Miscellaneous Facts:

Miscellaneous Facts:

 

  1. India’s GDP per Capita 622 (US $ PPP). It is 684 US $ for Pakistan.

 

  1. The top 3 countries with external debt are Brazil (235 billion $), China (193 billion $) & Russia (175 billion $). India is 9th with 112 billion $.

 

  1. Functional employment occurs when people change from one job to another & there is an interval. This can happen even in a situation of full employment. Structural employment happens when jobs exist for qualified persons but the unemployed do not have the matching qualifications. It also occurs when labour is available, but factors of production are missing. Cyclical unemployment arises out of cycles of recession. Disguised unemployment is when people are employed but their marginal productivity is zero.

 

  1. The CSO is responsible for estimating the national income. It is assisted by the National Sample Survey Organization (NSSO) which conducts large scale surveys.

 

  1. The tenth plan has taken the figure of 26% population below poverty line for planning purposes. Out of the total 75% are in rural areas & 25% in urban areas. Orissa (47.5%) has the highest proportion followed by Bihar (42.6%), M.P & Assam.

 

  1. WPI is a weighted average of indices covering 477 commodities & is a measure of inflation on an economy wide scale. Services do not figure in this. Base year is 1993-94. CPI is computed separately for three groups viz industrial workers (260 commodities), Urban non-manual employees (180 commodities) & agricultural labourers (60 commodities).

 

  1. The GDP deflator is arrived at by dividing the GDP at current prices by GDP at constant prices in terms of base year prices (1993-94). This indicates how much growth in GDP is due to price rise & how much due to increase in output.

 

  1. In WTO terminology, subsidies in general are identified by “boxes” which are given the colours of traffic lights: green (permitted), amber (slow down — i.e. be reduced), red (forbidden). For agriculture, all domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box. In order to qualify for the “green box”, a subsidy must not distort trade, or at most cause minimal distortion. It includes amount spent on research, disease control, infrastructure & food security. Blue box subsidies are held to be trade distorting & include direct payment to farmers to limit production & certain government assistance to encourage agriculture & rural development in developing countries.

 

  1. Tobin tax is the suggested tax (within 0.1% to 0.25%) on all trade of currency across borders intended to put a penalty on short-term speculation in currencies leading to crisis (Eg. Asian Crisis).

 

 

 

 

 

 

 

  1. In 1972, 107 companies operating in the general insurance business were nationalized into four groups – NIC, United India Insurance Company, Oriental Insurance Company & New India Insurance Company with GIC as the holding company. These companies can compete against each other in all areas except aviation & crop insurance which are the monopoly of GIC.

 

  1. IRDA act 1999 has ended the monopoly of LIC/GIC in the insurance sector.

 

  1. The only two national stock exchanges of India are NSE & OTECI (Over the counter exchange of India). BSE is a regional stock exchange.

 

  1. At present the value of SDR is fixed in relation to a basket of five currencies – US dollar, German mark, British pound, French frank & Japanese yen.

 

  1. Current Account Convertability – the holders of domestic currency have the right to convert the currency into foreign exchange for any current account purpose such as travel, tourism, trade. Transactions like those in assets are not permissible unless there capital account convertability.

 

  1. Ceteris Paribus – ‘Other things remaining equal’. ‘Ad Valorem’ means as per value. Laffer Curve – hypothesis that when the tax rate is raised the revenue realized tends to fall. Monopsony – single buyer as opposite of monopoly where there is a single seller. Lorenz curve shows graphical representation of income distribution. The Phillips curve illustrates the relationship between inflation and unemployment.

 

  1. Bretton Woods Agreement led to the establishment of World Bank & IMF. More developed a country greater would be its dependence on direct tax.

 

  1. MODVAT (modified value added tax) was introduced in India in 1986 (MODVAT was re-named as CENVAT w.e.f. 1-4-2000). Increase in RBI credit to the government during a year represents Monetised deficit.

 

  1. A high fiscal deficit leads to adverse effects on BoP, rise in interest rates & a high cost economy.

 

  1. The reverse repo rate is the rate at which banks park their short-term excess liquidity with the RBI, while the repo rate is the rate at which the RBI pumps in short-term liquidity into the system

 

  1. PNB is the oldest existing commercial bank in India. India’s short term debt is less than 10 % of India’s total debt.

 

  1. The title of World Development Report 2005 is “A Better Investment Climate For Everyone”.

 

  1. The 12th financial commission recommendation would be applicable for the period 2005-2010. Minimum Alternate Tax is a tax on zero tax companies.

 

  1. Press Note 18 requires that a foreign company in a joint venture with an Indian company cannot get into other wholly owned ventures without the domestic partner’s permission.

 

 

 

 

 

 

 

  1. Domestic Commercial Banks contribute to the Rural Infrastructure Development fund to the extent of their shortfall in their lending to the priority sector lendings.

 

  1. Capital adequacy ratio affects assets of banks, its share capital & its investment. International Finance Corporation essentially provides loans to boost private sector investment of member countries.

 

  1. Zero-based Budgeting requires that a program be justified from the ground up each fiscal year. ZBB is especially encouraged for Government budgets because expenditures can easily run out of control if it is automatically assumed what was spent last year must be spent this year

 

  1. The main source of revenue for the Union government in ascending order of importance are income tax, custom duties, corporate tax & excise duties.

 

  1. Prevention of Money Laundering act is applicable to drug trafficking, mafia, gun running etc. Maintaining its increasing trend since 1990-91, except in 1998-99, the share of direct taxes in central tax revenues increased from 19.1 per cent in 1990-91 to 43.3 per cent in 2004-05 (RE) and further to 47.9 per cent 2005-06 (BE).

 

  1. Trade Related Investment measures (TRIMS) under WTO apply that no restrictions will be imposed on foreign investment in any sector; all restrictions on foreign companies will be scrapped; Imports of raw materials by foreign companies are to be allowed freely.

 

  1. Participatory Notes (P-Notes) refers to investment in Indian securities by unregulated FIIs & Hedge funds. NCLT will replace the role of Company law board, BIFR & High courts. Fiduciary issue is the paper currency not backed by gold or silver.

