are
its examples. This sector is responsible for government purchase role in GDP.
External sector: This sector is engaged in export and import (external trade) of goods
and services. If domestically produced goods and services are sold to the rest of the
world, then it is called export. If the goods and services are purchased from the rest of
the world, then it is called import. Apart from export and import of goods, there can be
inflow of goods (i.e., a country inviting capital from foreign countries) and outflow of
foreign capital (i.e., investing in foreign countries). The expenditure on gross domestic
product attributable to the foreign sector is net exports.

Main Objectives of any Macro Economic Policies

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 Chapter 2 – National Income Accounting

Goods: In economics a good is defined as any physical object, man-made, that could command a
price in the market, and these are the materials that satisfy human wants and provide utility
Consumption Goods: Those final goods which satisfy human wants directly. E.g.: ice-cream and
milk used by the households.
Capital Goods: Those final goods which help in production. These goods are used for
generating income. These goods are fixed assets of the producers. Ex- plant and machinery.
FinalGoods are those goods which are used either for final consumption or for investment.

Intermediate Goods refers to those goods and services which are used as a raw material for
further production or for resale in the same year.
Investment: Addition made to the physical stock of capital during a period is called
investment. It is also called capital formation.
Capital formation: - Change in the stock of capital is also called capital formation.

Depreciation: It means fall in value of fixed capital goods due to normal wear and tear and
expected obsolescence. It is also called consumption of fixed capital.
Gross Investment: Total addition made to physical stock of capital during a period. It
includes depreciation. OR Net Investment + Depreciation
Net Investment: Net addition made to the real stock of capital during a period. It excludes
depreciation.
Net Investment = Gross investment – Depreciation

Stocks: Variables whose magnitude is measured at a particular point of time are called stock
variables. E.g., National Wealth, Inventory etc.
Flows: Variables whose magnitude is measured over a period are called flow variable.
E.g., National income, change in stock etc.
Circular flow of income: It refers to continuous flow of goods and services and money income
among different sectors in the economy. It is circular in nature. It has neither any end and nor
any beginning point. It helps to know the functioning of the economy.
Leakage: It is the amount of money which is withdrawn from circular flow of income. For
e.g., Taxes, Savings, and Import. It reduces aggregate demand and the level of income.
Injection: It is the amount of money which is added to the circular flow of income. For e.g.,
Govt. Exp., investment, and exports. It increases the aggregate demand and the level of income.

Domestic Aggregates

Gross domestic Product at Market Price GDPMP is the market value of all the final goods and
services produced by all producing units located in the domestic territory of a country during an

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accounting year. It includes the value of depreciation or consumption of fixed capital.
Net Domestic Product at Market Price □NDPMP □:NDPMP =GDPMP -Depreciation (consumption of
Fixed capital). It is the market value of final goods and services produced within the domestic
territory of the country during a year exclusive of depreciation.
Domestic Income □ NDPFC □: It is the factor income accruing to owners of factors of
production for suppling factor services within domestic territory during an accounting year.

NATIONAL AGGREGATES

Gross National Product at Market Price □GNP MP □ is the market value of all the final goods and
services produced by normal residents (in the domestic territory and abroad) of a country during
an accounting year. GDPMP □ NFIA □ GNPMP □MNPFC □

National Income

NNPFC

It is the sum of all factors incomes which are earned by normal residents of a country in the form
of wages. Rent, interest, and profit during an accounting year.

NNPFC □ NDPFC □ NFIA □ National Income

National Income at Current Prices: It is also called nominal National income. When goods
and services produced by normal residents within and outside of a country in a year valued at
current year’s prices i.e., current prices are called national income at current prices.

Y=QxP

Y = National income at current prices

Q = Quantity of goods and services produced during an accounting year

P = Prices of goods and services prevailing during the current accounting year

National Income at Constant Prices: It is also called as real national income. When goods and
services produced by normal residents within and outside of a country in a year valued at constant
price i.e., base year's price is called National Income at Constant Prices.

Y' = Q x P'

Y' = National income at constant prices

Q = Quantity of goods and services produced during an accounting year P' = Prices of goods and

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services prevailing during the base year

Value of Output: Market value of all goods and services produced by an enterprise during an
accounting year.

Value added: It is the difference between value of output of a firm and value of inputs bought
from the other firms during a particular period.

Problem of Double Counting: Counting the value of a commodity more than once while
estimating national income is called double counting. It leads to overestimation of national
income. So, it is called problem of double counting.

Ways to solve the problem of double counting:

• By taking the value of only final goods.

• By value added method.
Private Income: Private income is estimated income of factor and transfer incomes from all
sources to private sector within and outside the country.
Personal Income: It refers to income received by household from all sources. It includes factor
income and transfer income.
Personal Disposable Income: It is that part of Personal income which is available to the
households for disposal as they like.
GDP and Welfare:
In general GDP and Welfare are directly related with each other. A higher GDP implies that
more production of goods and services. It means more availability of goods and services. But
more goods and services may not necessarily indicate that the people were better off during the
year.
In other words, a higher GDP may not necessarily mean higher welfare of the people. There are
two types of GDP:
Real GDP: When the goods and services are produced by all producing units in the domestic
territory of a country during a/c. year and valued these at base year’s prices or constant price, it is
called real GDP or GDP at constant prices. It changes only by change in physical output not by
change price level. It is called a true indicator of economic development.
Nominal GDP: When the goods and services are produced by all producing units in the
domestic territory of a country during an a/c. year and valued these at current year’s prices or
current prices, it is called Nominal GDP or GDP at current prices. It is influenced by change in
both physical output and price level. It does not consider a true indicator of economic
development.

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Conversion of Nominal GDP into Real GDP

Real GDP = Nominal GDP

Price Index

Price index plays the role of deflator deflating current price estimates into constant price
estimates. In this way it may be called GDP deflator.

Welfare means material wellbeing of the people. It depends on many economic factors like
national income, consumption level quality of goods etc. and non-economic factor like
environmental pollution, law, and order etc. the welfare which depends on economic factors is
called economic welfare and the welfare which depends on non-economic factor is called non-
economic welfare. The sum total of economic and non- economic welfare is called social
welfare. Conclusion thus GDP and welfare directly related with each other, but this relation is
incomplete because of the following reasons.

Limitation of per capita real GDP/GDP as an indicator of Economic welfare:

• Non-monetary exchange
• Externalities not taken into GDP, but it affects welfare
• Distribution of GDP
• All products may not contribute equally to economic welfare
• Contribution of some products may be negative
• Inflation may give falls impression

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 Chapter 3 – Money and Banking

Money: Money may be defined as anything which is generally acceptable as a medium of

exchange and at the same time acts as a measure, store of value and standard of deferred
payment.

Functions of Money:

Primary Functions
a. Medium of exchange
b. Common measure of value or unit of value

Secondary Functions
c. Standard of deferred payment
d. Store of value
e. Transfer of value

Barter Exchange: It implies the direct exchange of goods for goods without the use of money.
Difficulties involved in the Barter Exchange:
• Lack of a common measure of value.
• Lack of double coincidence of wants
• Lack of standard of deferred payments.
• Lack of store of value.
• Lack of divisibility.
• Difficulty in exchange of services

Supply of Money: Total stock of money (currency notes, coins, and demand deposit of banks) in
circulation are held by the public at a given point of time. Supply of money does not include cash
balance held by central and state govt. and stock of money held by banking system of country as
they are not in actual circulation of the country.
Measures of Money Supply = Currency held by Public + Net Demand Deposits held by
commercial banks
M1 = C + DD + OD
C = Currency and coins with the public
DD = Demand deposits of the public with the banks OD = Other deposits

M2 = M1+ Post office savings deposits

M3 = M1+ Time deposits of commercial banks
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 M4= M3+ Total deposits with the post office saving organization excluding the
deposits on NSC

Banks and Banking System:

Commercial Banks: Commercial Banks are financial institution who accepts deposits from the
public and provide loans facilities for investment with the aim of earning profit.
Functions of Commercial Banks:
1. Primary functions:
(a) Accepting deposits
(b) Advancing loans
(c) Discounting bill of exchange.

2. Secondary functions:
(a) Transfer of fund
(b) Collection of funds
(c) Purchase and sale of shares and securities on behalf of the customers
(d) Collection of dividend and interest
(e) Payment of bills and insurance premium on behalf of customers
(f) Acting as executor and trustee of will
(g) Acting as correspondent and representative of customer and provide letter of
credit to the customer.

Central Banks: The central Bank is the apex institution of monetary and financial system of a
country. It makes monetary policy of the country in public interest. It manages, supervises and
facilitates the banking system of the country.
Functions of Central Banks

1. Bank of Issue
2. Banker to the Government
3. Banker’s Bank and Supervisor.
4. Controller of credit.
5. Lender of last resort
6. Custodian of foreign exchange reserves

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MONEY CREATION OR CREDIT CREATION BY COMMERCIAL BANKS
CREDIT is defined as finance made available by one party to another party on a certain rate of
exchange. The capacity of banks to create money or credit depends on (i) Amount of primary
deposits and (ii) Legal reserve ratio (LRR).

Legal Reserve Ratio (LRR): is fixed by the central bank of a country and it is the minimum ratio
of deposit legally required to be kept as cash by banks.
Cash Reserve Ratio (CRR): It is a part of LRR which is to be kept with the central bank.
Statutory Liquidity Ratio (SLR): It is a part of LRR which is to be kept with the bank
themselves.

Commercial bank’s demand deposits are a part of money supply. Commercial banks lend money
to the borrowers by opening demand deposit account in their names. The borrowers are free to
use this money by writing cheques. According to definition demand deposits are a part of money
supply.
Therefore, by creating additional demand deposits bank create money. Money creation depends
upon two factors:
Primary deposits and Legal Reserve Ratio (LRR).
Deposit Multiplier = 1/LRR Total Deposit creation = Initial deposit X 1/LRR

Repo rate: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in
case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate
is used by monetary authorities to control inflation.
Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive
for banks to borrow from the central bank. This ultimately reduces the money supply in the
economy and thus helps in arresting inflation.

Reverse repo rate: Reverse repo rate is the rate at which the central bank of a country (Reserve
Bank of India in case of India) borrows money from commercial banks within the country. It is a
monetary policy instrument which can be used to control the money supply in the country.
Description: An increase in the reverse repo rate will decrease the money supply and vice- versa,
other things remaining constant. An increase in reverse repo rate means that commercial banks
will get more incentives to park their funds with the RBI, thereby decreasing the supply of money
in the market.

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 Chapter 4 – Income Determination

Aggregate Demand refers to total value of all final goods and services that are planned to buy
by all the sectors of the economy at a given level of income during a period.
AD represents the total expenditure on goods and services in an economy during a period of
time.
Components of Aggregate demand are:
(i)Household consumption expenditure (C).
(ii)Investment expenditure (I).
(iii) Govt. consumption expenditure (G).
(iv) Net export (X – M).

Thus,
AD = C + I + G + (X – M)

In two sector economy AD = C + I

Aggregate Supply is the money value of all final goods and services available for purchase by
an economy during a given period. It is the flow of goods and services in the economy. Since,
money value of final goods and services is equal to net value added, AS is nothing but the
national income.
AS = C + S
Aggregate supply represents the national income of the country. AS = Y (National Income)

Consumption function shows functional relationship between consumption and Income. C =

f(Y)
Where C = Consumption Y = Income f= Functional relationship.

Equation of Consumption Function C = C + MPC * Y

C = Consumption
C = Autonomous consumption.
MPC(b)= Marginal Propensity to consume

C does not changed/affected by change in income. It is minimum level of consumption, even

when income is zero. Consumption expenditure at zero level of income is called autonomous
consumption. It is income inelastic.
Induced consumption is the expenditure which is affected by change in income. It is indicated by
MPC × Y. Induced consumption is the portion of consumption that varies with disposable
income.

Average Propensity to consume: - It is a schedule that shows consumption expenditure at

different levels of income in an economy.

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Consumption function (propensity to consume) is of two types:
1. Average propensity to consume (APC)
2. Marginal propensity to consume (MPC)

Average propensity to Consume (APC): It refers to the ratio between total consumption (C)
and total income (Y) at given level of income in the economy.

Marginal Propensity to Consume (MPC): Marginal propensity to consume refers to the ratio
of change in consumption expenditure to change in income.

Saving function refers to the functional relationship between saving and national income. S = f
(y)
Equation of Saving function
S = □C + MPS.
where S = saving
Y = National Income
f = Functional relationship

Saving function (Propensity to Save) is of two types.

Average Propensity to Save (APS): Average propensity to save refers to the ratio of savings to
the corresponding level of income

Marginal Propensity to Save (MPS): Marginal propensity to save refers to the ratio of change in
savings to change in total income.

Investment refers to the expenditure incurred on creation of new capital assets.

The investment expenditure is classified under two heads:

Induced Investment: Induced investment refers to the investment which depends on the profit
expectations and is directly influenced by income level (only for reference).
Autonomous Investment: Autonomous investment refers to the investment which is not
affected by changes in the Level of income and is not induced solely by profit motive. It is
income inelastic.
Equilibrium level of income is determined only at the point where AD = AS or S = I, i.e., the
flow of goods and services in the economy is equal to the demand for goods and services
But it cannot always be at full employment level also as it can be at less than full employment.
Full employment is a situation when all those who are able and willing to work at prevailing
wage rate, get the opportunity to work.

