The economic consequences of the British rule can be studied under three heads:

• Decline of Indian Handicrafts and progressive ruralisation of the Indian economy
• Growth of the new land system and the commercialisation of Indian agriculture
• Process of industrial transition of India

Decline of Handicrafts

• While India was an exporter of Handicrafts before the Industrial Revolution, the revolution reversed the character of India’s foreign trade
  • Increase in demand for raw material for British industries
  • Hence, steps were made to crush Indian handcrafts as well as commercialise agriculture to meet the interests of the British industries
• Principle causes for the decline of Indian handicrafts
  • Disappearance of Princely courts
  • Hostile policy of the East India Company and the British Parliament
  • Competition of machine-made goods
  • The development of new forms and patterns of demand as a result of foreign influence
• Economic consequences of the decline of handicrafts
  • Increased unemployment
  • Back-to-the-land movement: handicrafts were forced to take up agriculture or become landless labourers. This increased the pressure on land. This trend of growing proportion of the working force on agriculture is described as ‘progressive ruralisation’ or ‘deindustrialisation of India’. Thus, the crisis in handicrafts and industries seriously crippled Indian agriculture.

Land System during 1793-1850

• 1793: permanent settlement
• Zamindari, Ryotwari, Mahalwari systems
• Absentee landlordism emerged
• The result of the whole change in the land system led to the emergence of subsistence agriculture
• It helped the concentration of economic power in the hand of absentee landlords and moneylenders in rural India.

Commercialisation of Agriculture (1850-1947)

• Define: Production of crop for sale rather than for family consumption
• What distinguished commercial agriculture from normal sales of marketable surplus was that it was a deliberate policy worked up under the pressure from British industries. It was thus forced upon the Indian peasantry.
• Resistance: Indigo revolution etc
• Why CA? Industrial Revolution
• Impact of railways and road transport: Railways and road transport made possible a huge expansion in cash cropping, for national and international markets, and production regimes across the subcontinent were placed in a new context of opportunity
• Impact of CA
  • Mass movement to commercial agriculture caused decline in food production, increase in prices and famines.
  • Halted the process of industrialisation in India

 

 

• Dadabhai Naoroji: ‘Poverty in India’ (1876)
• He claimed that the drain of wealth and capital from the country which started after 1757 was responsible for absence of development in India.
• Drain was done through trade, industry and finance
• Two elements of the drain
  • That arising from the remittances by European officials of their savings, and fro their expenditure in England
  • Arising from remittance by non-official Europeans
• India has to export much more than she imported to meet the requirements of the economic drain
• In 1880 it amounted to 4.14% of India’s national income
• Consequences of the Drain
  • Prevented the process of capital formation in India
  • Through the drained wealth, the British established industrial concerns in India owned by British nationals
  • It acted as a drag on economic development

 

Budgeting

Budgeting is the process of estimating the availability of resources and then allocating them to various activities of an organization according to a pre-determined priority. In most cases, approval of a budget also means the approval to various spending units to utilize the allocated resources. Budgeting plays a criucial role in the socio-economic development of the nation.

Budget is the annual statement of the outlays and tax revenues of the government of India together with the laws and regulations that approve and support those outlays and tax revenues . The budget has two purposes in general :
1. To finance the activities of the union government
2. To achieve macroeconomic objectives.

The Budget contains the financial statements of the government embodying the estimated receipts and expenditure for one financial year, ie.  it is a proposal of how much money is to be spent on what and how much of it will
be contributed by whom or raised from where during the coming year.

Different types of Budgeting

Economists throughout the globe have classified the budgets into different types based on the process and purpose of the budgets, which are as follows:-

1- The Line Item Budget

line-item budgeting was introduced in some countries in the late 19th centuary. Indeed line item budgeting which is the most common form of budgeting in a large number of countries and suffers from several drawbacks was a major reform initiative then. The line item budget is defined as “the budget in which the individual financial statement items are grouped by cost centers or departments .It shows the comparison between the financial data for the past  accounting or budgeting periods and estimated figures for the current or a future period”In a line-item system, expenditures for the budgeted period are listed according to objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on ensuring that the agencies
or units do not exceed the ceilings prescribed. A central authority or the Ministry of Finance keeps a watch on the spending of various units to ensure that the ceilings are not violated. The line item budget approach is easy to understand and implement. It also facilitates centralized control and fixing of authority and responsibility of the spending units. Its major disadvantage is that it does not provide enough information to the top levels about the activities and achievements of individual units.