 

 

Essential Extra Reference:

 

  • Various Schemes launched by the government

 

  • Capex in various sectors- telecom etc.

 

  • Export Import Value with trade in Merchandise

Commissions/Committees & Their Purpose

  Commissions/Committees & Their Purpose
Arjun Sen Gupta   Public Sector Enterprise Autonomy
Committee        
Rangarajan Committee   Disinvestment of PSUs & Balance of Payments.
Malhotra Committee   Insurance Sector & its regulation. Follow up led to setting up of IRDA.
Madhukar Committee   Gold exchange traded fund implementation.
L.C. Gupta Committee   Derivatives in India Model
Naresh Chandra Committee   Corporate Audit & Governance
JJ Irani Committee   Company Law
B. Bhattacharya Committee   Committee on pension reforms
Rakesh Mohan Committee   Small saving & Administered interest rates
Vijay Kelkar Committee   FRBM  (fiscal responsibility & budget management) Act implementation
S.P. Gupta Committee   Generation of Employment opportunities in the 10th plan.
Raghvan Committee   Replacement of MRTP act by competition act.
Eradi Panel   Industrial Insolvency.
M.S. Verma   Restructuring weak banks
Lakdawala Committee   Estimating Poverty line in India
Montek Singh Ahuluwalia   Power Sector reforms
Rakesh Mohan Committee   Development of Infrastructure in India
Abid Hussain Committee   Small Scale Sector
Jha Committee   MODVAT
Vasudev Committee   NBFC
Omkar Goswami Committe   Industrial Sickness
G.V. Ramakrishna   Disinvestment Commission
Arvind Virmani   Import Tariff Reform
Vaghul Committee   Money Markets India reforms

 

FERA   FEMA
Violation of FERA was a criminal offence. Violation of FEMA is a civil wrong.
Offences under FERA were not compoundable. Offences under FEMA are compoundable.
Penalty was 5 times the amount involved. Penalty is 3 times the sum involved.
Citizenship was a criteria to determine residential Stay in India for more than 182 days is the
status of a person under FERA. criteria to decide residential status.
There was only one Appellate Authority namely There are two appellate authorities namely
Foreign Exchange Regulation Appellate Board. 1. Special Director (Appeals) and
  2. Appellate Tribunal for Foreign Exchange.

 

 

 

 

 

Fiscal Responsibility & Budget Management (FRBM) Act 2003

 

  • The revenue deficit as a ratio of GDP should be brought down by 0.5 per cent every year and eliminated by 2007-08;

 

  • The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every year and brought down to 3 per cent by 2007-08;

 

  • The total liabilities of the Union Government should not rise by more than 9 per cent a year;

 

  • The Union Government shall not give guarantee to loans raised by PSUs and State governments for more than 0.5 per cent of GDP in the aggregate;

 

Population Policy 2000

 

The immediate objective of the NPP 2000 is to address the unmet needs for contraception, health care infrastructure, and health personnel, and to provide integrated service delivery forbasic reproductive and child health care. To bring the TFR to replacement levels by 2010. Stable population by 2045 at a level consistent with sustainable economic growth.

National Socio-Demographic Goals for 2010

 

  1. Address the unmet needs for basic reproductive and child health services, supplies and infrastructure.

 

  1. Make school education up to age 14 free and compulsory, and reduce drop outs at primary and secondary school levels to below 20 percent for both boys and girls.

 

  1. Reduce infant mortality rate to below 30 per 1000 live births.
  2. Reduce maternal mortality ratio to below 100 per 100,000 live births.

 

  1. Achieve universal immunization of children against all vaccine preventable diseases.

 

  1. Promote delayed marriage for girls, not earlier than age 18 and preferably after 20 years of age.
  2. Achieve 80 percent institutional deliveries and 100 percent deliveries by trained persons.

 

  1. Achieve universal access to information/counseling, and services for fertility regulation and contraception with a wide basket of choices.

 

  1. Achieve 100 per cent registration of births, deaths, marriage and pregnancy.

 

  1. Contain the spread of Acquired Immunodeficiency Syndrome (AIDS), and promote greater integration between the management of reproductive tract infections (RTI) and sexually transmitted infections (STI) and the National AIDS Control Organisation.

 

  1. Prevent and control communicable diseases.

 

  1. Integrate Indian Systems of Medicine (ISM) in the provision of reproductive and child health services, and in reaching out to households.

 

  1. Promote vigorously the small family norm to achieve replacement levels of TFR.

 

  1. Bring about convergence in implementation of related social sector programs so that family welfare becomes a people centred programme.
  Selected Terms
Revenue Deficit Difference between revenue expenditure & revenue receipts
Budget Deficit Difference between total expenditure & revenue receipts
Fiscal Deficit Budget deficit plus non debt creating capital receipts
Primary Deficit Fiscal deficit – Interest Payments.
FIPB Foreign Investment Promotion Council
MIGA Multilateral Investment Guarantee Agency

 

 

Four Modes of Services under GATT

  Four Modes of Services under GATT
Mode 1 Cross border trade, which is defined as delivery of a service from the territory of one
  country into the territory of other country;
Mode 2 Consumption abroad – this mode covers supply of a service of one country to the service
  consumer of any other country;
Mode 3 Commercial  presence  –  which  covers  services  provided  by  a  service  supplier  of  one
  country in the territory of any other country, and
Mode 4 Presence of natural persons – which covers services provided by a service supplier of one
  country through the presence of natural persons in the territory of any other country

 

 

 

 

 

 

 

 

Direct & Indirect Taxes

    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

    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

 

Organizations & Their Survey/Reports

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

 

Millenium Development Goals

Millenium Development Goals
1. Eradicate extreme poverty and hunger
2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria, and other diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development

Financial Inclusion

Financial Inclusion

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable.

Government of India has launched an innovative scheme of Jan Dhan Yojna for Financial Inclusion to provide the financial services to millions out of the regulated banking sector.