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Voluntary unemployment is a situation where person can work but not willing to work at
prevailing wage rate.
Involuntary unemployment is a situation where worker is able and willing to work at
prevailing wage rate but does not get work.
Under employment is a situation where all those who can work at existing wage rates, are
notgetting jobs. It refers to that situation in the economy where AS = AD or S = I, but without
fuller utilisation of labour force.

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 Chapter 5 – The Government: Functions & Scope

Budget is a financial statement showing the expected receipt and expenditure of Govt. for the
coming fiscal or financial year.
Main objectives of budget are:
• Reallocation of resources.
• Redistribution of income and wealth
• Economic Stability
• Management of public enterprises.
• Economic Growth
• Generation of employment

There are two components of budget:

Revenue Budget consists of revenue receipts of govt. and expenditure met from such revenue.
Capital budget consists of capital receipts and capital expenditure.
BUDGET RECEIPTS:
Revenue Receipts
• Tax
a. Direct Tax
i. Income tax
ii. Corporate Tax
iii. Wealth and Property Tax

b. Indirect Tax

i. Value added Tax

ii. Service Tax
iii. Excise Duty
iv. Custom Duty
v. Entertainment Tax

• Non-Tax
a. Commercial Revenue

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 b. Interest
c. Dividend, Profits
d. External Grants
e. Administrative Revenues
f. Fees
g. License Fee
h. Fines, Penalties
i. Cash grants-in-aid from foreign countries and international org.

2. Capital Receipts

A. Borrowing and Other liabilities

B. Recovery of Loans
C. Other receipts (Disinvestments)

Direct Tax: A direct tax is one whose burden cannot be shifted to others i.e., the impact
and incidence of the tax is on the same person. ex- income tax, wealth tax, gift tax.
Indirect Tax: An indirect tax is one whose burden can be shifted to others or the impact and
incidence of an indirect tax falls on different people. ex- excise duty, VAT, service tax.

Revenue Receipts:
(i) Neither creates liabilities for Govt.
(ii) Nor causes any reduction in assets.

Capital Receipts:
(i) It creates liabilities or
(ii) It reduces financial assets.

BUDGET EXPENDITURE:

1. Revenue Expenditure
(i) Neither creates assets
(ii) Nor reduces liabilities.
e.g., Interest Payment, subsidies etc.

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 Capital Expenditure:
(i) It creates assets
(ii) It reduces liabilities.
e.g., Construction of school building Repayment of loans etc.

Budget Deficit: It refers to a situation when budget expenditure of a govt. are greater than the
govt. receipts.
Budgetary Deficit: Total Expenditure > Total Receipts.
Revenue deficit: It is the excess of govt. revenue expenditure over revenue receipts.
Revenue Deficit: Total revenue expenditure > Total revenue receipts

Fiscal Deficit: When total expenditure exceeds total receipts excluding borrowing.
Fiscal Deficit: Total expenditures > Total Receipts excluding borrowing.

Primary Deficit: By deducting Interest payment from fiscal deficit, we get primary deficit.
Primary Deficit: Fiscal deficit – Interest payments.

Measures to correct different deficits:

(i) Monetary expansion or deficit financing.
(ii) Borrowing from public.
(iii) Disinvestment
(iv) Borrowing from international monetary institution and other countries.
(v) Lowering govt. expenditure.
(vi) Increasing govt. revenue.

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 Chapter 6 – Open Economy Macroeconomics
The balance of payment is a comprehensive and systematic records of all economic transaction
between normal residents of a country and rest of the world during an accounting year.

Accounts of Balance of Payments:

Current Account: The current account records export and import of goods and services and
unilateral transfers.
Capital Account: It records of all such transactions between normal residents of a country and
rest of the world which relates to sale and purchase of foreign assets and liabilities during an
accounting year.
Components of Current Account Components of Capital Account
1. Visible items (import and export of 1. Foreign Direct investment.
goods)
2. Invisible items (import and export 2. Loans
of services).
3. Unilateral transfers. 3. Portfolio investment.
4. Income receipts and payments from 4. Banking capital transactions.
and to abroad.
5. These are the transactions which do 5. These are the transactions which
not affect the assets or liabilities affect the assets or liabilities position
position of the country. of the country.

6. It is a flow concept. 6. It is a stock concept.

Balance of trade is the net difference of Import and export of all visible items between the
normal residents of a country and rest of the world.
Autonomous items are those items of balance of payment which is related to such transaction as
are determined by the motive of profit maximization and not to maintain equilibrium in balance
of payments. These items are recorded as a first items before calculating deficit or surplus in
balance of payment a/c.
These items are generally called ‘Above the Line items’ in balance of payment.
Accommodating item refers to transactions that take place because of other activity in Balance
of Payment. These transactions are meant to restore the Balance of Payment identity. These
items are generally called ‘Below the Line items.
Deficit of Bop Account: When total inflows of foreign exchange on account of autonomous
transactions are less than total outflows on account such transaction then there is a deficit in Bop.

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Foreign exchange rate refers to the rate at which one unit of currency of a country can be
exchanged for the number of units of currency of another country. In simple words, we can say
that the price of one currency in terms of other currency is known as f oreign exchange rate or
exchange rate.

SYSTEM OF EXCHANGE RATE:

• Fixed exchange rate
• Flexible exchange rate.
In fixed exchange rate system, the rate of exchange is officially fixed or determined by
Government or Monetary Authority of the country.

In a system of flexible exchange rate (also known as floating exchange rates), the exchange rate
is determined by the forces of market demand and supply of foreign exchange.
The demand of foreign exchange has the inverse relation with flexible exchange rate. If flexible
exchange rate rises the demand of foreign exchange falls. Vice versa.
Determination of Equilibrium Foreign Exchange Rate: Equilibrium FER is the rate at which
demand for, and supply of foreign exchange is equal. Under free market situation, it is
determined by market forces i.e., demand for and supply of foreign exchange. There is inverse
relation between demand for foreign exchange and exchange rate. There is direct relationship
b/w supply of foreign exchange and exchange rate. Due to above reasons demand curve
downward sloping and supply curve is upward sloping curve graphically intersection of demand
Curve and supply curve determines the equilibrium foreign exchange rate.

Devaluation of a currency: When government or monetary authority of a country officially

lowers the external value of its domestic currency (in respect of all other foreign currency) is
called devaluation of a currency. It takes place by government order under fixed exchange rate
system.
Revaluation of a currency: When government or monetary authority of a country officially
raises the external value of its domestic currency is called revaluation. It takes place by
government order under fixed exchange rates system.
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In currency depreciation there is a fall in the value of domestic currency, in term of foreign
currency due to change in demand and supply of the currency under flexible exchange rate system.
In currency appreciation, there is a rise in the value of domestic currency in terms of foreign
currency due to change in demand and supply of the currency under flexible exchange rate
system.
Managed floating system is a system in which the central bank allows the exchange rate to be
determined by market forces but intervenes at times to influence the rate. When central bank
finds the rate is too high, it starts selling foreign exchange from its reserve to bring down it.
When it finds the rate is too low, it starts buying to raise the rate.

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 Chapter 7 – Introduction to Microeconomics
Economy: - An economy is a system of organizations and institutions that either facilitate or
play a role in the production and distribution of goods and services in a society. Economies
determine how resources are distributed among members of a society; they determine the value
of goods or services; and they even determine what sorts of things can be traded or bartered for
thoseservices and goods.
Three Types of economy:
Market/capitalist economy: - In this type of Economy the factors of production are owned and
operated by individuals or group of individuals. Main objective of production is self - interest or
profit maximization. Central problems are solved by price mechanism or market forces of
demand & supply.
Planned/centrally planned/ socialistic economy: - Factors of production are owned and
operated by Govt. Main objective of production is social welfare. Central problems are solved by
central planning authority.
Mixed Economy: - The Economy in which factors of production are owned and operated by
both Govt. and private sector. Main objective is profit maximization (private sector) and social
welfare (Government sector). Central problems are solved by central planning authority (in
public sector) and price mechanism (in private sector)
Microeconomics and Macroeconomics: -

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Central Problems of an Economy: -

• Basic economic problem is the problem of choice which is created by the scarcity of resources.
It is also called problem of economizing the resources, i.e., the problem of fuller and efficient
utilization of the limited resources to satisfy maximum number of wants.
• Main causes of central problems are unlimited human wants, limited economic resources and
alternative uses of resources.
• Resources of factors of production can be natural like (land, air), human (i.e., labor), capital (like
machines, building) and entrepreneurial (i.e., a person who bears risk).
• Central problems facing every economy are like allocation of resources:

-(i) What to produce and how much to produce?

(ii) How to produce?
(iii) For whom to produce?

What to produce: - An economy has unlimited wants and limited means having alternative use.
Economy can’t produce all type of goods like consumer goods, producer goods etc. So, Economy
must make a choice what type of goods and services are to be produced and in what quantities.
How to produce: - It is the problem of choice of technique of production. There are two
techniques of production.

(a) Labour Intensive Technique: - It is the technique of production when labor is used more
than capital.
(b) Capital Intensive Technique: - In this technique capital is used more than Labor.

For whom to produce: - It is the problem related to distribution of produced goods among the
different group of the society.

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It has two aspects: -
Personal distribution: - When the National Income is distributed according to the ownership of
the factors of production.
Functional distribution: - When the national Income/Production is distributed among different
factors of production like Land, Labor, capital, and Entrepreneurship for providing their service
in terms of rent, wages, interest, and profit respectively.
Production possibility frontier or production possibility curve
This shows all possible combinations of two set of goods that an economy can produce with
available resources and given technology, assuming that all resources are fully and efficiently
utilized.
Production Possibility Frontier or Curve Features (a) Slopes downward from left to right because
if production of one commodity is to be increased then production of other commodity has to be
sacrificed as there is scarcity of resources. (b) Concave to the origin because of increasing
Marginal opportunity cost or (MRT)

The Production possibility curve will shift under following two conditions:

(a) Change in resources, (b) Change in technology of production for both the goods.
Rightward shift of PPF shows increase in resources or improvement in technology. Ex- Labour

24
becoming more skilled, improvement in technology, increase in productivity of land.

Leftward shift of PPF shows the decrease in resources or degradation of technology in the
economy.
The Production possibility curve will rotate outward under following two conditions:
(a)Improvement in technology in favor of one commodity (b) Growth of resources for
the production of one commodity

Marginal Rate of Transformation (MRT) – It is the amount of one commodity that is to be

sacrificed to increase the production of another commodity by one unit. It can also be called
Marginal Opportunity Cost. It is defined as the additional cost in terms of number of units of a
good sacrificed to produce an additional unit of the other good.

Opportunity Cost: -
Opportunity cost is the cost of alternative opportunity gives up.

25
 Chapter 8 – Theory of Consumer Behavior

Consumer is an economic agent who consumes final goods or services for a consideration.
Thus, Consumer behavior is the study of how individual customers, groups or organizations
select, buy, use, and dispose ideas, goods, and services to satisfy their needs and wants. It refers
to the actions of the consumers in the marketplace and the underlying motives for those actions.
Utility is want satisfying power of a commodity. There are two types: -
Total utility is the total satisfaction derived from consumption of given quantity of a commodity
at a given time. In other words, it is the total of marginal utility.
Marginal Utility is the change in total utility resulting from the consumption of an additional
unit of the commodity. In other words, it is the utility derived from each additional unit.
Law of Diminishing Marginal Utility: As consumer consumes more and more units of
commodity the Marginal utility derived from each successive unit go on declining. This is the
basis of law of demand.
Consumer Budget: - A budget constraint represents all the combinations of goods and services
that a consumer may purchase given current prices within his or her given income. Consumer
Budget states the real income or purchasing power of the consumer from which he can purchase
certain quantitative bundles of two goods at given price. It means, a consumer can purchase only
those combinations (bundles) of goods, which cost less than or equal to his income.
Budget Line: A graphical representation of all those bundles which cost the amount just equal to
the consumer’s money income gives us the budget line. The budget line represents two different
combinations of goods which a consumer can purchase with the given income and prices of
commodities.
Indifference Curve: It is a curve showing different combination of two goods, each
combination offering the same level of satisfaction to the consumer.

26
Characteristics of IC
1. Indifference curves are negatively sloped (i.e., slopes downward from left to right).
2. Indifference curves are convex to the point of origin. It is due to diminishing marginal rate of
substitution.
3. Indifference curves never touch or intersect each other. Two points on different IC cannot give
equal level of satisfaction.
4. Higher indifference curve represents higher level of satisfaction.
Consumer’s Equilibrium: A consumer is said to be in equilibrium when he maximizes his
satisfaction, given his money income and prices of two commodity. He attains equilibrium at
that point where the slope of IC is equal to the slope of budget line.

Marginal Rate of Substitution: -

Marginal Rate of Substitution MRS refers to the rate at which the consumer substitute one good
to obtain one more unit of the other good.
MRS is never constant, it varies over the IC. As we move along Indifference Curve, MRS falls
also called Diminishing Marginal rate of substitution.

27
Quantity Demanded: It is that quantity which a consumer is able and is willing to buy at
a price and in a given period of time.

Determinants of Demand:
• Price of Good
• Income of Consumers
• Taste & Preference of Consumer
Market Demand: It is the total quantity of the commodity demanded in the market by all
consumers at different prices at a point of time.
Demand Function: It is the functional relationship between the demand for a commodity and
factors affecting demand.
Law of demand: The law states that when all other thing remains constant then there is inverse
relationship between price of the commodity and quantity demanded of it. That is, higher the
price, lower the demand and lower the price, higher the demand.
Change in Demand: When demand changes due to change in any one of its determinants other
than the price.
Change in Quantity Demanded: When demand changes due to change in its own price keeping
all other factors constant.