2 – Performance Budgeting

a performance budget reflects the goal/objectives of the organization and spells out performance targets. These targets are sought to be achieved through a strategy. Unit costs are associated with the strategy and allocations are accordingly made for achievement of the objectives. A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation – it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.

3- Zero-based Budgeting

The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of Zero-based Budgeting is phasing out of programmes/ activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.

4- Programme Budgeting and Performance Budgeting

Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was introduced in the US Federal Government in the mid-1960s. Its core themes had much in common with earlier strands of performance budgeting.
Programme budgeting aimed at a system in which expenditure would be planned and controlled by the
objective. The basic building block of the system was classification of expenditure into programmes, which meant objective-oriented classification so that programmes with common objectives are considered together.
It aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.

 

 

Budgetary Control

Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed.

Budgetary control involves the following steps :

(a) The objects are set by preparing budgets.

(b) The business is divided into various responsibility centres for preparing various budgets.

(c) The actual figures are recorded.

(d) The budgeted and actual figures are compared for studying the performance of different cost centres.

(e) If actual performance is less than the budgeted norms, a remedial action is taken immediately.

The main objectives of budgetary control are the follows:

1. To ensure planning for future by setting up various budgets, the requirements and expected performance of the enterprise are anticipated.
2. To operate various cost centres and departments with efficiency and economy.
3. Elimination of wastes and increase in profitability.
4. To anticipate capital expenditure for future.
5. To centralise the control system.
6. Correction of deviations from the established standards.
7. Fixation of responsibility of various individuals in the organization.

 

Responsibility Accounting

Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts.

These decentralized parts are divided as : 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers.

1. revenue center (a segment that mainly generates revenue with relatively little costs),
2. costs for a cost center (a segment that generates costs, but no revenue),
3. a measure of profitability for a profit center (a segment that generates both revenue and costs) and
4. return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).

 

Advantages:-

1. It provides a way to manage an organization that would otherwise be unmanageable.
2. Assigning responsibility to lower level managers allows higher level managers to pursue other activities such as long term planning and policy making.
3. It also provides a way to motivate lower level managers and workers.
4. Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances.

In India the budget is prepared from top to bottom approach and responsible accounting would not only improve the efficiency of Indian budgetary system but also will help in performance analysis.

Social Accounting

Social accounting is concerned with the statistical classification of the activities of human beings and human institutions in ways which help us to understand the operation of the economy as a whole.

Social accounting is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large

The components of social accounting are production, consumption, capital accumulation, government transactions and transactions with the rest of the world.

The uses of social accounting are as follows:

(1) In Classifying Transactions

(2) In Understanding Economic Structure

(3) In Understanding Different Sectors and Flows

(4) In Clarifying Relations between Concepts

(7) In Explaining Movements in GNP

(8) Provide a Picture of the Working of Economy

(9) In Explaining Interdependence of Different Sectors of the Economy

(10) In Estimating Effects of Government Policies

(11) Helpful in Big Business Organisations

(12) Useful for International Purposes

(13) Basis of Economic Models

 

Budgetary Deficit

Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called deficit financing by the government of India. This deficit adds to money supply in the economy and, therefore, it can be a major cause of inflationary rise in prices.

Budgetary Deficit of central government of India was Rs. 2,576 crores in 1980-81, it went up to Rs. 11,347 crores in 1990-91 to Rs. 13,184 crores in 1996-97.

The concept of budgetary deficit has lost its significance after the presentation of the 1997-98 Budget. In this budget, the practice of ad hoc treasury bills as source of finance for government was discontinued. Ad hoc treasury bills are issued by the government and held only by the RBI. They carry a low rate of interest and fund monetized deficit. These bills were replaced by ways and means advance. Budgetary deficit has not figured in union budgets since 1997-98. Since 1997-98, instead of budgetary deficit, Gross Fiscal Deficit (GFD) became the key indicator.