 

 

 

 

Various program’s for financial inclusion are:-

  • Swabhimaan Scheme:under the Swabhimaan campaign, the Banks were advised to provide appropriate banking facilities to habitations having a population in excess of 2000 (as per 2001 census) by March 2012.
  • Extention of  the banking networkin unbanked areas,
  • Expansion of Business Correspondent Agent (BCA)Network
  • Direct Benefit Transfer(DBT) and Direct Benefit Transfer for LPG (DBTL)
  • RuPay, a new card payment scheme has been conceived by NPCI to offer a domestic, open-loop, multilateral card payment system which will allow all Indian banks and financial Institutions in India to participate in electronic payments.
  • Pradhan Mantri Jan-Dhan Yojana (PMJDY)was formally launched on 28th August, 2014. The Yojana envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension. The beneficiaries would get a RuPay Debit Card having inbuilt accident insurance cover of Rs.1.00 lakh. In addition there is a life insurance cover of Rs.30000/- to those people who opened their bank accounts for the first time between 15.08.2014 to 26.01.2015 and meet other eligibility conditions of the Yojana.

 

 

 

Inflation in India

<use fundaes from your MAP> this question is very likely to be asked given the present inflationary trend.

Monetary Policy of India

Topics

  1. MP background
  2. Evolution of monetary policy in India: Different phases
  3. Transmission Mechanism
  4. Goals of MP
  5. Instruments of MP
  6. Determinants of MP
  7. Role of RBI: Pre and post-reforms
  8. MP: pre and post reforms
  9. Committees on Monetary Management in India
  10. MP and Money Market
  11. MP and Fiscal Policy
  12. MP and the external sector
  13. MP and the banking sector
  14. MP and Economic growth
  15. MP and Inflation
  16. Financial Stability: New Challenge
  17. Challenges before monetary policy
  18. Criticisms of India’s MP

 

Some background information

  • An important factor that determines the effectiveness of MP is its transmission – a process through which changes in the policy achieve the objectives of controlling inflation and achieving growth
  • MP transmission mechanism describes how MP action affects output and inflation, the final objectives of MP
  • Various MP transmission channels
    • Quantum Channel relating to money supply and credit
    • Interest Rate Channel –this has become important in the post reform period
    • Exchange Rate Channel
    • Asset Price Channel
  • How these channels function in an economy depends on its stage of development and its underlying financial structure.
  • These channels, however, are not mutually exclusive. There could be considerable feedback and interaction among them.

Evolution of MP

  • 1935: Proportional Reserve System
  • 1954: Minimum Reserve System
  • 1973-76: Minimum and maximum lending rates for bank loans prescribed
  • 1985: Flexible monetary targeting with feedback
  • 1998: Multiple indicator approach adopted

Divide MP into phases and study

Functions of RBI

  • Monetary functions
    • Conduct of monetary policy
    • Bank of issue
    • Banker to the government
    • Banker’s Bank and Lender of the Last Resort
    • Controller of credit
    • Custodian of foreign exchange reserves
    • Foreign exchange management – current and capital account management
    • Oversight of the payment and settlement systems
  • Non-monetary functions
    • Regulation and supervision of the banking and non-banking financial institutions, including credit information companies
    • Regulation of money, forex and government securities markets as also certain financial derivatives
    • Promotional functions: promotion of IFCI, SFC etc
    • Developmental role
    • Research and statistics

Objective of MP

  • To catalyse economic growth: by ensuring adequate flow of credit to productive sectors
  • Price stability
  • After the financial crisis, achieving Financial Stability has emerged as an important objective. Exchange rate management can be yet another objective

Tools of MP

  • General Credit Control (Quantitative Control)
    • Bank Rate
    • Open Market Operations
    • Cash Reserve Ratio
  • Specific and direct credit control (Qualitative Control)
    • Lending margins
    • Purpose specific credit ceiling
    • Discriminatory interest rates
    • Eg: Credit Authorisation Scheme, Credit Monitoring Arrangement.

MP pre-reforms

  • MP in India was conducted under the monetary targeting framework till 1997-98 with M3 as an intermediate target. This amounted to regulating money supply consistent with the expected growth in real income and a projected level of inflation.
  • During the monetary targeting phase (1985-1998), while M3 growth provided the nominal anchor, reserve money was used as the operating target and   cash reserve ratio (CRR) was used as the principal operating instrument.  Besides CRR, in the pre-reform period prior to 1991, given the command and control nature of the economy, the Reserve Bank had to resort to direct instruments like interest rate regulations and selective credit control. These instruments were used intermittently to neutralize the expansionary impact of large fiscal deficits which were partly monetised. The administered interest rate regime kept the yield rate of the government securities artificially low. The demand for them was created through periodic hikes in the Statutory Liquidity Ratio (SLR) for banks. The task before the Reserve Bank was, therefore, to develop the financial markets to prepare the ground for indirect operations.

MP post-reform

  • In the wake of the financial reforms, questions were raised about the appropriateness of this framework.
  • Working Group on Money Supply (1998)
    • Highlighted that the interest rate channel of transmission mechanism was gaining importance
  • On the recommendation of this working group, RBI shifted over to a multiple-indicator approach from 1998-9
  • Multiple Indicator Approach: Interest rates or rates of return in different markets (money, capital and g-sec), along with such data as on currency, credit extended by banks and financial institutions, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange available on high-frequency basis, are juxtaposed with output data for drawing policy perspectives.
  • LAF: Another important feature post reform is the increased use of LAF. It has enabled RBI to modulate short-term liquidity under varied financial market conditions, including large capital inflows from abroad.
  • CRR: Reduced
  • 1992-93: market borrowing programme of the government was put through the auction process
  • SLR was brought down to its statutory minimum of 25 pc by Oct 1997 and 24 pc in 2010
  • CRR was brought down from 15 pc of NDTL of banks to 9.5 pc in Nov 1997 which has stabilised at 6 pc for a long time. Not bound by its statutory limit (lower) of 3 pc now.
  • Narsimhan Committee (1998) recommended reforms in the money market
    • RBI introduced LAF in 2000 to manage market liquidity on a daily basis and also to transmit interest rate signals to the market. In the post-reform period, LAF, with OMO, has emerged as the dominant instrument of MP, though CRR continued to be used as an additional instrument of policy.
    • Call money market was transformed into a pure inter-bank market by 2005.
    • With the introduction of prudential limits on borrowing and lending by banks in the call money market, the collateralized money market segments developed rapidly
  • To absorb the capital inflows in excess of the absorptive capacity of the economy MSS was introduced in 2004. Interestingly, in the face of reversal of capital flows during the recent crisis, unwinding of the sterilised liquidity under the MSS helped to ease liquidity conditions.
  • Increased Micro-finance: To strengthen rural finance RBI has focused on SHGs.
  • Fiscal Monetary Separation: Automatic monetization of deficit faced out since 1994. Thus it has separated the monetary policy from the fiscal policy.
  • Changed interest rate structure: Phased deregulation of lending rates in the credit market. Minimum lending rates had been abolished and lending rates above Rs. 2 lakh were freed. In 2010, the base rate mechanism was adopted. Savings rate was deregulated in 2011
  • Higher market orientation for banking: the banking sector got more autonomy and operational flexibility.