Demand curve and demand schedule: The tabular presentation of price and quantity. It is
called demand schedule and a demand curve is the graphical representation of the demand
schedule.

Demand curve and its slope:

28
Price Elasticity of Demand: Price Elasticity of Demand is a measurement of change in quantity
demanded in response to a change in price of the commodity.

Mehtods of Measurements of Price

Percentage Method

Elasticity of Demand
Total Expenditure
Method

Geometric Mean

Percentage Method:

Factors influencing Price elasticity of Demand

(a) Nature of the Commodity.
(b) Availability of Substitute goods.
(c) Income level of the consumer.
(d) Price level of the commodity.
(e) Time Period.
(f) Different use of the commodity.
(g) Behavior of the consumer.
(h) Postponement of consumption.

29
 Chapter 9 – Production and Costs
Production: - It is mainly transformation of resources into commodities.
Production Function: Physical inputs. Production function of a firm describes the relationship
between the output and the factors of production which are being used in the production process.
It shows the required number of inputs needed to produce the maximum level of final output.
The following formula is used to express the production function: Q □ f □x1, x2 □
Were
Q = final units of output

The above equation shows that the final units of output can be produced by using production
factors 1 and 2.

Types of Production Function: There are two types of Production Function.

1. Short-run Production Function: In this production function one factor of production is
variable and all others are fixed. So, law of return to a factor is applied. It is also called variable
proportion type of production function.
It is a time period which is not enough to make change in all inputs. In this level of
production can be changed by changing the variable factors.

2. Long-run Production Function: In this production function all the factors of production are
variable. So, law of returns to scale is applied. It is also called constant proportion type of
production function.
It is a time period which is enough to make change in all inputs, all inputs are variable in
the long run. In this level of production can be changed by changing all inputs.

Total product or Total physical product: - Total product is the summation of the final units of
output produced by a firm by using the given amount of inputs during a particular period of time.
Total product is the relationship between variable factors of production and final units of output
when all other factors of production are held constant. The following formula can be used to
express the total product:

30
Average production is the per unit production of variable factor.
Marginal product refers to the change in total product resulting from the employment of an
additional unit of variable factor. In other words, it is the contribution of each additional unit of
variable factor to output.
Marginal Product of an Input= Change in Total Product/Change in Variable Product

Relation between Total, Average and Marginal Product

Returns to a factor: It refers to the behavior of output when only one variable factor of

31
production in increased in short run and fixed factors remain constant.
Law of variable proportion: The law states that when more and more units of variable factors
are employed to increase the output, initially output increases at an increasing rate and finally
falls.

Stage I (Stage of Increasing Return to factor): TP Increases at increasing rate: In the initial
phase as more and more units of variable factors are employed with fixed factor total physical
production increases at increasing rate, MP increases.

Stage II (Stage of Diminishing Return to factor): TP increases at decreasing rate: As more and
more units of variable factors are employed with fixed factors then total product increases at
diminishing rate, MP decreases but is positive. At the end of this phase TP maximum and MP
becomes zero.

Stage III (Stage of negative return to factor): TP falls: As more and more units of variable
factors are employed with fixed factors; total production starts decreasing and marginal product
becomes negative.

Economic Cost: It is the sum total of explicit and implicit cost.

Explicit Cost: Actual money expenditure incurred by a firm on the purchase and hiring the factor
inputs for the production is called explicit cost. These are entered into books of accounts. For
example-payment of wages, rent, interest, purchases of raw materials etc.

Implicit cost is the cost of self-owned resources of the production used in production process. Or
estimated value of inputs supplied by owner itself. These are not entered into books of accounts.

32
Normal Profit: It is the minimum amount required to keep the producers into business. In other
words, it is the minimum supply price of the entrepreneur. It is also called the wage off an
entrepreneur.

Total cost refers to total amount of money which is incurred by a firm on production of a given
amount of a commodity.
Total cost is the sum of total fixed cost and total variable cost.
TC = TFC + TVC or TC = AC × Q
Total fixed cost: - It is also called supplementary cost. It is the total expenditure incurred by the
producer for employing fixed inputs. Ex- Rent of land and building, interest on capital, license
fee etc.
TFC = TC – TVC or TFC = AFC × Q

Total variable cost is the cost which vary with the quantity of output produced. It is zero at zero
level of output. TVC curve is parallel to TC curve. Ex-cost of raw material, expenses on power
etc.
TVC = TC – TFC or TVC = AVC × Q
Average cost is per unit cost of production of a commodity. It is the sum of average fixed cost
and average variable cost.

33
Average fixed cost is per unit fixed cost of production of a commodity.

Average variable cost is per unit variable cost of production of a commodity. AVC is U- shaped
due to law of variable proportion.

Marginal Cost - It refers to change in TC, due to additional unit of a commodity is produced.
MC = ΔTC/ΔQ or MCn = TCn – TCn–1. But under short run, it is calculated from TVC.

34
Money received from the sale of product is called revenue.
Total revenue is the total amount of money received by a firm from the sale of given units of a
commodity.
TR = AR ´ Q or TR = S MR
TR = Price ´ Quantity Sold
Price = AR

Per unit revenue received from the sale of given units of a commodity is called average
revenue. Average revenue is equal to price. Per unit price of a commodity, it also called AR.

Marginal revenue is net addition to total revenue when one additional unit of output is sold.
Concept of Producer’s Equilibrium: If refers the stage where producer is getting maximum
profit with given cost, and he has no incentive to increase or decrease the level of output.
(A) MR and MC Approach: Conditions of producers’ equilibrium according to this approach
are:
(a) MC = MR and AR = MR, hence AR = MR = MC. MC should be rising.
(b) MC curve should cut the MR curve from below at the point of equilibrium.
Or MC should be more than MR after the equilibrium point, with increase in output.

35
 Firm’s Equilibrium point
(Perfect Competition)

Normal Profit: - It is a no profit no loss situation, it is achieved when P = AC. It is the minimum
return that a producer expects from his capital invested in the business.
Break-even Point: - It occurs when AR = AC or (TR = TC). At this point, firm is earning zero
economic profit or normal profit. OR we can say it is just covering all its costs.
Shut-down Point: - It occurs when a firm is covering its variable costs only, here, the firm is
incurring loss of fixed cost. (TR < TVC OR AR < AVC)

36
 Chapter 10 – The Theory of the Firm under Perfect Competition

Market is a mechanism or arrangement through which the buyers and sellers of a commodity or
service come into contact with one another and complete the act of sale and purchase of the
commodity or service on mutually agreed prices.

Market- Structure

Imperfect Competition Perfect Competiton

Monopolistic
Monopoly Oiligopoly
Competition

Perfect competition is a market structure where there are large number of buyers and sellers
selling identical products at uniform price with free entry and exit of firms and absence of govt.
control. Under perfect competition, price remains constant therefore, average, and marginal
revenue curves coincide each other i.e., they become equal and parallel to x-axis.

In this, price is determined by the industry based on market forces of demand and supply. No
individual firm can influence the price of the product. A firm can take the decision regarding the
output only. So, industry is price maker and firm are price taker.
Important features of perfect competition:
• Very large no. of buyers and sellers
• Homogeneous product
• Free entry and exit of firms in the market
• Perfect knowledge
• Perfect Mobility
• Perfectly elastic demand curve
• No transportation cost

37
Price Line The price line is the line which represents the graphical relationship between price
and output. The demand curve and the price line are equal in a perfectly competitive market.
Graphical representation of the price line is as below:

The line indicates that a firm can sell its goods and services at the existing price. The shape of
the price line in a perfectly competitive market is horizontal.
Revenue: It refers to the money receipts of a firm from the sale of its output. Total Revenue
(TR) is the total of revenue derived from the sale of all units of commodity.
Average Revenue: It is the revenue per unit output sold.
AR = TR/Q
TR = P × Q
where P is Price whereas Q is Output, AR is Average revenue.
Marginal revenue is the revenue which is generated by selling an additional unit of a
commodity. It is the change in total revenue when an additional unit of a commodity is sold in
the market.
The relationship between market price and marginal revenue can be explained by using the
following equations:

TR = Total revenue
MR = Marginal revenue Q = Quantity

The above equation indicates that the price is equal to marginal revenue in a perfectly
competitive market. Graphical representation of the relationship between marginal revenue and
price:

38
The diagram shows that the price, marginal revenue, average revenue, and demand curve are
the same in a perfectly competitive market.

Profit is the difference between revenue and cost. It is determined as:

Profit = Revenue – Cost

Profit maximization in a competitive market –

If a profit-maximizing firm produces positive output in a competitive market, then the following
conditions must hold:
• At the quantity level, marginal revenue should be equal to marginal cost. If the marginal
revenue is less than the marginal cost, then a firm would not produce more quantity in a
perfectly competitive market.
• There should be an increase in the marginal cost according to an increase in the quantity
produced.
• Price should not be less than the average variable cost. It should be equal or greater than
that of the price in short run.
• Price should not be less than the long-run average cost. The price should be equal or more
than the long-run average cost.

Supply: Refers to the amount of the commodity that a firm or seller is willing to sell at different
prices during a given period.

Supply Schedule: Tabular statements of relationship between price and supply of commodity is
called supply schedule.

Supply Curve: Graphical presentation of relationship between price and supply of commodity
is called supply curve.

Market Supply Curve: The market supply curve for a commodity shows relationship between the price of
a given commodity and quantity sellers are inclined to sell.

39
 Determinant of Supply Curve

I. Technological Process
II. Input Price
III. Unit tax

Elasticity of Supply: It is defined as a measure in the degree of responsiveness of quantity supplied to

changes in commodity’s own prices.

Measurement of Elasticity of Supply:

Percentage Method:
E = % change in quantity supplied / % change in price = DQ/ DP = P/Q
where P is the actual price, DP is change in price, DQ is change in quantity and Q is the actual quantity

Two extreme cases of Elasticity of Supply:

i. Perfect Elastic supply (es = ¥)

ii. Perfect inelastic supply (es = 0)

Equilibrium Price: The price at which the quantity demanded and supplied are equal isknown as
equilibrium price.

Equilibrium quantity: The quantity demanded and supplied at an equilibrium price is knownas
equilibrium quantity.

Market equilibrium is a state in which market demand is equal to market supply. There is no
excess demand and excess supply in the market.

40
Application of Demand of Supply:

a. Maximum Price Ceiling: It means the maximum price the sellers are allowed to charge less
than equilibrium market price. Government imposes such a ceiling when it finds that the demand
for necessary goods exceeds its supply. That is, when consumers are facing shortages and
equilibrium price is too high. Government does it in the interest of consumers. Excess demand
may be fulfilled by: (a) Rationing (b) Dual marketing

b. Minimum Price Ceiling: It means that producer is not allowed to sell, the goods below the
price fixed by Government, When government finds that equilibrium price is too low for the
produce, then Govt. fixes a price ceiling higher than equilibrium price to prevent the possible loss
to the producers. The price is also called floor price or minimum support price. Generally,
government buys the excess supply at this price.

SUpply Curve of the firm in short run-

The upward sloping part of the short-run marginal cost curve is considered the supply curve of a
firm in the short run. The supply curve of a firm in the short run is comparatively less elastic as it
cannot be changed according to changes in the demand for goods and services. The supply curve
is also regarded as the addition of the upward sloping portion of short-run marginal cost.

41
Graphical representation indicating the supply curve in the short run:

The diagram indicates the upward sloping part of the marginal cost curve which is considered the
short run supply curve of a firm in the short run.
Supply curve of the firm in long run:
In the long run, supply of goods and services can be changed according to the changes in the
demand. So, the shape of the supply curve in the long run is elastic as indicated in the diagram.

The supply curve is upward sloping with an addition of the rising long-run marginal cost curves.

42
 Chapter 11 – Non-Competitive Markets

Market is a mechanism or arrangement through which the buyers and sellers of a commodity or
service come into contact with one another and complete the act of sale and purchase of the
commodity or service on mutually agreed prices.
Perfect competition is a market structure where there are large number of buyers and sellers
selling identical products at uniform price with free entry and exit of firms and absence of govt.
control.
Under perfect competition price remains constant therefore, average, and marginal
revenue curves coincide each other i.e., they become equal and parallel to x-axis.

Under perfect competition price is determined by the industry based on market forces of
demand and supply. No individual firm can influence the price of the product. A firm can take
the decision regarding the output only. So, industry is price maker and firm are price taker.

MONOPOLY MARKET
Monopoly is that type of market where there is a single seller and large number of buyers. There
is absence of close substitutes to the products.
Features of Monopoly market: -
• Single seller and large number of buyers.
• Restrictions on the entry of new firms.
• Absence of close substitutes.
• Full control over price
• Price discrimination.
• Price maker
• Downward sloping less elastic demand curve.

AR or MR Curve in Monopoly market:

AR (Demand) Curve slopes downward from left to right and less elastic than that of
monopolistic competition. It means that to increase demand, he must reduce the price. Given the
demand for his product, the monopolist can increase his sales with lower price, the marginal
revenue also falls but the rate of fall in marginal revenue is greater than that in average revenue.

43
A monopolist either decides price or output. He cannot decide both at a time.

MONOPOLISTIC COMPETITION
It is that type of market in which there are large number of buyers and sellers. The Sellers sell
differentiated product but not identical. The products are close substitutes of each other.