 

Fiscal Deficit

• The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government and thus amounts to all the borrowings of the government . While calculating the total revenue, borrowings are not included.
• The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
• Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
• A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

 

Revenue Deficit

• Revenue deficit is concerned with the revenue expenditures and revenue receipts of the government. It refers to excess of revenue expenditure over revenue receipts during the given fiscal year.
• Revenue Deficit = Revenue Expenditure – Revenue Receipts
• Revenue deficit signifies that government’s own revenue is insufficient to meet the expenditures on normal functioning of government departments and provisions for various services.
• In India social expenditure like MNREGA is a revenue expenditure though a part of Plan expenditure.
• Its targeted to be 2.9% of GPD in the year 2014-15, though the fiscal revenue and budget management act specifies it to be zero by 2008-09

 

• The process of industrial transition divided into: industrial growth during the 19^th century and industrial progress during the 20^th century
• Industrial growth during the 19^th century
  • Decline of indigenous industries and the rise of large scale modern industries
  • 1850-55: first cotton mill, first jute mill and the first coal mine established. Railway also introduced.
  • Despite some industrialisation, India was becoming an agricultural colony
  • The thrust to industrialisation came from the British because
    • They had capital
    • They had experience in setting up industries in Britain
    • They had state support
  • British industrialists were interested in making profits rather than economic growth of India
  • Parsis, Jews and Americans were also setting industries
  • No Indian industrialists because
    • Neither the merchants nor the craftsmen took the lead in setting industries
    • While the craftsmen didn’t possess capital, the merchants were happy with trading and money lending activity which was also growing at that time.
  • However, some Parsis, Gujaratis, Marwaris, Jains and Chettiars joined the ranks of industrialists
• Industrial Growth in the first half of the 20^th century
  • Imp events that stimulated industrial growth
    • 1905: Swadeshi Movement
    • First WW
    • Second WW
  • Great stimulus was given to the production of iron and steel, cotton and woollen textiles, leather products, jute.
  • Tariff protection was given to Indian industries between 1924 and 1939. This led to growth and Indian industrialists were able to capture the market and eliminate foreign completion altogether in important fields
  • The increase in industrial output between 1939 and 1945 was about 20 percent
  • After the WW I, the share of the foreign enterprises in India’s major industries began to decline.
• Causes for the slow growth of private enterprise in India’s industrialisation
  • Inadequacy of entrepreneurial ability
    • Indian industrialists were short-sighted and cared very little for replacement and renovation of machinery
    • Nepotism dictated choice of personnel
    • High profits by high prices rather than high profits by low margins and larger sales
  • Problem of capital and private enterprise
    • Scarce capital
    • Few avenues for the investment of surplus
    • No government loans
    • Absence of financial institutions
    • Banking was not highly developed and was more concerned with commerce rather than industry
  • Private enterprises and the role of government
    • Lack of support from the government
    • Discriminatory tariff policy: one way free-trade
    • Restrictions transfer of capital equipments and machinery from Britain
    • Almost all machinery was imported
  • Despite these difficulties, the Indian indigenous business communities continued to grow, albeit at a slow pace.