 

Challenges in the post-reform period

  • A major challenge is the conduct of monetary policy in surplus liquidity conditions.
  • Increased capital inflows
    • To deal with this, RBI initiated the Market Stabilization Scheme (MSS) in 2004
    • Under the scheme RBI issues Treasury Bills and dated government securities. The money generated from sale of these bills is kept in a different account held by the government and maintained and operated by RBI. This money is not available for government’s expenditure. Thus, liquidity in the market is mopped.
    • The operationalisation of the MSS to absorb liquidity of more enduring nature has considerably reduced the burden of sterilization on the LAF window.
  • Financial stability is an emerging concern
  • The ongoing modernisation of the payments system with the introduction of RTGS would have a significant impact on MP.
  • The transmission of policy signals to banks’ lending rates has been rather slow. <base rate system introduced to correct this?>
  • Central bank independence

Criticisms/Limitations

  • In case of high fiscal deficit, monetary expansion has continued to happen
  • Limited coverage: The MP covers only commercial banking system and leaves out the non-bank institutions. This limits the effectiveness of MP
  • Unorganised money market: Its pretty large and does not come under the control of the RBI. Hence, MP does not affect them.
  • Predominance of cash transcation (?): <check out the current situation> In India, still there is huge dominance of cash in total money supply. It is one of the main obstables in the effective implementation of MP. Because MP operates on the bank credit rather than cash.
  • Increase volatility: As MP has adoptged changes in accordance to the changes in the external sector as well, it could lead to a high amount of volatility.

Evaluation of the changes in MP and Money Market

  • In response to the reforms, over the years the turnover in various market segments increased significantly
  • The reforms have also led to improvement in liquidity management operations by the RBI as is evident from the stability in call money rates, which also helped improve integration of various money market segments and thereby effective transmission of policy signals
  • The rule based fiscal policy pursued under the FRBM Act, by easing fiscal dominance, contributed to overall improvement in monetary management.
  • With the changing framework of monetary policy in India from monetary targeting to an augmented multiple indictors approach, the operating targets and processes have also undergone a change. There has been a shift from quantitative intermediate targets to interest rates, as the development of financial markets enabled transmission of policy signals through the interest rate channel. At the same time, availability of multiple instruments such as CRR, OMO including LAF and MSS has provided necessary flexibility to monetary operations. While monetary policy formulation is a technical process, it has become more consultative and participative with the involvement of market participant, academics and experts. The internal process has also been re-engineered with more technical analysis and market orientation. In order to enhance transparency in communication the focus has been on dissemination of information and analysis to the public through the Governor’s monetary policy statements and also through regular sharing of policy research and macroeconomic and financial information.
  • The availability of multiple instruments and their flexible use in the implementation of monetary policy have enabled the RBI to successfully influence the liquidity and interest rate conditions in the economy.

Changes in MP

  Pre-reform Post-reform
Operating Target Reserve Money was used as the operating target in the monetary targeting framework until mid-1990s Multiple Indicator Approach
Monetary Policy Instruments CRR and SLR was heavily used Reliance on direct instruments has been reduced and liquidity management in the system is carried out through OMOs in the form of outright purchases of g-secs and daily repo and reverse repo operations under LAF. MSS also introduced.
    Large capital inflows witnessed in recent years have posed a major challenge in the conduct of monetary and exchange rate management.
    Phased deregulation of the interest rates
  High SLR and CRR Low SLR and CRR
     

 

Money Market

  • RBI operationalises its monetary policy through its operations in government securities, foreign exchange and money markets
  • 1985: Money Market reforms begin
  • 1992: Introduction of auction system for government securities
  • 1996: Primary Dealer System initiated
  • 2002: Electronic trading and guaranteed settlement through CCIL for G-Sec starts
  • 2006: RBI expressly empowered to regulate money, forex, G-sec and gold related securities markets

 

Role of RBI

Pre-reform Post-reform
Developmental Role: the developmental role has increased in view of the changing structure of the economy with a focus on SMEs and financial inclusion Priority Sector Lending: Introduced from 1974 with public sector banks. Extended to all commercial banks by 1992 In the revised guidelines for PSL the thrust is on ensuring adequate flow of bank credit to those sectors that impact large segments of the population and weaker sections, and to the sectors which are employment intensive such as agriculture and small enterprises
Lead Bank Scheme Special Agricultural Credit Plan introduced.
Kisan Credit Card scheme (1998-99)
Focus on credit flow to micro, small and  medium enterprises development
Financial Inclusion
Monetary Policy: the role of RBI has changed from regulating credit and money flow directly to using market mechanisms for achieving policy targets. MP framework has changed to promote financial deregulations and market development. Role as a facilitator rather than as principal actor. M3 as an intermediary target Multiple Indicator Approach
Regulation of foreign exchange Management of foreign exchange
Direct credit control Open Market Operations, MSS, LAF
Rupee convertability highly managed Full current ac convertability and some capital account convertability
Banker to the government Monetary policy was linked to the fiscal policy due to automatic monetisation of the deficit Delinking of monetary policy from the fiscal policy. From 2006, under FRBM, RBI ceased to participate in the primary market auctions of the central government’s securities.
As regulator of financial sector: As regulator of the financial sector, RBI has faced the challenge of regulating the increasing financial sector in India. Credit flows have increased. RBI had to make sure that financial institutions are regulated in a way to protect the consumers while not impeding economic growth. Reduction in SLR
Custodian of FOREX reserves Forex reserves have increased drastically. Need to manage it adequately and avoid inflationary impact
Inflation Direct instruments were used Multiple indicators
Financial Stability Closed economy Increased FDI and FII has made financial stability one of the policy objectives.
Money Market Narsimhan Committee (1998) recommended reforms in the money market

 

 

The term Sustainable growth became prominent after the World Conservation Strategy Presented in 1980 by the International Union for the Conservation of Nature and Natural Resources. Brundland Report(1987) define sustainable development as the a process which seek to meet the needs and aspirations of the present generation without compromising the ability of the future generation to meet their own demands.