Features of Monopolistic Competition: -

• Large no. of buyers and sellers
• Product Differentiation on basis of color, taste, packing, trademark, and size.
• Selling Cost on advertisement and sales promotion.
• Free entry or exit of firms.
• Lack of perfect knowledge.
• Partial control over price.
• Imperfect mobility: Factors of production and products are not perfectly mobile.
• Elastic and downward sloping demand curve.

OLIGOPOLY
Oligopoly is the form of market in which there are few sellers or few large firms, intensely
competing against one another and recognizing interdependence in their decision-making.

44
Features of Oligopoly:
• Few Sellers
• All the firms produce homogeneous or differentiated product.
• Under oligopoly demand curve cannot be determined. It has a kinked demand curve.
• All the firms are interdependent in respect of price determination.
• Price rigidity.

Price Maker: - In economics, a price maker is a monopolistic company that can dictate the
prices of its goods because there are no substitutes for it. In trading, a price maker is a
stockholder who controls a large number of shares and can affect the stock's price.

Shape of Demand Curve under Different Market Structures: -

Monopoly is that market category in which there is only a single seller and therefore there is
no difference between a firm and an industry. The firm is itself an industry and therefore the
demand curve of the individual firm as well as the industry demand curve will be the same.
Moreover, as there are no close substitutes under monopoly the demand curve is relatively
steeper showing relatively inelastic demand under monopoly.

45
Under Monopolistic Competition there is competition among a group of monopolists
producing differentiated product. The product of each firm is slightly different from that of other.
There are also substitutes and therefore the demand curve of each firm’s product is downward
sloping and is relatively elastic in nature. In monopolistic competition there are many sellers
with differentiated product and hence industry demand curve hardly has any meaning.

In case of Oligopoly market there are few sellers producing either differentiated or
homogenous products. The demand for a firm’s product is influenced by the actions of its rivals.
The demand curve of a firm under oligopoly has a kink.

46
PART B

47
 Union Budget 2022-23
The Budget goals for FY2022-23 aim to further India's aspirations in Amrit Kaal, as it moves towards its
100th-year post-independence.

• Focus on growth and all-inclusive welfare

• Promoting technology-enabled development, energy transition, and climate action
• Virtuous cycle starting from private investment, crowded in by public capital investment

The Union Budget for FY 2022-23 this year aims to strengthen the infrastructure with its focus on four
priorities:

• PM GatiShakti
• Inclusive Development
• Productivity Enhancement & Investment, Sunrise opportunities, Energy Transition, and Climate
Action
• Financing of investments

Macro Fiscal

• Real and nominal GDP growth rates are estimated at 8-8.5% (Economic Survey) and 11.1% (Union
Budget 2022) respectively for FY23.
• Total expenditure growth is estimated at 7.4% in FY22 and 4.6% in FY23.
• As a proportion of GDP, center’s capital expenditure is budgeted at 2.9% of GDP in FY23, the
highest since at least FY09.
• Effective capex of the Central Government is estimated at INR10.68 lakh crore in FY23, which will
be about 4.1% of GDP. INR 1 lakh crore allocated to States for capex in FY23 as 50-year interest-
free loans, over and above normal borrowings allowed to States. Revenue expenditure growth is
estimated to be low at 2.7% in FY22 and is budgeted to fall to 0.9% in FY23.
• Growth in Center’s gross tax revenues is estimated at 24.1% in FY22, slowing to 9.6% in FY23.
Accordingly, tax revenue buoyancy is estimated at 1.4 in FY22 and 0.9 in FY23.
• The quality of fiscal deficit, as indicated by the ratio of revenue deficit to fiscal deficit, shows an
improvement in FY23. This ratio stands at 59.6%, the lowest since FY17

Sector Highlights

Agriculture

• The “PM GatiShakti” is designed to support farmers with better connectivity to marketplaces.
• INR2.37 lakh crore direct payment of MSP value to the farmers, thereby increasing the disposable
income in the hands of farmers.
• Ken-Betwa Link Project to be implemented for providing irrigation benefits and increased drinking
water supply.
• Financial inclusion of farmers and senior citizens is proposed through linkage of bank accounts and
post office accounts vide the Anytime –Anywhere Post Office Savings scheme.
• Allocation of funds of INR45,000 crores for promotion of scientific organic farming in north-eastern
states.
48
• Use of ‘Kisan Drones’ to be promoted for crop assessment, digitization of land records, spraying of
insecticides, and nutrients.
• Support to be provided for post-harvest value addition, enhancing domestic consumption, and for
branding millet products.
• To create a level playing field for organized farming, Alternate Minimum Tax for co-operative
societies is now reduced from 18.5% to 15%, and surcharge on co-operative societies is now
reduced from 12% to 7% where the income exceeds INR1 crores and is up to INR10 crores.
• Basic Customs Duty (‘BCD’) exemption for specific agricultural implements and parts used for
their manufacture that include paddy transplanter, sugarcane harvester, cotton picker etc., to be
withdrawn effective 1st April 2023 which will support domestic manufacturers under the ‘Make in
India’ initiative.

49
Infrastructure

• The PM's infrastructure-focused GatiShakti framework augurs well for the auto industry in the long
run.
• The expansion of the national highway network by 25,000 km in 2022-23 will have a positive
multiplier impact on the automotive industry.
• Focus on green energy and clean transportation options. In consideration of urban area restrictions,
the Battery Swapping Policy and interoperability standards will be announced.
• Increased emphasis on the EV ecosystem and encouragement for private actors to build business
models for battery or energy as a 'service'.
• Concessional tax rate of 15%1 to new manufacturing companies which were to commence
operations by 31 March 2023 have one additional year till 31 March 2024 to commence operations.
• This will encourage new investments in the auto sector, including commitments under Auto PLI
Scheme.

BFSI

• The Reserve Bank of India to issue ‘digital rupee’ backed by blockchain.

• Surety bonds to act as a substitute for bank guarantee in government procurement. IRDAI has given
a framework for the issue of surety bonds by insurance companies.
• 1.5 lakhs post offices to connect with core banking system enabling financial inclusion.
• Scheduled commercial banks to set up 75 digital banking units in 75 districts.
• For timely settlement of disputes under international jurisprudence, International Arbitration Centre
to be set-up in GIFT city.
• A flat rate of 30% will be applicable on gains from digital assets, along with 1% TDS on the transfer
of such assets. No setoff will be allowed in case of losses. Also, gifts in virtual assets will be taxed
at the recipient’s end.
• Divestment targets for FY23 has been reduced to Rs. 65,000 cr from Rs. 1.75 lakh cr last year
• Conversion of interest liability payable to financial institutions/non-banking financial
company/scheduled bank into debentures shall also not be regarded as discharge of liability and
accordingly, will not be allowed as deductible expenditure.
• Provisions in relating to bonus stripping and divided stripping shall now apply to units of business
trusts such as Infrastructure, Investment Trust (InvIT), Real Estate Investment Trust (REIT), and
Alternate Investment Fund (AIF).

Defence

• Increase in budget allocation for capital outlay in 2022-23 (BE) by 12.82% over 2021 -22 (Budget
Estimates).
• 68% of capital procurement defence budget earmarked for domestic industry in 2022-23, up from
58% in 2021-22. The same is in line with Government’s commitment to reduce defence imports
and promoting ‘self-reliant India’.
• Defence Research & Development (R&D) to be opened up for industry, Start-ups and academia
with an allocation of 25% of total Defence R&D budget.

50
 • Private industry including start-ups encouraged to take up design and development of military
platforms and equipment in collaboration with DRDO and other organizations through the SPV
model.

Healthcare

• Universal healthcare facilitated by digitization continue to be on agenda for the government.

• National Tele-Mental Health Program introduced –better access to quality mental health counselling
and care services.
• Tax exemption for the amount received towards medical treatment expenses for COVID-19 in the
hands of the recipient - 100% for reimbursement of treatment expenses: self-and/or family members,
100% in case of death when received from employer or any other person provided the amount is
received within 12 months of the death, Up to 10lakhs in case of death when amount received from
other than employer.
• Health cess on import of surgical needles for manufacture of surgical sutures reduced from 5% to
NIL.

Telecom, IT, MSME

• A new section introduced to tax “virtual digital assets” (VDA) effective 1 April 2023.
(VDA to mean any information or code or number or token (not being Indian currency or any
foreign currency), generated through cryptographic means and includes non-fungible token or
tokens (NFTs) of similar nature.)
• Any income from transfer of VDA will now be taxable @ 30%.
• No deduction of expenses or allowance of set-off of any loss to be allowed other than cost of
acquisition. No set off of losses or carry forward of losses will be allowed on transfer of VDA. Gift
of VDA will be taxable in the hands of the recipient.
• Introduction of Central Bank Digital Currency (CBDC) to boost digital economy.
• Startups to facilitate 'drone shakti' for promotion of drone usage.
• Financing of agricultural and rural start-up through NABARD.
• Surcharge on long-term capital gains on transfer of capital asset (including unlisted equity shares) to
be capped at 15% (vis-à-vis erstwhile highest surcharge rate of 37%).
• Multiple digital banking units to be set up to further promote digital banking, digital payments and
fintech innovations.
• Scheme for design-led manufacturing to be launched as part of Production Linked Incentive Scheme
to build a strong ecosystem for 5G mobile services.
• Affordable broadband and mobile services proliferation to be facilitated in rural and remote areas.
• Optical fiber network expected to be laid in every village by 2025.

REFERENCES:

• https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf

• https://www.pwc.in/assets/pdfs/budget/2022/powering-sustained-growth.pdf

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 All you need to know about CBDC

What Is a Central Bank Digital Currency (CBDC)?

Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank. They
are pegged to the value of that country's fiat currency.
Fiat money is a government-issued currency that is not backed by a physical commodity like gold or silver.
It is considered a form of legal tender that can be used to exchange goods and services. Traditionally, fiat
money came in the form of banknotes and coins, but technology has allowed governments and financial
institutions to supplement physical fiat money with a credit-based model in which balances and transactions
are recorded digitally. That’s how you are able to pay via google pay or Paytm etc in the canteen.
The introduction and evolution of cryptocurrency and blockchain technology have created further interest in
cashless societies and digital currencies. Thus, governments and central banks worldwide are exploring the
possibility of using government-backed digital currencies. But you may ask if we already have cashless
options like google pay, Paytm, etc, what is the need for this now?
The need
Right now if you have to transfer money over UPI, you need to make a request and forward it to your bank.
The bank then decides to deduct the balance and transfer it to the beneficiary account. And while this is an
oversimplified account of the settlement and the clearing process that underlines our payment infrastructure,
it still does a good job of explaining the role banks play in facilitating payments. They are very important to
our cause.
But with digital currencies, you don’t need banks at all. In fact, you could simply transfer money to another
account without using an intermediary whatsoever. “Imagine a UPI system where CBDC (Central Bank
Digital Currency) is transacted instead of bank balances as if cash is handed over — the need for interbank
settlement disappears”
Think about that for a moment — Programmable Money. If you’re thinking of extending cash to farmers so
they could buy fertilizers with it, then you could technically program it in a way such that it could only be
used to buy fertilizers. If you further want to measure the efficacy of the program, you could track this
money and see where people are spending it. It’s not like money on your e-wallet at all. This is an entirely
different beast altogether.
The main goal of CBDCs is to provide businesses and consumers with privacy, transferability, convenience,
accessibility, and financial security. CBDCs could also decrease the maintenance a complex financial
system requires, reduce cross-border transaction costs, and provide those who currently use alternative
money transfer methods with lower-cost options. A CBDC also provides a country's central bank with the
means to implement monetary policies to provide stability, control growth, and influence inflation. Central
bank digital currencies would also reduce the risks of using digital currencies in their current form.
Cryptocurrencies are highly volatile, with their value constantly fluctuating. This volatility could cause
severe financial stress in many households and affect the overall stability of an economy. CBDCs, backed
by a government and controlled by a central bank, would provide households, consumers, and businesses
with a stable means of exchanging digital currency.

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Issues Addressed By CBDCs
• Free from credit and liquidity risk
• Cross-border payment improvements
• Supports the international role of the dollar
• Financial inclusion
• Expands access to the general public

Countries moving towards CBDC

Many central banks have pilot programs and research projects intending to determine the viability and
usability of a CBDC in their economy. As of March 2022, nine countries and territories launched CBDCs.

• The Bahamas
• Antigua and Barbuda
• St. Kitts and Nevis
• Monserrat
• Dominica
• Saint Lucia
• St. Vincent and the Grenadines
• Grenada
• Nigeria

There are 80 other countries with CBDC initiatives and projects underway. Here are a few:

• In February 2022, India's central bank announced that it would introduce a digital rupee by the end
of 2023.8
• Jamaica minted its first batch of CBDC in August 2021. The Bank of Jamaica is expected to launch
its CBDC in 2022.9
• The United States is investigating CBDCs to improve the domestic payments system, increase
efficiency, and reduce costs.11 And in March 2022, President Biden directed federal agencies to
evaluate the infrastructure that would be needed to issue a U.S. CBDC.12
• The Bank of England (BoE) is still investigating integrating CBDC into its financial system.13
• The Bank of Canada (BOC) continues to research implementing CDBC

Why are central bankers aggressively working on the feasibility and development of CBDCs?
The answer is twofold. Firstly, CBDC is the central bank’s Armor against the increased public interest in
independent digital currencies aka cryptocurrencies. Cryptocurrencies allow consumers to undertake
anonymous transactions which are outside the ambit of the formal financial system. The anonymity of
transactions can be misused by maleficent entities threatening the safety and security of investors and
economies.