Forms and Consequences of Colonial Exploitation

• Main forms of colonial exploitation
  • Exploitation through trade policies
  • Exploitation through export of British Capital to India
  • Exploitation through finance capital via the Managing agency system
  • Exploitation through the payments for the costs of the British administration
• Exploitation through trade policies
  • Exp of cultivators to boost indigo export: forced
  • Exp of artisans by compulsory procurement by the Company at low prices: gomastas were the agents of the Company who used to do this
  • Exp through manipulation of export and import duties:
    • Imports of Indian printed cotton fabrics in England were banned
    • Heavy import duties on Indian manufactures and very nominal duties on British manufactures.
    • Discriminating protection was given (to industries that had to face competition from some country other than Britain). This was whittled down, however, by the clause of Imperial Preference under which imports from GB and exports to GB should enjoy the MFN status.
  • Exploitation through export of British Capital to India
    • There were three purposes of these investment (in transport and communication)
      • To build better access systems for exploited India’s natural resources
      • To provide a quick means of communication for maintaining law and order
      • To provide for quicker disbursal of British manufactures throughout the country and that raw materials could be easily procured
    • Fields of FDI
      • Economic overhead and infrastructure like railways, shippings, port, roads, communication
      • For promoting mining of resources
      • Commercial agriculture
      • Investment in consumer goods industries
      • Investments made in machine building, engineering industries and chemicals
    • Forms of investment
      • Direct private foreign investment
      • Sterling loans given to the British Government in India
    • Estimates show that foreign capital increased from 365 mn sterling in 1911 to 1000 mn sterling in 1933.
    • British multinationals were the chief instruments of exploitation and it were they who drained out the wealth of India.
    • These investments show that
      • British were interested in creating economic infrastructure to aid exploitation and resource drain
      • They invested in consumer goods and not in basic and heavy industries to prevent the development of Indian industries
      • Ownership and management of these companies lay in British hands
    • Exploitation through finance capital via the Managing agency system
      • Managing agency system: The British merchants who had earlier set up firms acted as pioneers and promoters in several industries like jute, tea and coal. These persons were called managing agents
      • It may be described as partnerships of companies formed by a group of individuals with strong financial resources and business experience
      • Functions of managing agents
        • To float new concerns
        • Arrange for finance
        • Act as agents for purchase of raw materials
        • Act as agents to market the produce
        • Manage the affairs of the business
      • They were important because they supplied finance to India when it was starved of capital
      • In due course, they started dictating the terms of the industry and business and became exploitative and inefficient
      • They demanded high percentage of profits. When refused they threatened to withdraw their finance
    • Exploitation through payments for the costs of British administration
      • British officers occupied high positions and were paid fabulous remunerations.
      • These expenditures were paid by India
      • They transferred their savings to Britain
      • India had to pay interest on Sterling Loans
      • India has to pay for the war expedition of the Company and later the Crown

Consequences of the exploitation

• India remained primarily an agricultural economy
• Handcrafts and industries were ruined
• Trade disadvantage developed due to the policy of the British
• Economic infrastructure was developed only to meet the colonial interests
• Drain of Wealth
• The net result of the British policies was poverty and stagnation of the Indian economy

Monetary Policies

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Objectives of Monetary Policies are:-

• Accelerated growth of the economy
• Balancing saving and investments
• Exchange rate stabilization
• Price stability
• Employment generation

Monetary Policy could be expansionary or contractionary;  Expansionary policy would increase the total money supply in the economy while contractionary policy would decrease the money supply in the economy.

RBI issues the Bi-Monthly monetary policy statement. The tools available with RBI to achieve the targets of monetary policy are:-

• Bank rates
• Reserve Ratios
• Open Market Operations
• Intervention in forex market
• Moral suasion

 

Repo Rate- Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds. 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 is the rate at which RBI borrows money from the commercial banks.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.

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.

CRR specifications give greater control to the central bank over money supply. Commercial banks have to hold only some specified part of the total deposits as reserves. This is called fractional reserve banking.

Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers.its the ratio of liquid assets to net demand and time liabilities.Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.

Inflation & Control Mechanism

inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services.It is the percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis. It effectively measures the change in the prices of a basket of goods and services in a year. In India, inflation is calculated by taking the WPI as base.

 

 

 

Formula for calculating Inflation=

(WPI in month of current year-WPI in same month of previous year)
————————————————————————————– X 100
WPI in same month of previous year

Inflation occurs due to an imbalance between demand and supply of money, changes in production and distribution cost or increase in taxes on products. When economy experiences inflation, i.e. when the price level of goods and services rises, the value of currency reduces. This means now each unit of currency buys fewer goods and services.

It has its worst impact on consumers. High prices of day-to-day goods make it difficult for consumers to afford even the basic commodities in life. This leaves them with no choice but to ask for higher incomes. Hence the government tries to keep inflation under control.

Contrary to its negative effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% is beneficial for an economy as it encourages people to buy more and borrow more, because during times of lower inflation, the level of interest rate also remains low. Hence the government as well as the central bank always strive to achieve a limited level of inflation.