Natural resources are limited and thus sustainable development promotes their judicious use and put emphasis on conservation and protection of environment.Global warming and Climate change has brought the issue of Sustainable development in prominence.

Inclusive Growth is economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society.Indian Plans after the independence were based on the downward infiltration theory, which failed to bring equitable growth to all the sections of the Indian society.

Approach paper of 11th five year plan talked about “Inclusive and more faster growth” through bridging divides by including those in growth process who were excluded. Divide between above and Below Poverty Line, between those with productive jobs and those who are unemployed or grossly unemployed is at alarming stage.

Liberalization and Privatization after 1990’s have brought the nation out of the hindu growth rate syndrome but the share of growth has not been equitably distributed amongst different sections of Indian Society.

Various dimensions of Inclusive growth are:-

  1. economic
  2. social
  3. financial
  4. environmental

Important issues that are needed to be addressed to achieve the inclusive growth are:-

  1. Poverty
  2. Unemployment
  3. Rural Infrastructure
  4. Financial Inclusion
  5. Balanced regional development
  6. Gender equality
  7. Human Resource Development (Health, Education, Skill Development)
  8. Basic Human Resources like sanitation, drinking water, housing etc.

Government has launched several programs and policies for Inclusive growth such as:-

  1. MNREGA
  2. Jan Dhan Yojna
  3. Atal Pension Yojna
  4. Skill India Mission
  5. Deen Dayal Upadhyaya Gram Jyoti Yojana
  6. Pradhan Mantri Suraksha Bima Yojana
  7. Pradhan Mantri Jeevan Jyoti Bima Yojana
  8. Sukanya Samridhi Yojana
  9. Pradhan Mantri  Garib Kalyan Yojana
  10. Jan Aushadhi Yojana (JAY)
  11. Nai Manzil Scheme for minority students
  12. The Pradhan Mantri Awas Yojana (PMAY) or Housing for all by 2022

 

Food Security & Public Distribution System(PDS)

WHO Defines Food security to exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life.
Food security has three interlinked contents such as :-

  1. Availability of food,
  2. Access to food and
  3. absorption of food.

Food security is a multidimensional concept covering even the  micro level household food security,energy intakes and indicators of malnutrition.

 

Major components of food security are:-

  1. Production and Procurement
  2. Storage
  3. Distribution

Indian Agriculture is rightly called as a gamble with Monsoon, variability in food production and rising population creates food insecurity in the nation and worst effected are the downtrodden section of the society.

While India has seen impressive economic growth in recent years, the country still struggles with widespread poverty and hunger. India’s poor population amounts to more than 300 million people, with almost 30 percent of India’s rural population living in poverty. The good news is, poverty has been on the decline in recent years. According to official government of India estimates, poverty declined from 37.2% in 2004-05 to 29.8% in 2009-10.

Need for Self-Sufficiency:

India suffered two very severe droughts in 1965 and 1966. Food Aid to India was restricted to a monthly basis by USA under the P.L. 480 programme.  The Green Revolution made a significant change in the scene. India achieved self-sufficiency in food grains by the year 1976 through the implementation of the seed- water-fertilizer policy adopted by the Government of India.

Food grain production increased four-fold during 1950-51 and 2001-2002 from 51 million tons to 212 million tones. The country is no longer exposed to real famines. But the regional variation in the success of Green Revolution which was chiefly limited to northern- Western states has lead to the divide in the nation. Evergreen revoloution and Bringing green revolution to eastern India is the need of the hour.

Green revolution was focused on wheat and rice and thus the production of pulses was stagnant.

National Food Security Mission comprising rice, wheat and pulses to increase the production of rice by 10 million tons, wheat by 8 million tons and pulses by 2 million tons by the end of the Eleventh Plan (2011-12). The Mission is being continued during 12th Five Year Plan with new targets of additional production of food grains of 25 million tons of food grains comprising of 10 million tons rice, 8 million tons of wheat, 4 million tons of pulses and 3 million tons of coarse cereals by the end of 12th Five Year Plan.
The National Food Security Mission (NFSM) during the 12th Five Year Plan will have five components

(i) NFSM- Rice;

(ii) NFSM-Wheat;

(iii) NFSM-Pulses,

(iv) NFSM-Coarse cereals and

(v) NFSM-Commercial Crops.

Government through Public Distribution System has tried to counter the problem of food insecurity by providing the food grains through fair price shops.

The central Government through Food Corporation of India has assumed the responsibilities of  procurement,storage,transfer and bulk allocation of food grains to state governments.

The public distribution system (PDS) has played an important role in attaining higher levels of the household food security and completely eliminating the threats of famines from the face of the country, it will be in the fitness of things that its evolution, working and efficacy are examined in some details.

PDS was initiated as a deliberate social policy of the government with the objectives of:

  1. i) Providing foodgrains and other essential items to vulnerable sections of the society at resonable (subsidised) prices;
  2. ii) to have a moderating influence on the open market prices of cereals, the distribution of which constitutes a fairly big share of the total marketable surplus; and

iii) to attempt socialisation in the matter of distribution of essential commodities.