Further, cryptocurrencies are volatile as they are not backed by assets or commodities. Increased interest in
cryptocurrencies will result in the creation of risky and unregulated alternate financial systems. Government
views CBDCs as a viable solution to address the increased demand for digital currencies while safeguarding
consumers against the risks of cryptocurrencies. Secondly, CBDCs offer opportunities to central banks to
further modernize and strengthen the financial system.

53
It fosters the development of a cashless society. It also enables governments to directly tap the financially
excluded market segment who have access to mobile phones. Further, CBDC will allow central banks to
better regulate the financial system. For instance, the central bank can change the supply of CBDC and
directly transmit the effect to households, without any banking intermediation.

Risks associated with CBDC

As the saying goes, there are no free lunches. CBDC also has a few associated challenges/risks. Successful
adoption and usage of digital currencies would involve significant technological overhauling of financial
systems globally and there are bound to be teething pains. CBDCs are susceptible to hacking as they would
be circulated via a central server. Countries with low financial literacy may have frauds pertaining to
CBDC. CBDC also impinges on the privacy of users as it can be used by the government to understand
consumers’ spending behavior and take actions accordingly.

Conclusion
For an economy to depend on a virtual currency, it would require deeper penetration of high-speed Internet
and telecommunication services.

Looking at the brighter side, unlike physical cash, a digital currency will be much easier and cheaper to
track and eventually lead to an efficient, regulated, and legal tender-based payment system. It shall ensure
that the transactional currency of a country remains consistent, and outliers can be identified.
An easier way to track such a currency will also assist in tracking unaccounted money in the economy, thus
potentially leading to the inclusion of more people into the taxation system. A modern digital payment
system will also help settle interbank gross settlements in near real-time, saving consumers the hassles of
later dates, according to the Bank for International Statements.

The power lies in the implementation!

References :

o https://economictimes.indiatimes.com/markets/cryptocurrency/will-cbdc-be-a-
gamechanger/articleshow/86907351.cms?from=mdr

o https://timesofindia.indiatimes.com/readersblog/vista/central-bank-digital-currency-the-future-of-
money-42849/

o https://finshots.in/archive/is-india-getting-its-own-digital-currency/
o https://finshots.in/archive/what-is-chinas-digital-yuan/

o https://www.outlookindia.com/business/digital-rupee-the-cbdc-frontier-for-payment-systems-news-
185576

o https://www.forbes.com/sites/frankvangansbeke/2021/06/27/why-central-bank-digital-currencies-cbdc-
now-and-what-could-they-mean-for-climate-change-12/?sh=d3ad75224a86

o https://www.pwc.in/industries/financial-services/fintech/dp/central-bank-digital-currency-in-the-indian-
context.html

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 Russia-Ukraine War

The biggest news of the year has been the Russia-Ukraine war, and the ripple effect has been felt globally.
Before we analyze the economic impact, let’s look at the recent history of the relationship between these
two countries.

Source: https://www.nytimes.com/2022/03/26/world/europe/ukraine-russia-tensions-timeline.html

Sanctions on Russia
The West from the beginning has warned Russia about the ‘consequences’ of attacking Ukraine. Both the
EU and the US unequivocally condemned the actions of Russia and imposed financial sanctions on Russia
to choke them financially.

Here are some of the sanctions already in place:

• Russia’s central bank assets have been frozen to stop it from using its $630bn of foreign currency
reserves which have led to the rouble falling 22% in value. This in turn has led to increasing in the
prices of goods leading to a 14% rise in Russia’s inflation rate
• The US has barred Russia from making debt payments using the $600mn it holds in US banks. This
essentially means it becomes doubly hard for Russia to pay its international loans
• Since major Russian banks have been removed from the international financial messaging system
SWIFT, Russia is facing delays in energy export payments
• The UK has blocked key Russian banks from the UK financial system, frozen all Russian banks'
assets, prohibited Russian enterprises from borrowing money, and imposed limits on the amount of
money Russians can deposit in UK banks
• The US has announced a ban on all Russian oil and gas imports and the UK will phase out all
Russian oil imports by 2022. Germany on the other hand has frozen plans for the opening of the
Nord Stream 2 pipeline from Russia. Moreover, the EU has said that it will halt Russian coal
imports by this August
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 • The US, UK, EU, and other countries have together already banned more than 1000 Russian
individuals and businesses including wealthy business leaders, oligarchs, Russian government
officials, etc.
• Additionally, Russia has been blocked from accessing high-tech products like computers, computer
chips, etc. from other countries

Major brands like McDonald’s, Netflix, Starbucks, Coca-Cola, etc. have either suspended trading or
withdrawn altogether from Russia. Nestle has stopped selling some of its product lines except the staples in
response to the aggression of Russia. The UK has imposed a 35% tax on some imports from Russia.

Russia’s Response:
• More than 200 products, including telecommunications, medical, automobile, agricultural, electrical
equipment, and lumber, have been prohibited by Russia until the end of 2022
• Russia has blocked interest payments to foreign investors who hold government bonds and has
banned Russian shareholders from paying overseas shareholders
• Foreign investors who hold bonds and stocks in Russian companies have also been banned from
selling their securities
• Russia increased its key interest rate to 20%

The set of sanctions imposed on Russia differs vividly from the actions taken earlier majorly due to the
proactiveness and speed at which they have come to effect. Moreover, imposed restrictions focused on the
Russian central bank, different business sectors, people, and the government agencies have been
equivocally supported and deployed with urgency. Even different companies pulling out of Russia and self-
sanctioning themselves purport a decisive stand against Russia.

https://www.youtube.com/watch?v=LbPWyxj8VY4
https://www.youtube.com/watch?v=VVGQhFQrtpo

Global Impact of the ongoing war

Prior to the conflict, the global recovery from the pandemic was expected to continue in 2022 and 2023,
helped by continued progress with global vaccination efforts, supportive macroeconomic policies in the
major economies, and favourable financial conditions. Here are the OECD projections for 2021 OECD
Economic Outlook Projections

However, the ongoing war comes as a major setback to the global economy in a multilateral way. Three
primary channels will carry the effects. First, increased costs for commodities such as food and energy
would drive inflation higher, diminishing the value of incomes and putting downward pressure on demand.
Second, adjacent economies will face disruptions in commerce, supply chains, and remittances, as well as
an unprecedented increase in refugee movements. Finally, lower company confidence and increased
investor uncertainty will put downward pressure on asset values, tightening financial conditions and
perhaps causing capital outflows from emerging markets.

Russia and Ukraine are major commodities producers, and disruptions have caused global prices to soar,
especially for oil and natural gas. Food costs have jumped, with wheat, for which Ukraine and Russia make
up 30 percent of global exports, reaching a record. Oil-importing economies, like India, will suffer larger
fiscal and trade deficits, as well as increased inflation pressure, however, some exporters, such as those in
the Middle East and Africa, may gain from higher prices.
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 • Rising Oil and Gas Prices
Energy costs have been rising before Russia's invasion of Ukraine due to several factors including the
COVID pandemic, restricted energy sources, and mounting tensions between Russia and Ukraine. Before
the invasion, oil prices were constant in the US$80 to US$95 range and post-invasion the oil prices
surpassed $110 per barrel. Russia being the second-largest oil producer will face difficulties in supplying
the oil to different countries as the sanctions mount which will have a direct impact on its economy owing
to its heavy dependence on oil-based incomes. The Russian invasion of Ukraine has caused energy supply
shocks and a persistent spike in energy prices due to Russia's high proportion of oil exports. Fears of a
worldwide energy supply interruption have caused gas prices to rise for domestic consumption. Energy is
the main spillover channel for Europe as Russia is a critical source of natural gas imports. Wider supply-
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chain disruptions may also be consequential. These effects will fuel inflation and slow the recovery from
the pandemic. Although the US can release its energy reserves to solve global energy shortages, it will take
a long time to meet expanding energy demand due to ongoing energy trade negotiations as global energy
prices rise.

• Decline in economic output and growth

Higher oil prices will have a direct impact on the economic growth of the countries, especially oil import-
dependent economies like India. This is because firms will have to spend more money to import raw
materials to produce goods and services which means higher input and output prices, and individuals may
be unable to afford high-priced goods and services. In effect this will lead to fewer consumer purchases and
a reduction in the supply of goods and services, resulting in a fall in economic output. Consumption
expenditure will also be affected as households will spend more on oil and gas for cooking in their homes.
This will lead to a fall in household disposable income after tax, thereby dampening consumer spending.
This will affect the consumption expenditure component of GDP.

The impact of a 10% rise in oil prices and a 50% rise in gas prices on selected European countries
(percentage points change in GDP growth)

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 • Global Supply Chain Disruption

Military actions during Russia's invasion of Ukraine will disrupt global supply chains, affecting operations
in numerous sectors. The restriction on Russian exports and Russia's retaliatory prohibition on international
imports, as well as Russia's refusal to allow foreign goods to transit through its waterways and airspace
during the conflict, have the potential to disrupt the global supply chain. It has the potential to create
scarcity and inflate the cost of imported items. Companies have predicted that the disruption created by
cross-border blockades and trade bans will result in resource hoarding, resulting in high prices. Moreover,
commercial flight limitations near the Ukraine-Russian border, as well as intensified security checks at
refugee camps in neighbouring countries, will affect freight flow and border operations, since cross-border
goods supplies may be suspended or delayed. This will exacerbate the global supply chain disruption and
drive up import costs.

• Other Economic Impacts

§ Effect on the global banking system with large operations in Russia like Austria’s Raiffeisen bank,
Italy’s Unicredit and France’s Société Générale, etc.
§ Global Stock market volatility
§ Increased cost of living in different countries, especially the ones dependent on oil imports

Impact on major commodities

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 Food staple prices on the rise

https://www.oecd-ilibrary.org/sites/4181d61b-en/index.html?itemId=/content/publication/4181d61b-
en#chapter-d1e21
https://voxeu.org/article/economic-consequences-war-ukraine-igm-forum-survey
https://blogs.imf.org/2022/03/15/how-war-in-ukraine-is-reverberating-across-worlds-regions/#
https://www.thehindu.com/news/international/explained-the-effects-of-the-russia-ukraine-conflict-on-the-
global-economy/article65312083.ece
https://economictimes.indiatimes.com/news/international/business/how-russias-war-in-ukraine-rocked-the-
global-economy/articleshow/90388762.cms
https://www.businesstoday.in/magazine/current/story/the-economic-impact-of-the-russia-ukraine-conflict-
324788-2022-03-04
https://assets.kpmg/content/dam/kpmg/xx/pdf/2022/03/russia-ukraine-conflict-yael-selfin-piece.pdf

Impact on the Indian Economy

• India imports more than 80% of its oil requirements which means due to the higher oil prices in the
global market it will have higher import bills. This will impact the current account deficit and
reserves in the short term
• Oil and gas prices, amongst other commodity prices, have escalated very quickly. They are expected
to remain high as long as the uncertainties persist and it will have a direct impact on the inflation
rate
• Continuous foreign fund outflows, and heavy selling in domestic equities could weigh on the equity
markets and India’s market valuations. Extreme volatility in commodity, equity, and debt markets
can erase the wealth of investors and possibly postpone major IPOs
• Financial conditions of companies with significant exposure to Russia and Europe could come under
stress– auto, oil, and gas, oilseeds, electrical and electronic equipment, fertiliser, pharmaceutical,
tea, etc., will have a short-term impact on their finances as trade gets hampered

60
 • India relies on Russia for food, edible oil (sunflower oil), and fertiliser imports. In 2020-21, Russia
and Ukraine would account for 80% of India's total sunflower oil imports. The supply chain will
most likely be disrupted if Ukraine suspends operations at its ports.
• Fuels, mineral oils, pearls, valuable or semi-precious stones, nuclear reactors, boilers, machinery,
mechanical appliances, and electrical machinery and equipment are all dependent on Russia. India
imports largely agricultural, metallurgical, plastics, and polymers from Ukraine.
• India's tea exports to Russia and Ukraine are significant, with total shipments to these countries
being 30.89 million kg and 1.6 million kg, respectively, from January to November 2021. The
current tensions are expected to have an influence on India's tea exports, resulting in an oversupply
scenario in the domestic market and a price drop.

https://www2.deloitte.com/in/en/pages/about-deloitte/articles/russia-ukraine-crisis-impact.html

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 Oil – Price Drivers and Inflation

Introduction
The spot price of a barrel (159 liters) of benchmark crude oil—a reference price for buyers and sellers of
crude oil—is referred to as the price of oil. Global supply and demand determine crude oil prices. One of
the most important elements influencing petroleum product—and thus crude oil—demand is economic
growth. Energy demand rises as economies grow, particularly for transporting commodities and materials
from producers to consumers. The transportation sector around the world is nearly entirely reliant on
petroleum products like gasoline and diesel fuel. For heating, cooking, and electricity generation, many
countries rely heavily on petroleum fuels. Crude oil and other hydrocarbon liquids are used to make
petroleum products, which account for about a third of total global energy use.

Source: https://worldpopulationreview.com/country-rankings/oil-consumption-by-country

The top 10 oil consumers account for over 60% of global oil consumption, with the rest of the world
accounting for roughly 40% of global oil consumption. The United States is both the world's top producer
and user of oil, mining around 11.5 million barrels per day—more than the entire European Union (9.8
million). This accounts for about 15-20% of total global oil use. China consumes 14.2 million barrels of oil
per day, followed by India, which consumes roughly 4.7 million barrels per day. Over a third of the world's
total oil consumption is consumed by the United States, China, and India combined. These three countries
have the world's three most populous populations.