Various measures of Inflation are:-

• GDP Deflator
• Cost of Living Index
• Producer Price Index(PPI)
• Wholesale Price Index(WPI)
• Consumer Price Index(CPI)

There are following types on Inflation based on their causes:-

• Demand pull inflation
• cost push inflation
• structural inflation
• speculation
• cartelization
• hoarding

Various control measures to curb rising inflation are:-

• Fiscal measures like reduction in indirect taxes
• Dual pricing
• Monetary measures
• Supply side measures like importing the shortage goods to meet the demand
• Administrative measures to curb hoarding, Cratelization.

 

		Direct & Indirect Taxes
	Direct Tax			Indirect Tax
	Corporation Tax			Excise Duties
	Income Tax			Service Tax
	Interest Tax			Central Value Added Tax (Vat)
	Expenditure Tax			Sales Tax
	Wealth Tax			Property Tax
	Gift Tax			Octroi
	Estate Duty			Customs Duties
	Land Revenue			Stamp Duties

				Components of Money Supply
M1	Consists of currency with the public (ie notes & coins in circulation minus cash with the banks)
	plus demand deposits with the bank (deposits which can be withdrawn without notice) plus
	other deposits with RBI (usually negligible). Also called narrow money
M2	M1	+ saving deposits + Certificate of Deposits (CDs) + term deposits maturing within a year.
M3	M2	+ term deposits with maturity more than a year + term borrowing of banking system. Also
	known as broad money.
L1	M3	+ all Deposits with the Post Office Savings Banks (excluding National Savings Certificates)
L2	L1 + Term Deposits with Term Lending Institutions and Refinancing Institutions (FIs) + Term
	Borrowing by FIs+ Certificates of Deposit issued by FIs; and
L3	L2 + Public Deposits of Non-Banking Financial Companies

 

Role of Commercial Banks

A Commercial bank is a type of financial institution that provides services such as accepting deposits, making business loans, and offering basic investment products

There is acute shortage of capital. People lack initiative and enterprise. Means of transport are undeveloped. Industry is depressed. The commercial banks help in overcoming these obstacles and promoting economic development. The role of a commercial bank in a developing country is discussed as under.

1. Mobilising Saving for Capital Formation:

The commercial banks help in mobilising savings through network of branch banking. People in developing countries have low incomes but the banks induce them to save by introducing variety of deposit schemes to suit the needs of individual depositors. They also mobilise idle savings of the few rich. By mobilising savings, the banks channelize them into productive investments. Thus they help in the capital formation of a developing country.

2. Financing Industry:

The commercial banks finance the industrial sector in a number of ways. They provide short-term, medium-term and long-term loans to industry.

3. Financing Trade:

The commercial banks help in financing both internal and external trade. The banks provide loans to retailers and wholesalers to stock goods in which they deal. They also help in the movement of goods from one place to another by providing all types of facilities such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc. Moreover, they finance both exports and imports of developing countries by providing foreign exchange facilities to importers and exporters of goods.

4. Financing Agriculture:

The commercial banks help the large agricultural sector in developing countries in a number of ways. They provide loans to traders in agricultural commodities. They open a network of branches in rural areas to provide agricultural credit. They provide finance directly to agriculturists for the marketing of their produce, for the modernisation and mechanisation of their farms, for providing irrigation facilities, for developing land, etc.

They also provide financial assistance for animal husbandry, dairy farming, sheep breeding, poultry farming, pisciculture and horticulture. The small and marginal farmers and landless agricultural workers, artisans and petty shopkeepers in rural areas are provided financial assistance through the regional rural banks in India. These regional rural banks operate under a commercial bank. Thus the commercial banks meet the credit requirements of all types of rural people. In India agricultural loans are kept in priority sector landing.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and having low incomes do not possess sufficient financial resources to buy durable consumer goods. The commercial banks advance loans to consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc. In this way, they also help in raising the standard of living of the people in developing countries by providing loans for consumptive activities and also increase the demand in the economy.

6. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in developing countries. They provide loans for the education of young person’s studying in engineering, medical and other vocational institutes of higher learning. They advance loans to young entrepreneurs, medical and engineering graduates, and other technically trained persons in establishing their own business. Such loan facilities are being provided by a number of commercial banks in India. Thus the banks not only help inhuman capital formation but also in increasing entrepreneurial activities in developing countries.