 

The focus of the Targeted Public Distribution System (TPDS) is on “poor in all areas” and TPDS involves issue of     35 Kg of food grains per family per month for the population Below Poverty Line (BPL) at specially subsidized prices. The TPDS requires the states to Formulate and implement :-

  1. foolproof arrangements for identification of poor,
  2. Effective delivery of food grains to Fair Price Shops (FPSs)
  3. Its distribution in a transparent and accountable manner at the FPS level.

 

 

 

 

Establishment of Various Financial Institutions

1.     Reserve Bank of India 1934        
2.     Industrial Finance Corporation of India 1948. Sick financial institution.
3.     ICICI 1955        
4.     SBI 1955. Nationalized
5.     Life Insurance Corporation (LIC) 1956        
6.     Industrial Development Bank of India (IDBI) 1964        
7.     Unit Trust of India (UTI) 1964        
8.     HUDCO 1970        
9.     General Insurance Corporation (GIC) 1972        
10.   NABARD 1982        
11.   SEBI (Replaced Controller of Capital Issue) 1988  Functional in 1992
12.   Small Industries Development Bank of India (SIDBI) 1990. Subsidiary of IDBI
13.   IRDA 1999        
          Various Acts & their Enactment Years        
      1.   Banking Regulation Act     1949    
      2. Industries (Development & Regulation) Act     1951    
      3.   MRTP Act     1969    
      4.   FERA     1973    
      5.   Negotiable Instrument Act     1981    
      6.   FEMA     2000    
      7.   Competition Act     2002    
          FDI Upper Limit in Various Sectors        
    1. Print Media   26 % (Recent)  
    2. Defense Sector   26 % (Recent)  
    3. Private Sector Banking, Radio (FM)   74%    
    4. Insurance   26%    
    5. Telecommunications   74%    
    6. Trading   51%    
    7. Power, Drugs & Pharmaceuticals, Road and highways, Ports 100%    
        and harbours, Hotel & Tourism, Advertising, Films, Mass        
        Rapid Transport Systems, Pollution Control & Management,        
        Special Economic Zones, Petroleum Refining(Private Sector)        
        Construction Development, Non Banking Financial Companies.        
    8. Airports   74%    
    9. Domestic Airlines   49%    
    10. Agriculture (including plantation except tea), Atomic Energy, Not Allowed  
        Railways (except Mass Rapid transport system)          
    11. Tea Plantation   100%    

 

 

 

 

 

 

 

 

 

Depository Receipt

A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depositary receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s.

 

Global Depository Receipt

A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

 

Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.

 

American Depositary Receipt

An American Depositary Receipt (abbreviated ADR) represents ownership in the shares of a non-U.S. company that trades in U.S. financial markets. The stock of many non-US companies trade on US stock exchanges through the use of ADRs. ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border & cross-currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.

 

Each ADR is issued by a U.S. depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock.

 

Commercial Paper

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

 

Qualified Institutional Placement – QIP

A designation of a securities issue given by the Securities and Exchange Board of India (SEBI) that allows an Indian-listed company to raise capital from its domestic markets without the need to submit any pre-issue filings to market regulators. The SEBI instituted the guidelines for this relatively new Indian financing avenue on May 8, 2006.

 

Minimum Alternate Tax (MAT)

The Indian Income Tax Act contains large number of exemptions from total income. Besides exemptions, there are several deductions permitted from gross total income. Further, depreciation allowable under the Income Tax Act is not the same as required under the Companies Act. The result of such exemptions, deductions, and other incentives under the Income tax Act in the form of liberal rates of depreciation is the emergence of Zero tax companies which inspite of having high book profit are able to reduce their taxable income to nil.

 

The system of minimum alternate tax has accordingly been introduced under which a company is required to pay a minimum tax of 7 % of the book profit in case the tax on the total income computed under the normal provisions of law works out to less than this amount [Sec 115JB].

 

 

 

Negotiated Dealing System

Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments.

 

NDS facilitates electronic submission of bids/application by members for primary issuance of Government Securities by RBI through auction and floatation. NDS also provides interface to Securities Settlement System (SSS) of Public Debt Office, RBI, thereby facilitating settlement of transactions in Government Securities including treasury bills, both outright and repos.

 

National Spot Exchange

Estd. 2008

 

HQ: Mumbai

 

It is a private commodity exchange in India that is a joint venture of Financial Technologies (India) Ltd. (FTIL), Multi Commodity Exchange (MCX) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED).

 

Basel III

India is a member of the Basel Committee on Banking Supervision. It has actively engaged in the development of the Basel III accord. Proposals entail:

 

Require banks to hold more and better quality capital

Require banks to carry more liquid assets

This would limit their leverage and mandate them to build up capital buffers in good times that can be drawn down in periods of stress.

 

Teaser Loans

Loans – usually house loans – that have low, customer friendly and fixed interest rate for initial some time and high interest rate set on a floating rate basis thereafter.

 

The problem with such loans is that there is a greater risk of default as the interest rate increases.

 

National Payments Corporation of India

Incorporated in 2008. To consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail payment systems. Promoted by 10 banks.

 

Multidimensional Poverty Index

Developed by Oxford Poverty and Human Development Initiative supported by UNDP

It was featured in HDR-2010 and replaces Human Poverty Index (HPI) which had been included in HDR since 1997

Was created using a technique developed by Sabina Alkire and James Foster

The Alkire-Foster method measures outcomes at the individual level (person or household) against multiple criteria (dimensions and indicators)

The method is flexible and can be used with different dimensions and indicators to create measures specific to different societies and situations

The method can show the incidence, intensity and depth of poverty, as well as inequality among the poor, depending on the type of data available to create the measure

<details in the file in the economy section>

de-mutualised, online exchange dealing in numerous commodities

Indian Commodity Exchange (ICEX) –

Others are:

 

Bharat Diamond Bourse – (Diamond Exchange) – Mumbai

International Pepper Exchange – 1997 – Kochi

These are regulated by the Forward Market Commission setup in 1953

 

Credit Default Swaps

It is a form of insurance against debt default. When an investor buys corporate (or govt) bonds he/she faces the risks of default on part of the issuing agent. The investor can insure its investment in such bonds against default through a third party. The investor pays a premium to the party providing insurance. In the event of default by the bond issuer, the insurer would step and pay the investor. A CDS is just that insurance, which is bought by those who fear default and sold by those who believe it wont.