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As of 2020, the world's proven oil reserves are predicted to be 1.73 trillion barrels. The world consumes
more than 88 million barrels of oil every day, according to estimates. The world's proven reserves are
around 46.6 times annual consumption levels, implying that at present consumption levels, the Earth has
nearly 53 years of oil left.

About OPEC
The Organization of Petroleum Exporting Countries (OPEC) is a 13-country international group that
produces petroleum. OPEC countries, which have their headquarters in Vienna, produce almost two-fifths
of the world's crude oil. They possess more than 80% of the world’s total crude oil reserves. In 2020, they
produced about 37% of the world’s crude oil. OPEC aims to manage oil production by setting crude oil
production targets, or quotas, for its member countries. Because production decisions are ultimately in the
hands of individual members, OPEC member compliance with quotas is mixed.

https://www.indiatimes.com/explainers/news/crude-oil-prices-opec-551332.html

How is Crude Oil Priced?

Crude oil prices measure the spot price of various barrels of oil, the most common of which are West Texas
Intermediate, Brent Blend, or the Dubai Mercantile Exchange. The basket price of the Organization of
Petroleum Exporting Countries (OPEC) and the futures price of the New York Mercantile Exchange are
also sometimes quoted.

• West Texas Intermediate: Benchmark crude oil in the Americas; Lightweight and low sulfur content
make it excellent for making Gasoline
• Brent Blend: Refined in Northwest Europe; Primary benchmark for crude oils in Europe and Africa
• Dubai/Oman: Prices for oil produced in the Middle East are benchmarked to the Oman Crude Oil
Futures Contract listed on the Dubai Mercantile Exchange (DME). Most of the oil listed on the
DME is exported throughout Asia.

Further Information:

• WTI sells at close to a $3.00–$4.00 per barrel discount to Brent. The difference is the increased
supply of WTI from U.S. shale oil producers
• Oil prices are volatile due to commodities traders. They trade oil futures contracts at an auction
much like the options market. That mentality can make them bid prices up during a shortage and bid
them down during a surplus
• The OPEC basket price is an average of oil prices from Algeria, Angola, Congo, Equatorial Guinea,
Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, Ecuador, Qatar,
and Venezuela. The price of this basket is used by OPEC to keep track of global oil market
conditions

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It is not always Supply and Demand!

Well, common sense dictates that as the supply increases for oil, the prices should fall, and similarly as
demand increases the prices should go up. However, the oil prices are very much decided by market
sentiment and that is where the economics do not add up. The mere belief that oil’s demand will decrease at
some point in the future can result in a dramatic decrease in prices in the present as oil futures contracts are
sold (possibly sold short as well), and vice-versa, which means that prices can hinge on little more than
market psychology.

Counter-intuitively, there have been times when supply was at a peak, however, the prices did not show any
sign of going down majorly since distribution and refinement haven’t been able to keep up with the supply.
Moreover, a good number of refineries still operate at a lower capacity to meet the potential excess
demands of the future.

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 Crude Oil Prices Trend

Other Key Determinants of Crude Oil Prices:

• Economic Growth is seen as one of the major determinants of Crude Oil prices
• Market Forces – Global Politics, Commodity Price Cycles, etc.
• Technological innovations in crude extraction
• Derivatives and Reports

What happened to Oil Prices recently?

Oil prices soaring in the recent past can be defined majorly because of the two reasons:

• The ever-evolving state of the viral pandemic has played havoc with both supply and demand.
Therefore, energy has been gripped by a violent price swing
• Russia going into an all-out war with Ukraine is another major reason for oil prices going through
the roof as Russia is one of the major energy exporters globally and currently facing multiple
economic sanctions due to its actions in Ukraine. Russia's exports supply 4% to 5% of the world's
energy per year

65
 Crude Oil WTI Futures

https://www.thebalance.com/crude-oil-prices-trends-and-impact-on-the-economy-and-you-3305738
https://www.thebalance.com/us-shale-oil-boom-and-bust-3305553
https://www.investopedia.com/articles/economics/08/determining-oil-prices.asp
https://www.api.org/oil-and-natural-gas/energy-primers/gas-prices-explained
https://www.indiatimes.com/explainers/news/crude-oil-prices-opec-551332.html

Projections as per U.S. Energy Information Administration

• The May Short-Term Energy Outlook (STEO) is subject to heightened levels of uncertainty
resulting from a variety of factors, including Russia’s full-scale invasion of Ukraine
• Major factors driving energy supply uncertainty include how sanctions affect Russia’s oil
production, the production decisions of OPEC+, and the rate at which U.S. oil and natural gas
producers increase drilling
• The Brent crude oil spot price averaged $105 per barrel (b) in April, a $13/b decrease from March.
Sanctions on Russia and other independent corporate actions contributed to falling oil production in
Russia and continue to create significant market uncertainties about the potential for further oil
supply disruptions. These events occurred against a backdrop of low oil inventories and persistent
upward oil price pressures
• EIA expects the average prices to fall to $97/b in 2023, although they accept the volatility in prices
owing to the sanctions imposed on Russia, any potential future sanctions, and independent corporate
actions that affect Russia’s oil production or the sale of Russia’s oil in the global market. Moreover,
the EU’s recent import ban on Russian oil can be detrimental to the crude oil prices as well

https://www.eia.gov/outlooks/STEO/
https://oilprice.com/oil-price-charts/

66
What does this mean for India?
India imports close to 3 million barrels of crude oil every day. An adverse oil price shock tends to mess up
many of India’s macroeconomic variables. Oil prices have risen to uncomfortably high levels since Russia's
invasion of Ukraine. Brent crude has doubled in price in the last year. Oil prices have been quite volatile
even in March.

In India, a key assumption behind the projected GDP growth in the Economic Survey 2021-22 has been that
oil prices would be $70-75/barrel. The high oil prices mean that the impact on growth, inflation, budget
numbers, and the BoP cannot be shrugged aside. Bulk fuel prices have risen significantly, while petrol,
diesel, and LPG costs are all continuously rising. Inflation will be affected directly because of this. The
Wholesale Price Index (WPI) weights 'fuel and power' at 13.20%, whereas the Consumer Price Index
weights 'fuel and light' at 6.8% (CPI).

Cascading effects:

• High energy costs will push up costs at every stage of production. In October 2021, the RBI
estimated that a 10 percent increase in crude oil prices might push up domestic inflation by 30 bps
• Furthermore, the rise in oil prices occurs against a backdrop of already high inflation rates. While
CPI inflation was 6.07 percent in February, WPI inflation was substantially higher at 13.11 percent.
The disparity between CPI and WPI inflation could indicate that CPI inflation will rise in the
coming months
• Due to the inelastic nature of its demand, an increase in crude prices invariably leads to higher
import bills for the country in the short run. This would worsen the current account deficit
• The tumbling rupee is also a condiment of the high fuel prices combined with the outflow of FII
money, repo rate hikes, and ongoing geopolitical disturbances
• If the Indian government chooses to absorb the high costs in the market it will severely hurt the tax
revenues. So far, the government hasn’t shown any signs of trying to absorb the high costs

https://www.moneycontrol.com/news/business/budget-2022-how-the-oil-prices-can-disturb-the-
governments-and-your-sleep-7961371.html

https://www.thehindubusinessline.com/opinion/high-oil-prices-and-their-domino-
effects/article65292779.ece
https://www.godigit.com/fuel/taxes/excise-duty-on-petrol-and-diesel-in-india
https://www.livemint.com/news/india/if-petrol-and-diesel-are-brought-under-gst-they-ll-have-to-be-taxed-
at-more-than-100-11615277275408.html

67
 What led to Sri Lanka’s biggest economic catastrophe?

2019-present in a nutshell
The Sri Lankan economic crisis of 2019–2022, which is now impacting the island nation of Sri Lanka, is
partly attributable to the current government's economic incompetence. It has resulted in historic levels of
inflation, almost depleted foreign exchange reserves, medical supply shortages, and price rises in basic
commodities. Multiple compounding reasons, such as tax cuts, money creation, and a countrywide strategy
to move to organic or biological farming, as well as events such as the Easter bombings of 2019 and the
effect of the COVID-19 pandemic, are alleged to be responsible for the catastrophe.

The real reasons for the crisis

Following independence from the British in 1948, export-oriented products such as tea, coffee, rubber, and
spices dominated Sri Lankan agriculture. The foreign money obtained from exporting these crops
contributed significantly to its GDP. The funds were utilized to import necessary food products. Over time,
the nation started to export clothes and gain foreign currency via tourism and remittances (money sent into
Sri Lanka from abroad, perhaps by family members). Any decrease in exports would be an economic shock,
straining foreign exchange reserves.

As a result, Sri Lanka regularly had balance of payments issues. It received 16 IMF loans beginning in
1965. Each of these loans came with requirements, such as reducing the budget deficit, maintaining a
restrictive monetary policy, cutting government subsidies for food for the people of Sri Lanka, and
depreciating the currency (so exports would become more viable). However, during economic downturns,
effective fiscal policy mandates that governments spend more to stimulate the economy. With IMF
restrictions, this becomes impossible. Despite this, IMF loans continued to flow, and a battered economy
absorbed more and more debt. Sri Lanka received its final IMF loan in 2016. From 2016 to 2019, the nation
got $1.5 billion. The circumstances were familiar, and the economy suffered during this period. Growth,
investments, savings, and revenue all declined, while debt increased.

With two economic shocks in 2019, an already terrible position became much worse. First, in April 2019,
there was a succession of bomb blasts in churches and luxury hotels in Colombo. The explosions resulted in
a significant reduction in tourist arrivals – up to an 80% drop, according to some sources – and depleted
foreign exchange reserves. Second, the new government led by President Gotabaya Rajapaksa lowered
taxes arbitrarily.

Value-added tax rates (akin to goods and services taxes in certain countries) have been reduced from 15%
to 8%. Other indirect taxes were abolished, including the nation-building tax, the pay-as-you-earn tax, and
economic service charges. The corporate tax rate was cut from 28% to 24%. These tax cuts cost the
government around 2% of its GDP in income.

In March 2020, the COVID-19 pandemic struck. During the Covid-19 lockdown, the government identified
5 million families with the "fragile financial status of low-income households" and granted them a Rs 5,000
allowance, however, this only helped briefly. The Rajapaksa government committed another grave error in
April 2021. To avoid the depletion of foreign exchange reserves, all fertilizer imports were banned. Sri
Lanka has been designated as a country with 100 percent organic farming. This policy, which was phased
out in November 2021, resulted in a sharp drop in agricultural production, necessitating increased imports.

68
 However, foreign exchange reserves remained depleted. Tea and rubber productivity fell as a result of the
fertilizer ban, resulting in lower export revenues. Food shortages emerged as a result of decreasing export
earnings. Because there is less food and other items to buy, but no decrease in demand, the prices for these
goods rise.

How crisis disrupted life

The new economic catastrophe, aggravated by the Russia-Ukraine conflict, which has resulted in a sharp
increase in oil prices, delivered another gut punch, creating scenes of despair and panic among common
people. Shortages have reached such heights that exams for millions of students in the country have had to
be postponed owing to a scarcity of paper and ink.
Sri Lanka's fuel stocks are depleting as a result of the Russia-Ukraine war. Authorities have indicated that
nationwide power outages would grow to four per day due to a lack of fuel to power generating stations.
Fuel shortages have resulted in long queues at gas stations, as well as rolling power outages over most of
the nation. A severe diesel shortage has forced the closure of many thermal power plants, resulting in
rolling power outages throughout the country. Fuel prices have also risen frequently, with petrol up 92%
and diesel up 76% since the beginning of the year.

The unexpected spike in commodity prices has driven inflation to new highs. In April, the country's
inflation rate was about 30%, much beyond the central bank's target range of 4-6%.

Meanwhile, the Sri Lankan rupee depreciated by 33% against the US dollar in the year ending April 1, 2022.
Given the swings in cross-currency exchange rates, the Sri Lankan rupee depreciated by 31.6 percent against
the Indian rupee, 31.5 percent against the euro, 31.1 percent against the pound sterling, and 28.7 percent
against the Japanese yen during this period.

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70
2022 Sri Lankan Protests
The 2022 Sri Lankan protests are a series of ongoing protests by various non-partisan protesters, primarily
the public and opposition political parties, against the government of President Gotabaya Rajapaksa, who is
accused of mismanaging the Sri Lankan economy, resulting in an economic crisis with severe inflation,
daily blackouts lasting up to ten hours, a shortage of fuel, and a shortage of many essential items. The
protesters' main demand is that the Rajapaksa family's administration quit immediately, making room for a
whole new set of competent democratic rulers. The majority of protesters were unaffiliated with any
political party, and several were even critical of the current parliamentary opposition. Protesters commonly
chanted slogans like "Go home Gota" and "Go Home Rajapaksas."

Protesters attacked Rajapaksa family members and government officials. In retaliation, the government
adopted authoritarian techniques such as declaring a state of emergency, enforcing curfews, restricting
social media such as Facebook, Twitter, WhatsApp, Instagram, Viber, and YouTube, assaulting protesters
and journalists, and arresting online activists.
These measures increased popular disapproval of the government, and the Sri Lankan diaspora also began
demonstrations against the suppression of basic human rights.