7. Help in Monetary Policy:

The commercial banks help the economic development of a country by faithfully following the monetary policy of the central bank. In fact, the central bank depends upon the commercial banks for the success of its policy of monetary management in keeping with requirements of a developing economy.

Issue of NPA

A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.According to RBI, terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset.

However, in terms of Agriculture / Farm Loans; the NPA is defined as under:

• For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.
• For Long Duration Crops, the above would be 1 Crop season from the due date.

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues. When a borrower makes any default in repayment and his account is classified as NPA; the secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it; as per provisions of the SAFAESI Act.

Reselling of NPAs :- If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).  These sales are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15 months before it sells to other bank. They purchase such loans on low amounts and try to recover as much as possible from the defaulters. Their revenue is difference between the purchased amount and recovered amount

 

Commodity Exchanges in India

Though there are about 25 commodity exchanges in India, the following are the major ones:

 

Multi Commodity Exchange (MCX) – 2003 – Mumbai – MCX COMDEX index

National Commodity and Derivatives Exchange (NCDEX) – 2003 – Mumbai

National Multi-commodity Exchange (NCME) – 2001 – Ahmedabad – first

Organizations & Their Survey/Reports

1.	World Economic & Social Survey	U. N
2.	World Investment Report	UNCTAD
3.	Global Competitiveness Report	World Economic Forum
4.	World Economic Outlook	IMF
5.	Business Competitive Index	World Economic Forum
6.	Green Index	World Bank
7.	Business Confidence Index	NCAER
8.	Poverty Ratio	Planning Commission
9.	Economic Survey	Ministry of Finance
10.	Wholesale Price Index	Ministry of Industry
11.	National Account Statistics	CSO
12.	World Development Indicator	World Bank
13.	Overcoming Human Poverty	UNDP
14.	Global Development Report	World Bank

 

Money Supply

Money supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts.

• Money Supply can be estimated as narrow or broad money.
• There are four measures of money supply in India which are denoted by M₁, M₂, M₃and M₄. This classification was introduced by the Reserve Bank of India (RBI) in April 1977. Prior to this till March 1968, the RBI published only one measure of the money supply, M or defined as currency and demand deposits with the public. This was in keeping with the traditional and Keynesian views of the narrow measure of the money supply.
• M1 (Narrow Money) consists of:

(i) Currency with the public which includes notes and coins of all denominations in circulation excluding cash on hand with banks:

(ii) Demand deposits with commercial and cooperative banks, excluding inter-bank deposits; and

(iii) ‘Other deposits’ with RBI which include current deposits of foreign central banks, financial institutions and quasi-financial institutions such as IDBI, IFCI, etc., other than of banks, IMF, IBRD, etc. The RBI characterizes as narrow money.

• M₂. which consists of M₁plus post office savings bank deposits. Since savings bank deposits of commercial and cooperative banks are included in the money supply, it is essential to include post office savings bank deposits. The majority of people in rural and urban India have preference for post office deposits from the safety viewpoint than bank deposits.
• M₃. (Broad Money) which consists of M₁, plus time deposits with commercial and cooperative banks, excluding interbank time deposits. The RBI calls M₃as broad money.
• M₄.which consists of M₃plus total post office deposits comprising time deposits and demand deposits as well. This is the broadest measure of money supply.
• High powered money – The total liability of the monetary authority of the country, RBI, is called the monetary base or high powered money. It consists of currency ( notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI. If a memeber of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. Similarly, the deposits are also refundable by RBI on demand from deposit holders. These items are claims which the general public, government or banks have on RBI and are considered to be the liability of RBI.
• RBI acquires assets against these liabilities. The process can be understood easily if we consider a simple stylised example. Suppose RBI purchases gold or dollars worth Rs. 5. It pays for thr gold or foreign exchange by issuing currency to the seller. The currency in circulation in the economy thus goes up by Rs. 5, an item that shows up on the liabilityside of RBI’s Balance sheet. The value of the acquired asset, also equal to Rs. 5, is entered under the appropriate head on the Assets side. Similarly, the RBI acquires debt bonds or securities issued by the government and pays the government by issuing currency. It issues loans to commercial banks in a similar fashion.