 

Seigniorage

When the cost of production of a note or coin is less than its face value, seigniorage is said to exist. In some cases, especially for low denomination coins, negative seigniorage can exist. This will mean that the cost of producing the coin is more than its face value.

 

Takeout Finance

Takeout finance is essentially a mechanism designed to enable banks/lenders to avoid asset liability mismatch that may arise out of extending long tenor loans to infrastructure projects. Under this arrangement, banks that extend credit facility to infrastructure projects enter into an arrangement with a financial institution for transferring the loan outstanding in the banks’ books to the books of the financial institution who take out the loan.

 

Subsequent to the announcement in the Union Budget of 2010-11, the government entrusted India Infrastructure Finance Company Ltd (IIFCL) with the task of introducing the Takeout Finance Schemes (TFS)

 

The scheme enhances the availability of long tenor debt finance for infrastructure projects, enables availability of cheaper cost of finance available for the borrower, addresses sectoral/group/single party exposure issues of banks etc. three institutions IIFCL, LIC and IDFC signed MoU to provide takeout finance for infrastructure projects.

 

Impact of Liberalisation

The leading economists of the country differ in their opinion about the socioeconomic and ecological consequences of the policy of liberalisation.Liberalization has led to several positive and negative effects on Indian economy and society. Some of the consequences of liberalisation have been briefly described here:

  1. Increase in the Direct Foreign Investment:The policy of liberalisation has resulted in a tremendous increase in the direct foreign investment in the industrial and infrastructural sector (roads and electricity).
  2. Enhancement in the Growth of GDP:There is a significant growth in the Gross Domestic Product (GDP). Prior to the liberalisation, the growth rate of GDP was around 4 per cent which rose to around 10 per cent in 2006-07.
  3. Reduction in Industrial Recession: The industrial sector of India was passing through a period of recession prior to the policy of liberalisation. The foreign and private investment has checked the recession trend. This happened because of the massive investment in modernisation, expansion, and setting up of many new projects. Industries like automobiles, auto-components, coal-mining, consumer electronics, chemicals, food-processing, metal, petrochemicals, software, sport-goods, and textiles have undergone a growth rate of about 25 per cent. In addition to these, other industries, like crude-oil, construction, fertilisers, and power generation have shown an increase of about 15 per cent.
  4. Employment:The heavy investments in industries and infrastructure by the Indian and foreign investors have generated great employment opportunities for the professionals, and skilled and unskilled workers.
  5. Development of Infrastructure: Prior to the liberalisation, the infrastructure (roads and electricity) were in a bad shape affecting the industrial growth and economic development of the country adversely. Heavy investment in infrastructure has improved the efficiency of the industrial sector significantly.
  6. Rise in Export:There is a phenomenal increase in export after liberalisation. Simultaneously India is importing raw materials, machinery, and finished products. Despite heavy imports, there has been a tangible improvement in the balance of payment.

7-Increase in Regional Disparities:The policy of liberalisation and New Industrial Policy (1991) could not reduce the regional inequalities in economic development. In fact, investments by the Indians and foreign investors have been made in the states of Andhra Pradesh, Gujarat, Haryana, Karnataka, Maharashtra, Rajasthan, Tamil Nadu, and West Bengal. The states like Bihar, Himachal Pradesh, Jammu and Kashmir, Kerala, Meghalaya, Mizoram, Nagaland, Orissa, Tripura, Uttar Pradesh, and Uttarakhand are lagging behind. This has accentuated the regional imbalance and has lead to north south devide. The maximum investment so far has been done in Maharashtra, Gujarat, Andhra Pradesh, West Bengal, and Tamil Nadu. This uneven industrial development has resulted into many socioeconomic and political problems. The Naxal Movement, ULFA, and political turmoil in Jammu and Kashmir may be partly explained as being caused due to the less industrial and economic development of the regions.
8. Damage to Cottage and Small Scale Industries:Liberalisation in a country like India has adversely affected the traditional cottage and small scale industries which are unable to compete with the large-scale industries established by the multinationals. The cottage and small scale industries need protection in the form of subsidies, technology, technical access, funds, and network to export their products, Indian traditional workers such as silk workers of bihar are threatened by the imported synthetic silk.

9.Sophisticated Technology: The latest technology, being sophisticated, replaces labour and thus results in unemployment. This may be counter productive and detrimental to our industrial structure.

  1. Comparatively Little Direct Investment: The foreign investors are more inclined to portfolio investment rather than direct investment. The former may be withdrawn at will at the slightest of hurdles giving a jolt to the economy of the country  and it may create instability to Indian economy.

    11. Investment in Selected Industries: Most of the foreign investment comes to white-goods and not to wage-good sector. Hence, it may be fruitful in improving the high priority sector and bringing in the latest technology. This will be counter productive. India is blessed with demographic dividend and the selective investment has failed to harness it.

    12. Economic and Political Freedoms are at Stake: The over-enthusiasm of liberalisation to attract more investors and foreign exchange might lead to gradual handling over of the whole economy to the multinationals. This will affect adversely our economic and political freedom.

  2. Inflation:Since the new industrial policy and liberalisations, the rate of inflation is continuously increasing. A section of the society is becoming more rich and adopting the lifestyle of consumerism. As opposed to this, the absolute number below the poverty line is also increasing. The gulf between the rich and the poor may be the cause of numerous social problems resulting in social tension.

Impacts of Privatization

Privatization in generic terms refers to the process of transfer of ownership, can be of both permanent or long term lease in nature, of a once upon a time state-owned or public owned property to individuals or groups that intend to utilize it for private benefits and run the entity with the aim of profit maximization.
ADVANTAGES OF PRIVATIZATION
Privatization indeed is beneficial for the growth and sustainability of the state-owned enterprises.
• State owned enterprises usually are outdone by the private enterprises competitively. When compared the latter show better results in terms of revenues and efficiency and productivity. Hence, privatization can provide the necessary impetus to the underperforming PSUs .
• Privatization brings about radical structural changes providing momentum in the competitive sectors .
• Privatization leads to adoption of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.
• Privatization has a positive impact on the financial health of the sector which was previously state dominated by way of reducing the deficits and debts .
• The net transfer to the State owned Enterprises is lowered through privatization .
• Helps in escalating the performance benchmarks of the industry in general .
• Can initially have an undesirable impact on the employees but gradually in the long term, shall prove beneficial for the growth and prosperity of the employees .
• Privatized enterprises provide better and prompt services to the customers and help in improving the overall infrastructure of the country.