Following weeks of anti-government protests, Mahinda Rajapaksa resigned as Prime Minister in May’22.

References:

https://indianexpress.com/article/explained/sri-lanka-economic-crisis-explained-7849208/
https://edition.cnn.com/2022/04/05/asia/sri-lanka-economic-crisis-explainer-intl-hnk/index.html
https://timesofindia.indiatimes.com/business/international-business/explained-how-sri-lanka-fell-into-its-
worst-economic-crisis-whats-next/articleshow/91495670.cms
https://www.financialexpress.com/economy/sri-lanka-economic-crisis-why-is-the-island-nation-in-deep-
waters-explained/2520495/

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 Global Supply Chain Disruption: Challenges, Impact and Way
Ahead
When countries closed their doors and demand ceased due to the pandemic, the retail apocalypse began to
take root. Companies began to build in lag, however, after demand began to recover, and we witnessed
panic purchasing for certain items, we faced a supply crunch and surplus demand. These led to a surge in
prices for various commodities and raw materials. Even now, labor shortages, shipping delays, and a lack of
crucial components are still plaguing supply chains that were affected during the global health crisis.

The global supply chain is so intricately connected in a web that when it faces a small glitch, it rapidly
amplifies and halts the flow of many commodities. This effect is called the bullwhip effect.
(If you flip one end of the whip while holding it, it requires a very slight flick of the wrist, but as it travels
through the supply chain, the flick gets increasingly larger). Chip shortage is the perfect instance of the
bullwhip effect. Everything that runs software is powered by microchips, including smartphones, household
devices, and even automobiles. The bottleneck of chips was caused by a delay in manufacturing at the onset
of the pandemic, followed by a surge in demand owing to work and study from home mode. Manufacturers
continue to struggle to meet the demand for computers, mobile phones, tablets, automobiles, and other
technological goods.

Major reasons that disrupted the global supply chain:

1. Impact of the Covid-19 pandemic: Several lockdowns across the world, panic buying, and a sudden
surge in demand
2. Shipping issues: Closing of ports, and shortage of containers
3. Supply bottlenecks: Inadequate raw material
4. Labor supply and energy issues: Lack of workforce and power (Coal) crisis.

Few Facts and figures:

• 94% of Fortune 1000 firms are experiencing supply chain interruptions due to COVID-19
• 75% of organizations have had significant business repercussions
• 55% of businesses expect to reduce their growth forecasts (or have already done so)

What Indian companies are doing:

1. Relying on one main business partner: Many organizations have strong ties with a single significant
supplier, client (or export market), and/or supply chain partner. As we emerge from the COVID-19
pause, many companies see the need to better equip their supply networks by establishing
alternative trade alliances. Auto component companies in India have started processing more parts
within the country,
2. India Inc moves to cut reliance on China for raw materials: Several major corporations have chosen
alternative supplier areas to lessen their reliance on China for raw materials and counteract the effect
of rising commodity and input prices on operating profits. The Tata Group has changed their key
strategy for 2022 to focus on building strong supply networks.
3. Validate Business Continuity Planning: Many BCPs failed during the pandemic due to inadequate
planning. Now, several companies will alter their supply chain strategy and BCPs after learning
from previous mistakes to develop better supply and enhance customer fulfilment. Each alternative
plan will be assessed for cost, customer service, financial effect, and risk. They will also learn new
skills needed to defend themselves in the future.
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 4. Increasing investment on Technology: In 2022, Indian businesses will likely invest more heavily to
improve critical supply chain planning capabilities using advanced digital enablers like cognitive
planning and AI-driven predictive analytics, as well as to improve supply chain security using
advanced track and trace and blockchain technologies.

References:

https://home.kpmg/in/en/home/insights/2021/12/evaluating-post-pandemic-supply-chain-mantra.html

https://economictimes.indiatimes.com/news/economy/foreign-trade/india-inc-rejigs-supply-chain-models-
as-ukraine-invasion-chinese-lockdowns-disrupt-working/articleshow/90901463.cms?from=mdr

https://www.accenture.com/us-en/insights/consulting/coronavirus-supply-chain-
disruption#:~:text=Supply%20chains%20lack%20global%20resilience,represent%20a%20company's%20hi
ghest%20costs.

https://www.ideasforindia.in/topics/trade/global-supply-chain-disruptions-causes-and-the-way-ahead.html

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 Impact of 5G on the economy
As the integration of 5G progresses, industry and governments—as much as consumers—will be chief
drivers of 5G deployments. Use cases will include autonomous vehicles, many drone applications, and
telemedicine. Enabled by low-cost, long-life modules with sensors and connectivity, MIoT applications
will range from asset tracking to smart cities to the monitoring of utilities and vital infrastructure.

The economic impact of 5G

• In 2035, 5G will enable $12.3 trillion of global economic output. That is nearly equivalent to US
consumer spending in 2016 and more than the combined spending by consumers in China, Japan,
Germany, the United Kingdom, and France in 2016.
• The global 5G value chain will generate $3.5 trillion in output and support 22 million jobs in 2035
• Moreover, 5G deployment will fuel sustainable long-term growth to global real GDP. From 2020
to 2035, the total contribution of 5G to real global GDP will be equivalent to an economy the size
of India.

Policy-Making:
The 5G economy will introduce a new level of complexity to policymaking and regulation as new business
models emerge and the old ways of delivering goods and services are either dramatically altered or
abandoned completely. Areas, where policy and regulatory modernization will be required for a 5G-ready
world, include public safety, cyber security, privacy, spectrum allocation, public infrastructure, healthcare,
spectrum licensing and permitting, and education, training, and development. Policies that safeguard the
ability of firms to take risks, make investments, and continue the relentless pursuit of innovation—
particularly rules governing intellectual property protection—are the optimal vehicle for leveraging and
capturing the full value of the 5G economy
Impact of 5G in different sectors
• Improving Healthcare Processes and Diagnoses,
5G-powered healthcare applications will add USD 530 billion to the global GDP by 2030. It has the
potential to revolutionize the health sector. With low latency and faster speeds, healthcare
professionals can monitor patients easily without going to their place. The continuous and real-time
remote doctor-patient interactions also reduce the hospitalization period. Telemedicine facilities will
improve drastically. This will have a positive impact on the economy. Moreover, with more
affordable and accessible healthcare services, the health of the general public can improve. This
results in improved productivity and hence helps the economy.
• Creating Virtual Experiences in Financial Services:
5G applications in financial services will add USD 85 billion to the global GDP by 2030. Banks and
other financial services players have adopted a digital-first approach and migrated their services to
digital channels, such as online and mobile banking. Further, by combining drones with 5G
technology, the insurance industry can monitor insured properties and prevent fraudulent practices.
This will streamline claims management processes.
• Accelerating Industrial Automation in Manufacturing:
According to industry projections, 5G applications in manufacturing will add USD 134 billion to the
global GDP by 2030. It’s also estimated that the number of IoT-connected devices would increase to

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 over 70 billion by 2025, many of them in use in industrial applications. The technology has enabled
cost-efficient customization and increased the speed of data flow on the factory floor.
• Agriculture: Improved connectivity and digitization can yield up to 25% increased productivity. It
is estimated to decrease inputs by 30% and cost reduction by 20%, along with 15% increased crop
yields
• Smart sensors can also prevent traffic jams by helping the driver in choosing the less congested
route. This can save plenty of time and hence can reap economic benefits.
• 5G has the potential to create more remote work and virtual work opportunities. This will save
money for businesses and employees in the long run.
• 5G will make smart cities a reality. Smart cities have more resource efficiency. The safer and
cleaner cities will also result in economic growth.
• As more and more industries will utilize 5G technology, there will be more risk of cyberattacks.
The impact of cybercrime on the world’s economy may increase.

References:
• https://www.groupdiscussionideas.com/impact-of-5g-on-global-economy/
• https://www3.weforum.org/docs/WEF_The_Impact_of_5G_Report.pdf
• https://timesofindia.indiatimes.com/blogs/voices/the-economic-impact-of-5g-on-industries/
• https://www.qualcomm.com/5g/the-5g-economy

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 Indian Startup Ecosystem
India has the third-largest startup ecosystem in the world after the US and China; expected to witness YoY
growth of consistent annual growth of 10-12%. The government recognized over 14,000 new startups in
2021-22 against 733 in 2016-17. With this, the total number of recognized startups in the country surpassed
65,400. India had 83 unicorns with a total valuation of $277.77 billion. Most of these unicorns are in the
services sector, which contributes over 50% to India’s GDP.

Startups in the country have been able to create an estimated 2 lakh new jobs over the year, taking the total
jobs in the start-up ecosystem to 6.5 lakh. Bangalore has been listed within the world’s 20 leading startup
cities in the 2019 Startup Genome Project ranking. It is also ranked as one of the world’s five fastest-
growing startup cities. Investments in startups were a defining feature of 2021, as private investors
committed over $36 billion to Indian startups, compared to the $11.5 billion they invested in 2020, as per
the Indian Tech Unicorn report 2021.

Many of us have "startup ideas," but even the most inventive of us have trouble carrying them out. Palicha
and Vohra had both enrolled at Stanford to pursue a Computer Science degree, but had dropped out to
pursue their entrepreneurial dreams. Zepto is an Indian startup that delivers groceries in as little as ten
minutes. The concept for Zepto arose from their houses' limitations during the Covid-19 outbreak. Due to a
surge in demand for delivery services, groceries and other necessities would arrive in a matter of days,
leaving a gap in the market for quick delivery. As a result, Zepto was born with all of this knowledge. To
deliver so quickly, they have nearby warehouses or dark stores with all of the products, and Zepto delivery
boys are on the stores themselves to reduce distance time, which is why they have opened dark stores or
warehouses so close to their customers.

In India, a $1 trillion retail market where grocery purchases account for most of the consumer spending, e-
grocery delivery is gaining traction. The Indian e-grocery market was valued at $2.9 billion in 2020, and
from 2021 to 2028, it is expected to grow at a rate of 37.1%. Zepto had a valuation of $570 million when it
was a five-month-old startup after raising $100 million in a Series C round led by Y Combinator's
Continuity Fund, which was a 2X increase from its previous valuation of $60 million only 45 days before.
Zepto has raised another round of funding led by Y Combinator, bringing its total valuation to $900 million.

The startup ecosystem in India has been facilitated through various government departments & programs.
Approximately 4100+ startups have benefitted in the last year through various programs of the Central
Govt, 960 crores of funding have been enabled to startups through various schemes and 828 crores funds
have been sanctioned for infrastructure. To build a strong eco-system for nurturing innovation and Startups
in the country the Government launched a Startup India Action Plan that offers the following support to
recognized supports through:

Tax Exemptions

● IT exemptions for 3 years

● Capital gains exemption to people investing such capital gains in the Govt. recognized Fund of
Funds
● Tax exemption on investments above Fair Market Value

Legal Support in Patent Filing

● Fast track of Startup Patent applications

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 ● A panel of facilitators to assist in filing applications, govt. bears facilitation costs: 423 facilitators
for patent & design, 596 for trademark applications
● 80% rebate in filing of patents

Relaxed Compliance and Norms

● Self-certification and compliance of 9 environments and labor laws through Startup India web
portal/mobile app. Online self-certification for labor and laws is enabled through the ‘Shram
Suvidha’ portal.
● Relaxed Norms for Public Procurement by easing the requirement of prior experience and prior
turnover in tenders for application by startups

Fund of Funds:

● ₹ 10,000 Cr. Fund of Funds to be provided by Mar 2025: Avg. ₹ 1,100 Cr. Per year
● Operating guidelines have changed to incorporate the following:
○ 2x of FFS to DIPP Startups
○ Allow funding of entity after ceasing to be startup (under DIPP)
● 600 Cr (+25Cr Interest) was given by DIPP to SIDBI which further committed Rs 623 Cr to 17
VC. 56Cr has been disbursed to 72 startups catalyzing investments of Rs 245 Cr

Pradhan Mantri Mudra Yojana:

PM Modi launched Pradhan Mantri Mudra Yojana, wherein Micro Units Development and Refinance
Agency Bank or MUDRA Banks provide loans at low rates to micro-finance institutions and non-banking
financial institutions, who in turn provide low-interest loans to startups and MSMEs. Hence, Pradhan
Mantri Mudra Yojana is one of its kind fund of funds, devised and conceptualized to empower Indian
entrepreneurs. Loans up to Rs 10 lakh can be availed under the MUDRA scheme. It was launched in 2015
and within 2 years, more than 1.8 crore jobs were generated due to the loans and business generated via
MUDRA. Till August 14th, 2020, more than 67 lakh loans amounting to Rs 48,000 crore have been
sanctioned under the MUDRA scheme.