DISADVANTAGES OF PRIVATIZATION
Privatization in spite of the numerous benefits it provides to the state owned enterprises, there is the other side to it as well. Here are the prominent disadvantages of privatization:
• Private sector focuses more on profit maximization and less on social objectives unlike public sector that initiates socially viable adjustments in case of emergencies and criticalities .
• There is lack of transparency in private sector and stakeholders do not get the complete information about the functionality of the enterprise .
• Privatization has provided the unnecessary support to the corruption and illegitimate ways of accomplishments of licenses and business deals
ADVANTAGES AND DISADVANTAGES OF PRIVATISATION IN INDIA

  • Privatization loses the mission with which the enterprise was established and profit maximization agenda encourages malpractices like production of lower quality products, elevating the hidden indirect costs, price escalation etc..
    • Privatization results in high employee turnover and a lot of investment is required to train the lesser-qualified staff and even making the existing manpower of PSU abreast with the latest business practices .
    • There can be a conflict of interest amongst stakeholders and the management of the buyer private company and initial resistance to change can hamper the performance of the enterprise .
    • Privatization escalates price inflation in general as privatized enterprises do not enjoy government subsidies after the deal and the burden of this inflation effects common man

 

 

Impacts of Globalisation:-

Definition of Globalization :- Its a process(not an outcome) characterized by increasing global Interconnections by gradual removal of barriers to trade and investment between nation and higher economic efficiency through competitiveness.

Various economic, political, social and cultural effects of globalization are as follows:-

Economic:-

  • Breaking down of national economic barriers
  • International spread of Trade, Financial and productive activities
  • Growing power of transnational cooperation and International financial Institutions(WTO, IMF)Through the process of:-

1- Liberalization- relaxation of restrictions, reduction in role of state in economic activities,decline in role of govt in key industries, social and infrastructural sector.

2- Privatization- Public offering of shares and private sale of shares, entry of private sector in public sector and sale of govt enterprises.

3- FDI

4- International regulatory bodies(WTO,IMF)

5- MNC’s

6- Infrastructural development

7- Expansion of information and communication technology and birth of information age.

8- Outsourcing of services- ie BPO and Call Centres.

9- Trade related intellectual property rights(TRIPS)- product based patent rather than process based.

Social effects:-

  • Withdrawal of National govt from social sectors ie declining share of govt in public spending, reducing social benefits for worker(social dumping,pension cuts,subsidies reduction)
  • Labor  reforms and deteriorating Labor welfare:-
    • Labour Market deregulation:-
      • Minimum wage fixing
      • Employment security
      • Modifying tax regulation
      • Relaxed standards of security
    • Increased Mechanization demands skilled labour and thus loss of job for unskilled labour
    • Loss of jobs for traditional workers for example bihar silk workers due to imported Chinese- Korean silk
  • Feminism of Labour ie increased women participation specially in soft industries
  • Trickle down theory of poverty reduction has limited success and in agricultural nations poverty has infect increased.
  • Unsustainable development practices such as:- excessive use of fertilizers, irrigation, fish trawling by mnc’s(Protein flight ),Exploitation of natural resources by MNC’s.
  • Migration and urbanization have lead to problem of slums
  • Commercialization of indigenous knowledge:- patenting
  • Rising inequality in wealth concentration

 

Cultural:-

  • Increased pace of cultural penetration
  • Globalization of culture
  • Development of hybrid culture
  • Resurgence of cultural nationalism ie shivsena opposing valentine day

 

Political:-

  • Globalization of National Policies- Influenced by International agencies
  • Reducing economic role of govt
  • Political lobbying

 

Positive effects of Globalization

  • Increased competition
  • Employment generation
  • Investment and capital flow
  • Foreign trade
  • Spread of technical know how
  • Spread of education
  • Legal and ethical effects
  • Improved status of women in the society
  • Urbanization
  • Agriculture:- greater efficiency,productivity, use of HYV seeds, Future contracts and cooperative farming
  • Higher standard of living

 

 

Financial Stablity

 

Reasons for financial instability

  • Increased non-official capital flows across countries through banks and international capital markets.
  • Hasty and non-strategic liberalisation
  • Deregulation of financial sector
  • Opening up of the capital account in many countries

Intiatives by RBI

  • Had set up the Committee on Financial Sector Assessment in 2009
  • Will setup a dedicated interdisciplinary Financial Stability Unit with the remit to assess the health of the financial system with a focus on identify and analysing potential risks to systemic stability and carrying out stress tests on an ongoing basis
  • Financial Stability Reports are being released

Financial Stability Report

  • Three FSRs released till June 2011
  • First was released in March 2010
  • As per the three FSRs released so far, there is no serious threat to the Indian financial system
  • FSR 2011
    • states that the Indian financial system remains stable in the face of some fragilities being observed in the global macro-financial environment.
    • Banking sector continues to be stable
    • Banking stability indicator confirms the overall improvement in the stability of banking sector
    • Toxity index/vulnerability index: the probability of a bank causing distress to another bank or being affected by the distress of another bank

FS in India

  • The relatively crisis free environment in the Indian financial system can be attributed to the strength of state home grown policies pursued with caution and prudence.
  • In the late 1990s, FS was incorporated as a specific objective of the RBI’s policy after the Asian Financial crisis.
  • Present weaknesses in the financial system
    • Greater access of domestic corporate to ECBs has resulted in increased currency mismatches
    • Increased reliance on market borrowings could adversely affect the liquidity position of banks
    • There remains gaps in the regulatory framework for NBFCs

 

 

Role of Commercial Banks

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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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

MONEY SUPPLY

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.