Credit Guarantee Scheme for Start-Up

● Corpus of ₹ 2,000 Cr across 3 years

● Collateral Free, Fund & Non-Fund Based Credit Support
● Loans of up to 5 Cr. per Startup to be covered
● Status: EFC Memo circulated on 22 March 2017 to 6 Dept’s
● Impact: Credit guarantee to benefit 7,500+ Startups in 3 years

Corporate Connect

Enterprises are realizing the disruptive potential of start-ups and are thus partnering/investing in them.
Examples of corporate support:

● Facebook in partnership with Startup India disbursed cash grants of $50,000 each to the top 5
selected startups
● The 10000 Women program by Goldman Sachs is providing women entrepreneurs all around the
world with a business and management education, mentoring and networking, and access to capital

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 ● Microsoft Ventures Accelerator Program in India has recently picked up 16 startups

References:

https://www.startupindia.gov.in/content/sih/en/about-startup-india-initiative.html

https://www.startupindia.gov.in/content/sih/en/state-startup-policies.html

https://economictimes.indiatimes.com/tech/startups/indian-startups-bag-record-36-billion-funds-in-
2021/articleshow/88464088.cms

https://cleartax.in/s/startup-india-tax-exemptions-eligibility

https://www.startupindia.gov.in/content/dam/invest-
india/Templates/public/5_years_Achievement_report%20_%20final%20(1).pdf

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 Metaverse and its impact on Digital Economy

Metaverse can be defined as an expansive network of digital spaces, including immersive 3D experiences in
augmented, virtual, and mixed reality, that are interconnected and interoperable so one can easily move
between them, and in which one can create and explore with other people who aren’t in the same physical
space. Some have referred to the metaverse as an “embodied internet” in which individuals will feel as if
they are actually “present” in experiences and not simply looking at experiences through their screens. This
means that interacting with the Internet (and the devices that provide access to the Internet) has the potential
to be much more natural, incorporating modes of communication that include gesture and voice, such that
individuals are not limited to typing or tapping.

Some noteworthy elements of Metaverse:

· Metaverse is envisioned to be able to host almost all the activities we currently take part in (e.g.,
socializing, work, learning, entertainment, shopping, content creation, etc.) and make new types of
activities possible as well
· It is expected to be a continuous experience without pauses and delays, including an unlimited
number of users
· Metaverse is expected to be an open market, where businesses and individuals would freely engage
in activities and generate content and experiences
· It is expected to encompass both the digital and physical worlds and offer an extraordinary
“interoperability of data, digital items/assets, content, and so on
· Augmented reality (AR), virtual reality (VR), mixed reality (MR), extended reality (XR),
blockchain, and non-fungible tokens (NFTs or “tokens”) are expected to be the backbone of the
metaverse or of social and economic activity within the metaverse

While the technology is under development and adoption being the key to the success, here are some of the
key impacts that we see Metaverse will have on the digital economy:

· Blockchain networks, which are defined by their lack of a central authority, could provide a neutral
ledger for payment and financial services in a variety of virtual currencies
· Smart contracts may mediate transactions and encode appropriate incentive mechanisms
· The metaverse property registry could be the killer app for non-fungible tokens (NFTs), whose
market fell after a Q2 peak in crypto-art transactions
· Tools for decentralised file storage, computation and self-sovereign identity management will be
required
· In parallel there will be development of open standards for higher adoption of the Metaverse for all
so that virtual assets can be interpreted and accessed
· 5G technology will be key to Metaverse and its introduction will directly speed up the development
in 5G and ICT sector
· A more diverse and distributed workforce, without the restrictions of geography, would be possible
for different sectors and the creation of new jobs
· Education and training facilities in the Metaverse will be highly advanced and more immersive
· In total the dependence of Metaverse is very heavy on digital infrastructure, therefore the
development of all digital infrastructure will be augmented through Metaverse

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 · It is said that a fully realized metaverse won’t just be part of the digital economy, but it will be a
quasi-independent economy in itself

https://accelerationeconomy.com/metaverse/how-will-the-metaverse-impact-the-global-economy/
https://www.entrepreneur.com/article/422122
https://www.atlantis-press.com/article/125971939.pdf
https://www.analysisgroup.com/globalassets/insights/publishing/2022-the-potential-global-economic-
impact-of-the-metaverse.pdf
https://business-reporter.co.uk/technology/the-metaverse-the-new-digital-economy
https://www.youtube.com/watch?v=VhBv26f5VQQ

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PART C

81
 INDICES
PMI:
PMI or a Purchasing Managers’ Index (PMI) is an indicator of business activity -- both in the
manufacturing and services sectors. It is a survey-based measure. It is derived from a series of qualitative
questions. Executives from a reasonably big sample, running into hundreds of firms, are asked whether
key indicators such as output, new orders, business expectations and employment were stronger than the
month before and are asked to rate them. It is calculated separately for the manufacturing and services
sectors and then a composite index is constructed.

A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction. Higher
the difference from this mid-point greater the expansion or contraction. The rate of expansion can also
be judged by comparing the PMI with that of the previous month data. If the figure is higher than the
previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month
then it is growing at a lower rate.

India’s manufacturing PMI index

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IIP:
Index of Industrial Production data or IIP as it is commonly called is an index that tracks manufacturing
activity in different sectors of an economy. The IIP number measures the industrial production for the
period under review, usually a month, as against the reference period. IIP is a key economic indicator of
the manufacturing sector of the economy. Electricity, crude oil, coal, cement, steel, refinery products,
natural gas, and fertilizers are the eight core industries that comprise about 40 percent of the weight of
items included in the Index of Industrial Production. IIP index is currently calculated using 2011 -2012
as the base year.

IIP is computed and published by the Central Statistical Organization (CSO) which works under the
Ministry of commerce.

CPI:
Consumer Price Index or CPI as it is commonly called is an index measuring retail inflation in the
economy by collecting the change in prices of most common goods and services. CPI is calculated for a
fixed list of items including food, housing, apparel, transportation, electronics, medical care, education,
etc. Price data is collected periodically, and thus, the CPI is used to calculate the inflation levels in an
economy. This can be further used to compute the cost of living. This also provides insights as to how
much a consumer can spend to be on par with the price change. The CPI is calculated with reference to a
base year, which is used as a benchmark. It is the change in price of the goods and services in the basket
compared to base year.

WPI:
Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by
wholesale businesses to other businesses. WPI is unlike the CPI, which tracks the prices of goods and
services purchased by consumers. WPI tracks prices at the factory gate before the retail level. WPI
components are divided into food and non-food segments. Food segments include items such as Cereals,
Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish. Non-Food segments include Oil
Seeds, Minerals and Crude Petroleum. It also tracks Petrol, Diesel, and LPG gas prices. It covers
manufactured products such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals, and more.

Shared Economy:
The sharing economy is an economic model defined as a peer-to-peer based activity of acquiring,
providing, or sharing access to goods and services that is often facilitated by a community-based on-line
platform.
The ‘shared economy’ includes segments such as co-working (Awfis, WeWork India), co-living (Stanza
Living, OYO Life, Oxford Caps), shared mobility (Uber, Ola, Shuttl) and furniture rental (Furlenco,
Rentomojo). The shared economy in India is estimated to be an about $2 billion industry by the end 2020,

83
according to a recent report by Maple Capital Advisors. In this era of growing concern on climate,
wastage, resource scarcity and population intensity (especially in the developing world), the shared
economy seems to be a sustainable, scalable, and efficient form of addressing these concerns.”

REFERENCES:

• https://economictimes.indiatimes.com/news/economy/indicators/what-is-purchasing-
managers-index-pmi/articleshow/6259031.cms

• https://www.financialexpress.com/what-is/consumer-price-index-meaning/1623418/

• https://www.thehindu.com/business/Economy/shared-economy-at-2-bn-by-end-
2020/article31034036.ece

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 Gig Economy
In a gig economy, flexible and temporary jobs are offered on a part-time or contractual basis to the
workforce. It is mostly based out of online platforms. It helps in various cost-reduction measures for the
employers and provides a strong opportunity to the workforce to perform jobs that they are more
interested in so that their skill sets can be enhanced. Some of the famous examples of gig-economy are
Uber, Ola, AirBnb, and Swiggy. The gig economy can add up to 90 million jobs in the Indian economy
and contribute 1.25% to the GDP in the long-term.

With the advent of more and more businesses becoming technology driven,
Some of the pros of gig economy include:

• There is no hierarchal set-up, and the workforce can do away with the shackles of bureaucracy
altogether. The systems are faster in gig economy with more operational efficiency as obligations
or formalities are significantly reduced.
• It has become a very viable option for people such as students who are able to generate a new
source of income for their daily expenses helping them reduce their financial burden. As well as
for the part of the workforce who cannot dedicate full working hours to a traditional job, this
provides a good option.
• For a country like India which has a median age of around 27 years, the gig economy can enable
a sense of ownership amongst workforce which could in the long-term lead to higher
entrepreneurial ventures.
• From the company’s perspective, gig economy helps in reducing expenditures considerably as
they only spend when there is work and are not under any obligations to carry out additional
employee benefit programs such pertaining to healthcare or employee stock options.
• Especially for online businesses, the location factor can be done away with completely and anyone
can work from anywhere remotely as per their convenience. This is bound to increase labour
productivity as travel time can be done away with.
Some of the Cons of gig economy include:

• The workforce needs to have self-motivation and dedication towards their work as nobody will
be providing them with intangible support.
• There is a downside when we look at job stability angle as in a slowed down economy there is no
work for workforce under gig-economy and they are left on their own.
• When a person is working independently, they are restricted on their daily learning as working in
a formal organisation provides a better chance at trainings and upskilling.
• For a company, their workforce and culture are what define them. In a gig economy, the essence
of an organisation is compromised, and the morale of the organisation is lost too.

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 • For a business to be successful, it is very important for all the stakeholders to have a common set
of goals, vision, and mission. In a gig economy, this alignment maybe missed out and it
becomesdifficult to maintain a uniformity across.

REFERENCES

• https://www.businesstoday.in/current/economy-politics/gig-economy-can-
serve-90-mn-jobs-add-12-to-gdp-over-long-term/story/435286.html

• https://finance.yahoo.com/news/bankruptcy-student-loans-142107991.html

• https://www.livecareer.com/resources/jobs/search/job-market

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Quantitative Easing, Unconventional Monetary Policies and RBI
Unconventional monetary policies:

As per definition unconventional monetary policies are non-standard or un-traditional and non-orthodox
policies used by central banks to revive or run economy within control.

Broadly, economies are generally run by two different measures:

1. Fiscal policies: policies by the government to support economy
2. Monetary policies: policies by central banks to maintain liquidity and growth with controlled
inflation
Central banks help governments to run economy successfully by maintaining GDP growth rate with
proper liquidity, availability of credit, controlling forexes etc. while maintaining inflation. In India, RBI
has set a target range of 2-6% for inflation while working for growth of economy.
The conventional or orthodox tools used by central banks are interest rates both on loans and deposits
(repo and reverse repo rates), open market operations and reserve requirements. Basically, these all-tools
work on a belief that higher the liquidity or cash available in market, more people will spend and thus
economy will grow with surge in inflation. Opposite to that applies when central banks want to control
inflation, they reduce liquidity in market.

But limitation to this policy comes from tendency and risk appetite of people. After 2008 financial crisis
inability of conventional policies were highlighted. Same is applied in COVID-19 economic crunch. Due
to worldwide economic blunders people lose their faith in economy and hesitate to spend more.
Businesses also be cautious and do not invest in new ventures and reducetheir capital expenditures. Thus,
in this scenario conventional monetary policy doesn’t work. Even 0 interest rates sometimes fail to attract
people in such situations.

Thus, central banks have developed new tools time by time to tackle these issues and achieve their goals.
These newly developed tools which focuses on increasing liquidity and cash flow are un -conventional
monetary policy tools.

Unconventional tools include:

• Quantitative easing
• Negative interest rates
• Helicopter money
• Forward guidance etc.

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Quantitative easing:

The most popular non-conventional monetary policy which includes buying financial assets by central
bank is called quantitative easing. When interest rates are already at 0 but still there is not enough credit
and liquidity in the market central banks use QE. It is basically a procedure of buying distressed assets
or just normal financial assets. This was invented by Bank of Japan and later used by Federal Bank of
America and European Central Bank after 2008 financial crisis. RBI so far has not used the method in
India.

The aim of method is to boost confidence in the economy. These purchases are generally placed in open
market only. Central banks can purchase any assets like Mortgage-Backed Securities, private deposits,
commercial papers, certificate of deposits or even stocks. The aim is just to push cash in system and
increase investor confidence. While method is very effective and pushes money directly into the system
giving quicker results; has some disadvantages. It can create surplus of cash increasing inflation and
while asset book of central bank rises exponentially also bad assets or NPA can rise for central banks.

Unconventional monetary policies in India:

Majorly RBI has not used unconventional methods in India so far. RBI has been using conventional
methods like interest rate change, OMO, forex reserves, price of rupee etc. methods to fight recessions if
happened. In India both monetary and fiscal policy work together increasing effectiveness and confidence
in the market. But the recession caused by COVID-19 also put RBI in a situation to think creatively.
A step towards unconventional method is G-SAP: Government Security Acquisition Plan announced in
April 2021 as 2nd wave of COVID-19 India hurt massively. The program is a step towards QE in India.
Along with-it RBI announced Variable Reverse Repo Rate (VARR) to suck up the excess liquidity if
present in market. This is nothing else but purchasing government bonds like previous methods only,
butRBI has announced this very well in advance. RBI has announced that it will securities worth rupees
1 trillion in 1st quarter on FY22. This is done by RBI to boost interest of investors in G-Sec and thus
increase cash available to the government.
But again, to summarise there is no direct measures taken by RBI which can be directly classified under
nonconventional methods. But with changing economic parameters, if RBI might adopt any of them it
wouldn’t be a surprise.

REFERENCES

• https://www.investopedia.com/articles/investing/022415/how-unconventional-
monetary-policy-works.asp

• https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/02AR_190320211B1E0F7A3E4547
2EB390EAB717066A8D.PDF

• https://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1076

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Major Economic Indicators
Reference: https://dea.gov.in/sites/default/files/April%20MER_Final_1.pdf